The Benefits of Appointing a Receiver to Achieve an Equitable Remedy and Asset Protection
The appointment of receiver is an “equitable” remedy that allows judges to protect and preserve assets while parties are in legal disputes. The use of receivers can be traced back to England during the rule of Queen Elizabeth when they established courts to deal with equitable issues. These courts were called chancery courts. The American colonies gave the courts the same equitable powers to use receivers with the adoption of the Constitution in 1787. Receivers are most commonly appointed over real estate but they can also be appointed over businesses, health and safety issues, environmental issues, family estates, government regulatory matters, and to enforce judgments.
For the purpose of this article the term “asset” could mean real or personal property, a business, and/or inventory. The term “opposing party” could be taken to mean a borrower in default or a defendant in an underlying legal action.
1. Just Petitioning a Court for a Receiver Often Triggers a Settlement
In my full-time practice as a court appointed receiver, it is quite frequent that no sooner than an attorney petitions a court to have me appointed as a receiver over a matter, I receive a phone call from that attorney informing me that the debtor promptly reinstated the loan or the opposing party agreed to settle the matter. “What made the debtor or opposing party act so quickly?” you might ask. Here are three of the reasons I’ve experienced for that phenomenon:
1) Petitioning a court for a receiver signals to the other party that you mean business. Once you petition a court for a receiver, you’ve crossed the line from “talk” into “action” and forced the opposing party to respond or incur the potential consequences. Once you file that petition, if the opposing party plans on opposing it, they are forced to hire legal counsel and challenge your request. That means spending time, money and effort opposing a motion that might be better spent settling the issue.
2) Many business owners and property owners don’t like to lose control of their asset. The nomination of a receiver signals to the other party that they will most likely lose control of their business, property, or other asset during the receivership. Although it’s quite often the case that such asset and its income stream are best protected in the hands of a receiver, just the thought of losing control of this income stream and/or the management of the asset itself, is enough to make the opposing party soften their position and move towards settlement.
3) Petitioning a court for a receiver triggers the fear of incurring legal fees and receiver fees in the mind of the opposing party. Money isn’t the only motivating factor in legal disputes, but when most parties realize that their actions could potentially cost them in terms of legal fees and receiver fees, it’s surprising how quickly settlement becomes an attractive option. We frequently see delinquent borrowers become more responsive to lender demands once they realize that they could be held liable for the cost of a receiver under their loan documents and/or personal guarantees. If an aggrieved party does not file a lawsuit and petition the court for the appointment of a receiver, quite often the opposing party has little incentive to promptly cooperate and work towards settlement.
2. A Receiver is in a Good Position to Mediate a Settlement amongst the Parties
Settling a legal dispute can be challenging when faced with the common scenario that the parties to a matter are distrustful of each other and the other side’s representatives. As a neutral third party appointed by the court, a receiver is in a unique position to work out a settlement in this scenario. A receiver doesn’t answer to the parties, but rather to the judge that appointed him or her. Often in litigation, settlement is made difficult because both the parties are entrenched in their position and the clients are instructing their attorneys to take positions that are unsubstantiated and unrealistic. This often makes settlement difficult without a neutral third party intervening. Since a receiver is neutral, the parties will often feel more comfortable communicating with the receiver when exploring potential settlement. We find this to be truer when one or more of the parties is not represented by legal counsel.
Although mediators are often used to try and mediate settlement, a mediator will often lack the rapport with the parties, an understanding of the parties’ “hot buttons”, the personal knowledge of the asset in question, and an insight into the core issues of a dispute that a receiver handling a matter will have. Keep in mind that, depending on the scope for which receiver has been appointed, a receiver usually has to communicate regularly with both parties and their attorneys, personally evaluate the condition of the asset at issue, obtain a valuation of the asset, and prepare an analysis of the issues of the case.
As such, the receiver has a hands-on/working knowledge of the parties, their positions, the asset and the issues. This all lends credibility to the receiver’s recommendations when leading the parties towards settlement that a mediator won’t usually have.
Between the receiver’s neutral status and credibility with the parties, a receiver can often bring the parties together for an expedited settlement, saving the parties time and money. In addition, a receiver has great incentive to facilitate settlement because a receiver knows that some judges appreciates working with a receiver that can resolve disputes and help lighten his or her overburdened court calendar (and it’s the judge that is ultimately responsible for appointing the receiver on future cases in his or her courtroom).
3. The Receiver Protects the Property
The receiver can stop the theft of copper piping, electrical wires/panels, and heating units, air-conditioning units, and building materials. They can also prevent the pilfering of trade fixtures or the dumping of hazardous waste at the property. When the property is not being responsibly managed, City and County Inspectors often take note and issue citations that are costly to resolve. Insurance companies also take action when buildings are not maintained and will often issue correction notices, increase premiums or cancel the policy. If an insurance policy is cancelled for failure to maintain, it will become difficult to get a new insurance policy placed. As such, the appointment of a receiver helps to protect a property’s structure and value.
4. The Appointment of a Receiver Can Bring a Fresh Approach to the Management of an Asset
A receiver will often put new and fresh management in place. This brings a fresh perspective and approach as to how the asset can be run more efficiently and profitably. The appointment of a receiver will usually strip the opposing party of their management and control of the asset and their ability to continue business practices that could be putting the asset deeper into its distressed condition. Depending on the court issued receivership order, part of a receiver’s duties is often to conduct an analysis of the management currently in place. An experienced receiver will have the resources to conduct this type of analysis and determine what’s working and what’s not working as far as the asset’s performance and how it’s being managed. We’ve had receiverships where bringing in new management quickly got a business back in the black, leased vacant space that wasn’t being properly marketed, needed capital improvements made that had been overlooked, and a repositioning of the marketing of the property that quickly lead to a higher sales valuation. In addition, a receiver will monitor this new management team, since the receiver is usually required to submit monthly status reports to the parties and the court informing them of the progress on the asset. A receiver will keep the current management in place, when he or she determines that it’s in the best interest of the asset and receivership estate to do so.
5. A Receiver Can Improve the Value of the Asset
On a real estate receivership, from the time that a lender records a notice of default, it will take approximately 90 to 180 days to reach a trust deed sale, depending on the state where the action is being filed. While the lender is waiting for the trust deed sales date, a Court Receiver can be working to increase the value of the property. Most investors that attend a trust deed sales or purchase after a sale, will make their offers based on the condition and value of the property.
A receiver can be instrumental in using this valuable time to improve the condition of the property and increase its value. A receiver can oversee the leasing of vacant space, complete necessary capital improvements, working with the city to resolve any outstanding permit or entitlement issues, help resolve title issues that might be plaguing the property, borrow funds and complete unfinished construction, prepare an asset repositioning plan, benchmarking studies, expense audit analysis, portfolio analysis, and a strategic marketing plan that incorporates a complete exit strategy.
If the asset is a business, bringing in new management can quickly stabilize the business operation, gain control of the cash flow, conduct an inventory of the business assets, and reevaluate the business practices that were compromising the success of the business. All these matters lead to an improvement in the health of the business and its value.
A receiver is always looking for ways to increase the value of the asset. Increasing the value or income stream of the asset makes for happy parties and also helps increase the likelihood of appointments for the receiver in the future. In addition, protecting and increasing the income stream of the asset helps insure that funds are available to pay investors and/or litigants.
6. A Receiver Can Help Determine an Asset’s Highest and Best Use
When dealing with real property, determining an asset’s “highest and best use” is another area that a receiver can serve to increase an asset’s value. Many lenders are going to be inundated with commercial properties that are in default and it will be daunting to keep track of them, determine accurate valuations for these properties, and establish the highest and best use for each property. A receiver can evaluate the condition of a property, as well as the surrounding properties that may have an impact on the value of the lender’s investment. If a property can be repositioned to increase its value, a receiver will be able to identify this and compile a business plan with the repositioning strategy and present said plan to the parties for their input. An experienced receiver will have relationships with appraisers, real estate brokers, management companies, city officials, contractors and inspectors that can pin point the value of a property and provide support documentation so that lenders have the information they need to make informed decisions to maximize returns, regardless of the direction they choose to take with the property (i.e. foreclosure or trust deed sale).
7. Appointment of a Receiver can help a Lender Avoid the Liability of Taking Ownership of an Asset upon Foreclosure
Once a lender forecloses on a property, the lender goes on title as its legal owner and becomes legally responsible for all debts and liabilities relating to the property. As such, the lender can become entangled in general liability claims, tenant claims, code enforcement citations, and Environmental Protection Agency citations. Even after the lender has sold the property and has gotten it off their books, the lender could potentially face future legal claims by the new ownership. Lenders are in the business of lending and often don’t want the extra exposure that comes from owning and selling real property. As long as the property is in receivership, the borrower remains on title as the owner and the lender avoids the legal liability of being on title.
8. Having a Receiver Sell a Property Helps Avoid the Potential Lender Liability and Stigma of an REO Sale
A receiver can be given the authority to sell a property if such authority is approved by a judge and included in the judge’s court order. If the receiver is given this authority, the lender never has to take possession of the property or assume liability for its sale. In addition, since the receiver is signing all sales documents in the name of the borrower, the sale will not be stigmatized as an REO (Real Estate Owned) property of the bank, which tends to bring in much lower offers and sales price.
9. A Receiver can Keep a Property Insured and do it at a Reduced Cost
It is common for a borrower that is not in compliance with a loan to allow the property’s structure and liability insurance to lapse. Not having insurance puts a lender’s collateral at risk. A lender usually has the right to place forced insurance in place but it is usually expensive and provides limited coverage. For example, if a property is vacant, an insurer won’t usually provide coverage in the event of vandalism. A receiver will research if insurance is in place and work to avoid the cancellation of the insurance coverage. If the policy was recently cancelled, the receiver might be able to get it reinstated.
A receiver will review the insurance policy in place and determine if the policy provides sufficient coverage. He or she will also competitively shop the insurance policy for the best terms, coverage and pricing. In the event the insurance policy is cancelled, the receiver often has a preferred relationship with different insurance companies that will write competitive insurance policies (not forced), based solely on a long standing positive relationship and track record with the receiver. Insurance companies often feel a property is better protected with an experience receiver in place and will provide better rates and coverage accordingly.
10. A Receiver Can Bring Investors in to Resolve Litigation
There are a number of ways that a receiver can bring investors in to help resolve foreclosure litigation. Most lenders would like to see their loans reinstated, paid off or sold. It’s also usually in the best interest of the borrowers to see their loan reinstated or paid off. If any of those three scenarios were to occur, it could potentially resolve the litigation between a lender and borrower. A receiver can work with an inexperienced borrower to try and get the loan reinstated. Borrowers frequently attempt to bring in outside investors resolve the situation. Outside investors usually want to get a better understanding of the property than the borrower can give them, not to mention they don’t always trust the information provided to them by the borrower. A receiver, without providing any guarantees, can give credibility and transparency to a potential deal, as well as the necessary comfort level an investor will want before committing. In addition, receivers are inundated with inquires from investors looking to purchase lender’s notes or borrower’s distressed properties. Investors know that receivers are handling these types of assets. If an investor is a good fit to purchase or inject capital into an asset under receivership a manner that is the best interest of receivership estate, it is a win-win situation.
Kevin Singer is founder and President of Receivership Specialists which, since 2001, has specialized in state and federal court receiverships, referee assignments, and partition sales. Along with co-owner, John Rachlin, Esq., Receivership Specialists has offices in Sacramento, Los Angeles, San Francisco, San Diego, Phoenix, Reno, and Las Vegas and handles assignments throughout the Southwest.