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CRE Finance World, Summer 2012

Property Sales in Receivership: Alternative to Foreclosure on the Increase Receivers have no obligation, and often no right — without prior defendant in the action for foreclosure. While legally unrelated, the court order — to pay any debts incurred by the borrower prior to the Federal rules for receivership sales are very similar to “363” sales receivership, which also means that many financial burdens on the in a bankruptcy action. The various state receivership rules are property can be negotiated and resolved prior to any foreclosure. another matter entirely. Some states have specific rules that allow for sales by receivers. Other states may have statutes or case law Receiver Sales: As is, Where is that specifically prohibit such sales. Equally common are those There are several key points regarding receiver sales that warrant states which have no specific rules at all when it comes to receiver attention. The Purchase and Sale Agreement for a receiver sale sales. Until last year, that was the case in Arizona, and borrowers will be identical for all prospective buyers (other than price). A counsel argued that in this case the only means for recovery by receiver need not — indeed must not — allow any one party a term a lender was by way of foreclosure. We were, along with lenders not offered to all. In our role as receiver, we prepare a standard counsel, able to persuade two judges in two unrelated matters to ironclad P&SA, which cannot be amended or altered by any buyer. grant us the right to sell as receiver. (The second judge had read In fact, such an attempt would cause the experienced receiver the decision issued by the other judge and our task of persuasion to exclude that interested party from any further consideration was greatly simplified in that case). as a purchaser. Receiver sales are “as is, where is”, without any representations or warranties by the receiver — and due diligence A very truncated description of the arguments accepted by the is solely the buyer’s responsibility. While the receiver cannot hide courts included 1) the fact that Arizona had no laws allowing sales any important information, he/she is not obligated to undergo any by receivers did not preclude the court’s permission, since there additional investigation. Escrow periods should be very short and was also no law in Arizona that specifically said receivers could not require substantial deposits and proof of ability to perform. We do sell; 2) as a court of “equity,” the judge was authorized to exercise not allow for conditions such as the obtaining of financing, and her own judgment in doing what was best for all parties, rather expect some deposit funds to “go hard” within a short time. than simply applying specific rules; 3) since special servicers cannot make new loans, but could restructure an existing loan and Finally, even if the receiver is granted the power to sell, the executed then allow it to be assumed by a new buyer, the property could be sale agreement should still be subject to the court’s final approval sold by the receiver with available financing — a huge benefit in a and order. In addition, the receiver will have reviewed the prospective rough CRE and financial market (in this case netting the servicer sale with title companies to be sure the form of the court’s order $50 million in additional recovery); 4) there was no equity in the meets their needs. The court’s final blessing protects the receiver property, beyond the loan amount and the present value was well and the lender from later claims. below the existing mortgage, so the borrower was, and would continue to be, unable to secure another loan or attract additional Legal Landmines — and Guidelines equity money (why become a partner in the existing debt when you could get the property for less after foreclosure and/or sale); and Unlike receivership, bankruptcy can be a very protracted and 5) in this case the receiver sale was a “win-win” for both parties — expensive process, especially when considering the various the lender could reduce its ultimate loss and the borrower would complex rules and requirements. In general, bankruptcy tends reduce any potential liability as guarantor by the same $50 million. to be for the benefit of the borrower and its creditors, while receivership is most often at a lender’s request and focused on Similar results have been accomplished in other states. In a protecting secured assets. receivership for a chain of convenience stores/gas stations in New Mexico, our earlier (pre-foreclosure) sale as a receiver gained The receivership process, however, does have its share of rules proceeds far better than would have been received at a later time. and regulations. In the case of a receiver appointed in Federal In this case, it was beneficial for the lender to avoid having legal Court (typically because the loan is secured by property in more title to the properties, thereby evading chain-of-title for potential than one state), there are specific Federal rules that provide for environmental claims. sales by the receiver, even over the objection of the borrower/ A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 59


CRE Finance World, Summer 2012
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