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CRE Finance World, Summer 2012

Property Sales in Receivership: Alternative to Foreclosure on the Increase Receivership appointments will vary depending on the assets to The bottom line? If the borrower and lender both agree that the be protected. For example, a “rents and profits” receiver is charged receiver can sell the property, the legal hurdles are certainly fewer, with protecting a specific asset which serves as security for a CRE providing both parties and the court are convinced that the marketing loan, while a “general assets” receiver usually covers all of the assets efforts of the receiver and broker were adequate and the price and of a particular business entity. A court can also allow for a “limited terms fair. receivership,” which, as its name implies, covers some very specific purpose – perhaps assets involved in a business partnership suit Beware of Lender Liability or to complete construction or remedy environmental issues. While our focus here has primarily to point out many of the benefits of the use of receivers by lenders and servicers, there is a long list The guidelines regarding authority and responsibilities of the of what a receiver can do wrong – including incurring unreasonable receiver are all detailed in the Order Appointing Receiver (OAR) delays and costs. The greatest risk for a lender falls under the which is signed by the judge and delivered to all parties. The OAR catchall phrase of “lender liability.” entered by the court covers the scope and authority given to the receiver which, in addition to the normal “protective” clauses may If a defendant (borrower) in a foreclosure matter is able to prove also include authority for the receiver to: that the receiver took action based on instruction or direction from the plaintiff (lender), or included the lender in making business •Accept funds made as “protective advances” by the lender to decisions, the court can rule that since the lender has taken an cover operating shortfalls, maintenance costs, protection of active part in the operation of the property and/or business, the licenses and franchises; losses or make improvements; lender’s status in effect changes to that of a “co-owner”, forfeiting any rights as a lender and making the lender an unwilling partner •Borrow money for similar purposes, secured by a “Receiver’s with the borrower. Such cases are rare, but none are small. Certificate”, which becomes a priority lien on the asset (usually made by the existing lender or servicer); When CRE loan defaults increase to a level we are now seeing, not only does the demand for receiver services expand, but •Bring legal actions to recover money owning to the property; the number of persons and companies claiming qualification as receivers also grows exponentially. Developers, management •Hire other professionals as needed, including management companies, lawyers, brokers and others whose regular sources companies, attorneys, brokers, environmental experts, contractors of income may have diminished in this downturn often seek and others. receivership assignments, sometimes discounting fees in order to also get leasing contracts or get a listing from the lender when the A recent California trial court decision (Wachovia Bank, N. A. v. property becomes REO. Using an unqualified receiver can be quite Downtown Sunnyvale Residential, LLC, et al.) unsettled the industry — risky, since receivership sales require an extensive understanding ruling that a receiver sale could be voided, since the property had of the court system, as well as real property and contract law issues. not been broadly marketed and the borrower had not consented. Inexperienced receivers, lenders and prospective buyers could Although a disturbing ruling to many, the decision was not appealed find themselves in a challenging position if they fail to properly and is a non-binding trial court decision. Title companies and lenders understand the statutory requirements involved in selling a property were both concerned with this result, but some receivers and through receivership. attorneys believe the decision at issue was an anomaly — based on a very peculiar factual situation — and will be unlikely to impede or impact other receivership sales. CRE Finance World Summer 2012 60


CRE Finance World, Summer 2012
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