A Bankruptcy and Receivership Overview

CRE Finance World, Summer 2013

A Bankruptcy and Receivership Overview Strategies for These Commonly Used Remedies Kelley McLaren pproximately $1.7 trillion in loans will mature in the next five years, and lenders are looking for the best options to improve results if looming defaults bear out. In the past, strategies for handling a defaulted loan were straightforward: the borrower would file bankruptcy or the lender would foreclose. Recently, other alternatives have emerged as effective alternatives for both lenders and debtors, including Deed in Lieu of foreclosure, bankruptcy (either 7 or 11), note sales, discounted pay offs and receivership. Increasingly popular, receivership is frequently mistakenly viewed as the mirror image of bankruptcy. Often, there is confusion between bankruptcy and receivership — even with creditors and attorneys, especially those who do not handle both on a regular basis. The most basic and fundamental differences between the two are fairly simple. A bankruptcy is an action usually filed to protect a borrower/debtor from collection actions by creditors. Bankruptcy courts and rules are primarily aimed at protecting the borrower, not the creditor. On the other hand, receivership is an ancillary action filed during a foreclosure proceeding in which the creditor seeks to protect its security by having an independent third party take possession of that security. In comparison, receivership is typically faster and less expensive than bankruptcy, as the process is not mired in rules or complications. Ultimately, there are benefits and detriments to both. Following is an overview: Receiverships on the Rise Many lenders seek state or federal court appointment of a receiver — an impartial third party — who can oversee and protect an asset during the foreclosure process and ideally maximize loan recovery. It is important to note that receivership is typically an “ancillary remedy.” The motion to appoint a receiver is filed after a suit is already in progress or contemporaneously with the filing of the original complaint – and the exact timing is dependent on the jurisdiction in which the receiver is appointed. Receivership is designed to protect a lender’s security interest in a debtor’s asset(s) during an interim period, for example, while a foreclosure action is pending. In this case, the secured creditor (lender) is asking the court to protect its security (land, buildings, business income, cash, etc.) until the foreclosure is resolved. When considering the appointment of a receiver, the court must take into account whether or not the debtor will act in the best interest of the asset and/or its value CRE Finance World Summer 2013 74 during the term of litigation. Thus the appointment of a receiver is the court’s acknowledgement that both an asset and its value are best preserved and maintained by an unbiased third party, or receiver, which routinely coincides with and supports a lender’s need or desire to request the appointment. Accordingly, the court will appoint an independent person, not connected to either the plaintiff (lender) or defendant (borrower) in the foreclosure action. That independent party “takes possession” of the asset(s) on behalf of the court and remains in possession and control of the asset(s) until the default of the loan is cured, the property is sold in receivership or the foreclosure is completed. Most commercial loan documents provide language for the appointment of a receiver in the event of a default. Additionally many states have statutes that allow the appointment of a receiver. However dissimilar jurisdictions and judges maintain a variety of opinions and approach the appointment of receivers very differently. While some utilize and approve the appointment of receivers routinely, others may view receivers as an extreme and/or last resort measure. Often those with the latter view are either unaware or do not possess the experience and/or knowledge base of the benefits of a receivership. When special circumstances arise (damage to the value of the underlying security, potential loss of franchise, failure to pay taxes or wages, etc.), lender’s counsel may seek an ex parte hearing, which shortens the notice period, sometimes to 24 hours. If unavailable, a hearing will be held according to statutory notice rules and according to the court’s calendar. A receiver may also be appointed by way of a stipulation between the parties, which makes the court’s action most expeditious and predictable. A stipulated appointment often occurs when the borrower is willing to walk away and the lender does not want a deed in lieu of foreclosure or to ever take title. A receiver is authorized to act when an Order Appointing Receiver (OAR) is entered by the court. However, in most jurisdictions, the receiver must file an oath and bond prior to commencing his/her duties. The purpose of the oath is for the receiver to state that he/ she will act responsibly according to the OAR. The bond protects the parties in the case of any malfeasance by the receiver. In some cases, the lender/plaintiff may also be required to file a bond. A receiver’s authority and responsibility is governed by the OAR and any additional instructions or orders of the court. It is important to include powers that encompass all anticipated circumstances. As a result, it is beneficial for lender’s counsel to speak with the proposed receiver. A Managing Director, Receivership Services Trigild David Wallace General Counsel Trigild


CRE Finance World, Summer 2013
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