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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 75 The receivership estate generally has no legal obligation to debts incurred prior to the receiver’s appointment, which protects the lender’s interest and also acts as a barrier against some creditor actions such as garnishment, attachment or repossession of assets without court consent. While dramatic changes or improvements to the property or its business operation are not usually a part of the receiver’s duties, the receiver does have the authority to expend funds to correct safety hazards, avoid deterioration and to maintain the asset and its value. Following are some more receivership issues with which lenders/special servicers should be familiar: Operating Businesses Present Special Problems. When considering their options, lenders should keep in mind vast difference between operating businesses such as hotels and restaurants, and traditional income properties such as office buildings and shopping centers. Receiverships can help with the complexities of an operating business, which include payroll and employment, tax liabilities, vendor and supplier relationships, utility services and inventories that may require immediate attention. In addition, an operating business will frequently include other technical issues, such as liquor licenses, franchise agreements, equipment leases and retail space tenants. Sales During Receivership. The sale of property through a receivership is one of the most notable and largest changes produced by this real estate cycle. This is largely because many creditors do not want to take title to a property through the foreclosure process, either because they are not in the business of owning real estate or they do not want to be in the chain of title of an environmentally challenged property. Once the receiver is in place and has the correct court approvals, he/she can quickly begin marketing the property for sale. These sales typically bring a higher recovery for the creditor rather than waiting to sell the property post foreclosure. In fact, If done correctly, a receiver sale can greatly expedite foreclosure litigation and reduce costs. Receiver’s Certificates for Additional Advances. If a property does not generate sufficient income to maintain itself, the receiver can ask the court to allow the issuance of “receiver’s certificates” for new loans made to the receivership estate by the lender. Receiver’s certificates become a priority over all other final distributions and are noted as such by the court. Assuming that the lender does not expect full recovery on its original loan, the loan to the receivership estate will be paid prior to others, including the lender’s original loan. State vs. Federal Receiverships. Special issues may arise within receiverships when the collateral is located in multiple states or jurisdictions. Receivership actions are commonly filed in state court in the county in which the debtor — or a significant portion of the lender’s collateral — is located. State court jurisdiction, however, is confined to the state and, in many instances, to the territory of the county in which the court and property are located, while federal receivership actions are conducted in the federal district court. Because of this, federal receiverships allow a receiver to exercise nation-wide jurisdiction, which ultimately, can be less costly. However, a lender is afforded a choice between federal and state court only if jurisdiction exists in both courts. Bankruptcy Basics Commercial real estate lenders frequently have debtors file for bankruptcy, and the operative word in this arena is valuation. Whether a lender is over-secured or under-secured can determine what options are available within the bankruptcy. While there are many kinds of bankruptcy, the two most common types encountered by commercial lenders are liquidations and reorganizations. A “Chapter 7” bankruptcy, named for its place in the bankruptcy code (11 U.S.C. § 701) is filed for the express purpose of liquidating the assets of a business or company and winding up its affairs. A “Chapter 11” bankruptcy (11 U.S.C. § 1101) is filed when a debtor seeks to reorganize its business and exit the other side of bankruptcy with a clean slate. Automatic Stay and Requesting Relief. The filing of a bankruptcy petition, whether voluntary or involuntary, operates as a stay against any action or proceeding against the debtor, including any act to enforce a judgment against the debtor’s estate or obtain possession of property of the estate (11 U.S.C. § 362). The automatic stay prevents any act to create, perfect or enforce any lien against property of the debtor’s estate. This includes foreclosure proceedings, even if already begun. However, many secured lenders will file a motion for relief from the automatic stay to complete the foreclosure process outside the jurisdiction of the bankruptcy court. The bankruptcy judge must evaluate various factors to determine if relief from the automatic stay will be granted, but it is a useful option for lenders to consider and can provide a quicker, less expensive way to get the collateral away from the protection of the bankruptcy court, so more traditional remedies for default can be enforced. A Bankruptcy and Receivership Overview “Often, there is confusion between bankruptcy and receivership — even with creditors and attorneys, especially those who do not handle both on a regular basis.”


CRE Finance World, Summer 2013
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