Question: What happens to debts the borrower incurred for the property prior to the appointment of a receiver?
Answer: The receivership estate generally has no legal obligation for debts incurred prior to the receiver’s appointment, which protects the lender’s interest and acts as a barrier against some creditor actions such as garnishment, attachment, or repossession of assets without court consent.
This rule, while logical to a lender whose security (rents and profits) should not be further reduced for the borrower’s benefit, is often misunderstood. Immediately after appointment, the receiver will send written notice to every known creditor advising them that pre-receivership debts are still the responsibility of the borrower, and all debts incurred by the receivership estate will be paid by that estate. Creditors can exercise their right against the borrower, but may not take possession of any property, cash, accounts receivable or other assets which are in the possession of the receiver pursuant to the court order. Creditors who have previously filed mechanics liens, UCC statements for personal property, or have otherwise established special rights may still be able to enforce those rights against the property.
Question: How do we guarantee that critical vendors remain in place?
Answer: Unlike bankruptcy, which provides a trustee with the power to force certain creditors to continue extending credit to the defaulting borrower, state receivership laws typically offer no such privilege to a receiver. In state court actions, the receiver may ask for an order to force creditors to continue doing business with the property. However, a court order directed at someone who is not a party to the action is often unenforceable. In contrast, the Federal courts do have the authority to enforce such an order.
Question: What happens, then, if a critical vendor refuses to follow the court order, and threatens to shut down service?
Answer: That is a good example of a case where the receiver may want to pay some pre- receivership debts. The ultimate goal of the receiver is to protect and maximize the value of the asset. In some cases, it may be worth paying some expenses related to unfinished construction or condo conversions, hotel franchises, unique suppliers, employees and others who provide critical services or products to maintain the value of assets. A prudent receiver will seek the court’s approval for such action, to avoid later challenges by the borrower or other parties.
Trigild and Sea Country Homes have aligned to offer lenders recovery services for unfinished residential developments. Trigild serves as receiver and Sea Country provides project management. Trigild has recently announced a similar alliance with Burnham Real Estate for distressed commercial construction, including condo conversions.