◀ Back    Trigild eTips Selling Assets During Receivership

Question: Can a receiver sell assets that are part of the receivership estate?

Answer: The simple legal answer to this question is "Maybe". Federal receivership rules have a specific provision for allowing the receiver to sell any or all of the assets in the receivership estate, subject to court approval. Most state courts’ receivership rules are much less specific and do not automatically provide the receiver with power to sell assets.

There are circumstances in which a state court is more likely to allow a sale, the most common being a stipulation from both sides that such a sale is beneficial to all. When borrowers have personal liability or a guarantee, they are more likely to cooperate in anything which reduces potential loss. In some cases the court will allow the sale even over the objection of the borrower when the recovery from an early sale will be higher and there is "no foul" to the borrower.

It is important to note that every case and every state is different, and the lender should speak with their counsel and the receiver to determine the availability of an early sale. The concept of sale during the receivership is still new in many jurisdictions and some judges will not approve it.

Question: Why would a lender want a receiver to sell assets, rather than wait until after the foreclosure?

Answer: There are a number of reasons a lender would prefer to have the assets sold by the receiver prior to foreclosure. In many cases, the earlier sale will usually deliver a higher price and better recovery for the lender, especially when the security includes not only real and personal property, but an operating business as well. Both receivership and bankruptcy can have a negative effect on buyers’ perceptions of value and business stability, often exacerbated by concerns of vendors, employees, customers and others. Therefore the earlier the property is sold, the less time those concerns have to build.

Another important issue for lenders is the potential liability, particularly in the case of properties with environmental problems, or pending warranties such as in a residential tract development or condominium conversions. This potential liability exposure is good reason for a lender to avoid ever taking title to the property as an owner. In contrast, a receiver’s liability, barring any malfeasance, is limited to the assets of the receivership estate itself, and no personal liability can attach.

A third reason for lenders to avoid ownership is the perceived "deep pocket" which unpaid vendors suppliers, utilities, critical suppliers, and especially franchisors, may attempt to get the lender to pay the borrower’s debts. The receiver has no obligation to pay any pre-receiver debts and can assume the role of the "bad cop" in order to affect a clean break between borrower and prospective buyers.

Question: What if the court will not allow the receiver to sell any assets? Does that mean we have to wait out the foreclosure period and then begin the marketing process as an REO?

Answer: Even when the receiver is not granted authority to sell the asset, the court may approve a marketing program by the receiver, and reserve the question of sale for later consideration and argument, by which time the borrower is mentally less connected to the property and more receptive to a stipulation. However remember that a receiver may not take any action to benefit only one party. Using receivership estate funds to make upgrades to enhance the later sale by the lender would be one example. Maintaining and repairing (vs. upgrading) the property is appropriate, however. Upgrades required as part of a franchise requirement would also be appropriate. Debtors’ lawyers routinely view a receiver as being under the control of the lender, since the lender requested that particular receiver. Courts do not see that implied conflict, and a skilled receiver will be careful to avoid a real conflict.

 

Legal Definitions

Receivership Estate: The totality of the interests that the receivers of an association in one or more states are appointed to protect. Black’s Law Dictionary (8th ed. 2004)

Receiver: A disinterested person appointed by a court, or by a corporation or other person, for the protection or collection of property that is the subject of diverse claims.