Question: I’m dealing with several defaulted loans that include operating businesses. Should the Order Appointing Receiver include anything special?
Answer: Court orders are crucial to any takeover — careful drafting not only saves time and helps curtail potential problems, but can affect the cost to the receivership and the amount recovered on the loan. When the asset involves the operation of a business (vs. a passive investment such as an office building), the court order is even more important — it is critical to view such entities primarily as a business and secondarily as a real estate asset. Special issues for "Special Properties" include:
Bank Accounts. A complex property such as a hotel will have multiple bank accounts, cash banks for personnel such as bartenders, and even accounts used under different names. With this in mind, the court order should allow the receiver to seize all accounts and specify other known names. The receiver should be able to keep the accounts open to receive additional deposits or transfers, but also have authority to freeze all funds so no further checks can clear.
Inventories. An "inventory" may also include accounts receivable. Most receivership statutes — when they even exist — refer to "receipts and disbursements," not profits and losses, implying that accounting should be done on a cash basis. It is best to not list accounts receivables as inventories or assets, but to simply note the apparent amount so any payments made can be reflected as income. Also, dollar values should not be assigned to most inventories, since these figures are subjective and can spark subsequent arguments.
Books and Records. Detailed records are key. Long lists of major corporate accounts, travel agents, daily reports and reservations are vital for hotels, while fuel supply data and store sales records are critical for gas stations and convenience stores. The bottom line? All business records provide valuable fodder for the court order.
Franchise Agreements. Most franchise agreements deem receivership or bankruptcy as a default. While a particular franchise can be a benefit, if unwisely selected, the "flag" can be detrimental. Receivers can quickly assess the brand’s value, successfully maintain the desirable identity and ideally improve on the terms. For these reasons, a court order should always allow the receiver to negotiate franchise agreements.
Licenses and Lottery Tickets. These are a vital source of income for many special assets, which may count on robust lottery ticket or liquor sales. A receiver needs authority to use existing licenses and/or to transfer licenses, as a new license rarely allows for immediate operation, and may take months of processing. Assignment, transfer or mere "use" of the existing license helps ensure continued, seamless operations.
Unusual Vendor Relationships. An operating asset’s relationship with vendors is not always clearcut. For example, when a customer pays via credit card at a gas station, the proceeds may be deposited directly into the account of a fuel supplier or "jobber," who also requires large deposits prior to fuel delivery. As these receipts may represent a large source of income, cash flow at the property can be limited, leading to the following discussion about receiver’s loan and receiver’s certificates.
Receiver’s Certificates. The lender should be prepared to fund a business’s operating losses to maintain or enhance the asset’s ultimate sale value. If this can be anticipated, the order appointing receiver should also grant permission for the receiver to borrow money. The loans can be added to the underlying indebtedness as additional advances, or "receiver’s certificates" to be issued as a separate debt.
Accounts Payable. Generally, a receiver has no obligation to pay pre-receivership debts, though the court may allow exceptions if the receiver warrants it necessary to protect or benefit the estate. When such expenditures are expected — i.e. for unpaid wages — the initial order should allow for payments at the receiver’s discretion.
Intercepting Mail. It is not uncommon for payments from major accounts to be directed to a location other than the actual property. For that reason, the receiver should have authority to intercept mail and have it redirected by the post office.
Personal Property. Operating assets such as restaurants, hotels and convenience stores often lease property. The receiver must determine who the actual owner is, and whether or not to continue honoring such leases. It may be beneficial to have the court "order" other parties not to remove leased equipment.
Franchise Agreement: The contract between a franchisor and franchisee establishing the terms and conditions of the franchise relationship. · State and federal laws regulate franchise agreements.
Black’s Law Dictionary (8th ed. 2004)
In just under one year, 26 of 42 gas and convenience stores located throughout Michigan and Ohio have sold during receivership. The remaining stores in escrow are set to close in the next few weeks. On February 20, 2007, Trigild was appointed Receiver of the properties and retained the broker services of Tranzon Hagen to facilitate the sales. To date, five buyers purchased the properties in a sealed bid auction.