◀ Back    Trigild eTips Commercial Loan Recovery 101: Part II


In the past when workout solutions failed, lenders would simply foreclose on the security for the loan and then sell the assets. During the foreclosure process, however, the borrower may allow the property to deteriorate, significantly diminishing the asset value.

An optimum solution may be to seek state or federal court appointment of a receiver – an impartial third party – who can oversee and protect the asset during the foreclosure process and ideally bring a higher recovery on the loan. This can be accomplished by stipulation with a cooperative borrower, or through an adversarial proceeding if necessary.

Most commercial loan documents provide for the appointment of a receiver in the event of a default. Different jurisdictions and judges’ attitudes about appointing a receiver can range from viewing it as routine, to seeing it as an extreme step.

In the case of a showing of special circumstances (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. When not available, the 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 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, for whatever reason.

A receiver is authorized to act when an Order Appointing Receiver 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 Order. The bond protects the parties in case of any malfeasance by that 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 Order Appointing Receiver and any additional instructions or orders. It is important to include powers to cover all anticipated circumstances. The lender’s lawyer will usually talk with the proposed receiver for this purpose.

Most courts distinguish between receivers appointed to take over an entire business entity – often called a general assets receiver, and one appointed to take possession of specific assets which secure the loan and any income generated by those assets – usually called a rents-and-profits receiver.

Typically, a receiver is responsible for protecting the property that represents the security for the loan – its improvements, furniture, fixtures, equipment, and its income – as well as accounting for all receipts and disbursements and repairs and maintenance, which is particularly important in the case of an operating business.

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 spend money to correct safety hazards, avoid deterioration and to maintain the asset and its value.

Operating Businesses Present Special Problems

When considering the options, lenders need to remember the vast difference between operating businesses such as hotels and restaurants, and traditional income properties such as office buildings and shopping centers. Receiverships can help deal with the complexities of an operating business such as 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 have other technical issues, such as liquor licenses, franchise agreements, equipment leases, and retail space tenants.

Receiver’s Certificates for Additional Advances

If the property does not generate sufficient income to maintain the property, 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. Also, the receiver can repay that loan at any time, and not have to wait until the final discharge and distribution. The issuance of a receiver’s certificate requires court approval – such authority should be included in the original Order Appointing Receiver.

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.

Selling Assets During Receivership

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. But most state courts’ receivership rules are less specific and do not automatically provide the receiver with the power to sell.

There are circumstances in which a state court is likely to allow a sale, the most common being a stipulation from both sides that such a transaction is beneficial to all. When borrowers have personal liability or a guarantee, they are more likely to cooperate, 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.

Bankruptcy vs. Receivership

Confusion between bankruptcy and receivership is common, but the differences are fairly simple. Bankruptcy is a legal process to protect a borrower/debtor from collection actions by creditors, and its rules are aimed at protecting the borrower, not the lender. Receivership is an action in which the lender seeks to protect its security by having an independent third party take possession of the asset. As compared to bankruptcy actions, receivership is normally faster and less expensive as the process is not mired in rules and tedious complications and delays.

The benefits of a receivership are many. The appointment of a third party to take possession of a property and operate the business will shield the lender from liability, since the receiver is an officer of the court, not an agent of the lender. The receivership can be as critical to the lender as the foreclosure itself, since the property’s cash now goes into the receivership estate, and the borrower cannot use it for non-property expenses like legal fees. It is important to remember that a receivership is not a legal “action,” in itself, but rather an “ancillary remedy” which is sought while another action (for example, a judicial foreclosure) is pending.

A lender’s recovery efforts are sometimes interrupted by a bankruptcy filing by or against the borrower. Sometimes, the bankruptcy case commenced by the filing will be a liquidation under Chapter 7 of the Bankruptcy Code. More often, it will be a business reorganization under Chapter 11 of the Bankruptcy Code. In either circumstance, the nature of the lender’s recovery efforts will necessarily change to some degree. If the lender understands the bankruptcy process, however, it will still be in a position to achieve its recovery goals in many cases. Following are some important aspects of the process that any lender making commercial loans should understand.

Automatic Stay

The automatic stay arises when a bankruptcy petition is filed, whether the case commenced is voluntary or involuntary. Notice to creditors is not required. The automatic stay generally stops collection efforts, foreclosure proceedings and other enforcement actions by creditors, including the commencement or continuation of any judicial, administrative or other action against the debtor, the enforcement of a pre-petition judgment against the debtor or property of the estate, any act to create, perfect or enforce a security interest or other lien against property of the estate and the setoff of any pre-petition debt owing to the debtor against any claim against the debtor. There are a number of exceptions to the automatic stay, but most tend to be narrowly drawn and, accordingly, do not provide relief to many lenders.

To obtain relief from the automatic stay, a lender typically must obtain a bankruptcy court order modifying or terminating (also called “lifting”) the automatic stay. The court may grant this relief for cause, including the lack of “adequate protection” of an interest in property. With respect to a stay of an act against property, the court may also grant this relief if the debtor does not have an equity in the property and if the property is not necessary to an effective reorganization. Additional grounds for relief may apply in a “single asset real estate” case.

This article is reprinted with the publisher’s permission from the COMMERCIAL LENDING REVIEW, a bi-monthly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publisher’s permission is prohibited. To subscribe to the COMMERCIAL LENDING REVIEW or other CCH Journals please call 800-449-8114 or visit www.CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of CCH or any other person. All rights reserved.

Trigild News

As receiver, Trigild is facilitating the sale of a 223 unit garden style apartment complex in Orange Park, FL. The property consists of 29, two story buildings constructed in 1986 on 19 acres. Utilizing its buyers registration database at http://www.trigild.com/Buyer_Re gistration/, Trigild sent information regarding the asset to potential buyers who flagged interest in multifamily properties on the east coast. For further information on the property, visit http://www.trigild.com/Prop ertyListing/Search/.

Trigild was appointed receiver and management company for a hotel located near the University of Notre Dame in South Bend, IN. Trigild’s hospitality team took immediate control of the asset, hired an interim general manager, andTrigild’s hotel marketing department is preparing and implementing a marketing and yield management plan to quickly increase revenues and improve the hotel’s bottom-line.

Continuing its stellar track record of selling properties in receivership, Trigild successfully facilitated the sale of a multifamily apartment complex in Las Vegas, NV. As receiver, Trigild kept the property clean, handled all life and safety issues and helped market the property for sale.

Adding to its growing receivership team, Trigild hired paralegal Jennifer Cooper to assist in case management. The company is currently handling 51 receiverships for 125 assets located throughout the U.S.

The Trigild Lender Conference early bird rate ends August 21, 2009. Visit www.trigildlenderconference.com for more information.