What are the pitfalls of using an inexperienced receiver?
Receivership is a complex legal process and there are many intricate details that a potential receiver needs to inherently understand. Inexperienced receivers will need additional hours — at the direct expense of the lender — to teach themselves the ins and outs of receivership law. Indeed, an “inexpensive” receiver can ultimately prove more costly, as the result of costly mistakes, lost opportunities, and expensive hourly fees for outside professionals who are needed to supplement the receiver’s abilities.
A novice receiver:
- May enter into agreements that are not “legal” — this will most likely lead to litigation down the road that can impede the loan recovery or cost the lender the property all together. For example, if the inexperienced receiver enters into vendor agreements and does not understand the termination clauses, thousands of dollars can be tacked on at the end of the receivership when these contracts are cancelled.
- May not understand complex tax laws. In a recent case, a receiver was forced to personally pay federal taxes out of the receivership estate because he had paid municipality taxes of the estate prior to paying the federal claim.
- Will have limited knowledge on what needs to stay in the debtor’s name or what items are prudent to transfer into the name of the receiver – such as liquor licenses. A lack of understanding about how to make such a transfer can lead to an extreme devaluation of the asset.
- May not know how to ensure that sales or TOT taxes are being paid and recorded appropriately. This can lead to priority liens placed on the property that cannot be removed until the property tax documentation has been appropriately filed.
- May be unaware of what payments the receiver is obligated to pay, or not pay, and could commit to unnecessary payments at the lenders expense.
- May agree to arbitration, not knowing that a receiver cannot arbitrate without the court’s blessing. This can create havoc and additional lawsuits.
- May not properly understand the disposition process. Selling a property as receiver can be tricky if you are not aware of what must be disclosed on all sales documents. Any slip up can lead to the sale being void — and a very large lawsuit. In one instance, a receiver improperly sold the receivership property and the whole sale subsequently fell apart.
- May not post bonds in a timely fashion. In a case where a receiver had not posted bonds in nine days, the debtor retained control of the property. Ultimately, the accounts were drained and the property was removed from receivership.
- May not understand what information should – and should not – be shared. The debtor has the right to receive a copy of everything and know what is transpiring at the property. A good receiver will know how to properly share what is happening without undermining the receivership.
- May not realize that the debtor has a right to object to everything the receiver does. An experienced receiver will be able to work under these confines and minimize if not eliminate the need to go back to court and at the same time not let information become public prematurely.
- May hire a management company under an improper contract that gives the management company carte blanche in its authority and spending capabilities. The receiver will be left with minimal if any control and any added costs from this mistake will be at the expense of the property.
- May not prepare the correct documents when winding up the receivership estate. A set group of people should receive a copy of the motion to release the receiver. If vendors are left off this list and if the receiver remitted funds to the bank, the vender may be able to seek an action against the bank as well.
Should I be concerned about Lender Liability?
As previously mentioned, there are many scenarios that could spawn lawsuits, making the appointment of a qualified receiver even more critical. In fact, receivers are responsible for walking a fine line when it comes to the lender or plaintiff. Crossing that line opens the lender up for a lender liability lawsuit and risks making the lender appear as a partner in the business.
Specifically, the lender should:
- Be cautious in discussions with borrower’s franchisor, lien claimant, vendors
- Assume that every internal communication will ultimately be produced and reviewed by the borrower
- Never control or exert control over the receiver
What are some additional legal ramifications of using an inexperienced/unqualified receiver?
Receivership has very few hard-core rules and regulations, very few written guides, and the court has very wide discretionary powers, allowing the receiver great latitude. This makes it even more important for lenders to enlist a competent, qualified professional.
Ultimately, mishandled receiverships can result in:
- Loss of property value
- Loss or misuse of cash, which could have been a part of the lender’s recovery
- Exposure to lender liability claims
- Penalties for breach of fiduciary duty
- Lawsuits filed by the parties, vendors, employees, unions, government agencies, franchisors and others against the property, future owners and sometimes even the lender
- Loss of liquor, franchise or gaming licenses
- Environmental liability imposed on the lender
- Loss of the enterprise value in an operating business
What questions should I ask a potential receiver?
Specific inquiries for potential receivers by lender and counsel should include but are not limited to: How many receivership assignments have you handled, and in which state or federal jurisdictions? For what kind of assets – office, multifamily, and hotel — have you worked, and do you have direct operational experience with this business type? Do you anticipate hiring outside professionals and if so, who are they, what are their qualifications and hourly rates?
What Else do I need to Consider when Hiring a Receiver?
The guidelines regarding authority and responsibilities of the receiver are all detailed in the Order Appointing Receiver, which will be signed by the judge and delivered to all parties. In most cases, the receiver will also share this document with important creditors and suppliers. Additionally, the receiver should be able to offer the lender and its counsel a list of circumstances that may transpire — and suggest language for inclusion in the order to circumvent additional trips to court. While no receiver can predict with certainty how each case will proceed — and the fees and costs that may be incurred — a reputable receiver will be able to provide concrete examples of similar work, along with a list of bankers and lenders familiar with his or her work and reputation. At minimum, the lender should be certain that every dollar of fees, expenses, and reimbursements will be clearly identified in the receiver’s regular reports. In addition, it is critical to evaluate how many other experts – e.g. lawyers, accountants, property managers — will be hired by the receiver, or if those services are available in-house.
There can be a great disparity in the real cost of a receivership and a true apples-to-apples comparison is vital. A receiver’s hourly rate is not helpful unless you understand his or her qualifications and experience — and how many hours will be billed at that rate versus work that can be done by junior staff members.
The idea that a receiver, or receivership services, can ever be offered for free is a myth that resurfaces in every downward real estate and economic cycle. Even if it were true, another old adage still applies: “You get what you pay for.”
The Los Angeles Times featured Trigild – and interviewed Bill Hoffman about receiverships – in its recent article “Commercial Real Estate is a Hot market for Court-appointed Caretakers.”
Adding to its growing list of hotel receiverships, Trigild was appointed receiver and management company for a 172-room franchised hotel in Phoenix, AZ. Trigild is working with the city to resume the hotel’s stalled renovation and bring the electrical changes up to code.
Trigild was appointed receiver for a 12-story, multifamily and retail property on Sunset Blvd in the heart of Hollywood.
On April 20th, Trigild President Bill Hoffman will speak at a meeting of the International Council of Shopping Centers in Los Angeles – addressing the topic of distressed commercial real estate.
Trigild added three new team members: Scott Lovell, Chris Gibson and Spencer Ruberti to its growing operations and marketing departments.