Frequently Asked Questions

A receiver is an unbiased third party appointed by a court – State or Federal – to take legal possession of property. There are a variety of scenarios in which a court might appoint a receiver, these include: interim corporate management and a pending foreclosure. In summary, receiverships offer a lender the opportunity to appoint a court empowered neutral party of its choice to receive, preserve, and/or liquidate its collateral -- pending the court’s resolution of the secured creditor’s claims.

A court appointed receiver is an impartial third party -- who can oversee and protect the asset during the foreclosure process and ideally bring an earlier and higher recovery on the loan.

It is important to remember that the receiver is not an agent for the lender, but a third party hired to protect the property as an agent of the court. In general, a receiver protects the business from being damaged or its value being diminished.

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.

While most jurisdictions have no specific requirements other than the receiver must be an unbiased third party, 18 years or older and no criminal record - an effective receiver must be knowledgeable in law and business operations. Trigild’s president and senior receiver, Bill Hoffman, has 30 years of real estate experience and a law degree, and employs a credential team of professionals who include MBAs and CPAs, as well as specialists in a variety of different commercial asset classes, including income properties, operating businesses and unfinished development. These qualifications -- and the fact that the company has handled hundreds of receivership appointments in nearly every state -- practically assures appointment. Alternatively, if the receiver’s qualifications are weak, the judge could select a receiver who is unknown to the lender or lender’s legal counsel.

The benefits of a receivership are many. The receiver will restore or create an environment of order and professionalism to protect management, operations, accounting and reporting that has deteriorated during the period preceding the loan default. In fact, the receiver can bring a fresh management perspective and implement practices that may benefit the business well beyond the period of receivership.

In addition, 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 its own purposes.

The receiver’s ability to immediately begin the process of marketing the property is critical in a period of rapidly declining values – and will ultimately generate higher returns for the lender. The traditional – and lengthy -- sequence of default, filing of the notice, waiting the jurisdiction period, conducting the foreclosure, engaging a broker, marketing the asset for a reasonable period and negotiating the sale can be dramatically shortened, which also helps maximize loan recovery.

A “Chapter 11” bankruptcy is filed when a debtor wants time to solve its financial problems while maintaining business operations, while a “Chapter 7” is filed for purposes of liquidating a business. There are other forms of bankruptcies, but these two are most commonly encountered by commercial lenders. Confusion between bankruptcy and receivership -- an action in which the lender seeks to protect its security by having an independent third party take possession -- is very common, even with some lenders and attorneys. The most basic and fundamental difference is fairly simple. A bankruptcy is an action filed to protect a borrower/debtor from collection actions by creditors. To that end, bankruptcy courts and rules are primarily aimed at protecting the borrower, not the lender. Receivership is a remedy lenders can use to protect their interests in the borrower’s secured assets.

The cost of the receiver is paid through the receivership estate, but the plaintiff/lender may need to advance the costs necessary to maintain the assets of the receivership estate.

Most judges experienced with receivership will not allow the receiver to automatically retain legal counsel for routine functions. If the need for separate legal counsel for the receiver is expected, the purpose should be carefully detailed to facilitate the court’s approval. An experienced receiver should not need to consult with legal counsel unless some unique circumstance or a suit against the receivership estate is brought. To do so ultimately adds an unnecessary cost.

The court’s order will usually grant authority to hire a management company, including a company in which the receiver is a principal, employee, etc.

Receivership actions are commonly filed in the state court in the county in which the debtor -- or a significant portion of the secured creditor’s collateral -- is located. State court jurisdiction, however, is confined to the state 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 provide more flexibility and be less costly. However, a secured creditor can bring its motion in Federal court only if jurisdiction exists based on specific rules.

Both Federal and State courts make clear that appointment of a receiver is an exceptional remedy -- warranted only in cases where there is a clear necessity to protect interest in property.

The Order Appointing Receiver defines the scope of responsibility and authority for the receiver to take possession and exclusive control, operate the business, continue, terminate or complete construction as appropriate (and agreeable to lender). Careful drafting of the Order Appointing Receiver (and the related Temporary Restraining Order) will save considerable time and money. At Trigild, our staff will address all of the anticipated hurdles in advance. This way, we can avoid returning to court for additional orders, and can seize and protect assets more effectively.

The prudent receiver will review the Order carefully prior to its filing. This will help ensure that the appropriate points are included -- including the ability to sell property “as is, where is” -- and that the Final Order Discharging Receiver removes any potential further liability of the receivership estate or the lender for claims of construction defects, title issues and other liability concerns.

The appointment 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 receivership can vary -- from viewing it as routine, to seeing it as an extreme step. In the case of special circumstances (damage to the value of the underlying security, potential loss of franchise, failure to pay taxes or wages, etc) a receiver may be appointed ex parte -- with short notice to the debtor or opposing counsel.

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.

In many cases, the entity seeking to appoint a receiver hopes to do so on a very short notice, usually because circumstances may threaten a creditor’s secured position. 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.

The lender must be prepared to fund operating losses of the business in order to maintain or enhance the ultimate sale value of the asset (if the lender continues such funding beneficial to its ultimate recovery). If this can be anticipated, the Order Appointing Receiver should also grant permission for the lender to make “protective advances’ under the existing loan or for the receiver to borrow money.

Loans can be secured by “receiver’s certificates,” which can be issued to secure this additional, and senior, debt. Most judges are reluctant to agree in advance to such borrowing, so it will be important to be prepared to explain a critical need. Some receivers and trustees are also experienced as expert witnesses in their field, and should be able to assist your legal counsel in drafting such requests. This is merely one example of why it is important to have a receiver who is knowledgeable about both receivership law and the specific business or industry.

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, usually in the case of an ex parte appointment.

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.

There are myriad reasons why the lender may not want to foreclose, among them homeowner association issues, health and safety concerns, possible future warranty issues, environmental questions and other reasons to avoid coming into title. In these cases, lenders should seriously consider using a receiver, who not only shields the lender from liability exposure, but also from other creditors’ view of the lender as a “deep pocket.” The receiver gives the lender impartial third-party control of the asset, and also allows a quick start on assessing current status, determining operating expenses, planning options for optimal recovery and preparing the property for sale through appropriate strategies.

The receiver will apply for and maintain all necessary permits and licenses, verify that documents are being properly recorded, secure approvals, select and monitor vendors and contractors, and, importantly, assure that the project moves along carefully and swiftly.

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. While there are many forms of receivership, most commercial lenders and servicers deal with only these two.

Additionally, a "Limited Receivership" is not a specific legal remedy, but simply a modified receivership that allows the receiver to take a more limited role as long as certain requirements are met, such as staying within budget on a schedule and using funding only for specified items.

It can be problematical when the lender sells the note if a receiver is in place. Even though the prior lender may have appointed the receiver, this does not mean that receivership has been dissolved and the receiver released. In fact, the new lender steps into the shoes of the old lender with respect to this litigation. Subsequently, the new lender becomes the substituted plaintiff, the receivership appointment stays in effect and the receiver continues to maintain control of the asset until dismissed by the court. In most jurisdictions, the only way to get a receiver released is by noticed motion and hearing -- meaning a return to court to request that the judge release the receiver. In this scenario, the substituted plaintiff must request that the receiver be released. However, if the new lender does opt to close out the receivership, they should be aware that they cannot take possession of the property, which would go back to the debtor until foreclosure, or another receiver is put in place.

A receiver can be appointed to any type of property, from traditional income properties -- such as office buildings, shopping centers and multi-family housing -- to special assets, which include a retail component. Examples of these include hotels, restaurants, convenience stores, gas stations, truck stops, senior care facilities and recreational or theme parks. These assets involve a host of complex business issues, and require specific knowledge of the business itself, not merely general real estate management skills.

In the past, lenders would often simply sit out the bankruptcy, expecting to re-start the foreclosure at a later date – but now there are fortunately other solutions.

For example, you can try to have your proposed receiver appointed as a trustee in the bankruptcy, although this is not easily accomplished, and requires a number of special circumstances. Another option is to remove the assets from the bankruptcy court’s jurisdiction by way of a "relief from stay" motion, allowing your foreclosure action to proceed. But keep in mind that the court will require a very persuasive argument as to why the debtor should lose possession and the bankruptcy estate should relinquish the asset. The most common argument for removing a property from the bankruptcy estate is the lack of any equity beyond the lender’s security and therefore the absence of any value to remaining creditors.

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 intensify.

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" -- unpaid vendors suppliers, utilities, critical suppliers, and franchisors, may attempt to get the lender to pay 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.

The term of the receivership is dependant on the length of the underlying case, and can therefore range from a few months to a few years. In some cases, the lender will choose to continually extend the foreclosure date -- allowing the property to be sold by the receiver.

When the receiver is discharged (usually after the foreclosure and/or the sale of the property), a final accounting and report is filed and a hearing set to discharge and to approve all actions performed by the receiver. The order discharging the receiver will direct what is to be done with any remaining assets. Normally these excess assets will be disbursed to the lender/plaintiff. As an officer of the court, the receiver is expected to provide the court with what the receiver believes to be the appropriate action. Often, the lender’s counsel will assist in preparing the needed motions and proposed orders.