When To Sell Assets During Receivership

by William J. Hoffman
on April 29, 2008 No Comments
Categories : E-Features

Although the protective role of a receiver, an independent third-party appointment by the courts, is not new to the realm of nonperforming loans, receivers were not often used until the late 1970s, when foreclosures of income properties hit peak levels. The demand for dealing with the subsequent turnarounds and sale of such properties demanded that lenders take early action to protect their interests when a default occurred.

As there is rarely a downside to appointing a receiver in an income property case, lenders have continued to turn to court-appointed receivers – even more so with the advent of the current real estate slump. The cost for the additional legal work and receiver fees is often a fraction of the potential loss in property value, which can rapidly grow with poor management, deferred maintenance or simple neglect.

In many cases, net cash profits actually increase when a property is taken over by a receiver and his or her management company. Shielding the lender from environmental concerns and other creditors' claims is one of the many benefits of employing a receiver prior to foreclosure.

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, in fact, circumstances in which a state court is likely to allow a sale. The most common of these circumstances is 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, thus helping to reduce 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 harm to the borrower.

{OPENADS=zone=16}It is important to note that every case and every state is different, and a lender should speak with its counsel and the receiver to determine the possibility – and consequences – of an early sale.

While the concept of sale during the receivership is still new in many jurisdictions, it is an increasingly common and profitable solution.

Often, an earlier sale will 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 there is for those concerns to build.

Another important issue for lenders is potential liability, particularly in the case of properties with environmental problems, or pending warranties such as in a residential tract development or condominium conversions.

Potential liability exposure is good reason for a lender to completely avoid taking title to the property. In contrast, a receiver's liability, barring any malfeasance, is limited to the assets of the receivership estate.

A third reason for lenders to avoid ownership is the perceived deep-pocket stigma – in 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 a bad-cop role to affect a clean break between borrower and prospective buyers.

A court can indeed prevent the sale of an asset by a receiver, but even when the receiver is not granted authority to sell, the court may approve a marketing program by the receiver, and reserve the question of sale for later consideration. By this time, the borrower is mentally less connected to the property and more receptive to a stipulation.

It is critical to remember, however, that a receiver may not take any action that benefits only one party, such as by using receivership estate funds to make upgrades to enhance the later sale by the lender. Maintaining and repairing (versus upgrading) the property is appropriate, as are upgrades required as part of a franchise requirement.

Debtors' lawyers routinely view a receiver as being under the control of the lender – as the lender requested that particular receiver – but courts do not see that implied conflict, and a skilled receiver will be prepared and careful to avoid a real dispute.

William J. Hoffman is president, CEO and founder of Trigild, a San Diego-based company specializing in maximizing recovery on nonperforming commercial loans. He can be contacted at (858) 720-6700.

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