When secured lenders intend to foreclose on collateral securing a defaulted loan, they are sometimes faced with the prospect of having to manage or maintain an ongoing business operation on the foreclosed premises. Suppose that the collateral is a multi-unit apartment structure with multiple tenants, and the secured lender wishes to maintain tenant occupancy to preserve the value of the business upon foreclosure. How might the lender most easily gain access to the rent roll, leases, security deposits, access keys, and other information necessary to maintain operations? Or suppose that a lender seeks to collect on a borrower’s accounts receivable, but the borrower is uncooperative and the accounts are worthless without the borrower’s records. What is the best course of action for the lender when the value of such accounts may be tied up in information (such as contact information and historical invoices) that is under the exclusive control of the borrower? What are the lender’s options?
Perhaps in a more favorable economic environment, lenders could pursue foreclosure, collection on accounts receivable, or similar remedies with less worry over such complexities. However, given the current financial climate, lenders must consider the potential drawbacks of taking title to distressed real estate or otherwise assuming control of collateral, regardless of whether an ongoing business is involved. Such drawbacks and obstacles can include, but are not limited to, the following:
Managing business affairs; obtaining important documents and elusive information; lender liability; assuming control over properties with multiple code violations; assuming control over properties with incomplete construction; and environmental concerns.
Receivership as a Possible Solution
In today’s uncertain lending environment, a court-supervised receiver can offer a useful and cost-effective solution, avoiding some or all of the obstacles listed above. A receiver is an officer appointed by the court (upon motion by a lender) that can hold possession of the property, manage the property, and preserve it on behalf of the creditor. Moreover, a receiver can be appointed pre-foreclosure, while generally enjoying judicial immunity. The primary legal authority establishing the receivership remedy is set forth in the Texas Civil Practice and Remedies Code § 64.001, et seq. In short, the statute allows a lender to communicate directly with the receiver and monitor its collateral while remaining insulated from the various vexations that can arise.
In the case of our multi-unit apartment structure above, upon court appointment before foreclosure, a receiver can assume control of the apartments, receive rents, make disbursements (such as salaries, utilities, maintenance, and insurance), reconcile bookkeeping, and generally perform any other acts authorized by the court. In this way, the lender is able to protect its collateral while the receiver, under court guidance, navigates pitfalls and facilitates a smoother transition in ownership.
A great advantage of employing a receiver is that the receiver’s powers and duties are limited only by the necessities of the situation at hand and the auspices of the court. Thus, a prudent secured lender can have a receivership specifically tailored to whatever situation (or court proceeding) it may be involved in. In addition to the powers described above, a partial listing of a receiver’s potential powers includes the following:
1) Gaining access to and control of collateral (real and personal property);
2) Collecting and compromising accounts;
3) Listing any and all collateral for sale or auction and making transfers;
4) Borrowing and investing funds held as receiver;
5) Retaining support professionals (such as appraisers, surveyors, and property managers); and
6) Closing and opening borrower bank accounts.
It is also worth mentioning that a secured lender can use a receivership to gain leverage or secure performance under a forbearance agreement should the lender wish to delay foreclosure for any reason. Lenders should also be aware that their loan documents may provide for the appointment of a receiver upon default, and this can factor into a court’s decision as to whether a receivership is appropriate, and if so, under what terms and conditions the receiver should operate.
This article is intended only as a general overview of the scenarios under which a receivership may benefit a secured lender and the powers a court may grant a receiver. Multiple legal issues are implicated in petitioning a court for a receivership, including applicable statutory and common law requirements. Each issue must be evaluated and analyzed on a case-by-case basis. Depending on the lender’s goals and the nature of the collateral, a receivership may provide an invaluable tool to maximize the value of a lender’s collateral while reducing the risks associated with lender liability.