Creditors Rights

Another Arrow in Your Quiver: Considering the Benefits of Receivership for Secured Lenders

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.

By: Cliff A. Wade and Will G. Bassham.

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Dallas Morning News names SettlePou as Top 100 Places to Work

For the second year in a row, SettlePou has been named by The Dallas Morning New’s as one of the Top 100 Places to Work in the metroplex. Companies recognized in the Top 100 must excel in six areas: direction, execution, career, managers, conditions, and pay and benefits. The selection process includes getting feedback from employees about each of these areas through a survey process, and over 1700 companies participated in 2010. The Dallas Morning News reports that after these surveys are completed, responses are compiled, weighted, and ranked by their research partner, Workplace Dynamics. SettlePou is among only a handful of law firms to be granted with this recognition.

Creditors Rights

Texas Foreclosure Legislation: A Trip Through the Sausage Maker

Once in every generation the “perfect storm” hits the Texas Legislature. The ongoing financial crisis and the resulting “foreclosure crisis” have created a flood of proposals in Austin during the 2009 legislative cycle.

Presently, Texas has one of the fastest and easiest foreclosure processes in the nation. Typically, with respect to a residential asset (which is not a home equity loan), a foreclosure can take place in as little as two months with a 20-day notice of default and a 21-day notice of sale. Texas is a non-judicial foreclosure state, with little if any oversight of the foreclosure process by the state government or courts. Foreclosure sales have historically been a “private” matter between the lender and the owner.

Pending Texas legislation seeks to change this and takes primarily four forms.

First, there are timeline bills. The purpose of these bills is to enlarge the timeline for the notice of default (issued with residential properties) and the notice of sale (the document posted at the court house). In general, these timelines are proposed to be enlarged to 45 days (notice of default) and 60 to 90 days (for notice of sale).

Second, there are “process” bills. These bills fall into two types. With respect to residential loan assets, it is proposed that notice of default will be given on a form mandated by the Texas Attorney General which contains various types of information about the foreclosure process and the loss mitigation alternatives available to the borrower. These bills also typically require that the lender attempt to make telephone contact with the defaulted residential consumer in order to counsel the consumer on loss mitigation options. The second type of process bill is more far reaching and attempts to change Texas from a non-judicial to a judicial foreclosure state. This would be a substantial departure from our historically hands-off foreclosure process requiring little, if any, governmental intervention. Judicial foreclosure bills are being strongly opposed by both the lending industry as well as the Texas judiciary, who do not desire to see a new influx of lawsuits into their courts.

Third are bills which attempt to aid tenants in property following a foreclosure. Under present Texas law, a tenant in a property following a foreclosure must vacate the property within 30 days of being requested to do so by the lender. Various bills seek to enlarge this time from 30 days to 60 or 90 days. And one pending bill even seeks to require an individual who acquires a property through foreclosure to honor a tenant lease.

Fourth are consumer protection bills. These bills seek to describe something called a “sub-prime” loan. Some of the “sub-prime” loan features are not normally associated with sub-prime loans. Sub-prime loans would include loans not only with a higher then average interest rate (measured against the prime lending rate), but also would include loans with balloon features and pre-payment penalties, as well as certain adjustable rate loans which allow for the interest rate to increase more than two percent per year. These consumer protection bills either outlaw loans within these features or severely restrict the lender’s ability to foreclose such a loan in default.

We are also keeping our eye on significant federal legislation. Specifically, a “cram down” bill could pass allowing residential consumers in bankruptcy to have a bankruptcy court reset the customer’s interest rate to a lower level. In addition, this “cram down” bill could allow a loan secured by a property with negative equity to be stripped of any debt in excess of the value of the property at the time the bankruptcy is filed. This session of the Texas Legislature draws to a close on June 1, 2009. Over seven thousand bills were filed by the filing deadline, and a great many of these bills will not become law. Nevertheless, with the economic crisis and foreclosures at record levels, we believe it likely that some form of foreclosure reform and consumer protection will be adopted by the Texas Legislature. After the Legislature adjourns, watch for a follow-up article in an upcoming SettlePou newsletter discussing the final set of laws enacted by the Legislature.

By Barry D. Johnson