Real Property Receiverships: Strategy, Ethics, and Practice Tips

Chris Chauvin & Matt MitznerFlower Mound Bar Association

October 31, 2014

Where It Begins

● So you have some valuable property…

► Collateral securing loan (e.g., real estate)

► Businesses/Partnerships

● And you’re worried about…

► The property’s future

► An unsecured loss

● Options

► Wait and sue for damages

► Get a receiver

► Foreclose

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Real Property vs. Corporate

● Real property receiver

► Exclusive possession and control

− Landowner retains ownership

− Rents and profits

● Corporate receiver

► Control of all corporate activity and property

► Generally controls several pieces real property

Real Property & Corporate Receiverships

● Foreclosure instead of receiver

► Client just following normal receivership protocol?

− Can you articulate the specific reason why someone other than the borrower/current business owner—for some period of time—needs to take control of the property?

► Court/borrower known for opposing receiverships?

− Above articulation + devious/adversarial borrower

► Court seeking to load receivership with unwanted or overwrought conditions?

− If you can trust the receiver, empower him/her in the order

− If you don’t like the conditions, foreclosure is the quickest work-around

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Real Property Receivership

● Types

► Multi-family

► Shopping center

► Hotel

► Office building

● Types of receivers

► Property manager

► Attorney

► Forensic accountant

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Real Property Receivership

● Receiver Instead of Foreclosure

► What is the condition of the property?

− Will your client be able to sell the collateral in its current condition?

− Are there any environmental concerns/latent liabilities?

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Early Questions in the Receivership Process

● Marshal evidence

► Defaults and standing

► Appraisals

► Mechanic’s liens/tax liens/code violations

► Property condition report

● Contractual agreement to receiver

► Riverside Properties v. Teachers Ins. & Annuity Ass’n of America, 590 S.W.2d 736, 738 (Tex. App. – Houston [14th Dist.] 1979)

● State versus federal court

► Subject matter jurisdiction

► Timing and cost

Texas State Court Receivership (cont.)

● Possibly faster and cheaper

● Procedure and strategy

► TRCP 695: Three days’ notice

► Ex parte burden

► Easy amendment

► Couple with request for TRO trapping rents

● Grounds: CPRC § 64.001

► Secured creditor

► 64.001(b): danger of being lost, removed, or materially injured

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Texas State Court Receivership (cont.)

● Rules of equity apply (CPRC § 64.004)

● Who can be receiver? CPRC § 64.021

► Texas citizen and qualified voter at time of appointment

► Not interested in lawsuit

► Maintain Texas residence during lawsuit

● Bonds

► Receiver (CPRC § 64.023)

► Applicant (TRCP 695a)

● Oath (CPRC § 64.022)

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Texas State Court Receivership (cont.)

● Duties

► Primarily governed by the order

► CPRC § 64.031: possession, collect rents, compromise claims

● Application of rents/proceeds

► Primarily governed by the order

► CPRC § 64.051: receiver costs and obligations first, then pre-receiver obligations

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Texas State Court Receivership (cont.)

● Receiver liability

► CPRC § 64.052: suit may be brought where claimant resides

► CPRC § 64.053: judgment paid from receivership funds

► CPRC § 64.054: judgment lien against receiver primes senior secured creditor

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Texas Federal Court Receiver

● Federal Rule of Civil Procedure 66

► No standard provided

● Santibanez v. McMahon & Co., 105 F.3d 234, 241-42 (5th Cir. 1997)► a valid claim by the party seeking the appointment;

► the probability that fraudulent conduct has or will occur;

► imminent danger that property will be concealed, lost, or diminished in value;

► (4) inadequacy of legal remedies;

► (5) lack of a less drastic equitable remedy;

► (6) likelihood that receiver will do more good than harm;

► (7) the property being of insufficient value to insure payment; and

► (8) poor financial standing of the borrower.

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Texas Federal Court Receiver (cont.)

● No specific receiver qualifications

► Out of state

► Entity

● 28 U.S.C. § 754: property in multiple states

► Domesticate order within 10 days

● 28 USC § 1692: service of summons as if property in one district

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Texas Federal Court Receiver (cont.)

● 28 USC § 2001: receiver sale procedures

► Notice and hearing to all interest parties

► Receiver reports to court on marketing and sales procedures

► Standard: best interest of the property

► Court appoints three appraisers

− 2/3 appraised value requirement

− Offer 10% more than proposed sale price kills sale

► As court to waive procedures based on robust marketing

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Problems to Anticipate

● Potential Problems with Receivership

► Court appoints a “good friend”

− Court refuses to appoint receivership professional

► Receiver is untrustworthy

− Receiver’s typical nonliability for mismanagement or misappropriation of funds post-receivership

► Court is slow or apathetic

− Inability to get the Court’s intervention to stop worse mismanagement by receiver

► Court refuses to permit quick move to foreclose

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Ethical Issues

● Be careful with “your proposed” receiver

► Pre-filing strategy

► Personal associations/communications

► Offers to “work for free” in exchange for cut of listings, leasing commission, and property management

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Winding Down Receivership

● How long should it last?

● Property disposition options

► Receiver sale

► Foreclosure

► Deed in lieu

● Court authorization

● Remitting cash flow

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Receivership and Bankruptcy

● Debtor Files Bankruptcy After Receiver Appointed

► Property Turned Over to Debtor-in-Possession Unless Receivership in Place for 120 Days (Amaravathi)

● What if Bankruptcy Court Leaves Receiver in Possession?

► Accuracy of Financial Information from Receiver for Plan of Reorganization

Impact of Guaranties

● General types of Guaranties in Commercial Loans Secured by Real Property

− Nonrecourse

− Nonrecourse with “Bad Boy” carveouts

− Recourse

● Form guaranties in the industry typically shift the total deficiency risk to borrowers

● … But if it’s a reputable or professional borrower, then the guaranty is likely nonrecourse

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Impact of Guaranties

● Receiver Instead of Foreclosure

► Guaranty will help direct choice re: receiver

− Deficiency: difference between value of property at foreclosure sale and the loan balance, interest, and attorneys’ fees

► Do you have a solvent guarantor?

− Foreclosure risks mitigated by solvent-guarantor’s liability

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Impact of Guaranties

● Do you have a recourse guaranty?

► Nonrecourse guaranties (only remedy is recovering the collateral) make receivership far more central to your strategy

► Evidence uncovered without obstacle

− Receiver preceding suit strengthens your suit, especially for federal court

− Receiver will identify liability for “Bad Boy” carveouts

● Shifting this risk to the borrower is paramount for the interests of lender clients

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Impact of Guaranties

● Courts will enforce guaranties, but they carry a “disfavored” status under Texas law

● Possible defenses

► No default

► Bad assignment (loan docs not in order)

► Disputed signature

► Windfall deficiency due to disputed fair-market-value at time of foreclosure, etc.

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Guarantor’s Waiver of Defenses

● Guarantor’s broad waiver of defenses enforced

► “All defenses”

− Moayedi v. Interstate 35/Chisam Road, L.P., —S.W.3d—, 57 Tex. Sup. Ct. J. 724 (Tex. June 13, 2014)

► “Offset”

− LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837 (5th Cir. 2000)

► Every defense but full and final payment waivable

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Questions?