What Happens in a Court Appointed Receivership
WHAT IS A RECEIVERSHIP?
A receivership is a court-appointed position in which an individual is given the custodial responsibility for managing the property of others, including tangible and intangible assets and rights. Once appointed, the entities of which the person is receiver are said to be “in receivership.”
There are three fundamental types of receivership appointments:
1. A receiver appointed by a (government) regulator pursuant to a statute
2. A privately-appointed receiver
3. A court-appointed receiver’ (For the purpose of this article, we will only focus on court-appointed receivers).
As an equity remedy, receivership emerged in the English Courts of Chancery, where a receiver was appointed to protect real property. A receiver or a manager acts primarily on behalf of the asset. The power to appoint and the powers of the receiver are derived from a valid charging document (court order). The governing authority for this comes from the local, state, or federal court system.
THE PURPOSE OF RECEIVERSHIP
The need to appoint a receiver typically arises when a secured creditor has concerns about the stability of the asset and the financial position of the borrower has changed. As an example, if the asset is vacant land or a building, and is being neglected by the borrower, the condition of the building could be in serious jeopardy of disrepair. This, in turn, could greatly affect the value of the asset. The direct response to the condition of the building could seriously affect the rental income in a negative way. Tenants are less likely to stay and new prospective tenants may be unlikely to lease the property. In a retail environment, a tenant could see its revenues decline if customers fail to do business with them because of the condition of the building.
At that point, the position of the creditor is to request that a receiver or manager be appointed to take control of the asset in order to secure and stabilize the asset. Basically, they are managers of the property, but are not owners (or deed holders) of and do not have a security interest in the property.
THE AUTHORITY TO APPOINT A RECEIVER
As an example, under Illinois Statutes Chapter 735, Civil Procedure § 5/15-1704, the court has the authority to appoint receivers. “Notwithstanding the provisions of subsections (b), (c) and (d) of Section 15-1701 [735 ILCS 5/15-1701], and except as provided in Section 15-1702 [735 ILCS 5/15-1702], upon request of any party and showing of good cause, the court shall appoint a receiver for the mortgaged real estate.”
A creditor can petition the court for an appointment on a specific asset. Usually, the petitioner making the request uses an attorney to draft the order and then files it with the court in the county in which the asset is located. The borrower(s) is then notified by the creditor’s attorney. The borrower, if they so choose, can make their “argument” on why they feel there is no need for a receiver. This is usually done the day the matter is up in court. At that time, the borrower’s attorney can request the court to allow the borrower to file a reply in response to the petitioner’s request.
To ensure that the receiver exercises their duties or responsibilities in a fiduciary way, the court may require a bond. A bond is obtained from one of the sureties. A bond is like an insurance policy and is there to protect the asset if the receiver does not act in a responsible way. The amount of the bond is typically based on the rental income and/or outstanding mortgage on the asset. In most cases, the court order is not effective until the court has approved the bond submitted by the receiver. At that point, the receiver assumes their responsibilities.
It is important to note that a court-appointed receiver is an officer of the court. He is a “neutral” party and typically a person, not a company. A receiver can be mutually beneficial to all parties. The purpose is “to stabilize, secure, and protect the asset.”
The qualifications for the position of receivership have never been outlined or developed in the industry. Officially, there are no real requirements. However, a good receiver should have an inherent understanding of the law and procedures, court methodology, be a “solution-minded” consultant, and a good business manager. Most importantly, the receiver should not
have any conflicts of interest with the property. Having experience in construction (commercial & residential) and property management are a big advantage. This is due to the fact that one may know how to manage, but may not necessarily be familiar with what they are managing (or have an awareness or understanding of the mechanics of the physical property).
THE DUTIES (RESPONSIBILITIES) OF A RECEIVER
The main responsibility of the receiver is to protect the asset and uphold the governing statutes, as well as stay a “neutral party” throughout the process. Under the statute cited earlier, “These duties are to have full power and authority to operate, manage, and conserve such property, and shall have all the usual powers of receivers in like cases.”’
A receiver shall have the power and authority to:
1. Secure tenants and execute leases
2. Insure the property
3. Collect rents, issues, and profits from the asset
4. Employ counsel, custodians, janitors, and other help where needed
5. Pay real estate taxes
6. Institute utility service for the operation of the building
Duties are as follows:
1. Send out notices to all parties, including requests for documentation, building keys, notification of receiver, and any other pertinent information. This would include, but not be limited to, notices to borrower(s) and tenants.
2. Take possession of the asset and secure the property.
3. Stabilize or improve the asset’s value position where deemed necessary and authorized by the court.
4. Document all inventory of the assets with detailed reporting.
5. Maintain existing casualty and liability insurance on the property.
6. May engage a management company to handle normal maintenance and other asset operations.
7. Collect and manage all rental income and security deposits, and manage all tenants’ issues.
8. Renew or execute new leases, or initiate eviction proceedings if necessary.
9. Open bank accounts (operating and security deposit accounts).
10. Maintain or engage maintenance contractors to maintain property or make repairs where they are deemed necessary.
11. Allocate receipts, including receivership fees, insurance premiums, attorney fees (authorized by court), maintenance and repair, operating expenses, real estate taxes, etc.
12. Draft and file receiver reports for the court and all parties involved (service list). This would also include appearing in court to give an account of the details of the receiver report.
13. In some states, the receiver has the authority to sell the asset or make the request to the court for the same.
THE RESULT OF A RECEIVERSHIP
Putting in place a receiver on an asset can and should be mutually beneficial to all parties. After all, the purpose is “to stabilize, secure, and protect the asset” as outlined under statutory law. The Receiver is there to enhance the opportunity for a possible “work out” and to avoid a costly foreclosure process by all parties. As a representative of the court, the receiver acts as a neutral mediator of the court. Not all circumstances justify the appointment of a receiver. Each situation is different