Transcript Real Property Receiverships: Strategy, Ethics, and Practice Tips

Real Property Receiverships:
Strategy, Ethics, and Practice Tips
Chris Chauvin & Matt Mitzner
Flower Mound Bar Association
October 31, 2014
Where It Begins
● So you have some valuable property…
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Collateral securing loan (e.g., real estate)
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Businesses/Partnerships
● And you’re worried about…
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The property’s future
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An unsecured loss
● Options
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Wait and sue for damages
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Get a receiver
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Foreclose
Real Property vs. Corporate
● Real property receiver
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Exclusive possession and control
− Landowner retains ownership
− Rents and profits
● Corporate receiver
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Control of all corporate activity and property
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Generally controls several pieces real property
Real Property & Corporate Receiverships
● Foreclosure instead of receiver
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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?
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Court/borrower known for opposing receiverships?
− Above articulation + devious/adversarial borrower
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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
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Multi-family
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Shopping center
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Hotel
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Office building
● Types of receivers
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Property manager
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Attorney
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Forensic accountant
Real Property Receivership
● Receiver Instead of Foreclosure
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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
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Defaults and standing
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Appraisals
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Mechanic’s liens/tax liens/code violations
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Property condition report
● Contractual agreement to receiver
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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
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Subject matter jurisdiction
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Timing and cost
Texas State Court Receivership (cont.)
● Possibly faster and cheaper
● Procedure and strategy
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TRCP 695: Three days’ notice
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Ex parte burden
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Easy amendment
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Couple with request for TRO trapping rents
● Grounds: CPRC § 64.001
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Secured creditor
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64.001(b): danger of being lost, removed, or materially
injured
Texas State Court Receivership (cont.)
● Rules of equity apply (CPRC § 64.004)
● Who can be receiver? CPRC § 64.021
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Texas citizen and qualified voter at time of appointment
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Not interested in lawsuit
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Maintain Texas residence during lawsuit
● Bonds
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Receiver (CPRC § 64.023)
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Applicant (TRCP 695a)
● Oath (CPRC § 64.022)
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Texas State Court Receivership (cont.)
● Duties
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Primarily governed by the order
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CPRC § 64.031: possession, collect rents, compromise
claims
● Application of rents/proceeds
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Primarily governed by the order
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CPRC § 64.051: receiver costs and obligations first, then
pre-receiver obligations
Texas State Court Receivership (cont.)
● Receiver liability
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CPRC § 64.052: suit may be brought where claimant
resides
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CPRC § 64.053: judgment paid from receivership funds
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CPRC § 64.054: judgment lien against receiver primes
senior secured creditor
Texas Federal Court Receiver
● Federal Rule of Civil Procedure 66
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No standard provided
● Santibanez v. McMahon & Co., 105 F.3d 234, 241-42
(5th Cir. 1997)
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a valid claim by the party seeking the appointment;
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the probability that fraudulent conduct has or will occur;
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imminent danger that property will be concealed, lost, or diminished in value;
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(4)inadequacy of legal remedies;
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(5)lack of a less drastic equitable remedy;
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(6)likelihood that receiver will do more good than harm;
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(7)the property being of insufficient value to insure payment; and
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(8)poor financial standing of the borrower.
Texas Federal Court Receiver (cont.)
● No specific receiver qualifications
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Out of state
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Entity
● 28 U.S.C. § 754: property in multiple states
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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
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Notice and hearing to all interest parties
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Receiver reports to court on marketing and sales
procedures
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Standard: best interest of the property
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Court appoints three appraisers
− 2/3 appraised value requirement
− Offer 10% more than proposed sale price kills sale
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As court to waive procedures based on robust marketing
Problems to Anticipate
● Potential Problems with Receivership
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Court appoints a “good friend”
− Court refuses to appoint receivership professional
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Receiver is untrustworthy
− Receiver’s typical nonliability for mismanagement or
misappropriation of funds post-receivership
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Court is slow or apathetic
− Inability to get the Court’s intervention to stop worse
mismanagement by receiver
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Court refuses to permit quick move to foreclose
Ethical Issues
● Be careful with “your proposed” receiver
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Pre-filing strategy
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Personal associations/communications
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Offers to “work for free” in exchange for cut of listings,
leasing commission, and property management
Winding Down Receivership
● How long should it last?
● Property disposition options
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Receiver sale
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Foreclosure
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Deed in lieu
● Court authorization
● Remitting cash flow
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Receivership and Bankruptcy
● Debtor Files Bankruptcy After Receiver Appointed
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Property Turned Over to Debtor-in-Possession Unless
Receivership in Place for 120 Days (Amaravathi)
● What if Bankruptcy Court Leaves Receiver in
Possession?
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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
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Guaranty will help direct choice re: receiver
− Deficiency: difference between value of property at foreclosure
sale and the loan balance, interest, and attorneys’ fees
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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?
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Nonrecourse guaranties (only remedy is recovering the
collateral) make receivership far more central to your
strategy
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Evidence uncovered without obstacle
− Receiver preceding suit strengthens your suit, especially for
federal court
− Receiver will identify liability for “Bad Boy” carveouts
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Shifting this risk to the borrower is paramount for the interests of
lender clients
Impact of Guaranties
● Courts will enforce guaranties, but they carry a “disfavored”
status under Texas law
● Possible defenses
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No default
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Bad assignment (loan docs not in order)
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Disputed signature
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Windfall deficiency due to disputed fair-market-value at
time of foreclosure, etc.
Guarantor’s Waiver of Defenses
● Guarantor’s broad waiver of defenses enforced
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“All defenses”
− Moayedi v. Interstate 35/Chisam Road, L.P., —S.W.3d—, 57
Tex. Sup. Ct. J. 724 (Tex. June 13, 2014)
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“Offset”
− LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837 (5th Cir. 2000)
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Every defense but full and final payment waivable
Questions?
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