A Receiver Can Help                                 back to articles
Catch a Falling Property
by Steven Linkon, Esq.
WRIGHT, FINLAY & ZAK, LLP

A court appointed receiver can be an important element of the foreclosure process. The receiver can collect rents and ensure against borrower mischief against the property. A receiver is also useful where the foreclosing lender prefers not to take title to the property, and instead permits the receiver to sell the property to a third party with the proceeds applied to pay off the loan. A sale by the receiver saves the lender from coming into the chain of title and is advantageous where the property is impacted by environmental issues, severe deferred maintainance, or other legal issues that may subject an owner of record to legal liability.

But there are costs to having a receiver appointed.

The lender's costs to have a receiver appointed include the legal fees to prepare and present a motion to the court; plus the cost of bonds that the court may require. At the end of the case more legal fess wil be expended to obtain the receiver's discharge and approve the receiver's final report and account.

The receiver also charges a fee and these are highly negotiable and variable. The best deal is one where the receiver charges a percentage of the rents collected, such that the cost of having the receiver is no greater than if there were an outside property manager in place, which is essentially what the receiver becomes. This arrangement is best suited to uncomplicated property requiring ordinary management until a foreclosure sale can be completed.

If extraordinary management is required, the receiver will want to charge an hourly fee, either in lieu of or in addition to a property management fee calculated on the rents collected.

The receiver is also entitled, with court approval, to retain counsel. The fees of the receiver's counsel can become a significant cost of the receivership. Accordingly, in ordinary non-contested situations, the lender will permit its attorney to bring motions on behalf of the receiver, such as motions for instructions or to borrow funds. This practice is not desirable where the foreclosure action is contested by the borrower, or other borrower litigation is ongoing or anticipated. In these situations, it is necessary that the receiver obtain separate counsel so that the receiver's indepenence is unquestioned.

Payment of Receivership Costs

Generally, the costs of the receivership, including the receiver's fees and the fees of receiver's counsel are recovered from the income generated by the property subject to the receivership. The receiver simply deducts the receivership costs from the rents collected. If the income from the receivership is insufficient to pay the receivership costs then there is a deficit. The court has several options available to address the deficit.

First, the receiver is not permitted to incur obligations that are likely to result in a deficit to the receivership estate. So before a deficit situation arises the receiver will raise this issue with the court and seek instructions. The court could authorize the receiver to borrow money to fund the receivership. Usually, these loans come from the foreclosing lender.

The court has the power to charge expenses against partnership property in receivership or to either of the parties exclusively or by allocating expense between them in equitable proportions. As a practical matter, the court will usually impose the cost of the receivership on the party who moved for the appointment and presumably derived the bulk of the benefits flowing from the receiver's appointment.

The costs of a receivership can increase dramatically if the receiver is sued.

The receiver's role in a foreclosure action does not cease when the property is sold, or when the underlying case is dismissed. The receiver's obligations continune until the court approves the receiver's final account and the receiver is discharged. Claims may be made against the receiver up until the time the receiver seeks to be discharged. These claims may become yet another expense of the receivership. And they may be borne by the lender if there is a deficit in the receivership estate.

The possibility that the receiveship could incur significant liability weighs in favor of the lender only using receiver's that are experienced and capable of acting in a fashion that will minimize any potential liability that may occur.

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