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Richard A. Rogan, Esq.415.398.8080
RRogan@JMBM.comJuly 2009
RECEIVERSHIP 101:What you need to know now!
©2009 Jeffer Mangels Butler & Marmaro LLP. All Rights Reserved
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Disclaimer
Q. What is a Receiver?
A. A neutral person who is appointed by a
Court to temporary possession of propertybelonging to one or more litigants.
Q. Does there have to be a lawsuit filed in
order to get a Receiver appointed?
A. Yes
3
The Essentials: FAQ's
Can a defendant ask that a Receiver be appointed?Yes, but it is uncommon
Usual circumstances include:
• Borrower sues a Lender and Lender files a cross-complaint to collect the loan and appoint a Receiver
• One partner sues another partner and secondpartner files a cross-complaint and asks to appoint aReceiver
A.Q.
4
FAQ's continued
5
FAQ's continued
Q. Who can be a Receiver?
A. There are no statutory requirements.
Q. Who cannot be a Receiver?
A. A party, attorney of a party, interested person
or relative of the judge
• To manage theproperty after Iforeclose?
• As to compensation
and how he or she willmanage the property?
NoCRC 3.1179(b)(1)
NoCRC 3.1179(b)(2)-(4)
Can I make a dealwith the proposedReceiver...
Q.
6
FAQ's continued
A.
A.
Q. How does the Court choose who to appoint asReceiver?
A. It is up to the judge, but the parties usually nominate
Q. What types of Receivers are there?A. 1. Rents and profits receivers; 2. Equity receivers
Q. Is the Receiver liable for debts incurred by theBorrower prior to the appointment of the Receiver?
A. No
7
FAQ's continued
• Real estate loans arein default
• To collect rents
• A responsible neutralperson is needed tocare for distressedassets
• To collect assets andliquidate collateral
8
When Would a Lender Consider Moving to Appointa Receiver?
• Inventory shrinkage
• Removal of businessassets
• Payments to tradecreditors instead ofSecured Lender
• Embezzlement
Borrower informs Lender that it will cease operations,but is unable to provide a plan for orderly operation
Typical fact patterns includes:
9
Disposition of Assets:A Failing Business
• Transferring assets to newly formed (secret)entity
• Selling inventory at a loss
• Skimming accounts
• Paying phony accounts payable
10
Disposition of Assets:Fraudulent Transfer of Assets
• Secures control over premises
• Inventories: tangible and intangible assets
• Recovers property
• Begins to collect accounts and rents
11
Disposition of Assets:What Can the Receiver Do?
Q. Can the Receiver sue?
A. Yes
Q. Can the Receiver sell assets outside theordinary course of business?
A. Only with Court approval
Q. Can the Receiver abandon assets that aretoo costly to maintain?
A. Yes
12
Disposition of Assets
Most common Receivership is where there is amonetary default and an income-producing property
• Lender commences judicial foreclosure and asksthe Court to appoint the Receiver to collect rents,and records a Notice of Default under the Deed ofTrust to begin nonjudicial foreclosure
• Lender must choose between foreclosingnonjudicially at a trustee’s sale or obtaining adecree of foreclosure in Court
• Election of remedies not final until auctioncompleted or Court enters judgment
13
Real Estate Foreclosures
• Receiver collects rent for3 months and 20 days –the notice period before asale can take place
• Receiver pays expenses,including his or her feesand counsel’s fees fromrent collected
• Balance paid to Lenderat end of Receivership
A trustee’s saleis an auction.
14
Real Estate Loans:Nonjudicial Foreclosure (Trustee's Sale)
• To recover a substantial deficiency, Lendercan choose to foreclose judicially
• Receiver acts as auctioneer
• Borrower has one year to pay debt andredeem property
• Receiver remains in possession during thisyear
15
Real Estate Loans:Judicial Foreclosure
A Receiver may be appointed if the Borrower:
• Fails to completeconstruction
• Fails to make repairs
• Denies Lender the right toinspect for environmentalhazards
16
Real Estate Loans
Loan in default
• To protect collateral when there are disputesamong principals or owners of a business
• To protect collateral for all creditors when loanis unsecured
Collect or enforce a judgment
• To collect assets, liquidate them and pay toLender when Borrower will not repay evenafter the Lender has obtained a judgmentCCP 564(b)(3)-(4)
17
Equity Receiverships
Preserve property
• To protect collateral where property is indanger of being lost, removed or materiallyinjured
Business insolvency or dissolution
• To protect assets when a business is insolventor going to be dissolved
• Corporation, LLC, partnership or soleproprietorship
18
Equity Receiverships
Borrower needs to borrow more
• To provide knowledgeable businessmanagement to generate funds forrepayment (and any new loan made)
Deadlocked principals
• To provide knowledgeable businessmanagement when principals cannot agreehow to move forward
19
Equity Receiverships
• When?– When the lawsuit is filed
– But can move anytime during the lawsuit
• How?– Ex Parte Motion
• Most common
• Quick
• Give notice before 10 AM of the previous Courtday
– Noticed Motion• 16 Court days + 5 days for mailing!!
20
Procedures for RequestingReceivership Appointments
• Why Ex Parte?
– Defendant is:
• In default
• Collecting rents oraccounts
• Stealing collateral orassets
• Dissipating collateralor assets
– There is or will be anIrreparable Injury or anemergency
CRC 3.1175(a)(1)
• What is needed for Ex Parte
relief? CRC 3.1175-1176
– Plaintiff must post a bond
– Plaintiff must showirreparable injury will occurif Receiver is not put inplace immediately
– Default under Assignment
of Rents CC 2938 (c)
• Second Order confirming no
later than 15 – 22 days
21
Procedures for RequestingReceivership Appointments: Ex Parte Motions
• Single assignment judges unfamiliar with Receivership
• Counter-arguments to Receiver is a drastic remedy– Irreparable injury not needed if default under Assignment of Rents
– Deed of Trust or Security Agreement may include agreement toappointment of a Receiver
– A Receiver Costs Too Much
• Paid out of estate
• Lost rents and profits
• Plaintiff ultimately responsible for expense of Receivership
• Provides management services Defendant should beproviding but is not, such as property management andcompetent business operations CRC 3.1175(a)(4)
• Stops embezzlement or theft
22
Procedures for RequestingReceivership Appointments: Ex Parte Motions
If Ex Parte Motion is Denied• Set hearing to appoint a Receiver
• Ask for Order Shortening Time
CRC 3.1176(a) vs. CRC 3.1300(b)
• Ask for Temporary Restraining Order (TRO) tostop Defendant from looting the Receivershipestate and to keep the status quo pending thehearing on the motion to appoint the Receiver
– Bond required for TRO CCP 529
23
Procedures for RequestingReceivership Appointments
Noticed Motion
• If no irreparable injury, must proceedon a noticed motion
• 16 Court days’ notice if you‘re lucky
24
Procedures for RequestingReceivership Appointments
Order AppointingReceiver
• Source of power
• Judicial CounselformCCP 568
How to SupplementReceiver’s Powers
• Petition Court forinstructions andseek ordersauthorizing specificactions
25
Procedures
Receiver’s Bond
• The Receiver willfaithfully dischargeduties and comply withthe Court
• In addition to ex parte
bond CCP 567(b)
Receiver’s Powers
• Receiver must keepfunds in insuredaccounts, maintainedby licensed securitiesdealers and not in theBank that is a party to
the action. CCP 569
26
Procedures
Sale of Property
• A Receiver may sell property of estate onlyafter order of the CourtCCP 568.5
27
Procedures
• No statutory provisions address turnover ofpossession after reinstatement
• Provide for turnover after reinstatement in OrderAppointing Receiver
• Order Approving Final Accounting shouldinclude explicit instructions as to disposition ofassets in possession of Receiver
28
After Reinstatement
• Receiver should consider solvency of estate atoutset and throughout the assignment
• Seek consensual solution
• Ask Plaintiff to lend money to Receivershipestate and issue Receiver's certificates
• Petition for Instructions or Move for Discharge
29
Administrative Insolvency
Receiver’s Inventory
• Must be filed within 30
days CRC 3.1181
Receiver’s Attorney
• Must obtain Courtpermission before
employing counsel.
CRC 3.1180
Receiver’s Certificates
• Receiver borrows money tosustain operations of illiquidenterprise/property by selling“Receiver’s Certificates”(almost always to securedcreditor).
• Certificates bear interest andhave priority over all debtsexcept administration of theReceivership estate.
30
Procedures
Receiver’s Monthly Reports
• Report to parties and (if requested) non-parties
• Lenders entitled to reports if Borrower’sprincipals caused appointment of Receiver
• Not filed with Court
• Narrative of events, financials, reports, feesCRC 3.1182
31
Procedures
Receiver’s FinalAccount
• Final account andreport must beapproved by the Court
Receiver’s Fees
• Receiver and counselmust seek Courtapproval of fees oninterim and final basis
• Paid out of assets ofReceivership
• Appointing party canbe held liable forpayment if estate isinsolvent
32
Procedures
Borrowers in Chapter 11
• Seeking to keep control of property,Borrowers often file Chapter 11 when aReceiver is appointed.
• Borrowers often fail to comprehend theserious fiduciary responsibilities that Debtors-in-Possession owe to Creditors
33
Procedures:Effect of Bankruptcy - Borrowers
Receiver’s Response
• Makes no further disbursements
• Delivers property to Debtor-in-Possession
• Files accounting in bankruptcy court
• After noticed hearing, Court will allow feesand costs to Receiver
34
Procedures:Effect of Bankruptcy on Receiver
Choice #1: DealWith BankruptcyCourt
• Lender can allowBorrower tobecome Debtor-in-Possession
Choice #2: Move ToAppoint A Chapter11 Trustee
• If there is cause(usually fraud isrequired)
35
Procedures:Effect of Bankruptcy on Lender
Choice # 3: Move ToExcuse ComplianceIn The Best InterestOf Creditors
• Under section 543 (a)and (b) of theBankruptcy Code
• Bankruptcy courtsrarely grant thismotion
Which course of actionis best depends on thecircumstances of eachcase
36
Procedures:Effect of Bankruptcy on Lender
Considerations
Lender Borrower
Borrower is concerned that theReceiver will discover the"skeleton in the closet" thatBorrower has successfully hiddenfrom Lender for years
Lender believes the Borrower hascommitted financial defalcationsand needs a thoroughindependent review of theBorrower's operations andfinancial record keeping
Borrower believes that theappointment of a Receiver willdestroy the Borrower's ability tovoluntarily sell the asset for a profit
Lender does not have theexpertise to work with theBorrower to try to turn around itsoperations
Borrower does not wish to give upcontrol of the asset
Lender lacks confidence in themanagement skills of theBorrower
37
Considerations
Borrower assumes that theReceiver is the Lender's hired gunwho is out to get the Borrower
Receiver brings new "neutral"professionalism to often tensesituation
"Hope springs eternal in the[Borrower's] breast . . . "
Lender will not advance neededfunds to the Borrower, but willadvance them to the Receiverthrough "Receiver's certificates"
Borrower is afraid that theReceiver will damage hisdelicately balanced relationshipswith suppliers
Receiver can maximize cashbecause he/she is not liable forpre-appointment trade obligationsand may not be making regularmortgage payments to Lender
Lender Borrower
38
Borrower fears that the Receiverwill discover the true financialcondition of the business and shutit down
Receiver can provide accuratefinancial and other informationabout the business
Borrower fears that his or herfranchise will be terminatedbecause the Receiver wasappointed
Receiver must deal withfranchisors and other contractualrelationships
Borrower is afraid that the EPA willcome after him
Receiver takes interim control ofan environmentally challengedasset
Lender Borrower
39
Considerations
Borrower may file Chapter 11 tooust the Receiver
Lender wants the Receiver to sellthe business or its assets to payoff the loan
Borrower is concerned about thecost of the Receivership
Lender is concerned about thecost of the Receivership
40
Considerations
Lender Borrower
41
Questions?
Richard A. Rogan, Esq.Jeffer, Mangels, Butler, &Marmaro LLPTwo Embarcadero Center,5th FloorSan Francisco, CA 94111415.398.8080RRogan@JMBM.com
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