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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2013

For Sale by Receiver

With the right plan and team, real property may be sold out of receivership

For Sale by Receiver

Since the recession, many strug- gling properties in the commercial real estate market have ended up in the hands of receivers — a fate that typically is perceived as an alternative to foreclosure. This alternative, however, has become the center of industry controversy over the ability of a receiver, particularly a so-called rents and profits or rents/issues/profits (RIP) receiver, to sell real property out of receivership.

This controversy has been fueled by a number of cases such as the highly publicized 2010 property-receivership case of Wachovia Bank, National Association v. Downtown Sunnyvale Residential LLC, in California. In this case, a receiver’s proposed sale of real property was analogized to a foreclosure and denied on the ground that the sale failed to provide the statutory protections guaranteed to defaulting borrowers under California law.

Some observers of the Sunnyvale decision took the position that, under present California law, courts lack the authority to order or approve the sale of property out of receivership and that any such sale — particularly where it claims to transfer title free and clear of all liens — is without any legal foundation. Other observers considered receivers’ sales unrealistic, suggesting they promise far more than they can deliver.

  • This increased scrutiny has highlighted a number of issues at the core of a receiver’s authority to sell real property out of receivership, including:
  • The limits of a court’s authority to allow a receiver’s sale, including a sale free and clear of existing liens;
  • The steps that a receiver might take to maximize the likelihood of a sale; and
  • The influence that litigants can exert over a proposed receiver’s sale.

Many commentators have focused exclusively on legal issues and ignored more mundane, practical concerns. Such a focus is not unjustified, because the law concerning receivers’ sales of real property is sparse and subject to varied interpretations. Nevertheless, receivers’ sales are regularly approved — and concluded — throughout California. That is why it is important to consider alternatives to the positions reflected in Sunnyvale. In addition, real estate professionals, including commercial mortgage brokers, can benefit from a preliminary overview of the practical concerns facing would-be lenders and buyers in a receiver’s sale. This discussion can add worthwhile context to the issue of a receiver’s authority to sell real property out of receivership and to the critical role that a receiver and an experienced team of insurers, lenders, brokers, and attorneys can play in a contentious real property dispute.

Background

The appointment of a receiver is an equitable remedy, including in the context of a distressed-property dispute. A receiver’s authority is likewise equitable, deriving from the appointing court. As a court-appointed, third-party neutral, a receiver’s authority is limited by the contents of a court’s appointing order, unless amended. In simple terms, if the appointing order does not allow for a receiver’s sale, and a receiver’s authority is not expanded to allow it, no sale can be conducted.

Nonetheless, California law indisputably permits certain sales of property out of receivership. Specifically, Cal. Code Civ. P. § 568.5 provides that a “receiver may, pursuant to an order of the court, sell real or personal property in the receiver’s possession” in a manner consistent with the California Code of Civil Procedure. In turn, Cal. Code Civ. P. § 701.630 (part of the section referenced by the Code of Civil Procedure [the Code]) provides that “if property is sold pursuant to this article, the lien under which it is sold, any liens subordinate thereto, and any state tax lien ... on the property sold are extinguished."

California courts have, on occasion, acknowledged the propriety and necessity of receivers’ sales under certain circumstances. Attorneys for receivers regularly cite the 1973 case of People v. Riverside University and the 1982 case of Cal-American Income Property Fund VII v. Brown Development Corp., for the proposition that, with court permission, a receiver can sell real property out of receivership and deviate from the statutory scheme outlined in the Code. In the case of Riverside University, the court found that “if no good reason appears for refusing to confirm a receiver’s sale … the sale should be confirmed … The matter of confirmation rests upon the sound discretion of the appointing court.” Likewise, the Cal-American court found that “judicial confirmation of a receiver’s sale rests upon the appointing court’s sound discretion.”

Less-cited case law also supports this position. Courts have recognized their broad discretion when deciding whether to approve the sale of assets out of receivership, and have held that a receiver’s recommendation in favor of a proposed sale is entitled to significant deference, particularly where the proposed sale would yield the highest price possible.

Legitimate sale

There does therefore appear to be a reasonable argument in favor of the legitimacy of receivers’ sales. Nonetheless, the controversy that erupted in the wake of the Sunnyvale decision bears consideration and highlights a number of issues, three of which are addressed here.

  • Although a court may legitimately interpret the law as allowing for receivers’ sales, the same law supports a court’s authority to deny a sale when it is not satisfied that appropriate and equitable protections have been afforded to all interested parties. A receiver that does not protect the interests of all parties equally is not performing his or her duties as a court-appointed neutral.
  • By implication, a receiver must ensure proper notice of a proposed sale, of course, but also strive for cooperation among all interested parties, ideally in the form of an agreement to the sale by all parties. Any receiver that has attempted to sell real property (or lender that has attempted to underwrite a sale) over the objections of a second-lien holder can appreciate this insight.
  • RIP receivers may indeed lack authority — at least initially — to sell property out of receivership. RIP receivers, however, do not exist in a vacuum, and the interests of the estates they administer are routinely affected by the vagaries of the parties, the financial exigencies of the moment, and a myriad of unforeseen developments.

Receiverships are necessarily fluid. A receiver’s duties and powers consequently can be expanded, in accordance with the principles of equity, by the appointing court. For example, a receiver might originally be appointed solely for the purpose of directing an income stream to the benefit of a receivership estate. Yet the receiver might later determine that the interests of the estate would best be served by a sale of real property out of receivership, and an appointing court might allow this. One might argue that in approving a sale proposed by a RIP receiver, an appointing court would be altering the nature of the receiver’s appointment. The nature of the receiver’s appointment indeed would necessarily be expanded beyond the original RIP appointment to include the authority to sell.

Best interests

A receiver’s ability to evaluate a receivership estate’s best interests from an independent, neutral position, and to secure court approval for the proposed administration of the estate, makes a receiver particularly valuable to secured lenders, defaulting borrowers and courts alike. Receivers therefore should be prepared to adapt to the requirements of the estates they administer and to avail themselves of the benefits that a court-approved and properly conducted receiver’s sale can afford — to all parties — when appropriate. This should ultimately inure to the benefit of each estate and should increase a property’s sale price and the likelihood of a positive outcome for a receivership. For instance, receiverships might be particularly important to parties charged with maximizing the value of secured property before the sale.

Even assuming that any legal obstacles can be overcome, receivers pursuing sales of real property out of receivership still face additional, practical challenges. For example, given the unique nature of receivers’ sales, title insurers often are wary and may not be eager to involve themselves in such unusual — though not uncommon — transactions. According to Marc Brooks, a broker who has participated in dozens of successful receivers’ sales, few title insurers presently are willing to participate in these sales. Those that do likely will require longer-term and highly publicized notice and marketing efforts, heightened diligence to ensure all liens against the subject property are adequately identified, lien holders notified, and court orders resulting from properly noticed motions granted over the objections of all comers.

Commercial mortgage brokers should be aware that securing financing presents an additional challenge to prospective buyers. Many would-be buyers — and lenders — might be reluctant to involve themselves in sales subject to the sorts of legal challenges a receiver’s sale invites. To assuage any such concerns, receivers would do well to ensure they have legal assistance and cooperation in designing a sale process and preparing and arguing all necessary motions. They also are advised to partner with real property brokers to market subject properties appropriately, for a sufficient duration, and with a title insurer intimately familiar with the unique process and legal complexities fundamental to receivers’ sales.

In other words, appropriate preparation — and the right team — will maximize the likelihood of a successful sale by addressing the most pressing concerns of potential buyers and their lenders. When authorized by an appointing court and appropriately noticed and conducted, receivers’ sales remain a valuable tool in the administration of receivership estates.

Disclaimer: The above is for informational purposes only and does not constitute legal advice.


 


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