A receiver is a person or entity that has been charged with custodial responsibility for the property of others. One type of receivership that we saw quite a bit in the past decade involved the FDIC, which was appointed as the receiver after the failure of various banks. As receiver, the FDIC was tasked with recovering the maximum amount possible from the disposition of the failed bank’s assets. The FDIC is a type of receiver that is appointed by a government regulator, and there is a statutory basis for this kind of receivership.
Another type of receivership is one that is appointed by a state or federal court. These types of receiverships might take place in the context of foreclosure or bankruptcy proceedings. In most commercial real estate loan transactions, the loan documents will provide that upon a default, the lender is entitled to the appointment of a receiver. Nonetheless, a receiver is an officer of the Court, so in order to take advantage of that provision in the loan documents, lenders must initiate a lawsuit to ask the Court to appoint a receiver.
One way to show the Court that a receiver should be appointed for commercial property is to show that the rents are not being applied to the outstanding debt. This may establish that there is waste or serious risk of loss. In these cases, the receiver’s objective would be to collect and apply rents and profits to the debt, thereby protecting the lender’s security interest in its collateral. Generally, the receiver’s primary responsibility in connection with a foreclosure sale is to manage and maintain the property, prepare a full and complete accounting of all receipts and expenses, and file such information with the Court. Alternatively, a receiver could be appointed solely to collect the rents and to pay expenses, which is sometimes referred to as a “lock-box” function. In these cases, the responsibility for day-to-day management of the property, including negotiating leases and contracting for services, could remain with the owner.
There are many different types of receiverships, and the various options should be carefully considered when deciding what kind of strategy to implement in the context of your commercial case.
