30 March 2012

The Role Of A Real Property Receiver: How A Receiver Assists Parties From Taking On Unnecessary Risks And Exposure

In discussing the role of a receiver appointed over a distressed real property, it is apparent that many financial institutions and services still have a misunderstanding as to what a receiver truly is, what he or she does and why the receiver is necessary in certain circumstances.
United States Real Estate and Construction
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In discussing the role of a receiver appointed over a distressed real property, it is apparent that many financial institutions and services still have a misunderstanding as to what a receiver truly is, what he or she does and why the receiver is necessary in certain circumstances. Here are the most common questions a receiver is faced with along with comprehensive answers that should clear up some of these misunderstandings.

What Is a Receiver?

The Receiver is an agent of the court, not of the parties, and the receivership estate is under the control and supervision of the court. The appointment of the receiver is an ancillary proceeding concerned with the preservation of the property subject to a dispute in litigation pending the outcome and disposition pursuant to a final judgment in that litigation. (CCP 564)

A Receiver is to take custody and control of an asset (thus, creating a receivership estate), and protecting and preserving that asset. In a receivership proceeding, the main function of the court through the receiver is to manage or dispose of the estate in the best manner possible and for the best interest of all of the parties concerned.

Who Appoints the Receiver?

As stated above, the receiver is appointed by the court, acts as an agent of the court and acts on behalf of the court in protecting and preserving the assets that make up the receivership estate. The appointment is sought, usually by a lender or secured creditor in a court of law. After appointment, the Receiver takes custody and control of the receivership estate as directed by the court. The court grants the Receiver such authority as the court considers appropriate to protect and preserve the property. This authority may be narrowly or broadly tailored depending upon the scope and breadth of the receivership.

It should be noted that by California law, the Receiver serves the Court and does not work for either the Plaintiff or the Defendant. The receiver does have a fiduciary duty to all parties having an interest in the property.

What Are The Qualities And Skills That a Receiver Must Possess?

Above all, the Receiver must be honest and be a person of integrity. Because the Receiver has a fiduciary obligation to the parties, he must have the ability to operate transparently.

Due to the contentious nature of a receivership, the Receiver must maintain his poise and have the ability to act without being adversely impacted by the parties' challenges. A large amount of patience is required in dealing with the parties who will sometimes be belligerent and irritated as in those cases where they are fighting for survival. The Receiver must deal with the parties without taking their criticism personally.

In saying this, keep in mind that the Defendant in most instances has his heart and soul in the property not to mention enormous financial commitment to the project. The Defendants are angry with the Plaintiff and make the assumption (wrongly) that the Receiver is the Plaintiff's representative. On the other side, the Plaintiff is not very happy that it may be necessary for it to put more money into an already distressed project. It is up to the Receiver to navigate these troubled waters and maximize the value of the receivership estate for the benefit of all.

Importantly, the Receiver must have the knowledge and experience in managing the type of asset over which he is being appointed. It's important that the Receiver have a seasoned staff that can help manage and monitor complex projects. This can be both efficient and cost effective to the receivership estate. The staff needs to include accounting personnel with an understandable accounting system.

The Receiver must have the ability to anticipate problems and be prepared with solutions. It's important for the receiver to have the capability to be able to ask the right questions when evaluating a project—this will save both time and money in the long run. The Receiver must have the ability to pay attention to detail while seeing the big picture.

Does The Lender Always Need to Have a Receiver Appointed?

The short answer to this question is, not always. But there are certain considerations that a lender needs to understand when contemplating a foreclosure versus having a Receiver appointed. As it relates specifically to condominium or other types of residential projects, the construction defect liability issues are complex and should be considered both from a short‐term and a long‐term risk perspective. Receivers can exercise their equitable position to assist in resolving many of these concerns and issues.

The Perils of SB 800

Consider the following: in 2003 Senate Bill 800 ("SB 800") was enacted in an attempt to limit the number of actions resulting from residential construction defect litigation. In California, the homeowner or homeowners association has up to 10 years to file an action for construction defects. SB 800 provides for the developer to have an opportunity to inspect the property with the alleged construction defect and attempt to remedy it, as well as for the homeowners and developer to meet in order to mediate any unresolved construction defect issues and, hopefully, resolve those issues prior to filing an action, all in an attempt to avoid costly litigation.

The Perils of a Lender Taking Title Through a Foreclosure

By the lender foreclosing on a property, the lender now enters the chain of title and exposes itself to potential liability for any construction or design defects in the future. It's important for any lender to understand the potential long‐term issues relating to being on title, including but not limited to exposure under SB 800, detailed above.

California courts have not ruled on the issue of lender liability in the event of foreclosure in an SB 800 context. However it is likely that plaintiffs' attorneys will file suit and name commercial lenders who have foreclosed on certain residential properties if, for no other reason, than they are a deep pocket and the original developer has no ability to respond to the damages. The case for holding lenders responsible for construction defects becomes stronger the moment a lender takes control of the physical assets and makes any effort to complete construction of any unfinished improvements.

By appointing a Receiver, the lender limits its liability by preserving its capacity to that of a lender and not stepping into the shoes of the owner/developer, and therefore does not open itself up for litigation in the future as a result of being on the chain of title.

The appointment of a Receiver to complete and sell a residential project keeps the developer entity in place as the responsible party in the event of a construction defect claim, and keeps the lender off title and at arms' length from any construction issues, thereby creating a layer of liability protection.

Other risks of ownership are avoided by a lender if a Receiver takes custody and control as well, including entitlement concerns, environmental hazards and personal injuries at the property.

All in all, in some circumstances the appointment of a Receiver is an ideal solution for a lender to resolve an outstanding loan, by avoiding certain liabilities and risks.

James N. Guthrie, Jr. is Managing Director of Charter Equities Group, LLC. and is an experienced receiver and a member of the California Receivers Forum. He has been a real estate professional for over 30 years working with both residential and commercial projects. Charter Equities specializes in distressed real properties working with lenders to resolve the issues.

Richard Ormond is a Shareholder in Buchalter Nemer's Litigation Practice Group, Chair of the Firm's Pro‐Bono Committee, and serves as the Firm's Hiring Partner. His practice focuses on Receivership, Real Estate Litigation, Commercial/Business Litigation, Corporate and Partnership Disputes, Alternatives to Bankruptcy and, Intellectual Property Litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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