Real Property Receiverships: Strategy, Ethics, and Practice Tips Chris Chauvin & Matt Mitzner Flower...
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Transcript of Real Property Receiverships: Strategy, Ethics, and Practice Tips Chris Chauvin & Matt Mitzner Flower...
Real Property Receiverships: Strategy, Ethics, and Practice Tips
Chris Chauvin & Matt MitznerFlower Mound Bar Association
October 31, 2014
Where It Begins
● So you have some valuable property…
► Collateral securing loan (e.g., real estate)
► Businesses/Partnerships
● And you’re worried about…
► The property’s future
► An unsecured loss
● Options
► Wait and sue for damages
► Get a receiver
► Foreclose
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Real Property vs. Corporate
● Real property receiver
► Exclusive possession and control
− Landowner retains ownership
− Rents and profits
● Corporate receiver
► Control of all corporate activity and property
► Generally controls several pieces real property
Real Property & Corporate Receiverships
● Foreclosure instead of receiver
► Client just following normal receivership protocol?
− Can you articulate the specific reason why someone other than the borrower/current business owner—for some period of time—needs to take control of the property?
► Court/borrower known for opposing receiverships?
− Above articulation + devious/adversarial borrower
► Court seeking to load receivership with unwanted or overwrought conditions?
− If you can trust the receiver, empower him/her in the order
− If you don’t like the conditions, foreclosure is the quickest work-around
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Real Property Receivership
● Types
► Multi-family
► Shopping center
► Hotel
► Office building
● Types of receivers
► Property manager
► Attorney
► Forensic accountant
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Real Property Receivership
● Receiver Instead of Foreclosure
► What is the condition of the property?
− Will your client be able to sell the collateral in its current condition?
− Are there any environmental concerns/latent liabilities?
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Early Questions in the Receivership Process
● Marshal evidence
► Defaults and standing
► Appraisals
► Mechanic’s liens/tax liens/code violations
► Property condition report
● Contractual agreement to receiver
► Riverside Properties v. Teachers Ins. & Annuity Ass’n of America, 590 S.W.2d 736, 738 (Tex. App. – Houston [14th Dist.] 1979)
● State versus federal court
► Subject matter jurisdiction
► Timing and cost
Texas State Court Receivership (cont.)
● Possibly faster and cheaper
● Procedure and strategy
► TRCP 695: Three days’ notice
► Ex parte burden
► Easy amendment
► Couple with request for TRO trapping rents
● Grounds: CPRC § 64.001
► Secured creditor
► 64.001(b): danger of being lost, removed, or materially injured
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Texas State Court Receivership (cont.)
● Rules of equity apply (CPRC § 64.004)
● Who can be receiver? CPRC § 64.021
► Texas citizen and qualified voter at time of appointment
► Not interested in lawsuit
► Maintain Texas residence during lawsuit
● Bonds
► Receiver (CPRC § 64.023)
► Applicant (TRCP 695a)
● Oath (CPRC § 64.022)
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Texas State Court Receivership (cont.)
● Duties
► Primarily governed by the order
► CPRC § 64.031: possession, collect rents, compromise claims
● Application of rents/proceeds
► Primarily governed by the order
► CPRC § 64.051: receiver costs and obligations first, then pre-receiver obligations
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Texas State Court Receivership (cont.)
● Receiver liability
► CPRC § 64.052: suit may be brought where claimant resides
► CPRC § 64.053: judgment paid from receivership funds
► CPRC § 64.054: judgment lien against receiver primes senior secured creditor
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Texas Federal Court Receiver
● Federal Rule of Civil Procedure 66
► No standard provided
● Santibanez v. McMahon & Co., 105 F.3d 234, 241-42 (5th Cir. 1997)► a valid claim by the party seeking the appointment;
► the probability that fraudulent conduct has or will occur;
► imminent danger that property will be concealed, lost, or diminished in value;
► (4) inadequacy of legal remedies;
► (5) lack of a less drastic equitable remedy;
► (6) likelihood that receiver will do more good than harm;
► (7) the property being of insufficient value to insure payment; and
► (8) poor financial standing of the borrower.
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Texas Federal Court Receiver (cont.)
● No specific receiver qualifications
► Out of state
► Entity
● 28 U.S.C. § 754: property in multiple states
► Domesticate order within 10 days
● 28 USC § 1692: service of summons as if property in one district
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Texas Federal Court Receiver (cont.)
● 28 USC § 2001: receiver sale procedures
► Notice and hearing to all interest parties
► Receiver reports to court on marketing and sales procedures
► Standard: best interest of the property
► Court appoints three appraisers
− 2/3 appraised value requirement
− Offer 10% more than proposed sale price kills sale
► As court to waive procedures based on robust marketing
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Problems to Anticipate
● Potential Problems with Receivership
► Court appoints a “good friend”
− Court refuses to appoint receivership professional
► Receiver is untrustworthy
− Receiver’s typical nonliability for mismanagement or misappropriation of funds post-receivership
► Court is slow or apathetic
− Inability to get the Court’s intervention to stop worse mismanagement by receiver
► Court refuses to permit quick move to foreclose
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Ethical Issues
● Be careful with “your proposed” receiver
► Pre-filing strategy
► Personal associations/communications
► Offers to “work for free” in exchange for cut of listings, leasing commission, and property management
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Winding Down Receivership
● How long should it last?
● Property disposition options
► Receiver sale
► Foreclosure
► Deed in lieu
● Court authorization
● Remitting cash flow
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Receivership and Bankruptcy
● Debtor Files Bankruptcy After Receiver Appointed
► Property Turned Over to Debtor-in-Possession Unless Receivership in Place for 120 Days (Amaravathi)
● What if Bankruptcy Court Leaves Receiver in Possession?
► Accuracy of Financial Information from Receiver for Plan of Reorganization
Impact of Guaranties
● General types of Guaranties in Commercial Loans Secured by Real Property
− Nonrecourse
− Nonrecourse with “Bad Boy” carveouts
− Recourse
● Form guaranties in the industry typically shift the total deficiency risk to borrowers
● … But if it’s a reputable or professional borrower, then the guaranty is likely nonrecourse
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Impact of Guaranties
● Receiver Instead of Foreclosure
► Guaranty will help direct choice re: receiver
− Deficiency: difference between value of property at foreclosure sale and the loan balance, interest, and attorneys’ fees
► Do you have a solvent guarantor?
− Foreclosure risks mitigated by solvent-guarantor’s liability
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Impact of Guaranties
● Do you have a recourse guaranty?
► Nonrecourse guaranties (only remedy is recovering the collateral) make receivership far more central to your strategy
► Evidence uncovered without obstacle
− Receiver preceding suit strengthens your suit, especially for federal court
− Receiver will identify liability for “Bad Boy” carveouts
● Shifting this risk to the borrower is paramount for the interests of lender clients
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Impact of Guaranties
● Courts will enforce guaranties, but they carry a “disfavored” status under Texas law
● Possible defenses
► No default
► Bad assignment (loan docs not in order)
► Disputed signature
► Windfall deficiency due to disputed fair-market-value at time of foreclosure, etc.
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Guarantor’s Waiver of Defenses
● Guarantor’s broad waiver of defenses enforced
► “All defenses”
− Moayedi v. Interstate 35/Chisam Road, L.P., —S.W.3d—, 57 Tex. Sup. Ct. J. 724 (Tex. June 13, 2014)
► “Offset”
− LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837 (5th Cir. 2000)
► Every defense but full and final payment waivable
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Questions?