Receiverships are becoming a popular tool for creditors to manage distressed real estate and to realize upon their collateral. Lenders are looking at receiverships as a faster and more efficient and cost effective strategy than forcing a debtor into bankruptcy. They offer the lender flexibility as opposed to well established procedures under bankruptcy. The current economy is also resulting in increased use of receiverships to complete unfinished buildings.
There exists legal and practical differences among the various states regarding situations in which a receiver may be appointed, the standards for appointment, notice required to be given to adverse parties, the party who has the burden of proof in connection with the appointment of a receiver, the nature of evidence required for appointment of a receiver, and the requirement of a bond. A federal district court also has the power to appoint a receiver in the event a party meets the requirements for federal jurisdiction.
Receivers may be appointed in a multitude of settings and for multiple purposes. Circumstances in which a receiver may be appointed in Illinois include:
- The foreclosure of a mortgage in order to collect rents or profits from the mortgaged real estate, or manage, conserve or operate the mortgaged real estate.
- Completion of unfinished buildings or other improvements;
- Remedying violations of municipal or state building codes;
- Winding up a fraudulent conveyance;
- Winding up a dissolved corporation or one that is insolvent;
- Winding up a dissolved partnership or limited liability com6. pany, and
- A court’s exercise of its own equitable powers.
A recently enacted statute allows a municipality to obtain court permission to reclaim uncompleted condominium projects that are a danger to the community. The properties can be turned over to a receiver for management, completion, sale or dissolution of the condominium.
Receivers are most typically sought in actions to foreclose mortgages. Although the appointment of a receiver is usually considered a drastic remedy, the appointment of a receiver ancillary to the foreclosure of a mortgage is not viewed as an extraordinary remedy. Illinois permits the appointment of a receiver for non-residential real estate without much more than a showing of the mortgagor’s default and a provision in the mortgage entitling the mortgagee to a receiver upon default. The burden then shifts to the mortgagor to show the absence of a default or good cause why a receiver should not be appointed.
Two recent cases demonstrate the difficulty in defending against a receiver and in particular in meeting the burden of good cause. In Centerpoint Properties Trust v. Olde Prairie Block Owner, LLC, No. 1-09-1481 (February 10, 2010), the court found that good cause may exist in circumstances where the mortgagor has a commitment from a lender to refinance a loan or from an investor to provide additional funding needed to complete the project and that appointing a receiver would likely impede the completion of that transaction. However, it is likely that a court would also find that the transaction must be imminent and not at some unknown time in the future. In Bank of America, N.A. v. 108 N. State
Retail, LLC, No. 1-09-3523 (March 31, 2010), the court found that the mortgagor’s argument that it is in a better position to complete the unfinished project itself is in it self not good cause in light of the statutory presumption in favor or granting possession to a mortgagee of commercial property.
A receiver under the Illinois Mortgage Foreclosure Law is an officer of the court. It acts for the benefit of all parties. It has possession of the mortgaged real estate and the full power and authority to operate, manage and conserve such property. It has the power and authority to secure tenants and execute leases for the real estate based on a duration and terms which are reasonable and customary for the type and use involved. It even has the power to accept and reject leases.
On the other hand, it has a duty to manage the mortgaged real estate as would a prudent person taking in to account the receivership’s management on the interest of the mortgagor. To the extent it receives sufficient receipts from the mortgaged real estate it is required to maintain existing casualty and liability insurance, use reasonable efforts to maintain the mortgaged real estate and make repairs and improvements necessary to comply with the building and housing codes.
A receiver likely does not have a right to sell the real estate which is the subject of the receivership estate. Under the Illinois Mortgage Foreclosure Law its duties and responsibilities are to operate, conserve and manage the receivership estate. However, under appropriate circumstances, a receiver may be able to convince a court to sell the receivership estate if the parties agree or if the real estate is in imminent danger. Courts in Cook County, Illinois have permitted receivers to sell units of an unfinished condominium with the proceeds applied to the mortgage indebtedness. However, it is unclear whether in these instances the mortgagor agreed to the sale or did not object to the sale. Also, either the receiver or the mortgagee would be required to procure title insurance for the purchaser.
Receiverships are something that all lenders should consider in managing distressed real estate. Lenders should also consider creative ways for receivers to manage distressed assets to meet the needs of a particular situation.