Hotel Receiver, Lender in Hotel Receiverships may Incur Liability

There are two articles published in the California Receivers Forum’s Summer 2010 issue of Receivership News that address conflicts and ethical and liability issues of court appointed receivers and those seeking to appoint them, such as lenders and special servicers. A copy of both articles is available through the link below. Neon Hotel SignThese issues are especially applicable to a hotel receiver and hotel receiverships since hotels are complex multi-million dollar assets and a combination of real estate, entities that own it, and operating businesses. Of particular importance are two areas where conflicts, ethics and the potential for liability exist beyond the hotel receiverships. One area is where a real estate broker is vying for the hotel listing with a lender or special servicer. The second is where a lender or special servicer wants to appoint a particular management company to manage the hotel asset post receivership or after foreclosure. In some cases, there have been hotel real estate brokers and hotel management companies approaching lenders and special servicers with proposals to act as the “hotel receiver” in exchange for the sales listing or management contract post the hotel receivership. In California, there are strict fiduciary responsibilities. A hotel receiver is a court officer and neutral party acting for the benefit of all parties who may have an interest in the receivership property. The party seeking a receiver (i.e. special servicer) cannot require a receiver to enter into any agreement, contract or understanding as part of the appointment. Where a real estate broker acts as the court appointed receiver in exchange for the listing and commission, this could compromise the neutrality of the hotel receiver and not provide for the best fee or marketing exposure of the hotel property, then if it were bid between competing firms. This also encourages the now court appointed hotel receiver to potentially speed up a sale at a lower price in order to reduce its own time and expense, instead of maximizing the amount of possible buyers and price bidding over a longer sales listing period. In situations where a hotel management company is appointed as the receiver in exchange for them managing the hotel later on, this may encourage the court appointed receiver to not seek a better monetary solution to resolve the dispute, such as a sale of the hotel assets during the receivership or foreclosure. Or, the management company may propose a reduced fee during the hotel receivership in exchange for the long term management contract post receivership. This type of arrangement often encourages less time and oversight as the court appointed receiver and it may compromise their duties and effectiveness on behalf of any interested third parties. Both the receiver and lender or special servicer could be liable in some of the above circumstances for their actions. For example, if the subsequent hotel sale were successfully challenged by the debtor as being below market value, the subsequent valuation difference might be a surcharge to the hotel receivership. Where a management company was also the court appointed receiver, it could face potential liability post receivership as the operator if it is now deemed to have caused the hotel to fail as part of its prior arrangement.