Pitfall for Court Appointed Receiver and Lender in Receivership Sale?

The use of a court appointed receiver by a lender to take over income producing real property and then sell those assets during the receivership may call into question their authority. Whether a rents and profit receiver can sell real property free and clear of liens is one issue. Another is the traditional argument that there is no basis in the law. Yet, state court judges, such as in California, are signing orders that give this authority to receivers to proceed with sales that are unencumbered by any liens. In the Spring 2012 issue of the Receivership News – a publication of the California Receivers Forum – there is in the first part of a two series article a traditional perspective by the author as to why a court appointed receiver should be restricted. This article on page 4 makes several important points worth reading, say where the objective is to sell the lodging assets during a hotel receivership, including: 1) A rents and profits receiver is “limited and special;” the rents and profits emanating from the property are impounded for the benefit of the mortgagee, but the debtor retains its other property. 2) Having obtained the appointment of a receiver, however, many lenders and their attorneys quickly change their tunes and assert that the rents and profits receivership is not limited and that the receiver can do anything a general equity receiver can do. This common reversal of position argument on the nature of a rents-and-profits receivership is a revealing one. 3) Since the trust deed rarely, if ever, contains language authorizing the receiver to actually sell the security, the lender must rely on statutes and case law that apply to the power of receiver for an entity or corporation to sell that corporation’s assets. It is also not uncommon for distressed hotels that get placed in receivership to be sold eventually like the prominent hotel in this article. Thus, the remedy by a lender and their attorneys to have a court appointed receiver accomplish the same goals as part of the receivership order makes sense. However, this may leave the borrower without other recourse and prompt additional litigation. What say you in our comments section below?