The Role of a Real Property Receiver: How a Receiver Assists Parties From Taking on Unnecessary Risks and Exposure By James N. Guthrie Jr. and Richard P. Ormond Esq. n 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.
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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 is entrusted to protect and preserve 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?
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 may be reached by phone at (714) 434-8554 or e-mail guthrie@charterequitiesgroup.net. Richard P. Ormond Esq. 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. He may be reached by phone at (213) 891-5217 or email rormond@buchalter.com.
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Above all, the receiver must be honest
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 the title and at armslength 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.
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What are the qualities and skills that a receiver must possess?
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 the 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.
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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.
and be a person of integrievaluating a project— ty because the receiver this will save both time has a fiduciary obligation and money in the long to the parties, he must run. The receiver must have the ability to operate have the ability to pay transparently. attention to detail while Due to the contentious seeing the big picture. nature of a receivership, Does the lender the receiver must maintain their poise and have always need to the ability to act without have a receiver being adversely impacted appointed? The short answer to this by the parties’ challenges. “Above all, the question is, not always, A large amount of receiver must be but there are certain conpatience is required in honest and be a siderations that a lender dealing with the parties person of integrity needs to understand who will sometimes be because the receiver when contemplating a belligerent and irritated has a fiduciary foreclosure versus having as in those cases where obligation to the they are fighting for sur- parties, he must have a receiver appointed. As vival. The receiver must the ability to operate it relates specifically to condominium or other deal with the parties withtransparently.” out taking their criticism —James N. Guthrie Jr. types of residential projects, the construction personally. defect liability issues are In saying this, keep in complex and should be mind that the defendant, considered both from a in most instances, has short-term and a longtheir heart and soul in term risk perspective. the property not to menReceivers can exercise tion enormous financial their equitable position commitment to the projto assist in resolving many ect. The defendants are of these concerns and angry with the plaintiff issues. and make the assumption (wrongly) that the receivThe perils er is the plaintiff’s representative. On the other of SB 800 Consider the following … side, the plaintiff is not “It is up to the in 2003, Senate Bill 800 very happy that it may be receiver to navigate necessary for it to put these troubled waters was enacted in an attempt to limit the nummore money into an and maximize ber of actions resulting already distressed projthe value of the from residential construcect. It is up to the receiver receivership estate for tion defect litigation. In to navigate these trouthe benefit of all.” California, the homeownbled waters and maximize the value of the —Richard P. Ormond er or homeowners associEsq ation has up to 10 years receivership estate for the to file an action for conbenefit of all. Importantly, the receiver must have struction defects. SB 800 provides for the knowledge and experience in man- the developer to have an opportunity to aging the type of asset over which they inspect the property with the alleged are being appointed. It’s important that construction defect and attempt to remthe receiver have a seasoned staff that edy it, as well as for the homeowners can help manage and monitor complex and developer to meet in order to projects. This can be both efficient and mediate any unresolved construction cost-effective to the receivership estate. defect issues, and hopefully, resolve The staff needs to include accounting those issues prior to filing an action, all personnel with an understandable in an attempt to avoid costly litigation. accounting system. The receiver must have the ability to The perils of a lender anticipate problems and be prepared taking the title through with solutions. It’s important for the foreclosure receiver to have the capability to be By the lender foreclosing on a property, able to ask the right questions when the lender now enters the chain of title