Where It Begins

1. Real Property Receiverships: Strategy, Ethics, and Practice TipsChris Chauvin & Matt MitznerFlower Mound Bar AssociationOctober 31, 2014

2. 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

3. 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

4. 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

5. Real Property Receivership • Types • Multi-family • Shopping center • Hotel • Office building • Types of receivers • Property manager • Attorney • Forensic accountant

6. 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?

7. 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

8. 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

9. 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)

10. 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

11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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

17. Winding Down Receivership • How long should it last? • Property disposition options • Receiver sale • Foreclosure • Deed in lieu • Court authorization • Remitting cash flow

18. 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

19. 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

20. 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

21. 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

22. 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.

23. 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

24. Questions?