March 14, 2011

The ABC’s of Receiverships

By Frank M. Kessler1

The ABC’s of Receiverships

Among the many services provided by Marcum LLP, are fiduciary services. One form of a fiduciary is the court appointed receiver. A receiver is an impartial person appointed by a court to secure and preserve a business and its assets pending ongoing legal proceedings. The appointment of a receiver is not arbitrary. A crisis likely exists where the business and its assets are at risk of being lost, removed or injured. The risk must be so great that it would compel a court to insert a virtual stranger to seize and control a business and its assets from its owner(s). Thus, counsel and its clients must carefully consider the ramifications of filing a petition for receivership, and draft proposed orders and receivership plans with precision, yet allowing for flexibility.

While a court may appoint a receiver on its own volition, receivers are typically appointed by a court order arising from a petition filed by an interested party (the “petitioner”). The petitioner is often an individual or entity who believes that their interest in a business and its assets are at risk of being lost, removed or injured and petitions the court to appoint a receiver in order to prevent that from happening. The standard for the appointment of a receiver likely varies from jurisdiction to jurisdiction. It is our experience that the petition to appoint a receiver will likely fail unless evidence is presented, so compelling, that the court agrees that the business and its assets are at grave risk of rapid deterioration which will result in irreparable harm to those with an interest in that business and its assets. Retaining an attorney who possesses the requisite skills and knowledge of the process to properly present such a petition to the court will greatly enhance the petitioner’s ability to gain the appointment as desired – but this is just the first step. The content of the petition must adequately set forth the objectives of the receivership.

A petition for the appointment of a receiver should only be filed when economically necessary and justified by the circumstances. This assumes that, in advance of filing a petition with the court, the petitioner and its counsel have carefully considered the ramifications of seeking such an appointment and the fact that the cost of a receiver can be substantial. To do this properly, the petitioner and their attorney will need to know what the receiver will be expected to do, memorialize the receiver’s responsibilities in a receivership plan and ensure that this plan becomes part of the order appointing the receiver. This practice does not always happen and it can create unexpected problems or even failure of the receivership to accomplish its intended objectives. At this pre-filing stage, counsel and their clients can greatly benefit from a business consultant, with skills and experience that are relevant to the operations and industry of the property for which receivership is sought. The consultant can play a vital role in formulating the receivership plan, thus, enhancing the likelihood that the receivership will achieve its objectives.

The general duties of the receiver are the proper management, operation, preservation, maintenance, protection and administration of the business and its assets in accordance with the rights of the interested parties. While there are general forms that can be and are used to define the duties of a receiver, it is unwise not to tailor the order to serve as a receivership plan which suits the particular needs of the business in which the receiver is sought. The receivership plan sets forth the specific objectives, goals and expectations of the particular receivership and the powers assigned to the receiver in order to achieve those objectives, goals and expectations. The order and plan should be specific but should contain a reasonable level of flexibility for the receiver to exercise prudent business judgment.

Every component involved in obtaining a court order appointing a receiver and setting up a receivership is meaningless without the proper selection of a receiver. Just about anyone without a criminal record can serve as a receiver; however, that does not mean that they should be one. First and foremost, the receiver is a crisis manager. Then, as with any service provider, the selection of the receiver must be based upon that receiver’s skills, qualifications, and experience in managing a business and its assets similar to that of the business for which the receiver is going to be asked to manage. Additionally, the receiver must possess the necessary back office resources to get the job done.

Recently, Marcum LLP Partner, Barry Mukamal was appointed as receiver for a distressed, interrupted real estate development in foreclosure. The senior secured lender, a major financial institution, sought to protect its collateral during the foreclosure process by petitioning for the appointment of a receiver to seize control of, secure, protect, operate and participate in the sale of the mortgaged properties. The properties were comprised of dozens of fully completed and partially completed homes and developed lots.

The developer in this case had long abandoned the mortgaged property and deeded it to a third party under disputed circumstances. Essentially, the properties were commandeered by an unrelated and unwanted party who made use of the property for financial gain without accepting a single responsibility associated with the ownership and management of such property. As a result, the real estate assets serving as security for a loan were greatly abused and rapidly deteriorating in value. The lack of any compliance with either municipal code or the bylaws of the homeowner’s association also exposed the property to heavy fines and litigation.

Upon appointment as receiver, Mr. Mukamal immediately took control of and began operating and maintaining all of the developer’s real estate assets. He neutralized the unwanted third party, identified and negotiated leases with qualified occupants, evicted unauthorized occupants, established compliance with municipal codes and stabilized the relationship with the homeowner’s association (“HOA”).

After less than one year of operations, Mr. Mukamal successfully preserved the real estate and mitigated liability with the municipal authorities and HOA. Further, Mr. Mukamal widely marketed the real estate portfolio to the public, stimulating interest therein, assisted in the advancement of due diligence with the responding prospective purchasers and created a competitive sale process. This resulted in a successful sale of the final judgment of foreclosure at a price which exceeded expectations and at an expense below that which was budgeted. The sale of the final judgment had the added benefit to the lender of mitigating potential legal liability as well as reducing ongoing expenses of carrying the asset beyond the foreclosure process. This is but one example as to what can be accomplished by a properly planned and executed receivership, which can only be accomplished by a fully qualified receiver who has the necessary back office resources to get the job done – qualifications and resources that the professionals in Marcum LLP’s Advisory Services Group possess.

1 Frank M. Kessler, is a Senior Manager in the Advisory Services Group of Marcum LLP.