On occasion I represent receivers in commercial mortgage foreclosure cases. Last year, I posted this article after giving a little “Do’s and Don’ts” presentation to one of our receiver clients. Since I've been unable to create a new post this week, I thought re-share some of my tips here today related to receiverships over mortgaged real estate:
1. Review and understand the proposed order appointing receiver before signing on. Ask an attorney (like me) to review and help negotiate terms, as needed.
2. Ensure your compensation is fair and profitable from the outset. See #1.
3. Before the receivership hearing, eyeball the property – drive by and/or inspect if possible. Understand the lay of the land.
4. Determine the plaintiff lender’s objectives with regard to the case and the property from the beginning: babysit the property only, improve the property, sell the property, etc.? Get a feel for the lender’s cost tolerance. As a practical matter, the plaintiff lender is the captain of the ship.
c. Determine the status of real estate taxes and confer with the lender regarding any delinquency. Develop a plan with the lender as to how and when taxes should be paid, if at all. Send a confirming email and record the status/plan in court-filed reports.
d. Investigate the status of utilities and consider action.
e. Evaluate whether there is any non-real estate (personal property) collateral of value and, if so, learn what the lender wants you to do with it. Ensure that the action is covered by prior court order, or obtain order authorizing the action.
6. Hire an attorney unless (a) you have prior experience with, and trust in, lender’s counsel and (b) there is no apparent adversity with the lender. Some lawyers have the view that receivers should always retain independent counsel. I don’t necessarily share that opinion and tend to assess the issue on a case-by-case basis.
7. Report, report, report. Inundate the lender’s representative and/or lender’s counsel with emails regarding significant issues and action. Timely file all reports required by the order appointing receiver.
8. As to major decisions affecting the property, including significant expenditures, obtain prior written approval from the lender or lender’s counsel. See #7. Emails are easy. Use them. Archive them for your file.
Potential receivers are free to call or email me with any questions. And for more information on Indiana receiverships, please click on the category “Receiverships” to your right.
This follows-up last week’s post that introduced foreclosure-related environmental issues and focused on liability exposure for conventional lenders. This week’s post centers on environmental liability risks that purchasers of distressed loans may face. In this situation, the traditional secured lender exemption discussed in my last post may not apply because of the investor’s intent to hold the property rather than to divest itself of the property as early as commercially reasonable. Can liability still be avoided?
Successor lenders. When an investor takes assignment of a distressed mortgage loan, thereby becoming the mortgagee (the lender), the investor’s objectives may be of critical importance in the context of potential environmental liability. Some investors acquire a distressed loan with the goal of obtaining a payoff of the loan with interest. They do not seek to own the underlying property through foreclosure, and if they do ultimately foreclose, they want to sell the property as soon as possible. These types of investors are very similar to conventional lenders and, as such, the secured lender exemption discussed in last week’s post should apply. Having said that, the law is not crystal clear on this point.
Investors/Developers. Some investors acquire a distressed loan with the intention owning the mortgaged real estate. In other words, they want the project – not the income from the loan. Some call this a “loan-to-own” foreclosure. Such purchasers of loans in default have developer-like aims, and it is these types of investors, and the transactions in which they engage, that are the real focus of today’s post. The loan-to-own investors probably fall outside the CERCLA secured lender exemption because they are not seeking to divest themselves of the property “as early as commercially practicable.”
The unsettled BFPP issue. We believe that the investor still could avoid liability by going through the steps to become a BFPP (see last week). The problem is that the BFPP rules require that the investor not have any “affiliation” with a PRP (here, the borrower/mortgagor/prior owner) through “any contractual … relationship ….” Thus a question arises as to whether the loan documents create some kind of affiliation that defeats the BFPP exemption. In one written opinion, the Court cited EPA guidance suggesting that “in deciding what ‘affiliations’ are prohibited by CERCLA, courts should be guided by ‘Congress’s intent of preventing transactions structured to avoid liability.’” Ashley II of Charleston, LLC v. PCE Nitrogen, Inc., 746 F. Supp. 692, 753 (D.N.C. 2010). Based on that rationale, we are of the view that the BFPP exemption should be available to investors. Neither a mortgage loan nor a sheriff’s sale are transactions structured to avoid environmental liability.
The policy argument. Ultimately, if a court were to find a prohibited “affiliation” between a borrower and a mortgagee-turned developer, so as to defeat the BFPP exemption, such a finding would seem to be inconsistent with the purpose of the CERCLA’s BFPP and secured lender protections—namely, redevelopment of brownfields. We think that it would be in keeping with CERCLA’s purpose of encouraging redevelopment to allow an investor to foreclose on its mortgage, transform itself into a BFPP and thus avoid liability. But this is an unsettled area of law that could be highly fact dependent, and as experienced environmental litigators know, avoiding liability under CERCLA is an uphill battle.
Upshot? Environmental liability related to the purchase and assignment of mortgage loans and subsequent development is clouded and complicated. However, steps can be taken to ensure that your unique transaction most closely follows the statutory defenses to CERCLA and puts your entity in the best position should an environmental issue arise. An investigation into environmental issues is advisable if you are interested in purchasing a distressed loan. For more information on how the secured lender and Bona Fide Prospective Purchaser exemptions apply to your transaction, please contact Leah B. Silverthorn or me. I’d like to thank Leah for taking the lead with these informative posts.
From time to time, banks may be forced to foreclose upon mortgaged real estate with an active environmental problem. I touched upon this subject back in September of 2009 – Always Consider An Environmental Liability Analysis – but this and next week’s posts provide depth to the topic with the assistance of my colleague Leah Silverthorn, who specializes in environmental law at our Firm.
Some history on environmental law. The Comprehensive Environmental Response Compensation and Liability Act, also is known as “Superfund” (“CERCLA”), enacted in 1980, imposes joint, strict, and several liability for releases of hazardous substances upon four categories of parties: “owners,” “operators,” “transporters,” and “arrangers” (collectively known as potentially responsible parties or “PRPs”). The statute imposes liability simply by virtue of acquiring a contaminated property. In 1986, Congress amended CERCLA through the Superfund Amendments and Reauthorization Act (“SARA”), which, among other things established the innocent landowner exemption, the now rarely-invoked precursor to the 2002 exemptions discussed below.
The exemptions. CERCLA’s goal is the cleanup of contaminated sites, and, as such, it originally contained virtually no legal defenses. Because of this harsh liability scheme, both lenders and developers, as well as local municipalities, raised concerns over the disincentive this statute caused for re-development of “brownfields”—a term given to contaminated (or perceived to be contaminated) real estate. As a result, in 2002, Congress enacted the Small Business Liability Relief and Brownfields Revitalization Act (the “Brownfields Amendment”), adding an exemption to liability for bona fide prospective purchasers (“BFPPs”) and for secured lenders.
BFPP defense. The BFPP defense requires a party (a) to conduct all appropriate inquiries (through a Phase I Assessment), (b) not be related to or associated with another PRP and (c) follow post-closing obligations, including notifications, stopping or preventing future releases or exposure, and cooperating with government requests for access, if necessary. With the enactment of the BFPP exemption, a party can purchase a property with knowledge of environmental conditions and still avoid liability, so long as it takes these steps. (Aside: The BFPP defense does not prevent the United States, if it undertakes remediation itself directly, from placing a senior lien on the real estate. The theory is that the landowner benefitted from such cleanup activities and should not receive a windfall for such benefit. Care should be taken to ensure that the government does not see a need to undertake a cleanup.)
Lender’s exemption, specifically. The Brownfields Amendment also created an exemption for secured lenders (mortgagees), resulting from financial industry worries that foreclosure would automatically transfer liability for all contamination to a foreclosing mortgagee. This exemption comes into play when a mortgagee is forced to foreclose on the property and/or take control of the management of the property. Per CERCLA, lenders typically are exempted from the “owner or operator” definition so long as they “hold indicia of ownership primarily to protect [a] security interest.” The lender must not “participate in management” of environmental decision making and must “seek to sell, re-lease (in the case of a lease-finance transaction)” “at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.” A Phase I is not a prerequisite to this exemption.
Good to go, generally. In instances where banks immediately intend to liquidate the mortgaged real estate following the sheriff’s sale, the law is relatively clear—banks generally will be exempt from liability. Since selling the real estate as soon as possible is the modus operendi of virtually all banks and lending institutions, the law provides at least some comfort that conventional banks, in business to enforce their loans through foreclosure and prompt liquidation of their loan collateral, should not be exposed to environmental liability.
Part II, next week, involves the sticky situation when the foreclosing mortgagee decides to retain ownership of the mortgaged real estate.
My research turned up another Indiana federal court opinion regarding the Rooker-Feldman doctrine, which I have discussed on three prior occasions (most recently, Another Rooker-Feldman Knock-Out: Federal Court Ends Post-Foreclosure Lawsuit). Roberts v. Cendant, 2013 U.S. Dist. LEXIS 80210 (S.D. Ind. 2013) (.pdf) is a fourth recent opinion in which the Court granted a defendant mortgagee’s motion to dismiss a pro se plaintiff’s federal court action.
The law. With regard to the applicability of Rooker-Feldman, the Court stated “the fundamental question is whether the injury alleged by the federal plaintiff resulted from the state court judgment itself or is distinct from that judgment.” The doctrine prevents federal courts from exercising subject-matter jurisdiction where federal claims were “tantamount to a request to vacate the state court’s judgment of foreclosure.” In Roberts, the Court concluded that the success of the plaintiff’s statutory and constitutional claims required “evaluation of the state court’s judgment” in the underlying foreclosure action. The plaintiff borrower’s core argument was that the lender never had standing, but “the underlying action necessarily concluded that the [foreclosing lender] had standing to foreclose.”
Foreclosure firm. One thing that distinguished Roberts from the cases in my prior posts was that the borrower named in his federal court suit the law firm that handled the state court foreclosure case. Judge Magnus-Stinson held that “the Rooker-Feldman arguments are equally effective at barring the claims against . . . [the foreclosure firm/lawyers], and the Court dismisses the claims against them as well.”
Dismissed. The Court ultimately held:
Accordingly, because the success of [borrower’s] statutory and constitutional claims require evaluation of the state court judgment in the foreclosure action, and those claims can only succeed if the Court were to conclude that the state court acted erroneously in finding that [lender] had standing to foreclose and granting judgment in favor of [lender], the Rooker-Feldman doctrine bars the Court from exercising subject-matter jurisdiction in this matter.
The Rooker-Feldman doctrine is a powerful and well-recognized defense – at least in Indiana – for lenders to obtain a quick and inexpensive exit to what, in the final analysis, really are frivolous claims brought by disgruntled pro se (unrepresented) borrowers.
My definition. The terminology “deficiency judgment” refers to the amount of the judgment remaining after deducting the price paid at the sheriff’s sale or, more generally, the difference between the debt amount and the value of the collateral securing the debt.
Indiana’s process. It’s my understanding that some states require post-sale deficiency actions. Not in Indiana. Here, a judgment entered in a mortgage foreclosure action typically is comprised of two elements. The first is a money judgment on the promissory note and/or guaranty, and the second is a decree of foreclosure based on the mortgage. The deficiency is a product of the sheriff’s sale. In Indiana, a deficiency judgment isn’t really a technical or statutory term. More than anything, the words simply describe the net amount owed by a borrower or guarantor following a sheriff’s sale.
One judgment. So, as to Indiana, unlike some other states, a personal judgment (against a borrower or a guarantor) for any post-sale deficiency actually occurs before the sheriff’s sale takes place. There is no second procedural step or subsequent process to establish a deficiency judgment. In fact, as noted in my 8/1/08 post Full Judgment Bid = Zero Deficiency, ultimately there may be no deficiency (residual money judgment) if the sheriff’s sale price meets or exceeds the amount of the judgment.