What happens if, as a secured lender, you file a foreclosure suit and have a receiver appointed, and during that process you learn of circumstances in which your borrower (a/k/a the receivership entity) has a claim for damages against a third party? Because the financial wellbeing of a borrower usually inures to the benefit of the lender, it may be in the mutual best interests of the secured lender and the borrower to pursue a lawsuit against that third party. Judge Hamilton of the USDC for the Southern District of Indiana addressed some general principles surrounding this issue in his September 5, 2007 opinion, Marwil v. Kluff, 2007 U.S. Dist. LEXIS 65996 (MarwilOpinion.pdf). Marwil illustrates how a receivership might help a secured creditor get paid.
Not a foreclosure, but applicable nonetheless. The backdrop to the Marwil case was a civil enforcement action brought by the SEC. The Court had appointed a receiver for the Church Extension of the Church of God, Inc. (CEG), an Indiana non-profit corporation founded to raise funds for an Indiana-based church with more than 230,000 members nation-wide. CEG, the receivership entity, allegedly had been mixed up in multiple fraudulent conveyances associated with a highly complicated loan and real estate transaction scheme. The specific issue in the Marwil opinion was the validity of the receiver’s suit against third parties based upon Indiana’s fraudulent transfer statute, Indiana Code §§ 32-18-2-14 and 15.
Receivership rules and analysis. The third parties (the defendants in Marwil) that allegedly participated in the fraud filed a motion to dismiss. They argued that the receiver did not have standing to bring suit because the suit, in reality, was for the benefit CEG’s creditors, not CEG itself. Judge Hamilton held, however, that the Complaint asserted CEG, the receivership entity (not the creditors), suffered actionable injuries. Based upon those assertions in the Complaint, he denied the motion to dismiss. Here are some of the general receivership rules that applied:
The role of the receiver is to promote orderly and efficient management of property involved in a dispute for the benefit of the creditors. Id. at 10.
The benefit to creditors contemplated by receivership law, however, is only a derivative one. The general rule is that a receiver may pursue only the rights and claims that belong to the receivership entity itself. Id.
For a receivership entity to possess claims, the entity itself must have suffered a cognizable, redressable injury reasonably traceable to the challenged action of the defendants. Id. at 11.
Fraud on the receivership entity that operates to its damage is for the receiver to pursue (and to the extent that investors as the holders of equity interests in the entity may ultimately benefit from such pursuit, that does not alter the proposition that the receiver is the proper party to enforce the claim).
Judge Hamilton concluded that “so long as the claims themselves seek redress for injuries suffered by CEG, [the receiver] can assert and pursue them against the defendants.” Id. at 12.
Indiana’s receivership statute. Indiana Code § 32-30-5-7 states, in pertinent part:
The receiver may, under the control of the court or the judge:
(1) bring and defend actions;
(2) take and keep possession of a property;
(3) receive rents;
(4) collect debts; and
(5) sell property;
in the receiver’s own name, and generally do other acts respecting the property as the
court or judge may authorize.
For reasons unclear to me, Judge Hamilton did not cite to this statute in reaching his decision. The Indiana statute may not have applied because the underlying action in Marwil dealt with SEC violations. It is significant to note for purposes of this article, however, that the Indiana statute supports the proposition that receivers have the power to file lawsuits.