If Requested, Receiverships In Indiana Commercial Mortgage Foreclosure Actions Are Mandatory
July 25, 2008
There are many scenarios when a secured lender might want a receiver to take possession and control of commercial real estate loan collateral in order to preserve and protect the property during the pendency of a foreclosure suit. The purpose of today’s post is to explain that, in Indiana, a motion for the appointment of a receiver should be granted every time.
What controls. Indiana’s receivership statute, Ind. Code § 32-30-5, including specifically section 1(4), governs the appointment of a receiver:
Appointment of receivers; cases
Sec. 1. A receiver may be appointed by the court in the following cases:
(4) In actions in which a mortgagee seeks to foreclose a mortgage.
However, upon motion by the mortgagee, the court shall appoint a receiver if, at the time the motion is filed, the property is not occupied by the owner as the owner’s principal residence and:
(C) either the mortgagor or the owner of the property has agreed in the mortgage or in some other writing to the appointment of a receiver. . . .
Most loans secured by commercial real estate will have a loan document containing a receivership provision, which is a clause stating that the lender/mortgagee is entitled to the appointment of a receiver if the borrower/mortgagor is in default. In such cases, Indiana’s legislature has left no doubt that lenders are entitled to a receivership.
(Please note that subsection (B) provides another basis when “it appears that the property may not be sufficient to discharge the mortgaged debt” or, in other words, when the amount owed is greater than the value of the real estate.)
The essentials. In order to have a receiver appointed in an Indiana commercial mortgage foreclosure action, mortgagees simply need to show:
1. the lender/mortgagee has filed a lawsuit seeking to foreclose a mortgage;
2. the property is not occupied by the owner as the owner’s principal
3. the borrower/mortgagor has agreed in a written loan document to the
appointment of a receiver.
Not discretionary. How do we know a receivership is mandatory in such cases? Because the Indiana Court of Appeals has said so. In Citizens Financial v. Innsbrook, 833 N.E.2d 1045 (Ind. Ct. App. 2005) (Innsbrook.pdf), the trial court refused to appoint a receiver in the plaintiff bank’s action to foreclose a mortgage on the real property of a country club. On appeal, the Court examined the mortgage language, as well as I.C. § 32-30-5-1(4)(C):
To meet the requirements of Ind. Code § 32-30-5-1(4)(C), Citizens must show: (1) that it, as mortgagee, sought to foreclose the mortgage; (2) at the time the motion is filed, the property is not occupied by the owner as the owner’s principal residence; and (3) either the mortgagor or the owner of the property has agreed in the mortgage or in some other writing to the appointment of a receiver.
The evidence in Innsbrook established these requirements. The Court of Appeals thus reversed the trial court and held that the court had abused its discretion by not appointing a receiver. The Court of Appeals focused upon the “shall” language in the operative statute and noted that the appointment of a receiver is mandatory if section 4, and any one of its conditions, which include subsection (C), are met.
If you’re wondering whether your institution is entitled to the appointment of a receiver, or how difficult it may be to have one appointed, you can see that in Indiana it’s practically automatic. If your loan is nonperforming and presents problems that call for the solutions provided by a receivership, then don’t hesitate to pursue a court-appointed receivership. Should you need additional details about the process, or to discuss strategies surrounding whether or when to seek a receivership in the first place, stay tuned for future blog posts or, as always, feel free to contact me.