Order Granting Receiver’s Motion For Turnover Of Funds Upheld

Lesson. Upon the entry of an order appointing a receiver, all assets of the entity over which the receiver is appointed become assets of the receivership estate.

Case cite. Steingart v. Musgrave, 221 N.E.3d 725 (Ind. Ct. App. 2023)

Legal issue. Whether the trial court’s order for the turnover of funds allegedly owed to the receiver was erroneous.

Vital facts. An Indiana limited liability company executed five promissory notes in favor of a lender totaling about $10.5 million. The lender later filed suit against the LLC and the owner-members due to the notes being in default. In connection with the suit, the court appointed a receiver over the LLC.

The receiver discovered that, eleven days pre-appointment, one of the member-owners opened a bank account in Minnesota and allegedly deposited nearly $400K of the LLC’s assets into the account. The receiver claimed that the funds were then disbursed without notice to or authorization from the receiver, contrary to the court’s order appointing the receiver. The receiver filed a motion for turnover requesting the court to order the member-owner to return certain of the funds to the LLC.

Procedural history. The trial court ordered the member-owner to turn over about $300K to the receiver within seven days. The member-owner appealed the trial court’s turnover order.

Key rules. In Indiana, a receivership “is an equitable remedy, the purpose of which is to secure and preserve property or assets for the benefit of all interested parties, pending litigation.”

Indiana trial courts control and supervise the property in a receivership, as well as direct and advise the receiver. In the trial court’s discretion, the court can grant the receiver the necessary powers to carry out the duties. Indiana Code 32-30-5-7 “provides a nonexclusive list” of those powers.

Immediately upon appointment and qualification, the entity's assets become receivership assets until final distribution by the court. “To that end, property in receivership remains under the court's control and continuous supervision, and it is the duty of the receivership court to protect the property from interference.” It follows that the receivership court “has the power to control all controversies that affect such property.”

The parties, in turn, “have a duty to deliver to the receiver all property in their possession that is included in the court's order.” Should the parties fail to fulfill such duty, the receiver “has the authority to request the court to act to prevent interference with, or the denial of, his or her possession of the property.”

Holding. The Indiana Court of Appeals affirmed the trial court’s order.

Policy/rationale. The member-owner asserted that the trial court abused its discretion by issuing the turnover order. The member-owner felt the receiver’s concerns of misappropriation were unfounded. The Court of Appeals noted that any money in the Minnesota bank account on the day the receiver was appointed was subject to the receivership order. The LLC was obligated to remit to the receiver all deposit accounts, money and other property listed in the order. The member-owner’s failure to turn over to the receiver the funds in the account as of the day of appointment, or thereafter deposited, was a violation of the receivership order. The Court further found that, as practical matter, the subject turnover order merely was an extension of the original receivership order. Since Indiana gives trial courts “inherent power” to enforce compliance with their receivership orders, the Court of Appeals found no error with the issuance of the turnover order to obtain the assets of the LLC.
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Part of my practice involves representing parties in receivership proceedings. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Receiver Sales: Why ... Why Not?

I wanted to post some content before leaving on a vacation to celebrate my 25th wedding anniversary. Today’s article incorporates material first published back in 2015 and relates to my prior post - Receiver Not Authorized To Sell Property Without Mortgagor’s Consent - which followed another post - Can Indiana receivers sell the subject real estate?  Those pieces begged the question: When would a lender/mortgagee in a commercial foreclosure case want to pursue a receiver’s sale in the first place?

Why? There are a multitude of factors involved in a lender’s decision to pursue a receiver’s sale of the mortgaged real estate. The pros and cons are almost endless and vary depending upon the lender, the borrower, the extent of any competing liens, the nature of the real estate, the purpose of the borrower’s business, if any, that operates on the property and the costs of the auctioneer. With those factors in mind, based upon my experience the following is a list of considerations in favor of seeking a receiver’s sale:

• The plaintiff lender has no interest in taking title to the real estate.
• The plaintiff lender desires to quickly cut off its interest in, and thus the attendant expenses associated with ownership of, the real estate. Costs may include real estate taxes, hazard insurance premiums and receivership expenses (for the maintenance/management of the property).
• The plaintiff lender has reason to believe that there are interested buyers.
• A defendant junior lien holder may be particularly interested since it should have a greater chance of being paid. A receiver’s sale, due to enhanced and targeted marketing, coupled with a more organized transaction, should net more proceeds than a standard sheriff’s sale.
• Similarly, a defendant guarantor of the debt may be especially attracted to this option. Since a receiver’s sale theoretically will result in a higher price, the deficiency judgment (if any) should be lower. In other words, a guarantor’s personal liability could be reduced or even eliminated.
• In complex cases involving multiple competing liens, the replacement of the real estate with a cash fund often triggers, simplifies and expedites a global settlement of the litigation. (Remember that a foreclosure case could last many months, meaning that a sheriff’s sale may be delayed indefinitely.)

Why not? Factors weighing against a receiver’s sale include, but are not limited to:

• The lender (or current owner of the loan) desires to take ownership of the property.
• The real estate taxes, hazard insurance and receivership/management costs are tolerable.
• There is no known, immediate market for the property.
• Attorney’s fees to obtain court authority for the receiver’s sale, coupled with the fees associated with closing the sale, are higher and otherwise unnecessary in a standard foreclosure case. Also, sheriff’s sales are cheap – a few hundred dollars.
• The foreclosure case is either uncontested, or there is a realistic possibility for some kind of settlement.
• Perhaps most importantly, one or more parties, particularly the owner/mortgagor, objects to the receiver’s sale. (Objections to the sale, especially from the mortgagor/owner, create an insurmountable obstacle to obtaining court authority for the sale.)

Hybrid? My old post In Indiana Sheriff’s Sale, Consider The Option Of Using A Private Auctioneer addressed a kind of hybrid between a receiver’s sale and a sheriff’s sale. And, unlike receiver’s sales, there is no question as to the statutory authority for this relief, and mortgagor/owner consent generally isn’t needed. We have not seen many of these types of sheriff’s sales in recent years – (or many commercial foreclosures period due to the healthy economy) – but this statutory alternative should not be forgotten.
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Part of my practice includes representing parties in connection with sheriff’s sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Tips For Indiana Receivers, Updated

My practice includes representing receivers in commercial mortgage foreclosure cases.  Since we could see an uptick in commercial loan defaults this year, I thought I'd re-share a few tips related to receiverships over mortgaged real estate: 

1. Review and understand the proposed order appointing receiver before agreeing to serve.   Ask an attorney (like me) to review and help negotiate terms, as needed.  Receivers can be personally liable for certain conduct or damages, so you need to go into the job with your eyes wide open. 

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. 

5. Once appointed:

    a.  Line up a receiver's bond immediately.

    b. Secure rents ASAP.

    c. Ensure that hazard insurance is current.

    d. 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.

    e. Investigate the status of utilities and consider action.

    f. 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.  Having said that, the trend is for receivers to have independent counsel, which probably is best.   

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.  Full disclosure of operations is the best practice, especially if there are other creditors involved and/or an interested owner/borrower.  

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.

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I represent parties involved with receiverships, including receivers themselves. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Court Of Appeals Clarifies Bond Requirement In Corvette Receivership

Burelli v. Martin, 130 N.E.3d 661 (Ind. Ct. App. 2019) approved the appointment of a receiver to sell an expensive item of personal property, subject to the posting of a bond.  

At a judgment creditor’s request, the trial court appointed a receiver under I.C. 32-30-5-1(1) and (2) to sell a multi-million dollar Corvette to satisfy the debts of the owners of the Corvette.  Those sections are:

    (1): In an action by a vendor to vacate a fraudulent purchase of property or by a creditor to subject any property or fund to the creditor's claim.  [The judgment creditor alleged the Corvette was subject to his claim.]

    (2): In actions between partners or persons jointly interested in any property or fund.  [ The judgment creditor and the Corvette’s co-owners were all jointly interested in the Corvette, and the proceeds from its sale.]

The Court of Appeals affirmed the appointment a receiver. 

However, the Court reversed the trial court for failing to require the receiver to post a bond.  Although the parties apparently had stipulated to a $2.5 million insurance policy on the car, the insurance did not meet the bond obligation. 

The Court held that the insurance policy only protected the receivership property (the Corvette).  The statutory requirement for a bond (Section 3), on the other hand, insures the receiver’s conduct.  The Court expanded on the point of the receiver's personal liability:

When a receiver breaches his duty by acting outside his statutory authority or orders of the appointing court or is guilty of negligence and misconduct in administering the receivership, he is personally liable for any loss to any interested party.  A receiver must therefore post a bond to secure that obligation.

The Court remanded the case to the trial court to amend the receivership order to require the receiver to post “an appropriate bond to secure [the receiver’s] oath to faithfully discharge his duties.”  The Court expressed no opinion on what would be an appropriate amount, however.

See Also:  Standards And Duties Applicable To Indiana Receivers

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I represent parties involved with receiverships, including receivers themselves.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Reminder: Receivership CLE Next Wednesday, April 22nd

I'll be co-presenting (via Zoom) an hour-long continuing legal education program for the IndyBar on Wednesday, 4/22/20, from 4-5 p.m EDT.  For more information, click here:  Vignettes from Receivership Cases and Comparisons to Bankruptcy.  Jason Burke of Blackwell Burke & Ramsey will be joining me.    

In Property Revitalization Case, Court Declines To Impose Receivership On Owner Of Common Areas

Lesson. A receivership can be a powerful remedy but only will be granted in unique situations, unless it is a mortgage foreclosure case.

Case cite. Towne & Terrace v. City of Indianapolis, 122 N.E.3d 846 (Ind. Ct. App. 2019).

Legal issue. Whether a receiver should have been appointed in a nuisance/unsafe property case.

Vital facts. Towne & Terrace involved a dispute between the City of Indianapolis (City) and Town and Terrace (T&T), a corporation that developed a condominium complex at 42nd and Post in 1964. Due to crime in the area, in 2014 the City filed a public nuisance suit against T&T for, among other things, safety-related concerns in the complex, including poor conditions in the common areas. The litigation later evolved into a receivership proceeding in which both sides sought the appointment of a receiver for various purposes. The litigation was complicated by the fact that, at the time of the courts’ decisions, the City owned portions of the property, T&T owned portions (mainly common areas), and third parties owned other portions. Please read the opinion for a more in-depth summary of the factual and legal issues in the case, of which there were many. One element of the case dealt with the trial court’s effort to create a public-private partnership to rebuild and recreate “a safe and thriving T&T neighborhood.”

Procedural history. This post relates to the trial court’s order granting the City's motion to appoint a receiver over the property owned and controlled by T&T within the complex.  The trial court ordered both the City and T&T to pay for the receiver’s services, which were to upgrade, repair, and restore the common areas in the complex.

Key rules. Indiana Code 32-30-5 is our state’s general receivership statute. Subsection (7) [aka the “catch all” provision] provides that a receiver may be appointed in cases “as may be provided by law or where, in the discretion of the court, it may be necessary to secure ample justice to the parties.”

Indiana common law provides that "a receiver should not be appointed if the plaintiff has an adequate remedy at law [basically, money damages] or by way of temporary injunction.”

Holding. The Indiana Court of Appeals reversed the appointment of a receiver over T&T, specifically the property T&T owned.

Policy/rationale. T&T did not own any structures in the complex. Thus, T&T’s involvement was limited to common areas that it managed. There was no evidence that those common areas were “so deteriorated that they contribute to the undesirable activities at the complex….” Moreover, T&T had not violated any ordinances or statutes. Because the “extreme necessity” for a receiver did not exist, the Court declined to appoint one. My guess is that an unstated rationale in play was that T&T did not want to fund the receivership and was able to convince the Court of Appeals that it should not have to. Receivers do not work for free.

Related posts.

• If Requested, Receiverships In Indiana Commercial Mortgage Foreclosure Actions Are Mandatory
• Some Tips For Indiana Receivers

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My practice includes the representation of lenders and borrowers, as well as receivers, entangled in real estate-related cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Some Tips For Indiana Receivers

On occasion I represent receivers in commercial mortgage foreclosure cases.  Since I've been unable to create a new post this week, I thought re-share, with some updates, 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. 

5. Once appointed:

    a. Secure rents ASAP.

    b. Ensure that hazard insurance is current.

    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.  Having said that, the recent trend is for receiver's to have independent counsel, which probably is best.   

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.  Full disclosure of operations is the best practice, especially if there are other creditors involved and/or an interested owner/borrower.  

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” and the "Receivership" statute to your right.

Indiana Receiver Sales – When And Why?

I have previously addressed the issue:  Can Indiana receivers sell the subject real estate?  That post begged the question:  When would a lender/mortgagee in a commercial foreclosure case want to pursue a receiver’s sale in the first place? 

Why?  There are a multitude of factors involved in a lender’s decision to pursue a receiver’s sale of the subject real estate.  The pros and cons are almost endless and certainly vary depending upon the lender/mortgagee, the borrower/mortgagor, the extent of any competing liens, the nature of the real estate and the purpose of the business, if any, being operated on the real estate.  With those reservations, based upon my experience and understanding, here is a list of considerations in no particular order:

•         The mortgagee has no interest in taking title to the real estate.
•         The mortgagee desires to quickly cut off its interest in, and thus the attendant expenses associated with, the real estate.  Costs may include real estate taxes, hazard insurance premiums and receivership expenses (for the maintenance/management of the property).
•         The mortgagee has reason to believe that there are one or more interested buyers laying in wait.
•         Junior lien holders have a greater chance of being paid because the receiver’s sale, due to enhanced and targeted marketing, as well as a more organized transaction, presumably would net more proceeds than a sheriff’s sale. 
•         Similarly, a guarantor of the debt may be particularly interested in this approach as a receiver’s sale theoretically should result in a higher sale price and thus a lesser deficiency judgment for which the guarantor may be responsible.
•         In complex cases involving multiple competing liens, the replacement of the real estate with a cash fund may trigger, simplify and expedite a global settlement of the litigation.  (Remember that a foreclosure case could last many months, meaning that a judgment and sheriff’s sale may be delayed to an indefinite period in the distant future.)

Why not?  Factors weighing against a receiver’s sale include, but are not limited to:

•         The mortgagee desires to take ownership of the property.
•         The real estate taxes, insurance and receivership costs are tolerable.
•         There is no known, immediate market for the property.
•         Attorney’s fees to obtain court authority for the receiver’s sale, and the legal counsel associated with closing the sale, are relatively high and otherwise unnecessary in a standard foreclosure case. 
•         The foreclosure case is either uncontested, or there is a realistic possibility for some kind of settlement.
•         Perhaps most importantly, one or more parties, particularly the owner/mortgagor, objects to the receiver’s sale.  (Objections to the sale, especially from the mortgagor, create an insurmountable obstacle in terms of obtaining court authority for the relief.)

Hybrid?  As an aside, my March 29, 2007 post In Indiana Sheriff’s Sale, Consider The Option Of Using A Private Auctioneer addressed a kind of hybrid between a receiver’s sale and a sheriff’s sale.  And, unlike receiver’s sales, there is no question as to the statutory authority for this relief, and mortgagor consent generally isn’t needed.  This option seemingly is used even more rarely than a receiver’s sale but should not be forgotten as an alternative in Indiana commercial foreclosure cases. 

Please e-mail me or post a comment if you are aware of additional factors that may go into the receiver’s sale analysis.  As always, I welcome your questions via e-mail.

In Indiana, Parties Have 30 Days Post-Final Report To Pick A Bone With The Receiver

Parties to cases involving a receivership can, if warranted, assert a claim for damages against the receiver.  Luxury Townhomes v. McKinley Properties, 992 N.E.2d 810 (Ind. Ct. App. 2013) delves into the procedure applicable to addressing a party’s concerns with a receiver’s performance. 

Objection.  In Luxury, following a settlement between the lender and the borrower in a commercial foreclosure case, the receiver filed its final report.  The borrower objected to the report and also sought permission to assert independent claims against the receiver.  The trial court held a three-day evidentiary hearing on the matters.  The court ended up approving the final report and discharging the receiver, and also denying the borrower leave to bring a subsequent action against the receiver for negligent performance.  The borrower appealed the trial court’s denial of the motion for leave. 

Discharge.  For a good overview of Indiana authority relating to receiverships, read the Luxury opinion.  In Indiana, before discharge can occur, a receiver must file a final report with the court.  Ind. Code § 32-30-5-14.  Interested parties can file objections to that report, but they must do so within thirty days of filing.  I.C. § 32-30-5-18(a).  “If objections are not filed within thirty days, they are forever barred.”  If a trial court approves a receiver’s final report, this constitutes a release and discharge of the receiver and its surety “for all matters and things related to or contained in” the report.  I.C. § 32-30-5-20.  Upon the trial court’s approval, the receiver is discharged, subject to the right of appeal. 

Barred.  The receiver in Luxury contended that the borrower was barred from raising any subsequent claims.  Again, the borrower sought to pursue a collateral lawsuit attacking the adequacy of the receiver’s performance.  However, that issue had already been considered by the trial court during the evidentiary hearing.  In accepting the final report, “the trial court determined that [the receiver] had acted in an appropriate fashion and that [the receiver] had adequately performed his duties as receiver.”  That factual determination precluded any subsequent determination that the receiver had acted negligently in its administration of the receivership estate.  In legalese, this is known as res judicata. 

Takeaway.  The Court of Appeals in Luxury basically held that the borrower could not have another bite at the apple.  The performance of the receiver had already been considered by the trial court during the hearing on the borrower’s objection to the receiver’s final report.  The Court effectively prohibited a subsequent suit against the receiver for alleged negligence in the administration of the receivership estate.  If, as a lender or a borrower, you have a beef with the performance of the receiver, you must raise it within thirty days of the filing of the final receiver’s report.  Otherwise, according to Luxury, the receiver is fully and finally released and discharged. 

Some Tips For Indiana Receivers

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. 

5. Once appointed:

    a. Secure rents ASAP.

    b. Ensure that hazard insurance is current.

    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 Time, Lender Did Not Relinquish Its Right To A Receiver In Subordination Agreement

What if, as a foreclosing lender/mortgagee, you want a receiver, but you entered into a subordination agreement with a de facto senior lender/mortgagee who does not?  As the subordinated lender, can you still obtain one?  According to PNC Bank v. LA Development, 2012 Ind. App. LEXIS 368 (Ind. Ct. App. 2012), it depends upon the language in the subordination agreement.

Subordination circumstances.  In 2004, PNC entered into a mortgage loan with LA Development concerning residential developments called Harrison Crossings and Kingston Village.  In each mortgage, LA Development, as the borrower/mortgagor, stipulated to the appointment of a receiver in the event of a default.  In 2008, the subject promissory notes had matured, but INTA agreed to advance $705,000 to LA Development to complete the Harrison Crossings project.  What resulted was a closing involving PNC, INTA and LA Development in which (a) PNC and LA Development entered into a forbearance agreement, (b) INTA and LA Development entered into a promissory note secured by a mortgage on Harrison Crossings and (c) PNC and INTA entered into a subordination agreement, which essentially provided for the subordination of PNC’s mortgage in favor of INTA’s.  (For more on the specific language in the subordination agreement, please read the opinion.) 

Legal proceedings.  In 2011, PNC filed a lawsuit to foreclose based on LA Development’s default under the 2008 forbearance agreement.  PNC simultaneously sought the appointment of a receiver to complete the Harrison Crossings development.  INTA filed a cross-claim/counter-claim for foreclosure of its mortgage, but for reasons not specified in the PNC opinion, INTA objected to PNC’s request for a receiver. 

PNC’s contentions.  PNC alleged that the appointment of a receiver was mandatory under Indiana law, as detailed by my July 25, 2008 post.  See also, Ind. Code § 32-30-5-1(4)(C).  Indeed INTA did not dispute that, given LA Development’s default and written stipulation in the subject mortgage, PNC satisfied Indiana’s receivership statute.

INTA’s contentions.  INTA instead argued that PNC “relinquished its right to the mandatory appointment of a receiver in the subordination agreement.”  INTA’s position was that the subordination agreement deprived PNC of its rights and remedies derived from its loan documents. 

Lien rights vs. enforcement rights.  PNC asserted that, although the PNC/INTA agreement contemplated the subordination of “liens” and “priorities,” it did not subordinate all of PNC’s rights.  The Court agreed.  PNC did not relinquish its enforcement rights and remedies.  For example, PNC elected to foreclose on Harrison Crossings, and INTA conceded that the subordination agreement authorized such action. 

If [PNC] waived all of its enforcement rights and remedies under the mortgages by executing the subordination agreement, then the right to foreclose on Harrison Crossing would be included.  Either [PNC] subordinated all of its enforcement rights and remedies in the mortgages or it did not.  INTA cannot pick and choose which rights and remedies [PNC] subordinated to support its argument.

Different result?  Neither PNC nor this post stands for the proposition that a subordinate lender will always get a receiver over the senior lender’s objection.  The language of the subordination agreement is critical.  The Court in PNC emphasized the necessity of using specific language to limit rights and remedies of junior mortgagees.  Citing to legal commentator Patrick E. Mears, the Court suggested that senior mortgagees should require junior mortgagees, in subordination agreements, to waive their rights to marshal assets and to postpone any enforcement rights that they may have.  If the subordination agreement in PNC had done that, then I think the result would have been different. 

Some Tips For Indiana Receivers

On occasion I represent receivers in commercial mortgage foreclosure cases.  Last week, I gave a little “Do’s and Don’ts” presentation to one of our receiver clients.  I thought I’d share some of my tips here: 

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. 

5. Once appointed:

    a. Secure rents ASAP.

    b. Ensure that hazard insurance is current.

    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.

Once Appointed, Receiver Gets Virtually All Property-Related Funds

The Indiana Court of Appeals issued two opinions in DBL v. LaSalle Bank, 2010 Ind. App. LEXIS 2056 (Ind. Ct. App. 2010) and 2011 Ind. App. LEXIS 167 (Ind. Ct. App. 2011).  DBL, one of those factually-dense, unique cases, shows what an important tool a receivership can be for a foreclosing lender/mortgagee.

Layers of claims, settlements.  DBL involved a mortgage loan secured by a plaza located in a city in Southern Indiana.  The borrower’s property was the subject of a condemnation and nuisance lawsuit with the city.  The borrower and the city reached a settlement, apparently without the lender’s knowledge, with regard to the nuisance claim in which the city agreed to pay the borrower $1,725,600 in three installments.  There was a separate agreed judgment entered regarding the condemnation claim in which the city was to pay the borrower and the lender $224,600, but those funds all went directly to the borrower in error.  At some point along the way, the lender filed a foreclosure action and requested the appointment of a receiver.  The lender then discovered that the city made sizeable payments to the borrower pursuant to the settlement of the nuisance claim. 

Turnover.  The lender sought a court order directing the borrower to turn over, to the receiver, the funds the borrower received from the city.  The lender alleged that the borrower was in violation of the trial court’s order appointing receiver.  The trial court granted the motion and directed the borrower, within a week, to pay $1,365,600 to the receiver. 

Scope.  One issue in the case surrounded whether the payments made by the city were within the scope of the receivership order.  The Court noted generally that in Indiana (a) a receiver ordinarily takes all the property of the debtor that constitutes the subject of the action but (b) does not take property not involved in the action or not included in an order designating the particular property of which the receiver is to have charge.  Because the settlement related specifically to the subject real estate, the Court concluded that “the checks paid by [the city to borrower] concerned [the mortgaged real estate] and were within the scope of and subject to the Receivership Order, and [borrower’s] failure to include the monies paid or otherwise notify the Receiver of the [settlement agreement] was a violation of that order.”  The Court therefore initially affirmed the trial court’s turnover order.

DBL II.  The borrower petitioned the Court of Appeals for a rehearing, which is the method to have the Court reconsider a prior opinion.  The problem was that the borrower had immediately disbursed the settlement funds received from the city.  The money the trial court ordered the borrower to turn over was gone.  As such, upon further review, the Court reversed its initial decision and remanded the case to the trial court for further proceedings.   

Non-party technicality.  The Court of Appeals, on rehearing, held that there should have been a determination by the trial court whether the borrower was in possession of the funds at the time it issued its turnover order.  In Indiana, where a debtor distributes funds to third persons before the establishment of the receivership, “a court or receiver cannot compel the third persons, without due process of law, to turn over such funds to the receiver.”  In DBL, if the $1,506,000 paid to the borrower had been distributed to third persons, the receiver, in an attempt to acquire such funds, would first need to amend the complaint to make such outsiders a party to the proceedings or otherwise file a separate action against such outsiders.  So, in that respect, the power of a receiver is not unlimited. 

But wait.  The borrower was not off the hook.  The Court stated:

we point out that it appears from the record that [borrower] has concealed the whereabouts of not only the $1,506,000 by not including it in any record which was ordered to be turned over to the Receiver, but also the $360,000 paid to [borrower] after the date of the Receivership Order.  Indeed, neither this installment nor the existence of the Settlement Agreement was disclosed to the Receiver.  Nevertheless, we believe that these questions are best left to the trial court to resolve by way of a fact-finding hearing and any other procedures which may be necessary.

Although the borrower successfully distributed the settlement money outside of the immediate reach of the receiver, the borrower may still pay a price for its alleged violation of the prior receivership order.

As explained on this blog before, a receivership can be a potent device for foreclosing lenders in Indiana.  It can, and generally does, put a choke hold on income generated by the subject property, and DBL illustrates just how broad the scope of a receivership order can be.

Standards And Duties Applicable To Indiana Receivers

This post will supplement my November 7, 2006 and December 6, 2007 posts related to court-appointed receivers’ potential for exposure to liability.  The recent opinion by Judge McKinney in PNC Bank v. OCMC, 2010 U.S. Dist. LEXIS 98368 (S.D. Ind. 2010) (.pdf) dealt with a receiver appointed primarily to liquidate the assets of the defendant corporation.  The standards under Indiana law apply with equal vigor to receivers appointed to preserve and protect the subject real estate in mortgage foreclosure cases.  Receivers have certain obligations under Indiana law and are not immune from liability. 

Attempts to sue receiver.  The allegations against the receiver in PNC are not terribly important here.  Various parties and creditors sought to file a complaint against the receiver.  For a variety of reasons (read the opinion for additional details), Judge McKinney ruled in favor of the receiver and denied the parties’ request for leave to sue the receiver. 

Objection to receivership.  Parties that do not object to the appointment of a receiver at the time the appointment is made may be estopped from later raising claims of wrongful receivership.  “An objection to the appointment of a receiver must be raised at the time such appointment is made.”

Rule summary.  Perhaps the most meaningful thing to take away from PNC is the opinion’s outline of assorted Indiana legal principles applicable to receiverships:

1. The only claims that may be brought against a receiver are those alleging (a) actions outside the scope of the receiver’s authority or (b) misconduct in the performance of receivership duties.  [A] “receiver who acts outside his statutory authority or orders of the appointing court, or who is guilty of negligence or misconduct in the administration of the receivership, is personally liable for any loss resulting therefrom.” 
2. A court-appointed receiver “may be held liable in negligence when he has breached a duty owed either to creditors or others with whom the receiver is in privity, or held liable for other misconduct in the administration of the receivership.”  The duties inherent in a receivership flow from the receiver to the parties to the underlying suit and not to third-parties. 
3. In PNC, the receivership order limited negligence suits in the case.  The order clearly stated that the receiver will not be liable for mere negligence but will be liable for actions taken “as a result of malfeasance, bad faith, gross negligence, or reckless disregard of their duties.”  Thus the order of appointment may limit liability.
4. A receiver owes fiduciary duties to the creditors that the receivership is set up to protect.  “A receiver may not subordinate the interest of one creditor in favor of those of another creditor.”  This duty includes protecting the receivership property such that the claims of creditors may be paid out of it.

As previously noted here, and as reiterated by Judge McKinney in PNC, court-appointed receivers have certain duties with which they must comply.  But the scope of such responsibility is limited under the law and can be further limited by the order appointing the receiver. 

Seemingly, 99% of the time the receiver will be the plaintiff lender’s friend and, as a practical matter, a partner in the foreclosure case.  There are instances, however, when a conflict may arise between those two parties, particularly if a receiver causes damage or loss to the receivership estate or otherwise fails to prevent such damage or loss.  In such cases, lenders have recourse against the receiver. 

Wells Fargo, Part III: Absence Of Loan Default Interferes With Appointment of Receiver

This is the third of three posts about the loan enforcement/receivership-related opinion in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  Today’s edition explores a rare scenario in Indiana when a defendant borrower defeated a plaintiff lender’s motion to appoint a receiver.  The Court of Appeals concluded that, technically, the trial court erred when it denied the receivership, but in the end the error was harmless.

Error.  The lender in Wells Fargo sought the immediate appointment of a receiver.  The trial court denied the motion, and the lender appealed.  On appeal, the lender asserted that it properly met the statutory requirements in I.C. § 32-30-5-1(4) as interpreted by Citizens v. Innsbrook, 833 N.E.2d 1045 (Ind. Ct. App. 2005).  The Court stated:  

Here, it is undisputed that (1) the [real estate] is not occupied by [borrower] as its  principal residence, (2)[borrower] agreed in the Mortgage to the appointment of a receiver in the event of foreclosure proceedings, (3) the [real estate] is a commercial retail complex occupied by tenants who are entitled to possess a portion of the property and who are not liable for the debt secured by the mortgage, and (4) all or any portion of the property is being leased to those tenants.  Pursuant to Subsection 4, therefore, the appointment of a receiver was mandatory.

(See July 25, 2008 post.)  The Court conceded that, pursuant to the receivership statute “the trial court should have granted [the lender’s] motion to appoint a receiver . . ..” 

But . . . The Court’s analysis did not end there.  Critical to the outcome was the unenforceability of the cross-guaranty I discussed last week.  The borrower had made timely payments on the subject loan (Loan 1) for ten years and was prepared to pay off Loan 1 until the lender, citing to the cross-guaranty, rescinded a previously-submitted payoff statement.  Evidently, the lender later refused to accept payment without an accompanying payoff of Loan 2, the alleged cross-collateralized loan that was in default and already had been accelerated. 

An out, maybe.  The Court remanded the case to the trial court with instructions that the lender “provide a reasonable payoff statement within a reasonable period of time to be determined by the trial court and that [the borrower] then be given a reasonable period of time to pay off the mortgage accordingly.”  If the borrower complies with the pay off, then the lender’s foreclosure action will be moot.  If, however, the borrower is unable to comply with the new payoff statement, “then at that point the loan undisputedly would be in default and the trial court would and should appropriately appoint a receiver.”  But at the current stage in the proceedings, “the trial court’s decision to deny the request for receiver was, at most, harmless error.”

Lack of cross-default the key.  The receivership issue in Wells Fargo was rather unique given the facts and circumstances in the case, including the problems with the loan documents and certain pre-suit negotiations.  The case rested on an unenforceable cross-collateral/default agreement, meaning that the loan at the center of the receivership dispute was not in default at the time the foreclosure suit began.  The Court gave the borrower a second chance to pay off the subject loan.  (By then, the loan had matured.)  Assuming a payoff, the lender will not be permitted to foreclose, much less have a receiver appointed.  

Although, in general, appointments of receivers in Indiana commercial mortgage foreclosure cases are mandatory, Wells Fargo provides insight into one of the only ways around that mandatory requirement - if the borrower can convince the trial court that the subject loan is not in default.  Normally, of course, that is a difficult proposition, given that the basic premise of all mortgage foreclosure cases is that the loan is in default.

Receiver Not Authorized To Sell Property Without Mortgagor’s Consent

On January 11 and January 20, 2010, I discussed issues related to Indiana receiver sales and some of the unresolved questions under Indiana law.  Shortly thereafter, the Indiana Court of Appeals definitively answered one of those questions in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  The opinion provides that the trial court erred in a mortgage foreclosure case when it gave the receiver the authority to sell the subject real estate at a private sale without the mortgagor’s consent.

Backdrop.  Lender/mortgagee Wells Fargo filed a commercial mortgage foreclosure suit against borrower/mortgagee Tippecanoe.  Wells Fargo promptly filed a motion for the appointment of a receiver, and the order granting the motion provided that the receiver had the power to sell the subject real estate at a private sale without Tippecanoe’s consent. 

Operative statutes.  The Court first noted that the general receivership statute provides “a non-exhaustive list of the powers” a court may grant to a receiver at Ind. Code § 32-30-5-7(5).  Among other things, “the receiver may, under the control of the court or the judge:  (5) sell property . . . in the receiver’s own name . . ..”  The Court next cited to a “more specific statute” governing receiverships in mortgage foreclosure actions that articulates the receiver’s role more narrowly and, significantly, “does not include the right to sell the mortgaged property at a private sale.”  See, I.C. § 32-29-7-11(a).  The Court concluded that the latter statute carried more weight because it was a more specific statute pertaining to the subject of mortgage foreclosures. 

Stripping the right of redemption.  The Court then considered Indiana’s statutory right of redemption at I.C. § 32-29-7-7.  The Court proclaimed that “every defendant in a mortgage foreclosure action has the right to redeem its property by paying off the amount due at any time before the property is sold at a sheriff’s sale.”  Tippecanoe asserted that the trial court’s authorization of the receiver to sell the subject real estate at a private sale, without Tippecanoe’s consent and before the sheriff’s sale, “stripped Tippecanoe of its statutory right of redemption.”  The Court agreed.

The only “sale” contemplated by the statutes governing receiverships over mortgage[d] property is a sheriff’s sale.  I.C. § § 32-29-7-3, -4, -7, -8, -9, -10.  Thus, all property owners are entitled to redeem their property up to the date on which their property is sold by the sheriff.  See also I.C. § 32-29-1-3 (prohibiting a mortgage instrument from authorizing the mortgagee—i.e., the bank—from selling the mortgaged property); Ellsworth v. Homemakers Fin. Serv., Inc., 424 N.E.2d 166, 169 (Ind. Ct. App. 1981) (holding that “[a] mortgagee is not permitted to sell mortgaged premises, but such sale shall be made by judicial proceeding” and that “[t]he judgment of foreclosure shall order the mortgaged premises sold by the sheriff”).  It must be true, therefore, that any receiver charged with preserving and maintaining mortgaged property must do so through the date of the sheriff’s sale and may not sell the real property prior to that time without the owner’s consent.  By giving the receiver herein the authority to sell the Tippecanoe property prior to a sheriff’s sale and without Tippecanoe’s consent, the trial court stripped Tippecanoe of its statutory right of redemption.

Waiver?  The primary contention of Wells Fargo on appeal was that Tippecanoe previously waived its right of redemption in the mortgage, which indeed contained a waiver clause.  The argument failed, however, because Tippecanoe executed the waiver before the default occurred.  Pursuant to Indiana cases, the waiver could not be enforced. 

Going forward.  The Wells Fargo opinion definitively answers the question of whether the receiver, in a mortgage foreclosure case and at the request of the plaintiff mortgagee, can sell the property if the owner/borrower/mortgagor contests the sale.  The decision does not, however, conclusively resolve the issue of whether the receiver can sell the property when other parties, such as junior mortgagees or mechanic’s lien holders, object.  One could argue that the Court’s rationale supports the notion that the consent of all parties may be required for a receiver’s sale to happen.  I’ll continue to monitor the cases to see whether anything else develops in this area. 

Wells Fargo addresses a handful of other important issues that are useful for commercial mortgage lenders and their foreclosure counsel.  Next week’s post will discuss those points.  This week’s lesson is that a lender cannot force a receiver’s sale over the objection of a borrower.  Mortgagees and receivers need the mortgagor’s consent. 

Indiana Receiver Sales – When And Why?

Last week, I addressed this issue:  Can Indiana receivers sell the subject real estate? That post begged this week’s question:  When would a lender/mortgagee in a commercial foreclosure case want to pursue a receiver’s sale in the first place? 

Why?  There are a multitude of factors involved in a lender’s decision to pursue a receiver’s sale of the subject real estate.  The pros and cons are almost endless and certainly vary depending upon the lender/mortgagee, the borrower/mortgagor, the extent of any competing liens, the nature of the real estate and the purpose of the business, if any, being operated on the real estate.  With those reservations, based upon my experience and understanding, here is a list of considerations in no particular order:

        The mortgagee has no interest in taking title to the real estate.

        The mortgagee desires to quickly cut off its interest in, and thus the attendant expenses associated with, the real estate.  Costs may include real estate taxes, hazard insurance premiums and receivership expenses (for the maintenance/management of the property).

        The mortgagee has reason to believe that there are one or more interested buyers laying in wait.

        Junior lien holders have a greater chance of being paid because the receiver’s sale, due to enhanced and targeted marketing, as well as a more organized transaction, presumably would net more proceeds than a sheriff’s sale. 

        Similarly, a guarantor of the debt may be particularly interested in this approach as a receiver’s sale theoretically should result in a higher sale price and thus a lesser deficiency judgment for which the guarantor may be responsible.

        In complex cases involving multiple competing liens, the replacement of the real estate with a cash fund may trigger, simplify and expedite a global settlement of the litigation.  (Remember that a foreclosure case could last many months, meaning that a judgment and sheriff’s sale may be delayed to an indefinite period in the distant future.)

Why not?  Factors weighing against a receiver’s sale include, but are not limited to:

        The mortgagee desires to take ownership of the property.

        The real estate taxes, insurance and receivership costs are tolerable.

        There is no known, immediate market for the property.

        Attorney’s fees to obtain court authority for the receiver’s sale, and the legal counsel associated with closing the sale, are relatively high and otherwise unnecessary in a standard foreclosure case. 

        The foreclosure case is either uncontested, or there is a realistic possibility for some kind of settlement.

        Perhaps most importantly, one or more parties, particularly the owner/mortgagor, objects to the receiver’s sale.  (See last week’s post - objections to the sale, especially from the mortgagor, could create an insurmountable obstacle in terms of obtaining court authority for the relief.)

Hybrid?  As an aside, my March 29, 2007 post “In Indiana Sheriff’s Sale, Consider The Option Of Using A Private Auctioneer” addressed a kind of hybrid between a receiver’s sale and a sheriff’s sale.  And, unlike receiver’s sales, there is no question as to the statutory authority for this relief, and mortgagor consent generally isn’t needed.  This option seemingly is used even more rarely than a receiver’s sale but should not be forgotten as an alternative in Indiana commercial foreclosure cases. 

Please e-mail me or post a comment if you are aware of additional factors that may go into the receiver’s sale analysis.  As always, I welcome your questions via e-mail.

Can Indiana Receivers Sell The Subject Real Estate?

My July 25, 2008 post explains that, under Indiana law, a motion for the appointment of a receiver must be granted in foreclosure cases in which the mortgagor has agreed in writing to the appointment of a receiver.  There are many scenarios when a mortgagee (secured lender) might want to utilize the receiver, once in place, to sell commercial real estate loan collateral before a foreclosure judgment is entered and in lieu of a sheriff’s sale.  Some day, I might discuss the pros and cons of receiver’s sales, or the rationale behind a decision to pursue such a sale.  This post is limited to whether a receiver’s sale is even an option in Indiana and, if so, whether the receiver can sell the real estate free and clear of all liens, a la a sheriff’s sale. 

Two main obstacles.  First, the receiver must have court authority for the sale.  The receiver will need to file a motion in the foreclosure case and obtain a court order that permits the sale and details the logistics.  Second, the receiver should have the commitment of a title insurance company that an owner’s policy can be delivered to the buyer post-sale.  The policy would provide, among other things, that title to the property has been conveyed free and clear of all liens.  It’s my understanding that most, but perhaps not all, Indiana title insurance companies will insure receiver’s sales. 

Statutory authority, or lack thereof.  To obtain court authority, lawyers logically would look first to Indiana’s receivership statute.  Ind. Code § 32-30-5-7(5) states that a “receiver may, under control of the court or the judge . . . sell property in the receiver’s own name . . ..”  “Property” is not defined in the statute, but it’s safe to presume that the term includes real estate.  More significantly, the receivership statute does not state at § 7(5), or anywhere else, that the receiver can sell property free and clear of all liens.  Thus the statute doesn’t specifically authorize the contemplated sale, but it doesn’t prohibit one either.   

Case law provides the solution.  More definitive answers can be found in a handful of appellate court opinions, the majority of which are very dated.  Indiana case law supports the proposition that trial courts may order real estate to be sold by a receiver free and clear of any existing liens, with the liens attaching to the proceeds of the sale.  Here is a listing of the cases we found, and I’d like to thank last year’s summer associate, Peter Gundy, for assisting with this research:  Kline v. Hammond Machine & Forge Works, 127 N.E. 220 (Ind. Ct. App. 1920); Randall v. Wagner Glass Co., 94 N.E. 739 (Ind. Ct. App. 1911); Totten & H. Iron & Steel Foundry Co. v. Muncie Nail Co., 47 N.E. 703 (Ind. 1897); Mueller v. Stinesville & Bloomington Stone Co., 56 N.E. 222 (Ind. 1900). 

Contested sales?  The cases imply the need for court authority and mandate that all parties with an interest in the real estate receive notice of the receiver’s motion with an opportunity to be heard.  As a practical matter, most if not all the parties to the case probably should be on board with the decision to proceed with such sale.  If the sale is contested, particularly by the owner/borrower/mortgagor, the law becomes less clear as to what the outcome should be.  I’ve heard through the grapevine that this issue could be on its way to the Court of Appeals, so perhaps we’ll see a definitive decision from the courts in the near future.

Liens attach to proceeds.  Although Indiana law permits a receiver’s sale of real estate free and clear of all liens, the liens are not extinguished.  Rather, they attach to the proceeds of the sale, which proceeds are placed into escrow pending the outcome of the case.  Lien priority, damages amounts and other issues still can be litigated. 

Again, why receiver’s sales might or might not make sense in a given case goes beyond the scope of this post.  Today’s point is that, under Indiana law, there is legal authority to support the notion that a receiver can circumvent a sheriff’s sale by holding a pre-judgment sale of the underlying real estate loan collateral.  A receiver generally can deliver a deed conveying title free and clear of all liens as long as all the interested parties receive notice of the receiver’s plans, all (or most) of the parties agree to the approach, the judge enters an order authorizing the sale and a title insurance company is prepared to provide an owner’s policy at closing.

IndyStar: Receivers for Apartments

Today's Indianapolis Star has an insightful article about property manager Buckingham's recent involvement as a receiver in several lawsuits to foreclose on loans secured by apartment property.  Here's a link:  When apartments fail Buckingham Cos. gets a call.  The Star highlights some of the practical (and challenging) aspects associated with the job   

If Requested, Receiverships In Indiana Commercial Mortgage Foreclosure Actions Are Mandatory

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:     

IC 32-30-5-1
 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
  residence; and
 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.

Potential Negligence Of An Indiana Receiver

Judge Theresa Springmann of the Northern District of Indiana issued an opinion on November 5, 2007 in the case FTC v. Think Achievement, 2007 U.S. Dist. LEXIS 82621 (N.D. Ind. 2007) (ThinkAchievementOpinion.pdf).  Think Achievement was a negligence case brought against a court-appointed receiver relating to the alleged failure to preserve and protect the assets of the receivership estate.  The opinion addresses some of the general rules in Indiana and the Seventh Circuit that apply to receivers.  Although the underlying case dealt with Federal Trade Commission Act violations, the opinion relates to secured lenders because of their interest in holding receivers accountable for the protection of the receivership estate. 

Why the suit?  The receiver failed to procure insurance for a valuable estate asset, specifically a private residence in Carmel, Indiana.  The residence was damaged by arson, and there was no insurance coverage for the fire-related losses.  The question was whether the receiver should pay for the damage. 

More background.  The court-appointed receiver was an attorney with no prior experience as a receiver.  Interestingly, he also acted as legal counsel for the receiver.  (In essence, he provided legal counsel to himself.)  The receiver understood he had a responsibility to protect the assets in the receivership estate, including keeping insurance on property.  He ultimately dropped the ball, however, despite a seemingly reasonable excuse.  (I won’t bore you with the relevant insurance law.) 

Legal theories.  The case was a negligence action asserting that the receiver breached his duty, owed to the receivership estate, “to exercise reasonable care to protect and preserve the assets of the receivership estate.”  Id. at 8.  Here are a couple important points cited in the opinion:

• Standard:  In carrying out the duties of a receiver, the receiver “must exercise ordinary care and prudence, that is, the same care and diligence that an ordinary prudent person would exercise in handling his or her own estate, or under like circumstances.”  Id.

• Help:  “If a receiver is uncertain how to preserve property, he should petition the court for instructions.”  Id.

In this particular case, the plaintiff argued that the scope of the duty included, specifically, a duty to obtain insurance for the protection of the estate assets and that the receiver breached that duty. 

Outcome.  The dispute did not center upon whether a duty existed.  Indeed, the defendant did not deny that he had a duty of care to the receivership estate requiring him to obtain insurance on insurable assets.  Id.  Instead, the issue was whether and to what extent he appropriately carried out that duty, and the Court held there was evidence from which a jury could conclude either way.  Although Judge Springmann pointed to facts unfavorable to the defendant, in the final analysis she held that the facts concerning whether the receiver breached (violated/failed to comply with) his duty did not “lend of themselves to only a single inference.”  Id. at 12.  In other words, whether the receiver conformed his conduct to the applicable standard of care was a triable issue of fact that must be reserved for the jury.   

The upshot for receivers.  There are a handful of points receivers can take away from the Think Achievement opinion.  First, a court-appointed receiver may be exposed to liability for damages if it acts unreasonably with regard to its duty to protect the assets of the receivership estate.  Second, if the receiver is faced with an issue and is unsure as to what to do, the receiver can and should petition the court for direction.  Finally, as suggested by Judge Springmann, it may be prudent to seek the assistance of outside legal counsel. 

Neither receivers, nor parties involved in a receivership, want to see unnecessary or avoidable expenses incurred.  Hiring lawyers and filing motions with courts can become expensive and can, indirectly, dissipate the assets of the receivership estate.  However, reasonable measures need to be undertaken to prevent damage to the property, such as the fire-related losses addressed in the Think Achievement case.  Receivers are well advised to consider the retention of legal counsel when confronted with a tricky issue. 

Lender applicability.  From the perspective of a secured lender, the Think Achievement case is important because it is a reminder that, not only is a receiver’s purpose to protect loan collateral, but an unreasonable failure to do so may expose the receiver to a damages claim.  Secured lenders might be able to seek recourse against receivers that negligently cause losses to the receivership estate.

Indiana Receivers Can Sue For Damages Suffered By The Receivership Entity

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.

LENDER AND RECEIVER BOTH MAY PAY FOR MISMANAGED FORECLOSURE

If you deal with receiverships, this case will be of interest to you.  A lender, a borrower and a court-appointed receiver have been battling one another in an Indiana federal court in connection with a failed construction project.  Problems arose when a partially-constructed apartment complex deteriorated so much during a foreclosure suit that a judge condemned the property and ordered it to be demolished, resulting in damages alleged by the borrower of $4,167,881 (representing the purported value of the property pre-suit minus the value of the foundations of the buildings after demolition).  In Judge Philip P. Simon’s words, “assessing who is at fault for this mess is at the center of the action currently before the Court.”  In rulings filed September 18, 2006 and October 16, 2006, the Northern District’s Judge Simon brought some order to the chaos in case no. 2:02cv368, Four Winds v. American Express Tax and Consulting Services, et al.  The cite to the September Opinion, which relates to the borrower’s claims against the receiver, is 2006 U.S. Dist. LEXIS 71349.  The October Opinion, which addresses the receiver’s cause of action against the lender, can be found at 2006 U.S. Dist. LEXIS 75581.

Lender spanked.  The litigation began when the lender decided to foreclose.  The borrower filed a counterclaim asserting wrongful foreclosure because there had been no default.  The borrower convinced the court that no default occurred, so the court dismissed the foreclosure aspect of the case.  The lender then settled with the borrower for a “hefty amount” on the counterclaims.   

Receiver faces trial.  The borrower also is pursuing the receiver for negligently failing to protect and preserve the project.  An agreed order governed the receiver’s conduct, and the issue is whether the receiver was grossly negligent.  The receiver sought a dismissal of the claim by submitting evidence that it did not act with gross negligence.  In fact, the receiver undertook at least some measures to protect the property.  But Judge Simon ruled that the case must go to the jury to decide factual issues, including:  (1) how the project would have faired had the receiver not undertaken the protective measures that it did, (2) how much damage would more extensive protective measures have prevented, (3) why the receiver did not apply to the court for permission to complete the project or for funding to implement more extensive measures, (4) how many times should the receiver have visited the project and (5) whether the receiver was grossly negligent in fulfilling its duties as the receiver.  The case is set for a jury trial on February 20, 2007. 

Receiver v. lender dismissed.  The receiver, in turn, had its own negligence claim against the lender, which claim really was about seeking reimbursement for any damages the receiver might have to pay to the borrower.  The receiver pointed the finger at the lender, arguing that the lender controlled the receiver’s actions through the funding (or lack thereof) of the receivership.  Judge Simon held there was no legal basis for the receiver’s position, however, and dismissed the claim.  If any negligence-based duties flowed between the parties, they flowed from the receiver to the lender, not vice versa.  Thus the receiver, if found to be grossly negligent, cannot recoup any losses from the lender (although the receiver may be entitled to a credit/set-off for the money the lender paid to the borrower.)

Interestingly, the agreed order appointing the receiver required the receiver to preserve and protect the property with receivership funds, even though there were no “receivership funds” to do so because the property generated no income.  That catch-22 may have been the property’s downfall.  The receiver was responsible for directing the preservation of the property, but on whose dime?  Evidently there was an informal arrangement whereby the lender funded the receivership.  That went okay at the beginning, but the problems and costs later seemed to snowball out of control.  I gather that, if and to the extent the receiver was negligent, it was due in part to inadequate funding by the lender.  The confidential “substantial” settlement the lender paid to the borrower supports my speculation. 

Lessons.  Even though the lender won its legal battle with the receiver, the lender had already lost when the project failed and the borrower forced the lender to settle.  There are some lessons here for lenders (and receivers):

• Ensure there is a default before a foreclosure case is initiated
• Spell out in the receivership order exactly how the receivership will be funded
• Clarify in the order the duties of the receiver, and the borrower or lender as warranted
• If the lender agrees to fund the preservation of the property, it should take reasonable steps to do so and should not unreasonably permit a project to deteriorate substantially in value

But perhaps the greatest lesson is - in cases of construction loans where the collateral is being built - lenders should foreclose and appoint a receiver only as a last resort.