RichardA.Rogan,Esq. - PDF document

RichardA.Rogan,Esq. 415.398.8080 RRogan@JMBM.com July2009 RECEIVERSHIP101: Whatyouneedtoknownow! © 2009 Jeffer Mangels Butler& Marmaro LLP.AllRightsReserved Theinformationinthispresentationhasbeenpreparedby Jeffer , Mangels ,Butler& Marmaro LLP(JMBM)forgeneral informationalpurposesonlyandshouldnotbeconstruedaslegal adviceonanysubjectmatter,ortoanswerspecificlegal problemsyoumayhave. Whilewetrytoensuretheaccuracyoftheinformation,wecanno tguaranteethatalloftheinformationisaccurate.You shouldbeawarethatthelawisconstantlychangingandvariesb ycircumstance.Therefore,informationonagivenlawor legalissuemaynotbecurrentorapplytoyourparticularsitua tion.Youshouldnotactorrefrainfromactinguponthis informationwithoutseekingtheadviceofprofessionalcounseli nyourjurisdiction.Viewinganduseofanyofthe informationonthissitedoesnotcreateanattorney - clientrelationshipbetweenyouandJMBM. Donotsendusconfidentialinformationrelatedtoyouoryourc ompanyuntilyouspeakwithoneofourattorneysandget authorizationtosendthatinformationtous.Anyinformationyo udosendtousthroughInternetemailthroughthissiteisnot secureandisdonesoonanon - confidentialbasisanddoesnotconstituteorcreateanattorney - clientrelationship.Weaccept clientsonlyafteraconflictsresolutionprocesshasbeenclear ed,andawrittenagreementonrepresentationhasbeenagreed tobytheprospectiveclientandJMBM. Unlessotherwisenoted,JMBMattorneysareadmittedtopractice onlyinCalifornia.Thispresentationaddressesonlythelaw ofCaliforniaandmaynotbeapplicableinotherjurisdictions. Allcontentincludedinthispresentation,orincorporatedbyas sociation,suchastext,graphics,logos,buttonicons,and images,areusedwithpermissionorarethepropertyofJMBM,it sstrategicalliances,clients,orcontributors.Noportionmay bereproducedinwholeorinpartwithoutexpresspermission.An yotheruse,includingthereproduction,modification, distribution,transmission,republication,displayorperformanc e,ofthecontentonthissiteisstrictlyprohibited. Disclaimer Q. WhatisaReceiver? A. Aneutralpersonwhoisappointedbya Courttotemporarypossessionofproperty belongingtooneormorelitigants. Q. Doestherehavetobealawsuitfiledin ordertogetaReceiverappointed? A. Yes 3 TheEssentials:FAQ's CanadefendantaskthataReceiverbeappointed? Yes,butitisuncommon Usualcircumstancesinclude: • BorrowersuesaLenderandLenderfilesacross - complainttocollecttheloanandappointaReceiver • Onepartnersuesanotherpartnerandsecond partnerfilesacross - complaintandaskstoappointa Receiver A. Q. 4 FAQ'scontinued 5 FAQ'scontinued Q. WhocanbeaReceiver? A. Therearenostatutoryrequirements. Q. WhocannotbeaReceiver? A. Aparty,attorneyofaparty,interestedperson orrelativeofthejudge • Tomanagethe propertyafterI foreclose? • Astocompensation andhowheorshewill managetheproperty? No CRC3.1179(b)(1) No CRC3.1179(b)(2) - (4) CanImakeadeal withtheproposed Receiver... Q. 6 FAQ'scontinued A. A. Q. HowdoestheCourtchoosewhotoappointas Receiver? A. Itisuptothejudge,butthepartiesusuallynominate Q. WhattypesofReceiversarethere? A.1.Rentsandprofitsreceivers;2.Equityreceivers Q. IstheReceiverliablefordebtsincurredbythe BorrowerpriortotheappointmentoftheReceiver? A. No 7 FAQ'scontinued • Realestateloansare indefault • Tocollectrents • Aresponsibleneutral personisneededto carefordistressed assets • Tocollectassetsand liquidatecollateral 8 WhenWouldaLenderConsiderMovingtoAppoint aReceiver? • Inventoryshrinkage • Removalofbusiness assets • Paymentstotrade creditorsinsteadof SecuredLender • Embezzlement BorrowerinformsLenderthatitwillceaseoperations, butisunabletoprovideaplanfororderlyoperation Typicalfactpatternsincludes: 9 DispositionofAssets: AFailingBusiness • Transferringassetstonewlyformed(secret) entity • Sellinginventoryataloss • Skimmingaccounts • Payingphonyaccountspayable 10 DispositionofAssets: FraudulentTransferofAssets • Securescontroloverpremises • Inventories:tangibleandintangibleassets • Recoversproperty • Beginstocollectaccountsandrents 11 DispositionofAssets: WhatCantheReceiverDo? Q. CantheReceiversue? A. Yes Q. CantheReceiversellassetsoutsidethe ordinarycourseofbusiness? A. OnlywithCourtapproval Q. CantheReceiverabandonassetsthatare toocostlytomaintain? A. Yes 12 DispositionofAssets MostcommonReceivershipiswherethereisa monetarydefaultandanincome - producingproperty • Lendercommencesjudicialforeclosureandasks theCourttoappointtheReceivertocollectrents, and recordsaNoticeofDefaultundertheDeedof Trusttobeginnonjudicialforeclosure • Lendermustchoosebetweenforeclosing nonjudiciallyatatrustee ’ ssaleorobtaininga decreeofforeclosureinCourt • Electionofremediesnotfinaluntilauction completedorCourtentersjudgment 13 RealEstateForeclosures • Receivercollectsrentfor 3monthsand20days – thenoticeperiodbeforea salecantakeplace • Receiverpaysexpenses, includinghisorherfees andcounsel ’ sfeesfrom rentcollected • BalancepaidtoLender atendofReceivership Atrustee ’ ssale isanauction. 14 RealEstateLoans: Nonjudicial Foreclosure(Trustee'sSale) • Torecoverasubstantialdeficiency,Lender canchoosetoforeclosejudicially • Receiveractsasauctioneer • Borrowerhasoneyeartopaydebtand redeemproperty • Receiverremainsinpossessionduringthis year 15 RealEstateLoans: JudicialForeclosure AReceivermaybeappointediftheBorrower: • Failstocomplete construction • Failstomakerepairs • DeniesLendertherightto inspectforenvironmental hazards 16 RealEstateLoans Loanindefault • Toprotectcollateralwhentherearedisputes amongprincipalsorownersofabusiness • Toprotectcollateralforallcreditorswhenloan isunsecured Collectorenforceajudgment • Tocollectassets,liquidatethemandpayto LenderwhenBorrowerwillnotrepayeven aftertheLenderhasobtainedajudgment CCP564(b)(3) - (4) 17 EquityReceiverships Preserveproperty • Toprotectcollateralwherepropertyisin dangerofbeinglost,removedormaterially injured Businessinsolvencyordissolution • Toprotectassetswhenabusinessisinsolvent orgoingtobedissolved • Corporation,LLC,partnershiporsole proprietorship 18 EquityReceiverships Borrowerneedstoborrowmore • Toprovideknowledgeablebusiness managementtogeneratefundsfor repayment(andanynewloanmade) Deadlockedprincipals • Toprovideknowledgeablebusiness managementwhenprincipalscannotagree howtomoveforward 19 EquityReceiverships • When? – Whenthelawsuitisfiled – Butcanmoveanytimeduringthelawsuit • How? – ExParteMotion • Mostcommon • Quick • Givenoticebefore10AMofthepreviousCourt day – NoticedMotion • 16Courtdays+5daysformailing!! 20 ProceduresforRequesting ReceivershipAppointments • WhyExParte? – Defendantis: • Indefault • Collectingrentsor accounts • Stealingcollateralor assets • Dissipatingcollateral orassets – Thereisorwillbean IrreparableInjuryoran emergency CRC3.1175(a)(1) • WhatisneededforExParte relief? CRC3.1175 - 1176 – Plaintiffmustpostabond – Plaintiffmustshow irreparableinjurywilloccur ifReceiverisnotputin placeimmediately – DefaultunderAssignment ofRents CC2938(c) • SecondOrderconfirmingno laterthan15 – 22days 21 ProceduresforRequesting ReceivershipAppointments:ExParteMotions • SingleassignmentjudgesunfamiliarwithReceivership • Counter - argumentstoReceiverisadrasticremedy – IrreparableinjurynotneededifdefaultunderAssignmentofRen ts – DeedofTrustorSecurityAgreementmayincludeagreementto appointmentofaReceiver – AReceiverCostsTooMuch • Paidoutofestate • Lostrentsandprofits • PlaintiffultimatelyresponsibleforexpenseofReceivership • ProvidesmanagementservicesDefendantshouldbe providingbutisnot,suchaspropertymanagementand competentbusinessoperations CRC3.1175(a)(4) • Stopsembezzlementortheft 22 ProceduresforRequesting ReceivershipAppointments:ExParteMotions IfExParteMotionisDenied • SethearingtoappointaReceiver • AskforOrderShorteningTime CRC3.1176(a)vs.CRC3.1300(b) • AskforTemporaryRestrainingOrder( TRO )to stopDefendantfromlootingtheReceivership estateandtokeepthestatusquopendingthe hearingonthemotiontoappointtheReceiver – BondrequiredforTRO CCP529 23 ProceduresforRequesting ReceivershipAppointments NoticedMotion • Ifnoirreparableinjury,mustproceed onanoticedmotion • 16Courtdays ’ noticeifyou ‘ relucky 24 ProceduresforRequesting ReceivershipAppointments OrderAppointing Receiver • Sourceofpower • JudicialCounsel form CCP568 HowtoSupplement Receiver ’ sPowers • PetitionCourtfor instructionsand seekorders authorizingspecific actions 25 Procedures Receiver ’ sBond • TheReceiverwill faithfullydischarge dutiesandcomplywith theCourt • Inadditiontoexparte bond CCP567(b) Receiver ’ sPowers • Receivermustkeep fundsininsured accounts,maintained bylicensedsecurities dealersand not inthe Bankthatisapartyto theaction. CCP569 26 Procedures SaleofProperty • AReceivermaysellpropertyofestate only afterorderoftheCourt CCP568.5 27 Procedures • Nostatutoryprovisionsaddressturnoverof possessionafterreinstatement • ProvideforturnoverafterreinstatementinOrder AppointingReceiver • OrderApprovingFinalAccountingshould includeexplicitinstructionsastodispositionof assetsinpossessionofReceiver 28 AfterReinstatement • Receivershouldconsidersolvencyofestateat outsetandthroughouttheassignment • Seekconsensualsolution • AskPlaintifftolendmoneytoReceivership estateandissueReceiver'scertificates • PetitionforInstructionsorMoveforDischarge 29 AdministrativeInsolvency Receiver ’ sInventory • Mustbefiledwithin30 days CRC3.1181 Receiver ’ sAttorney • MustobtainCourt permissionbefore employingcounsel . CRC3.1180 Receiver ’ sCertificates • Receiverborrowsmoneyto sustainoperationsofilliquid enterprise/propertybyselling “ Receiver ’ sCertificates ” (almostalwaystosecured creditor). • Certificatesbearinterestand havepriorityoveralldebts exceptadministrationofthe Receivershipestate. 30 Procedures Receiver ’ sMonthlyReports • Reporttopartiesand(ifrequested)non - parties • LendersentitledtoreportsifBorrower ’ s principalscausedappointmentofReceiver • NotfiledwithCourt • Narrativeofevents,financials,reports,fees CRC3.1182 31 Procedures Receiver ’ sFinal Account • Finalaccountand reportmustbe approvedbytheCourt Receiver ’ sFees • Receiverandcounsel mustseekCourt approvaloffeeson interimandfinalbasis • Paidoutofassetsof Receivership • Appointingpartycan beheldliablefor paymentifestateis insolvent 32 Procedures BorrowersinChapter11 • Seekingtokeepcontrolofproperty, BorrowersoftenfileChapter11whena Receiverisappointed. • Borrowersoftenfailtocomprehendthe seriousfiduciaryresponsibilitiesthatDebtors - in - PossessionowetoCreditors 33 Procedures: EffectofBankruptcy - Borrowers Receiver ’ sResponse • Makesnofurtherdisbursements • DeliverspropertytoDebtor - in - Possession • Filesaccountinginbankruptcycourt • Afternoticedhearing,Courtwillallowfees andcoststoReceiver 34 Procedures: EffectofBankruptcyonReceiver Choice#1:Deal WithBankruptcy Court • Lendercanallow Borrowerto becomeDebtor - in - Possession Choice#2:MoveTo AppointAChapter 11Trustee • Ifthereiscause (usuallyfraudis required) 35 Procedures: EffectofBankruptcyonLender Choice#3:MoveTo ExcuseCompliance InTheBestInterest OfCreditors • Undersection543(a) and(b)ofthe BankruptcyCode • Bankruptcycourts rarelygrantthis motion Whichcourseofaction isbestdependsonthe circumstancesofeach case 36 Procedures: EffectofBankruptcyonLender Considerations Lender Borrower Borrowerisconcernedthatthe Receiverwilldiscoverthe "skeletoninthecloset"that Borrowerhassuccessfullyhidden fromLenderforyears LenderbelievestheBorrowerhas committedfinancialdefalcations andneedsathorough independentreviewofthe Borrower'soperationsand financialrecordkeeping Borrowerbelievesthatthe appointmentofaReceiverwill destroytheBorrower'sabilityto voluntarilyselltheassetforaprofit Lenderdoesnothavethe expertisetoworkwiththe Borrowertotrytoturnaroundits operations Borrowerdoesnotwishtogiveup controloftheasset Lenderlacksconfidenceinthe managementskillsofthe Borrower 37 Considerations Borrowerassumesthatthe ReceiveristheLender'shiredgun whoisouttogettheBorrower Receiverbringsnew"neutral" professionalismtooftentense situation "Hopespringseternalinthe [Borrower's]breast..." Lenderwillnotadvanceneeded fundstotheBorrower,butwill advancethemtotheReceiver through"Receiver'scertificates" Borrowerisafraidthatthe Receiverwilldamagehis delicatelybalancedrelationships withsuppliers Receivercanmaximizecash becausehe/sheisnotliablefor pre - appointmenttradeobligations andmaynotbemakingregular mortgagepaymentstoLender Lender Borrower 38 BorrowerfearsthattheReceiver willdiscoverthetruefinancial conditionofthebusinessandshut itdown Receivercanprovideaccurate financialandotherinformation aboutthebusiness Borrowerfearsthathisorher franchisewillbeterminated becausetheReceiverwas appointed Receivermustdealwith franchisorsandothercontractual relationships BorrowerisafraidthattheEPAwill comeafterhim Receivertakesinterimcontrolof anenvironmentallychallenged asset Lender Borrower 39 Considerations BorrowermayfileChapter11to ousttheReceiver LenderwantstheReceivertosell thebusinessoritsassetstopay offtheloan Borrowerisconcernedaboutthe costoftheReceivership Lenderisconcernedaboutthe costoftheReceivership 40 Considerations Lender Borrower 41 Questions? RichardA.Rogan,Esq. Jeffer , Mangels ,Butler,& Marmaro LLP TwoEmbarcaderoCenter, 5thFloor SanFrancisco,CA94111 415.398.8080 RRogan@JMBM.com