By Dennis T. Lewandowski, Bankruptcy, Creditors’ Rights & Business Restructuring

Part 1 of 4.

Historically, receiverships for commercial real estate were used to collect rents and fees generated by income-producing properties prior to the completion of foreclosure sales on those properties. While receiverships are still being used for that purpose, receiverships also may be used as an alternative to foreclosure, as a method to actually sell real estate collateral.

No specific factors are provided in the statutory scheme for when the appointment of a receiver is appropriate. The Virginia Code simply states that a receiver may be appointed “[w]henever the pleadings in any suit make out a proper case…” The two most common grounds for the appointment of a receiver are (i) a provision in the loan documents for the appointment; and (ii) exigent or emergency circumstances, such as a failure to maintain the premises and possibly even the collection of rents and fees and the failure to make payments to the lender.

A receivership may proceed either with or without notice. Notice of the receivership proceeding does not have to be provided in those cases in which an emergency exists and it is necessary to preserve the subject matter. However, in such cases the receivership order must state the emergency and necessity for immediate action. In the appropriate circumstances, it could be argued that the continued collection of rents and the failure to make payments to the lender justify the appointment of a receiver without notice.

However, it may be more difficult to obtain the appointment of a receiver without notice, as courts generally prefer that notice be provided to the adverse parties whenever possible. Also, if a receivership is obtained without notice, a surety bond is required to cover all damages and injury properly and naturally flowing from such emergency appointment. Finally, if a receiver is appointed without notice, the appointment is limited to a period of not longer than 30 days, during which time the court shall hear the matter, upon notice to the owner(s) and all lienholders, to determine whether the receivership is appropriate. However, often a borrower/owner will not contest an appointment without notice if sufficient (especially contractual) grounds exist. Also, aside from obvious instances in which there is an immediate need for a receiver to preserve the property, if there is a concern that funds in the borrowers bank account from rents previously collected will no longer be available if notice is provided, an appointment without notice should be considered.

For either the initial hearing or the subsequent hearing after the appointment without notice, notice must be provided to the defendant(s) and to all other parties having a substantial interest, either as owners of or lienors of record and lienors known to the plaintiff in the subject matter. It is important to note that, even though some of these parties are not technically defendants, they must be served in the same manner as if they were defendants and they were being served with process in a civil action. At the hearing on the receiver it may be necessary to establish the basis for such relief by introducing the loan documents that provide for a receiver and the existence of the default, and/or by establishing the emergency or exigent circumstances that require the appointment of a receiver. The receiver should also be present at the hearing and prepared to establish their qualifications.

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The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.