The lender does not want the defaulting borrower to remain in possession when it could take many months or longer before the lender can legally get title and possession of that asset, sell it and recover the money they lent. That lender can go to court to ask to appoint an independent “disinterested” (not involved in the case in any way) agent of the court to take possession and control of the asset(s) while the legal action is pending. That agent “receives” the property as receiver. The appointed receiver takes exclusive possession and control of the property—land, building(s), personal property and any income generated by the property—until the case is resolved.

GlobeSt.com: How do you expect the use of receiverships and receivership sales in 2018 to compare to 2017?

Hoffman: We saw requests to serve as receiver increase moderately but noticeably at the beginning of 2017, and that pace has increased throughout this year. Every indication we see and hear is the rate of increase in receivership hearings will continue at least through 2018, outpacing 2017, as maturities continue and lenders' scrutiny responds.

GlobeSt.com: There was a surge in receiverships during the downturn. Are they still a popular remedy? Why?

Hoffman: Downturns in commercial real estate occur with some regularity, although not always predictably. Over Trigild's 41-year history, there have been a number of slumps. The “surge” is usually in mortgage defaults, followed by a surge in foreclosure filings, then followed by a partial surge in receivership actions and/or bankruptcy filings.

It has now become more commonplace for loan documents to include an agreement that in case of a loan default, the borrower agrees a receiver can be appointed. Judges often cite that when ordering the appointment of a receiver. Recently, I was in court when a judge refused to appoint any receiver in spite of the fact that the loan was in default and had matured and the borrower had agreed to such appointment in the loan agreement; however, this is unusual. In recent years, judges, lenders and lawyers have become more informed about the unique character and uses of receivers. Many law firms have created “creditors' rights groups,” which handle both receivership and bankruptcy.

GlobeSt.com: How is receivership different than bankruptcy?

Hoffman: Receivership is founded in a court of equity, while bankruptcy is a matter for a court of law. The same judge in the same courtroom on the same day may deal with both, but the distinction is important. A court of law can only apply statutes enacted by governing bodies or must apply laws already established by prior cases and appeals—in other words, strict rules. A judge in a court of equity has very wide latitude to do what she/he deems to be fair and just and in the best interests of the parties. A mistake in law can be overturned by legal rules and processes. An equity judge is allowed to exercise his/her best judgement and will rarely be challenged except in cases of misconduct by the court. Receivers have similar protection against lawsuits (quasi-judicial immunity).

In a nutshell, think of bankruptcy as a legal right to protect a borrower from a creditor. No more debtors' prisons here. Receivership was developed generations before that as a mean to achieve fairness—in today's CRE environment, to keep a borrower who has not paid from continuing to withhold the lender's security.

GlobeSt.com: What about receivership sales? Are they common?

Hoffman: Until recently, they were not common, and are still rare in some jurisdictions. Some states specifically say receivers cannot sell property unless all parties (plaintiff, defendants, creditors) agree. Most borrowers prefer not to lose their property. Other states have specific provisions that do allow receivers to sell property in the receiver's hands. Still other states are silent on the subject. Federal courts have specific rules and procedures by which receivers sell property; the formalities are similar to those required of bankruptcy trustees.

GlobeSt.com: Why would a borrower consent to a receivership sale?

Hoffman: If the lender and borrower are able to negotiate a reasonable method to resolve the pending litigation, the lender may still prefer not to take title to the property and become an owner. Environmental exposure may affect every past, present and new owner to liability and costs to mitigate environmental dangers. If the receiver sells the property under the court's scrutiny and final approval, no foreclosure occurs. The lender may offer some incentive to encourage the borrower to cooperate. As mentioned above, receivers can sell property without borrower approval in many states and in all federal courts.

We have learned in the last few decades that receiver sales often garner higher selling prices than foreclosure sales and may draw more interest without the stigma of foreclosure.