Posts in Receiverships
December 13, 2011
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.
Posted at 12:38 PM in Receiverships
May 04, 2011
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:
- 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.”
- 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.
- 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.
- 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.
Posted at 03:02 PM in Receiverships
April 23, 2010
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.
Posted at 05:34 PM in Receiverships
April 06, 2010
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.
Posted at 09:50 PM in Receiverships