Receiverships: An Effective Remedy for Distressed Commercial Real - - PowerPoint PPT Presentation

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Receiverships: An Effective Remedy for Distressed Commercial Real Estate

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Maximizing Property Values and Minimizing Legal Risk Through Court-Appointed Receivers

A Li 90 Mi t T l f /W bi ith I t ti Q&A

Today's panel features: Richard T. Arrowsmith, Senior Vice President, Special Assets Group, GE Capital, Healthcare Financial Services, Bethesda, Md. Thomas A. Seaman, CFA, Principal, Thomas Seaman Company, Irvine, Calif.

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

, , p , p y, , Daniel Brozost, Partner, Raines Law Group, Beverly Hills, Calif.

Thursday, September 9, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 P ifi 10 am Pacific

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RECEIVERSHIPS: AN EFFECTIVE REMEDY FOR DISTRESSED COMMERCIAL REAL ESTATE

Maximizing Property Values and Minimizing Legal Risk Through Court- Appointed Receivers Webinar Panelists:

• Rick Arrowsmith – GE Capital
• Thomas Seaman – Thomas Seaman Company
• Daniel S. Brozost, Esq. – Raines Law Group LLP

September 9, 2010

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Thomas Seaman Company

Rick Arrowsmith

Rick is a Senior Vice President in the Special Assets Group of GE Capital, Healthcare Financial Services, a premier provider of financing to the healthcare industry with focus areas in Corporate Finance, Real Estate and Life Sciences. In this capacity, he is responsible for all aspects of loan workout and restructuring. Rick is also the GE Capital, Healthcare Financial Services instructor for “Problem Loan Management and Workout Process Overview”, an internal Risk training class that he co- g , g

• developed. He also co-instructs the “Problem Loan Detection” class and other risk

management training classes. Prior to his current role Rick was a Vice President at First Union responsible for a portfolio Prior to his current role, Rick was a Vice President at First Union responsible for a portfolio

• f subperforming and non-performing commercial real estate loans. He joined GE through

the acquisition of Heller Financial in 2001 and subsequently led a quality project to ascertain the root causes of problem loans that resulted in green belt certification in 2004. Rick received his Bachelor of Science degree in Finance from University of Maryland, in College Park, MD. He also received a Master of Science degree in Real Estate and Urban Development from American University in Washington, D.C.

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U ve s y W s g o , .C.

Thomas Seaman

Thomas A. Seaman is a Judicial Receiver and Principal of Thomas Seaman Company, which assists him in the execution of his duties as a court appointed fiduciary. Thomas Seaman Company provides business management services in civil matters which require a neutral third party to serve p g q p y as receiver, referee, provisional director, or administrator. Thomas Seaman Company has the capability to manage and administer a broad range of asset classes including operating companies, financial assets, real property and construction projects.

• Mr. Seaman has over 30 years of business experience both in private industry and as a court-

i t d fid i H i f CFO d C t ll d i Ch t d Fi i l A l t appointed fiduciary. He is a former CFO and Controller, and is a Chartered Financial Analyst (CFA). Mr. Seaman entered the insolvency arena in 1989 and has served has receiver in over 175 matters since formation of Thomas Seaman Company. He has operated distressed businesses that were the subject of a State Court Receivership, Chapter 11 Bankruptcy estate, Federal regulatory action, partnership dispute, partition action, dissolution proceeding, probate matter, or in other litigation requiring a fiduciary. Thomas Seaman Company has operated companies in numerous i d t i i l di l t t f t i t ti h lth i t d li i i industries including real estate, manufacturing, construction, healthcare, assisted living, service, hospitality and others. Mr. Seaman is experienced at seizing assets, stabilizing operations, and formulating & implementing business solutions.

• Mr. Seaman earned a Bachelor of Science degree in Finance from the University of Illinois in

1979 and was awarded a CFA charter in 1993 Mr Seaman’s firm is licensed by the State of 1979, and was awarded a CFA charter in 1993. Mr. Seaman s firm is licensed by the State of California as a Registered Investment Adviser and as a California Real Estate Broker. He is a member of the Institute of Chartered Financial Analysts, the Los Angeles Society of Financial Analysts, the California Receiver’s Forum, and the Orange County Bar Association, as a non- lawyer.

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Thomas Seaman Company

Daniel S. Brozost, Esq.

Dan is a partner at Raines Law Group LLP, with a practice focused p p , p primarily on transactional real estate matters, including asset and real property acquisitions and dispositions, finance, commercial leasing, formation and structuring of joint ventures, investment funds, syndications and other investment entities and private placements of debt and equity securities Dan represents a wide placements of debt and equity securities. Dan represents a wide range of clients, including real estate investment funds, developers and syndication groups, institutional landlords and asset managers, commercial lenders, receivers, hedge funds, private equity investment firms, entrepreneurs and high-net worth families and i di id l g individuals. Dan received his undergraduate degree from Cornell University, with a concentration in Industrial and Labor Relations. He received his Juris Doctorate from the University of Virginia School of Law. Prior to joining Raines Law Group LLP in 2007, Dan worked in the Los Angeles offices of Latham & Watkins LLP and Allen Matkins Leck Gamble Mallory & Natsis LLP.

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Definition of Receiver Definition of Receiver

 “A receiver is a ministerial officer, agent, creature, hand or arm,

and temporary occupant and caretaker of property for, the court. And he represents the court appointing him, and he is the medium through which the court acts.” Pacific Indep. Co. v. W k ’ C ti A l Bd 258 C l A 2d 35 Workman’s Compensation Appeals Bd., 258 Cal. App. 2d 35 (1968)

 Receivership is an equitable remedy imposed by a court where a

neutral third-party takes possession of real and personal property to prevent deterioration, waste or dissipation in value of that property.

 A receiver holds assets for the court and not for the plaintiff or

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p the defendant.

Types of Receiverships Types of Receiverships

 Real estate/rents and profits  Operating companies  Judgment enforcement  Protection of property  Marital disputes  Environmental remediation  Regulatory

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Basis for Appointment Basis for Appointment

 Statutory

 Specific to government agencies or industries, such

as SEC receiverships or those relating to insolvent insurance companies and bank or other thrift insurance companies and bank or other thrift institutions.

 Equity

 Equitable remedy imposed by a court in which an

action or proceeding is pending, such as (a) a breach of contract action (b) an action by a lender breach of contract action, (b) an action by a lender for judicial foreclosure, or to enforce an assignment

• f rents provision, or (c) an action to enforce a

j d t

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judgment.

Fiduciary Duty Fiduciary Duty

 A receiver is a fiduciary, which means he/she owes duties of good

faith and loyalty to the court and to the parties that hold claims against the receivership estate against the receivership estate.

 A receiver must not favor one creditor over another, engage in self

dealing, or take any action that is not in the best interests of the receivership estate.

 Cal Rule of Court 3 1179(b): The receiver may not enter into any  Cal. Rule of Court 3.1179(b): The receiver may not enter into any

contract, arrangement, agreement, or understanding with the appointing party concerning: (1) The role of the receiver with respect to the property following termination of the receivership, without specific court g p, p permission; (2) How the receiver will administer the receivership or how much the receiver will charge for services or pay for services to appropriate or approved third parties hired to provide services; (3) Wh h i ill hi k l hi (3) Who the receiver will hire, or seek approval to hire, to perform necessary services; or (4) What capital expenditures will be made on the property.

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Receiver Qualifications Receiver Qualifications

 Must be an individual  Cannot be a party to the underlying action, nor an

attorney for a party

 Cannot be a relative of any judge of the appointing  Cannot be a relative of any judge of the appointing

court

 Ability to file bond and oath of disinterestedness  Judgment, trust, experience relevant to the proposed

appointment N f l t i i li i i d

 No formal training or licensing required

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Jurisdictional Considerations Jurisdictional Considerations

 California governing statutes

 Cal. Code of Civil Procedure, Sections 564 – 570  Cal. Rules of Court, Section 3.1175, et seq.

Oth t t

 Other states  Federal court  Many state receivership laws are modeled on the  Many state receivership laws are modeled on the

Federal Bankruptcy Code’s reorganization provisions p

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Reasons for Appointing Receiver Reasons for Appointing Receiver

 Defaulted loan

 Allows lender to protect cash flow prior to foreclosure

Allows lender to protect cash flow prior to foreclosure

 Gives lender head start on stabilizing collateral prior to

foreclosure and maximization of recovery value

 Pre-foreclosure remedy

Ability to inject cash into collateral without funding to

 Ability to inject cash into collateral without funding to

borrower

 Prevent waste and/or mismanagement; protection of

collateral C

 Complete construction

 Other Reasons

 Enforcement of a judgment

Partnership dispute

 Partnership dispute  Corporate dissolution  SEC or other governmental enforcement actions

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Practical Considerations Practical Considerations

 Lender/movant becomes financially responsible if insufficient

y p funds

 Allows lender input in the management of the asset

Select a financially responsible receiver that will manage the

 Select a financially responsible receiver that will manage the

property in the manner you would as lender

 Closure/shutdown considerations  Secured lender internal approvals and other issues for

advancing new money on a defaulted loan

 Managing and interfacing with other stakeholders  Managing and interfacing with other stakeholders,

governmental agencies (taxing authorities, licensing bureaus, adjoining property owners, politicos, unions, judicial branch representatives

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representatives.

Receivership Examples Receivership Examples

 Borrower has no equity to recover

(abandonment, “throwing the keys”, “walking away”) /

 Tenants/residents are jeopardized  Protection of collateral from sabotage  Stalemate in negotiations on restructuring

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Choosing a Receiver Choosing a Receiver

 Asset type  Asset location  The defaulting party  Other considerations relating to the secured

transaction (i.e. nature of the exit strategy)

 Skills of a good receiver  How are receiver candidates chosen?

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Procedure for Appointment Procedure for Appointment

 Underlying action in which the court is authorized

to appoint a receiver

 Application for appointment

E t

 Ex parte  Standard notice  Stipulated appointment

Stipulated appointment

 Notice and hearing, if applicable  Court approval of order appointing receiver

pp pp g

 Receiver files declaration, bond and oath

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Order Appointing Receiver

 Sets forth in detail the receiver’s specific powers, such as:

 Employment of management company and at what rate  Employment of attorney and at what rate  Leasing parameters  Sale/disposition parameters  General duties of the receiver  Parameters for other expenditures relating the receivership estate  Borrowing funds from the lender  Use of the borrower’s taxpayer ID number  Receivership bank accounts  Seizure of books and records and bank accounts  Continuing operations of an ongoing business

 Disclosures of pre-existing relationships  Amount of receiver’s bond

Amount of receiver s bond

 Receiver’s fees  Reporting requirements  Receiver’s duties upon borrower filing bankruptcy

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Order Appointing Receiver Order Appointing Receiver

 Forms of orders

 May be required in certain jurisdictions  May be required in certain jurisdictions  If form not required, usually better to tailor an order to

the specific situation

 Other considerations  Other considerations

 As receiver, specifically include any power that receiver

needs in order to successfully operate and manage the asset

 As receiver, disclose anything that may be held to

compromise the neutrality of the receivership

 As tenant or purchaser, review the order to ensure

receiver’s authority receiver s authority

 Anything not specifically authorized by the order will

require court authorization

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Powers of the Receiver Powers of the Receiver

 Authorized actions – specifically set forth in the

• rder (leasing, contracts, management, attorneys,

power to sue, etc.)

 Prohibited actions

pre arranged agreements

 Prohibited actions – pre-arranged agreements,

lender influence

 Mandatory actions – reporting requirements,

Mandatory actions reporting requirements, payment of taxes

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Amending the Order/Further Instr ctions Instructions

 Anything not authorized by the order will require

additional authorization from the court

 Time and expense considerations

P id t it f i t t

 Provides an opportunity for opposing party to

• bject

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The Take Over Process The Take-Over Process

 Take control of the real property by delivering a letter of

instruction to all tenants for the payment of rent and instruction to all tenants for the payment of rent and property maintenance requests

 Review insurance to ensure that it is in full force and effect,

review coverage levels confirm that lender is listed as a review coverage levels, confirm that lender is listed as a loss payee and additional insured, and that the receiver is also a named insured

 Obtain borrower’s tax ID number to open a bank account  Obtain borrower s tax ID number to open a bank account

for the receivership estate

 Demand turnover of property books & records from

borrower borrower

 Demand turnover of property operating income in

borrower’s bank account A h i l diti f ll t l

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 Assess physical condition of collateral  Assess current vendors and retain or replace accordingly  Abstract all leases and enforce their terms

Day to Day Operations Day-to-Day Operations

 Retain and direct property manager  Retain and manage leasing broker  Negotiate new leases and lease renewals  Construction management, if applicable

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Receivership Costs Receivership Costs

 Property operating costs and receiver’s fees  Paid from the receivership estate or if insufficient

funds, by applicant R i ’ tifi t

 Receiver’s certificates

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Reporting and Disclosure Req irements Requirements

 File written inventory with court  Monthly financial reports to the parties which

include property operations, financial statements and receiver’s statement of fees and receiver s statement of fees

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Interaction with Lenders and Borro ers Borrowers

 Financial reporting to all parties  Coordinate stipulations and give notice of motions  Lender

 Keep informed about property operations  Coordinate pre-foreclosure inspections; appraiser,

environmental and property condition environmental and property condition

 Seek approval where appropriate, i.e., leasing

 Borrower

 Turnover of books and records, and funds in bank

accounts S k f b h i t

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 Seek concurrence of borrower where appropriate

Leasing and Disposition Issues – Recei er Perspecti e Receiver Perspective

 Market-based business terms  Court approval  Approval of the parties to the action

D t id & ti

 Do not provide reps & warranties  Legal drafting considerations

Al id th i ’ fid i d t d

 Always consider the receiver’s fiduciary duty and

potential liability

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Termination Events Termination Events

 Court order  Foreclosure  Disposition of property  Fulfillment of receivership purpose

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Termination Process Termination Process

 Turnover possession of property  Payment of all accrued but unpaid bills  Noticed motion or stipulation of all parties  Final report and accounting  Request for discharge and exoneration of

i ’ b d receiver’s bond

 Court order to discharge receiver

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Liability Issues

 Lender liability

 Avoid becoming “mortgagee in possession” – potential for significant

Avoid becoming mortgagee in possession potential for significant liability

 Premises liability  Environmental liability  Liability to borrower  Liability to borrower  Avoid improper communications with the receiver and/or the

receiver’s professionals.

 Receiver liability

 Liable for acting outside of authority granted by the appoint court.  Liability for unpaid taxes  Must disclose to court and parties any relationships with

professionals/vendors that the receiver will retain. p

 Claims against the receiver:  Must be pursued by separate lawsuit with approval of the court

appointing the receiver.

 Must be brought prior to the receiver being discharged

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Must be brought prior to the receiver being discharged

 Avoid improper communications with parties.  Avoid conflicts of interest.  If unsure, ask court for further instructions/guidance.

Leasing and Disposition Issues – Tenant/B er Perspecti e Tenant/Buyer Perspective

 Carefully review order regarding receiver’s

powers and authority

 Non-controversial decisions may be subject to

court approval court approval

 The defaulting party’s rights  Expect delays

timing considerations

 Expect delays – timing considerations  Incomplete information  “As is” transactions – no reps & warranties  As is transactions

no reps & warranties

 Communications with parties to the action  Don’t assume favorable business terms

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Don t assume favorable business terms

Borrower Bankruptcy Borrower Bankruptcy

 11 U.S.C. Section 543 addresses what happens

when debtor files a bankruptcy petition after a receiver is appointed

 Any custodian (including receiver) appointed pre-  Any custodian (including receiver) appointed pre-

petition who becomes aware of a bankruptcy filing by the debtor must:

 Not make any disbursements from or of receivership assets  Take any action to administer the receivership estate unless

necessary to preserve property

 Deliver to the trustee any property of the debtor held by

receiver

 Prepare and file with the bankruptcy court an accounting of

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any property of the debtor (and proceeds thereof) that came into the receiver’s possession at any time

Borrower Bankruptcy Borrower Bankruptcy

 Bankruptcy court may excuse the receiver from the

f i if th dit ’ b t i t t ld b foregoing if the creditors’ best interests would be served by the receiver remaining in control

 Factors

 Debtor’s misconduct or incompetence  Duration of receivership  Receiver’s experience in bankruptcy cases  Receiver s experience in bankruptcy cases

 Pending motion for relief from section 543’s requirements,

receiver may remain in possession of property, but may not make disbursements of dispose of property make disbursements of dispose of property

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Advantages of Receivership Advantages of Receivership

 Allows for secured lender to preserve collateral value

d l d th / i i l f and precludes the money sponsor/principal from pillaging the business.

 Affords the secured lender a better insight into the

Affords the secured lender a better insight into the financial performance and thus ascertain a true evaluation of the value of the collateral.

 Provides a judicial oversight structure that will drive a

resolution more quickly.

 Brings an un-conflicted third party rationale to the  Brings an un conflicted third party rationale to the

investment (sponsors aren’t always motivated in the secured lender’s best interests).

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Disadvantages of Receivership Disadvantages of Receivership

 It’s your money and might even be good

money after bad.

 It’s your money.  Asset management is time consuming  Potential for lender liability or counter-claims

increased

 Receivership liability and the attendant

i d it indemnity

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Contact Information

Rick Arrowsmith

GE Capital 2 Bethesda Metro Center, Suite 600 Bethesda MD 20814 Bethesda, MD 20814 (301) 347-3124 richard.arrowsmith@ge.com

Thomas Seaman

Thomas Seaman Company 3 Park Plaza, Suite 550 Irvine CA 92614 Irvine, CA 92614 (949) 222-0551 tom@thomasseaman.com

Daniel S. Brozost

Raines Law Group LLP 9720 Wilshire Blvd., Fifth Floor Beverly Hills CA 90212

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Beverly Hills, CA 90212 (310) 440-4100 dbrozost@raineslawgroup.com