11 Essential Parts of a Receivership Order
What if you are asked to act as a Receiver for an Indiana commercial property in foreclosure? Frequently in Receiverships, the secured creditor does not want the Receiver to engage counsel because of the added expense. When you agree to the Receivership appointment, the secured creditor will send you a lengthy draft order to submit to the Court appointing you as Receiver. You may find yourself wondering what provisions are necessary in your position. Below is a list of important items a prospective Indiana Receiver should look for in most Receivership orders:
- Reporting requirements: The order should provide how frequently the Receiver must file updates with the Court regarding the status and finances of the Receivership, including the income and expenses.
- Extent of Receivership: The order should define whether the Receiver will control the borrower itself or just the property pledged as collateral in favor of the secured creditor. Commonly the Receiver will only be appointed to control the collateral, whether that collateral is real estate or personal property. Actually taking control of the borrower itself can add complications and expenses for the Receiver, such as filing tax returns. Also, if real estate constitutes the only collateral, it is helpful if the order provides that books and records related to the real estate must be turned over by the borrower and its officers to the Receiver.
- Selling Property: The order should provide whether the collateral that constitutes the Receivership estate can be sold by the Receiver. The order should also provide the procedure for selling the collateral (i.e. notice required to other parties and court for a proposed sale, period of time for objections to a sale motion). Rarely would a Receiver’s ability to sell personal property be challenged. However, as discussed in another of my blog posts, a Receiver cannot sell Indiana real estate unless the borrower has entered into a post-default waiver of its equity of redemption. If the Receiver’s primary motivation for accepting the Receiver engagement is the possible commission from a sale of property, the Receiver needs to understand whether it will be able to sell that property.
- Compensation of Receiver: The order should specifically define the amount, the frequency, and the procedure for the Receiver to obtain compensation for its services. Typically, the Receiver receives payment of compensation upon submission of invoices to the court and an absence of objection by any party for a specified period of time without a hearing. Also, the order should include any commission from the sale of property in addition to any flat monthly fee or hourly rate for the Receiver’s services.
- Retention of Professionals: Even if the bank insists that the Receiver does not hire counsel at the beginning of a Receivership, it may later become necessary. Unforeseen complications, challenges to actions by the Receiver, and/or a sale of property could necessitate legal advice. Also, situations could arise that require retention of an accountant or other similar professionals.
- Ability to Commence Actions: The order should authorize the Receiver to file actions to protect the Receivership property. The most common such actions involve lease terminations and contract disputes with vendors.
- Expenses of Receivership: The order should authorize the Receiver to incur expenses to protect the Receivership estate including paying vendors and utilities, obtaining insurance, repairs to the property, etc. The order may cap the amount of such pre-approved expenditures or provide that expenses are subject to approval by the secured creditor.
- Loans from the Bank: Ideally the Receivership property will generate sufficient income (typically from rents) to pay the expenses of the Receivership, including the Receiver’s compensation. Frequently this is not the case, especially if the property is in a state of disrepair and requires any improvements before marketing the property is feasible. Consequently, loans from the secured creditor are often necessary to fund the Receivership, and the order should pre-approve such loans.
- Bank Accounts: A separate deposit account should be set up by the Receiver for the Receivership. The order may dictate where such an account must be established, as banks often require that the Receiver’s account be maintained at that bank so that the bank can monitor the account during the Receivership.
- Bond: The Indiana Receiver Statute does require the posting of a bond to protect the secured creditor, borrower, and other parties in the action. However, some courts may allow the Receiver to serve without such a bond, but if there is a concern that the borrower may appeal the appointment of the Receiver, it is advisable to have the bond posted.
- Interference with Performance: The Order should preclude the borrower or any other parties from interfering with the Receiver’s performance of its court appointed duties.
These considerations will be relevant in virtually every Indiana Receivership. With that being said, every Receivership will have its own unique facts and circumstances to consider when a potential Receiver reviews a proposed Receivership order. It is necessary for the proposed Receiver to have a firm understanding of the facts related to the Receivership and the secured creditor’s expectations for the Receivership before accepting a Receiver engagement.
