Time to Take a New Look at Federal Vs. State Receiverships? – By Jim Butler

Most of the receiverships in the United States are state court receiverships. But lenders seeking the relief and protection of receiverships are giving new consideration to filing in federal court. Our partner Nick De Lancie took the lead in putting together this summary of some key factors in making this choice today.

Time for a new look at Federal vs. State Receiverships

Many state courts are closed or backlogged

Due to the Covid-19 crisis, getting receivers appointed in many state courts may be difficult. Some state courts are effectively closed, others are backlogged, and still others have temporary restrictions on receivership or foreclosures proceedings that push receivership applications even further down the stack.

Federal courts are generally open and working. Federal courts, however, have generally been proceeding with their cases in a more-or-less normal fashion. Even though federal courts do not have the quick receivership hearings that some states permit in ordinary times, federal receiverships, which are not commonly used by secured creditors, can be a very useful remedy for defaulted loans. This is particularly true even when state courts are fully “open for business” where the borrower’s operations and the creditor’s collateral are located in multiple states.

Similarities to state receiverships. Federal receiverships are similar to traditional state court receiverships but they have nationwide scope and may avoid many of the problems that arise from seeking and using multiple receivers, each from a court in a different state. They are historically recognized by federal law and are recognized and governed by the Federal Rules of Civil Procedure.

Like state court receivers, federal receivers are officers of the appointing United States district court. The district court may authorize a federal receiver to act across the entire United States, not just, as with state court receivers, within the state in which the receiver was appointed. Further, like many state court receivers, federal receivers may be authorized to sell receivership assets, thus avoiding the creditor having to take possession of the collateral or foreclose on it.

Other considerations about federal receiverships

Multi-state jurisdiction. Where there is operating real property collateral of a borrower or group of borrowers located in multiple states, a federal receivership may provide substantial legal, procedural, practical, and cost economies over multiple state court receiverships. Also, in a federal receivership proceeding, like in most state receivership proceedings, the petitioning creditor will have significant input into the court’s choice of the receiver.

Federal question or diversity required. But federal receiverships also have some limitations that state court receiverships do not have. Federal actions not based on federal rights require that there be complete “diversity” between the plaintiff creditor and the borrower/debtor defendant or defendants. Depending on the type of entities involved, this may be a hurdle to a federal receivership.

Grounds for appointment. Further, the grounds for appointment of a federal receiver are, generally, more limited than those for most state court receivers. The factors that typically warrant appointment of a federal receiver include the probability that fraudulent conduct has or will frustrate the creditor’s claim; the imminent danger the subject property will be concealed, lost, or diminished in value; the inadequacy of legal remedies; the lack of less drastic equitable remedies; and the likelihood that appointing a receiver will do more good than harm. Fraud, however, is not a required factor.

Receivership sales. Another big difference between federal and state court receivers is with respect to private sales of collateral. Federal law authorizes private receivership sales that are subject to court confirmation with three disinterested appraisals where the sale price is at least two-thirds of the appraised value and there is an opportunity for overbidding. However, even these requirements may, in the proper circumstances, be worked-around. Public receivership sales at auction, on the other hand, are very much the same as those of most states.

If you hold or service a loan with multi-state collateral and borrower operations, and are interested in learning more about how a federal receivership may provide a very useful and effective remedy instead of multiple state court receiverships, please contact the undersigned. Jeffer Mangels Butler & Mitchell LLP has significant experience in assisting creditors and servicers in these situations.

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Who we help. We assist banks, special servicers, and other financial institutions with all aspects of distressed projects, including forbearances, loan modifications, recapitalizations, receiverships, workouts, turnarounds, restructurings, and bankruptcies.

Wide-ranging experience. The size of the troubled loans we have worked on ranges from a few million dollars to billion-dollar properties and portfolios; as of April 21, 2020, we have been engaged on new distressed hotel and retail loans for two major lender/special servicers in excess of $1.2 billion.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. Please contact us if you would like to discuss any issues or development that affect your hotel interests. We would like to see if our experience might help you create value or avoid unnecessary pitfalls. Who’s your hotel lawyer?