Creative Use of Receiverships to Solve Environmental, Construction and Other Problems in Distressed Projects
Appointment of a receiver is a flexible remedy for solving serious business problems in distressed projects while reducing delay and risk. A receivership can provide (in addition to reliable management of a property approaching foreclosure) court supervision and certainty without the delay and expense of bankruptcy.
Even more important, appointment of a receiver can be a creative tool to fix common problems arising in troubled real estate projects-including avoiding potential environmental liabilities, completing a "broken" construction project and facilitating the sale of distressed property.
Using Receiverships to Avoid a Lender's Potential Environmental Liability
Secured lenders are often reluctant to foreclose on properties where there are environmental problems, based on concerns either about the practical aspects (including signing manifests to dispose of chemicals and complying with applicable law) or about liability under environmental laws (as a deemed owner or operator). Lenders can avoid both the practical problems and liability under California law by arranging for the appointment of a receiver for the property. California Civil Procedure Code Section 564(c) authorizes a receiver to inspect the property to assess the existence and magnitude of hazardous substance releases, and the order implementing the receivership (typically prepared by the lender) can authorize the receiver to remedy contaminated property. Because the receiver is entitled to quasi-judicial immunity as an officer of the court (see California Rule of Court 3.1179), he is not subject to liability as an owner or operator of contaminated real property if acts are taken as specifically directed by the appointing court. (Typically, under a later order submitted by the receiver.) The lender also is not liable because it is neither an owner nor operator of the property in the receiver's charge.
Employing Receiverships to Complete a Broken Construction Project
Frequently (and particularly recently) a developer-borrower lacks the resources to finish a construction project, and contractors are unwilling to keep working without assurance of payment. In those circumstances, a receivership can be utilized to complete the project based on the protections afforded by California law. The court order that establishes the receivership and the receiver's powers (which is typically prepared by the lender with approval by the receiver) often includes language authorizing the receiver to take steps necessary to finalize a project, including employing and paying contractors and vendors as the receiver deems appropriate. The debts for such goods and services are generally entitled to payment priority over all pre-receivership obligations, although subject to debts secured by receivership property, such as those of the secured lender and mechanics lien claimants. We are currently representing the receiver of the Ritz Carlton Hotel at Northstar near Lake Tahoe, California, where we are using these techniques to resolve construction issues.
Utilizing Receiverships to Aid the Sale of Distressed Property and Maximize Value
In any distressed sale where there are different levels of debt and equity, it is often difficult to get cooperation, consensus or even clear title without a risk of later litigation. A receivership can be used to facilitate the sale of property and to avoid those problems. California Civil Procedure Code Section 568.5 authorizes a receiver to sell property according to a court's order. Such a sale can result in delivering "clean title" to a buyer, based on the court's authorization for sale free of liens, claims and interests in the property (which attach to the sale proceeds). Parties objecting to the sale can have their objections addressed and overruled prior to the sale (rather than waiting years to sue) and the presence of a hearing date and deadline to object drives the sale process to conclusion. A receiver's sale also relieves a lender from having to provide (or even negotiate over) representations and warranties to a purchaser (including implied representations of title in a grant deed) which might be necessary in a sale after a lender foreclosure on property.