Navigating Receivership

By Paul Dincin and Richard Rappold

Court-appointed receivership has emerged as the method of choice to manage and protect distressed property during a foreclosure. During the 18 months it can take for a final judgement of foreclosure to be entered in some counties, a property without proper care and maintenance could lose almost all its value. That is a result neither an owner (borrower) nor a lender wants. Receivership is a fair and cost-effective way to address this problem because a receiver is a court-appointed, independent party that puts the protection of the property first. Their duty is to protect the property entrusted to their care for the benefit of all interested parties, while the court determines the right of various claimants to it.

Although the length of the receivership appointment will vary, it consistently prevents further decay and price erosion to the distressed property by taking control of the finances, taxes, insurance and maintenance. A receiver’s efforts can also increase the value of the property through professional management and operation, which are essential to generating income from the property. If the situation is complicated by stalled construction, the receiver can provide construction oversight and expertise, as well as preserve the improvements so that its maximum value will be achieved once the foreclosure is resolved.

Courts have the authority to appoint receivers of other types of property, however, this article is limited to receivers of real property pursuant to a mortgage foreclosure proceeding. The court’s authority and the receiver’s duties pursuant to a mortgage foreclosure proceeding are in large part governed by the Illinois Mortgage Foreclosure Law (“IMFL”). IMFL is the receiver’s guidebook. It sets out the receiver’s powers and obligations.

After the receiver is appointed by the court (usually at the request of the lender and sometimes with the consent of the borrower), the court will order the receiver to take possession of the property and its operations, including bank accounts and accounts receivable. The court may require a bond in an amount it feels is adequate to protect the borrower from damages caused by the receiver. The court may waive the requirement for a bond if the lender can establish good cause for the waiver.

Immediately after taking possession, a complete physical inspection of the property must be made. Any dangerous or hazardous conditions must be repaired at once and all fire and safety equipment must be in good working order. A list of any other defects should be made and matters of safety addressed first.

The receiver should contact the owner to obtain copies of all property documents, such as leases, surveys, title policies, tax bills, utility bills, rent roll, maintenance and service contracts and other documents relating to the operation of the property. Utilities, contractors and insurers must be notified to forward all bills to the receiver. The receiver should review all maintenance and service contracts to determine whether they are in the best interests of the property and reject any which are not.

If the property is vacant, it must be immediately secured. All entrances and windows should be boarded up. If the property is occupied by tenants, then the receiver must notify each tenant of the appointment and instruct them to send all rent payments to the receiver and verify all security deposits. If there is no current insurance policy, the receiver must obtain one as soon as possible. If there is an existing policy, the receiver should notify the insurer of the appointment, add the receiver as an additional insured and request notification of any changes to or termination of the policy.

Real estate taxes need to be paid so the receiver must review the tax records. If taxes are past due, the receiver should notify the lender to ask whether they will advance the funds. The taxing authorities should also be notified of the new mailing address.

Once the receiver is established as operator of the property, she becomes responsible for all of the day-to-day issues concerning the property. The receiver must manage the property as a reasonably prudent person would manage their own property. The receiver may hire a management company, but remains liable for their actions and may have their fees adjusted by the court. A receiver has the authority to lease the property; collect rents; insure the property; employ legal counsel, custodians and other help; and pay the taxes. Any activity outside of those authorized by IMFL should be taken only after receiving the court’s authorization.

To the extent that the receiver collects adequate revenue, the receiver must maintain the existing insurance, maintain the property in the same condition as existed at the time of appointment and make repairs needed to comply with building codes. If revenues are not sufficient to pay these expenses, the receiver should request the lender advance the funds needed to protect its collateral.

Receipts from the operation of the property are applied in the following order of priority:

1. Reimburse the receiver for reasonable costs and expenses;
2. Payment of insurance premiums;
3. Payment of management fees;
4. Payment of receiver’s fees as approved by the court;
5. Payment of the costs of maintenance, operating
expenses and common assessments;
6. Payment of mortgages which are not a subject of the
litigation;
7. Payment of premiums for additional insurance authorized
by the court;
8. Payment of repairs and improvements needed to bring
the property to code or pursuant to a contract; and
9. The balance to be held or disbursed as ordered by
the court.

Frequently an owner will challenge the decisions and fees of the receiver, which often results in further delays to the foreclosure case. A receiver may even be sued for actions taken without receiving the prior approval of the court and which could allegedly result in damage to a party with an interest in the property. Therefore, it is very important for the receiver to either follow the requirements of IMFL or obtain the court’s approval prior to taking the action. Since a receiver must regularly report to the court, the receiver should anticipate, and advise the court and all parties to the litigation, of any actions to be taken which are outside the ordinary course of operating the property. Any leases, even if authorized by the IMFL, should be presented to the court for approval. Any repairs or maintenance which may be done on a non-emergency basis should also be presented to the court. If the court approves the action, the receiver is generally immune from suit unless the receiver deviates from the court’s authorization. Any lawsuit against the receiver is usually heard by the court which appointed the receiver. Accordingly, if there is a material change in the terms of a lease or repair contract, it is best for the receiver to obtain the court’s consent.

Court-appointed receivership in mortgage foreclosure cases is an independent and efficient way to protect and increase the value of a property which offers positive results for both the owner and lender. However, since the receiver is an officer of the court and not a representative of the lender, the receiver should have his or her own independent legal counsel. The receiver’s attorney should be approved by the court and will guide the receiver through the legal issues which will arise and will present the receiver’s petitions for authority to conduct any non-authorized activity and requests for payment of fees and costs.

  • Scott Seger says:

    Very informative, great article.

  • jerry dincin says:

    Paul , this is a very clear article. It serves as a primer for anyone interested in receivership and is a great idea to have it written and published.

    Good work!

    jerry Dincin

  • David says:

    if there is a mortgagor in possession, while a receiver has been appointed, does the receiver have the right to evict if the mortgagor is not paying rent?
    that way he can lease out the property and make money on it.

    thank you

  • Frank says:

    Does a receiver need to file any tax returns for the property? I had to obtain an EIN as receiver. Is this still mortgagor responsibilty?