Receiverships are a vital, indeed an almost required, aspect of any commercial foreclosure. They can even have a role in a residential foreclosure, for example when the borrower is renting out the premises (more meaningful for a two, three or four family house). So, consideration of a receiver in many foreclosure actions is an option to weigh.
Having made that recommendation however, it must be noted that sometimes receiverships do not proceed as effortlessly as might be expected.
Out of state mortgage lenders and servicers B or those in New York who less often encounter the situation B are astounded at how inefficient some foreclosure receiverships can be. The receivership, of course, is designed to benefit all parties (but likely the plaintiff more), not to make the process more cumbersome.
What is it which so confounds the uninitiated (and even the veterans)?
APPOINTING THE RECEIVER
It can take longer than it should, or longer than might be expected. Although the papers prepared by plaintiff’s counsel to appoint the receiver are fairly extensive, servicers can assume that counsel will attend to this quickly and that it is a matter of the court reading the papers and signing an order. Back in the late seventies and early eighties, this consumed perhaps a day or two. The world has changed since then, however, and now the process tends to be measured in weeks, sometimes much longer in the five boroughs of New York City. If there is genuine exigency, counsel’s emergency affirmation can certainly shorten the time, but that is only under unusual circumstances.
WILL THE RECEIVER SERVE?
Sometimes when finally the receiver is appointed, counsel contacts him and he chooses not to serve, either because he doesn’t know what to do, or he is too busy, or there is a perceived conflict, or the prospective commissions are not to his liking. Mindful that the receiver is paid a maximum of five percent of the sums collected, a residential property or a group of very few stores, for example, might not provide adequate compensation for the efforts expended. (Of course, the major commercial property can be a bonanza.)
If compensation is the issue, sometimes the court will require the foreclosing plaintiff to pay the receiver a typical attorney’s hourly billing rate, perhaps $250 to $500. (There is no legal authority for this where the receiver actually collects income, but sometimes this is imposed nonetheless.) While that sum is reasonable in New York, there is no telling how many hours the receiver might devote to the property so that the open ended aspect of the payment could prove more than unsettling.
Should the receiver not be persuaded to serve B money issues notwithstanding B then the court needs to be asked to appoint another receiver. While this sometimes would not require the formality of a new order, it still adds time to the process, obviously slowing down what is expected to be something that moves quickly. And in a significant percentage of such cases a new formal application is required.
DOES THE RECEIVER DO THE JOB?
In any business or profession, there are those who are devoted and those who are not. While most lawyers appointed to be receivers approach the responsibility with the requisite dedication, a few may be less assiduous. And the problem can be two-fold. A receiver could be too occupied with other pursuits to prosecute the receivership with appropriate diligence or, endeavoring to work hard, nevertheless is just too inexperienced to do the job well. In either instance, the result is unsatisfactory when the receiver does not properly attend to maintenance of the property and collection of income. It really does require a certain level of expertise and caring and anyone lacking those qualities could create an unsatisfactory result.
THE ISSUE OF RECEIVER’S COUNSEL
Although a receiver is almost invariably an attorney (he need not be as a matter of law however) he is not expected to be a litigator. So, should tenants not be paying, that is one of a number of the occasions where the receiver needs counsel and a specific additional court order is required to approve the engagement. Although the fees the attorney charges are subject to court scrutiny, there have been occasions where courts have been overly generous in paying those attorneys for work which should have been done by the receiver and encompassed by the receiver=s commission. This problem is not an epidemic, but there can be room here for concern from time to time.
THE RECEIVER’S MANAGING AGENT
As a practical matter, an attorney appointed to be a receiver is not a professional property manager and therefore would understandably insist upon the authority to engage a managing agent. That is almost always appropriate, although the managing agent is then paid a commission of perhaps four to seven percent of the income. In essence, the agent manages the property on a day to day basis with executive decisions being made the receiver (assuming the requisite dedication on the latter’s part.) A professional managing agent can be a major plus for any receivership, although in very rare instances, the managing agent might be inefficient. This tends not to be a problem, but the factor of the inevitable managing agent’s commission is to be borne in mind in advance. (Here too, a separate order is needed to appoint a managing agent B who must be on New York’s approved list.)
REPLACING THE RECEIVER
If a receiver does not attend to the stewardship of the property, he can be replaced, but this requires a motion on notice to the receiver. Obtaining the order for a successor can sometimes consume weeks or months, depending upon the county within the state. Thus, there should be a solution to the inept receiver problem, but it adds time to the case.
SUING THE RECEIVER
A receiver cannot serve until he files both an oath and a bond. (In rare, highly unusual cases a court might dispense with the bond.) With a surety standing behind the receiver to pay for any defalcations, there is a source of recompense if the receiver causes damage to the property or does not properly account for monies received. The receiver can also be personally liable for certain acts, although foreclosing plaintiffs are certainly not seeking additional lawsuits. It helps to note, though, that remedies against a receiver or his bonding company do exist.
The cited litany of possible difficulties with receiverships is not designed to suggest that a receivership should not be pursued in a case where it is necessary. Rather, it is presented to highlight some of the practicalities so that servicers can approach the receivership cases with a more enlightened view of timeframes and pitfalls.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.