Tasked to serve as a receiver with all aspects of property operations and management in a foreclosure action filed by a bank against a condominium, Colliers International, Inc. faced a hefty shortage of funds. Unable to pay current and future debts of the condominium for which it was appointed as a receiver, Colliers sought authority from the court to borrow up to $2,000,000.00 and to issue primed receiver’s certificates to secure the loan. The bank, who filed the foreclosure action, and who had first priority with its mortgage on the condominium property, objected. Though considered “well settled,” the issue before the court was whether or not the court could give a receiver authority to issue receiver’s certificates, and if so, under what circumstances. Bank of America, NA v. The Domaine de la Rive Condominiums, et al. 2013 WL 5217559 (E.D.KY.2013)
Receiver certificates are promises to pay amounts from a receivership fund, which are used to secure the debt. Receiver certificates are typically granted a first lien position on the property, despite any existing mortgages or liens. Because a receiver does not generally have the authority to incur debt on behalf of property it manages (its authority is created by the terms of the order of appointment), a court order is required for the issuance of the receiver’s certificates.
A court must first consider whether the receiver has been appointed to oversee the property of a private corporation or a public utility. Public utilities serve a vital function to the public and, accordingly, the issuance of receiver’s certificates for the purposes of preservation and for operation of the business may be considered warranted. Under this standard, a court would have more flexibility in authorizing the issuance of the certificates.
In contrast, if dealing with a private corporation, as was the case herein, the court may only authorize issuance of receiver certificates to secure funds necessary for the preservation of the property. A receiver’s certificate should not be authorized for the purpose of improving, adding to or carrying on the business of the company without the consent of the creditors whose liens would be affected. Citing another case which addressed the issue, this Court held “The authority to disturb existing liens for the purpose of securing receivers’ certificates should… be exercised with great caution and carried no further than actually necessary to attain the desired results.”
In the instant case, the receiver submitted a budget to support its motion to borrow funds. The Court found that the budget contained a number of cost items that were considered to merely be a benefit for the property, rather than solely for the preservation of the property. The Court additionally noted the difficulty in determining which items could potentially be preservation costs due to the vagueness of the line items. Finally, the Court acknowledged the necessity of reviewing the budget with a “fine tooth comb,” due to the potential loss the secured creditor may face if its security loses priority to the receiver’s certificate. Finding that the Court could not exercise “great care” in assessing the budget as submitted, the parties were required to provide additional information so the Court could accurately determine what items were for preservation costs.
In sum, a Court is authorized to order the issuance of receiver’s certificates. Due to the fact that it would likely displace the position of a prior lienholder, however, the reigns must be tightly held. In matters involving private corporations, a court may not permit this issuance of the certificates for any item unless it is clearly, and solely, related to preservation expenses.
For more information, please contact M&P attorney Molly E. Rose. The real estate law attorneys of Morgan & Pottinger, P.S.C. assist buyers and sellers of residential and commercial real estate with their transactions, as well as represent clients in real estate litigation and dispute resolution.