What is a Court Appointed Receiver?
Submitted by S. Leonhard
In certain situations where a company or individual is in default on loan obligations, such lenders or creditors may seek appointment by an authorized court of law of a Receiver to safeguard their interests. The Receiver is an independent party to the foreclosure and reports to the court. His responsibility is to preserve the property and his duties include collection and application of rental income from the property and preservation of the property’s physical plant. The Receiver reports to the court at certain intervals and is usually required to post a bond to protect against any mismanagement or wrongdoing.
In New York, the time frame for completion of a foreclosure action is generally between 9 month and one year. These time frames are increasing due to the current volume of cases pending before the court and lengthy delays can result from the motions filed by the mortgagor in an attempt to forestall the foreclosure sale. Facing uncertainty as to the time required to foreclose on a mortgage, lenders with loans secured by income producing real estate often use a court appointed Receiver to protect the rental income stream of the collateral property and prevent decay in the value of the real estate.
The appointment of a receiver also reduces the exposure to the lender of certain other liabilities created when becoming a mortgagee in possession. These include the potential injuries to third parties while on the property, violations of zoning laws and municipal ordinances, waste, deterioration and vandalism of the property, vacancy and non-paying tenancy and the siphoning of rents away from the property. As a bonded officer appointed by the court the rent receiver virtually eliminates the lender from much of this exposure.
The appointment of a receiver lies within the discretion of the court. The court looks to whether the appointment is necessary to protect the interest of the lender with a particular emphasis on whether the collateral is in a precarious or uncertain position. Factors supporting the appointment of a Receiver include the inadequacy of the property to satisfy the indebtedness, misappropriation of rents, failure to pay real estate taxes, failure to insure the property, failure to keep the property in good repair or a decline in property value.
In New York, payment of compensation to the receiver may not exceed 5% of the rents collected. The compensation is agreed to and placed in the order appointing the receiver. In the event the receiver does not collect sufficient funds to satisfy his expenses, the party who for the appointment is charged with paying the balance due. With approval from the court the Receiver may appoint other professionals such as legal counsel, property managers and appraisers.
Once the foreclosure action has been completed the Receiver is required to make a final accounting to the court. Upon review and approval, the court issues an order discharging the receiver form further responsibility of the property and directing the Receiver as to how the funds accumulated during the Receiver’s term of engagement are to be disbursed.