When should you ask the Court to put a receiver in place?

Under many loan documents, lenders will have the right to appoint a receiver in the event of a default under the loan. In such circumstances, a receiver may be needed to take charge of the property in order to avoid dissipation and waste of the lender’s collateral. One example is a commercial building, where the owner is collecting rents but is not using those rents to pay the loan. In such a case, a lender which has initiated a foreclosure suit may want a receiver appointed to manage the building, collect the rents and place them into a designated account during the course of the litigation.

Although the loan documents may provide receivership as a right, the decision whether to ask the Court to appoint a receiver is one that should be carefully considered. First, lender’s counsel will need to show waste or risk of loss to the value of the collateral. Lender’s counsel must also be prepared to show the Court that the value of the collateral is less than the debt owed. If a creditor wishes to object to the receivership, they may be able to post a bond as security, but they are typically unwilling or unable to do so.

Lenders considering receivership should also evaluate whether the goal of the receivership will be liquidation, or whether it would be more beneficial to ask the receiver to manage and maintain the property. This is sometimes referred to as an “operating receivership.” Of course, these types of receiverships can be costly. The value of preserving the collateral through receivership should outweigh the costs of the receivership. But whether liquidation or operation is the goal, in each case, a lender should consider the expense of receivership in deciding whether to make a receiver part of the bank’s litigation strategy.