Court Preservation of Real Estate Assets: Receiverships and Bankruptcies

 

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Court Preservation of Real Estate Assets: Receiverships and Bankruptcies Neal Fellenbaum, Esq. Zegen & Fellenbaum (212) 986-4848 [email protected]   Allen G. Kadish, Esq. DiConza Traurig Kadish LLP (212) 682-4940 [email protected]

Michael Feldman Choice New York Management 212-982-3600  [email protected]

 

Copyright © 2014 National Law Institute All Rights Reserved www.nationallawinstitute.com

   

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Table of Contents:   RECEIVERSHIP   I.

Overview:  What  is  a  receivership?  …………………………………………………………………            4  

II.

A  person  is  requested  by  a  judge  to  be  a  receiver.    What  information  should  that   person  obtain  and  what  questions  should  he  ask?  ……………………………………......          7  

III.

An  appointee  decides  to  accept  the  receivership:  what  should  he  then  do?  …              20  

IV.

Secondary  appointments  ………………………………………………………………..……………              28  

V.

Keeping  good  records  ………………………………………………………………………….……….            32  

VI.

Operating  During  Receivership  …………………………………………………………………….          32  

VII. Liability  of  the  Receiver  ……………………………………………………………………………….          34   VIII. Receiver’s  Commissions  ……………………………………………………………………………….          35   IX.

Interim  and  final  accountings;  interim  and  final  applications  for  legal  fees  ….          37  

X.

Getting  Paid!  ………………………………………………………………………………………………….    40  

XI.

Finishing  the  receivership  -­‐  getting  discharged  ……………………………………………….    41  

BANKRUPTCY   I.  

Overview:    Bankruptcy  Policy  …………………………………………………………………………      42  

II.  

Types:    Chapter  11,  Chapter  7    …………………………………………………………………………    43  

III.   Key  Concepts  ……………………………………………………………………………………………………  43    

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a.  

Property  of  the  Estate  …………………………………………………………………………    43  

b.  

Automatic  Stay  …………………………………………………………………………………..    43  

c.  

Debtor  in  Possession  …………………………………………………………………………..  44  

d.  

Trustee  or  Examiner  ……………………………………………………………………………  44  

e.  

Operation  in  Ordinary  Course  …………………………………………………………….  44  

f.  

DIP  Financing  ……………………………………………………………………………………..  44  

g.  

Sales  ………………………………………………………………………………………………….  44  

h.  

Contracts  …………………………………………………………………………………………..  44  

i.  

Plan  …………………………………………………………………………………………………..  45  

IV.   Receivership  ………………………………………………………………………………………………  45   a.  

Turnover  …………………………………………………………………………………………..  45  

b.  

Excuse  from  Turnover  ……………………………………………………………………….  46  

c.  

Key  Concepts  …………………………………………………………………………………..  ..46   i.  

Duties/Structure  ……………………………………………………………………….  46  

ii.  

Retention  of  Professionals  ………………………………………………………..  46  

iii.  

Reporting/Transparency  ……………………………………………………………  46  

iv.  

Conclusion  of  Role  …………………………………………………………………….  46  

v.   V.  

1.  

Bankruptcy  Court  ………………………………………………………………46  

2.  

State  Court  ………………………………………………………………………  46  

Compensation  ………………………………………………………………………….46  

Other  Types  of  Receiverships  and  Status  in  Bankruptcy  ……………………………….  47    

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RECEIVERSHIP

I.

Overview: Methods that State and Federal Courts employ to preserve assets This outline will explore how State and Federal Courts can and will preserve assets pending litigation to dispose of them. For example, creditors seeking to foreclose on mortgages often have to apply to a court (usually a state court) for a receiver to safeguard a property while going through the time consuming foreclosure process. Additionally, parties involved in a corporate or partnership dispute may seek to have a receiver appointed to preserve the assets pending resolution of the dispute. Parties (debtors or creditors) may also seek relief from Federal Bankruptcy Courts to preserve and dispose of property. The appointment of a state court receiver often prompts one or more of the parties to file for bankruptcy. The Bankruptcy Courts have separate and very different methods of accomplishing this objective, and may appoint individuals or entities to achieve this. This outline will provide a an overview of how state and federal bankruptcy courts operate to preserve property. First, we will provide general discussion of what a New York state court receiver is, what a such a receiver does, the operational aspects of receivership, and how the New York courts treat receivers and the various issues encountered by them. References to “receiver” in this outline will mean, unless otherwise indicated, a receiver appointed by a New York State Court. Receivers are also appointed by Federal Courts, but such appointments are far less frequent that appointments by the state courts. Second, throughout this outline, we will discuss the ethical issues a prospective appointee for a receivership and the receiver himself/herself might encounter under Part 36 of the New York State Court Rules, which is a unique set of rules governing appointments by New York State Courts. In many respects, Part 36 has provisions analogous, if not very similar, to the Rules of Professional Conduct. Third, we will provide a summary of basic federal bankruptcy concepts, and discuss the intersection of receivership and bankruptcy law. A. The Receiver is a judicial officer considered an impartial “arm of the court.” 1.

New York Court of Appeals description of a receiver: “A receivership is a creature of the court” subject to the control of the court at all times, and functions in the place of and as the instrumentality of the court itself. As a special “officer of the court” (see Copeland v.

 

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Salomon, 56 N.Y.2d 222, 228, 451 N.Y.S.2d 682, 436 N.E.2d 1284) with “fiduciary responsibilities” the receiver acts solely on the court's behalf and is otherwise a stranger to the parties and their dispute.” Matter of Kane, 75 N.Y.2d 511, 515, 553 N.E.2d 1005, 1007, 554 N.Y.S.2d 457, 459 (N.Y. 1990). 2.

Primary function of a receiver: To preserve the property or estate from harm while the underlying dispute is resolved.

3.

Principle no. 1: As “an arm of the court,” the receiver is answerable to the judge that appointed him/her and to no one else.

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Principle no. 2: First and foremost, the receiver is a fiduciary, and fiduciary principles govern the way a receiver acts. A fiduciary has the duty to act in the “utmost good faith” and honesty. Funds held in your possession as a receiver are not, and will never be, your money. A receiver’s fiduciary duties with respect to receivership funds are completely analogous to an attorney’s fiduciary responsibilities toward escrow or trust funds in his/her possession as set forth in Rule 1.15 of the Rules of Professional Conduct.

5.

Principle no. 3: The powers and duties that a receiver has are defined by (a) the statute under which he was appointed, e.g., Article 64 of the CPLR; and (b) more importantly, the order appointing the receiver. Thus, for example, CPLR 6401(b), the principal receivership statute, provides that “the court appointing a receiver may authorize him to take and hold real and personal property, and sue for, collect and sell debts or claims, upon such conditions and for such purposes as the court shall direct…Upon the motion of the receiver or a party, powers granted to a temporary receiver may be extended or limited or the receivership may be extended or limited or the receivership may be extended to another action involving the property.”

 

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6.

7.

Some of the types of matters in which receivers are appointed: (a) foreclosures; (b) business disputes (corporate dissolutions and disputes, partnership disputes, etc.); (c) enforcement of judgments; and (d) matrimonial cases. How is a receiver appointed: (a) By application to the court (b) Applications can be made by motion or ex parte; many mortgages provide for a “strict right” of foreclosure whereby an applicant may apply ex parte (without notice) for the appointment of a receiver. Mortgages with such provisions typically provide that in the event of a foreclosure a receiver may be appointed “as a matter of right and without notice to the Mortgagor and without regard to the adequacy of the Property for the repayment of the indebtedness secured hereby.” See, CSFB 2004-C3 Bronx Apts LLC v. Sinckler, Inc.,---N.Y.S.2d---, 2012 WL 2428244 (1st Dept.) (c) In cases other than mortgage foreclosures courts often describe the appointment of a receiver as an “extreme” or “drastic” remedy necessary to stop the danger of irreparable loss or damage to property and to protect the interests of the parties. See, e.g., Suissa v. Baron, 2013 WL 2421008 (2nd Dept. 2013); Moran v. Moran, 77 A.D.3rd 443, 908 N.Y.S.2d 661 (1st Dept., 2010) (d) A court cannot sua sponte (on its own motion) appoint a receiver. Gosine v. Sahabir, 91 A.D.2d.3d 910, 937 N.Y.S.2D 316 (2nd Dept. 2012)

II.

A person is requested by a judge to be a receiver. What information should that person obtain and what questions should he ask? A.

Is it a State or Federal Court Appointment? 1. If it is a New York state court appointment, the provisions of Part 36 (22 NYCRR §36, et seq.) of New York’s court rules regulating appointments by the court will apply. A copy of the Part 36 Rules is annexed as Exhibit no. 1 and can also be found here: http://www.nycourts.gov/ip/gfs/Part36RulesFINAL_1.pdf.

 

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B.

2.

If it is a federal court receivership, state restrictions do not apply. Because of the lack of Part 36 restrictions imposed by Part 36, and the fact that Federal Court judges will listen to the requests of counsel seeking the appointment, Federal District Court appointments are preferable. Recently, some national banks, banks, i.e., banking institutions chartered and supervised by the Office of the Comptroller of the Currency, an agency in the U.S. Treasury Department, under to the National Bank Act (the have the term “N.A.” after their names, have been using their jurisdictional rights to commence foreclosure actions federal courts, have been bringing foreclosure actions in the local District Courts, e.g., the Eastern District. The purpose is to avoid backlogged state court dockets.

3.

If it is a state court appointment, Part 36 rules may prevent an appointee from accepting an appointment.

For all intents and purposes Part 36 comprises a set of ethics rules specifically governing the appointment of New York court appointees and important aspects of their conduct as such fiduciaries.

1.

The Missions of Part 36’s rules: (a) to ensure that appointments by New York State Courts avoid actual or potential conflicts of interest or the appearance of impropriety, and are otherwise fair. (b) to ensure that individuals are appointed on the basis of merit and competence.

2.

B C.

Accepting a state court appointment; ethical and practical factors to consider: 1.

 

Part 36 was enacted in reaction to patronage scandals (principally in Brooklyn) in which the appointments of court fiduciaries were tainted by favoritism, nepotism, “or other factors unrelated to the qualifications of the appointee or the requirements of the case.” Very similar to principal tenets of the Rules of Professional Conduct, Part 36 seeks to eliminate conflicts of interest and any appearance of impropriety in judicial appointments. Thus, Part 36 provides guidelines for the appointment of judicial fiduciaries and how those appointees should conduct themselves after they are appointed.

When does the appointment become “effective?” 8  

The appointment does not vest, i.e., it does not become effective, until the appointee accepts it, and files his or her oath and bond. 2.

The three questions that must be answered before an appointee can accept an appointment: (a)

Am I on the court’s list of eligible appointees for the county in which the appointment occurs?

(b)

Even though I am on the list of eligible appointees, is there a factor that will cause me to be disqualified? and

(c)

Even though I have passed the above tests, do I want to accept the appointment?

(If you are not on the list of eligible appointees, as set forth below, a court can appoint you outside the list under certain conditions; however, you still must deal with questions B and C.) Thus, before the appointee can even think about accepting an appointment, the appointee must determine (a) whether he or she is qualified to accept an appointment, and (b) if so, whether certain factors will disqualify him or her from accepting the appointment. 3.

First question: Are you qualified under the Part 36 Rules to accept an appointment? (a)

One must be on the Court’s list of eligible appointees who must be individuals, not entities:

Under the Part 36 rules, individuals, not the firms they are associated with, are appointed as the fiduciaries. Unless the court appoints an individual outside of the lists, pursuant to strict conditions discussed later, an individual must be on the court’s list of eligible appointees to accept the appointment. The New York State Office of Court Administration administers the lists and vets the people who are on them. With respect to receiverships in property matters, the court cannot appoint a person who is not on the court’s list of approved appointees in the appropriate category. (b) Categories relevant to appointments in real property matters:  

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(1) receivers (2) counsel (3) accountants (4) appraisers (5) property managers (must be licensed real estate brokers) (6) real estate brokers (must be licenses) (c) A person seeking appointment as a receiver must take a training course to become eligible to be a receiver: To get on the receiver eligibility list, you have to take a training course. An approved provider of receiver training courses is the New York State Bar Association, which gives these courses several times a year. A person does not have to be an attorney to be eligible to be a receiver. Non-attorneys can also get on the list of individuals approved for receivership appointments. (d) How does one get on the court’s list of approved individuals? A person who is interested in being appointed as a receiver may apply through the Office of Court Administration. The Office’s website is https://iapps.courts.state.ny.us/fiduciary/jsp/instructions.html. You can contact the Office via this email: [email protected]. On the website, there is an online form (UCS form 870 – attached as Exhibit No. 2) that can be submitted electronically, and then the applicant must send a hard copy to the court’s Fiduciary Office with other required documents, such as proof that the applicant took a receiver training course. Depending on the workload of the Fiduciary Office, it can take as little as two weeks or as long as 6-7 weeks to be approved. Lists of categories of eligible appointees are kept for each county. In order to be appointed by a judge in a particular county, a person seeking an appointment has to be on the approved list for that county. For example, a candidate might want to accept appointments only for Manhattan (New York County) matters, but not in Suffolk County, which might be too far away. Thus, the potential receiver may choose only to be on a New York County list. A Suffolk County J.S.C. would not be able to appoint the applicant because he is not on the Suffolk list. Typically, once an applicant qualifies, he should choose as many counties as practicable for appointments. One can never know where a good appointment might come up. But remember, just because a judge may ask a potential applicant to be a receiver does not mean that he should accept a particular appointment. (e)  

The Court’s lists of appointees; the court’s fiduciary website: 10  

The Court’s Fiduciary Home page, https://iapps.courts.state.ny.us/fiduciary/jsp/home.html is a very useful source of information for all fiduciaries, and should be consulted for questions regarding any fiduciary appointment. On this page, one can find information regarding the following: Eligible Lists: Individuals eligible for appointment by category/county Notices of Appointment: Identifies individuals who have been appointed within the past 12 months, the cases in which they have been appointed, and the judges who have appointed them. Approved Compensation awards: Identifies the fee awards made to appointees. (f) Part 36’s objective of curbing corruption and favoritism does not address some practical business realities It should be noted that the Part 36 fiduciary regulations were drafted as a reaction to the patronage scandals that plagued Supreme Court and Surrogate’s Court judges, principally in Brooklyn. However, they are silent on many important issues and have not been drafted to reflect the way, for example, law is practiced or the way the real estate industry functions. Some Examples: Real Estate Broker commissions: In most real estate rental transactions there are two brokers sharing the commission on a co-broker basis, i.e. there is broker for a receiver/lessor and a broker for the lessee. In this situation, under normal circumstances the receiver might be required to pay 1½ commissions, i.e., a ½ commission to receiver’s broker and a full commission to the lessee’s broker. But wait, the receiver may not be authorized to pay the lessee’s broker. What happens here? The law is unclear, but see below. Attorneys assisting appointed attorneys: An individual attorney is appointed as counsel to the receiver, but the matter is huge and complicated, requiring the services of more than one attorney. Can the appointed counsel use other attorneys in his firm? The rules are silent. As a practical matter, courts will permit the appointed counsel to utilize the services of his partners, associate attorneys and non-legal employees of his law firm, and allow the law firm’s statement for  

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services to stand as the statement of services of the appointed individual counsel. To be paid from receivership funds, the appointed individual counsel, will, on behalf of his law firm, have to file a motion to approve the law firm’s legal fees, supported by an affidavit of services. The affidavit of services must, among other things, have the firm’s time sheets with detailed entries of the services performed as an exhibit. It seems clear that the appointed individual counsel would bear the same responsibilities that a law firm would have under Rule of Professional Conduct Rule 5.1, e.g., “…ensure that the work of partners and associates is adequately supervised, as appropriate.” Rule 5.1(c). In several cases, to facilitate the case, the court has appointed law firms, notwithstanding the rules requiring appointment of an individual attorney, not a law firm. See Exhibit no. 3 (an order appointing a law firm, instead of an individual, as counsel to a receiver). In this case, the court felt it was necessary and appropriate to appoint a law firm because collective resources of a case were necessary to get the job done. Putting this another way, where the Part 36 Rules cause an unnecessary impediment, courts can and often will ignore them to properly administer a case. If one is not on the list, under the rules, a judge may appoint “outside the list,” i.e., people who are not on the list, if: (a) the court makes a written finding of good cause to make the appointment; and (b) the finding is filed with the court’s fiduciary clerk; and (c) the judge sends the appointment to the court’s chief administrator. As a general rule, a judge will appoint those who will handle the case smoothly and not cause the court any problems. IN ALL OF THE ABOVE SITUATIONS, notwithstanding what the rules may say, if the judge approves the appointment or payment, the activity is protected. Transparency in the appointment process and in the way the appointee operates is one of the most important and unstated touchstones of Part 36. See, e.g., Exhibit no. 3. 4.

Second question: Do the Part 36 Rules disqualify you from being appointed? Comparable to the goals of the Rules of Professional Conduct, Part 36 sets forth rules to assure that with respect to judicial appointments (a) there are no actual, apparent, or imputed conflicts of interest; (b) there is no favoritism; (c) competent individuals are appointed; and (d) there is transparency in the process. (a)

 

Persons who can never be appointed at any time by a NYS Court: 12  

(b)

(1)

Judges and their relatives (within the “fourth degree of relationship,” i.e., spouses, parents, children, siblings and first cousins. First degree relatives include parents, offspring, and siblings. An uncle/aunt, niece/nephew or a grandparent is a second-degree relative, a first cousin is a third-degree relative and a great-grandparent or great-grandparent is a fourth-degree relative).

(2)

People working for the courts.

(3)

Miscreants: (A)

Disbarred and suspended attorneys

(B)

Felons (forever)

(C)

Those who have been convicted of misdemeanors within the last 5 years.

Persons who cannot be currently appointed because of legal restrictions resulting from political or election activity: (1)

Relatives of Political Party Leaders: Rule 36.2(c)(4)(i): “No person who is the chair or executive director, or their equivalent, of a State or County political party, or the spouse, sibling, parent or child of that official, shall be appointed while that official serves in that position and for a period of two years after that official no longer holds that position. This prohibition shall apply to the members, associates, counsel and employees of any law firms or entities while the official is associated with that firm or entity.” (italics added) Thus, if any lawyer in a law firm is a political leader, no one associated with that law firm can be appointed.

(2)

Persons connected with the courts: Rule 36.2(c)(4)(ii): “No person shall be appointed who is a full-time or part-time employee of the Unified Court System. No person who is the spouse, sibling, parent or child of an employee who holds a position at salary grade JG24 or above, or its equivalent, shall be appointed by a court within the judicial district where the employee is employed or, with respect to an employee with statewide responsibilities, by any court in the state.”

 

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(3)

Persons connected with judicial campaigns cannot be appointed by the candidate judge within 2 years after his/her election: Rule 36.2(c)(5): “No person who has served as a campaign chair, coordinator, manager, treasurer or finance chair for a candidate for judicial office, or the spouse, sibling, parent or child of that person, or anyone associated with the law firm of that person, shall be appointed by the judge for whom that service was performed for a period of two years following the judicial election. If the candidate is a sitting judge, the disqualifications shall apply as well from the time the person assumes any of the above roles during the campaign for judicial office.”

(c) Persons who cannot be currently appointed because of the amount of “compensation” previously received from fiduciary appointments, or the amount of “compensation” anticipated to be received from a new fiduciary appointment: Rule 36.2(d): The following rules are limitations on the number and type of appointments that a person can receive. They are not limitations on the amount of compensation a person can receive from an appointment or or ongoing appointments. (1)

What is compensation?: Compensation means an award of court fees, commissions, allowances or other compensation, excluding disbursements.

(2)

Limitations on receiving more than one large fee appointment (described below) within a calendar year : What does “receiving” mean? For all practical purposes, receiving means accepting an appointment, i.e., filing the appointee’s bond and oath to start acting as a receiver. If the appointee does not accept or qualify for the appointment, e.g., in the case a receiver does not file his bond and oath, the appointment is not consummated. The court will appoint another individual and the appointment goes to the next party who will accept it. As set forth below, the appointee declining an appointment should notify the appointing judge, who will issue a new order appointing a new appointee (supplanting the old order), an order canceling the old order, etc. (A) The “$15,000” rule (22 NYCRR §36.2(d)(1)): “No person or entity shall be eligible to receive more than one

 

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appointment within a calendar year for which the compensation anticipated to be awarded to the appointee in any calendar year exceeds the sum of $15,000.” (italics added) This rule is highlighted by a checkoff box contained in Form UCS 782 which is filed with the Fiduciary Clerk upon acceptance of an appointment. This box inquires whether or not the Receiver anticipates fees in excess of $15,000.00 resulting from this Receivership. (B) How does this rule work? Hypothesis no.1: The appointee has already reached more than $15,000 in anticipatory fees during a calendar year from an appointment received earlier that year: If an appointee has already earned more than $15,000 in anticipatory receiver fees during a calendar year from a particular appointment received within that calendar year, whether or not he checked the box on form UCS 782, he clearly cannot receive another appointment of that size or larger during the same year. The policy underlying the rule, i.e., limiting the number of lucrative appointments to one a year, should also apply even if, at the time of the prior appointment, no one could have “anticipated” that it would be that remunerative. (He can, however, accept smaller appointments subject to aggregation limitations; see below) Hypothesis no. 2: The appointee has not previously received a large appointment during a calendar year, and is now appointed to what appears to be a very lucrative appointment, i.e., the appointee anticipates - but of course cannot not be sure - that he or she would be awarded more than $15,000 for this appointment, if it continues for several months. Because of the anticipated fees, the appointee checks off the $15,000.00 box on Form UCS 782. What does “anticipated to be awarded” MEAN? The wording anticipated to be awarded creates a minefield in which the appointee must carefully evaluate in deciding whether or not he or she should accept an appointment. For example: Suppose the case changes for the worse (from the appointee’s financial point of view) immediately after the appointment, e.g., the appointment prompts an immediate bankruptcy filing (see discussion of bankruptcy below) or settlement of the case (often happens). Can the appointee accept another appointment of $15,000 or more within the same calendar year? After all, from the outset, it looked like a great financial case that, prior to accepting the  

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appointment, the appointee reasonably anticipated would yield more than $15,000 in commissions or fees. But the appointee did not anticipate, nor could he or she have known, that the mortgagor would file for bankruptcy, thus rendering the appointment worthless to the appointee. In that case, is the appointee precluded from accepting another large appointment? Should the appointee have to guess at the onset what is going to happen before he or she earns a penny? This language has yet to be clarified. Under the literal terms of the rule, the appointee can’t accept another appointment, and that is grossly unfair. In this instance, the appointee already filed his notice of appointment (a UCS form 872; see Exhibit no. 4) with the court’s Fiduciary Office, and immediately thereafter the matter went into bankruptcy. At this point, the appointee has not earned a penny. If the appointee accepts an appointment, he must file a UCS 872 form with the Supreme Court’s Fiduciary Clerk. Checking the box on this form that the appointee has accepted an appointment in which he anticipates to be awarded more than $15,000, and filing that form with the Supreme Court Fiduciary Office, will, without subsequent action by the appointing judge, bind the appointee and preclude him from accepting another large appointment during the same calendar year. The form will be immediately transferred to the Office of Court Administration and cannot be amended by filing an amended form. The appointee will then need a court order from the appointing judge: (a) rescinding the court’s order appointing the appointee as the receiver and/or (b) permitting the appointee to amend the UCS form to show that the appointment was not an appointment anticipated to yield commissions in excess of $15,000. The rescinded or amended order should be presented to the court’s Fiduciary Office, making the appointee free to accept another appointment in excess of $15,000 during that calendar year. Practice tip: It is best to wait several days or perhaps a week before the appointee qualifies, i.e., files his bond and oath, and the UCS 872, with the problematic “more than $15,000” box checked. If, for example, the case goes into bankruptcy before the appointee can qualify (see discussion of bankruptcy below), he should advise the appointing judge in writing that he declines the appointment (i.e., the appointee will not have “received” it); then the appointee will be free to accept another appointment. Where there is any doubt that the order appointing the appointee will bind him in some way, it is always better (as noted above) to have the  

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appointing judge issue an order (a) rescinding his appointment, or (b) amending the filed UCS order to reflect that the appointment the appointee accepted was not, after all, an appointment anticipated to yield commissions or fees of $15,000 or more. (2)

Reiteration of the above Part 36 questions to be analyzed: Q.

Do you anticipate (whatever that means) that this appointment could yield $15,000 or more this calendar year? A. If “no”, you can take the appointment (smaller appointments can be accepted - subject to aggregation rules discussed below) A.

If “yes”, you have to see what else you accepted during the calendar year.

New question: Q.

(d)

Did you accept an appointment in the current calendar year in which the compensation was expected to be (or has actually been) more than $15,000? A. A.

If “no”, you can take the appointment. If “yes”, you must decline the appointment.

Q.

If you are forced to decline an appointment because it would violate the $15,000 rule, can you accept subsequent smaller appointments?

A.

Yes, subject to the $75,000.00 aggregation rule below.

Part 36 Aggregation rules that prevent an appointee from accepting an appointment: Being awarded more than $75,000 in fees in any particular calendar year prevents an appointee from receiving any appointment in the following calendar year: Language of the rule - Rule 36.2(d)(2): “If a person or entity has been awarded more than an aggregate of $75,000 in compensation by all courts during any

 

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calendar year, the person or entity shall not be eligible for compensated appointments by any court during the next calendar year.” Does this mean that if you earn $75,000 or more during a year on a particular matter, an appointee can’t earn more money on the same matter the following year? NO. It just means that the appointee can’t accept a new appointment in the following calendar year. An old lucrative appointment can continue. Also, the rule applies to an actual court award of fees, not just accrual of anticipated fees. For example, if you are appointed to a receivership of income producing property where it is anticipated that you will earn $10,000.00 per month, based on the rent roll, but you do not apply for your fees until one full year has elapsed from the date of your appointment, you are free to disregard aggregating fees from this receivership until the year in which you apply for, and the Court actually awards you fees in excess of $75,000. If you apply for fees in December 2011, but the award is not made until 2012, you would be ineligible for further appointments in 2013. You would, however, be eligible for further appointments during 2012. (1)

(2)

Questions to ask to determine preclusion from obtaining appointments in the year succeeding a year in which you were awarded compensation: Q.

How much was I awarded cumulatively in the prior calendar year?

A.

If that cumulative sum is more than $75,000, the appointee MAY NOT RECEIVE NEW APPOINTMENTS in the following calendar year. (This is not a cap; it is permissible for one to be awarded far more than $75,000 on ongoing matters during a calendar year.)

Q.

What about old appointments that I am handling that continue to pay well each year, i.e., more than $75,000 during a calendar year. Do I have to give those up under the aggregation rules?

A.

No. You can keep the old inventory.

Exception to the above limits: Continuity of service: The above limitations do “not apply where the appointment is necessary to maintain continuity of representation or of service to the same person or entity in further or subsequent proceedings.” Rule 36.2(d)(5)

5. Third question: Even if Part 36 does not disqualify the appointee, should he or she accept the appointment? Some practical factors to consider:  

18  

(a)

Who is the appointing judge? Do you know him or her? Knowing the judge will make it easier to get things done.

(b)

Which law firm is seeking your appointment? Do you know the firm? Some firms might have recommended you to the court. The law firm can make it easier or harder for you to do your job and get paid. In reality, a receiver will cooperate with, and want the cooperation of, the law firm that had him or her appointed. If there is no cooperation from the law firm, that could very well be an indication that the law firm’s client may attack you later on regarding your application for commissions and the fees of your secondary appointees, i.e., counsel to receiver.

(c)

If a bank is seeking the appointment of a receiver, which bank is it? Some banks are very cooperative and some are not. For example, if the receivership runs short of money and the receiver needs a protective advance, some banks might be better to deal with than others. Some banks are adverse to advancing money to protect their collateral, e.g., advancing money to the receiver to cure urgent building violations. If the bank says, “sorry, we won’t do this,” e.g., release to the receiver money needed for immediate repairs in light of an anemic rent roll, don’t take the appointment. The appointee will become ensnared in a quicksand of problems, requiring a lot of time for limited, if any, compensation.

 

(d)

What kind of receivership is it, e.g., a foreclosure, a business dispute, a matrimonial matter, a dispute among partners in a partnership, members in an LLC or LLP, or shareholders in a corporation? Foreclosures are usually easier because, in the main, the appointee is just dealing with the defaulting debtor and the creditor bank. However, the problem with foreclosures is that they often head to bankruptcy court. If the appointee is owed fees or commissions in a receivership, he or she will become an administrative creditor in the bankruptcy and he will have to apply to the bankruptcy court to get paid...not a good situation. Of late, U.S. Trustees in the Southern District of New York have been attacking applications for fees in bankruptcy court matters.

(e)

What type of property is the subject of the receivership: commercial or residential property? If the latter, is it a multiple dwelling? Residential buildings are more difficult to operate; according to a First Department decision, a receiver could be surcharged, i.e., have his fees reduced, eliminated or worse (possibly held personally liable if found to be grossly negligent, reckless or dishonest) for not curing “habitability issues.” See Fourth Federal Sav. Bank v. 32-22 Owners Corp., 236 A.D.2d 300, 653 N.Y.S.2d 588 (1st Dept. 1997).

(f)

What is the cash flow? Is there sufficient cash flow to cover expenses? If not, is 19  

the creditor prepared to supply necessary funds to the receiver to operate the property? The appointee might want to get that assurance before taking on a receivership. He does not want to find himself in the position of having accepted a receivership and then being forced to resign because the foreclosing bank won’t supply the appointee with funds. (g)

Does the building have multiple and/or serious building violations? If it does and the moving bank does not want to commit funds to fix them, it may not be worth taking on the receivership. If the property is in New York City, the appointee should look at the Department of Buildings web site to determine the violations on the property, or have a property manager the appointee knows find this out.

(h)

Is it a partially completed building - finishing construction may cause problems.

(i)

What are the chances that the matter may be thrown into bankruptcy? Foreclosures often are. If there are personal guarantors of the mortgage, there is a smaller chance that the matter will go into bankruptcy.

(j) If one accepts the appointment and it quickly ends or goes into bankruptcy, will the limits on compensation in Part 36 prevent him from accepting appointments in this calendar year or during the following calendar year? III.

An appointee decides to accept the receivership: what should he then do? A.

Make sure that the order has all the powers and tools the receiver needs to be effective. 1.

Making sure you have a sufficient and proper receivership order in place before you accept the appointment is the most important thing you can do. Good forms of such orders are attached as Exhibit nos. 5 and 6. The receiver can only exercise the powers that the appointing order gives him: A temporary receiver may exercise only such powers as are granted pursuant to statute (CPLR 6401[b]), as delimited by court order (Daro Indus. v. RAS Enters., 44 N.Y.2d 969, 970, 408 N.Y.S.2d 329, 380 N.E.2d 160 [powers limited to those enumerated in the appointing order]). As the Court observed in Kaplan v. 2108-2116 Walton Ave. Realty Co., 74 A.D.2d 786, 425 N.Y.S.2d 817, “A Receiver is an officer of the court and not an agent of the mortgagee or the owner * * * His duty is to preserve and operate the property, within the confines of the order of appointment and any subsequent authorization granted to him by

 

20  

the court” (citing Knickerbocker Ice Co. v. Benson, 155 Misc. 738, 740, 279N.Y.S. 86). A receiver is required to maintain itemized accounts of receipts and expenditures, which remain open to inspection by “any person having an apparent interest in the property” Jacynicz v. 73 Seaman Associates, 270 A.D.2d 83, 85, 704 N.Y.S.2d 68, 70 (1st Dept., 2000). This duty of a receiver is essentially the same as an attorney’s fiduciary responsibility under Rule of Professional Conduct 1.15 to keep accurate and detailed records of escrow and trust accounts. See Rule of Professional Conduct 1.15 (d)(1) (i) and (ii). 2.

Almost all receivership orders as submitted to the court are woefully inadequate and must be resubmitted for signature by the appointing judge before the appointee can accept the appointment.

3.

The receivership order is the template, the bible, as to what can the receiver can do. To reiterate: A receiver can only have the powers that are granted by the order. If a power the receiver needs is not in the court’s order, a motion must be brought to have the court give the Receiver the power that should have been there in the first place. An appointee must make sure that he or she has all the powers that the receiver needs to avoid having to go back to Court for every little thing. The purpose of the appointing order is not only to provide the receiver with the necessary tools, but also (a) to protect the Receiver by precluding criticism for exercising those powers, and (b) to provide transparency as to what those powers are. As one judge observed: “If you want to pave a driveway with gold bricks, you can do that provided the appointing order specifically allows you to do that.”

Or if the order does not specifically allow that, “you can do that after filing a motion with notice to the world to approve that and getting a court order permitting the receiver take that action.”

 

4.

Caveat: If the receiver ever has any doubt that the order of receivership does not give him the power to do something, always ask for the court to specifically permit it. Again, the overarching principle is that if the court blesses it, you cannot be criticized later for doing what the court permitted you to do. See Exhibit 7 (Order to Show Cause for Additional Relief).

5.

If the appointee is unhappy with the order, he may propose an amended order and ask the court to have a conference about amending it. 21  

B.

Powers that a receiver should have (hardly inclusive) 1.

The order should provide, among other things: (a)

 

That the receiver has the following powers and duties to: (1)

Manage the Property

(2)

Collect rents and funds and to demand, collect and receive same from the tenant or tenants in possession of said Property, or other persons liable therefor, all the rents, issues and profits thereof now due and unpaid or hereafter to become due must be paid directly to the Receiver or the Receiver’s managing agent.

(3)

Commence legal proceedings, i.e., be authorized to institute and carry on all legal proceedings necessary for the protection of said Property or to recover possession of the whole, or any part thereof, and to institute and prosecute suits for the collection of rents now due or hereafter to become due, and summary proceedings for the removal of any tenant or tenants or other persons therefrom. The receiver signs his own checks - not the usual requirement that the surety company sign the check.

(4)

Maintain insurance

(5)

Hire counsel (to be approved by the court as a secondary appointment)

(6)

Hire landlord-tenant counsel (to be approved by the court)

(7)

Hire a managing agent (to be approved by the court)

(8)

Enter into leases without court order - (usually 2 years for residential; 3 years for commercial). When there is something that may cause the lease to be questioned, e.g., it might appear that the rent is too low, always get a court order approving it; that will protect the receiver.

(9)

Prepare interim accountings at particular time intervals, e.g., quarterly, semi-annually, etc., and a final accounting when the Receivership ends.

(10)

Pay taxes 22  

(b)

 

(11)

State how much you can spend without court approval; e.g., make, without court approval, major non-emergency repairs not to exceed a certain specified amount.

(12)

State that you can make expenditures for emergency repairs (but even if this power is not specifically stated in the order, the receiver has inherent power to do so to protect and preserve the property)

(13)

Pay ordinary expenses (the order should state what the limits of those expenditures should be without the need to obtain court approval or perhaps the permission of the foreclosing mortgagee)

(14)

Pay municipal assessments

(15)

Allow the receiver to exercise the usual powers not hereby enumerated (the “catch basin” clause”).

That the operator/owner of the property must: (1)

cease and desist from operating the property

(2)

turn over to the receiver all of the following documents, funds and items in its possession, including, but not limited to: (A)

all rent security

(B)

all keys to entrance doors, storage and boiler rooms, etc. of the Property;

(C)

all leases or amendments thereto in effect for the tenants and equipment at the Property;

(D)

copies of all current rent rolls and tenancy lists relating to the Property;

(E)

a reconciliation of all security deposits and accounts, and a list setting forth each account number and the name of the depository where each account is maintained;

(F)

copies of all current financial statements, including, but not limited to, all documentation concerning delinquent tenants at the Property; 23  

(c)

 

(G)

all documents containing references to all utility accounts including, but not limited to, electricity, gas, heat, water and telephone service;

(H)

the names and account numbers of all utility companies servicing the Property;

(I)

copies of all insurance policies in effect for the Property and any part thereof;

(J)

copies of all contracts relating in any way to the Property including, but not limited to, contracts with vendors or other service personnel, or any union contracts covering building personnel;

(K)

Copies of all real estate tax bills on the Property, and the status of any tax certiorari proceedings;

(L)

a list of suppliers and copies of all contracts currently in force, including service and vendor contracts;

(M)

an employee roster and payroll information;

(N)

a list of any proceedings in any court regarding or relating to leases on the Property;

(O)

copies of any court stipulations for payment for rent or arrearages;

(P)

an equipment and inventory list; and

(Q)

(catch basin clause) such other items, records, or documents that the Receiver may reasonably require to lease, manage and maintain the Property (anything the appointee may have forgotten to put in with the kitchen sink but are necessary to operate the receivership.

The property owner and any person other than the receiver (e.g., the property owner’s managing agent) are enjoined from collecting rents and tenants are enjoined from paying anyone other than the receiver. 24  

If the owner does not comply with the directives of the order, the receiver can bring a motion to hold the owner in contempt of court. C.

D.

 

Judge picks a bank; you can recommend a bank to the judge 1.

This is very important. Sometimes (more often than not) a judge will leave the name of the bank blank and ask a proposed receiver to pick a bank; or a judge might permit a receiver to pick “any commercial bank” or TBC (to be chosen), usually by the receiver. See Exhibit no. 8.

2.

Having a bank a receiver can work with is very important. A receiver will need to contact his bank often to monitor the receivership account, get information quickly and make quick transfers of money for emergencies, etc. It is important to choose a bank in which the receiver has a close relationship with an officer. Having a difficult bank to work with can make a receivership a nightmare. For example: Suppose a commercial tenant pays by large wire transfers. The receiver wants to know immediately when the wire comes in. Or suppose the funds are lost in the wiring process, which can happen often. The receiver will want cooperative help in tracing it. Or if the receiver needs to send a mortgage payment to the foreclosing bank, say by wire or ECF transfer...the receiver wants to be sure that his bank effectuates the transfer to avoid late fees, etc.

3.

The receiver’s bank records are extremely important - he will need good bank records to prepare accountings required by the court. Having a cooperative and competent bank can be the difference between a smooth receivership and a nightmare scenario.

Choosing a managing agent: 1.

This is extremely important - a managing agent can make you or break you.

2.

The managing agent runs day-to-day operations.

3.

The managing agent keeps the books, very important for the courtrequired accounting.

4.

The managing agent is a receiver’s lifeline to the building

5.

The managing agent may have to testify in court.

6.

The receiver is responsible for the managing agent’s actions. If the managing agent acts or fails to act in an inappropriate manner, the buck stops with you. A managing agent is a vital bulwark from later criticisms for the operations of the 25  

receivership or to limit your exposure to liability. For example, a managing agent would make sure that all workers for a contractor are covered by Workers Compensation insurance. (The failure to have such coverage could render the Receiver personally liable for Workers Compensation claims. See Workers’ Compensation Law section 52(1)(c).)

E.  

7.

The managing agent will select contractors for the building; you, not the contractor or the managing agent, will be responsible for any problems.

8.

The managing agent will supervise work at the building.

9.

The managing agent will supervise or supply personnel at the building, e.g., individuals who are vital to the building’s operation.

10.

The managing agent is especially important in a residential building where a tenant can refuse to pay a receiver because the receiver did not cure “habitability” issues; as noted above, habitability claims can be raised against a receiver. See Fourth Federal Sav. Bank v. 32-22 Owners Corp. 236 A.D.2d 300, 653 N.Y.S.2d 588 (1st Dept. 1997), discussed above.

11.

The managing agent is an individual, not the management company or other entity with which the person is associated.

12.

The managing agent must be a licensed real estate broker.

13.

Before the managing agent can be appointed by the court, he must be on the Office of Court Administration’s (OCA) approved list of property managers.

14.

Managing agents are “secondary appointees,” i.e., the receiver, who is first appointed, must move the court to have the managing agent appointed as the property manager.

15.

The managing agent must be on the OCA Fiduciary’s approved list for each county in which the managing agent wants to work. So, if the managing agent is on the New York County list, but not on the Queens list, he cannot be appointed as a property manager in Queens.

16.

The managing agent signs a contract with the receiver; usually gets paid a percentage of the rent roll; should bill hourly for extra services; and should have the actual contract approved by the court. That way, the fee structure is approved by the court in advance.

Qualifying as a receiver 26  

1.

An appointee can’t act until he files a bond and oath. A sample bond and oath is attached as Exhibit no. 9. Once they are filed with the clerk, the appointee becomes the receiver, and all of his powers under the appointing order become effective.

2.

Surety bond: The party moving for the receiver should, and almost always does, pay the bond premium. It is foolish for an appointee to advance the premium himself. It is not easy anymore to get bonded. There are fewer bonding companies, and those that remain often demand detailed applications.

F.

3.

A bonding company will sometimes require you to sign checks with their signature, i.e., double signed checks. This is impractical, and many banks don’t like or permit this procedure. If the bond or order requires this, have this changed immediately by the Court and bonding company. As a general rule, the Receiver must sign all checks, except if the volume of checks is so great that a facsimile signature stamp must be used, in which case the receiver must put protections in place (see below).

4.

The bond is not cancelled unless and until at the end of the receivership, a court issues an ex parte order discharging you as receiver and canceling the bond. If such an order is not issued, the bond will stay open on the books of the carrier and you will have to pay the bond premiums as they accrue until the bond is cancelled.

5.

The receiver’s oath is a standard form that is almost always prepared by the bonding agent and sent to you with the bond to be filed. Both are filed at the same time with the court.

Insurance 1. The receiver should never qualify until necessary liability and casualty insurance is in place. 2. It is the responsibility of the party moving for a receiver to obtain and pay the premiums for the initial necessary liability and casualty insurance. Additional insurance needed later on, e.g., renewals, can be paid from receivership funds. 3. The receiver and his managing agent must be named as additional insureds on the liability policy. The receiver must be named as additional insured and loss payee on the casualty policy. If there is a loss, the receiver wants the proceeds check to go directly to him so that he can have the repairs made.

 

27  

4. The receiver has an insurable interest in the property. 5. The capacities of the receiver and his managing agent must be clearly stated in the policies. 6. As a receiver is an arm of the court, a party upset with the performance of the receiver needs court permission to sue him. But what if the court finds that the receiver has been negligent and grants permission for someone to sue the receiver, e.g., a tenant who was injured by a dangerous condition?...a receiver absolutely needs insurance for such possibilities. G.

Filing OCA UCS “notice of appointment” forms upon qualifying. Upon qualifying, i.e., filing the bond and oath, the appointee has to fill out and file an Office of Court Administration UCS 872 form - “Notice of Appointment.” See Exhibit no. 4. This form advises the court, among other things, of the type of appointment, whether you had other appointments in the past, and whether this appointment is one where the appointee “anticipates” he will receive $15,000 or more in fees. As previously discussed, you must be careful in filing this. Once the appointee files a “Notice of Appointment” with the “anticipated to receive $15,000” box checked, the appointee is precluded from accepting another such appointment during that calendar year, unless, as noted above, the appointing judge is notified that the appointee is withdrawing and/or the court issues an order annulling the prior appointing order and/or deems the UCS 872 filing to be a nullity, and/or appoints a new receiver.

IV.

Secondary appointments A.

Counsel: The receiver must make an application to the court to have counsel appointed. If the receiver is an attorney, a number of courts say that the receiver has to do the routine, “ordinary work” of an attorney. See, e.g., Strober v. Warren Property Co., 84 A.D.2d 834, 444 N.Y.S.2d 475 (2nd Dept. 1981).

Query: What is “routine legal work”? In general, litigation by or against the receiver is not considered routine. Thus, it is appropriate for the receiver to seek court  

28  

authorization to hire counsel for those purposes. Hiring counsel to bring landlord/tenant proceedings is almost always permitted. Otherwise, the few cases dealing with this issue do not provide an answer to this inquiry. It’s in the eyes of the beholder. In a bitterly contested receivership matter with vitriolic litigation, very little could be considered “routine.” Very detailed and precise records should be kept by the receiver’s counsel. More often than not, after a receivership ends, former bitterly warring parties find common ground on a single issue - virulently attacking the commissions of receivers and legal fees of their counsel to sweeten the pot to be divided by the former antagonists. Accurate, detailed billing records are an excellent way to deal with this problem. Keeping very good, detailed records is paramount because, in New York, fee on fee claims, i.e., a claim for legal fees incurred to defend or obtain legal fees, are not allowed, under current case law, unless specifically allowed by statute (for example, fee on fees are allowed by some provisions of the Landlord-Tenant law), agreement or under extremely limited case law exceptions to the American Rule, i.e., each side bears their own legal expenses. See, e.g., Baralan International v. Avant Industries,242 A.D.2d 226, 661 N.Y.S.2d 226 (1st Dept., 1997), which discusses the bad faith exception to the American Rule. So, if counsel is attacked on his fees, even if his fees are ultimately awarded, he will have to expend uncompensated time in his efforts to get paid. In general, a receiver’s counsel should only bill for legal matters beyond the routine legal work that a receiver might have to do if the receiver is an attorney himself. Again, what is considered routine? Receiverships, in and of themselves, are anything but routine, because they almost always arise out of difficult litigations or situations where property has to be preserved. But there are many matters in which an attorney is absolutely required, such as Orders to Show Cause to approve leases, to expand the receiver’s powers, etc. The most frequent use of an attorney involves a contempt proceeding that a receiver has to bring against the owner of a property in receivership to turn over records, security deposits, documents and funds in the owner’s possession. It is extremely common that such an owner, whose property has been forced into a receivership, is angry and will not cooperate with the receiver. Again, it is an individual attorney, not his law firm, who is secondarily appointed. What happens if the attorney who is appointed is a litigator (as often is the case), but not a full charge real estate attorney able to draft complicated leases, and the appointed attorney turns to his real estate partner for assistance? Can the real estate partner bill for his time as a colleague of the appointed counsel? The Part 36 regulations are silent on this issue. Presumably, assuming that the real estate work has been done competently, the court  

29  

will authorize payment to avoid unjust enrichment. Courts will work around this silence and make the appointments they deem necessary to smoothly run the case, e.g., appoint a law firm instead of an individual attorney. See Exhibit no. 3. Suppose there is a need for expertise outside any area practiced by your firm. When in doubt, ask the court by motion to use someone else. Again, if the court blesses this with an order, you are protected. See Exhibit no. 3.

To get paid, the attorney will apply to the court. Typically, the attorney will submit his/her detailed time sheets together with: (a) his/her affidavit describing what he/she has done; and (b) an affidavit from the receiver stating that he/she directed that the legal services be done and that they were done competently. Again, the attorney seeking payment faces a different set of circumstances after the termination of the receivership. During the heat of battle, invariably all of the fighting parties in a receivership will deal with the receiver’s counsel with the utmost respect and cordiality. Why? Since you are the receiver’s counsel, they need your goodwill and cooperation. However, once the receivership ends and the need for being nice to the receiver’s attorney ends, the formerly fighting parties often band together in a MolotovRibbentrop pact to attack your fees. This is especially so when the owner of the property has been subject to a contempt proceeding brought by the receiver’s counsel for noncompliance with the terms of the receivership order. The owner may retaliate for this by fighting the counsel’s fees. Another problem a fee-seeking attorney will face: As a general rule, the appellate decisions strongly suggest that the court hold a hearing on an attorney’s legal fees and the commissions of the receiver, especially where there are objections to the fees and commissions. A receiver and any person associated with a law firm of that receiver are prohibited from being the receiver’s counsel under the Part 36 rules “unless there is a compelling reason to do so”. 22 NYCRR 36.2(c)(8). Again, under special circumstances, a court could disregard this rule. See Exhibit no. 10. For example, a receiver who is also an attorney can be assigned a highly complicated and time consuming matter. The receiver could apply to the judge to have members of his firm assist him and to be paid for those services. To reiterate, judges disregard the Part 36 prohibition if doing so can make it easier and more efficient to administer the case. If the judge blesses the application with an order, you are protected. To prevent your hourly rate from being attacked later, it is always better to have the  

30  

court approve your retainer letter with an hourly rate at the outset of the appointment. B.

Property manager The receiver must ask the court to appoint a property manager. It is always preferable to have the agreement between the property manager and the receiver attached to the motion to approve. This way, the terms of the agreement cannot later be challenged. Typically, a property manager is paid monthly (5% or 6% of the rent roll). In addition, the property manager can also bill extra (i.e., hourly) for extraordinary expenditures of time not covered by the usual duties of a manager (e.g., testifying in court). The agreement should carve out extra duties such as preparing a receiver’s accounting. In instances where the rent roll is, at inception, insufficient to make it worth anyone’s while to be the property manager, often the agreement will provide for a percentage or minimum dollar amount, whichever is greater. A property manager should keep good records as to the contractors it hires in order to justify those hires, lest anyone accuse the property manager of conflicts of interest, etc. C.

Real Estate Broker Another secondary appointment is the real estate broker. A receiver cannot hire (and pay) a broker without court approval. Here, as in many other instances (discussed above), the Part 36 rules were drafted without regard as to how the real estate industry works in New York. As in the case of all fiduciary appointments, the real estate broker must be an individual appointed from the approved lists. However, as noted above, a judge can make an exception to the rules to achieve the best possible way to handle the case. To reiterate, if the judge blesses the application with an order, you are protected.

 

31  

V.

Keeping good records Similar to the obligations set forth in the Rules of Professional Conduct for an attorney to keep detailed, accurate records, it is very important for the receiver to maintain good records, the more detailed the better...especially in today’s paranoid and politically correct environment. Receivership records will find themselves in an interim or final accounting, which are public records. Since they are public records, anyone has the ability to look at them; they can be put on the internet, and even the press can look at them. So prepare your records as if the public at large...the press...etc., could examine them at any time, and put them on the front page the next day. Records forming the basis of an accounting will often be scrutinized by the court’s Fiduciary Office.

VI.

Operating During Receivership. A.

Be a hands-on receiver

Remember that if anything goes wrong in the receivership, the buck stops with you. B.

Call your managing agent every couple of days to check on the operation of the property in receivership. Check your bank records often. You should have electronic access to your receivership bank records so that the bank records can be checked at any time.

C.

If possible, do not delegate any check signing authority to anyone! Sign all checks. If something goes wrong, the receiver will bear the blame. Also, it won’t make the judge who appointed the receiver happy. What if there are too many checks to sign, e.g., you are appointed to run a very large project? First, you must always sign checks above a certain amount. What that sum may be is a matter of the receiver’s discretion. If you have to have an automatic signature stamp, e.g., if a large payroll is involved, the receiver should put into place auditing protections. This means that an accountant should be appointed to perform auditing functions, i.e., to make sure that the checks that are issued with a facsimile signature stamp are properly issued. Concerning the discretion of the receiver to do this, if the appointing order specifically allows you to delegate signature authority, the receiver is protected. If not, the “catch all” clause of the receivership order, which allows you take all other necessary actions to perform your duties - which all appointing

 

32  

orders should have - should be sufficient to allow you to do this. When in doubt, ask the appointing judge to provide you with specific authority. D.

Emergencies during the operation of the receivership: Suppose a receiver receives a call during the middle of the night from the managing agent that a boiler has broken down and that there’s no heat on a frigid winter night. Or there’s been a fire in a ground floor retail store. Or a large water main has broken in the street, flooding the basement of the Receiver’s building? The receivership order says that the receiver can’t spend more than $10,000 for repairs without approval of the court and/or the bank that sought his appointment. But he has to immediately hire contractors that will cost far more than that. Can he do this? Yes. The receiver’s primary mission is to preserve the property and, therefore, the receiver has inherent authority to take the necessary action to make all emergency repairs. What does he do next? At the first available opportunity, the receiver should notify the judge who appointed him, and, of course, both the foreclosing lender that had him appointed and the defendant in the foreclosure. He should then ask the court for authority to spend more money if necessary. Remember, notice and transparency are critical. See Exhibit no. 7. Having a competent managing agent to handle emergencies is also critical: If the managing agent botches the emergency repairs, ultimately, it will be the receiver who is responsible.

E.

The relationship of the receiver with appointing judge and the parties (a) The receiver should maintain constant contact with the appointing judge to apprise the court on a real time basis what is transpiring with the receivership. Judges do not like to be surprised or embarrassed by developments in the receivership, especially where the court has not been informed of the facts by the receiver. (b) The receiver should keep all of the parties fully informed of what is going on, lest he/she be accused later (especially when applying for commissions or fees) of not keeping the parties fully informed. (c) In a foreclosure action, the receiver should have a good relationship with the foreclosing mortgagee because he/she may need to have the mortgagee make protective advances to the receivership to keep a property operating. (d) In general, a mortgagee can make protective advances to a property, since they are for the benefit of the property, i.e., to maintain it, and no one, including the court, should object. However, one court recently held that where a mortgagee made protective advances to a receiver for expenses not necessary to maintain the property or preserve its condition, e.g., expenses for appraisals in connection with marketing

 

33  

the property for sale after foreclosure, such advances were not reimbursable expenses to the mortgagee. See, Bank of America, N.A. v. Oneonta, L.P., --N.Y.S.2d---, 97 A.D.3d 1023, 2012 WL 2924031 (3rd Dept., 2012). F.

Other matters a receiver might have deal with (1) Filing fiduciary tax returns pursuant to IRS Section 1065 for a partnership or LLC, if the property is owned by such an entity. (2) The Receiver might have to file tax certiorari proceedings (3) The Receiver may have to commence contempt proceedings against a party who does not obey the Court’s order appointing the Receiver or who otherwise thwarts the Receiver’s operation of the receivership. See, Simens v. Darwish, 104 A.D.3d 465, 960 N.Y.S.2d 120 (1st Dept. 2013).

VII.

Liability of the Receiver A. Appointing judge must give permission in order for lawsuit commenced against a receiver to proceed: As an “arm of the court”, as a general rule, during the receivership, a receiver cannot be sued unless the court that appointed him permits the suit to proceed, i.e., obtaining such permission is a condition of the lawsuit going forward. Copeland v. Salomon, 56 N.Y.2d 222 (1982). Suing the receiver without such permission could be considered a contempt of court. Id. This rule also applies to lawsuits brought against a receiver after he or she is discharged. (“Where a receiver has been discharged from any and all liability, he or she may not be sued unless the appointing court vacates its order and grants leave to sue.” Estate of Gordon v. City of New York ---N.Y.S.2d--- 106 A.D.2d 472 (1st Dept. 2013)). What all of this means is that if someone sues a receiver or a former receiver without court permission, a receiver’s motion to dismiss will almost always be granted. However, the failure of a plaintiff to obtain such permission prior to starting an action against a receiver does not deprive the court of jurisdiction to hear the case. Obtaining permission is merely a condition precedent to the lawsuit going forward. Where a plaintiff fails to obtain permission from the appointing court, the court may allow the action to continue nunc pro tunc. (This legalism means that the court will permit the action to go forward as if it had been properly commenced in the first place.) Wilshire State Bank v. Unger, 25 Misc.3d 1243(A), 906 N.Y.S.2d 776 (Table) (N.Y.Sup. 2009), 2009 WL 4878630); Copeland v. Salomon, 56 N.Y.2d 222 (1982).

 

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But, if an action is commenced in advance of obtaining court permission to do so, the court may choose not to allow the action to go forward if plaintiff has no excuse for not applying for that permission first. Collins v. Vickers, 296 A.D.2d 320, 321, 744 N.Y.S.2d 672, (1st Dept. 2002). B.

VIII

Can a receiver be held personally liable for his actions as a receiver? A receiver cannot be held personally liable if he acts in good faith within the authority conferred by the order of appointment. See Jacynicz v. 73 Seaman Associates, 270 A.D.2d 83, 704 N.Y.S.2d 68 (1st Dept. 2000); Trustco Bank, National Association v. Eakin, 256 A.D.2d 778, 681 N.Y.S.2d 410 (3rd Dept. 1998).

Receiver’s Commissions A.

Statutory limits on the amount of commissions awarded 1.

General Rules: (a) Maximum amounts of commissions are set forth in statutes: Commission rates set forth in the statutes are the maximum amounts; the court has the discretion to award lower amounts. See First New York Bank For Business v. 418 West 49th Street Realty Corp.252 A.D.2d 460, 675 N.Y.S.2d 867 (1st Dept. 1998). (b) The usual rate of commission is 5% of monies received and disbursed: CPLR 8004(a) provides the general method for the calculation of receivership commissions. That method is up to 5% of the monies received and disbursed by the receiver.

2.

Other statutes provide a different rate of commission: Some other statutes, such Business Corporation Law 1217, used in corporate dissolutions, provide for a lower fee structure. Receivers in corporate dissolutions under BCL 1217 are paid under a sliding scale of commissions upon sums received and disbursed “as may be allowed by the court as follows”:

 

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“(a)(1) On the first twenty thousand dollars, not exceeding five percent; (2) On the next eighty thousand dollars, not exceeding two and one-half percent; and (3) On the remainder, not exceeding one percent. (b) If the commissions of the receiver so computed do not amount to one hundred dollars, the court in its discretion may allow such sum not exceeding one hundred dollars as shall be reasonable. (c) When more than one receiver shall be appointed, the compensation herein provided shall be divided between them, as the court directs.” 3.

Exception to general statutory provision of a specific commission rate: (a)

CPLR 8004(b): CPLR 8004(b) provides as follows: “If, at the termination of a receivership, there are no funds in the hands of the receiver, the court, upon application of the receiver, may fix the compensation of the receiver and the fees of his attorney, in accordance with the respective services rendered.” The CPLR appears to apply a quantum meruit standard for calculating compensation. Who has to pay if the court awards additional compensation under CPLR 8004(b)? Answer: The party who sought the appointment of the Receiver.

(b)

Can the amount awarded under CPLR 8004(b) exceed the 5% limit of CPLR 8004(a)? One court has recently said “yes.” In Flotteron v. JEL Realty 58 A.D.3d 677, 677-678, 871 N.Y.S.2d 706, 706 (2nd Dept.,2009), the Second Department held: “Under the circumstances presented, the Supreme Court providently exercised its discretion in determining that special circumstances existed warranting a recovery in excess of five percent of the amount collected by the receiver in rents.” Caveat: The quantum meruit exception of CPLR 8004(b) does not apply elsewhere, e.g., to BCL receiverships. See Jakubowitz v. A.C. Green Elec. Contractors, Inc. 25 A.D.3d 146, 803 N.Y.S.2d 71 (1st Dept. 2005).

(c)  

Can a court award a receiver compensation not provided in the statutes? 36  

Apparently yes. See Exhibit no. 8, p.4, where the court allowed the receiver to receive an hourly rate. B.

What does “sums received and disbursed” mean: 1.

Commissions are paid upon sums received and disbursed by the receiver. All of the statutes awarding receivership commissions provide that a receiver is paid upon “sums received and disbursed” by him. This language means that a commission is earned on the same monies passing through the receiver’s hands, NOT a commission taxed on the amount of the monies as they come into the receiver’s hands, and then another commission taxed on the funds as they are disbursed by the receiver. This is the interpretation of the courts. For example: In Dissolution of Elkund Farm Machinery, 73 A.D.3d 1319, 903 N.Y.S.2d 157 (3rd Dept. 2010), the receiver, appointed under the Business Corporation Law, argued, unsuccessfully, that the lower court should have awarded his final commissions based on applying the statutory percentage to the amounts received and then again (separately) to the amounts disbursed. Or putting this another way 1% on the monies collected and then again 1% on the monies being disbursed, effectively, a 2% recovery. NO said the court. The court interprets the statutory language as meaning that the commission will be the amount both collected and disbursed (i.e., no double dipping). Putting this another way, “a commission is due upon the total amount which passes through a receiver’s hands”, quoting from Matter of Jakubowitz v. A.C. Green Elec. Contractors, Inc., 25 A.D.3d 146, 150, 803 N.Y.S.2d 71 (1st Dept. 2005). And in Estrich v. Citiwide, 218 A.D.2d 43, 637 N.Y.S.2d 712 (1st Dept.) the court held that, with respect to CPLR 8004, the statute providing the general rule for calculating a receiver’s commission (up to 5%), the receiver’s commission is based on money passing through the hands of the receiver or a maximum of 5% of the total monies received. The court emphasized that a receiver is not entitled to a double recovery of 5% of the sums received plus 5% of the sums disbursed.

IX.

Interim and final accountings; interim and final applications for legal fees A.

 

In general: Accountings detail a Receiver’s operation as a Court Fiduciary 37  

Preparation of accountings is extremely important. An accounting is the Receiver’s report to the court of what he did as the court’s fiduciary. Typically, the receiver provides the court, in affidavit form, a rendition of all the things that he did as a receiver. The more the receiver describes, the better. A detailed narrative, e.g., explaining the serious problems you encountered, how you dealt with them, what results you achieved, etc., will go a long way to justifying your fees later on when you apply for them. A receiver’s obligation to keep accurate records is comparable to an attorney’s responsibility to keep correct and detailed financial records pursuant to Rule 1.15 of the Rules of Professional Conduct. The accounting has to contain a report for the period in question in the “A, B, C” format as follows: A.

a summary of the monies the receiver received during

the period; B. a summary of the monies disbursed during the period; and C.

the amount of cash in the receiver’s possession at the end of the period in question.

This is known as the “A B C” method. For complete transparency, the receiver should prepare and attach, in separate schedules for each item, a general ledger listing all of the transactions that passed in and out of the receivership. Thus, item A should have as an exhibit a general ledger listing each check and item of deposit, etc. that was received. The ledger should be broken down into categories, rent receipts, cash receipts, tax refunds, etc. Item B should have as an exhibit a general ledger showing in categories all of the funds disbursed; e.g., mortgage payments, taxes, repairs, purchase of supplies, etc. (the more detail the better). Item C should list the cash on hand in the various bank accounts (to be identified). The numbers must tie in, i.e., A minus B must equal the amounts you have in your bank accounts, i.e., Item C. (There might be several bank accounts. For example, in receiverships with very large sums of money flowing through them, some courts like to see the money spread around in several institutions to spread the risk of possible bank failure.) B.  

Interim accountings: 38  

Interim accountings are done at periodic intervals during the course of a receivership. If the receivership is a multi-year receivership, at a minimum accountings should be done once a year. In very large receiverships with large sums of money flowing through receivership accounts every month, the court might order semi-annual or quarterly accountings to keep track of what is going on. Interim accountings are used to, among other things, award interim commission payments and the interim payments of fees to the professionals appointed by the court. If a receiver has been working hard during a long receivership, there is no reason to wait until the end to get paid. More importantly, approved interim accountings establish the commissions for the period which are hard to attack when the final accounting is prepared. Putting this another way, for each interim period in which an accounting is approved, the accountings and commission awarded for those periods are “inoculated.” It is extremely hard to attack such a commission later on when the final accounting is prepared. In any event, the longer a receiver waits to have a commission approved, the higher the unapproved amount will be at the end. Unapproved, accrued higher amounts are much easier to be attacked ---and to be cut in much greater sums --- at the end of a receivership. An example of an application for an interim accounting is annexed as Exhibit no. 11. C.

Final accountings: A final accounting is submitted at the termination of a receivership. It summarizes all of the activity during the term of the receivership. If interim accountings have been submitted and approved, this makes the task of preparing a final accounting much easier. First, what the receiver has done in the past has been already been blessed by the court, so the court does not need to re-verify your figures again. Second, the final accounting can then be a summary of the prior approved interim accountings plus the accounting for the final period. The ability and competence of a managing agent to keep accurate and understandable records for an accounting is extremely important. An accounting riddled with errors or not in the proper format will prevent or delay you from being paid. It must be simple and easy to understand by a person who has little, if any, accounting experience. The judge generally sends the proposed accounting to the Fiduciary Office for review. Once it is approved by the Fiduciary Office, the judge will approve it. Sometimes a judge will decide not to send the accounting to the Fiduciary Office for approval if he sees great detail and that it was prepared in the proper format.

D.  

Sample accounting forms: 39  

(1)

Exhibit no. 12-1: Affidavit in support of receiver’s motion to approve final accounting. (2) Exhibit no. 12-2: Verified final accounting. (3) Exhibit no. 12-3: Affirmation in support of Ex Parte Discharge Order. (4) Exhibit no. 12-4 Ex Parte Discharge Order. E.

Interim and final applications for professional fees, e.g., the legal fees of the Receiver’s counsel Similarly, professionals such as attorneys and accountants to receivers should submit interim and final applications for the payment of their fees. As noted above, attorneys’ billing runs should be very detailed, describing exactly what was done. A minimal entry such as “review email from party x” may not do. You should describe what the email was about, and if possible what you did with respect to it. Again, the more detail, the better. F.

X.

Surcharging a receiver: 1.

In general: A surcharge means that the amount of compensation that a receiver is supposed to receive, e.g., his commissions, should be reduced or eliminated because the receiver did not carry out some duty properly, e.g., he carried out repairs by unlicensed contractors. See Jacynicz v. 73 Seaman Associates, 270 A.D.2d 83, 704 N.Y.S.2d 68 (3rd Dept. 2000). Thus, e.g., if a receiver does not repair habitability issues in a residential building, he can be surcharged, i.e., have his commission reduced because he failed to cure those problems. See Fourth Federal Sav. Bank v. 32-22 Owners Corp.,36 A.D.2d 300, 653 N.Y.S.2d 588 (1st Dept. 1997).

2.

Can a receiver be “surcharged” so that he is held personally liable? As noted above, as a fiduciary, a receiver cannot be held personally liable if he acts in good faith within the authority conferred by the order of appointment. See Jacynicz v. 73 Seaman Associates, 270 A.D.2d 83, 704 N.Y.S.2d 68 (1st Dept. 2000); Trustco Bank, National Association, v. Eakin, 256 A.D.2d 778, 681 N.Y.S.2d 410 (3rd Dept. 1998).

Getting Paid! The receiver should, if possible, escrow money as he goes along to make sure that there are sufficient funds on hand to pay commissions, legal fees, etc.

 

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XI.

Finishing the receivership - getting discharged. A.

The Receiver has to prepare and submit a final accounting to be approved by the court. Usually (not necessarily), the judge will submit the proposed accounting to the court’s Fiduciary Office for review.

B.

Court approval of the accounting and post-approval procedures Once the accounting is approved by the Fiduciary Office, the court will sign an order

approving the accounting (see Exhibit no. 13) and file with the Fiduciary Office a UCS 875 (see Exhibit no. 14) statement of compensation from which the judge signs on the amounts to be awarded and disbursed. Once the amounts are disbursed, the receiver must prepare an Ex Parte Discharge Order (i.e., not on notice to the other parties) (see Exhibit no. 12-4) which discharges him from the obligations of the receivership and directs the clerk to cancel his bond. The receiver should submit a supporting affirmation showing that all funds to be disbursed under the final accounting have been disbursed. Typically, the Fiduciary Office requires the receiver to submit photocopies of canceled checks showing that all funds have been disbursed and there are $-0- balances in the receivership’s bank accounts. The Ex Parte Discharge Order is important because even though the receivership has ended and all monies have been disbursed, the surety bond has to be canceled by a court order filed with the clerk of the court. The bonding company will require the receiver to obtain and present to it a filed copy of the order. If the receiver does not do this, the bond will still remain in effect. In other words, the surety will keep the bond in force on its books and force the receiver to pay bond premiums until it is canceled. Once the receivership is finished, do not discard your records. Aside from New York’s rules that closed files have to kept for 7 years, future owners or transferees of the properties in question may ask the receiver questions on what was done to the property during the receivership.

 

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BANKRUPTCY I.

OVERVIEW: BANKRUPTCY POLICY

The United States Bankruptcy Code, Title 11 of the United States Code, is the source of the federal bankruptcy law. As a federal law it supersedes state law to the contrary or that would impede its implementation. See, e.g., Weisfelner v. Fund 1 (In re Lyondell Chemical Co.), 503 B.R. 348, 369-73 (Bankr. S.D.N.Y. 2014) (Gerber, J.) (discussing multiple forms of federal preemption of state law). Nevertheless, basic debtor-creditor rights are dictated by applicable state or other non-bankruptcy law. See, e.g., Butner v. U.S., 440 U.S. 48, 55 (1979) (“Property interests are created and defined by state law[]” and “[u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”). And in bankruptcy, the “debtor” must obey other non-bankruptcy laws. See, e.g., In re Investors Funding Corp., 547 F.2d 13, 16 (2d Cir. 1976) (permitting actions against debtors in possession that violate nonstate law pursuant to 28 U.S.C. § 959). For example, an individual “debtor” in bankruptcy must still obey traffic laws (state and municipal law), and pay state, local and federal taxes; whether his vehicle lender’s security interest in his vehicle is perfected depends upon whether the lender complied with state law and registered the title with the state DMV if that’s a requirement; if he owns an airplane, it must be registered with the (federal) FAA. Or, a corporate “debtor in possession” must observe labor laws (state and municipal), anti-fraud statutes (state and federal) and corporate authority (state law). The main policies of federal bankruptcy laws are to (a) preserve the “estate” for the benefit of all creditors, not a few, (b) provide the opportunity for a fresh start or reorganization, (c) assure equal treatment creditors according to their legal priorities. See 1 Collier on Bankruptcy ¶1.01[1] (16th ed. 2014); see also In re Residential Capital, LLC, 508 B.R. 851, 857 (Bankr. S.D.N.Y. 2014) (bankruptcy courts should modify contract rates sparingly; for example, when the rate impairs the debtor’s fresh start); Taub v. Taub (In re Taub), 427 B.R. 208, 220 (Bankr. E.D.N.Y. 2010) (directing the debtor’s husband not to interfere with the management of property of the estate to the detriment of the debtor’s creditors); Delta Air Lines, Inc. v. Bibb (In re Delta Air Lines, Inc.), 359 B.R. 454, 459 (Bankr. S.D.N.Y. 2006) (granting the federal government a right to setoff is at issue with the central bankruptcy objective of providing for the equal treatment of creditors). The United States Bankruptcy Court is an “Article I” court under the U.S. Constitution (not equivalent to the Article III district courts); appeals from the bankruptcy court go to district court. Jurisdiction of the bankruptcy court as a specialized federal court is narrow and proscribed by a specific set of statutes, 28 U.S.C. §§ 157, 1334. See Exec. Bens. Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 134 S. Ct. 2165, 2175 (2014) (when presented with “non-core” bankruptcy issues, bankruptcy courts  

42  

may only issue proposed findings of fact and concussions of law for de novo review and entry of judgment by a district court); Stern v. Marshall, 131 S. Ct. 2594, 2617 (2011) (bankruptcy courts may enter final rulings on core bankruptcy issues—such as claim objections—but Article III of the U.S. Constitution prohibits them from entering final rulings on non-core issues—such as state law based breach of contract counterclaims). II.

TYPES: CHAPTER 11, CHAPTER 7

“Chapter 11” of title 11 is the source of the key reorganization laws. Chapter 11 is available both to individuals and business entities. Chapter 11 may also be used to liquidate. Or Chapter 11 may be used to sell all assets and operations then liquidate and distribute the proceeds. As discussed below, in Chapter 11, a company is presumed to stay in management, possession and control of its business during the case. “Chapter 7” of title 11 is the source of the key liquidation laws. Chapter 7 is available to individuals and business entities. In Chapter 7, a company or individual is presumed to be removed automatically from control of its assets. (Chapter 15 is the source for international cases, Chapter 13 is the source for individual wage earner bankruptcy cases, Chapter 12 is the source for family farmer bankruptcies, and Chapter 9 governs municipal bankruptcies.) III. KEY CONCEPTS (a) Property of the Estate, 11 U.S.C. § 541: By operation of law, all property of the (“pre-petition”) debtor becomes property of a new legal entity, the debtor’s estate. This means all property, regardless of who holds it or where it may be held. U.S. v. Whiting Pools, 462 U.S. 198, 203 (1983) (property seized by the IRS from a party which later files a bankruptcy petition constitutes property of the estate even though it was held by the IRS on the petition date); (b) Automatic Stay, 11 U.S.C. § 362: Immediately upon the filing of a bankruptcy petition with the U.S. Bankruptcy Court, an automatic stay comes into effect, preventing further collection or prosecution of claims that existed “pre-petition.” This applies to anything financial (not to police or regulatory actions) and the definition of “claim,” 11 U.S.C. § 101(5), is extremely broad, so that all financial interests are administered in the single proceeding. In re Sonnax Indus., 907 F.2d 1280 (2d Cir. 1990) (“whether relief would result in a partial or complete resolution of the issues” and “whether the parties are ready for trial in the other proceeding” are among twelve broad factors courts weigh when considering whether to grant relief from stay); Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC, 460 B.R. 106, 113 (Bankr. S.D.N.Y. 2011) (the commencement or continuation of foreign actions against a bankruptcy debtor or estate violates the automatic stay).  

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(c) Debtor in Possession, 11 U.S.C. § 1107: In Chapter 11, the debtor is presumed to stay in management, possession and control of its business during the case. The “DI-P” is a fiduciary for all its creditors and accountable to the Bankruptcy Court. As a fiduciary, the D-I-P has serious disclosure and reporting duties to the court and creditors. (d) Operation in Ordinary Course, 11 U.S.C. § 1108: Unless ordered otherwise the “D-I-P” operates in its ordinary course under pre-existing directorship and management. Out of the ordinary course transactions require court approval, 11 U.S.C. § 363. (e) Trustee or Examiner, 11 U.S.C. §§ 1104, 1106: In Chapter 11, for “cause,” defined as including “fraud, dishonesty, incompetence, or gross mismanagement,” whether by the D-I-P or former management, or “in the interests of creditors,” the court may appoint a trustee. A trustee displaces directorship and management and thus this is a drastic and rare remedy. The trustee becomes the sole personification of the debtor, retains professionals and executes the duties of the debtor in lieu thereof. Where a limited examination may be required, the court may appoint an examiner who ordinarily conducts the particular investigation and reports to the court; this is a more limited remedy. (f) D-I-P Financing, 11 U.S.C. § 364: The D-I-P may not enter into significant, or secured, financing without court approval. See 3 Collier on Bankruptcy ¶ 364.03[2] (16th ed. 2014) (borrowing outside of the ordinary course of business without prior court authorization may result in the lender being regulated to the status of a general unsecured creditor, the transaction being cancelled or disregarded, and/or the debtor’s bankruptcy case being dismissed for a finding of bad faith—entering post-petition financing agreements without court approval); See also Shapiro v. Saybrook Mfg. Co. (In re Saybrook Mfg. Co.), 963 F.2d 1490 (11th Cir. 1992) (not permitting crosscollateralization—securing pre-petition debt with pre- and post-petition collateral as part of a post-petition financing scheme). (g) Sales, 11 U.S.C. § 363(b): While ordinary operations may continue, significant, out of the ordinary course transactions, and sales of significant assets require court approval. Recently, “363 sales” have been used to sell the assets of entire businesses. In re General Motors Corp., 407 B.R. 463 (Bankr. S.D.N.Y. 2009) (permitting GM to sell substantially all of its assets). (h) Contracts, 11 U.S.C. § 365: “Executory contracts,” that is, contracts with performance due on both sides (so not a payment installment contract), are either (a) assumed, (b) assumed and assigned, or (c) rejected. Compare, In re Riodizio, Inc., 204 B.R. 417, 421 (Bankr. S.D.N.Y. 1997) (Bernstein, J.) (under the Countryman definition, a “prepetition contract is executory when both sides are still obligated to  

44  

render substantial performance”), with In re Worldcom, Inc., 343 B.R. 486, 493 (Bankr. S.D.N.Y. 2006) (under the functional approach, “a court looks to whether assumption or rejection of the contract in question would benefit the debtor’s estate, regardless of whether any material obligations remain outstanding”) (Gonzalez, J.). “Assumed” contracts become obligations of the bankruptcy estate (as opposed to the pre-petition debtor) or of the reorganized debtor; contracts that are assumed and assigned become enforceable against the third party assignee; contracts that are rejected are deemed breached as of the moment pre-petition, thereby relegating the damage claim to prepetition status and triggering provisions on breach like liquidated damages clauses. (i) Plan, 11 U.S.C. § 1129: “Confirmation” and “effectiveness” of a plan is the goal of a reorganization under Chapter 11. A plan is solicited to creditors for votes, may be confirmed upon democratic acceptance, or upon “cram down” of certain classes if warranted by the court under certain tests, and if confirmed by the court a plan becomes enforceable (a) as an order of the court and (b) as a contract between the debtor and creditors. In re Dow Corning Corp., 244 B.R. 696, 700 (Bankr. E.D. Mich. 1999) (as to dissenting creditors, a “cram down” plan must not “discriminate unfairly” and must be “fair and equitable”); In re Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986) (requirements for confirmation). (j) Retention of professionals, 11 U.S.C. § 327: Professionals for the estate (lawyers, accountants, financial advisors, investment bankers, sales brokers, expert witnesses) must be retained; there is a narrow exception for professionals not at all involved in restructuring efforts. See, e.g., In re Johns-Manville Corp., 60 B.R. 612 (Bankr. S.D.N.Y. 1986) (lobbyists are not professionals under 11 U.S.C. § 327 and it was in the ordinary course of business for the debtor to retain lobbyists). Professional compensation must be approved by the court. 11 U.S.C. § 330. (k) U.S. Trustee, 28 U.S.C. § 586: The US Trustee is a federal appointee with an office and staff operating as an agency of the US Department of Justice, with the charge to supervise the administration of bankruptcy cases. The US Trustee monitors cases to assure the integrity of the bankruptcy system including adequacy of filings, retention and payment of professionals, appointment of fiduciaries, compliance with deadlines, and reporting and transparency. IV.

RECEIVERSHIP

(a) Turnover, 11 U.S.C. §§ 542, 543: Ordinarily, all holders of assets of the debtor must turn over to the estate property of the estate. If there is a trustee, property must be turned over to the trustee; if the debtor is in possession, property must be turned over to the D-I-P. If property is in the hands of a custodian, the custodian must turn it over to the estate. A receiver is such a custodian. The obligation is on the custodian to “deliver” the property to the estate (not to cause the estate to chase the custodian).  

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(b) Excuse From Turnover, 11 U.S.C. § 543(d)(1): After notice and a hearing, the bankruptcy court may excuse compliance with the turnover requirement in the interests of creditors. So, infrequently, a receiver may be maintained in the bankruptcy case, usually by agreement of key constituents (at least lender and borrower). See In re Bryant Manor, LLC, 422 B.R. 278 (Bankr. D. Kan. 2010) (creditors were best served by permitting a state court appointed receiver to remain in place); In re Falconridge, LLC, 2007 Bankr. LEXIS 3755, 30 (Bankr. N.D. Ill., Nov. 8, 2007) (excusing the state court appointed receiver from complying with section 543 and modifying the automatic stay to the extent necessary to permit the receiver to exercise its powers as an appointed receiver); In re 400 Madison Ave. Ltd. Pshp., 213 B.R. 888, 895 (Bankr. S.D.N.Y. 1997) (a receiver left in place by the bankruptcy court has no role in the bankruptcy case beyond managing and preserving the property in his charge in accordance with the orders governing the receiver’s appointment). (c)

Key Concepts Governing a Receiver Maintained in Chapter 11

i. Duties/Structure: The duties of the receiver must be carefully stated in a bankruptcy court order given the uniqueness of the situation; the receiver ordinarily will not have the duties of the D-I-P but certain operational duties while the D-I-P is in charge of its case. ii. Retention of professionals: The court order should spell out that the receiver may retain professionals (and which or what types – counsel, accountants, special counsel, e.g., landlord/tenant counsel) and under what arrangements. Professionals must then be retained according to bankruptcy protocols. If the property manager or other agents are not “professionals” their engagement should be provided for by court order (the appointment order) as well making the terms of their engagement clear. iii. Reporting/Transparency: The receiver will be expected to report in a transparent method and the means should be made clear in the appointment order. iv.

Conclusion of Role:

1. Bankruptcy Court. The receiver, having been appointed by court order, should be discharged by court order. The order might also provide exculpation, implement document retention procedures and approve a final accounting. 2. State Court. If necessary, the Bankruptcy Court should authorize the receiver to return to the state court – the source of the original appointment – for any final motions and orders there. v. Compensation: The receiver’s compensation is governed by statute (CPLR § 8004). The receiver’s compensation in the Chapter 11 should be approved by order of  

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the Bankruptcy Court. V.

OTHER TYPES OF RECEIVERSHIPS AND STATUS IN BANKRUPTCY

We have been focusing principally on receiverships in foreclosure cases. Infrequently, a receiver will be appointed by a state or federal court to take control of a fraud-ridden or mismanaged business upon the ouster of the management by court order. The expanded duties of that receiver should be spelled out in the order of appointment. That receiver, who displaces and serves as directorship and management may seek – as the personification of the business itself – authority of the appointing court to serve as sole manager and director, and file a Chapter 11 for reorganization or liquidation of the business. Then the receiver becomes sole manager and director of the D-I-P. This provides a conundrum under bankruptcy law. On the one hand, the receiver is as if sole proprietor and is presumed to operate the business; after all, the non-bankruptcy court installed him to do so. On the other hand, the bankruptcy system and US Trustee have a specific means of appointing fiduciaries (“trustees”) where management has failed, and may seek to displace the receiver in favor of a new, court appointed trustee. (Section 1104 may bar the receiver from then serving as trustee.) Thus the support of creditors becomes crucial to whether the court will consider maintenance of the pre-petition receiver as sole manager of the D-I-P.

 

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