The appointment to serve as a Temporary Receiver in a foreclosure proceeding in New York State Court can be interesting, challenging and rewarding. Referred to as a "temporary receiver" in the statute,1 such a fiduciary is commonly referred to simply as a "receiver." A foreclosure action is a many-faceted proceeding that can involve real property law, complex financing, both commercial and residential landlord and tenant law, torts, debtor-creditor law and many other areas of law. Receiverships can impact residential and commercial tenants and licensees in rental properties, and proprietary leasees and tenants in co-ops. This article will focus solely on the role, duties and authority of the Receiver.2
Receiver's Relationship with the Court
Although generally appointed pursuant to the application of the mortgagee (the plaintiff/lender/mortgage holder), a Receiver is not the mortgagee's agent. A Receiver is responsible to the Court and must always remember that such an appointment is an expression of confidence in her or his ability, professionalism and ethical standards by the appointing judge. A Receiver's conduct and performance will not only reflect upon her or his professionalism and ability, but it will also reflect upon the judgment of the appointing judge, so it is especially important for a Receiver to be vigilant in the performance of her or his duties.
A Receiver is a fiduciary with many tasks similar to those of an executor or trustee. As the late United States Supreme Court Associate Justice Benjamin Cardozo so eloquently put it when he was Chief Judge of the New York State Court of Appeals, a fiduciary is held to a very high standard of conduct: "A trustee [fiduciary] is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior … the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd."3
Receiver's Primary Role, Investigation and "Qualification"
Fiduciary appointments by the Court are governed by Part 36 of the Rules of the Chief Judge and appointees should review the Rules carefully.4 At the outset, generally the Court will consult the list of candidates for appointment, which is compiled by the Office of Court Administration,5 and will call to inquire about availability to serve as a Receiver. Under Part 36 of the Rules of the Chief Judge, there are a number of circumstances which disqualify one from appointment, such as: being a judge, hearing officer, employee or family member of an employee of the Unified Court System; having already received an appointment in the calendar year in which anticipated compensation is greater than $15,000; having received an aggregate of more than $75,000 in compensation awarded from all appointments in the preceding calendar year; and several other disqualifiers.6
If available and permitted to accept such an appointment under Part 36 of the Rules of the Chief Judge, it is important to learn as much as possible concerning the property in question and the precise provisions in the Order Appointing Receiver that the plaintiff has presented to the Court. The primary role of a Receiver is to manage the property and maintain the value of plaintiff's mortgage collateral during the pendency of the foreclosure proceeding. This will prevent the deterioration of the property during the foreclosure action and avoid the potential of the mortgagor (the borrower/landlord) to exploit, make off with or otherwise take advantage of the rent collections. It also ensures that the rental income will be used appropriately, to maintain the property. But a Receiver has another important role: to ensure as best as possible that tenants and residents receive the services to which they are entitled.
Upon commencing a foreclosure action, the mortgagee (lender) is entitled to have a Receiver appointed on an ex parte basis, without notice,7 provided that the mortgage instrument contains a standard covenant "that the holder of this mortgage, in any action to foreclose it, shall be entitled to the appointment of a receiver." A Receiver's authority is limited by the provisions in the order of appointment. Therefore, it is critical that the Receiver carefully review the order and if supplementary authority is required, such as the authority to retain a managing agent, accountant, counsel, undertake substantial repairs, etc., then a supplemental order of the Court making the necessary secondary appointments should be obtained promptly upon qualifying to serve. A Receiver may not retain counsel absent a provision in the order of appointment or a subsequent order permitting such retention.8
It is important for a Receiver to know what she or he may be getting into. Is this a residential, commercial or mixed-use property, does the property require substantial repairs, are there tenants, is a rent roll available, will the Receiver require counsel, a managing agent, or contractors, is a bond required (almost always), will the Receiver have the right to institute eviction and other proceedings? Are rents, common charges and other obligations being paid by the tenants and residents? Without revenue, it will be difficult to provide services, pay vendors and maintain the property. Is the plaintiff willing to cover necessary expenses if the revenue flow is insufficient? Also, Receiver commissions are generally calculated based upon revenues received and disbursed. Where there are little or no revenues, absent an order fixing the Receiver's compensation and legal fees and directing the moving party to pay them or an agreement with the plaintiff to pay them, there may be no commissions or fees payable.9
"Qualifying" for appointment entails filing UCS Form 872: Notice of Appointment & Certification of Compliance, and an Oath with the undertaking (the bond) required under the Order of Appointment.10 Before qualifying, it is imperative that the Receiver be added to all liability and fire insurance policies as an additional insured and that a certificate of insurance is obtained confirming this. The Receiver immediately steps into the shoes of the owner/landlord and may be named in any claim for damages, so this is very important. Therefore, it is strongly suggested that before qualifying as Receiver, one should make certain she or he is added as an additional insured. Often, a Receiver can be added to an existing insurance policy as an additional insured. The plaintiff and defendant should be requested to provide information concerning all relevant insurance policies. It is in their interests to cooperate, as should they fail to comply, the Receiver will have to obtain separate policies, resulting in unnecessary additional expense.
It is advisable to contact counsel for the plaintiff as soon as a prospective Receiver learns from the Court that she or he may be appointed Receiver. The more information one obtains, the better the ability to make an informed decision whether to accept the appointment. For instance, if there are no rents to collect, as indicated above, unless there is an agreement to the contrary or an order fixing compensation and directing the plaintiff to pay, a Receiver is compensated solely based upon revenues collected and disbursed. If there are no rents, or there is a rent strike, will the plaintiff agree to fund management of the property, necessary repairs, and a compensation arrangement? Would the Court permit such an arrangement? Receivership duties can often require a great deal of time and effort. It is important to know that there will be a source of funds to manage the property and provide compensation, especially for solo and small firm practitioners. As Abraham Lincoln noted long ago, "An attorney's time and knowledge are his [and her] stock in trade."
As noted above, once the UCS Form 872: Notice of Appointment & Certification of Compliance, Oath and bond are filed, a Receiver has "qualified" and has legal authority "to take possession" of the property and begin collecting rents, maintenance fees and all other charges from tenants and residents. Often, the Order presented by the plaintiff is taken from a form book and will not include authority to retain other professionals necessary to effectively manage the property (referred to as secondary appointments). Upon qualifying and assessing the property and its needs, as discussed later in this article, it may be necessary to submit an application to the Court for expanded authority to take certain actions and retain the necessary professionals to meet the duties involved in the appointment.
Notice to Attorn
In order to collect rents, maintenance fees or other fees, the Receiver must serve upon tenants and residents a document called a Notice to Attorn, with a copy of the Order of Appointment attached. An attornment notice informs tenants, leasees or other occupants that the Court has appointed the Receiver, that they are required to make all further payments to the Receiver, the details concerning where to make those payments, and that they are enjoined from making such payments to anyone other than the Receiver.
Receipt of the Notice to Attorn will be very unsettling for most tenants, whether residential or commercial. Imagine being served with a formal legal notice and Order without any advance information. It is important to promptly assuage tenants' concerns. Tenants pay their rent and just want to receive the services to which they are entitled and be left alone. Life is stressful, and that stress is greatly enhanced when tenants and residents receive a legal notice directing that rent be paid to a stranger. They will be concerned about potential or already existing service interruptions and whether there will be staff reductions or changes. It is suggested that the Receiver include a cover letter explaining briefly that she or he has been appointed by the Court to manage the property during the pendency of a foreclosure action and that all reasonable efforts will be made to provide building services and maintenance.
Meet with Tenants and Staff
I have found it very helpful to include an invitation to a meeting in the cover letter to tenants which accompanies the Notice to Attorn. Having a meeting will help calm concerns and demystify the process. Such a meeting also affords the Receiver the opportunity to learn about tenants' concerns and building problems. It also provides an opportunity for the Receiver to introduce the managing agent, explain the process to the tenants and establish a line of communication. It is always unsettling for tenants when a building is foreclosed upon. If the property has been properly maintained and there is sufficient revenue, the Receiver will be able to assure the tenants that all services to which they are entitled will continue to be provided and tenants will notice little, if any, changes in the management of the property. If the property has not been properly maintained, the Receiver will be able to assure them that efforts will be made to provide all services to which they are entitled.11
Just as tenants will be deeply concerned, so too will staff. Staff will be concerned about job security and will be worried that they may lose their jobs. And an unsettled or frightened staff will invariably cause tenants' concerns to heighten. As soon as possible, a Receiver should hold a staff meeting with the managing agent present and inform building employees that the Receiver will do everything possible to avoid disruption. Calming the staff's concerns will go a long way to help the Receiver with tenant relations. If it's a union shop, promptly contacting the union shop-steward is recommended.
Secondary Appointments: Counsel and Others
Care must be taken: "secondary appointees," such as attorneys, accountants, managing agents, real estate brokers, auctioneers and appraisers may only be retained upon order of the Court.12 It is preferred that secondary appointees be on the Office of Court Administration's fiduciary list. However, the Court may appoint a non-list person or entity with a written finding of good cause which must be filed with the fiduciary clerk and the Chief Administrator.13 It is important to note that a Receiver may not be appointed as her or his own counsel, and no person associated with a Receiver's law firm may be appointed as counsel to that Receiver unless there is a compelling reason to do so.14
A Receiver may seek approval of secondary appointments ex parte pursuant to the Rules of the Chief Judge, Part 36, § 36.1(a)(10);15 however, to avoid conflicts or objections down the road, the far better practice is to make such applications on notice to all parties. Additionally, it is best practice for a Receiver to include with the application for secondary appointments copies of all proposed retainer agreements reflecting the compensation and duties of the respective secondary appointees. With regard to retaining counsel, it is advisable to seek broad authority to take such actions as are necessary and appropriate and that the order include specific language if initiating legal proceedings is contemplated or possible in the course of the Receiver's duties:
ORDERED, that the Temporary Receiver be and hereby is authorized to retain __________________ as legal counsel to represent the Receiver in all legal proceedings necessary to enforce the provisions of this Order and preserve the property; and it is further
ORDERED that the Receiver be and hereby is authorized to institute and prosecute all legal proceedings necessary or desirable for the proper care and protection of the mortgaged property.
In reviewing the Order of Appointment, the Receiver should make certain that there is authority to execute leases and that there are no restrictions that will hinder the ability to function effectively. There are significant differences between residential and commercial leases, and it is important to have sufficient flexibility, particularly regarding commercial properties. It is common that residential leases are limited to a maximum of two years, but commercial leases are frequently longer and often there are various financial concessions that a landlord (in this case the Receiver) will need to make. The parties may have concerns or objections and to avoid criticism, unless the parties consent, it is advisable to seek consent of the Court, on notice, before making any commercial lease.
The management of funds is an important aspect of any receivership. Typically, there is a provision in the Order Appointing Receiver that imposes significant restrictions on the circumstances under which withdrawals may be made. Some forms provide a banking provision requiring that the surety countersign all checks. This is problematic and will invariably cause unacceptable delays in processing payments to vendors, employees, and service providers. Additionally, such a requirement may impede the Receiver's ability to make emergency repairs promptly. Those delays may also impact the delivery of services at the premises. When such a provision is present, it is advisable to request that the Court and the bonding company agree to eliminate this requirement or, alternatively, to limit it to checks above a certain amount. A typical bank provision may include language similar to the following:
ORDERED, that the Receiver deposit all monies received by him/her in his/her own name as Receiver in any New York commercial bank, that such account shall show the name of this action and that no withdrawals be made therefrom (apart from the payment of ordinary recurring expenses) except as directed by the Court or by draft or check signed by the Receiver or countersigned by the Receiver's surety and that said depository provide monthly statements to the Receiver and also to the attorneys for Plaintiff.
In order to open the receivership bank account, the bank will require a copy of the Order Appointing Receiver, a copy of the Bond and Oath with proof of filing, and an employer identification number as Receiver. The Receiver should be the only signatory on all checks and should not delegate that authority to the managing agent. Where a Receiver engages a managing agent, the managing agent will generally want authority to sign checks, as they do for other buildings they manage. Only the Receiver should sign checks. Most property owners permit their managing agents to sign checks - it is standard practice in the industry. Nevertheless, the Receiver should insist that she or he sign all checks. Only the Receiver has been appointed as fiduciary by the Court. Reviewing invoices and making payment to vendors, providers of services and employees are among a Receiver's fundamental responsibilities. Therefore, whether it's a large commercial building in Manhattan or a small multi-family property in Brooklyn, only the Receiver should sign checks.
In order to ensure that the Receiver is able to take control of the property promptly, it is also important that the order contain a provision vis-à-vis the defendant's responsibilities and obligations:
ORDERED, that the Temporary Receiver be and hereby is authorized to receive, and the defendant be and hereby is directed to turn over to the Temporary Receiver all rent lists, rent rolls, security deposits, and any and all records, service contracts, orders, leases, correspondence, registration statements, and agreements related to the management, operation, occupancy, insurance, maintenance, or service of or construction upon the mortgaged property held by said defendants, to and including the date upon the which the Temporary Receiver files with the Clerk of the Court his/her oath and bond as set forth above.
A Receiver needs to take whatever measures necessary to obtain the information required to meet her or his duties. Without the property's financial records, it may be impossible for the Receiver to determine obligations which must be addressed and to know who is obligated to pay rent, common charges or make other payments to the Receiver. Should the defendant/landlord fail to comply after reasonable efforts are made, the Receiver should not hesitate to make a motion to hold the defendant/landlord in contempt.
The receiver is entitled to a commission as fixed by the Court in an amount not exceeding 5% of amounts received and disbursed.16 Unless there is an order of the Court authorizing interim or partial payment of commissions, fiduciary commissions are paid upon submission and approval of a final account. This can be many months (sometimes years) after appointment. Therefore, in the application for approval of secondary appointments, it may be useful to seek authority to submit interim accountings, and permission to pay commissions and fees of the secondary appointees on account, subject to approval of the interim accountings. If possible, it is helpful to distribute drafts of the interim accountings to the parties and obtain their consents prior to submission to the Court. It is improper for a Receiver to pay herself or himself commissions or secondary appointees' fees absent permission from the Court to do so.
Recordkeeping and Accounting
It is critically important that the Receiver maintain copious records from the outset. While a managing agent and accountant may be employed (if authorized by the Court), it is the Receiver's responsibility to maintain proper and accurate records and ultimately, to account for all transactions. It is the Receiver's responsibility - not the managing agent's or the accountant's - to maintain necessary books and records, file with the appropriate governmental agencies, and file all required tax returns (real estate, fiduciary income tax, etc.) in her or his fiduciary capacity. Fiduciary tax returns are somewhat different than other types of returns, so it is important to retain an accountant with knowledge of this highly nuanced area.
From the inception of the appointment, the Receiver should make certain that there are appropriate invoices and receipts which the Receiver reviews and approves or rejects for each and every transaction. This will help in assuring that the final account is accurate. It is not enough merely to sign all checks. The Receiver is responsible for the review and approval of all transactions and expenditures and must account for them. It is advisable to establish protocols from the outset to include copies of all invoices with the draft checks submitted for approval. Without the backup information, accounting will be considerably more challenging at the conclusion of the proceeding. If there are any questions by the Court, the parties or the fiduciary clerk, it may be difficult to explain certain transactions which occurred one or two years earlier without proper recordkeeping from the outset and sufficient documentation, especially if there were hundreds, or thousands, of transactions.
The final account is often where an inexperienced Receiver encounters considerable difficulty. To avoid problems, accurate recordkeeping is critical. As mentioned above, the Receiver is responsible to ensure that all records and receipts are maintained.17 The final account is the reconciliation of everything that occurred during the course of the receivership. It is very similar in structure to a formal estate or trust judicial account of proceedings. Among the schedules included in the final account will be every transaction, principal collected, income received from all sources (including bank interest, security account dividends and income,18 lawsuit settlements, rents, common charges, and all other sources of revenue), and all disbursements, losses, and declines in value. Submitting periodic interim accounts is most helpful, as the preparation of the final account is then likely to be much less burdensome.
A foreclosure may conclude with a judgment in favor of the plaintiff,19 a judgment in lieu of foreclosure, a settlement agreement, or on rare occasion, a dismissal of the action. Query: When does the Receiver's obligation to collect rent end? At execution of the deed? Upon ratification of the Final Account? When discharged by the Court? Look to the Order of Appointment for guidance.20 The filing and approval by the Court of the final account is not quite the end of a Receiver's duties. Upon conclusion of a receivership, any security deposits received must be turned over to the new owner and a notice should be sent to the respective tenants and occupants with any accumulated interest, if they are so entitled to such interest.21 It is important to obtain an order discharging the Receiver and the surety. Until there is such an order, the surety bond continues, as does the Receiver's obligation to pay the premiums for the bond.
Upon ratification and approval of the final account and distribution of all funds on hand, the Receiver should promptly file an Ex Parte Order of Discharge which indicates that the Receiver has fully complied with the prior Order of the Court approving the Receiver's Final Account, has duly issued the Court-approved payments required thereunder of the total balance on hand with proof of compliance (such as copies of checks or wire transfers) and therefore, the Court discharges the Receiver and the surety. Upon issuance of the Order of Discharge, the Receiver should serve a copy of the Order upon all appropriate administrative and governmental agencies, insurance companies, tenants, vendors, etc., with a cover letter notifying them that the Receiver has been discharged.
The role played by a Receiver is an incredibly important one. A Receiver represents the Court in a profound way, as a Receiver manages a property and helps to preserve the value of the property during the pendency of a foreclosure proceeding. Equally important, a successful Receiver ensures stability for tenants, staff, vendors, lenders, the community and others who may be impacted by the proceeding.