A mortgagee in the pre-foreclosure stage may prefer an equitable receivership either to attempting to obtain possession as mortgagee or to reliance on an assignment of rents provision. While the scope of am equitable receivership varies from jurisdiction to jurisdiction, it typically involves a judicial appointment of a third party to take possession of the mortgaged property, to repair or preserve the property and to collect rents.
1. Receiverships avoid the termination of subordinate leases by entry of the mortgagee.
2. Mortgagee avoids strict accounting responsibilities.
3. Receivership insulates motgagee from tort and landowner-type liabilities.
4. Important in lien theory states where ejectment is not an available alternative to obtaining possession.
5. Also, assignment of rents may not be helpful if there are no tenants paying rents. A receiver can take possession and attempt to reestablish a cash flow from the mortgaged premises.
6. A receiver is generally a property manager who the lender pays a percentage of the collections.
Dart v. Western Savings & Loan Association (Ariz. 1968): A receiver may not be appointed where the debt is adequately secured. Dart took possession and collected rents yet did not pay the mortgage. The value of the property equaled or exceeded the mortgage amount. A mortgage is a lien, not a possessory interest.
– Since there was adequate security and no waste, the contract provision consenting to the appointment of a receiver means nothing in a court of equity.
– In title theory states, receiverships are appointed only if the action for ejectment is deemed inadequate.
– Generally need some kind of equitable ground – waste, destruction, imminent danger loss – fact-specific reason to be argued before a judge with considerable discretion.
– Restatement: Mortgagee is entitled to the appointment of a receiver if (1) the mortgagor is in default under the mortgage; (2) the value of the real estate is inadequate to satisfy the mortgage obligation; and (3) the mortgagor is committing waste.
– Appointment of a receiver may take too long. Miami hotel sold for a lot less than the rents and the purchasers quickly spent all the profits.
– Assignment of rents and appointment of receiver clauses: May be ignored if no equitable grounds, but the Restatement states that if the clauses are present, have automatic right to a receiver (most courts do not adopt the R. though). State statutes may make the clauses enforceable.
– Some jurisdictions allow ex parte orders to appoint receivers. Is this a violation of due process? No because allowed when the mortgage provides that receivers can be appointed without notice. Is this waiver of due process objections?
– Receiver is bound by the agreement between the tenant and the mortgagor landlord. Receiver may disaffirm the lease if prepayments were made without the mortgagee’s written consent – tenant can be held liable to receiver for the advance rent previously paid to the mortgagor. Prepayments that are not authorized by the original lease are presumptively not commercially reasonable and will not be binding on the receiver.
– A receiver appointed at the instance of one mortgagee acts on behalf of that mortgagee and not generally on behalf of all lienholders.
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