Arizona Receiver Granted Right to Sell Property Without Foreclosure or Borrower's Consent
By Zeitzer, Beth Jo*
August 2, 2010 marked a clear turning point for Arizona Receivers when the Maricopa County Superior Court ordered Trigild Inc. (Receiver) from San Diego, California, to sell seven Arizona apartment complexes, over the Borrower's objections, and without requiring a foreclosure to occur first.
The case was LaSalle Bank National Association et al. v. Phoenix Kingdom I, LLC, etc., Arizona Superior Court case no. CV2009-007743. The borrower, Bethany Group from Irvine, California, walked away from these seven Arizona apartment complexes in December of 2008 (along with 6 others not involved in this case, that were acquired with financing from another source). Their subsidiary, Phoenix Kingdom I, LLC, purchased these seven apartment complexes with a CMBS loan.
In March, 2009, the court appointed Trigild as Receiver for these seven apartment complexes located in Phoenix, Mesa and Glendale, Arizona after it became known that Bethany Group had cut off employee salaries and operational funding of 60 of its apartment complexes nationwide.
Trigild received numerous offers on this portfolio, including an offer from Standard Portfolio, a real estate investment firm, for $123 million. This offer was $53 million over the next highest offer, but contingent upon the assumption of the existing CMBS loan that carried more favorable lending terms.
Prior to this case, there was no definitive Arizona law prohibiting or allowing the sale of assets in Receivership. In this case, waiting until after foreclosure, could have cost Bethany Group's lender more than $50 million.
LaSalle Bank National Association, was the trustee in the case, and supported the sale of the asset in receivership.
As special servicers seek to recover the value of defaulted loans rolled into CMBS, foreclosure is not a positive course of action in today's soft market. There is very little potential to recoup an outstanding loan balance, and the capital investment required to hold and manage an asset can be extensive. When it comes to selling a foreclosed asset, buyers have limited access to capital, and lenders are typically offering between 60%-70% loan-to-value. Plus, leveraged cash buyers bid lower, expecting higher annual returns to compensate for the higher risk of equity investment.
Being able to offer assumable financing allows buyers to partake in low cost capital that was originated during better market conditions, and thus, can recover the most funds possible for the special servicer. However, due to laws regulating CMBS loans, special servicers aren't allowed to offer collateral properties from defaulted CMBS loans for sale with assumable financing. They can't offer seller financing by creating new debt in existing CMBS pools that they manage. And the very act of foreclosing wipes out the original debt, so there is no longer a loan to assume. The only way for a new owner to assume existing financing is to directly take the place of an existing borrower of that CMBS loan.
In this case, the court ruled that the buyer will take the place of the existing borrower within that CMBS pool, allowing them to assume the existing loan. This is also positive for the other CMBS bond holders, since a non-performing borrower is replaced with a performing one.
*Beth Jo Zeitzer is an attorney in
California and Arizona, and is the owner and designated broker of R.O.I.
Properties. R.O.I. serves as court-appointed receiver and property manager
for lenders, special servicers and out of state receivers for Arizona real
estate assets. She may be reached at 602-653-0352 or
A quick review of the pleadings disclosed several items of note. The motion for authority to sell was prosecuted by the receiver, rather than by the plaintiff, and was strongly opposed by the defendant, which argued that Arizona statutes (and the security agreement) established the lender’s remedy – foreclosure (judicial or non-judicial) – and did not provide for pre-foreclosure liquidation of properties over the owner’s objection. Several additional arguments were made by the property owner, including that a forced sale was a constitutionally impermissible abridgement of its ownership rights in the property.
The receiver argued that the receivership order, when made, contained the right (and mandate) for the receiver to sell (even though the order appears to have been obtained without notice to the defendant), should have been eariler contested, and that the sale was in the best interests of the lenders and owners in that it would bring the highest obtainable price. The Receiver also argued that financial times were uncertain, and that because of the CMBS rules discussed in Ms Zeitzer’s article, significant existing encumbering debt would not be assumable if the lender were required to complete its foreclosure on the property before resale.
The court did not disclose the reasons for its ruling. The order also provided that legal title, not just equitable title, to the property could be transferred by the receiver. The pleadings did not disclose how the court, which holds only equitable title to property in receivership, wrested legal title away from the defendant/owner without further legal proceedings in order to allow the receiver to pass it to the purchaser.]