Problems can make for good business. Receivers go
looking for problems and problems, in turn, sometimes find them. Those
problems often require the same solution, money; money for repairs, money
for taxes, money for fees, money for litigation, and money for everything
But itís not always obvious
where that money will come from. Often, a receivership estate has little
or no cash on hand and, sometimes, the property's existing creditors are
unable or unwilling to fund necessities. While this is uncommon, it does
happen and it requires the receiver to track down funding for the
receivership estate. Whether the estate has big needs or small,
third-party lenders may be the best source of those funds.
To entice a third-party lender to lend to a
receivership estate, it is important to understand that lenderís
perspective. Those providers of targeted capital represent their own
interests, not the interests of the estate. And they charge a lot.
Interest rates are normally double digits, plus fees. The market for
third-party receivership financing is shallow, allowing the participants
to earn a scarcity premium on their money. They bring value, and they get
paid for it.
Before lending to a receivership estate, lenders
will usually require issuance of receivership certificates that have
priority over the existing liens on the property comprising the estate. To
do this the receiver must (1) find a lender willing to lend to the estate
on favorable terms, and (2) obtain court approval to issue receivership
certificates in exchange for such financing.
It is generally up to the receiver to show the
court that the third-party capital provider adds value worth its fees and
high interest rates. The receiver will also be tasked with demonstrating
to the lender that the receivership estate will be able to repay the
funds, which may come from future income or the eventual sale of the
Providing capital may be evidence of value in and
of itself, but what if the transaction doesnít close? Third-party
financing is only available to a receivership estate if the receiver can
make it worthwhile for that third party to pursue. What terms will
motivate a lender to finance a receivership estate? No matter how
straight-forward a transaction may seem, crazy stuff happens. How does a
provider of targeted capital know that he isnít speculating his resources
on something that wonít happen? How does the proposed priming lender know
that he isnít being used as a stalking horse?
While not used in every receivership, receivership
certificates can play an important role in ensuring that the estate has
proper funding to carry out its duties under the receivership order.
California courts have long recognized the necessity of such certificates
and for certain types of receiverships, they will continue to serve an
important function for many years to come.
Mechanics and Legal Standard
Generally, the costs of a receivership are paid
from the income of the property comprising the receivership estate. That
being said, receivers are often appointed to manage property, both real
and personal, that produces insufficient income to satisfy the
requirements of the receivership estate. In these circumstances, a
receiver has little choice but to borrow funds to ensure that he or she is
able to carry out the receiver's duties. To do so, a receiver must apply
to the court for permission to borrow funds in exchange for receiver's
here for Sample Certificate
Receiver's certificates operate as
security for amounts loaned to fund the receivership estate. The
certificates evidence the indebtedness of the receivership estate and, for
real property, the certificates are recorded against the property, similar
to a deed of trust. While there is limited case law addressing the
subject, the authority to issue receiver's certificates to fund the
receivership estate is left to the broad discretion of the court that
appointed the receiver.2 The court also reviews and
approves the provisions of the certificate, including the amount, interest
rate, and repayment terms.3 While the court has large
discretion to authorize borrowing in exchange for certificates,4
this discretion is ordinarily exercised with deference to a receiver's
reasonable business judgment.5 The certificate becomes
an obligation of the receivership estate, typically paid from the sale of
the property, but is not an obligation of the receiver personally.
It is also within the court's power
to authorize the issuance of certificates with super-priority lien status
over all other liens, including the liens of the secured lender that
sought the appointment of the receiver.6 Because of this
possibility, the senior secured lender typically loans funds to the
receivership estate in exchange for the certificates so that its liens are
not subordinated to another lender. Nevertheless, with court approval, the
receiver may borrower funds and issue receiver's certificates to a lender
other than the existing senior lien holder. Obviously, this is uncommon in
a rents-and-profits receivership, but when might that happen?
The Need for Third Party
Financing and Receivership Certificates
There are numerous instances that
might require the receiver to borrower funds in exchange for certificates
to ensure the property is managed and cared for, as set forth in the
Suppose the existing lender is a
private fund in bankruptcy or receivership and has no cash on hand? A
lender with no cash to protect its own interests might have been unheard
of six years ago, but not today. Suppose the receivership is for health
and safety? An existing lender may be so far underwater that it simply
declines to go in any deeper for a dilapidated property. Suppose the
receiver believes that a claim is critical to the value of the estate and
therefore should be litigated, but the existing lender disagrees? Or, a
receivership estate may be the defendant in litigation that threatens the
property comprising the estate. Suppose the amount of the receiverís
request is simply too large for the existing lender to manage?
For example, when a receiver is
appointed to manage real property that has not paid its property taxes in
many years there may be the threat of a tax sale looming. While an
existing lender would usually advance funds to pay the outstanding
property taxes, this may not always be possible. As mentioned above, the
lender may not have available cash to do so; this may be particularly true
when there are many individual or very small lenders who have financed the
property. They may lack both the funds and the coordination to advance the
property taxes. In this circumstance, finding third party financing is
vital to protecting the property. Because the stakes are so high, and the
value undeniable, it is very likely a court would be willing to approve
receivership certificates that prime the existing lender's liens in this
As it is generally the duty of the
receiver, as an appointed officer of the court, to protect the value of
the estate, third-party financing can be an important tool. Further, given
the varied nature of receivership estates, third party financing through
receivership certificates will stem from a wide variety of situations and
vary widely in complexity. The receivership certificate process might be
straightforward, but getting to the finish line takes time and resources.
Lenders will build such risk into the financing terms to ensure their
return is acceptable.
Nonetheless, when push comes to
shove, the most likely provider of receivership certificate financing is
the current, senior lender. Third-party lenders know this too so both the
receiver and the proposed lender should ensure that the existing lenders
are unwilling to provide financing before incurring the time and expense
to prepare a proposal and document the transactions.
Given the complexities associated
with issuing receivership certificates and obtaining third party
financing, hiring the right legal counsel with experience in these matters
is essential. Third-party providers of receivership certificate financing
should similarly be top of mind. For a host of problems, they may be just
the right fit.
* Kenneth A. Miller is President of Guardian Capital
Advisors, Inc., a private real estate lender and debt advisory firm in the
Bay Area. He has been advising capital providers on the placement,
valuation, structuring, restructuring, and liquidation of mortgage assets
for the last decade. Ken is a real estate broker with a Masters in
Economics, University of San Francisco and a Chartered Financial Analyst.
1 See Cal. Code. Civ.
Proc. ß 568; see also California Judicial Council Form RC-310 for
Order Appointing Receiver ("The receiver and the parties may at any time
apply to this court for further instructions and orders and for additional
powers necessary to enable the receiver to perform the receiver's duties
2 Title Ins. & Trust Co. v. California Development
Co., 171 Cal. 227, 233 (1915) ("[W]hether receiver's certificates
should be issued and whether those certificates when issued should be
given priority over the other indebtedness of the defendant, rested
largely in the discretion of the court below."); Barclays Bank of
California v. Superior Court, 69 Cal.App.3d 593, 600 (1977) (a court's
appointment of a receiver and administration of a receivership must be
"according to the principles Ö of equity, and the question 'is largely one
in the discretion of the court.'"); see also McLane v. Placerville & S.
V. R. Co., 66 Cal. 606, 629 (1885).
3 Miller & Starr, California Real Estate ß 33.12.
4 City of Santa Monica v. Gonzales, 43 Cal.4th
905, 931 (2008) ("Typically, however, court rulings on receivership
matters are afforded considerable deference on review . . . . Such
deference is the rule, even where the court confirms extraordinary action
by the receiver, such as a sale of real property.") (citations omitted).
5 See id. at 931-33.
6 Miller & Starr, California Real Estate ß 33.12 (3d.
ed. 2009); Schreiber v. Ditch Road Investors, 105 Cal. App. 3d 675,