September 18, 2020

Receiver’s Professionals and Compensation to Receiver and Her Professionals.

A receiver has the power to retain professionals to assist him during the case, but, must make certain specified disclosures.   A.R.S. §33-2614(A).   A person may be hired by a receiver even though she has been previously employed by or represented the receiver or has another “relationship with the receiver, a creditor or a party.”   The receiver may serve as a lawyer, accountant, broker or auctioneer for the receivership if authorized by law.  A.R.S. §33-2614(B).  

As a result, a receiver may hire himself or his own firm as one of the enumerated types of professionals. Of course that raises the question of should she hire her own firm to provide such services.  It also raises for officers of the lender who obtained the appointment the question: do we want our receiver to also be his own lawyer or broker.  

A lender very well may view a receiver hiring his own firm as a lawyer or broker to create a possible conflict of interest.   The lender will want the property marketed in a reasonable manner and the property sold promptly for a reasonable price.   If the receiver is also the broker, there may be a perception that he will have a financial incentive to market the property for a longer period of time holding out as the de facto owner for a higher price in order to try to obtain a larger commission.  The receiver has no disincentive from keeping the property because she is not the actual owner with a risk of loss and is not funding operating losses from her own funds.  The receiver’s apparent conflict is compounded if he is being paid for work as the receiver on an hourly basis. A receiver also may have a disincentive to promptly sell the property if he is earning fees for ongoing legal work performed in the receivership.  None of those concerns will be manifest if the receiver hires a separate professional.

The best practice is for the lender to require the receiver to provide a plan for the property before retention and require the receiver to hire third party professionals who are able to provide objective brokerage, legal or accounting advice.   That will ensure the receiver’s independence and that her decisions are based on an objective disinterested analysis of the realities of the property and its operations. It will also permit the lender to know that the marginal benefit of maintaining the receivership exceeds the marginal costs.  Critical to this analysis is for the lender to understand whether the receiver proposes that he be paid fees at an hourly rate for all or most services or on a flat monthly rate for most identified regular work and perhaps an hourly rate for limited services requiring extraordinary professional judgment, skill or analysis[1].  Lenders and other creditors almost always will be better off limiting a receiver to fixed monthly fees for the majority of services in the vast range of cases brought under the Act which probably will be the fairly routine “rents and profits” receiverships.  Such a defined flat fee structure also will make the process of obtaining approval of those fees by the court, pursuant to Section 33-2619(A), easier for the receiver. 

This is important because every dollar paid to the receiver and his professionals very well may reduce the amount paid to the lender unless there is equity in excess of the amount of the lender’s lien.  At a bare minimum, the lender should ask a receiver who wants to hire her own firm: (1) why is your firm the best qualified to provide those services; and (2) what have you done to determine that there are no comparable firms who can provide those services for less.  For example, has the receiver gotten bids from other brokerage firms regarding a reduced sales or leasing commission?  The test should be, has the receiver established that retaining his own firm will “put more money in the lender’s pocket”.

In hiring a broker, whether his own firm or an independent broker, the receiver should insist that the lender with the senior deed of trust and any junior lenders are identified as exclusions in the listing agreement unless the sale price exceeds the amount owed to those creditors.   There is no reasoned basis for paying a commission to a broker if a lender holding a lien against the property is the ultimate buyer of the property for an amount less than the aggregate indebtedness against the property.  The lender would not have to do so at a trustee’s sale so it should not have to pay a premium if the receiver and her broker fail to bring a buyer who returns a better result.    A simple illustration will suffice:  First Arizona Bank is owed $9.5 million secured in first position on an apartment building.   Last Bank of Arizona is owed $1,000,000 and is in second position.   The receiver hires Big Deal Brokers (“BDB”) to sell the property on a 5% commission.   BDB brings a buyer who agrees to pay $10 million.   Last Bank refuses to permit the short sale and acquires the building at a sale in the receivership court for $10.5 million.  Certainly, Last Bank should not be required to pay BDB a commission of $525,000.00 (5% of $10,500,000), which would only compound Last Bank’s loss. 

Lenders and the receiver also should consider limiting a broker’s compensation to a percentage of the sale proceeds in excess of what the lender reasonably believes it will receive if it forecloses.  If a lender will receive less through a receiver’s sale due to the payment of a broker’s commission, there will be little reason to allow that transaction to close.  As a result, a prudent lender will obtain a valuation of the property, this need not be a full blown appraisal, before commencement of the receivership action and determine the amount of any tax liens or other senior encumbrances.  That will allow the lender and the receiver to know the purchase price a receiver will need to obtain to provide a net benefit to the lender.

For example, take the hypothetical above with the following changes.  Last Bank’s valuation of the property shows that the property is worth $10,000,000.00.  If the commission is simply 5% of the purchase price, Last Bank would receive nothing if it allows the sale with a price of $10,500,000.00 to a third party to close after payment BDB’s $525,000 commission.  On the other hand, it would be fair to pay BDB a commission substantially higher than 5% on every dollar in excess of Last Bank’s $10,000,000.00 valuation.     For example, a commission of 25% on the amount by which the price exceeds Last Bank’s valuation would yield $125,000 to BDB.    Such a commission structure would align the incentives of the banks, the receiver and the broker to allow a receiver’s sale under the Act to close.

A lender also should require the receiver to demonstrate periodically that the benefits of the receivership continue to exceed the costs.   If at any time, the receiver is unable to establish that the additional costs from continuing the proceeding are outweighed by the probable additional return, the lender should proceed with foreclosure unless there is a significant reason it does not want the property on its books.

In order to receive compensation, the receiver and her professionals must file an “itemized statement” of the work done, the amount of time spent on each task, the hourly rate of each person who performed services and an itemized list of expenses.   Payment is subject to court approval.   A.R.S. §33-2614(C).   If the court finds that the receiver’s fees and costs are “reasonable and necessary”, it “may,” but is not required to, award compensation to her, pursuant to A.R.S. §33-2619(A). 

Although Section 33-2614 does not subject the fees of the receiver’s professionals to the same test of reasonableness and necessity, the standard for award of fees and costs by a court in other proceedings provides a similar standard and, no doubt, will be used by a judge in evaluating such fees under the Act.  In Arizona, the prevailing party is generally, “entitled to recover a reasonable attorney’s fee for every item of service which, at the time rendered, would have been undertaken by a reasonable and prudent lawyer to advance or protect his client’s interest in the pursuit of a successful [claim or defense].”  Schweiger v. China Doll Rest. Inc., 138 Ariz. 183, 188, 673 P.2d 927, 932 (1983) (quoting Twin City Sportservice v. Charles O. Finley & Co., 676 F.2d 1291, 1313 (9th Cir. 1982)).  A court may also consider, “the difficulty and intricacy of the work performed when determining the reasonableness of the attorney fees sought.” Schwartz v. Schwerin, 336 P.2d 144, 146 (Ariz.1959).

Any junior lender deciding whether to obtain a receiver must bear in mind that it very well may need to pay the receiver’s fees and costs, including those of his professionals, if the senior lender ends up foreclosing or the proceeds from the sale of the property are not sufficient to pay the senior lender in full.  See A.R.S. §33-2619(B)(1).  Therefore, a junior lender must carefully analyze whether there is substantial equity in the property in excess of the amount owed to the senior lender plus any real estate tax liens and closing costs, including real estate commissions before initiating a receivership action.   Getting stuck paying the receiver and her professionals’ bills will add substantial insult to the sizeable injury which an out of the money junior lender will sustain.

The requirements of A.R.S. §§33-2614 & 33-2619 are a significant change from the practice pre-UCRERA in which receivers routinely paid themselves and their professionals without oversight by creditors and the court[2].  Before the Act there were several examples of receivers in Arizona incurring an excessive amount of fees for their own services and the work of their professionals leaving lenders and other creditors with little recourse. The result in those situations was a reduction in the amount available to pay any junior lender and even the lender in first position.  Indeed, concerns over the relative costs and benefits of receiverships is one of the reasons that the United States Small Business Administration has been so loathe to approve receiverships for defaulted 7A and 504 loans.   

Sections 33-2614(C) and 33-3619(A) provide a necessary level of transparency to and recourse for senior lenders and junior creditors to prevent that type of abuse and should create greater confidence in the receivership process.   Receivers and their professionals who focus carefully on the benefits and costs to all creditors and their ability to demonstrate a positive net return from their actions will do well under this new structure.

[1]   For example, negotiating with potential purchasers, dealing with owners regarding the turnover of money or other assets that are receivership property and responding to demands or inquiries by junior lenders or other creditors appear to be matters for which paying on an hourly basis is justified.  Routine management issues such as directing, responding to or dealing with employees, addressing routine matters regarding the property, talking with a broker and employees of the lenders, preparing reports for the lender or to be filed with the court and working with tenants should be covered by a monthly fee.

[2] Although this section does not state that the “statement” must be served on creditors subject to possible objection, it clearly is a matter for which notice and opportunity for hearing must be provided, pursuant to Section 33-2602, because the court must grant its approval.

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