September 29, 2020

Sale & Use of Receivership Property.

The ability of receivers to sell property and the power of courts to authorize sales, especially sales free and clear of liens, was an issue of doubt in Arizona for years.  Section 33-2615(B) explicitly authorizes the “transfer”, including sales and leases, of receivership property, including sales free and clear of liens, with court approval.   Any lien on the property attaches to the sale proceeds and has the same validity and priority it had on the transferred asset.  A.R.S. §33-2615(C).

Accordingly, a court may permit the sale of an asset free and clear of any liens, even if there is a legitimate dispute over the validity or priority of the liens with those disputes to be resolved by the court at a future time.   The sale proceeds must be held, presumably by the receiver in a separate, segregated interest bearing account, until the court resolves that dispute.

There is no requirement for the transfer to be done through a public auction.  Although a court may, therefore, permit a sale of receivership property through a private sale, the actual terms and conditions of that transfer still must be noticed out to all creditors with an opportunity for a hearing pursuant to the requirements of Section 33-2602.   Any creditor holding a “valid lien” on the property is entitled to a credit in the amount owed to it if it decides to purchase the property as long as it pays cash in an amount necessary to pay in full “the reasonable costs of the transfer.”   See A.R.S. §33-2615(D).

The property transferred will be subject to the lien of a senior lender unless that lien is extinguished by that transfer.   Id.   This means that the buyer at the receiver’s sale need not pay off the liens of the lenders.   Obviously, however, any buyer will need to reach agreement on how each of those lenders will be paid or one of them will foreclose and wipe out the interest of the buyer.

The validity of any transfer to a person who receives the property in “good faith” will not be affected and any lien extinguished by the transfer will not be “revive[d]” by the reversal or modification of an order approving the transfer unless the court stayed the order approving the transfer.  The term “good faith” is defined to mean “honesty in fact and the observance of reasonable commercial standard of fair dealing”.   A.R.S. §33-2615(E) & (F).

The Commissioners who drafted UCRERA provided a succinct and convincing rationale for a lender to seek a sale of property through a receivership rather than foreclosing on the asset.

. . . public foreclosure sales do not consistently produce prices that approximate the market value that might be obtained in an arms-length, non-distress sale. By contrast, a receiver of mortgaged commercial real property could readily market that property to potential buyers in the context of operating the property during the receivership. Such marketing could permit potential buyers to perform more meaningful and complete due diligence. Further, a sale subject to judicial review and confirmation could produce greater finality regarding the title acquired by the buyer at the sale. Thus, there is adequate justification to expect that in many cases, a receiver sale of mortgaged commercial real estate would produce a higher sale price than a public foreclosure sale would produce.

UCRERA, §16, at p. 50.   Those are substantial possible benefits which a lender should carefully consider in evaluating foreclosure vs. receivership regarding a defaulted loan.

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