PRESENTED BY - NLI · NealFellenbaum,Esq.* Zegen&Fellenbaum* (212)9864848** [email protected]* AllenG.Kadish,Esq. DiConzaTraurigKadishLLP (212)6824940 [email protected]*

PRESENTED BY:

Sponsored by:

July 20, 2011

Receiverships and Bankruptcies: Court Preserva6on of Real Estate Assets

Neal Fellenbaum, Esq. Zegen & Fellenbaum

(212) 986-‐4848 [email protected]

Allen G. Kadish, Esq. DiConza Traurig Kadish LLP

(212) 682-‐4940 [email protected]

Michael Feldman Choice New York Management

212-‐982-‐3600 info@choice-‐ny.com

RECEIVERSHIP

OVERVIEW

•  Devices that State and Federal Courts can and will use to preserve assets pending li=ga=on to dispose of them.

•  Ethical issues faced by appointees of Courts to preserve assets

OVERVIEW

•  Receivers – Usually State court appointments

– Mortgage foreclosure -‐ to safeguard a property while going through the =me consuming foreclosure process.

– Corporate or partnership disputes; preserve assets pending resolu=on of the dispute

OVERVIEW

•  Bankruptcy: – Appointment of a state court receiver oKen causes the filing of a bankruptcy.

– Bankruptcy Courts have separate and very different methods of preserving assets.

– Receivers are also appointed by the Federal Courts.

OVERVIEW

•  Ethical issues an appointee may face:

•  Part 36 of the NYS Court Rules governs fiduciary appointments.

•  In many respects, Part 36 has provisions very similar to the Rules of Professional Conduct.

OVERVIEW

•  Bankruptcy – OKen an owner of property subject to a receivership will seek refuge in the Bankruptcy Courts.

– Bankruptcy operates very differently from a State Court receivership; different concepts; different rules; different proceedings.

RECEIVERS

•  A RECEIVER WEARS SEVERAL DIFFERENT HATS

•  You are an officer of the Court, i.e., a public official.

•  You are a fiduciary, i.e., you have to act with the utmost honesty and good faith.

•  You may be running a business, very much like a CEO, but you can’t operate as a normal businessman.

RECEIVERS

•  Unlike a businessman –

–  You are constricted by Court Rules and supervision by a judge, your ul=mate regent.

–  You are a fiduciary governed by rules very similar to the Code of Professional Conduct.

–  Your task is usually to preserve the property, not grow the business or increase profits.

RECEIVERS

•  Unlike a businessman -‐

•  You just can’t hire important persons such a managing agent, a[orney, accountant or broker; those persons must be on pre-‐approved lists of the court; then you have to explain to a judge why you need these assistants; and then the court has to appoint them.

•  Everything you do is poten=ally public record, and subject to public scru=ny by a[orneys, court officials and the judge who appointed you.

RECEIVERS

•  Unlike a businessman –

–  Everyone is deferen=al, if not obsequious, while you’re in control of the assets; but as soon as you relinquish control, you could (and likely will be a[acked by the very people who may have asked for a court to appoint a receiver and for whom you did a great job.

–  Unlike a businessman who might be the top dog, you ALWAYS have a boss, the judge who appointed you.

RECEIVERS

•  The nature of a Receiver

–  An “arm of the court” with fiduciary responsibili=es.

–  An extreme or dras=c remedy to prevent irreparable harm to property.

–  Only answerable to the judge who made the appointment.

–  A Receiver need not be an a[orney.

RECEIVERS

•  A receiver is a fiduciary –

–  Duty to act with the “utmost good faith and honesty.”

–  Funds held in your possession as a receiver are not, and will never be, your money.

–  A receiver’s fiduciary du=es with respect to receivership funds are completely analogous to an a[orney’s fiduciary responsibili=es toward escrow or trust funds in his/her possession as set forth in Rule 1.15 of the Rules of Professional Conduct.

RECEIVERS

•  The powers of a Receiver are limited.

–  Powers and du=es defined by (a) the statute under which he was appointed, e.g., Ar=cle 64 of the CPLR; and (b) much more importantly, the order appoin=ng the receiver.

–  CPLR 6401(b), the principal receivership statute, provides that “the court appoin=ng a receiver may authorize him to take and hold real and personal property, and sue for, collect and sell debts or claims, upon such condi=ons and for such purposes as the court shall direct…”

RECEIVERS

•  Some of the types of ma[ers in which receivers are appointed:

–  (a) Mortgage foreclosures; –  (b) Business disputes (corporate dissolu=ons and disputes, partnership disputes, etc.);

–  (c) enforcement of judgments; and –  (d) matrimonial cases.

RECEIVERS

•  How a receiver is appointed:

–  By applica=on to the Court

•  By mo=on.

•  Strict right of foreclosure; ex parte applica=on for an appointment of a procedure; this right is oKen set forth in mortgage documents.

RECEIVERS

•  What should you do if asked to be a receiver?

–  State or Federal appointment? (Federal are much be[er.) •  If NYS appointment, Part 36 Court rules, a version of ethics rules applying to fiduciary appointment, will apply. Rules may prevent a prospec=ve appointee being appointed.

•  If Federal, NYS restric=ons do not apply. Federal judges will oKen listen to requests of counsel seeking the appointment of a par=cular person.

RECEIVERS

Part 36 is in essence a set of ethics rules governing NYS court appointees and many aspects of their conduct: It shares may similari=es with the New York Rules of Professional Conduct.

RECEIVERS

•  Missions of Part 36 (similar to tenets of RPC):

–  Avoid actual or poten=al conflicts of interest.

–  Avoid appearance of impropriety.

–  Ensure that appointments are made on the basis of merit and competency.

RECEIVERS

•  The touchstone of Part 36 is transparency:

–  Part 36’s provisions don’t cover many situa=ons a court or an appointee will face; so a judge will diverge from requirements to meet the needs of a case as long as transparency and fairness are achieved.

RECEIVERS

•  ETHICAL AND PRACTICAL FACTORS TO CONSIDER BEFORE ACCEPTING A NYS COURT APPOINTMENT:

•  QUESTIONS THAT MUST BE ANSWERED BEFORE AN APPOINTEE CAN ACCEPT AN APPOINTMENT:

RECEIVERS

•  QUESTIONS TO ANSWER PRIOR TO APPOINTMENT:

–  (a) Am I on the court’s list of eligible appointees for the county in which the appointment occurs?

–  (b) Even though I am on the list of eligible appointees, is there a factor that will cause me to be disqualified? and

–  (c) Even though I have passed the above tests, do I want to accept the appointment?

RECEIVERS

•  First Ques=on – are you on the list?:

–  Are you qualified under Part 36 to accept an appointment?

•  Must be on the list of eligible appointees for each county.

•  The Court is required to appoint individuals and not en==es, although this rule is oKen ignored because of the needs of a case.

RECEIVERS

•  First Ques=on – Are you on the list?

•  Categories relevant to appointments in real property ma[ers:

–  receivers –  counsel –  accountants –  appraisers –  property managers (must be licensed real estate

brokers) –  real estate brokers (must be licensed)

RECEIVERS

•  First Ques=on – Are you on the list?

–  A person seeking appointment as a receiver must take a training course to become eligible to be a receiver.

–  Gemng on the list of persons eligible to be appointed: •  Apply on-‐line with Office of Court Administra=on. •  Get on the list of each county in which you could serve; never know when a good appointment may occur.

RECEIVERS

•  Second ques=on: Do the Part 36 Rules disqualify you from being appointed?

–  Comparable to the goals of the Rules of Professional Conduct, Part 36 sets forth rules to assure that with respect to judicial appointments (a) there are no actual, apparent, or imputed conflicts of interest; (b) there is no favori=sm; (c) competent individuals are appointed; and (d) there is transparency in the process.

RECEIVERS


–  Obvious ones: •  Judges and their rela=ves, i.e., spouses, parents, siblings, aunts and uncles, first cousins, etc.

•  Persons working for the courts or their rela=ves.

•  Disbarred and suspended a[orneys; Felons.

RECEIVERS

•  Second ques=on: Do the Part 36 Rules disqualify you from being appointed? –  Persons who cannot be currently appointed because of legal restric=ons resul=ng from poli=cal or elec=on ac=vity. •  Chairman/chairwomen of State or County Poli=cal Par=es or their rela=ves. •  Barred for two years aKer official leave that posi=on •  Prohibi=on applies to partners and employees of law firm of poli=cal leader.

RECEIVERS


–  Persons connected with judicial campaigns cannot be appointed by the candidate judge within 2 years aKer his/her elec=on.

RECEIVERS


–  Limita6on on number and types of appointments you can get.

–  Persons who cannot be currently appointed because of the amount of “compensa=on” previously received from fiduciary appointments, or the amount of “compensa=on” an=cipated to be received from a new fiduciary appointment: Rule 36.2(d).

RECEIVERS


•  These rules are limita=ons on the number and type of appointments that a person can receive. They are not limita=ons on the amount of compensa=on a person can receive from an appointment or ongoing appointments.

RECEIVERS


• What is compensa=on?: Compensa=on means an award of court fees, commissions, allowances or other compensa=on, excluding disbursements.

RECEIVERS


–  Limita=ons on receiving more than one large fee appointment within a calendar year:

– What does “receiving” mean? For all prac=cal purposes, receiving means accep=ng an appointment, i.e., filing the appointee’s bond and oath to start ac=ng as a receiver.

RECEIVERS


–  The “$15,000” rule (22 NYCRR §36.2(d)(1)):

–  “No person or en=ty shall be eligible to receive more than one appointment within a calendar year for which the compensa=on an)cipated to be awarded to the appointee in any calendar year exceeds the sum of $15,000.”

RECEIVERS


How does the $15,000 rule work?

Hypothesis no.1: The appointee has already reached more than $15,000 in an=cipatory fees during a calendar year from an appointment received earlier that year: Cannot accept this.

But, you can accept smaller appointments subject to aggrega=on limita=ons.

RECEIVERS


–  Hypothesis no. 2: The appointee has not previously received a large appointment during a calendar year, and is now appointed to what appears to be a very lucra=ve appointment, i.e., the appointee an=cipates -‐ but of course cannot not be sure -‐ that he or she would be awarded more than $15,000 for this appointment, if it con=nues for several months.

RECEIVERS


– What does “an=cipated” fees mean? This has to be clarified.

RECEIVERS


– Review of the rules regarding the number and types of appointments you can receive (not a limit on compensa=on from appointments):

RECEIVERS


•  Q. Do you an=cipate (whatever that means) that this appointment could yield $15,000 or more this calendar year?

•  A. If “no”, you can take the appointment (smaller appointments can be accepted -‐ subject to aggrega=on rules discussed below).

•  B. If “yes”, you have to see what else you accepted during the calendar year.

RECEIVERS


Q. Did you accept an appointment in the current calendar year in which the compensa=on was expected to be (or has actually been) more than $15,000? •  If “no”, you can take the appointment. •  If “yes”, you must decline the appointment.

RECEIVERS


–  Q. If you are forced to decline an appointment because it would violate the $15,000 rule, can you accept subsequent smaller appointments?

–  A. Yes, subject to the $75,000.00 aggrega=on rules.

RECEIVERS


–  The Part 36 aggrega=on rule:

•  Being awarded more than $75,000 in fees in any par=cular calendar year prevents an appointee from receiving any appointment in the following calendar year. (Again a limita=on on future appointments.)

RECEIVERS


•  Applica=on of the aggrega=on rules: –  Q. How much was I awarded cumula=vely in the

prior calendar year?

–  A. If that cumula=ve sum is more than $75,000, the appointee MAY NOT RECEIVE NEW APPOINTMENTS in the following calendar year. (This is not a cap on compensa=on; permissible to be awarded far more than $75,000 on ongoing ma[ers during a calendar year.)

RECEIVERS


•  Q. What about old appointments that I am handling that con=nue to pay well each year, i.e., more than $75,000 during a calendar year. Do I have to give those up under the aggrega=on rules?

•  A. No. You can keep the old inventory.

RECEIVERS


–  Excep=on to the above limits: Con6nuity of service: The above limita=ons do “not apply where the appointment is necessary to maintain con=nuity of representa=on or of service to the same person or en=ty in further or subsequent proceedings.” Rule 36.2(d)(5)

RECEIVERS

•  Third ques=on: If Part 36 does not disqualify the appointee, should the appointment be accepted?

•  Factors to consider – Who is the appoin=ng judge? –  If it is a bank seeking a receiver, which bank is it? – Which law firm is seeking the receiver? – What kind of receivership is it? Foreclosure; business dispute, etc. (foreclosures are best, but oKen lead to bankruptcy).

RECEIVERS


•  Factors to Consider, cont’d: – What type of property? Commercial? Residen=al? –  Residen=al proper=es are much more difficult to operate. (could be liable for not curing habitability issues)

– What is the cash flow? Sufficient to cover expenses? –  Are there building viola=ons? –  Is the building under construc=on?

RECEIVERS


•  Factors to Consider, cont’d:

•  What are the chances of a bankruptcy?

RECEIVERS

•  Part 36 does not address prac=cal business reali=es; the Courts fashion remedies to meet the touchstones of transparency and fairness.

–  Real estate broker commissions •  Paying commissions to a receiver’s broker (1/2 commission) and to leasing broker (full commission).

–  A[orneys assis=ng appointed a[orneys •  An individual is appointed as counsel; can he use a[orneys in his firm? The Part 36 Rules are silent.

RECEIVERS

•  Business reali=es not addressed by Part 36, cont’d:

•  Appointed counsel: As a prac=cal ma[er, courts will permit the appointed counsel to u=lize the services of his partners, associate a[orneys and non-‐legal employees of his law firm, and allow the law firm’s statement for services to stand as the statement of services of the appointed individual counsel.

–  Ethics rule: It seems clear that the appointed individual counsel would bear the same responsibili=es that a law firm would have under Rule of Professional Conduct Rule 5.1, e.g., “…ensure that the work of partners and associates is adequately supervised, as appropriate.” Rule 5.1(c).

RECEIVERS


•  Appointed counsel, cont’d: •  To be paid from receivership funds, the appointed individual

counsel, will, on behalf of his law firm, have to file a mo=on to approve the law firm’s legal fees, supported by an affidavit of services. The affidavit of services must, among other things, have the firm’s =me sheets with detailed entries of the services performed as an exhibit. Courts require detail; otherwise you won’t get paid.

RECEIVERS


•  Appointed counsel, cont’d: •  What do you do with =me records that have confiden=al

informa=on in them? You have to submit detailed records to get paid? –  CPR Rule 1.6: Confiden=ality of informa=on. –  (a) A lawyer shall not knowingly reveal confiden=al informa=on, as defined in this Rule, or use such informa=on to the disadvantage of a c client or for the advantage of the lawyer or a third person, unless…”

RECEIVERS

•  Business reali=es not addressed by Part 36, cont’d: •  Appointed counsel, cont’d: –  In several cases, to facilitate the case, the court has appointed law firms, notwithstanding the rules requiring appointment of an individual a[orney, not a law firm.

–  Notwithstanding what the rules may say, if the judge approves the appointment or payment, the ac=vity is protected. Transparency in the appointment process and in the way the appointee operates is one of the most important and unstated touchstones of Part 36.

RECEIVERS

•  What should a person do when he/she decides to accept an appointment?

– Make sure that the order has all the powers and tools the receiver needs to be effec=ve.

–  The receiver can only exercise the powers that the appoin=ng order gives him – a Rose[a stone; provide tools for the receiver.

RECEIVERS


–  A receiver is required to maintain itemized accounts of receipts and expenditures, which remain open to inspec=on by “any person having an apparent interest in the property.”

–  Ethics: This duty of a receiver is essen=ally the same as an a[orney’s fiduciary responsibility under Rule of Professional Conduct 1.15 to keep accurate and detailed records of escrow and trust accounts. See Rule of Professional Conduct 1.15 (d)(1) (i) and (ii).

RECEIVERS

•  What should a person do when he/she decides to accept an appointment? Make sure that the order appoin6ng the receiver has all of the powers you need. Most orders are inadequate – must be a bible – the more powers, the be[er; with a few excep=ons only can exercise powers in the order. The receivership order is the template, the bible, as to what can the receiver can do. Protects the receiver from cri=cism and provides transparency.

RECEIVERS


–  If the order is inadequate, you can always the court to give you more powers. If there is every any doubt that you need an addi=onal power to do something, ask the court to give it to give the power you need or to approve what you want to do. Again, the overarching principle is that if the court blesses it,, you cannot be cri=cized later for doing what the court permi[ed you to do.

RECEIVERS


–  Powers that a Receiver should have (hardly inclusive) •  Manage the Property. •  Collect rents and funds and to demand, collect and receive same from the tenant or tenants in possession. •  Commence legal proceedings (be as prophylac=c as possible).

RECEIVERS


–  Powers that a Receiver should have, cont’d: •  Maintain insurance – very important! •  Hire counsel •  Hire landlord-‐tenant counsel •  Enter into leases without court order -‐ (usually 2 years for residen=al; 3 years for commercial

•  Prepare interim accoun=ngs at par=cular =me intervals

RECEIVERS


–  Powers that a Receiver should have, cont’d: •  Pay taxes •  State how much you can spend without court approval (but a receiver has inherent powers to make emergency repairs •  Pay ordinary expenses •  Power to sign checks without a bonding company

RECEIVERS


–  Injunc6on against the property owner -‐ •  cease and desist from opera=ng the property; cease and desist from collec=ng rents. •  turn over to the receiver all of the following documents, funds and items in its possession, including, but not limited to:

RECEIVERS


•  Records that must be turned over to the receiver, cont’d – All rent security – All keys – All leases and amendments – Copies of all current rent rolls

RECEIVERS


•  Records that must be turned over to the receiver, cont’d – U=lity accounts and records – Copies of all insurance policies – Vendors – Copies of all real estate tax bills on the Property, and the status of any tax cer=orari proceedings.

RECEIVERS


•  Records that must be turned over to the receiver, cont’d – a list of suppliers and copies of all contracts – Equipment and inventory list – Catch basin clause

RECEIVERS


–  Picking a bank (very important) •  The Court picks the bank; you can recommend a bank to a judge.

•  Having a bank a receiver can work with is very important. Wire transfers; ACH deposits; monitor cash flows; keeping good records.

RECEIVERS


–  Choose a good managing agent (very, very important) •  A managing agent can make or break you. •  The managing agent – – Runs day to day opera=ons; a receiver’s lifeline to the property. – keeps the books, very important for the court-‐required accoun=ng.

RECEIVERS


•  Du6es of a managing agent, cont’d – Tes=fy in court – Select contractors for the building – Supervise work at the building – Supervise personnel at the building

RECEIVERS

•  What should a person do when he/she decides to accept an appointment? – Managing agents, cont’d

•  The managing agent is especially important in a residen=al building. •  The managing agent is an individual, not the management company or other en=ty with which the person is associated. He is called a “property manager.” •  The managing agent must be a licensed real estate broker. •  Before a managing agent can be appointed, he must be on the approved list of appointees.

RECEIVERS


– Managing agents, cont’d •  Managing agents are “secondary appointees,” i.e., the receiver, who is first appointed, must move the court to have the managing agent appointed as the property manager. •  Managing agents must be on each county’s list of persons eligible for appointment

RECEIVERS


– Managing agents, cont’d •  The managing agent signs a contract with the receiver to be approved by the court

RECEIVERS

•  QUALIFYING AS A RECEIVER

•  Obtain a surety bond in the amount required by the Court (never advance the premium)

•  File the Oath and Bond with the Court.

•  Bond is not canceled un=l the Court orders it canceled at the end of the receivership.

RECEIVERS

•  QUALIFYING AS A RECEIVER, cont’d – Make sure that adequate insurance is in place before filing.

–  Insurance is cri=cally important!

–  The receiver should never qualify un6l necessary liability and casualty insurance is in place. (Never pay the premiums.)

RECEIVERS

•  QUALIFYING AS A RECEIVER, cont’d

–  It is the responsibility of the party moving for a receiver to obtain and pay the premiums for the ini=al necessary liability and casualty insurance.

–  The receiver and his managing agent must be named as addi=onal insureds on the liability policy. The receiver must be named as addi=onal insured and loss payee on the casualty policy.

RECEIVERS

•  QUALIFYING AS A RECEIVER, cont’d

•  The receiver has an insurable interest in the property.

•  The capaci=es of the receiver and his managing agent must be clearly stated in the policies.

•  Upon qualifying, i.e., filing the oath and bond, the receiver has to fill out and file an Office of Court Administra=on UCS 872 form.

RECEIVERS

•  Secondary Appointments

–  These are appointments made by the Court of professionals to assist the Receiver aKer he/she is appointed.

–  Types of secondary appointees are – •  Counsel to the Receiver •  Accountant •  Auc=oneer

RECEIVERS


–  Types of secondary appointees, cont’d •  Appraiser •  Property Manager (managing agent) •  Real Estate Broker

RECEIVERS


–  The Receiver usually recommends to the judge who he wants as secondary appointees to work with him.

–  The secondary appointees must be on the lists of eligible persons to be appointed in each county.

RECEIVERS


–  Issues concerning counsel:

•  If the Receiver is an a[orney, he has to do the rou=ne, “ordinary work” of an a[orney.

• What is the “rou=ne work of a Receiver/A[orney? – Li=ga=on by or against Receiver is not rou=ne. » Example: Contempt ac=ons.

RECEIVERS

•  Secondary Appointments –  Issues concerning counsel, cont’d

•  Landlord/Tenant work is not considered “rou=ne”, and the hiring of landlord/tenant counsel is almost always permi[ed.

•  Very detailed and precise records should be kept by the receiver’s counsel. AKer receivership ends, par=es oKen and will a[ack you to reduce the fees.

•  Everyone is your deferen=al and your “friend,” while you’re an appointee, un=l you are not.

RECEIVERS


–  Issues concerning counsel, cont’d •  Reviewing again: – An individual a[orney, not his law firm, is supposed to be the appointee. – Some=mes, a judge will appoint a law firm instead of an a[orney for proper administra=on of the receivership; if it is ordered, you are protected; touchstone is transparency.

RECEIVERS


–  Issues concerning counsel, cont’d

•  Ethics rule: the appointed a[orney is responsible for the work of his colleagues: Code of Professional Conduct Rule 5.1, e.g., “ensure that the work of partners and associates is adequately supervised, as appropriate.” •  Keep good records; you will have to apply to get paid!

RECEIVERS


–  Property manager •  Must be a licensed real estate broker. •  Typically is paid 5% or 6% or rent roll. •  Can charge extra for extraordinary expenditures of =me. •  Property manager agreement should be approved by the court and be as detailed as possible. •  Must keep good records.

RECEIVERS


–  Real Estate Broker •  Must be licensed and on the lists of persons eligible to be appointed in each county.

RECEIVERS

•  Keeping good records!

–  Cannot emphasize enough how important this is. –  Since a Receiver is a court-‐appointed fiduciary, his fiduciary du=es to keep good records is analogous to those of an a[orney keeping escrow funds.

RECEIVERS

•  Opera=ng During the Receivership –  Be a hands-‐on receiver.

–  Contact your managing agent every couple of days.

–  If possible, do not delegate any check signing authority to anyone.

–  If too many checks, ask court for addi=onal order, e.g., permission to use facsimile signatures for payroll.

RECEIVERS

•  Opera=ng during the receivership, cont’d

–  Emergencies during the receivership.

–  The rela=onship of the receiver with the appoin=ng judge and the par=es: •  Keep in constant contact with the court; judges do not appreciate surprises. •  Keep par=es fully informed. •  In a foreclosure ac=on, need good rela=onship with creditor; may need protec=ve advances.

RECEIVERS

•  Opera=ng during the receivership, cont’d

–  Other ma[ers a receiver may handle: •  Filing fiduciary tax returns pursuant to IRC sec=on 1065, if the property is owned by such an en=ty.

•  Tax cer=orari proceedings.

•  Contempt proceedings.

RECEIVERS

•  Liability of the Receiver

–  A receiver cannot be held personally liable if he acts in good faith within the authority conferred by the order of appointment

–  As an “arm of the Court” permission of the Court must be obtained before a lawsuit can be filed; filing a lawsuit without court permission is technically a contempt of court, and a mo=on to dismiss should be granted.

RECEIVERS

•  Liability of the Receiver, cont’d

–  But, the failure to obtain court permission to sue does not deprive the court of jurisdic=on to hear the case. Obtaining permission is merely a condi=on precedent to the lawsuit going forward. The court, could conceivably allow the case to go forward, notwithstanding the prior failure to obtain permission.

–  Thus, gemng insurance, especially liability is cri=cal. Why undertake the burden of defending, when your carrier should!

RECEIVERS

•  RECEIVER’S COMMISSIONS

– Maximum amounts are set by statutes.

–  Usual rate of commission is 5% of monies disbursed CPR 8004(b) [statute says commissions are paid upon sums received and disbursed.

–  Other statutes provide different (and much lower) rates, e.g., the Business Corpora=ons Law.

RECEIVERS

•  Receiver’s Commissions

–  Excep=ons to payment by commissions: •  CPLR 8004(b); Quantum Meruit standard of fixing compensa=on if there is not enough money leK in the receivership to pay commissions at the end of the receivership.

•  Court paying compensa=on in ways not provided in statutes, e.g., payment by hourly rate.

RECEIVERS

•  Accoun=ngs

–  Accoun=ngs detail a Receiver’s opera=on as a Court Fiduciary (extremely important).

–  Need a detailed narra=ve backed up by documenta=on.

–  Ethics rule: A receiver’s obliga=on to keep accurate records is comparable to an a[orney’s responsibility to keep correct and detailed financial records pursuant to Rule 1.15 of the Rules of Professional Conduct.

RECEIVERS

•  ACCOUNTINGS, cont’d

–  Accoun=ng has to be in the “A, B, C” format”:

•  A -‐ A summary of the monies the receiver received during the period;

•  B -‐ A summary of the monies disbursed during the period; and

•  C -‐ The amount of cash in the receiver’s possession at the end of the period in ques=on.

RECEIVERS


–  Interim accoun=ngs •  Done at periodic intervals during the receivership •  Allows payment during the receivership, especially a lengthy one. •  “Inoculates” periods for the final accoun=ng. •  Professionals such as a[orneys and accountants should submit interim applica=ons for their fees.

RECEIVERS


–  Final accoun=ngs •  Submi[ed at the end of the receivership. •  Summarizes all ac=vity during the term of the receivership.

RECEIVERS

•  Surcharging a receiver:

–  In general: a receiver’s fee is reduced because he/she screwed up, i.e., did not carry out some duty properly.

•  For example: hiring unlicensed contractors; not maintaining minimal habitability, etc.

•  A receiver cannot be held personally liable if he acts in good faith within the authority conferred by the order of appointment.

RECEIVERS

•  Assuring you get paid

–  The receiver should, if possible, escrow money as he goes along to make sure that there are sufficient funds on hand to pay commissions, legal fees, etc.

Finishing the Receivership

Get the final accoun=ng approved; obtain an ex parte order canceling the surety bond.

July 20, 2011


BANKRUPTCY

I. OVERVIEW: BANKRUPTCY POLICY

•  The United States Bankruptcy Code, Title 11 of the United States Code, is the source of the federal bankruptcy law. As a federal law it supersedes state law to the contrary or that would impede its implementa=on.

•  Debtor-‐creditor rights are dictated by applicable state or other non-‐bankruptcy law

•  And in bankruptcy, the “debtor” must obey other non-‐bankruptcy laws.

•  Main policies of federal bankruptcy laws: (a) preserve the “estate” for the benefit of all creditors, not a few, (b) provide the opportunity for a fresh start or reorganiza=on, (c) assure equal treatment creditors according to their legal priori=es.

The United States Bankruptcy Court is an “Ar=cle I” court under the U.S. Cons=tu=on (not equivalent to the Ar=cle III district courts); appeals from the bankruptcy court go to district court. Jurisdic=on of the bankruptcy court as a specialized federal court is narrow and proscribed by a specific set of statutes, 28 U.S.C. §§ 157, 1334.

II. TYPES: CHAPTER 11, CHAPTER 7

“Chapter 11” of =tle 11 is the source of the key reorganiza=on laws. Chapter 11 is available both to individuals and business en==es. Chapter 11 may also be used to liquidate. Or Chapter 11 may be used to sell all assets and opera=ons then liquidate and distribute the proceeds. As discussed below, in Chapter 11, a company is presumed to stay in management, possession and control of its business during the case. “Chapter 7” of =tle 11 is the source of the key liquida=on laws. Chapter 7 is available to individuals and business en==es. In Chapter 7, a company or individual is presumed to be removed automa=cally from control of its assets. (Chapter 15 is the source for interna=onal cases, Chapter 13 is the source for individual wage earner bankruptcy cases, Chapter 12 is the source for family farmer bankruptcies, and Chapter 9 governs municipal bankruptcies.)

III. KEY CONCEPTS

(a) Property of the Estate, 11 U.S.C. § 541: By opera=on of law, all property of the (“pre-‐pe==on”) debtor becomes property of a new legal en=ty, the debtor’s estate. This means all property, regardless of who holds it or where it may be held.

(b) Automa=c Stay, 11 U.S.C. § 362: Immediately upon the filing of a bankruptcy pe==on with the U.S. Bankruptcy Court, an automa=c stay comes into effect, preven=ng further collec=on or prosecu=on of claims that existed “pre-‐pe==on.” This applies to anything financial (not to police or regulatory ac=ons) and the defini=on of “claim,” 11 U.S.C. § 101(5), is extremely broad, so that all financial interests are administered in the single proceeding.

(c) Debtor in Possession, 11 U.S.C. § 1107: In Chapter 11, the debtor is presumed to stay in management, possession and control of its business during the case. The “D-‐I-‐P” is a fiduciary for all its creditors and accountable to the Bankruptcy Court. As a fiduciary, the D-‐I-‐P has serious disclosure and repor=ng du=es to the court and creditors.

(d) Opera=on in Ordinary Course, 11 U.S.C. §1108: Unless ordered otherwise the “D-‐I-‐P” operates in its ordinary course under pre-‐exis=ng directorship and management. Out of the ordinary course transac=ons require court approval, 11 U.S.C. § 363.

(e) Trustee or Examiner, 11 U.S.C. §§ 1104, 1106: In Chapter 11, for “cause,” defined as including “fraud, dishonesty, incompetence, or gross mismanagement,” whether by the D-‐I-‐P or former management, or “in the interests of creditors,” the court may appoint a trustee. A trustee displaces directorship and management and thus this is a dras=c and rare remedy. The trustee becomes the sole personifica=on of the debtor, retains professionals and executes the du=es of the debtor in lieu thereof. Where a limited examina=on may be required, the court may appoint an examiner who ordinarily conducts the par=cular inves=ga=on and reports to the court; this is a more limited remedy.

(f) D-‐I-‐P Financing, 11 U.S.C. § 364: The D-‐I-‐P may not enter into significant, or secured, financing without court approval

(g) Sales, 11 U.S.C. § 363(b): While ordinary opera=ons may con=nue, significant, out of the ordinary course transac=ons, and sales of significant assets require court approval. Recently, “363 sales” have been used to sell the assets of en=re businesses. In re General Motors Corp., 407 B.R. 463 (Bankr. S.D.N.Y. 2009) (permimng GM to sell substan=ally all of its assets).

(h) Contracts, 11 U.S.C. § 365: “Executory contracts,” that is, contracts with performance due on both sides (so not a payment installment contract), are either (a) assumed, (b) assumed and assigned, or (c) rejected. Assumed contracts become obliga=ons of the bankruptcy estate (as opposed to the pre-‐pe==on debtor) or of the reorganized debtor; contracts that are assumed and assigned become enforceable against the third party assignee; contracts that are rejected are deemed breached as of the moment pre-‐pe==on, thereby relega=ng the damage claim to pre-‐pe==on status and triggering provisions on breach like liquidated damages clauses.

(i) Plan, 11 U.S.C. § 1129: “Confirma=on” and “effec=veness” of a plan is the goal of a reorganiza=on under Chapter 11. A plan is solicited to creditors for votes, may be confirmed upon democra=c acceptance, or upon “cram down” of certain classes if warranted by the court under certain tests, and if confirmed by the court a plan becomes enforceable (a) as an order of the court and (b) as a contract between the debtor and creditors.

(j) Reten=on of professionals, 11 U.S.C. § 327: Professionals for the estate (lawyers, accountants, financial advisors, investment bankers, sales brokers, expert witnesses) must be retained; there is a narrow excep=on for professionals not at all involved in restructuring efforts. Professional compensa=on must be approved by the court. 11 U.S.C. § 330.

(k) U.S. Trustee, 28 U.S.C. § 586: The US Trustee is a federal appointee with an office and staff opera=ng as an agency of the US Department of Jus=ce, with the charge to supervise the administra=on of bankruptcy cases. The US Trustee monitors cases to assure the integrity of the bankruptcy system including adequacy of filings, reten=on and payment of professionals, appointment of fiduciaries, compliance with deadlines, and repor=ng and transparency.

IV. RECEIVERSHIP

(a) Turnover, 11 U.S.C. §§ 542, 543: Ordinarily, all holders of assets of the debtor must turn over to the estate property of the estate. If there is a trustee, property must be turned over to the trustee; if the debtor is in possession, property must be turned over to the D-‐I-‐P. If property is in the hands of a custodian, the custodian must turn it over to the estate. A receiver is such a custodian. The obliga=on is on the custodian to “deliver” the property to the estate (not to cause the estate to chase the custodian).

(b) Excuse From Turnover, 11 U.S.C. § 543(d)(1): AKer no=ce and a hearing, the bankruptcy court may excuse compliance with the turnover requirement in the interests of creditors. So, infrequently, a receiver may be maintained in the bankruptcy case, usually by agreement of key cons=tuents (at least lender and borrower).

(c) Key Concepts Governing a Receiver Maintained in Chapter 11 i. Du=es/Structure ii. Reten=on of professionals iii. Repor=ng/Transparency

iv. Conclusion of Role: 1. Bankruptcy Court. The receiver, having been appointed by court order, should be discharged by court order. The order might also provide exculpa=on, implement document reten=on procedures and approve a final accoun=ng.

2. State Court. If necessary, the Bankruptcy Court should authorize the receiver to return to the state court – the source of the original appointment – for any final mo=ons and orders there.

v. Compensa=on: The receiver’s compensa=on is governed by statute (CPLR § 8004). The receiver’s compensa=on in the Chapter 11 should be approved by order of the Bankruptcy Court.

V. OTHER TYPES OF RECEIVERSHIPS AND STATUS IN BANKRUPTCY

July 20, 2011


Documents

PRESENTED BY - NLI · Neal*Fellenbaum,*Esq.* Zegen*&*Fellenbaum* (212)9864848** [email protected]* ** ** Allen*G.*Kadish,*Esq.* DiConzaTraurigKadishLLP (212)6824940 [email protected]*

PRESENTED BY - NLI · NealFellenbaum,Esq.* Zegen&Fellenbaum* (212)9864848** [email protected]* AllenG.Kadish,Esq. DiConzaTraurigKadishLLP (212)6824940 [email protected]*