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  • 09 May 2017 3:43 PM | Deleted user

    By: Catherine DeBono Holmes, Esq., Daniel B Lundy, Esq. and Jeffrey E. Brandlin, CPA, CIRA, CFF

    Managers and Investors in EB-5 Investment Funds should regularly monitor their investments in EB-5 Projects and be ready to take protective actions if their EB-5 Projects show signs of trouble.

    It is vitally important for managers and investors in EB-5 investment funds to stay informed of the status of their EB-5 projects , because EB-5 investors must demonstrate that the projects in which they invested were completed and, in some cases, that those projects are operating in accordance with projections, in order to qualify for approval of their I-829 petitions to remove conditions to their residence.  If the manager or EB-5 investors in an EB-5 investment fund discover signs that their EB-5 project may be experiencing financial distress or other difficulties that could prevent the project from being completed or operated in accordance with the original business plan for the project, the manager, the investors or their representatives need to evaluate whether there are any actions that could be taken to save the project, so that the EB-5 investors will ultimately qualify for approval of their I-829 petitions.  The manager or investors are in a far better position to take protective actions before the problems with their EB-5 project result in litigation, foreclosure, or SEC enforcement action, although it is still possible to take protective actions after one of these events occurs.  This article is the first of a series of articles that will describe how managers or investors can monitor their EB-5 projects to discover potential problems before they become a crisis, and the protective actions that may be taken to protect EB-5 investors if their EB-5 projects are in trouble.

    Both managers and investors in EB-5 investment funds should continuously monitor and evaluate the progress of their EB-5 projects, and collect documentation of transfers of EB-5 funds, payments of project expenditures, and other financial records that will be required as part of the I-829 petitions.  An unwillingness to provide such documentation, which is mostly generated in the normal course of business, can be a red flag indicating that something is wrong.  The manager of each EB-5 investment fund is the primary party responsible for monitoring the EB-5 fund’s investment in the EB-5 project.  However, in cases in which the manager is affiliated with the EB-5 project developer, or the manager is not fulfilling its obligation to properly supervise and monitor the EB-5 project, the EB-5 investors should have their own independent representatives monitor the EB-5 project and evaluate if and when protective actions are necessary to protect the E-5 investors.  The manager of an EB-5 investment fund, or third party service provider where the manager is affiliated with the developer, should provide regular reports (preferably on a quarterly basis) to the EB-5 investors in the fund regarding the status of construction and financing of the project, payments made to the EB-5 investment fund and whether or not the EB-5 project is in compliance with the terms of the investment made by the EB-5 investment fund in the project.  EB-5 investors should insist that the manager of their EB-5 investment fund make these periodic reports if the manager is not already doing so.  If EB-5 investors do not receive these reports, they should engage an independent representative to meet with the manager, review the EB-5 project and advise the EB-5 investors directly regarding the status of the project and any problems that are discovered as a result of the review.  In the paragraphs below, we provide further information regarding how that may be done.

    Managers and investors in EB-5 investment funds should be aware of the warning signs that their EB-5 project may be in trouble.

    Listed below are some of the warning signs that an EB-5 project may be in trouble:

    • Failure of the EB-5 project developer to deliver regular reports to the EB-5 investment fund manager of the status of the financing, construction and/or operation of the project
    • Failure of the EB-5 project developer to provide documentation of expenditures and the use of EB-5 funds on a regular basis
    • Failure of the EB-5 project developer to obtain all necessary financing to commence or complete the project
    • Failure to make payments on an EB-5 loan or equity investment, or on any other financing obtained by the EB-5 project
    • Failure to deliver required financial and other reports to EB-5 lender and/or EB-5 investors
    • Receipt of notice of default from the senior lender to the EB-5 project
    • Receipt of information that the EB-5 project is not paying its contractors
    • Receipt of notice that litigation has been filed against the EB-5 project or developer
    • Evidence that the EB-5 project has not commenced or has ceased construction
    • Failure of the EB-5 project to meet the dates specified in the project construction schedule
    • The fact that one or more of these events has occurred may not necessarily indicate that the EB-5 project is in trouble, but it is an indication that there may be a problem, and that further investigation should be done to determine if there is a problem.

    The manager of the EB-5 investment fund should hire an experienced construction monitor and/or accountant when it suspects the EB-5 project is in trouble to conduct a thorough review of the status of the EB-5 project.

    An experienced construction monitor and/or accountant will take the following steps to evaluate the status of the EB-5 project:

    • Interview the developer, architect and engineer for the EB-5 project
    • Obtain copies of the EB-5 project entity financial statements
    • Visit the office where the EB-5 project related books and records are maintained, and review the books and records, including general ledger, invoices and other financial records of the EB-5 project
    • Review all cash transfers of the EB-5 project entities above a specified dollar amount to determine if improper payments are being made
    • Conduct a site visit to assess construction activity and compare it to the project construction schedule and project construction reports
    • Conduct a public records search to determine all liens filed against the EB-5 project property
    • Review zoning approvals and building permits for the EB-5 project
    • Assess the market valuation of the EB-5 project with local real estate brokers

    Depending upon the results of that evaluation, the construction monitor and/or accountant will present a report to the manager regarding the status of the EB-5 project and any problems that have been discovered.  The construction monitor and/or accountant will also be able to assist the manager in determining the severity of the problem and evaluating potential solutions to the problem.  The manager and its consultants should review the options available for completing the project and determining which of those options should be pursued. In a future article, we will discuss options for saving an EB-5 project in trouble and how those options may be pursued.

    If EB-5 investors are concerned that the manager of their EB-5 investment fund is not performing its obligations, the EB-5 investors or their agents should hire their own experienced construction monitor and/or accountant to act as the representative of the EB-5 investors and report directly to the EB-5 investors.

    EB-5 investors have rights as limited partners or members of an EB-5 investment fund to review the books and records of the EB-5 investment fund and to require that the manager of the fund fulfill its duties to monitor the EB-5 project and protect the interests of the EB-5 investment fund and the EB-5 investors.  EB-5 investors may exercise these rights either individually or as a group.  EB-5 investors who are concerned that the manager of their EB-5 investment fund is not fulfilling its duties should engage an attorney to act as representative of one or more of the EB-5 investors to review the books and records of the EB-5 investment fund itself and the EB-5 project entities, and to meet with the manager of the EB-5 investment fund regarding the steps that should be taken so that the necessary monitoring and reporting is done.  The attorney for the EB-5 investors will undertake the following review and analysis of the protective actions that may be taken on behalf of the EB-5 investors:

    • Review the partnership agreement or operating agreement of the EB-5 investment fund to determine the specific rights of the EB-5 investors to take actions under the terms of the partnership agreement or operating agreement
    • Review the communications, construction reports and financial statements that have been received by the EB-5 investors
    • Review the books and records maintained by the manager of the EB-5 investment fund, including notices, reports and financial statements received by the manager from the EB-5 project entity or developer
    • Review the financial statements of the EB-5 investment fund
    • Review the project financing documents between the EB-5 investment fund and the EB-5 project entity (loan agreement, pledges, guaranties, intercreditor agreements, etc.) to determine the rights of the EB-5 investment fund
    • Interview the manager of the EB-5 investment fund and the EB-5 project developer
    • Review the adequacy of the documentation necessary to meet annual USCIS reporting requirements and the I-829 requirements
    • Evaluate the status of the EB-5 project to determine additional steps necessary to be taken to protect the EB-5 investors (both with respect to their visa petitions and their financial investment) and their investment in the EB-5 project

    The evaluation steps listed above should take two to four weeks, but may take additional time if the manager does not cooperate.  If the manager of the EB-5 investment fund does not cooperate, then the attorney may recommend that legal action be filed by the EB-5 investors to obtain a court order for the manager to turn over the necessary books and records to the attorney for the EB-5 investors.  Upon completing the review, the attorney should prepare a report of the findings of the review and distribute it to the EB-5 investors in the fund.  The report should include an analysis of the actions recommended by the attorney to protect the interests of the EB-5 investors.  These recommendations could include implementation of new reporting requirements by the manager of the EB-5 investment fund or by the EB-5 project entity, or requiring the manager to hire an independent construction monitor or loan servicer, or seeking further court orders if necessary for the protection of the EB-5 investors.  If the attorney discovers problems with the EB-5 project itself, the report would include an evaluation of the problems and discussion of the options available to the EB-5 investors to save the EB-5 project.

    The manager or investors in an EB-5 investment fund should implement a systematic plan for continuous monitoring and reporting on the status of the EB-5 project.

    Every EB-5 investment fund should have a regular process in place for monitoring its investment in the EB-5 project.  This is often referred to as EB-5 compliance, but can also be thought of as on-going due diligence. These processes are similar to those that would be used by any other private lender or institutional investor in a construction project or business, with the additional focus on job creation in addition to the financial health of the EB-5 project.  The following are some of the key components for monitoring an EB-5 project that every EB-5 investment fund should have in place: 

    • Document all money into the EB-5 investment fund escrow account, all money disbursed out of escrow to the EB-5 investment fund, and all money disbursed to the job creating entity for use in financing the EB-5 project, to demonstrate an unbroken chain in the path of funds from the EB-5 investor to the job creating entity
    • Conduct regular inspections of the project and review disbursement requests, and if appropriate hire a construction monitor to make the inspections and/or an independent loan servicer to receive reports and payments made by the EB-5 project entity to the EB-5 investment fund
    • Require requests for disbursement of EB-5 proceeds with detailed use of proceeds of each advance, including contractor invoices, architect or engineer certification, lien releases, and other documents (i.e. a draw package or payment application)
    • Require regular construction reports and financial statements from the EB-5 project developer
    • Require that the senior lender provide copies of notices to the NCE concurrently with delivery to the developer
    • Regularly communicate with the EB-5 project developer to find out as early as possible if problems are developing and if possible work with the developer to help resolve issues before they become a crisis

    If an SEC enforcement action is filed against a manager of an EB-5 investment fund, EB-5 investors should engage their own legal counsel to participate as interested parties in the action.

    The SEC is aware of the issues facing EB-5 investors whose EB-5 investment funds have become the subject of fraud enforcement actions, and will work with legal counsel for EB-5 investors to assist them if possible to save the EB-5 project so that the EB-5 investors will retain their eligibility for permanent visas.  However, the SEC does not represent the investors, and has limited tools at its disposal to help investors.  The legal and financial representatives of the EB-5 investors can assist them in the following actions:

    • Communicate with the SEC, receiver (if appointed by the Court) and USCIS regarding EB-5 investors’ desire to analyze viability of completing the EB-5 project
    • Hire (or coordinate with the receiver to hire) an experienced construction monitor/accountant to conduct the investigation described above and determine if the EB-5 project can be completed
    • Determine what additional capital sources would be required to complete the EB-5 project and assist in the transactions required to bring in those capital sources
    • Determine what changes in the business plan would be required to accept the additional capital and work with the USCIS to preserve the eligibility of the EB-5 investors in the project under the new capital structure

    In a future article, we will provide further information regarding the process of an SEC enforcement action and the steps that can be taken to assist EB-5 investors during that process. 

    Conclusion: Managers and EB-5 investors can and must take appropriate steps to monitor their EB-5 investment in order to discover any problems that arise and if possible participate in the resolution of those problems so that the EB-5 investors will retain eligibility for their permanent visas and if possible receive a return of their capital.  Managers should implement a process for regular monitoring of the EB-5 project status and reporting of any problems that develop.  Managers should provide regular reports to EB-5 investors so that the investors know that their investment is being properly monitored.  If managers do not fulfill their obligations, EB-5 investors should hire their own representatives to take the steps necessary to investigate the status of the EB-5 project and to implement a better monitoring process in the future.  If necessary, the manager or EB-5 investors need to be prepared to evaluate options to save their EB-5 project if it experiences financial or other problems.

    About the Authors:

    Daniel B. Lundy is a Partner and a member of the EB-5 practice of Klasko Immigration Law Partners, LLC. Mr. Lundy leads the Regional Center/Developer and EB-5 Compliance practice areas, and represents developers and others who seek to use foreign investment funds under the EB-5 program to fund their projects, either through the formation of a Regional Center or by joining with an existing Regional Center.  Mr. Lundy works with various securities lawyers, economists, business plan writers and other professionals in the preparation and filing of Regional Center designation and Regional Center amendment applications.  Mr. Lundy is experienced in reviewing Regional Center and project business plans, economic reports, securities offering documents, and corporate documents for compliance with the EB-5 program requirements, and in consulting and advising clients on the specific immigration requirements of the EB-5 program. Mr. Lundy has experience working with court appointed receivers in EB-5 matters involving SEC actions, and helping investors and regional centers with troubled projects.  Mr. Lundy has also successfully represented numerous immigrant investors in their EB-5 petitions and applications. Mr. Lundy is also experienced in litigating immigration cases in Federal Court.  For the last two years, he has been named as one of the top 25 immigration lawyers in the country by EB5 Investors magazine.

    Catherine D. Holmes is Chair of the JMBM Investment Capital Law Group, and she has practiced law at JMBM for over 35 years. She has also worked as a senior member of the JMBM Global Hospitality Group and JMBM Chinese Investment Group. Within the Investment Capital Law Group, she helps real estate developers and business owners, brokers, investment advisers and investment managers raise and manage investment capital from U.S. and non-U.S. investors. In the last five years, she has represented over 100 real estate developers obtain financing through the EB-5 immigrant investor visa program for the development of hotels, multi-family and mixed use developments throughout the U.S. She has also acted as lead counsel on numerous hotel and mixed-use developments and transactions in the U.S., Europe, China, South America and Asia Pacific regions, as well as hotel management and franchise agreements and public-private hotel developments. She has also represented private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues.  For the last two years, she has been named as one of the top 25 securities lawyers in the country by EB5 Investors magazine.

    Jeffrey E. Brandlin, CPA, CIRA, CFF founded Brandlin & Associates in 1980 to provide clients with tangible, timely and action-oriented insight. During his 40 year career, Jeff has pursued numerous financial frauds, accounting malpractices and trust fund embezzlements including recent work done on behalf of the SEC under enforcement actions pertaining to the EB-5 Program. Jeff and his team have restructured and rehabilitated more than $10 billion of real estate projects. Jeff and his team have also provided thorough financial due diligence in support of hundreds of successful transactions for equity and debt capital providers.  Jeff is a frequent speaker to industry organizations and law firms on the topics of fraud, forensic accounting and financial statement analysis. He earned his Bachelor of Science degree in Accounting and has been licensed to practice accountancy in California since April 1976. Jeff is a Certified Insolvency and Restructuring Advisor (CIRA), a Certified Merger & Acquisition Advisor (CM&AA) and is Certified in Financial Forensics (CFF) by the American Institute of Certified Public Accountants and currently serves as both the Secretary and Treasurer of the National Association of Federal Equity Receivers (NAFER)

    We refer to “EB-5 investment funds” as the “new commercial enterprise” in which EB-5 investors make their investment.  An EB-5 investment fund may be either a limited partnership or a limited liability company.  We refer to the “managers” of EB-5 investment funds as the parties designated as the general partner of the limited partnership or the manager of the limited liability company.

    1 We refer to “EB-5 investment funds” as the “new commercial enterprise” in which EB-5 investors make their investment.  An EB-5 investment fund may be either a limited partnership or a limited liability company.  We refer to the “managers” of EB-5 investment funds as the parties designated as the general partner of the limited partnership or the manager of the limited liability company.

    2 We refer to “EB-5 projects” as the project to be completed and/or operated by the “job creating entity” in which the EB-5 investment funds make their investment.

  • 09 May 2017 3:37 PM | Deleted user

    By Gary Owen Caris and Lesley Anne Hawes

    Equity receiverships often involve the administration of real estate assets.  While real estate cannot “walk away,” unlike tangible personal property assets and intangible assets not yet frozen in financial institutions, identifying, taking control of and administering real property that is properly considered part of the receivership estate can present unique challenges and a number of issues that need to be considered by a receiver.  This article will highlight some of those challenges and issues.

    Assessment of Estate’s Real Property Rights and Interests at Case Inception

    The first step in any receivership is for the receiver to assess the property rights and interests held by the estate.  The receiver’s initial interview with a reasonably cooperative defendant and its initial forensic analysis of accounting and legal records, physical or electronic invoices and paid bills (such as mortgage or real property tax payments) generally yield immediate information to help the receiver identify real property assets that are likely property of the estate.  Those records alone though are not definitive and are only the first pieces of the asset puzzle.  To complete the picture, the receiver should investigate the identified real properties through title and lien searches and potentially title histories to determine when the current title holder of the real property acquired the property and from whom.  Whether title to the real estate is in the name of a named, known receivership entity will not necessarily be determinative of whether the property is receivership property, and the receiver needs to explore through a forensic accounting any financial connection of the receivership estate to real property even if title to that property is held by an individual or entity not named explicitly as a receivership party.  The receiver may be able to assert an interest in real property held in the name of another depending on that financial connection, and will have to determine the most effective and appropriate litigation strategy to gain possession and control of that property expeditiously. 

    One of the first issues the receiver will need to consider is whether protecting the estate’s interests in its real estate assets may warrant recording lis pendenses against those assets.  Prior to recording any lis pendens, the receiver will need to investigate the local law of the state in which the real property is located, the grounds available for recording a lis pendens under that law and the applicable procedures and recording requirements of the local county recorder.  In some states, such as Massachusetts, it may be necessary to obtain a court order to record a lis pendens.   In other states, such as Florida, a lis pendens may have an automatic termination date.  In all states, it is important for the receiver to fit its claim to title and/or possession of the real property into the grounds for recording a lis pendens authorized by law in that state so that the lis pendens gives valid notice of the pending action and its impact on the property.   Receivers also need to be aware of the risks under state law of wrongfully recording a lis pendens against real property, such as in California where a party who successfully moves to expunge a lis pendens can in some circumstances recover the attorneys’ fees and costs the party incurs in moving to have the lis pendens removed.

    The receiver must also immediately assess the extent to which any real property in which the estate claims an interest is located outside the district in which the receivership case is pending.  To extend the receivership court’s jurisdiction to real property outside the district in which the case is pending, the receiver will need to file copies of the complaint and appointment order within 10 days in those other districts pursuant to 28 U.S.C. section 754. 

    The receiver also needs to review the status of title and liens against each real property as soon as possible.  The receiver in particular should check the property for any tax lien sale as often real property taxes may be delinquent for multiple years. 

    A.        Physical Inspection and Security

    Whether the estate leases the real property or owns it, the first and most important step is the receiver’s physical, visual inspection of the premises.  If personnel from the receiver’s office or from the receivership defendant’s business need to remain on the premises to review or copy records, secure property or perform other administrative tasks, it is important for the receiver to look for any signs of potential hazards at the property that could pose a risk to those personnel.  Are there any maintenance or repair issues, such as a leaky roof, damage to doors, walls or floors that may result in further deterioration through weather or other forces or make the property vulnerable to security risks?  Are there hazardous materials on the property that may require special handling and removal?  In recent years with the value of copper skyrocketing, it is common for properties to be vandalized for their copper materials, including pipes and other systems. The visual inspection will also reveal potential points of entry or security issues that should be addressed immediately to protect the premises and preserve the records and assets present there, including alarm codes that may need to be changed and alarm service that needs to be paid for to help maintain the integrity of the premises and the records.  Additional fencing or other physical security measures may be necessary to adequately secure the premises.  Merely changing locks on the property may not deter the copper thieves, however, so additional physical security and patrols may need to be considered.  In certain circumstances, where the property contains valuable assets and it is difficult to adequately secure it by other means, engaging a guard service may be justified for some period of time.  See generally Vander Vorste v. Northwestern Nat’l Bank, 81 S. D. 566, 138 N.W. 2d 411 (1965) (receiver personally liable for taking possession of receivership personal property and not properly caring for them resulting in loss or diminution in value of items).

    The physical inspection of the property also allows the receiver to ask important questions about the assets located in or on the property, including trying to identify who owns those assets.  If the assets located in or on the property are receivership assets, then there are a number of follow up issues for the receiver to consider regarding those personal property assets including:

    a.         What is their value?

    b.         Are they perishable or subject to diminishment in value through use, time, market forces, or other factors?

    c.         Do the assets require special treatment or care? Do they need to be relocated in order for them to receive that treatment or care?

    d.         Do the assets include hazardous materials or otherwise pose potential health or safety risks?

    e.         Do the assets require insurance separate from the real property insurance?

    f.          Are any of the personal property assets subject to leases, and should they be returned to the lessors?

    B.        Insurance

    The receiver must also take steps to investigate and confirm insurance coverage for the real property and determine that the insurance coverage is adequate to protect the estate’s interests.  See FTC v. Think Achievement Corp., 2007 WL 3286802, at *7 (N.D. Ind. 2007) (question of fact for jury as to whether receiver who failed to obtain insurance for asset damaged post-receivership was negligent) but see Reading Co. v. Brown 391 U.S. 471 (1968) (receiver not liable for property destroyed by fire when receiver could not procure insurance).  Most receivers have a blanket insurance policy covering the assets subject to their administration, but that policy may not be enough either in dollar amount or type and scope of coverage to fully protect the receiver, the specific real property asset and the estate.  The physical inspection might also reveal damage to the property as to which an insurance claim may exist that requires investigation to determine if (a) a claim has been made that may be an asset for the estate to be administered, or (b) a claim has not been made but should be made as soon as possible to avoid any assertion by the carrier that the claim is untimely.

    In addition, the receiver will want to be added to any existing insurance policies of the receivership entities as a “Named Insured” on the policies.  Post-receivership, policy premiums are paid by the receiver from funds of the receivership estate.  Having the receiver as a named insured facilitates future claims payments and communications with the insurer.

    The receiver should also try to obtain complete records from the insurance company regarding the insurance policy, any claims made under the insurance policy and the disposition of those claims.  The claims history may disclose valuable information regarding repairs and other work performed on the property or alert the receiver to prior risks or problems associated with the property.  See NAFER’s Model Receivership Order, Sections VII.A.26 and IX.F.

    C.        Zoning/Use Restrictions

    Zoning conditions and restrictions or any other legal restrictions or rules applicable to the operation, occupancy or use of the property should also be evaluated.  The receiver should not assume the property is in compliance with zoning laws based on its existing use.  Though not typical, commercial or residential property may be designated as “historic” and may be subject to extensive restrictions on its use, modification and maintenance.

    D.        Operation of the Property or the Business and Liability Issues

    Section 959(b) of title 28 requires receivers to comply with applicable law in operating a business, including operating real property, on behalf of the estate.  While there are a series of decisions that hold a receiver or trustee is not operating a property for purposes of section 959 if the trustee or receiver is liquidating the property, receivers need to be aware of the obligations imposed by this statute and the risks they may be facing if they are operating the property or a business on the property because of the provisions of 28 U.S.C. section 959(a) which obligate the receiver to manage property in accordance with applicable law.  When the receiver is “carrying on business” in connection with the receivership property, the receiver may be sued without  prior leave of court under section 959(a).  These risks should be considered in evaluating the nature and extent of insurance coverage the receivership estate may need, in determining whether the property is adequately secured or may need guards or other special security measures, in reviewing all applicable statutes, regulations, local ordinances and other legal requirements that must be met in order to operate the property or the business in compliance with applicable law and in weighing whether the benefits of operating the business or property are outweighed by the expense of these protective measures and the risks of violation of the law.

    The presence of hazardous substances on, in or under real property poses special concerns for a receiver.  While amendments to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), title 42 section 9601 et seq., in 1996 limit the liability of fiduciaries as “potentially responsible parties,” neither that statute nor section 959(b) prevents liability from being imposed against the receivership estate for acts taken if the receiver actually operates the real property or the receivership entity’s business on the real property in a manner that violates applicable environmental laws.   See In re Sundance Corp., 149 B.R. 641 (Bankr. E.D. Wash. 1993) (state court receiver in foreclosure action in which summary judgment was denied on claims against receiver for environmental clean up costs and claims dismissed where receiver was not negligent and did not act willfully and record was insufficient to determine if acts were outside receiver’s reasonable judgment).  The NAFER Model Order proposes to expressly limit the receiver’s potential liability for properties contaminated with hazardous substances and confirm that the receiver is acting solely in its “fiduciary capacity” in in administering the property in receivership.   See NAFER Model Order, Section XII.C.  The receiver’s document review may disclose prior Phase I environmental reports for the property.  Paints, cleaning solutions, fertilizers and other common materials may require special handling, removal and disposal in order for the receiver to properly comply with applicable environmental laws and for practical reasons, including in order to prepare the property for sale or transfer to a third party.

    E.         Interest in Entity that Owns the Property

    Sometimes the interest held by the estate is not a direct interest in the property itself but instead an interest in the entity that owns the property.  Such a personal property interest in the entity may nevertheless require the receiver to assess the underlying real property assets held by that entity, whether the estate’s interest is a majority interest, such that the receiver may potentially control the entity and its assets, or a minority interest, where the receiver may not be able to control management decisions regarding the underlying real estate assets.  If the estate’s interest is a minority interest, the receiver should determine what rights the estate has to liquidate its interest.  As a practical matter, the estate may be best served by a liquidation of the minority interest through a sale to the other owners.

    Real Property Owned by the Receivership Estate

    Once the receiver makes a preliminary assessment that the real property in question is or should be considered a receivership asset owned by the estate, the receiver has to evaluate whether that asset is worth administering.  In general, that assessment means determining the amount of valid liens encumbering the property and getting at least one or more broker’s opinions of value to assess whether there is likely any equity in the property for the estate if the property were liquidated.  The assessment also should include an evaluation of the physical condition of the property and repairs that may be needed to make the property saleable, whether unique characteristics of the property may impede or substantially delay a sale, the debt service and real property tax accruals and the availability of assets of the estate to service those expenses, and routine maintenance and preservation expenses.  The receiver also needs to evaluate the administrative expenses for the receiver’s personnel in addressing issues regarding the property during the receivership.

    A.        Third Party Occupied Property

    In some instances, the estate may have an ownership interest in real property that the receivership defendant is not using or occupying. In that case, the receiver must determine whether that property is occupied, and if so, by whom and under what authority (i.e., written lease agreement, month-to-month rental, or informal agreement for use of space).  It is not unusual to discover that the receivership defendant’s principal has “lent” the use of the property to friends or colleagues that do not have a valid, contractual right to possession.  In such circumstances, the receiver may first try to negotiate with the occupier to recover the property.  Failing an agreement to vacate the premises, the receivership appointment order will likely allow the receiver to proceed in the receivership court to recover possession of the property for the estate based on the usual “exclusive possession” provision, avoiding the time and expense of state unlawful detainer proceedings. F.R.C.P. Rules 70 and 71 provide for issuance of writs of assistance and other orders to enforce the Court’s order directing the occupier to vacate the premises.

    B.        Commercial Property

    If the property is commercial property occupied by a legitimate, third party tenant, then the receiver will need to examine the written lease or rental agreement, the rental rate compared to market, the term of the tenancy, the status of the tenant’s performance of both monetary and any non-monetary obligations under the lease or rental agreement and the tenancy’s net economic benefit to the estate.  This evaluation is needed to determine the receiver’s strategies going forward, such as whether to seek to abandon the property or attempt to renegotiate with the tenant.  As a practical matter, the receiver’s options may be limited when faced with a legitimate, third-party tenant.  In any event, the receiver will need to give written notice to the tenant to make its payments to the receiver for the duration of the lease.

    If the property is not occupied, the receiver must consider whether it is best to have the property remain vacant or whether the receiver should try to rent or lease the property post-receivership.  If the receiver rents the property, the receiver will be considered to be operating the property post-receivership and may be subject to liability for claims arising out of the operation of the property under 28 U.S.C. section 959. Slip and fall accidents or other incidents arising from its operation make it imperative to have sufficient general liability insurance coverage to protect the estate.  See Becknell v. McConnell, 142 Ga. App. 567, 236 S. E. 2d 546 (1977) (receiver not personally liable for personal injury claim from injured party’s fall at premises of receivership property, but estate could be liable if steps were negligently maintained).  If there is a secured creditor with a lien on the property, before the receiver enters into a new lease for all or a portion of the property, the receiver will likely need to address the new lease with the lender and potentially try to obtain a subordination and attornment agreement with the lender to allow the lease to remain in effect if the lender forecloses on the property in the future.  The proposed lessee is likely to insist on such an agreement.  The receiver also needs to consider whether the prospective lease is a sufficiently significant event in the receivership based on the duration of the lease, whether there is any likely dispute with interested parties over the sufficiency of the rent or other similar concerns so as to warrant seeking explicit court approval of the lease.  But see Chicago Deposit Vault Co. v. McNulta, 153 U.S. 554 (1894) (no sanction imposed on receiver for entering into a lease not expressly approved by court order where the lease was for a reasonable rental rate and had reasonable terms and would likely have been approved if presented to the court).  The receiver will also want to confirm that all tenants at the property have appropriate insurance coverage for their activities and use of the property. 

    Whether or not the property is occupied, a federal equity receiver with commercial real property needs to engage in the same property analysis that a rents and profits receiver would engage in regarding commercial income producing property, including determining if there are risks to the estate in leasing the property, such as environmental hazards or other health and safety concerns.  The receiver will have to evaluate whether those concerns could be remedied, the cost of remediation, and the net value the asset may have to the estate given any expenses of administration to be incurred.  The receiver should also consider the likely time frame for potential sale of the property for the benefit of the estate, assuming that the receiver has been granted sale authority or believes the Court would grant such authority.  The receiver will also need to evaluate the panoply of existing maintenance contracts for the property for their terms and relationship to market rates for the many services required to operate a commercial property.   Accordingly, the receiver should consider employing a real estate professional that can advise the estate on issues relevant to the management and operation of the property if any special expertise may be needed to properly administer the property, including expertise in compliance with local regulations affecting the property.

    Special issues arise in the administration of estate property that may be an investment property of the receivership defendants, such as hotel properties.  Those properties may have a host of additional administrative concerns for the receiver to address, including brand issues, management contracts, and whether to continue to operate such a facility post-receivership based on an analysis of its profitability and the scope of administrative activities required to operate the facility.

    C.        Residential Property

    If the receivership order does not prevent the receiver from taking possession of the residence, then the receiver has a number of issues to consider.  If the residential property is part of a common community, the receiver should investigate any homeowner’s association dues that may be required to be paid and the Covenants, Conditions & Restrictions (“CC&Rs”) that may impact the ability to rent the property to third parties, the ability to make changes to the exterior of the property, and other restrictions.  The CC&Rs should also be evaluated to determine what rights the receiver may have to attend and comment at meetings, to vote, and to elect board members, rights which may be meaningful based on the specific circumstances of the case and the property.  If unoccupied, security concerns may exist at the property, such as the risk of vandalism and liability if the property has a pool and could be an attractive nuisance to children or others.

    If the property is a multi-unit residential property, the receiver will need to determine if a management company is in place and assess that company’s performance, rates and services.  The disruption in changing property management can also sometimes disrupt rent payments to the detriment of the estate.  Whether the receiver keeps the existing management company in place, changes to a different management company or manages the property himself, appropriate notice that rent payments need to be directed to the receiver should be given as soon as possible.  The receiver also needs to investigate the status of tenant security deposits and to gain control of those deposits and an accounting of the funds held for the different tenants.  Applicable local law may also require notice to be given to the tenants of any transfer of the security deposits to the receiver.

    If the defendants are allowed to remain in the property, the receiver should conduct regular inspections of the property to ensure the property is not being damaged and is being properly maintained.  Even if the receiver cannot gain access to the interior of the premises, regular drive-by inspections should be conducted.  Ideally, periodic access to the entire property with reasonable notice to the defendants would be allowed to avoid the risk of serious damage to the premises occurring during the receiver’s administration though there may be privacy issues and the receivership order typically does not authorize access to the residence by the receiver if the defendants are allowed to remain in their home.  See, e.g., Securities and Exchange Commission v. Kowalewski and SJK Investment Management, LLC, U.S.D.C., N.D. Ga. Case No. 1:11-cv-0056 (serious damage caused to residence including removal of fixtures).

    D.        Undeveloped Land

    While raw land does not pose some of the risks that other real estate assets may hold, raw land nevertheless needs to be visually inspected and supervised during the receivership as well as investigated from an economic standpoint to determine if it should be administered.  The property may need to be physically secured by fencing or other physical barriers to protect the property from trespassers.  Though vacant, raw land can attract squatters and trespassers who need to be removed, or may have personal property located there that needs to be removed.  The receiver may need to also place visible signage on the property to deter trespassers if there are no signs prohibiting trespassing.

    Raw land can also be subject to physical deterioration that must be monitored and addressed during the receivership, including flooding and erosion.  There may be local ordinances and requirements for addressing brush clearance and other issues regarding the maintenance of the property that the receiver should investigate in order to assess the costs of administration of the property and the net value of the property for the estate, and to ensure the receivership estate’s compliance with law.  The receiver will also need to investigate any zoning issues and restrictions regarding the property that may affect the use of the property and the marketability of the property.  The receiver may need to analyze whether the raw land can be subdivided or whether it is already in a condition where it can be sold legally, and any restrictions that may exist on doing so, including minimum lot size requirements.

    Leasehold Interests Where the Estate Is Lessee: The Clock Ticks

    If the estate does not have an ownership interest in the property but has a leasehold interest, the receiver has a number of issues to address promptly.  The receiver will first need to determine who the landlord is and whether the landlord is an independent third party or an affiliate of the receivership defendants.  Assuming the landlord is an independent party, the receiver will need to read the written lease and any modifications that may have been made to the lease to determine the scope of the leased premises, the rent obligation, the duration of the tenancy and any other monetary or non-monetary obligations of the receivership defendant/tenant and rights such as any purchase option, under the lease.  Landlords will assert that the receivership is liable to pay post-petition rent accruing and other financial obligations to the landlord on an administrative priority basis so long as the receivership estate continues to use and occupy the premises, making time of the essence in evaluating the lease and whatever rights the receivership entity may have under it.

    If the receivership entity is the lessee of real property, it likely paid the landlord a pre-receivership security deposit.  That deposit is likely equal to at least one month’s rent or more.  The receiver may seek to negotiate with the landlord to have the deposit applied to any post-receivership rent accruing for the limited time the receivership estate may be occupying the premises.  The receiver is typically not deemed to have “assumed” the lease by occupation of the premises for a limited time after the commencement of the receivership, and the receiver may want to explicitly advise the landlord that the receiver is reserving the right to reject the lease, vacate the premises and limit the landlord to a claim against the receivership estate for any unpaid rent or other monetary obligations due under the lease beyond the limited rent payment for the estate’s post-receivership use and occupancy of the premises.

    The receiver needs to quickly determine (a) whether the lease has an option to purchase, a right to assign the lease or a right to sublease that could have value for the receivership estate; (b) the estate’s need to continue to occupy the premises and for how long; (c) the status of the receivership defendant’s performance under the lease, including whether rent is current, whether there are any ongoing violations of the lease regarding the use of the premises that need to be addressed and corrected, what obligations the receivership defendant may be facing in the near future that the estate might have to perform to maintain the lease, and the amount of pre-paid rent and security deposit in the landlord’s possession; (d) what the market rent for the leased premises is; and (e) available alternatives and the cost of alternatives if the estate needs a place to maintain records or personal property pending a sale or other disposition of those assets.

    1. Gary Owen Caris is a Partner and Lesley Anne Hawes is Senior Counsel at Diamond McCarthy LLP.  The authors would like to thank Greg Hays of Hays Financial Consulting LLC for contributions to this article through  his thoughtful comments and reference to his informative article, “Fiduciaries Gone Wild” and the authorities cited therein.  

    2. See, e.g. Muratore v. Darr, 375 F. 3d 140 (1st Cir. 2004); In re Delorean Motor Co., 991 F. 2d 1236 (6th Cir. 1993); In re Nathurst, 207 B.R. 755 (Bankr. M.D. Fla. 1997).

  • 09 May 2017 3:35 PM | Deleted user

    By Kathy Bazoian Phelps

    The NAFER 2017 Conference is shaping up to be the best ever. It will take place on October 18 – 20, 2017 at the Four Seasons Hotel in Miami, Florida.

    The Receiver’s Training Camp is back by popular demand and has been extended by one hour to include an Introduction to International Issues. Both experienced and unexperienced receivers, as well as professionals in the field, have praised the Training Camp as offering practical insights that are not immediately obvious even to the most seasoned professionals. This year, the Training Camp will cover the “Second Quarter,” addressing the next wave of issues that hit after the rush of the first week has past. Topics relating to Asset Identification, Asset Recovery and Asset Disposition will be covered in depth at the 3-hour Training Camp on October 18, 2017.

    The main conference on October 19 and 20 will also be packed with informative and practical programs. The panels will include:

    • Pursuing Claims Against Professionals, Fiduciaries, and Other Deep Pockets
    • Keys to a Cost-Effective Receivership: When to Hold ‘Em & When to Fold ‘Em
    • Taxing Questions for the Federal Equity Receiver: Qualified Settlement Funds, Final Tax Returns, Avoiding Personal Liability and Others
    • Fraud Vectors in the Receivership Universe
    • Avoiding Turf Wars in Parallel Receiverships and Forfeiture Proceedings
    • Judges’ Panel

    The panels will be filled with regulators, judges, and experienced receivers and professionals to discuss the issues of most concern to federal equity receivers. Check out the latest news about the conference and register at  

  • 08 Apr 2017 3:33 PM | Deleted user

    In early February 2017, Tom Brady led a spectacular comeback over the Atlanta Falcons.  Scoring 25 un-answered points the Patriots beat the Falcons 34-28 in Houston, winning Super Bowl 51.  The teams combined utilized 14 receivers that night. 

    The only place on earth with more receivers gathered in a single venue happened to be the Westin on Seven Mile Beach in the Cayman Islands which hosted NAFER inaugural international committee offshore conference.  This august event, The Cayman Insolvency and Asset Recovery Conference, was attended by over sixty of the leading Federal Equity Receivers from the United States and several dozen  Cayman Island  insolvency practitioners. 


    The supporting concept for this gathering was a three-legged stool of ambitious goals. 

    Much of the international insolvency community are not familiar with the unique tool of US receiverships as a tool in insolvency and asset recovery.  A portion of this day was the US Federal Receiver group educating the Cayman Insolvency professionals about the US Receivership tools to add another tool to their kit.

    Similarly, many US Receivers encounter offshore jurisdiction issues as they marshal assets in their respective estates.  Each offshore venue has unique laws, practice rules, and cultural aspects.  Knowledge of these can smooth the path to success, while ignorance can leave valuable assets out of reach or require significant time and cost for recovery.  The Cayman insolvency professionals did an outstanding job communicating the options for working with the Cayman professionals and Cayman courts.

    Lastly, between a sunset cruise, beachside cocktail hours and coffee breaks throughout the day this conference provided an outstanding networking opportunity for all involved.  As of the writing of this article the networking and introductions provided through the conference already had resulted in six referrals amongst the parties. 

    The NAFER International Committee was exceptionally pleased with the success of this conference.  We’d like to thank everyone who participated as a sponsor, speaker, or attendee. 

    Based on glowing feedback and support, planning is already underway for a 2018 event in the British Virgin Islands.  Stay tuned to the website ( ) for more details later in the year.     



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