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Appointment of Receiver Under State Law No Assurance Receiver Will Stay If Ch. 11 Filed
No sector is receiving more press about the impact of the rapid rise in interest rates than the commercial real estate industry. It seems like every day there is another article about the billions — or trillions — of dollars in debt that will mature over the next 24 months, secured by interests in real estate. For many properties, the owners' equity has been wiped out, and the lenders will be left to exercise rights to foreclose their collateral. An interim step in this process is often the appointment of a receiver to operate and or preserve the property during the foreclosure process. Many clients are not aware that the Bankruptcy Code provides that, upon the filing of a bankruptcy case, the receiver is required to give back possession of the mortgaged property to the debtor unless the lender obtains an order from the Bankruptcy Court excusing the receiver from this requirement. And most of the time, the lender does not want possession returned to the debtor that defaulted under the loan. So when can a receiver be excused from this requirement?
This decision regarding turnover ultimately involves whether the receiver or debtor is more likely to preserve and maximize the value of the property for the benefit of all creditors, not just the lender. The U.S. Bankruptcy Court for the Northern District of Illinois recently addressed this issue in In re Novus Structures, Case No. 23 B 6723 (Sept. 11, 2023), where a state court appointed receiver was not excused from turning over possession of commercial real estate property to the debtor that had filed for bankruptcy.
State Court Receiver Appointed In Foreclosure Litigation
According to the opinion, Novus Structures (debtor) owned a small apartment building with only three units and a two-car detached garage (property). The debtor was a borrower under a loan from J&D Commercial, LLC (lender) pursuant to a promissory note secured by a mortgage on the property and an assignment of rents derived from the property. The loan matured in 2019, and the lender initiated a state court foreclosure proceeding to collect the amount due.
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