by Gary Soles, Michael Ryan, Robert F. Higgins, and David E. Peterson
In recent years, lenders and special servicers in the commercial mortgage-backed securities (CMBS) industry have been frustrated by Florida case law developments that preclude receivers in foreclosure cases from selling the mortgaged real estate. These developments have a significant effect on the CMBS industry, and it is, therefore, important for lawyers representing such lenders to understand the rationale and limits of the case law.
The Fourth District Court of Appeal ruled in Shubh Hotels Boca, LLC v. Federal Deposit Ins. Corp., 46 So. 3d 163 (Fla. 4th DCA 2010), that a court presiding over a foreclosure case in which a receiver has been appointed does not have the power to order sale of the mortgaged property by the receiver prior to entry of a final judgment of foreclosure. Mortgage foreclosure practitioners will not find that result particularly surprising and may question why a mortgagee would even bother to make such an argument, given that a successful foreclosure of the mortgage results in a judicial sale of the mortgaged property in any event.
The answer is that in this age of securitization, the laws pertaining to real estate mortgage investment conduits (REMICs) oftentimes make such a procedure desirable. A REMIC is a business structure defined by the Internal Revenue Code (IRC) — essentially a pool of mortgages in which securities representing fractional interests have been issued. Absent the REMIC provisions of the IRC, a mortgage pool in which multiple classes of fractional interests have been issued would be treated for tax purposes as a corporation, and as a result, the income from the mortgages would be double taxed, first when it was earned at the pool level, and again when it was paid to the holders of the fractional interests. Double taxation of the income would make it economically unfeasible to issue fractional interests in mortgage pools.
As a result, in 1987, Congress amended the IRC to allow mortgage pools to be set up as REMICs. If it is done correctly, the income is taxed as a pass through to the holder of the residual securities issued by the REMIC, while payments to those holders of securities having a higher priority are deductible at the pool level and taxed to the recipients as payments on a debt. In general, then, there is no taxation at the pool level and hence, no double taxation.
As is often the case with tax benefits, however, Congress created a burden in exchange for the tax benefits that it extended to REMICs. To qualify, a REMIC must follow the tightly regulated structure that Congress prescribed. In particular, a REMIC must be a passive structure with no business other than the ownership and collection of specific mortgages, which must be transferred to the REMIC shortly after the creation of the pool. As a result, the REMIC cannot freely dispose of mortgages or acquire new mortgages.1
The IRC permits a REMIC to own foreclosed property for up to three years, with the possibility of an extension, but as a result of its inability to acquire new mortgages, the REMIC cannot offer purchase money financing. That might reduce what can be obtained by liquidation of the foreclosed property, especially in a down market wherein buyers might be willing to pay a higher percentage of the appraised value in anticipation of future appreciation but are unable to secure financing based on such a valuation. However, a result similar to seller financing might be achieved if the property can be sold subject to the mortgage, without foreclosing. That is when the receiver’s sale becomes useful. If the receiver is able to sell the real estate subject to the mortgage, the REMIC servicer might be able to enter into a modification of the mortgage with the purchaser that would not run afoul of the IRC.
The sale of mortgaged property by a receiver is a procedure that has been used successfully in other states.2 Prior to Shubh, title insurance companies were being asked to insure such properties in Florida, and as a result, some of the title insurance companies issued underwriting policies announcing that due to the lack of specific reported Florida case law authority, no such policy could be issued in the absence of a supporting deed from the mortgagor to the purchaser.3 Obviously, such a requirement greatly reduces the value of a sale by the receiver, since no such receiver sale would be required in the first place if the mortgagor were cooperative.
The decision in Shubh seems to have vindicated the judgment of the title insurers in declining to underwrite such transactions.4 However, given the benefits that might be derived from this procedure, it is worth looking at Shubh to see whether that case completely closed the door to a sale of the property by a receiver.5
Shubh and Its Limits
In Shubh, the court explained that the trial court had appointed a receiver in a mortgage foreclosure action, and ultimately, the lender sought court approval of a sale of the mortgaged property by the receiver. The owner/mortgagor objected to the sale, “arguing there is no legal authority for the receiver to sell the property and that he could not convey good title.”6 Nevertheless, the trial court approved the sale, and the owner appealed.
The Fourth District Court of Appeal reversed. In setting up the discussion, the court noted that the “lender has not cited any statute specifically applying to the circumstances we face here and authorizing a court appointed receiver in a foreclosure case to sell the mortgaged property….”7 The court stated in a footnote: “To lender’s argument that § 608.4492, Florida Statutes (2009), authorizes the receiver to sell the property here, we note there is no claim seeking dissolution of owner, a limited liability company. Nothing in that statute remotely purports to give mortgage foreclosure receivers such general authority.”8
The referenced statute, F.S. §608.4492, is part of the Florida limited liability company law that authorizes a court presiding over a dissolution proceeding to appoint a receiver to liquidate the assets of a dissolved limited liability company. Thus, from the start, the court drew a clear distinction between a receiver appointed in the context of a foreclosure proceeding and a liquidating receiver. The court stated that “the general Florida rule is that the role of a receiver in a foreclosure action is only to preserve the property’s value.”9 The court also stated, “the general Florida rule is that the mere appointment of a receiver does not itself confer any of the owner’s power or authority to sell such property.”10 Essentially, the court was saying that a receiver appointed in a foreclosure action does not acquire title to the mortgaged property, but merely takes possession for the purpose of safeguarding and operating the property until completion of the foreclosure, and, therefore, has no power to convey title.
For the latter proposition, the court cited Eppes v. Dade Developers Inc., 170 So. 875 (Fla. 1936), which it said held that the “appointment of [a] receiver does not affect title to property,” the receiver’s “appointment does not deprive [the] owner of rights,” and the “receiver merely holds for [the] rightful owner until [the] matter is determined.”11 Ironically, however, the Eppes decision is distinguishable because it did not involve a mortgage foreclosure, but rather a liquidating receiver, and because the Eppes decision itself implied (correctly in that context) that a sale of the property might be appropriate and held only that the sale could not divest a pre-existing judgment lienholder of his or her rights, at least without notice.
In citing Eppes, the Shubh court was obviously struggling to find applicable language in the Florida cases to support its conclusion. Moreover, the assertion that the receiver cannot transfer the property because he or she does not have title is problematic in some respects. The idea that the receiver does not acquire transferrable title to the receivership property is a difficult one to reconcile with other aspects of the receivership law. For example, even in a foreclosure proceeding, the court can authorize the receiver to pay expenses of the receivership with general funds of the receivership that might be in his or her possession.12 What is needed is an explanation as to why the mortgaged property should stand on a different footing than other receivership property.
Some Florida authorities have made ambiguous statements that receivers generally do not have the power to sell receivership property, but in certain circumstances are permitted to do so, without explaining why and when the exception should apply.13 Generally, authorities have cited cases that failed to discuss the distinction between a receiver appointed for the purpose of liquidating an entity’s property, and a receiver who simply takes possession of mortgaged property in aid of the court’s jurisdiction in a foreclosure.14 Such cases may have been correct on the facts of each case, but they have little to do with the issue in Shubh.
A good argument can be made that the issue presented in Shubh was a matter of first impression in Florida, at least in the context of a foreclosure receivership. Although it was not discussed in Shubh, the case law in other states is not very useful, given the wide variation among the states in the manner mortgages are enforced. Even though it was not very successful in supporting its decision with controlling authority, the Shubh court came to a very defensible conclusion, given the nature of the foreclosure process in Florida. In doing so, the court answered the implicit question of why the mortgaged property stands on a different footing than other receivership property in regard to the receiver’s power to transfer title.
The court stated:
[E]very mortgagor has a statutory right of redemption, made part of every mortgage, which continues even after a post-judgment foreclosure sale until issuance of a certificate of sale by the clerk of court conducting the sale. Recognizing a general interim power of a receiver to sell mortgaged property in a foreclosure case would contravene these statutory rights and principles.15
The court cited F.S. §45.0315 (2009), providing that the mortgagor’s right of redemption is cut off by issuance of the certificate of title in a judicial foreclosure sale. The court said that approval of a prejudgment sale by a receiver would undercut the Florida requirement that a mortgage be enforced in a foreclosure action, and, therefore, was impermissible.16
The court’s ruling comports well with the Florida case law pertaining to the appointment of receivers in foreclosure proceedings. In Pasco v. Gamble, 1876 WL 2506 (Fla. 1876), one of the earliest Florida cases relating to the appointment of a receiver in a foreclosure action, the court noted that the Florida statutes provided only that the mortgagee has a lien, and, thus, no right to possession, which instead rests in the mortgagor until after the foreclosure sale. The issue was whether the mortgagee could receive the rents, given such weakness in its title. The court stated:
I am clear that wherever the mortgagor, legally in possession, and entitled thereto by statute or contract, refuses and fails to do any act which is necessary to the preservation of the estate, and to the doing of this act the appointment of a receiver and sequestration of the rents is necessary, that a court of equity should not hesitate to take the possession from him. Here one of the allegations is that the purchaser has failed to pay the taxes. Such tax is an annual charge upon the lands, and when a receiver is necessary to its discharge the appointment is proper.17
Thus, the case law has historically recognized the potential conflict between the receivership remedy and the Florida statutes governing foreclosure. In Pasco, the court allowed the appointment of a receiver when it was necessary to protect the mortgagee’s rights, but in doing so, it was careful not to trample unnecessarily upon the mortgagor’s statutory right of redemption, confining its discussion to the right of “possession.” Another often-cited case, Carolina Portland Cement Co. v. Baumgartner, 128 So. 241 (Fla. 1930), cited and reinforced the holding of Pasco in that regard. Given the difficulty that courts had merely in extending the mortgagee’s rights to the rents, it is not surprising that the Shubh court would face similar difficulty when asked to weaken the mortgagor’s rights even further, nor is it surprising that it declined to do so.
The only part of the Shubh opinion that might prompt head scratching is the court’s statement that:
It is plain to us that this receivership provision does not purport to give the receiver any power of sale of mortgaged property before the entry of judgment foreclosing the mortgage. Indeed, it explicitly limits the receiver’s powers to a caretaker role — “to protect and preserve the Mortgaged Property” — which includes the authority only to operate the property and collect rents.
Because the specification in the mortgage of only certain delimited receivership powers strongly implies the deliberate exclusion of other more extensive powers, it is apparent to us that no receiver power of sale before final judgment was ever intended in the agreement between the parties on this mortgage loan.18
Read in isolation, the implication of this statement is that if such an express contractual provision had been included in the mortgage, then the court might have allowed the sale. However, given the court’s conclusion that a receiver sale would contravene Florida foreclosure law, one wonders why the court discussed the contractual language at all. The court’s discussion of the contractual language is obiter dictum. In effect, it would not have mattered if the mortgage had included a power of sale by the receiver. A foreclosure sale was in any event required by Florida law. Although a contractual provision for the appointment of a receiver is a factor courts will consider in appointing a receiver, the ultimate decision rests with the discretion of the court and not with the parties.19 Thus, the court should perhaps have not placed so much emphasis on the contractual language, but relied entirely on the Florida statutory requirements governing foreclosures as the basis for its decision.
Regardless of its reasoning, the court’s holding was clear: A receiver in a foreclosure proceeding has no power to sell the mortgaged property. Despite that clarity, however, the court left a loophole that might serve as a basis to order sale of a mortgaged property by a receiver in a proper case. Because the court distinguished the case of a liquidating receiver, the question arises whether the lender might take advantage of F.S. §608.4492 (2011) by commencing a dissolution proceeding under Ch. 608.
The statute says in part: “A court in a judicial proceeding brought to dissolve a limited liability company may appoint one or more receivers to wind up and liquidate, or one or more custodians to manage, the business and affairs of the limited liability company.”
A similar statute applies to Florida corporations,20 although limited liability companies tend to be the preferred form of entity when it comes to owning real estate.
Because, unlike the receiver appointed in a foreclosure action, the purpose of appointing a receiver in a dissolution proceeding is to facilitate the liquidation of the entity’s assets, a receiver for such purpose is generally empowered to sell property of the dissolved entity upon approval of the court. F.S. §608.4492(3)(a)(1) (2011), expressly states that the receiver: “May dispose of all or any part of the assets of the limited liability company wherever located, at a public or private sale, if authorized by the court.”
Therefore, one might conceive that if the lender could bring about the appointment of a receiver pursuant to the dissolution statutes, the court might properly approve a sale of the mortgaged property by the receiver.
However, aside from the obvious impediment that the lender must have the good fortune that its borrower is a Florida limited liability company or corporation,21 the lender’s right to seek dissolution is very limited. F.S. §608.449 (2011) states in part that a circuit court may dissolve a limited liability company:
(3) In a proceeding by a creditor if it is established that:
(a) The creditor’s claim has been reduced to judgment, the execution on that judgment returned unsatisfied, and the limited liability company is insolvent; or
(b) The limited liability company has admitted in writing that the creditor’s claim is due and owing and the limited liability company is insolvent.22
Generally, a lender seeking to avoid foreclosing will not be able to satisfy the requirements of subsection 3(a), above. That leaves subsection 3(b).23
In some instances, the lender may be able to show that the borrower has admitted in writing that the lender’s claim is due and owing and the limited liability company is insolvent. A lender might exact such an admission in a forbearance agreement. Perhaps even the borrower’s express admission in its answer to such an allegation would suffice, but presumably a mere admission by default would not suffice inasmuch as it is not in writing.
The right of a creditor to commence a dissolution proceeding depends on the borrower’s admission that the loan is due and owing — a fortuitous circumstance for the creditor, if it should occur. Therefore, the CMBS industry might find it worthwhile to seek a legislative expansion of the creditor’s right to commence a dissolution proceeding under F.S. §608.449. An amendment allowing such a proceeding without an admission by the borrower upon mere proof that the claim is due and owing and the borrower is insolvent would expand the statute’s applicability to most foreclosure situations, without significantly altering the substantive law as it now stands. The requirement of an admission is probably intended to avoid turning every lawsuit to recover a debt into a dissolution proceeding, but a requirement imposing a minimum amount in question might also accomplish the goal of restricting the dissolution remedy to the most momentous cases. However, even the existing Florida provision permitting a creditor to seek dissolution of a limited liability company is somewhat unusual. No such provision is included in the uniform acts. An effort to amend the Florida provision in that respect may, therefore, be a hard sell. Another approach might be to expand the court’s power to appoint a receiver under F.S. §608.4492 (2011) to situations involving nonjudicial dissolution, and giving a creditor standing to request such an appointment. In some foreclosure situations, the borrower has allowed itself to be administratively dissolved. Having done so, it cannot easily complain that a receiver might as a consequence be appointed at the request of its creditors. Although once again, such a remedy would be dependent upon factors beyond the control of the lender, it might at least expand the remedy to a larger number of cases.
Even in those instances in which a liquidation receiver may be appointed, however, the lender might find that bringing such a proceeding is more than it wants to undertake. A receiver in a dissolution proceeding has an obligation not only to the lender, but to all creditors of the dissolved limited liability company.24 The receiver actually works for the court — not the mortgage lender — and is not subject to the lender’s control.25 Moreover, the proceeding is not necessarily over when the court approves the sale of the mortgaged property. The lender could find itself litigating matters completely unrelated to the enforcement of its rights. On the other hand, the same is often true in a foreclosure, and in a proper case, the lender might believe that these risks are low because of the lack of other creditors and other assets.
Despite the awkwardness of bringing a dissolution proceeding for the purpose of compelling a sale of the property to an assuming purchaser, the benefits that derive from such a procedure might prompt some mortgage lenders and their servicers to take this unusual approach to the enforcement of the lender’s rights. The Shubh case does not appear to preclude that possibility, and in fact seems to suggest that in such a case, the trial court might well have the power to order a sale of the mortgaged property by a receiver. The Florida title insurance companies currently have underwriting policies that require a supporting deed by the mortgagor as a condition to insure these titles, and obviously, that makes it more difficult to negotiate and close such a transaction, but one might hope that the title insurance companies would take a different position in the case involving a liquidating receiver. Even so, absent legislative action, the strategy seems destined to remain relatively rare in light of the limited circumstances wherein the procedure is available as a matter of law, the limited number of instances in which it would provide a benefit, and the cost and uncertainty associated with such a strategy.
1 Even a significant modification of an existing mortgage is treated as a disposition of the old mortgage and the acquisition of a new mortgage, and is generally prohibited, except when the mortgage is in default or default is reasonably foreseeable. Although Congress and the IRS have somewhat relaxed these restrictions on modifying existing mortgages, attorneys who practice in this area will recall that at the commencement of the current financial crisis, it was difficult if not impossible to persuade a lender to modify a mortgage unless it was actually in default. Even after regulatory changes were made to facilitate such modifications, lenders are given only greater discretion in the exercise of their judgment, and must still generally have a reasonable (and documented) belief that the modification is necessary to avoid a reasonably foreseeable future default.
2 REMICs are often set up to own home mortgages, but for the purpose of this article, we focus on REMICs owning commercial mortgages. It is unlikely that a receiver would be appointed for a home mortgage, particularly in those instances when it would be permissible to sell the property under Shubh and would generate sufficient benefit to undertake the effort to do so. See, e.g., J. Craig Anderson Bethany Case Ruling a Win for Receivers, The Arizona Republic, August 22, 2010, stating that the receiver’s sale in that case resulted in a $53 million savings to the lender.
3 One might question the logic of requiring reported case law authority, given that the title insurance company would presumably be relying upon an order approving the sale by the court that appointed the receiver, which arguably is stronger than case law authority in that it would carry the force of res judicata. However, the doctrine of res judicata does not apply unless the deciding court has jurisdiction over the subject matter. See Florida Export Tobacco Co., Inc. v. Department of Revenue, 510 So. 2d 936 (Fla. 1st DCA 1987), rev. den., 519 So. 2d 986 (Fla. 1987); Florida National Bank v. Kassewitz, 25 So. 2d 271 (Fla. 1946). The title insurance underwriters likely wanted a ruling at the appellate level that the trial court had such jurisdiction.
4 See also MB Plaza, LLC v. Wells Fargo Bank, N.A., 72 So. 3d 205 (Fla. 2d DCA 2011) (citing Shubh in striking authorization to sell property from order appointing receiver).
5 Another question is whether the property could be sold “free and clear” of junior liens, either with or without a supporting deed from the mortgagor. Junior liens could obviously be eliminated in a foreclosure. This article does not discuss that issue, but see Brian S. Dervishi & Steven E. Seward, Using Receiverships to Maximize the Value of Distressed Assets, 83 Fla. B. J. 8 (Dec. 2009).
6 Shubh, 46 So. 3d at 165.
7 Id. at 165-6.
8 Id. at 46 So. 3d 166, fn. 6.
9 Id. at 167, citing at footnote 9, Cone-Otwell-Wilson Corp. v. Commodore’s Point Terminal Co., 114 So. 232 (Fla. 1927) (“The object of the appointment of a receiver is to preserve the security and to collect and apply the rents and profits…” at 451).
10 Id. 46 So. 3d at 167.
11 Id. 46 So. 3d at 167, fn. 8.
12 See, e.g., Knickerbocker Trust Co. v. Green Bay Phosphate Co., 56 So. 699 (Fla. 1911); William C. Field, Inc. v. Trizak Financial Plaza, Ltd., 528 So. 2d 1380 (Fla. 4th DCA 1988).
13 See, e.g., Fugazy Travel Bureau, Inc. v. State by Dickinson, 188 So. 2d 842, 844 (Fla. 4th DCA 1966) (disapproving sale of note by liquidating receiver, for lack of notice, and stating, “A sale by a receiver is ordinarily improper, but there are instances in which a sale by receiver is expedient and proper”). See also 44 Fla. Jur. 2d Receivers, §69; Michael P. Dickey, Receiverships in Florida, Florida Civil Practice Before Trial, Ch. 24 §24.28 (2009).
14 See, e.g., Bailey v. Treasure, 462 So. 2d 537 (Fla. 4th DCA 1985) (disapproving sale in case involving liquidating receiver, but implying that sale might be appropriate on better evidence); Arzuman v. Saud, 964 So. 2d 809 (Fla. 4th DCA 2007) (approving sale not in context of a foreclosure receivership).
15 Id. at 46 So. 3d 167 (citations and footnotes omitted).
16 See also Fla. Stat. §702.01 (2011) ( “All mortgages shall be foreclosed in equity.”).
17 Pasco v. Gamble, 1876 WL 2506 at *3.
18 Shubh, 46 So. 3d at 166.
19 See Carolina Portland Cement Co.,128 So. 241.
20 Fla. Stat. §607.1432 (2011).
21 Fla. Stat. §§608.4492(6) and 607.1432(6) (2011) also permit appointment of a receiver for foreign entities, but this introduces another layer of complexity, since another state’s law would presumably apply, and there is the possibility that another state’s courts would take primary jurisdiction. However, the statute says that the court may appoint a receiver “whenever the court deems that circumstances exist requiring the appointment of such a receiver.” Obviously, that is a much vaguer and potentially broader standard than what applies to a domestic entity, so that a lender might argue that it authorizes appointment of a receiver even if the borrower has not admitted that the debt is due and owing.
22 Again, similar provisions appear in the corporate statutes. See Fla. Stat. §607.1430(4) (2011).
23 In a more unusual case, if there is a minority equity owner of the borrower entity that is sympathetic to the lender’s strategy, the minority owner might have standing in its own right to seek dissolution pursuant to Ch. 607 or 608, particularly if the owners are deadlocked or waste can be shown.
24 See Forcum v. Symmes, 143 So. 630 (Fla. 1932).
25 Knickerbocker Trust Co. v. Green Bay Phosphate Co., 56 So. 699 (Fla. 1911).
Gary Soles is the head of the creditor’s rights and bankruptcy practice of Lowndes, Drosdick, Doster, Kantor & Reed, in Orlando. He has represented national, regional, and local lenders in sophisticated commercial workouts, foreclosures, defensive litigation, business litigation, and receiverships.
Mike Ryan is a partner at Lowndes, Drosdick, Doster, Kantor & Reed, in Orlando, who practices in the areas of real estate transactions, development, and finance; banking and financial services; and public finance.
Bob Higgins is the senior partner in the creditors’ rights and bankruptcy litigation practice of Lowndes, Drosdick, Doster, Kantor & Reed, in Orlando. He has represented lenders in the enforcement of loan documents and loan work-outs, receiverships, the defense of lender liability claims, and creditor representation in Ch. 11 bankruptcy cases.
Dave Peterson is an attorney at Lowndes, Drosdick, Doster, Kantor & Reed, in Orlando. He has a broad background in bankruptcy and creditors’ rights, as well as commercial litigation, in general. He represents lenders, creditors, and lessors in foreclosures, sophisticated Ch. 11 reorganizations, and Ch. 7 liquidations.
This column is submitted on behalf of the Real Property, Probate and Trust Section, William F. Belcher, chair, and Kristen Lynch and David Brittain, editors.