Receivers: emerging breed of workout specialists.

Receivers: Emerging breed of workout specialists

As the value of properties and rents have been declining, owners have found their properties being put into receivership by bankruptcy courts and lenders who are no longer able to wait for their money. In some cases, owners have brushed aside their own egos and called for help first. In other cases, the lenders have foreclosed and are calling in these same specialists to oversee the management of the property.

Knowledgeable workout consultants and attorneys familiar with property management and real estate problems are now in the front lines of the economic recovery, collecting rents, bringing in new tenants, supervising repairs, arranging auctions and generally managing the assets for the lenders and courts.

While a trustee is appointed pursuant to a bankruptcy in the Federal Court system, a receiver is usually part of a foreclosure, which is handled in the State court system. The trustee or receiver can act as manager and trustee (or manager and receiver) or hire a separate manager for the property. A referee sells property in a foreclosure sale and there are also Article 74 administrators who run buildings for the courts or in other proceedings.

Court Rules for Receiver

A receiver is a fiduciary, explained Harold Wolfe, a spokesperson for the New York State Office of Court Administration, and the appointment of receivers is governed by a rule of the chief judge.

Receivers, critics say, are by and large appointed for political reasons, primarily because the person or his company is known to the lenders and courts.

The current Chief Judge, Sol Wachtler, created the current rules to deal with criticism of the old procedure, Wolfe said. "The rule is designed to shed some light on the process and remove it from the dark corridors to the steps of the courthouse and increase public trust in the integrity of the system," he said.

In fact, once a month, Wolfe said, the Office of Court Administration issues a news release of all the fiduciaries which were appointed two months earlier.

The rules prohibit judges from appointing relatives, including those by marriage, and states that fees of $2,500 or more must be explained in writing. Additionally, no person is to be eligible to receive more than one appointment within a 12-month period which results in fees of over $5,000 unless the judge determines there were unusual circumstances and writes the reason for the exception.

Receivers have to be registered and file with the Office of Court Administration in order to qualify. Judges also appoint receivers from a pool of people. "The judges tend to appoint people that have some experience in the area, and tend to be professionals in the field but not necessarily lawyers," attorney Alan B. Reis said.

A property in foreclosure can have both a receiver and referee. A receiver for a foreclosure is usually an equity receiver who collects the rent and makes sure the mortgagee gets the money.

|A Lot of Work'

Trustees in bankruptcy court also provide similar functions under other sets of rules, but are also basically appointed to protect an asset. In a bankruptcy, the U.S. Trustee chooses the trustee. "It's different in each court," explained Stephen E. Estroff, who is the trustee for the Crown Building and other, Marcos properties. Estroff recently joined Lord Day & Lord Barrett Smith as a partner.

Estroff said being a receiver or trustee is "an enormous amount of work. People put your name in and you get recommended and you do it."

Reis, who has acted as referee and receiver, said the judges understand they have to appoint people with expertise and not just appoint someone off a list. "It is a public service," Reis explained, "nobody gets rich doing this. If you have an expertise you like to do this."

Reis, an attorney with expertise in general real property law and with representing lenders, has a particular specialty in the co-op field.

|Little Money'

"The problem," said one receiver who asked not to be identified, "is that it is a hard job and the fees are statutory."

"There's an elaborate statutory scheme for compensation," Estroff said. "The amount of time and effort that goes into the case is enormous." Because there is so much work and the fees are so high, a lot of people are concerned about the fees, Estroff explained. "So the courts look very carefully at what they do and there is some tendency to examine the fees," he said.

Estroff said "It's expensive to have a trustee come in and look at the books. The meetings run well into the night. "The reality," Estroff continued, "is that the trustees and trustees' attorneys are paid large fees but they are not even paid what they are due. If the law firm for the trustee gets a fee for $1.5 million dollars, people say, |what did he do?' But he probably put in $3 million dollars in time."

Neither Reis, the receiver in the De Santis/White Rose co-op foreclosure case, nor his law firm, Fishbach Hertan & Reis, were awarded the full amount of compensation requested of the court. "On this one I was happy to be able to participate," he said. "It's not the compensation."

White Rose was a hard case, Reis, said, because of the uniqueness. "There were issues that arose because of the nature of a co-op and the fact that it was not a typical rental buildings."

There are also rules about when the trustee or receiver can submit fees. "If you have a lot of them going and you know how to do them and you have other business that fills in the gaps and pays while you're waiting, it's good," Estroff said, "but not as good as everybody thinks. Someone conscientious cannot turn the matter on and off."

The question of appointing a manager depends on the type of property and if the problem is with the managing agent, Reis explained. Managing agent fees are also subject to the control of the court.

The receiver will take over the operation of the property. He collects the rents and pays the expenses. "If it is a large enough property," Reis noted, "you work with a managing agent so you do not deal with the day-to-day problems such as obtaining a plumber for the leaky faucet. "But you must oversee the maintenance of the property, the same as any owners," he said. It is the same responsibility as if you owned the property."

Managers Appointed

"Sometimes the judge, "Estroff said," is looking for a single decisive businessman or lawyer to run the shop and allows you to appoint a manager to collect the fees. "Sometimes the business runs itself."

Ronald B. Bruder, president of the Brookhill Group Inc., said his company is often called in as a manager or receiver. Bruder said working the property is the same as if you were managing it yourself but you have to go to court for approval. "You can't put in an anchor tenant or do new construction without approval," he explained. Bruder said the approval is not hard to get--it just has to make sense, he said.

Since Brookhill has operated in 20 states, Bruder said, the company is suggested by people they have worked with in the past and are brought in by banks, trustees, lenders and owners. "When they need someone for troubled properties we get called and are continuing to get more calls," he said. "The judges are starting to know who we are and that is leading to our getting additional properties."

Working for a court means that record keeping is very stringent. Deposits are made into segregated accounts and detailed operating reports are the norm. Things also can take time because, as Bruder put it, "the courts are besieged by humongous amounts of paperwork. They have more bankruptcies and receiverships than ever before."

Through receivers, Brookhill has been appointed manager of two properties including a property at East 86th Street and 3rd Avenue, which is a combination of commercial and residential tenancies. "They've gotten out of the pattern of paying rent," Bruder said. "Either they will become rent paying tenants or former tenants."

The other property is a full-block VMS property off lower Broadway known as 30-60-90 East 9th Street. "When we took it over there were 37 tenants, and only a handful were paying rent," he noted. "We renegotiated 20 new leases, found new tenants for it, and were able to salvage quite a few of the old tenants." Some renovation work has also been done in order to clean up the area. As manager, Brookhill handles the rent collections, the physical plant as well as evictions.

In effect, the receiver is the agent for the court and makes sure nothing happens to the asset while the plaintiff is exercising its right. "So the receiver is protecting it for everybody," Reis said. "The mortgagee want to make sure the owner doesn't do anything to jeopardize its interests."

But would Reis be a receiver again? "Sure," he said. "It's a challenging job. It's a lot of time that is not always compensated on the basis of the time and effort spent."