Receiverships and Conservatorships 101 Understanding a Powerful Legal Tool

When a property or individual finds itself or himself in a situation that threatens the continued economic viability of the asset or estate our laws provide a supervised level of assistance from qualified third parties.  In the case of real property that assistance is known as receivership.  In the case of an individual it is known as conservatorship.  In both cases the goal is to stabilize and preserve the value of real property and/or personal estate.

What is a Receivership and When is it Used?

Kris Kasten, an attorney specializing in condominium and community law and principal of Altus Legal in Chicago, says, “In Illinois, a receivership is a judicial process pursuant to which a person is appointed by a court to manage the real estate of another. Receiverships are used in a variety of circumstances.  Those circumstances include but are not limited to: (1) managing, conserving, or operating mortgaged real estate in a mortgage foreclosure action; (2) completing unfinished construction of buildings; (3) winding up dissolved corporations, partnerships, or limited liability companies; (4) remedying violations of municipal or state building codes; (5) operating, managing, and conserving a distressed condominium property; and (6) a court exercising its own equitable powers.”

Sima Kirsch, an attorney who represents numerous condominium associations in Illinois drills down a bit further.  “A Receivership is an extraordinary legal remedy that results when a chancery court divests the owner, through the board, of control of their property and puts it under the control of a court-appointed independent agent—the receiver, acting as a neutral, which may be an individual or a management company. The receiver may be authorized to manage assets or to act as a liquidator of the association.”

“A Receivership is ordered, among other reasons, to preserve property and maximize value during a lawsuit if it is found that the property will be further dissipated,” explains Kirsch. “A receiver may be appointed for purposes of liquidation or to restructure; each has different outcomes for those involved. Each individual state’s statute designates who may bring the action. The rules for receivership of different entities, excluding condominiums, HOAs, or co-ops, are different. When an association is assigned a receiver, the association is generally dysfunctional and/or the property is distressed and no longer solvent or close to insolvency. This could be due to different factors including failure to maintain a properly constituted board or there is no board, unexpected or higher than expected building repairs due to failure to properly budget and maintain appropriate reserves, members not paying their HOA dues coupled with poor collection habits, or the association paying for expensive legal fees in a lawsuit due to a breach of fiduciary duty or arising from an association that lacks proper governance and policies and rules to protect the association or a combination of the above.”

Other Uses

Receivership can have multiple uses.  “Sometimes it can be used when dealing with a corrupt co-op board,” says William McCracken, a partner with Ganfer Shore Leeds & Zauderer, a New York based law firm. "We have had occasions where the best solution is a receiver—for instance, a co-op board controlled by an entity not looking out for co-op,” perhaps a sponsor or investor, “and there is no other alternative other than to seek a receiver.  It’s a drastic remedy.”

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