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.”

On a more micro level, “I’ve seen it brought against unit owners with serious problems like hoarding, bed bugs, etc.,” says Jen Barnett, an attorney with Marcus, Errico, Emmer & Brooks, located in Braintree, Massachusetts.  “I recall that a municipality brought an action against an association over lack of elevator repairs.  The association said they didn’t have money to do repairs.  We got them to a table with the receivership to get the repairs done.  It’s also used in instances where a property can’t operate because of lack of formal organization or disfunction.  It’s appropriate when a property can’t be run effectively and is needed to operate a building.”  Barnett cites a small association in Dorchester.  “No bills were getting paid.  The client had been paying invoices as they came in, so court instituted a receivership."  

Scott Piekarsky, a partner at Phillips Nizer in Hackensack, New Jersey recounts a case some years ago where an association filed for bankruptcy protection.  He represented the management company.  “Sometimes there’s such problems the court says we need to get things on track to straighten things out, so let’s bring in a receiver.  In New Jersey this is known as a special fiscal agent. We got the property on track in a year’s time and then had new elections for a new board.”  

One important factor to keep in mind is that receivers are appointed by the court and answer only to the court.  They aren’t beholden to any other interested party which might seek to influence the process or outcome.  Receivership is designed to be impartial.  Its reputation, though, may appear otherwise.  Receivers, like those who send properties into financial turmoil, are subject to human frailties.  Many attorneys are reluctant to push for receivership out of fears that the receiver will be no more honest than the entity that caused the problem.  Receivership fees can be high as well.

Co-ops vs. Condos

If you are a shareholder in a co-op and the board isn’t protecting the value of the property, the appointment of a receiver is an improvement over the current board.  It’s really the receiver stepping in as a replacement for the board, at least temporarily.  The receiver would make the decisions on whether to keep the managing agent, corporation lawyers etc.  

In a condominium, it’s harder.  The condo board doesn’t control the real property where most of the control of a receivership is based, says McCracken.  “To the best of my knowledge, for a condo a receiver only makes sense where there is a substantial block of unsold units, as in newly-built or formed condominiums.”

The other question is, who are you appointing a receiver for?  McCracken explains that one can appoint a receiver for an individual unit for instance, to make sure common charges are paid.  But in a co-op, it’s conceptually easier to substitute a receiver for a managing agent to run the whole property.

Conservatorships

Conservatorship is the appointment of someone to protect the interests and estate of an individual.  “In Illinois, a conservatorship is a judicial process pursuant to which a person is appointed and supervised by a court to manage the financial affairs of a minor or incapacitated adult,” says Kasten. “That court appointed person is called the conservator or guardian of the estate (not to be confused with guardian of the person, who manages a person’s care).  Generally, a conservator does not have authority to manage real estate, as does a receiver.  Accordingly, a conservatorship is not a viable strategy for condominium or co-op properties to address operation, administration, or maintenance, repair, and replacements issues of such properties.”

Kirsch adds that, “A conservatorship is a legal procedure in which the court appoints, depending on the state, an individual or a nonprofit community development corporation—called a conservator for the purpose of managing the general day to day operations and affairs, finances, and management of the property with the intent of returning the association in a stable condition and turning full control over to the board of the entity. Unlike receivership the parties are not seeking dissolution.”

Kirsch explains further that “claims for conservatorship or receivership may only derive themselves out of the elements of a particular statute. If the particular facts and circumstances required by statute don’t exist, a remedy may not be available. Petitions for conservatorship arise, among other causes, when there are claims of fraud, failures of the board in their handling of the management of the association including failure to manage funds or carry out its purposes, abuse of the board’s power and if the directors are deadlocked and the members cannot break the deadlock.  In Illinois a court may appoint a provisional director or appoint a custodian. A provisional director will be appointed if it appears by doing so the grounds alleged by the complaining director or member entitled to vote will be remedied. A provisional director is appointed with all the rights and powers of a duly elected director. As with a provisional director a custodian may be appointed in cases where doing so will remedy the grounds alleged by the complaining director or member. Subject to court limitations a custodian exercises the powers of the corporation's board of directors and officers. In addition to managing and furthering the purposes and affairs of the association it also does so for the advantage of its creditors until removed by one of several methods returning control to the board.”

Conservatorship is more of an emergency situation, says Barnett, unlike a power of attorney.  If someone becomes disabled, she explains, or an elderly person in a condo can’t take care of themselves or puts themselves or other residents at risk and the family won’t intervene, a conservator may become necessary.

In the end, the benefit of receiverships and conservatorship in the long run is that there is a court-appointed, highly qualified, licensed, and insured person looking out for best interest of owners, and individuals depending on the legal mechanism employed.  They are fiduciary and acting on a court’s direction.  In essence they are quarterback for a problem to win the game.  They can fix a difficult situation and get a property or estate running smoothly again.

A J Sidransky is a staff writer/reporter for CooperatorNews, and the author of several published novels.

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