Courts in Florida have made some decisions that have frustrated lenders and special servicers in the CMBS industry. These decisions prevent receivers in foreclosure cases from selling the real estate, which affects the industry. It’s important for lawyers representing these lenders to understand these decisions. In one case, the court ruled that a receiver couldn’t sell the property before a final judgment of foreclosure. This affects mortgage investment conduits (REMICs) because of tax laws. REMICs are pools of mortgages where securities representing fractional interests have been issued. Without special tax provisions, the income from these mortgages would be double taxed, making it economically unfeasible. This is why it’s important for lenders to be able to sell the property through a receiver before a final judgment of foreclosure. Congress created tax benefits for REMICs, but they have to follow strict rules. They can only own and collect specific mortgages and can’t do any other business. They also can’t offer financing to buyers of foreclosed properties. However, they can sell the property subject to the mortgage, which can be beneficial. Some title insurance companies in Florida were unsure about insuring these kinds of sales, which made it harder for receivers to sell properties. In the Shubh case, the court said that a receiver appointed in a foreclosure case can’t sell the property. The court explained that the receiver’s role is just to protect the property, not to sell it. So, it looks like receivers can’t sell foreclosed properties. In a court case, the judge cited a previous decision to support their argument. However, the previous decision was not directly related to the current issue, and the judge seemed to struggle to find applicable language to support their conclusion. The idea that a receiver cannot transfer property because they don’t have title is questionable, and some authorities have made unclear statements about whether receivers have the power to sell property. Overall, there is confusion about the rules for receivers selling property in foreclosure cases. The issue in the Shubh case was new in Florida, especially in the context of a foreclosure receivership. Other state case law wasn’t helpful because each state has different rules for mortgages. The court didn’t have much support for its decision, but it made a good conclusion based on how foreclosures work in Florida. The court answered the question of why the property with a mortgage is different from other property in a receivership when it comes to the receiver’s power to transfer title. The court said that a mortgage holder’s right to take back the property doesn’t end until a certificate of sale is issued after a foreclosure sale. Allowing a receiver to sell the property before that would go against the law. This ruling follows previous cases in Florida where the court has been careful not to take away the rights of the person who owes the mortgage. In simple terms, the court said that a receiver in a foreclosure case can’t sell the property, even if the mortgage contract says they can. But the court also mentioned a possible loophole that might allow a sale in the right situation. This could happen if the lender starts a specific legal process. If a limited liability company (LLC) needs to be dissolved, a court can appoint someone to sell off its assets. This could include property like real estate. However, it’s hard for a lender to force the dissolution of an LLC unless the company admits in writing that it owes the lender money and can’t pay it. Even then, it’s not easy for the lender to avoid foreclosing on the property. The right of a creditor to start a dissolution process depends on the borrower admitting that they owe the loan, which is lucky for the creditor. The CMBS industry might want to try to change the law so that creditors can start a dissolution process without the borrower admitting they owe the money, as long as they can prove the borrower is insolvent. This could make the law apply to more foreclosure situations without changing it too much. Right now, Florida law is one of the few that allows a creditor to dissolve a company. Trying to change the law to make it easier for creditors to ask for a receiver in nonjudicial dissolution cases might also help in some foreclosure situations. If a borrower has let their company be dissolved, they can’t really argue if a receiver is appointed at the request of their creditors. This could help more cases get a remedy. Sometimes, if a lender wants to sell a property that they have a mortgage on, they might consider a special legal procedure called a dissolution proceeding. This involves appointing a receiver to sell the property. However, this process can be complicated and might not always be the best choice for the lender. It’s not very common because it has limited benefits and can be costly and uncertain. It’s important to carefully consider all the options before going ahead with this kind of legal strategy. The rules for modifying existing mortgages are strict, but some changes have been made to make it easier for lenders to modify mortgages. However, lenders still have to believe that a modification is necessary to prevent future default. REMICs can own commercial mortgages, and in some cases, a receiver may be appointed to sell the property to save money for the lender. The title insurance company may want a court ruling to make sure the court had the right to make the decision. This article discusses the sale of property when there are other debts or liens involved. It’s important to consider whether the property can be sold without those debts affecting the sale. It also talks about the use of receiverships to handle distressed assets and maximize their value. It includes references to legal cases and Florida state laws. The laws in Florida allow courts to appoint a receiver for foreign companies, which adds complexity because another state’s laws may apply. There is also a vague standard for when a receiver can be appointed, which could benefit lenders. If a minority owner of the borrower supports the lender, they may be able to seek dissolution of the company. There are also historical cases that established legal principles in this area. Gary, Mike, Bob, and Dave are lawyers who specialize in representing lenders in these types of cases. This column is written by the Real Property, Probate and Trust Section. It aims to teach its members about their duty to serve the public and improve the legal system. The section is led by William F. Belcher, and edited by Kristen Lynch and David Brittain. The section’s goal is to advance the study of law and make sure justice is served.
Source: https://www.floridabar.org/the-florida-bar-journal/trapped-between-tax-and-foreclosure-law-a-receivers-power-to-sell-mortgaged-real-estate-and-its-effect-on-the-cmbs-industry/
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