Commercial loan documents typically include provisions granting a lender the right to obtain appointment of a receiver following a loan default. Historically, these provisions were most often used by lenders to put in place a receiver to collect rents from income producing property pending foreclosure. With the enactment of Oregon’s new Receivership Code in 2017, however, lenders and borrowers are increasingly appointing receivers not only to manage income-producing properties pending foreclosure, but as an alternative way to liquidate and maximize the value of collateral.
Under the Oregon Receivership Code, a lender may generally obtain the appointment of a receiver in three instances: (i) if the lender’s collateral or the rents or profits from the collateral are in danger of loss or impairment, (ii) when a borrower is insolvent or in imminent danger of insolvency and a receiver is necessary to protect the property or to conserve or protect the interest the owners and creditors, and (iii) when the appointment of a receiver is necessary to secure justice to the parties. ORS 37.060. Once appointed, a court may grant a receiver a wide range of powers, including the power to sell collateral free and clear of subordinate liens and rights of redemption. ORS 37.250(2). Importantly, a sale of collateral by a receiver may be by either public auction or private sale. ORS 37.250(2).
In a traditional foreclosure, sales are by public auction, with a buyer required to pay the purchase price in cash at the auction. This cash payment requirement often precludes a buyer from financing the purchase price, resulting in fewer bidders at the auction. The effect is especially pronounced in large commercial loan foreclosures. As a consequence, a lender is typically the only bidder at a foreclosure auction, taking ownership of the collateral following the sale. For a borrower, this results in the elimination of any equity in the property and increased deficiency exposure a borrower and guarantors. For a lender, it results in the lender bearing the carrying costs of the property, which can be significant for tenantable space or collateral with environmental concerns.
By allowing sales free and clear and by allowing private sales, the Oregon Receivership Code gives both borrowers and lenders new avenues to maximize the recovery of all parties. First, the free and clear provision reduces buyer risk by limiting diligence requirements prior to closing. Second, by permitting private sales, the Oregon Receivership Code (i) allows a receiver to market collateral through brokers and in recognized markets and (ii) allows purchasers to finance the purchase price. These features often result in a higher purchase price—for the benefit of borrowers, guarantors, the lender, and other creditors—and allows the lender to avoid taking ownership and control of collateral—avoiding significant carrying costs.
As credit defaults continue to rise, both lenders and borrowers are well-advised to consider foreclosure alternatives. By allowing free and clear and private sales, the Oregon Receivership Code offers a value-maximizing alternative that parties should carefully evaluate before proceeding to auction.
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