Receivership Costs and Budgeting: What Will the Receivership Cost?

CONGRATULATIONS!

You’ve won a motion to appoint a receiver.

You found the perfect, highly-qualified receiver for your property/business/assets (“the receivership estate.”)

And, the receiver is eager to take the job!

What next? Well, consider:

What will this receivership cost? Is it possible to contain or minimize the costs?

It’s not outside the realm of possibility to have receiver remorse …

The situation:

Your opponent pushes hard for a receiver, vehemently arguing that taking control of the receivership estate from existing management is critical to closing a commercial sale (or whatever else is argued to be at stake).

Then, shortly after the court orders the appointment of a receiver (coupled with a good night’s sleep), that same opponent who requested the receiver has receiver regret, and tries arguing that the receiver should not even start work.

But… Why?

What is driving that change of heart?

Could it be… Cost??

Receiverships can be enormously expensive, especially in cases involving complex businesses or difficult-to-manage commercial properties.

Critical factors come into play in such receiverships.

A first critical factor is the receiver’s fee structure.

The highest cost of most receiverships is the receiver’s fee, which comes in a variety of structures. For example,

The Hourly Fee Structure.

This fee structure is quite common where the appointed receiver is an attorney, who oversees and analyzes the work of others who are managing the receivership estate.

Note: Hourly fees grow FAST!

$250-400 per hour may not sound like much …. if you envision the receiver only working a few hours a month ….

But most receiverships are not that simple – they involve contested matters or complex assets/businesses/properties. Hence, a common reason for the receiver in the first place!

And, if the receivership estate is particularly valuable, the receiver may find justification in assigning a large team to the receivership, leading to increased costs and, possibly, duplication of efforts.

Hourly fees out of control essentially “undo” the receiver’s work to maximize the value of the receivership estate.

Avoid these fee structures, if possible, to prevent such things as (a) valuable commercial properties becoming buried in hourly receivership fees (thus diminishing the equity in the property by piling receivership hourly fees on top of the outstanding debt) and (b) entire small businesses becoming dissipated with hourly receiver fees.

Such detrimental results are unfortunate and contrary to the purpose of receiverships – which is to preserve, protect and maximize value of the receivership estate.

The Flat Monthly Fee Structure.

Certain properties (i.e. commercial, industrial, office, retail) may be more than adequately managed by professional property managers for flat monthly fees plus direct costs of the receivership.

That’s right!

Contrary to popular belief, receivers are not all attorneys.

And, a law degree is not a prerequisite to serving as a receiver.

In fact, property and asset management companies that serve as receivers clearly understand their role as a neutral arm of the court charged with protecting and preserving the receivership estate such as to maximize its value.

This receiver fee structure can be especially cost-effective for certain types of property.

But, be sure to read the “fineprint.” It is important to clearly define and understand exactly what services are and are not included in that monthly flat fee structure.

Total Flat Fee Structure.

Flexible receivers may be willing to take on an engagement of a defined scope for a specific, total flat fee.

For example, a limited time and scope receivership works well into this type of fee structure and may be a good way to get a particular desired receiver involved (for example, someone with knowledge specific to a type of business) and still have significant control over the costs.

However, if the scope and length of the receivership changes, the fee structure will need to be revisited and modified and may not resemble the originally-intended structure.

A total flat fee structure is a good option for receiverships with a defined time frame and scope and a great way to control costs. But, beware of unexpected factors arising that necessitate revisiting the total flat fee structure.

Contingent Fee.

Where there is no dispute that the value of the asset is greater than the liabilities AND the receiver will be managing the assets and liquidating them, the receiver may be willing to take a fee contingent upon the successful disposition of the receivership estate assets—such as a percentage of the disposition amount.

Such a fee structure may result in a significant fee paid to the receiver for less overall work than seen in other receiverships -- equating to a higher per hour dollar return for the receiver.

The contingent fee structure may be a good option when the receivership estate doesn’t have present cash flow, or other similar income generating drawbacks, but has value in the market.

Budgets – What are they Good For???

Regardless of the receivership fee structure, it is critical that:

· The receiver prepare a budget for the expected duration of the receivership;

· That budget be presented to the parties for approval and objection, if necessary;

· The receiver adheres to the approved budget and reports out frequently on whether he/she is or is not “on budget,” and, finally,

· That objections are raised if the receiver is off budget or having other difficulties containing costs (i.e. unexpected circumstances arise).

A second critical factor is bond.

A court-appointed receiver generally is required to post a bond (unless the parties stipulate and the court agrees to waive this requirement).

If something goes wrong, the bond, in theory, should be sufficient to cover the loss.

The costs of obtaining the bond vary depending on the amount of the bond.

A third critical factor is insurance.

The receiver may determine that additional insurance is necessary to preserve the “receivership estate,” or changes may be made to an existing insurance policy.

Any insurance changes are costs that come out of the receivership estate.

A fourth critical factor is direct costs.

Direct costs of the receivership include such things as operating or maintaining the “receivership estate” (i.e. critical repair items, deferred maintenance issues, correcting deficiencies that place the receivership estate at risk, taxes, employee costs, vendor costs, etc.) and additional costs that relate to the work the receiver is doing (i.e. marketing an asset, mileage and travel costs, attorney fees if the receiver needs to retain counsel, etc.)

And, finally, intangible costs are a critical factor.

For real property, in particular, a receivership can have an impact on the likely sale value (if a sale is contemplated) or may project a lack of confidence in the business behind the receivership estate.

The costs of such factors is generally very subjective.

Thus, intangible costs unique to each receivership estate should be taken into consideration in factoring the ultimate cost of a receivership.

To learn more about this topic, or other legal issues, please contact Anissa C. Hudy, 248.417.9154 or email at ahudy@hudylaw.com.

Anissa Hudy focuses her practice on general business, real estate and commercial contracting and litigation.

This article nor any of the other articles posted on my page are intended to constitute legal advice and may not be construed to as providing legal advice or forming an attorney-client relationship.