As we all fight our way through historic economic times, there has been a tremendous increase in borrowers striking back by filing lender liability suits against their creditors. But this trend has moved beyond attacks on lenders to include third parties who assist secured creditors in recovering on their collateral. In particular, receivers and assignees for the benefit of creditors throughout Illinois have seen an increased need for legal counsel, along with rising litigation costs, during the economic downturn.
Receivers are usually appointed by court order in mortgage foreclosure cases, as well as suits to liquidate operating companies. At the time of their appointment, receivers are required to have a bond filed with the court. They are subsequently granted possession of the borrower’s property, generally with a mandate to maintain the property and collect any income or rents that might be owed on account of the property.
An assignee, on the other hand, is a creature of common law, whose responsibilities involve overseeing a trust that includes all of the borrower’s assets. Pursuant to a trust agreement, the assignee is vested with the power to liquidate these assets through what is commonly known as an assignment for the benefit of creditors (ABC). Unlike a receivership or a bankruptcy, this procedure takes place out of court and (in Illinois) is not overseen by a judge.
While it is common for both assignees and receivers to be chosen by the secured creditors involved in a case, these fiduciaries owe duties to a wider group. For example, judges in the foreclosure courtrooms around Chicago and throughout Illinois commonly inform receivers that they work for the judge and are subject to his or her instructions. Furthermore, an assignee also serves as a fiduciary for all secured and unsecured creditors, and has a duty to act in their best interest.
Avoiding Liabilities and Lawsuits
Although It has become commonplace for borrowers to accuse assignees of breaching their fiduciary duties and receivers of overstepping the powers granted to them, there are several easy steps that can be taken to head off these potential liabilities and lawsuits. First, assignees and receivers should pay close attention to the documents that create their positions, as the order appointing the receiver and the trust document that creates the assignment clearly lay out their boundaries and powers. Second, assignees and receivers should communicate openly, candidly and frequently with the debtor and creditor bodies—and never leave even the most mundane phone call unreturned.
Oftentimes, debtors and creditors simply want to stay informed. If they aren’t up to speed or are uncomfortable with the process, they are much more likely to file a suit. Obviously, there are creditors and debtors who feel it is their mission to be as difficult as possible, and there is little a receiver or an assignee can do to change those attitudes. However, if a receiver or assignee also makes a record of every function and duty he or she has carried out, these difficult third parties will be in a poor position to claim something improper has occurred.
Recent Illinois Case
In a recent Illinois case, an assignee was asked to take an assignment by a debtor’s principal, who happened to also be that company’s largest secured creditor. The assignee, acting without the advice of legal counsel, held a public sale in which the debtor’s principal bought the company’s assets. That type of outcome smacks of insider dealing and makes creditors question the fairness of the process. Had the assignee been represented by counsel, the transaction would have likely taken the form of a UCC foreclosure sale—an approach that creditors would have viewed as more “appropriate.” Instead, the assignee opened himself up to a potential lawsuit for his role in what may ultimately be deemed a fraudulent conveyance.
This case underscores the importance of legal counsel for both receivers and assignees. For example, an attorney can assist in drafting the trust documents in order to clarify the powers and duties of an assignee. Likewise, counsel can represent a receiver before the court to ensure that he or she has the appropriate authority and guidance to properly maintain the borrower’s property.
While these standard precautions are relatively simple to implement, anyone who has participated in a liquidation or a receivership during the current economic downturn knows that there are always unexpected challenges and virtually nothing goes as planned. What more can a receiver or an assignee do to reduce the likelihood of unwanted accusations from angry creditors or debtors? For starters, a receiver should notify the parties and the court of his or her intentions and always gain authorization to move forward. Similarly, an assignee should provide notice of his or her intended actions and give the parties an opportunity to weigh in so that no creditor is left feeling isolated from the decision.
While the unusual stresses of the current economic environment most certainly have led borrowers to play the blame game in hopes of shifting their liability to a third party, the steps outlined above could help reduce liability for receivers and assignees as they fulfill their duty of helping secured creditors maximize the return on their collateral.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Kurt M. Carlson | Creditors’ Rights, Insolvency & Bankruptcy Litigation & Resolution
Kurt’s practice concentrates on representing creditors, assignees and businesses of all sizes in a variety of ways, including complex business litigation, workouts, insolvency proceedings, bankruptcy reorganization cases and complex settlement negotiations. Kurt has extensive experience in a broad range of quasi-business and legal issues companies must address. If you need assistance with a related matter, contact Kurt.