Available Remedies in Addition to an Action for Foreclosure: Part I Receiverships and Sequestration of Rents

Aside from foreclosing on a piece of real property, a Lender may utilize numerous other methods to recoup monies left unpaid on a mortgage note and to take control of a piece of property that may be losing value based on improper management.  In this first installment piece, we will look at the purpose and process for appointing a receiver and sequestering rental income generated by the property.

Appointment of a receiver is an equitable remedy that rests in the discretion of the court.  Carolina Portland Cement Co. v. Baumgartner, 99 Fla. 987, 1003 (Fla. 1930).  While a provision in a mortgage allowing for the appointment of a receiver upon default is afforded considerable weight, a receivership is not a matter of right.  Id.  Receivership is an extraordinary remedy which must be exercised with caution as it is in derogation of the legal owner’s fundamental right to possession of the property.  Alafaya Square Assoc., Ltd. v. Great Western Bank, 700 So.2d 38, 40 (Fla. 5th DCA 1997).  The role of a receiver is to preserve the value of the secured property.  Id.  The power of a court of equity to appoint a receiver will not be exercised merely because it can do no harm.  Edenfield v. Crisp, 186 So.2d 545, 548 (Fla. 2nd DCA 1966).  A receiver is an officer of the court who acts under the supervision of the court.  SEC v. Elliott, 953 F.2d 1560, 1577 (11th Cir. 1992).

There is a relatively high burden that must be met by the Plaintiff before a court of equity will consent to appointing a receiver in a foreclosure action.  First, the Plaintiff must demonstrate that it has a likelihood of success in the foreclosure action.  The law requires a strong reason to believe that the party asking for a receiver will recover before one can be afforded.  Carolina at 1006.  Second, there must be evidence of waste or threat of impairment to the collateral before a court can properly appoint a receiver.  It is an abuse of discretion to make such an appointment in the absence of a showing that the secured property is being wasted or otherwise subject to serious risk of loss.  Alafaya at 40.  In Alafaya, the Court found that evidence of disrepair to the property’s parking lot or degradation to the exterior of the building did not constitute waste or any impairment of the property.  In Atco Construction & Dev. Corp. v. Beneficial Savings Bank, F.S.B., 523 So.2d 747 (Fla. 5th DCA 1988), the Court did not find waste even though there were outstanding property taxes owing and no hazard insurance on the property.  The Court reasoned that this did not amount to waste because the value of the property was sufficient to secure the mortgage loan.  Id.  The Third District Court of Appeal agreed to this ruling by stating that a receiver was inappropriate where there was no showing that the owner was wasting the mortgaged property or subjecting it to serious risk of loss, or that the value of the property was insufficient to secure the mortgage loan.  ANJ Future Investments, Inc. v. Alter, 756 So.2d 153, 154 (Fla. 3rd DCA 2000).

A request for appointment of a receiver must either be made as a prayer for relief in the initial complaint or as a separately filed motion.  Testimony in support of the motion or request for relief must be taken at a hearing.  The property owner must be given the opportunity to be heard at a hearing before a receiver can be appointed.  Edenfield v. Crisp, 186 So.2d 545, 548 (Fla. 2nd DCA 1966).  A receivership hearing is an evidentiary hearing at which the mechanics for presenting evidence and witness testimony is akin to a bench trial.

The usual rules of evidence will apply at the receivership hearing, including the owner of the mortgaged property being allowed to give an opinion as to the value of the property.  The moving party should come prepared to identify a suitable receiver for the property should the judge request a suggestion.  However, judges usually select their own receiver.  The receiver must be an impartial individual, although in certain cases the owner of the property may act as receiver if all parties assent to same.

The order appointing a receiver will delineate the scope of the receiver’s authority.  Courts are often inclined to give the receiver broad range over the duties it may perform when in charge of the property.  The owner of the property should pay close attention to the responsibilities listed in the order to ensure the receiver cannot take certain actions, such as leasing or selling the property, without the owner’s prior approval or a hearing before the court to make a determination.

Rule 1.620 of the Florida Rules of Civil Procedure requires the receiver to file an inventory of the property, under oath, within 20 days after appointment.  An inventory and accounting of the property must be filed every three (3) months thereafter until an order discharging the receiver is entered.  Rule 1.620 also includes a remedy for the receiver’s failure to file the required reports, including charging the receiver with the expenses associated with entering an order to file the required reports.

If a receiver is appointed, a bond must be posted by the receiver with good and sufficient surety, payable to the State, in an adequate amount to be fixed by the Court, conditioned on his faithful performance of his prescribed duties.  Edenfield at 548.  Further, some courts now require the Plaintiff to post a bond as well.

When a person’s conduct is restrained, or his business or property handed over to a receiver, the protection which such bonds afford should not be lightly dispensed with, but should be zealously guarded and uniformly enforced by the courts.  Such orders for injunction and receivership may have serious and far reaching effects on a person’s liberty of action and his property or business.  The party who initiates such drastic writs and processes should be made to place himself in a position of accountability, at least to the extent that the law specifies, to recompense his adversary for losses sustained, if it should be concluded ultimately that his action which brought it about was irregularly or improvidently invoked, or his cause without merit.

         Belk’s Dept. Store v. Scherman, 117 So.2d 845, 848 (Fla. 3rd DCA 1960).  An indemnity bond should be required of the Plaintiff prior to appointing a receiver.  Id.

Another option for obtaining immediate funds on a defaulted mortgage note is to request the court enforce the assignment of rents provision of the mortgage agreement.  Often times a mortgage will include language that, upon default, the Lender is entitled to collect any rental income, or other financial benefits, generated by the property.  An assignment of rents may also be an entirely separate agreement, which must be recorded in the public records in order to become a valid lien.

It used to be that appointing a receiver and sequestering rents paid on a piece of property went hand in hand.  Now, thanks to a change in statutory law, one does not necessarily require the other.  Today, a Lender may request sequestration of rents due without the need to appoint a receiver to collect the rents.  Fla. Stat. § 697.07 entitled “Assignments of Rents” states as follows in regards to a default under the terms of a loan which includes an assignment of rents:

(4)        Upon application by the mortgagee or mortgagor, in a foreclosure action, and notwithstanding any asserted defenses or counterclaims of the mortgagor, a court of competent jurisdiction, pending final adjudication of any action, may require the mortgagor to deposit the collected rents into the registry of the court, or in such other depository as the court may designate. However, the court may authorize the use of the collected rents, before deposit into the registry of the court or other depository, to:

(a) Pay the reasonable expenses solely to protect, preserve, and operate the real property, including, without limitation, real estate taxes and insurance;

(b) Escrow sums required by the mortgagee or separate assignment of rents instrument; and

(c) Make payments to the mortgagee.

            In order to make a valid request for sequestration of the rents, a Lender must first make a written demand for the rents to  the mortgagor prior to making a demand to the court for deposit of the collected rents.  It is within the court’s discretion to determine where the rents should be deposited and if there are any additional conditions for use of the rents, other than the requirement that the mortgagor account to the court and mortgagee for the receipt and use of the rents.  Id.  The Lender is also entitled to an expedited hearing on the matter in order to begin collecting on rental income as soon as possible.

An argument against sequestration will likely mirror those arguments set forth in Carolina v. Baumgartner for denying a receiver, which is the need to show waste of the property.  However, these arguments may not coincide with strict statutory interpretation, which would likely lead a court to grant any requests for sequestration absent a showing of extraordinary circumstances.  So, depending who you represent, you can argue traditional case law requirements or legislative intent in the construction of the statute.

These two additional counts to a foreclosure action often come at a price.  It can become costly to appoint a receiver as the court may require a substantial bond to grant appointment as well as the cost of paying the receiver to act in such a capacity.  A Lender must think carefully if the costs of these requests outweigh the potential relief before moving forward with either option.  There are other, potentially lest costly, options for more immediate control and receipt of funds.  But I’ll discuss those in my next article…