A recent federal court decision suggests a new approach to receiverships, which recognizes certain challenges lenders face in the current economic climate. Specifically, lenders are increasingly faced with the question of how to effectively protect their collateral in situations where the borrower has proven to be an incapable steward, especially when additional funding may be required. In U.S. Bank National Association v. Nesbitt,1 the U.S. District Court for the Southern District of New York granted a trustee’s2 motion to appoint a receiver for eight hotel properties even though the lender had not instituted a foreclosure proceeding contemporaneously with, or prior to, its receiver motion.3 If followed by other courts, Nesbitt provides a mechanism for lenders to more easily protect their diminishing collateral by replacing ineffective property-level management with a receiver and a hand-picked property manager. This article also discusses particular mortgage provisions that may help lenders who seek the appointment of receivers.
The ‘Nesbitt’ Case
In Nesbitt, the plaintiff was a trustee for a $187.5 million loan made to owners of eight hotels operated as Embassy Suites franchises.4 The borrowers were separately organized limited liability companies operating in six different states.5 The hotels served as collateral for the loan.6 The defendant borrowers defaulted, and funds generated by the hotels were then trapped in a cash-management account controlled by the loan servicer.7 These funds were insufficient to make current payments on the debt. Under the loan agreement $1.2 million in combined principal and interest payments were due monthly and defendants were six months behind in their payments. Payments in arrears totaled over $11 million.
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