BASIS FOR APPOINTMENT OF A RECEIVER IN ARIZONA

Under Arizona law, as articulating general common law equitable receivership principles, "The superior court or a judge thereof may appoint a receiver to protect and preserve property or the rights of the parties therein, even if the action includes no other claim for relief." Arizona law now makes clear that the remedy of receivership can be the subject of a superior court complaint, without the plaintiff needing to include substantive counts for judicial relief. This permits the appointment of a receiver, while a party seeks a non-judicial foreclosure.

Provisions for installing receivers are routinely included in trust deeds and mortgages as well as the assignment of rents. Arizona statutes addressing the appointment of receivers are Arizona's Revised Statute (A.R.S.) Title 10 (Corporations and Associations), Title 12 (Courts and Civil Proceedings), Title 15 (Education), Title 20 (Insurance), Title 32 (Professional and Occupational), Title 33 (Property) and Title 44 (Trade and Commerce). The most common, but by no means only, real property related statutes are A.R.S. Title 12, A.R.S. Title 33 and Rule 66 of the Arizona Rules of Civil Procedure.

Under A.R.S. § 33-702(B), a receiver may be appointed if the Mortgage or Deed of Trust provides for an assignment to the mortgagee/beneficiary of the leases, rents, issues, profits or income from the property. Often this assignment is contained as well in a separate Assignment of Rents and Leases executed by the borrower. This power is exercisable whether the assignment is effective before, upon or after default under the mortgage/deed of trust and without regard to the adequacy of the security or the solvency of the borrower, and may be exercised independent of and precede the exercise of any other right. A.R.S. §§ 33-702(B) and 33-807(C). The default can be monetary or non-monetary.

Procedures for Appointing a Receiver

The procedure for appointing a receiver is set forth in A.R.S. § 12-1242 and Rule 66, Arizona Rules of Civil Procedure. The initial step is the filing with the superior court of an Application for Appointment of a Receiver, either included in a verified Complaint or in a separate and independent verified Application filed in conjunction with or after the Complaint, which seeks the issuance of an Order to Show Cause. Rule 66(a), Arizona Rules of Civil Procedure.

Per A.R.S. § 12-1241, the Complaint and Application does not need to be brought with any other claim for relief. Thus, for example, a lender can initiate a non-judicial trustee's sale of the property and simultaneously and independently seek the appointment of a receiver over the property through the Complaint and Application. If a judicial foreclosure is pursued, it is most efficient to include both the foreclosure and receivership claims in the same Complaint. Unless circumstances otherwise dictate, it is best to file the action in the first instance in the "proper" county to avoid the inherent time delay in changing venue should the defendant seek to have the action transferred to the "proper" venue pursuant to A.R.S. § 12-404. Per Rule 66(a), Service of the Application and the issued Order to Show Cause on the adverse party must be obtained, except only that a receiver may be appointed without notice (i) if "substantial cause" exists or (ii) if, after ten (10) days, the applicant shows by affidavit that direct personal service cannot be obtained. Upon appointment, the receiver must comply with Rule 66(b) and file with the clerk of the court a bond as set by the court "conditioned that he will faithfully discharge the duties of receiver." The bond amount is in the court's discretion, although it is customary with rent-producing property to request that the bond be set in an amount based on some multiple of monthly gross rents.

Receivers Powers and Responsibilities

The receiver is a ministerial officer of the court, and acts subject to the court's control. Thus, the exact language of the court’s order appointing the receiver is key in establishing the scope and breadth of the receiver’s powers and responsibilities. The major actions of a receiver, such as borrowing money or creating liens against or selling the property, as well as significant construction and improvement of the property beyond simple maintenance, should only be pursued with express court authorization.

Some general powers and responsibilities associated with a receivership under general principles and Arizona law are set forth below:

• Commence and defend legal actions relating to the property (including forcible detainer and eviction actions);
• Collect and receive rents, issue, profits and income from the property to apply to the debt and account therefore;
• Collect and pay debts and obligations relating to the property;
• Protect, maintain and preserve the property;
• Borrow money, obligating the assets or the income of the property;
• Sell the property free and clear of liens.

The Receiver

While it is the preferred practice to have an individual appointed as receiver, it is not uncommon to have a business entity appointed directly as receiver. Per Rule 66(b)(1), the receiver cannot be a party, an officer or employee of a party, an attorney for a party, or a person interested in the legal action. An individual receiver typically contracts with an affiliated or third-party asset or property management company to perform custodial, managerial or supervisory functions on the property.

Authority Following Foreclosure

Following foreclosure of the property, title is transferred to a new owner and the receiver's functions with respect to the property theoretically end, subject to the practicalities of terminating the receivership. Per Rule 66(c)(3), the receiver is typically required to make a final accounting to the court before final termination and discharge of the receivership and exoneration of the bond. Further, with respect to a judicial foreclosure of the property, with its attendant redemption period following the Sheriff's Sale, it is a wise practice to expressly provide in the Judgment or other order of the court that the receivership may continue through the redemption period if the mortgagee is the successful purchaser at the Sheriff's Sale. The purchaser of the property at the Sheriff's Sale is entitled to receive from the borrower or other tenant-in-possession the income from the property or value for the use of the property during the redemption period.

Receiver's Authority Upon Bankruptcy

Upon the filing of a bankruptcy petition under the Bankruptcy Code which affects the property, the mandatory stay of the Bankruptcy Code enjoins further exercise of control over the property by the receiver. Per 11 U.S.C. §§ 101(11), 542 and 543, a Receiver (or "custodian" as defined in the Bankruptcy Code) has a mandatory duty to turn over the property and account to the bankruptcy trustee. A lender desiring to maintain either the receiver, or even itself as a mortgage-in-possession, in control of the property should pursue with the Bankruptcy Court the avenues allowed by § 543(d) of the Bankruptcy Code, which excuses compliance with the turnover requirement in certain circumstances in the interest of the creditors of the bankruptcy estate, such as to prevent fraud or imminent harm to the property as an asset of the estate. In such a circumstance, the Bankruptcy Court could then permit the receiver to continue in place in order to preserve and protect the property.

• A.R.S. § 12-1242. An application for the appointment of a receiver shall be in writing, supported by affidavit and served upon the adverse party, together with reasonable notice of the time of the hearing. The adverse party may file counter-affidavits, which may be considered at the hearing on the application. The court may restrain an adverse party from removing, secreting or otherwise disposing of property to the injury of the applicant, pending hearing on the application for appointment of a receiver.

• A.R.S. § 10-1432(A) - A receiver may be appointed by the court in an action to dissolve a corporation to wind up, liquidate, or manage the business and affairs of the corporation.

• The court must hold a hearing before appointing a liquidating receiver. A.R.S. § 10-1432 (A).

• A.R.S. §10- 1432(B) - A receiver need not be an individual. The court may appoint either a domestic or a foreign corporation authorized to do business in Arizona as a receiver.

• A.R.S. §10- 1432(B) - As in other cases when a receiver is appointed, the court may require the receiver to post a bond with or without sureties in such amounts as the court may determine.

• A.R.S. §10-1432 (C) - While the court may describe the powers and duties of a receiver, the statute makes clear that the receiver can exercise all the powers of a corporation in place of the board of directors, executive committee, or officers, as reasonably necessary to carry on the ordinary business of the corporation and manage its affairs in the best interests of the shareholders and creditors.

• A.R.S. §10-1432(D) - The court may also order compensation to the receiver or the payment of expenses of the receivership from the assets of the corporation or proceeds from any sale of the assets during the dissolution proceeding.

• A.R.S. §10-1432(E) - Because the receiver steps into the shoes of the corporation, the receiver may sue and defend the corporation in all courts in his own name as receiver.

• Rule 66 of the Arizona Rules of Civil Procedure outlines the application, notice, verification, and service requirements regarding appointment of receivers. The Rule also outlines the procedures regarding appointment, oath, bond, and certificate of receivers.