Sale of Property

10.01 In General

The sale of property in a receivership is a judicial sale. In a judicial sale, the court is the vendor and the sale is by the court itself even though the receiver may be the instrumentality of the sale. Until a sale by the receiver is confirmed by the court, no rights are conferred on the purchaser. In re Haywood Wagon Co., 219 F.655, 659 (2d Cir. 1914).

Judicial sales of real property by a receiver are governed by 28 U.S.C. § 2001³⁰ and § 2002,³¹ and the judicial sales of personal property by the receiver are governed by 28 U.S.C. §2004.³²

One court has held that it lacked jurisdiction to confirm the private sale of real property where the receiver failed to comply with the provisions of 28 U.S.C. § 2001. Acadia Land Co. v. Horuff, 110 F.2d 354, 355 (5th Cir. 1940). The provisions of 28 U.S.C. § 2001(b) are mandatory, and a Texas court has held that the requirement for three appraisals as a condition of a private sale will be enforced even when the costs of such appraisals exceed the value of the Estate. S.E.C. v. T-Bar Res., LLC, CIV.A.3:07CV1994-B, 2008 WL 4790987 (N.D. Tex. Oct. 28, 2008) (quaere why neither the Court nor the receiver explored the potentially less expense procedures of a public sale.)

On the other hand, 28 USC §2000 et. seq. does not apply to sale of property by a Sheriff upon execution on a judgment obtained in federal court. Generally, a judgment creditor in federal court must follow the procedures of the state in which the court is located in executing on a judgment obtained in federal court. See Federal Rule of Civil Procedure 69 (a)(1). Such a judgment creditor need not comply with 28 USC §2000 et. seq. Yazoo & M.V.R. Co. v. City of Clarksdale, 257 U.S. 10, 18 (1921).

Where a secured creditor, such as a bank with a mortgage on real property, is stayed from foreclosing its mortgage by the terms of the receivership order, the secured creditor may move the court to lift the stay in order to allow it to foreclose its mortgage. If the court grants the motion to lift the stay, the secured creditor should be able to pursue its remedies, including foreclosing the mortgage, without complying with 28 U.S.C. §2000 et. seq. because in such a case the court is not acting as a seller of the property but instead is simply removing the injunction that temporarily suspended the power of the secured creditor to sell the property. Prudential Ins. Co. of America v. Land Estates, Inc., 90 F.2d 457, 458 (2d Cir. 1937).

10.02 Implementing the Sales Procedures

Various practical steps taken by the receiver in connection with the sale of real and personal property can significantly enhance the amounts realized from such sale, as well as avoid legal and practical pitfalls.

Where real estate is concerned, the preference of the purchaser (or the attorney or real estate broker representing the purchaser) may be to use the “approved” form of contract developed by the realtors of that state. However, from the standpoint of the receiver and the court, it is better to have a standard form of contract developed by the receiver that, to the extent possible, will be used in all states in which receivership property is located, subject only to modifications compelled by local law. In practice, we have found that local attorneys and real estate brokers are willing to accept such a contract, so long as the receiver makes clear from the beginning that the special statutory issues governing such sales make it a “deal” point that the receiver’s form of contract be used. This is true whether the contract being entered into is a “private” sales agreement (conditioned upon approval of such private sale by the court), or a “judicial” sale agreement, entered into as a result of the “auction” of the property.

In drafting such a contract, we have found that the following points are critical:

1. Since the sale is a judicial sale, the contract should make clear that the purchaser is being granted “good and clear title as against the world, free and clear of all liens, encumbrances claims and interests of any kind,” except those liens, etc., which the Receiver has agreed to satisfy (e.g., existing mortgages, taxes, etc.) or subject to which the purchaser has agreed to accept title (e.g., association by-laws and existing restrictive covenants and utility encumbrances). Valid, non-excepted claims would then become a lien against the proceeds of the sale. However, the agreement should further make clear that there are no warranties of title in connection with the sale and that the Receiver is entering into the contract only in his capacity as Receiver, not in his personal capacity. The agreement should also make clear that the property is being sold “as-is.”
2. Since title will not be warranted and the property is being sold “as-is,” the purchaser must be given the opportunity to examine the state of the title (and the property) prior to the sale; in a private sale, a brief “inspection period” should be established during which this can be conducted. However, as indicated above, the contract should make clear that, except for such inspection (which should be completed prior to the confirmation hearing), there is no right to rescind an agreement to purchase, or to delay or condition closing, based upon title, etc., issues.
3. If the preliminary sales agreement is for a “private” sale,³³ there should be two “earnest money” deposits: a smaller one at the time the private sale agreement is entered into, and a more substantial one at the conclusion of the inspection period. (It is suggested that these deposits in the aggregate equal at least 10% of the proposed purchase price, rather than the relatively small earnest money deposits that often exist in sales of residential real estate.)
4. The private sale purchaser should acknowledge that the sale is being made subject to the statutory provisions cited above and is thus subject to confirmation by the court and additional bidding at the confirmation hearing. The contract should also specify that the Receiver thus has the right to continue to seek higher bids for the property. It is suggested that the Receiver have the right to recommend that any higher bid received at the confirmation hearing be accepted by the court and not just those exceeding the private sale purchase price by 10% (which are required by law to be accepted).
5. The contract should provide that the Receivership Court has exclusive venue and jurisdiction to interpret and enforce the purchase agreement.

If a broker is used in connection with the sale, the listing agreement should usually provide that no commission will be paid to the broker in connection with a private sale unless his client (or another purchaser represented by him) is the ultimate purchaser of the property; however, there will be exceptions to this suggestion in instances where there is little interest in the property, or the broker is expected to perform services of overall value to the receivership estate over and above finding a specific buyer. The broker should also be obligated to continue to seek additional bidders even after a private sale agreement has been negotiated, pending the confirmation hearing, where other interested parties will be permitted to bid on the property.

10.03 In General

The sale of property in a receivership is a judicial sale. In a judicial sale, the court is the vendor and the sale is by the court itself even though the receiver may be the instrumentality of the sale. Until a sale by the receiver is confirmed by the court, no rights are conferred on the purchaser. In re Haywood Wagon Co., 219 F.655, 659 (2d Cir. 1914).

Judicial sales of real property by a receiver are governed by 28 U.S.C. § 2001³⁰ and § 2002,³¹ and the judicial sales of personal property by the receiver are governed by 28 U.S.C. §2004.³²

One court has held that it lacked jurisdiction to confirm the private sale of real property where the receiver failed to comply with the provisions of 28 U.S.C. § 2001. Acadia Land Co. v. Horuff, 110 F.2d 354, 355 (5th Cir. 1940). The provisions of 28 U.S.C. § 2001(b) are mandatory, and a Texas court has held that the requirement for three appraisals as a condition of a private sale will be enforced even when the costs of such appraisals exceed the value of the Estate. S.E.C. v. T-Bar Res., LLC, CIV.A.3:07CV1994-B, 2008 WL 4790987 (N.D. Tex. Oct. 28, 2008) (quaere why neither the Court nor the receiver explored the potentially less expense procedures of a public sale.)

On the other hand, 28 USC §2000 et. seq. does not apply to sale of property by a Sheriff upon execution on a judgment obtained in federal court. Generally, a judgment creditor in federal court must follow the procedures of the state in which the court is located in executing on a judgment obtained in federal court. See Federal Rule of Civil Procedure 69 (a)(1). Such a judgment creditor need not comply with 28 USC §2000 et. seq. Yazoo & M.V.R. Co. v. City of Clarksdale, 257 U.S. 10, 18 (1921).

Where a secured creditor, such as a bank with a mortgage on real property, is stayed from foreclosing its mortgage by the terms of the receivership order, the secured creditor may move the court to lift the stay in order to allow it to foreclose its mortgage. If the court grants the motion to lift the stay, the secured creditor should be able to pursue its remedies, including foreclosing the mortgage, without complying with 28 U.S.C. §2000 et. seq. because in such a case the court is not acting as a seller of the property but instead is simply removing the injunction that temporarily suspended the power of the secured creditor to sell the property. Prudential Ins. Co. of America v. Land Estates, Inc., 90 F.2d 457, 458 (2d Cir. 1937).