Journal of
Corporate
Renewal
May
2017
Typically, the plaintiff in a receivership
action (e.g., the lender) designates a
specific person or entity, who, absent
objection, is appointed as receiver.
In certain states, only individuals
may be appointed as receivers.
In others, legal entities may be
appointed as receiver. Sometimes,
the receiver must be domiciled in the
state where the receivership action
is commenced. In such instances,
domiciled individuals associated with
experienced receiver companies can
be considered, or separate subsidiary
or affiliated entities can be formed
in the state of the appointment.
The receiver is granted full power and
authority to operate and manage the
property. Thus, the receiver takes control
of the property from the defaulted
borrower (or tenant) to maximize
value for all creditors, including the
lender (or landlord). The specific
scope of the receiver’s appointment
is determined by court order. The
order appointing the receiver sets out
the duties and powers granted to the
receiver and such other matters as
agreed to by the court. The scope of a
receiver’s duties may simply involve
obtaining custody of the real property
and collecting rents. Alternatively, the
scope of the receiver’s authority may
be substantially broader—as is often
true in the healthcare industry—and
may include operating the business
and displacing existing management.
Upon court approval of the appointment
of a receiver, the receivership estate
is established. The receivership estate
consists of all assets of the business,
which are utilized for going forward
operations and otherwise preserved
for the benefit of the creditors. The
receivership estate generally is only
liable for paying debts that arise
after the receiver’s appointment.
Any debts that predate the receiver’s
appointment will be paid if there
are available funds after all of the
receivership estate’s debts are satisfied.
Stabilizing Operations
A healthcare receivership applies to
real property that involves a healthcare
business, typically a senior living facility,
such as a nursing home, assisted
living facility, or similar business.
While lenders certainly can seek
appointment of receivers for healthcare
businesses, healthcare receiverships
recently have been used increasingly
by landlords. In the senior living space,
many leases contain provisions under
which the tenant agrees that upon
default the landlord is entitled to the
appointment of a receiver as a remedy.
A healthcare receivership is a powerful
remedy for lenders and landlords as
it allows for a receiver to take over,
stabilize, and potentially improve
operations, and facilitate an orderly
transition of the business operations to
a new operator or owner. All of this can
be achieved in a healthcare receivership
without displacing residents, disrupting
patient care, or jeopardizing any licenses
needed to operate the business.
The healthcare receiver typically has
operating experience in the industry
and is experienced at turning around
troubled healthcare businesses and
at running a sale process. In certain
circumstances, a lender or landlord
may have identified a new owner or
operator for the senior living facility
prior to commencement of the
receivership, and the receiver is put in
place to facilitate an orderly transition
of the business to the new owner or
operator. In other instances, the receiver
may run a process to sell the facility,
while at the same time operating the
business and attempting to implement
operational and financial improvements.
Because of the complexities of a
healthcare business, any healthcare
receivership requires substantial
planning before the lender or landlord
commences an action in court.
During the healthcare receivership, the
receiver is responsible for running the
operations and maximizing the value of
that business. To improve the chances
of success, the receiver will want to
conduct substantial due diligence
regarding the business operations, cash
flow, licensure requirements and status,
regulatory issues, and other matters. By
doing this work up front, the receiver
will be able to effectively take over the
business operations upon appointment.
The powers and duties of a
healthcare receiver may include:
• Managing the business and property
under the tenant’s/operator’s
licenses until the landlord enters
into a new lease with a new tenant/
operator or the business is sold
through the foreclosure process
• Cooperating with and assisting
the new tenant/operator/owner
in obtaining the necessary
licenses to operate the business
• Entering into an interim
management agreement with an
entity affiliated with the receiver
or with the new tenant/operator/
owner, pending transition of
the business to such entity
All of these rights and powers of the
receiver ensure that the residents and
patients are protected because there
is no disruption in the business, just a
new person in charge of overseeing
operations. In addition, licenses are
not jeopardized due to any change of
ownership. The change of ownership
will happen later when a new lease
is entered into between the landlord
and the new tenant/operator or
a sale transaction is closed.
Moreover, a lender or landlord does
not take on the risk of operating a
healthcare business and instead has
a receiver, who typically has deep
operational experience in the senior
living industry, in charge of maintaining
the business and licenses pending an
orderly transition of the business. As the
receiver may also improve operational
results, the sale value may be enhanced.
Potential Pitfalls
A healthcare receivership has many
unique issues that a lender or landlord
must consider, in addition to who the
receiver should be, before electing
this remedy. Those include:
• Licensure. The receiver must
be authorized to operate under
the existing operator’s licenses to
ensure that there is no interruption
in the business operations. Absent
such authorization, the healthcare
facility would have to close and
all patients/residents would be
transferred. This would result in a
substantial loss of value for the lender
or landlord. This can be avoided by
careful drafting of the receiver order
and using a receiver experienced
in the healthcare industry.
• Management. The lender, landlord,
and/or receiver must identify an
operator for the business. This
requirement can be met by having
the receiver enter into an interim
management agreement with the
proposed new operator until the
new operator has obtained the
necessary licenses. Alternatively,
the receiver or the receiver’s
