Brokers Serving as Receivers: The Dangers of Wearing Two Hats

The foreclosure crisis in America continues to evolve. What was once a subprime mortgage problem has become a prime mortgage problem, and what originated in the residential real estate market has expanded into the commercial real estate market. The number of commercial properties in foreclosure and/or under receivership has risen. During the truly bleak years of the crisis when transactions were few and far between, many brokers sought out and were retained as receivers to manage, maintain, and preserve property during foreclosure. While this transition seems like a fairly natural one, the duties owed by a broker are not always consistent with the duties of a receiver and understanding the distinctions is very important for any broker providing, or thinking about providing, receivership services.

The primary difference when serving as a broker versus a receiver is the authority to whom you must answer. For brokers, generally speaking, it is their client and the licensing authority, the Colorado Real Estate Commission. For receivers, it is the claimants to the receivership estate and the Court. Colorado Revised Statutes §38-38-601 and §38-38-602 provide for the appointment of a receiver when a judicial or public trustee foreclosure has been commenced if it appears that the security for the loan is clearly inadequate or that the property is in danger of being materially injured or reduced in value by removal, destruction, deterioration, accumulation of prior liens, or otherwise.

Once appointed, a Receiver is ". . . a fiduciary of the court and of the persons interested in the estate." K-Partners III, Ltd. v. WLM Hospitality Corp., 883 P.2d 604, 606 (Colo. App. 1996). "Receivers can exercise only such power as is expressly conferred upon him in the order of appointment and under such practice." Hendrie & Bolthoff Manuf. Co. v Parry, 37 Colo. 359, 367, 86 P. 113, 116 (1906); see also Sheila K. Hyatt & Stephen A. Hess, 5 Colo. Prac. Series, Civil Rules Annotated R 66 (4th ed.) ("The receiver is an officer of the court . . . . A receiver is not the agent of either party and acts indifferently, in order to preserve the value of the property rights involved in the main suit.").

Thus, while a Receiver may also hold a brokerage license, he or she is first and foremost an officer of the Court whose authority is expressly prescribed by the Order of Appointment. For example, a Receiver's compensation must be approved by the Court. Typically, in the case of a property in foreclosure, the Court will authorize the receiver to pay himself from the rental proceeds of the property. If there is not enough revenue from the property to pay the receiver, the foreclosing lender will usually pay the receiver's fees. In all instances, however, the receiver's compensation must be approved by the Court.

Some brokers serving as receivers are not as mindful of the Court's role as they should be. As receivers, brokers many times perform what are statutorily defined as "brokerage services" such as offering, negotiating, listing, selling or leasing real estate. C.R.S. § 12-61-101(2). Here, the broker is wearing two hats: one as broker, and one as receiver. As a licensee, the broker is required to comply with all licensing laws and the rules and regulations of the Real Estate Commission, but they are also required to comply with the Order of Appointment and their duties as receiver.

One example of how these two roles can get confused is when seeking or being offered referral fees by other brokers related to the sale or lease of the property under receivership. The Real Estate Settlement Procedures Act or "RESPA" prohibits kickbacks and unearned fees for business referrals. In its Position Statement on Referral Fees and Advertising Services (CP-2), the Colorado Real Estate Commission confirmed that payments between real estate brokers pursuant to cooperating brokerage or referral arrangements or agreements are acceptable when all parties are acting in a real estate brokerage capacity. The referral fee in that situation is considered earned compensation for the performance of brokerage duties.

However, simply because the Real Estate Commission has deemed that such referrals do not violate the state license laws or RESPA does not mean that a broker, acting as a receiver, can accept such a referral fee without court approval. If the Court has not approved the receiver's entitlement to referral fees, they could be considered property of the receivership estate. There are a myriad of other examples of potential conflicts that could arise from wearing these two hats: Can a receiver serve as leasing agent for the receivership estate? What accounting rules apply to a receiver performing some property management duties? Are interstate brokerage rules applicable to out of state receivers appointed over Colorado properties? In all instances, the broker must thoroughly consider the implications of serving in dual roles and seek legal advice as needed.