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A construction project can halt for many reasons, but few are as disruptive as the project owner running out of funds. Depending on the owner鈥檚 situation, a lender 鈥� like the bank or private equity group 鈥� may take control of the project through a receiver. For contractors and subcontractors, this development raises critical questions about the project鈥檚 future, payment for completed work, and the validity of existing contracts and liens.

However, the appointment of a receiver does not necessarily spell the end of a project. Oftentimes, it can be an essential step to getting the project back on track. Following is an explanation of the role of a receiver in a construction project, the circumstances leading to the receiver鈥檚 appointment, and the implications for contractors when a project enters receivership.

What is a receiver?

A receiver is a neutral third party appointed by a court to take custody, control and management of property or a business. In the context of a construction project, the receiver’s primary duty is to preserve and protect the assets鈥� value, which often includes the partially completed development.

You may have heard about receivers being appointed when an owner declares bankruptcy. But a receivership can also be requested by the lender that is financing the project. When an owner has fallen behind on payments to the lender, or defaults on the loan in some other way, the lender might want to take control of the project and can ask the Oregon courts to appoint a receiver to the project. A receivership is advantageous for the lender because all the value that has already been invested in the project will not be lost. And the lender may have a better chance to recover the whole value of the loan by seeing the project through to completion.

When is a receiver appointed for a construction project?

A receiver is typically appointed when a project owner defaults on its loan agreement, putting the property at risk. Under Oregon鈥檚 Receivership Code, a court may appoint a receiver if the project is in financial distress, or the property is in danger of being lost.

Many commercial loan agreements contain a clause that explicitly allows the lender to seek the appointment of a receiver in the event of a default. While not binding, courts often consider such provisions 鈥� chances are good that the project owner鈥檚 contract with its primary lender has a provision like this.

What happens when a receiver is appointed?

When appointed, the receiver assumes the owner鈥檚 role and takes control of the property, assets, and decision-making authority. For contractors, that means dealing with a new person stepping into the role of 鈥渙wner.鈥�

A receivership also triggers an automatic stay for six months. The automatic stay pauses almost all legal actions against the property and the project. That means that any creditors in the process of foreclosing liens on the project or the property will be subject to the stay when the receiver is appointed. The stay expires in six months but can be extended by the court.

What happens to contractor and subcontractor contracts?

Once appointed, the receiver will conduct a thorough assessment of the project to determine the best path forward. The goal is to maximize the asset鈥檚 value for the primary lender and other creditors. This could mean a few different things:

1. Completing the project: If finishing construction is the most profitable option, the receiver may secure new financing to complete the work. In this scenario, the receiver may choose to 鈥渁ssume鈥� a builder鈥檚 contract and keep it on to finish its work. But that contract won鈥檛 automatically be assumed 鈥� the receiver must get permission from the court to continue the contract. Alternatively, the receiver may seek to negotiate new terms or hire different contractors entirely.
2. Selling the project: The receiver might decide to sell the property 鈥渁s is鈥� to another developer to complete the project. Like the receiver, the new owner could elect to assume or renegotiate contract terms.
3. Liquidation: In some cases, the receiver may liquidate the assets to pay off creditors.

Will contractors and subcontractors be paid?

Of course, one of the most critical questions about receiverships for contractors and subcontractors is whether and how they will be paid. If the project was in financial distress before the appointment of the receiver, a builder may have a significant number of payments outstanding.

Amounts owed before the receivership

One of the receiver鈥檚 responsibilities is to deal with outstanding obligations of the former owner. Money owed to a builder for work performed before the receiver鈥檚 appointment becomes a claim against the receivership estate. The priority of a claim will depend on whether it is secured or unsecured. If a builder has a valid construction lien, its claim is secured and has a higher priority. Unsecured claims are paid after secured creditors and administrative expenses, meaning full recovery is less likely.

Payment for work after the receivership

If the receiver selects to rehire a builder to continue working on the project, the payment for this new work is considered an administrative expense of the receivership. These types of expenses have the highest priority and are typically paid before other claims, including those of the primary lender. This gives contractors that continue work under the receiver a greater assurance of payment; it鈥檚 one of the major upsides of a receivership for contractors and subcontractors.

Existing construction liens

The appointment of a receiver triggers an automatic stay, which acts as a pause on most legal actions against the property, including collection efforts like lien foreclosure. A lawsuit to foreclose on a construction lien likely cannot be initiated or continued while the stay is in effect.

But a builder can still perfect its lien rights to preserve its secured claim, even if a receiver has been appointed.

Conclusion

The appointment of a receiver introduces new complexities into a construction project, but it can also provide new opportunities and security for contractors and subcontractors. Given that receiverships can introduce new legal dynamics, consulting with an attorney who specializes in such law can help builders navigate the process effectively and protect their financial interests.

Cordelia Addington is a Schwabe, Williamson & Wyatt associate. Contact her at 503-796-2076 or [email protected].

Craig Russillo is a Schwabe, Williamson & Wyatt shareholder. Contact him at 503-796-2092 or [email protected].

This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91视频 guarantees the accuracy or completeness of any information published herein.