Court says receivers can’t use hotel funds to pay old debts – what this means for commercial lenders
When a hotel owner defaulted on a $10.7 million loan, Alabama’s top court ruled the receiver can’t use collateral to pay old debts first.
Earlier this year, SJP Investment Partners, LLC, owner of Hotel Indigo in Birmingham, defaulted on a commercial mortgage originally issued by DBR Investments Co., Ltd. and later assigned to Wells Fargo Bank, N.A., as trustee for the holders of Benchmark 2019-B13 Mortgage Trust Commercial Mortgage Pass-Through Certificates, Series 2019-B13. Wells Fargo alleged that SJP had mismanaged the property and failed to meet its loan obligations, leading to the loan’s acceleration and a request for court intervention.
The Jefferson Circuit Court appointed Jeffrey Kolessar of BFAL Associates, LLC as receiver to manage the hotel. Kolessar was tasked with operating the hotel, collecting revenues, paying operating expenses, and preserving the property. The court’s order also enjoined creditors from discontinuing services or attempting to collect pre-receivership debts from Kolessar or the hotel.
A dispute soon arose over whether Kolessar, as receiver, should be required to pay more than $1 million in pre-receivership claims, including vendor invoices and other debts incurred before his appointment. SJP argued for payment of these claims, while Wells Fargo and Kolessar opposed, contending that using the receivership estate for such payments would improperly prioritize unsecured creditors over the secured lender and could jeopardize the hotel’s ongoing operations and Wells Fargo’s collateral.
The circuit court issued an order in July 2024 requiring Kolessar to pay pre-receivership claims from the receivership estate. Kolessar and Wells Fargo appealed, arguing that this order undermined the purpose of the receivership, which is to preserve the property for the benefit of secured creditors and ensure the hotel’s continued operation.
On October 24, 2025, the Alabama Supreme Court reversed the lower court’s order. The court held that a receiver cannot be required to pay pre-receivership claims from the receivership estate without regard to creditor priority, particularly the rights of the secured lender, Wells Fargo. The justices emphasized that receivership is intended to protect the subject property and the rights of all parties until their claims can be adjudicated. Allowing unsecured pre-receivership claims to be paid from the receivership estate, the court explained, could endanger the secured creditor’s interests and disrupt the proper order of creditor priorities.
This decision is significant for mortgage professionals, servicers, and lenders involved in commercial real estate finance. It reinforces that secured creditors’ rights take precedence in receivership situations and provides guidance on the management of distressed commercial properties. The ruling also highlights the need for clear procedures and oversight when appointing receivers and handling competing creditor claims in commercial mortgage defaults.
The case underscores the importance of protecting collateral and maintaining creditor priorities in distressed asset scenarios. The Alabama Supreme Court’s decision offers a clear precedent for future disputes involving receiverships and commercial mortgage-backed securities, ensuring that secured lenders’ interests are protected during the resolution of troubled loans.
