A New Model Law for Real Estate Receiverships
For hundreds of years, courts have used receivership as an equitable remedy for the protection of creditors or for the preservation of disputed property. Courts have traditionally appointed receivers for real estate in a variety of cases, such as actions to vacate fraudulent purchases, partition actions, and actions for dissolution of partnerships or joint ventures.
Recently, courts have more frequently appointed receivers at the request of a foreclosing real estate mortgagee. Mortgage lenders may prefer receivership as a remedy because, for example: (1) the state’s foreclosure process takes substantial time to complete, and the lender wants a receiver to collect rents and apply them to the debt pending sale; (2) the mortgaged realty may be subject to waste, deterioration, or some other immediate physical harm that threatens to reduce its value; (3) the mortgaged property may be environmentally contaminated; or (4) the collateral includes personal property, and the mortgagee wants to use judicial supervision as conclusive evidence that the sale was done in a commercially reasonable manner.
Although a few states (notably Minnesota and Washington) have enacted detailed statutes governing receiverships, most states have little comprehensive statutory guidance regarding the appointment and powers of receivers. Thus, in 2012, based on a proposal from the Joint Editorial Board for Uniform Real Property Acts, the Uniform Law Commission (ULC) appointed a Drafting Committee to prepare a new model law on the appointment and powers of real estate receivers.
This new Model Act will attempt to address a number of key issues of importance to owners and mortgagees of commercial real estate for which existing state receivership law provides unclear or inadequate guidance. Some of these issues include:
The impact of receivership clauses: is a receiver a matter of right for the creditor or a remedy within the court’s discretion? Commercial real estate mortgages commonly include provisions in which the mortgagor consents to the appointment of a receiver on default. Some courts refuse to appoint a receiver, despite such consent clauses, unless the mortgagee can demonstrate waste or some other physical threat to the mortgaged premises. Courts in some states, however, appoint receivers under such clauses as a matter of right, without regard to the adequacy of the lender’s security or other factors that an equity court traditionally might have weighed in deciding whether to appoint a receiver.
To what extent can a receiver sell receivership property? A mortgagee might wish to have a receiver sell mortgaged property through marketing efforts that might produce a higher sale price than could be expected in a traditional foreclosure sale. Likewise, a real estate mortgage investment conduit (REMIC) holding commercial mortgage-backed securities loans may prefer to avoid foreclosing on a defaulted loan and may instead prefer to have the property sold through a receiver with the buyer assuming the mortgage, which can then be modified and restructured under the REMIC federal tax rules. Such a sale can produce a higher value by comparison to a cash sale and thus is attractive to lenders who want to avoid foreclosing on a property that is worth less than the outstanding mortgage debt.
In most states, however, statutes regarding receivership provide no explicit guidance regarding whether a receiver may sell receivership property. In the absence of such guidance, a number of courts have upheld sales by a receiver when the appointing court’s order authorized such a sale. Recent cases in Michigan and Ohio have even upheld the power of a receiver to sell the property free and clear of the mortgagor’s statutory redemption rights. See, e.g., CSB Bank v Christy, No. 305869, 2012 WL 5064618 (Mich. Ct. App. Oct. 18, 2012); City Nat’l Bank v. WBP Investments, LLC, No. 10AP-1134, 2011 WL 5924434 (Ohio Ct. App. Nov. 29, 2011). By contrast, courts in other states have ruled that a receiver’s role is purely custodial and that a court cannot authorize a receiver to sell free and clear of the mortgagor’s right of redemption. See, e.g., Shubh Hotels Boca, LLC v. FDIC, 46 So. 3d 163 (Fla. Dist. Ct. App. 2010); Wells Fargo Bank, N.A. v. Tippecanoe Assocs., 923 N.E.2d 423 (Ind. Ct. App. 2010).
To what extent can a receiver reject, assume, or assign executory contracts or unexpired leases? A receiver for a distressed real estate project could potentially enhance its value if it could reject unfavorable, below-market leases and re-let those premises at market rates. Statutes in most states, however, provide little or no guidance on the extent to which a court may empower a receiver to reject, assume, or assign executory contracts.
To what extent can a receiver borrow funds and make improvements to receivership property? If a distressed real estate project comprises or includes incomplete improvements, a receiver could maximize recovery for all parties by supervising the completion of the improvements. As noted above, however, some courts have suggested that the receiver’s role is purely custodial, raising some doubt regarding the receiver’s authority to make such improvements. Further, statutes in many states provide no effective guidance on the extent or limits of a receiver’s power to borrow funds (as might be necessary to complete improvements or fund property operations).
In addition to these issues, the Model Act expects to address numerous others, including the circumstances in which a receiver may be appointed; the extent to which a receivership should operate as a stay against creditor actions, the effect of a receivership on liens on after-acquired property and unperfected liens, receiverships involving property in multiple states, and the extent to which the act should cover owner-occupied single-family homes or other types of residential property.
The Drafting Committee reviewed the first draft of the act in September, and it plans to consider a revised draft in spring 2014, with plans for a first reading of the act at the ULC’s 2014 Annual Meeting in Seattle, Washington. The Committee will continue its work on the proposed act during 2014–15, with the act expected to receive a final reading and approval at the July 2015 Annual Meeting in Williamsburg, Virginia.
As work goes forward, the Committee welcomes participation and input from all interested persons. You can find copies of the most recent interim drafts of the proposed act, a summary of the work done at the September meeting, and other background material, on the ULC web site, www.uniformlaws.org, or by contacting Committee Chair Thomas Hemmendinger (firstname.lastname@example.org) or Reporter Wilson Freyermuth (freyer email@example.com).