Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.
In 2015, the Uniform Law Commission approved the Uniform Commercial Real Estate Receivership Act in response to concerns from the real property community about the patchwork of receivership laws in various states, and even differing practices by individual judges within a state. Most states did not provide any statutory guidance on the process for appointing receivers or the scope of their powers. In states with ambiguous receivership laws, receivers who take possession of real property can be faced with decisions that are beyond the scope of the governing law, such as when or how to post a bond, the procedures to notify interested creditors, or whether it is appropriate to sell the receivership property.
Twelve states have enacted the Uniform Commercial Real Estate Receivership Act (Arizona, Connecticut, Florida, Maryland, Michigan, Nevada, North Carolina, Oregon, Rhode Island, Tennessee, Utah, and West Virginia). The act offers a comprehensive, clear set of procedures for the administration of commercial property by a receiver, who is a court-appointed representative responsible for property in a variety of scenarios. Receivers may be appointed (1) to prevent waste, deterioration, or removal of real property while litigation or an appeal is pending, (2) to enforce a judgment against a parcel of real property, (3) to preserve real property while a corporation, partnership, or other type of legal entity is being dissolved or winding up, or in the event of corporate dysfunction, (4) to work on behalf of a creditor to manage or liquidate the real property of an insolvent debtor, or (5) to enforce a mortgage in default on behalf of a mortgage lender.
The act provides this much-needed guidance in several ways. First, the act requires notice to those affected by the proposed receivership and provides these individuals with the opportunity for a hearing before the issuance of most orders. The act establishes that the enacting state’s court of general equity jurisdiction will have exclusive jurisdiction over receivership proceedings. To clear up ambiguity surrounding the appointment of the receiver, the act sets qualification standards for receivers, mandates that the receiver post a bond or alternative security, and requires the receiver to be independent of all interested parties.
With regard to the legal effect of a receiver’s appointment, the act establishes that the receiver assumes the status and priority of a lien creditor for transactions involving the receivership property. Once the receiver is appointed, the act requires all property subject to the receivership to be turned over to the receiver and all payments on debts that are receivership property to be made to the receiver. Under the act, creditors must file claims with the receiver to receive distributions or proceeds from the receivership property, and the receiver is permitted to recommend the disallowance of any such claims. The receiver is granted immunity from liability for acts or omissions within the scope of the receiver’s appointment. The receiver is authorized to pay necessary professionals to assist with the administration of the receivership.
The act further permits the receiver to use, sell, lease, license, exchange, or otherwise transfer receivership property outside of the ordinary course of business but only with court approval. Additionally, the act gives the receiver the option to enter into an executory contract with the property owner, with procedures for both adoption and rejection of a proposed executory contract.
To ensure that creditors and other interested parties remain updated on the actions of the receiver, the act requires the receiver to file interim reports during the receivership and, once the receivership concludes, a final report.
Because the act grants jurisdiction over receivership to state courts, the receiver would traditionally be entitled to manage property that is within the boundaries only of the appointing jurisdiction. However, to address this issue for receivership properties located in multiple states, the act authorizes the appointment of a qualified receiver who has been previously appointed in another state. This ancillary receiver is granted the same rights, powers, and duties as a regular receiver appointed under the act.
A key feature of the act is that in the event the receiver is appointed by the request of a senior lienholder for purposes of a sale of the property, the property can be sold on the open market, free and clear of any junior liens or rights of redemption, and without the consent of junior lienholders. By contrast, in the event a junior lienholder obtains the appointment of a receiver, the property cannot be sold free and clear of senior liens without the consent of the senior lienholders. This procedure avoids foreclosure, which often results in a “distress sale” of the property for a price less than market value, while still providing the assurances of judicial review and confirmation and preserving the buyer’s ability to operate the property under the receivership.
Finally, the act establishes that a mortgage lender who requests the appointment of a receiver for property secured by the mortgage does not assume the liabilities of a mortgagee in possession. Similarly, the appointment of the receiver does not modify or limit any remedies that were available to the mortgage lender before the appointment.
Notably, the act applies only to commercial, and not consumer, properties. Residential properties with one to four dwelling units are generally not covered by the act. The act does cover properties that have a primary purpose of agricultural, mining, or other income-generating activity on the land, even if the property owner incidentally occupies a residence. The act also covers properties of any size that are rented out to tenants who are unaffiliated with the property’s owner.
The Uniform Commercial Real Estate Receivership Act provides comprehensive guidance for the appointment of a receiver and the procedures involved in the receivership. It should be considered in every state where it has not yet been enacted. n
