The Effort to Adopt a Uniform Receivership Law

There is a recent effort to adopt a uniform receivership act which is applicable to commercial real estate. If adopted in its current form in the 50 states, the receivership laws would provide a consistent treatment of laws across those states, and provide better predictability of outcomes for those impacted by the receiverships. The key provisions of the act include imposing an automatic stay against creditors, allowing receivership sales free and clear of liens prior to foreclosure (with liens attaching to sale proceeds), and requiring creditors to participate in a claims process.

The Uniform Commercial Real Estate Receivership Act

In July 2015, the National Conference of Commissioners ("NCC") on Uniform State Laws adopted the Uniform Commercial Real Estate Receivership Act ("Act"), with the hope that it would be adopted by each of the 50 states. The NCC believed there was a need for uniformity amongst the states on the application of receivership laws to commercial real estate ("CRE"), given the lack of specificity and dearth of receivership laws in certain states, and the inconsistency in the application of receivership laws as between the states. Utah has recently adopted the Act, and there are now four other states which have made significant inroads in adopting the Act (Nevada, Oklahoma, Michigan, and Maryland). At this time, California has not taken any steps to consider adopting the Act.

Highlights of the Act

The Automatic Stay

The Act provides that upon entry of an order appointing a receiver over CRE property, an automatic stay, similar to one created by a bankruptcy filing affecting the CRE property, will come into effect as to any creditor enforcement actions against the CRE property. The stay does not enjoin actions against the borrower directly. Creditors may seek relief from the stay to continue enforcement actions against the CRE property, solely on the basis of "cause" in the receivership court. The creation of a stay in a receivership is a marked change from many state court receivership proceedings, such as those in California, where there is no "automatic stay" as to enforcement actions of other creditors to the CRE property, such as junior lienholders. Under the Act, creditors violating the stay may be liable for damages to the receiver, including actual damages and reasonable attorney's fees. If the stay violation is intentional, civil contempt damages could be awarded.

The Sale Free and Clear of Liens

The Act authorizes receivers, who act in a custodial posture over the CRE property such as a rents-and-profits receiver, to sell CRE property free and clear of liens as part of the receivership process. Following the sale, any liens on the CRE property would attach to the proceeds of the sale. In many states, such a sale cannot be conducted under current laws without the consent of the CRE property owner. Under the Act, receivers will be authorized to sell CRE property through a private or public auction sale, and can close the sale prior to foreclosure of the CRE property, rather than wait until the foreclosure process is complete. This receivership sale process can result in a higher sale price since it allows prospective buyers the necessary time to conduct due diligence, and offers the same benefits as a foreclosure sale in extinguishing junior liens following the sale. As an added bonus, a receivership sale under the Act extinguishes any post-foreclosure redemption rights, to the same extent a redemption right would be extinguished under state law. Secured creditors would also be authorized under the Act to credit bid their outstanding indebtedness for all, or any portion, of the purchase price at a receivership sale.

The Receivership Claims Process

The Act requires that creditors with claims which relate to the CRE property file proofs of claim. These claims would need to be filed by all parties who might have a claim that relates to the CRE property including, for example, the property manager replaced by the receiver, the janitorial staff, lessees, and any secured lienholders on the Property. The receiver would set a claims bar date under the Act by which these claims must be filed and would administer a claims review and allowance/disallowance process, which is a significant power that most state court receivers do not currently hold.

Receivership Sales in Context of Mortgage Enforcement

Finally, the Act addresses the issue that in some states a pre-foreclosure receivership sale could constitute an election of remedies, or a violation of the "one-form of action" rule. The Act provides that a sale of CRE property in a receivership proceeding would not (i) constitute an election of remedies, (ii) make the secured obligation unenforceable due to the sale of the CRE property prior to a foreclosure, or (iii) constitute an "action" under any applicable "one-form of action" rule. The Act would resolve any uncertainty in states that have an applicable "one-form of action" rule, and provide that any pre-foreclosure receivership sale would not violate the rule.

Impact on Those Involved in CRE property

Buyers of CRE property should look closely at receivership sales. The receivership sale process can avoid the delay that often occurs in the foreclosure process, while offering the same title benefits, i.e., the extinguishment of junior liens and redemption rights.

Secured lenders of CRE property can use the receivership process as a potential way to facilitate the sale of property without the delay of a foreclosure sale, without the fees and costs associated with the foreclosure process (including trustee fees, trustee sale guarantee costs, and publication, notification and posting costs), and without the public auction limitation of only accepting cash or cash-equivalents for the purchase price. However, the costs associated with a receivership sale, including broker commission and receiver, title, and closing fees, among others, could potentially exceed the fees and costs associated with the foreclosure process.

Borrowers, owners and their managers should be aware of the legal and practical implications of a receiver being appointed under the Act, including the receiver's authority to take over management of the CRE property, collect rents, and conduct a receivership sale. Borrowers and owners should consult counsel before a receiver is appointed, if possible, to understand their legal options.

Third party vendors whose clients have property subject to a receivership under the Act should be careful to avoid inadvertent violations of the automatic stay through enforcement actions such as a judgment lien, and should pay close attention to the receivership claims process to make sure they timely submit a claim before the claims bar date.

While the Act does contain potential pitfalls for borrowers/owners and those unaware of its terms, it also provides property sale opportunities previously unavailable in many jurisdictions. All those potentially affected by the appointment of a receiver under the Act should consult a qualified attorney to learn more about it.