QUESTION: DO CHANGES TO RECEIVERSHIP LAW MATTER TO MY COMPANY?
ANSWER: THE UNIFORM COMMERCIAL REAL ESTATE RECEIVERSHIP ACT CAN REALLY HELP YOU OR REALLY HURT YOU.
What are the statutory powers of these new receivers?
The Uniform Commercial Real Estate Receivership Act (“UCRERA”) grants some of the most frequently used equitable powers of equitable receiverships to statutory receivers by default, with no specific court order needed. The receiver by statutory authority has the ability to:
- Control and manage property;
- Operate a business related to receivership properties;
- Pay debts related to receivership property;
- Assert claims on behalf of parties in interest; and
- Exercise the rights that a lien creditor would have with respect to property.
But receiverships aren’t “new”?
A receiver is a disinterested person appointed by a court for the protection of property. Receiverships were initially created by the English Chancery Courts centuries ago to preserve property while the litigants fought over it.
I have used receivers to preserve collateral and manage operations as varied as a hospice to a construction company. I have had receivers round up herds of cattle on the open range and I have routinely used receivers to protect judgment creditors’ minority interests in corporations, limited liability companies and partnerships. They are also routinely used for the enforcement of the assignment of rents provisions in deeds of trust.
In 2005, I used a receiver to take possession of and complete two partially constructed residential subdivisions in Pinal County. The receiver had to oversee securing the entire subdivisions and try to preserve the partially built houses from vandalism and the weather!
So, what are the advantages of the Uniform Commercial Real Estate Receivership Act?
In 2019, Arizona adopted a new, streamlined statutory receivership process. The law provides a framework for receivership powers and duties related to commercial real estate and certain residential property. It contains certain “lender/favorable” concepts patterned after other areas of law. (Unfortunately, the Uniform Commercial Real Estate Receivership Act doesn’t have a catchy acronym, only “UCRERA.”) UCRERA receiverships can be used wherever property or the revenue-producing potential of property “needs to be protected and preserved.”
The UCRERA explicitly grants powers to receivers that Arizona courts were historically hesitant to grant under the equitable receiverships described in Arizona Rule of Civil Procedure 66. The Act explicitly allows courts to grant receivers the power to:
- Incur debt for the use or benefit of receivership property outside the ordinary court of business;
- Make improvements to receivership property;
- Use or transfer receivership property outside the ordinary course of business; and
- Adopt or reject executory contracts of the property owner.
An automatic stay outside of bankruptcy?!!!
The UCRERA “borrows” the automatic stay from bankruptcy and applies it to receiverships. In a UCRERA receivership, any litigation or collection action against the property subject to the receivership is automatically stayed upon the appointment of the receiver. Lenders no longer need to incur expenses drafting court orders listing specific properties, creditors or actions to be stayed.
Sales of real property free and clear of all liens!
The Act allows courts to approve sales of receivership property free and clear of all liens. The senior lien holder does not need to foreclose on the property or hold a trustee’s sale to be able to sell the property free and clear of junior liens. Also, if the debtor finds a willing buyer for the property, (or the receiver or senior lien-holder find a willing buyer for the property), the sale process cannot be held up by non-consenting junior lien-holders or intransigent title companies.
The Act explicitly allows for sales of the property free and clear of liens before entry of any judgment. This procedure makes it possible to receive a greater return on the encumbered assets because the chilling effect of a “fire sale” is removed.
But who is looking out for those junior lien holders?
For junior lien lenders on commercial real estate, careful loan underwriting and diligent portfolio management have become even more important!
Junior lenders are not necessarily going to know that a receiver is being sought because no notice to junior lien-holders is required at the outset of the lawsuit seeking the appointment of a receiver. As parties in interest though, junior lenders must receive notice of a pending sale and have the right to intervene and object to the sale before the sale takes place.
Although the sale can take place free and clear of liens, liens attached to the sale proceeds (if there is equity beyond the amount needed to pay the holder of the senior lien).
Is the new receivership act good or bad for my company?
The Act codifies and streamlines many of the benefits of traditional equitable receiverships, but adds some new powerful tools that were previously only available in bankruptcies and foreclosures. These tools will help the careful and diligent creditors, but may be a great detriment to lenders and creditors that fail to follow good, old-fashioned lending and credit policies and procedures!
If you have any questions about either equitable or statutory receiverships, please call us. Our telephone receivers are working today!
This article may be distributed with attribution but may not be excerpted or modified without the permission of the author. Copyright © 2021
Gammage & Burnham, Attorneys at Law