Real Estate Litigation

By: Ben Reeves

As we previously reported here, several years ago the Uniform Law Commission (the “ULC”) (the organization that drafted such favorites as the Uniform Commercial Code and the Uniform Arbitration Act) determined that states would benefit from a model act that would govern the powers, rights, and duties of receivers appointed over commercial real property. Since that time, a drafting committee has worked diligently to prepare a comprehensive statute that would address this unique area of law. The ULC recently approved the drafting committee’s final version, and the result is the Uniform Commercial Real Estate Receivership Act (the “Act”). From here, the ULC will work to get as many states as possible to consider adopting the Act. In fact, I’m informed that several states have already expressed an interest in doing just that.

A major purpose of the Act was to streamline the court’s approval of common issues in receiverships to make the appointment of a receiver a more effective remedy. In doing so, the Act attempts to strike a balance between creating a comprehensive structure that addresses myriad issues that often arise in receiverships, while maintaining the court’s ability to act equitably based upon the needs of a particular case. Some of the more significant provisions in the Act are as follows:

• A secured creditor can obtain the appointment of a receiver over its real property collateral based solely on an agreement in the lien instrument to the appointment of a receiver upon default (Act § 6(b)(2));
• A receiver appointed under the Act obtains the status of a lien creditor (Act § 9);
• The Act authorizes a receiver to (without further order of the court) operate a business constituting receivership property, and (with prior court approval) incur debt and use receivership property outside the ordinary course of business (Act § 9);
• The Act requires the borrower to cooperate with a receiver appointed under the Act or face contempt (Act § 13);
• The Act authorizes the receiver to sell receivership property (Act § 16); and
• The Act establishes a claims submission and payment procedure (Act § 20).

In addition to these noteworthy provisions, the Act preserves unique receivership law concepts such as the “receivership litigation stay” (Act § 14) and the “quasi-judicial immunity” (Act § 19) that the law developed to protect receivers. In sum, the Act does a pretty good job at creating a comprehensive framework that will provide guidance to courts, receivers, and secured creditors for most routine receivership actions.

Playing devil’s advocate, the Act does have some potential pitfalls. Most notably, in Arizona for example, courts have been handling receivership actions without a comprehensive statute since before it entered statehood, and the remedy has worked just fine in most situations. Thus, some question the need for the Act in light of the body of receivership law that has developed naturally through the courts. Additionally, the Act reads somewhat like a mini-Bankruptcy code, and some fear that borrowers will exploit the numerous provisions of the Act to the detriment of secured creditors and receivers. Last, some practitioners are concerned that the Act would hamstring a receiver’s ability to do something that is not expressly authorized by the Act itself. Traditionally, courts decide receivership issues based upon equitable principles and – although the Act attempts to build this tradition into the statute (Act § 4(e)) – the fear is that courts will not deviate from technical language of the Act and thus limit the creativity of receivers and counsel when they confront a difficult issue.

Regardless of your thoughts on the Act, the ULC is attempting to get it enacted throughout the country, so it may be coming to a jurisdiction near you.