New Michigan Receivership Act Makes Commercial Real Estate Receiverships an Attractive Option for Mortgage Secured Creditors
Creditors holding real estate collateral will be gratified by the new recovery options offered in recently-enacted receivership legislation. Public Act 16 of 2018, the Uniform Commercial Real Estate Receivership Act (UCRERA), was signed into Michigan law on February 6, and becomes effective on May 7, 2018. UCRERA was enacted to provide a clearer path for appointment of receivers for the administration and disposition of Michigan commercial real estate properties. Key provisions of UCRERA provide for:
- an expanded number of specific and objective grounds for the appointment of receivers over commercial real estate;
- the taking of possession and control, maintenance, use and disposition of real property;
- sales of real property free and clear of liens (other than certain senior liens) with the liens to attach to the sale proceeds; and
- other powers and remedies in receiverships (like, the adoption or rejection of executory contracts and an automatic stay of certain actions relating to receivership property).
A receivership is one in an assortment of remedies typically available to a creditor to realize upon the property of its defaulting debtor. It starts with a petition to the applicable court for an order appointing a receiver over an individual or entity defendant or the assets of the defendant. If granted, the appointment order will appoint a disinterested person (or entity) as a receiver, who is then charged with taking possession and control of, preserving and maintaining, and ultimately liquidating, the property subject to the receivership. Although Michigan courts retain the discretion, authority, and jurisdiction to order and oversee receiverships of Michigan real estate, UCRERA, provides clarity, detail, and direction for the appointment of receivers and the myriad aspects of the receivership process. Most notably, UCRERA makes receiverships a more attractive and potentially, more worthwhile, option for collecting debts secured, in whole or in part, by commercial real estate; and, here, specific to mortgage secured commercial real estate, is why:
Expanded Grounds for Appointment or Receivers
Pre-UCRERA, Michigan statutes provided for the appointment of a receiver of real estate in a limited number of circumstances – waste and unpaid real property taxes. Under UCRERA, several grounds for receiver appointment were added (written agreement by mortgagor to receiver appointment on default, the property securing the mortgage is insufficient to satisfy the mortgage debt, the mortgagor fails to turn over rents the mortgagee is entitled to collect). Coupled with the relatively new (2014) Michigan Court Rule (MCR 2.622) governing the qualifications, selection, appointment, duties, powers and compensation of receivers, Michigan law now provides a much clearer and objective path for the appointment of a receiver. However, UCRERA and MCR 2.622 contain differing and overlapping disqualification rules for receivers.
Receiver Sales of Real Property
Although Michigan courts have entered orders facilitating receiver sales of real property free of redemption rights and liens, the authority for these orders under Michigan law has never been clear. This has resulted in several schools of thought among the judiciary. UCRERA clearly provides for such sales, thus greatly enhancing the certainty of achieving a liquidation of the receivership property.
Sales Free of Redemption Rights. Pre-UCRERA, Michigan law did not permit receiver sales free of the real property owner's statutory right of redemption under the foreclosure statutes. UCRERA provides that commercial real estate may be sold by a court appointed receiver in the ordinary course of business without a court order, or, outside the ordinary course of business with a court order – and, in either event, there is no right of redemption for the property owner. Thus, the receivership sale purchaser does not have to await the expiration of a redemption period to take possession of the property. This result is unlike the typical advertised or judicial foreclosure sale, both of which mandate a right of redemption.
Sales Free and Clear of Liens. Another benefit of UCRERA's provisions is that real property passes to the purchaser free and clear of the lien of the creditor who obtained the appointment of the receiver, as well as all junior liens, although the property remains subject to any senior liens.
Liens Attach to Proceeds. UCRERA also provides that the lien of the creditor who obtained the receiver and any junior liens attach to the sale proceeds of sale of the receivership property in the same validity, perfection and priority as immediately before the sale.
Other UCRERA Provisions of Note
UCRERA also (i) does not require commercial real estate receivership sales to be public (therefore, a receiver has flexibility to determine the appropriate manner of sale, including a public or private sale); (ii) permits a mortgage secured creditor to credit bid up to the amount of its debt on any sale, which is equivalent to its credit bid rights under Michigan foreclosure law; (iii) provides for notice of the receivership proceeding to all creditors of the owner, with exceptions if the court determines the receivership property will likely be insufficient to satisfy claims secured by receivership property; and (iv) provides for the filing of claims and receiver claim objection rights.
Recommendations for Secured Creditors
Creditors who may not be interested in pursuing a receivership themselves, but who have a lien on real estate that falls under a receivership initiated by another creditor, should stay informed of the receivership proceedings, determine whether they should or can file a claim, and otherwise evaluate their recovery rights as to the receivership property. It is recommended that legal counsel be consulted in these circumstances.
Varnum's team of attorneys has extensive experience and expertise in receivership matters, as counsel to mortgage secured creditors and receivers in state and federal courts in Michigan. Varnum was also involved in the drafting of the new Michigan Court Rule governing receiverships and the new Michigan Land Title Standards that are being drafted to address the impact of the adoption of UCRERA. For questions concerning UCRERA and receivership actions, please contact a member of Varnum's Real Estate team.
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