New Florida Receivership Statute Gives Commercial Mortgage Lenders Potential Leverage

Amidst the growing uncertainty caused by the COVID-19 pandemic, Florida’s newly enacted receivership law, the Uniform Commercial Real Estate Receiver Act (“UCRERA”), codified in Chapter 714 of the Florida Statutes, endeavors to offer predictability for commercial real property receiverships in the context of a commercial foreclosure legal action. UCRERA became effective on July 1, 2020 and codifies procedures, conditions and requirements to protect creditors’ interests in real property.  Prior to the enactment of UCRERA, Florida was without a uniform framework when it came to the basis, process, powers, and obligations related to the appointment of a receiver for commercial real property.  Instead, the appointment of a receiver and the administration of receiverships in the state were left to case law decisions and trial court discretion without any real guidelines.  With the adoption of UCRERA, however, this is no longer the case.  Instead, UCRERA provides a guidepost in what are proving to be unprecedented and turbulent times.

As its name implies, UCRERA applies only to receiverships for interests in commercial real property or incidental personal property used in operating the real property. Fla. Stat. 714.04. It does not provide for an independent cause of action, and is only available in connection with an underlying action relating to commercial real estate, such as a foreclosure action or similar proceedings.  For receiver appointments that were made before July 1, 2020, UCRERA does not apply to the extent its provisions differ from the existing appointment.  Fla. Stat. 714.28. But, for looming future defaults, which grow more certain as the pandemic lingers, UCRERA offers creditors effective options to protect their interests.

Appointment of a Receiver – Grounds for Appointment and Factors to Consider

While UCRERA codifies many of the same rights and remedies that were already at play in Florida, the law provides more accessible and uniform guidelines to the courts tasked with appointing receivers and overseeing the administration of the receivership.  Under UCRERA, appointment of a receiver may be made only after notice and an opportunity for a hearing, unless it is shown that there is a danger of an immediate and irreparable injury, loss or damage or that waste, dissipation, impairment, or substantial diminution in value will result to the property.  Fla. Stat. 714.03(1).  A receiver’s bond is required, but the statute leaves the specific amount of the bond up to the court. Fla. Stat. 714.08.  Following appointment of a receiver, the court then has exclusive jurisdiction to direct the receiver and determine any controversy related to the receivership or receivership property.  Fla. Stat. 714.05

Grounds for Appointment – Old and New

Under UCRERA, the court may appoint a receiver in connection with a foreclosure or other enforcement of a mortgage, either before or after judgment. Before judgment, a court may appoint a receiver to protect a party that demonstrates a right, title, or interest in the real property if the property or its revenue-producing potential (1) is being subjected to or is in danger of waste, loss, substantial diminution in value, dissipation, or impairment; or (2) has been or is about to be the subject of a voidable transaction.  Fla. Stat. 714.06(1)(a).

After judgment, a court may appoint a receiver (1) to carry the judgment into effect; or (2) to preserve nonexempt real property pending appeal or when an execution has been returned unsatisfied and the owner refuses to apply the property in satisfaction of the judgment.  Fla. Stat. 714.06(1)(b). Additionally, a court may appoint a receiver in an action on equitable grounds, or during the time allowed for redemption to preserve real property sold in an execution or foreclosure and secure its rents.  Fla. Stat. 714.06(1)(c)-(d).

Thus, while traditional common law grounds for the appointment of a receiver (mismanagement, waste, preservation of rents, risk of loss, etc.) are still available, UCERA offers new grounds such as the appointment of a receiver if the property has been or is about to be the subject of a voidable transfer. Fla. Stat. 714.06(1)(a)(2). This provides valuable options to creditors seeking to avoid fraudulent transfers of commercial real estate.  Additionally, while a post-judgment receiver was formerly possible, it was permitted only in limited circumstances, but now is explicitly authorized.  Fla. Stat. 714.06(1)(b).

Statutory Factors the Court Must Consider

In deciding whether to appoint a receiver for the mortgaged property, UCRERA provides that the court must consider the following factors, together with any other relevant facts:

1. Appointment is necessary to protect the property from waste, loss, substantial diminution in value, transfer, dissipation, or impairment;
2. The mortgagor agreed in a signed record to the appointment of a receiver on default;
3. The owner agreed, after default and in a signed record, to appointment of a receiver;
4. The property and any other collateral held by the mortgagee are not sufficient to satisfy the secured obligation;
5. The owner fails to turn over to the mortgagee proceeds or rents the mortgagee was entitled to collect; or
6. The holder of a subordinate lien obtains appointment of a receiver for the property.  Fla. Stat. 714.06(2).

These factors appear to underscore that a court should honor contractual rights to a receiver where there is a clear record of the agreement.

Administration of Receiverships – The Roles of the Receiver and Owner

UCRERA sets out the powers and duties of the commercial property receiver, and the duties required of the property owner. The now-codified powers of a receiver are comparable in many respects to the powers bestowed upon a bankruptcy trustee.  UCRERA also requires property owners to, among other things, assist and cooperate with the receiver in the receiver’s efforts to preserve and maintain the property.  An owner’s knowing violations of his or her statutory duties could land the owner with an adverse order for damages, attorney fees and costs. Overall, and as addressed more specifically below, UCRERA provides an effective framework for the orderly, and more predictable, administration of commercial receiverships, which was previously left to the courts and could vary widely from case to case.

Powers and Duties of the Receiver

The powers and duties of a receiver under UCRERA have not materially changed from Florida common law.  Generally, except as expanded, modified, or limited by court order, a receiver may manage and protect receivership property; operate a business; in the ordinary course, incur unsecured debt and pay expenses incidental to the receiver’s duties; assert claims and defenses relating to receivership property; seek instruction from the court concerning the property and the receiver’s powers and duties; and, with a subpoena, compel a person to submit to examination under oath or produce records relating to the receivership property.  Fla. Stat. 714.12(1).

With court approval, UCRERA provides that a receiver may also:

• Incur debt for the receivership property other than in the ordinary course of business;
• Make improvements to the property;
• Use or transfer receivership property other than in the ordinary course of business;
• Adopt or reject an executory contract of the owner;
• Pay compensation to the receiver and professionals engaged by the receiver;
• Recommend allowance or disallowance of a claim of a creditor; and
• Make a distribution of receivership property.  Fla. Stat. 714.12(2).

Importantly, UCRERA includes provisions that allow a receiver, with court approval, to serve as a liquidator of property.  Fla. Stat. 714.16.  Before judgment, and after reasonable notice is given to interested parties, including lienholders, the receiver may transfer by sale receivership property other than in the ordinary course of business.  Fla. Stat. 714.16(2).  After judgment, and after reasonable notice is given to interested parties and lienholders, the receiver may transfer receivership property other than in the ordinary course of business to carry the judgment into effect or to preserve nonexempt real property pending appeal or when an execution has been returned unsatisfied and the owner refuses to apply the property in satisfaction of the judgment.  Fla. Stat. 714.16(3). Additionally, UCRERA gives the court the power to order that a transfer of receivership property under Section 714.16 is free and clear of any liens on the property.  Fla. Stat. 714.16(4).

In addition to these powers, UCRERA also outlines the receiver’s duties, including among other things: preparing and retaining business records; accounting for receivership property; making disclosures to the court regarding any fact which would disqualify the receiver; and perform other duties imposed by court order or law. Fla. Stat. 714.12(3).

The receiver is entitled to all defenses and immunities provided under state law for an act or omission within the scope of the receiver’s appointment, and may only be sued personally for an act or omission in administering receivership property with approval of the court that appointed the receiver.  Fla. Stat. 714.18. Receivers may be removed by the appointing court for cause, or if the court decides the appointment of the receiver was improvident or that circumstances no longer warrant continuation of the receivership.  Fla. Stat. 714.22.

The court may award the receiver from the receivership property the “reasonable and necessary” fees and expenses of performing their duties and exercising their powers.  Fla. Stat. 714.21.  The court also has the option of ordering payment of the receiver’s fees and expenses from the person that requested appointment of the receiver, if the receivership does not produce sufficient funds to pay the fees and expenses; or the person whose conduct justified or would have justified the appointment of the receiver.  Fla. Stat. 714. 21.

Duties of the Owner

UCRERA also explicitly mandates certain duties of the owner of the commercial property.  As defined in UCRERA an “owner” means the person for whose property a receiver is appointed.¹

Specifically, UCRERA requires that property owners: assist and cooperate with the receiver; preserve and turn over to the receiver all receivership property; identify records and make them available to the receiver; upon subpoena, submit to examination under oath by the receiver; and perform other duties as required by court order.  Fla. Stat. 714.13(1).  Further, UCRERA provides for the award of actual damages, attorney fees, and costs to the receiver in cases where the owner knowingly fails to perform the duties imposed by it.  Fla. Stat. 714.13(3).

Potential Impacts on Creditors – More Predictability, More Options

The statutory framework provided by UCRERA will undoubtedly impact creditors as they take steps to protect their interests.  One seemingly positive impact, of course, is the predictability and accessibility provided by the law.  Instead of a patchwork of cases to cobble through, creditors can now easily reference the statutory requirements.

As one example, under UCRERA, claimants and creditors to property in receivership will now be subject to a more predictable and formal process to perfect their claims and get paid.  Fla. Stat. 714.20(3). The process set forth in the statute has requirements akin to the Proof of Claim process in bankruptcy, and sets clear criteria for submission of claims, timing of the submission, claims objections, and distribution of property.  Fla. Stat. 714.20(1)-(7).

Again harkening to the Bankruptcy Code, UCRERA also provides predictable safeguards to receivership property similar to those provided by the automatic stay.  After notice and a hearing, the court may enter an order staying any act, action or proceeding to obtain possession of, exercise control over, or enforce a judgment or lien against receivership property.  Fla. Stat. 714.14(1).  The court may also enter an order enjoining an act, action, or proceeding against or relating to receivership property if necessary to protect against misappropriation of, or waste relating directly to, the receivership property. Fla. Stat. 714.14(2).

In addition to predictability, UCRERA provides new options in lieu of a traditional foreclosure sale.  One notable new option is the possibility, for a secured creditor, of a post-judgment receiver’s sale. With the statutory authorization provided by UCRERA, secured creditors could seek the appointment of a receiver prior to judgment and allow the receiver to sell the property after judgment.  This option has potential to maximize recovery for the creditor, and provides a valuable alternative to a traditional foreclosure sale, which, in the case of a credit bid, oftentimes leave the creditor with the burden of marketing, maintaining, and selling the property.

While UCRERA provides new and valuable options, the traditional roads to receivership are still available.  In circumstances, for example, involving substantial personal property that may not be incidental to the commercial real property, we recommend seeking a receiver both under UCRERA and, alternatively, under the contract and Florida common law.  By way of illustration, consider a foreclosure action involving a manufacturing plant of an owner-operator borrower.  In that case, the commercial real property would include equipment, inventory and A/R, which may not be considered “incidental” to the real property for purposes of UCRERA.  Thus, we would recommend seeking receivership under UCRERA, and also filing a companion or supplemental request for receivership under the security agreement, Florida common law and Florida Rule of Civil Procedure 1.620, as an alternative basis for appointment.  This belt and suspenders approach makes receivership relief more likely in the face of potential challenges to the appointment of a receiver under UCRERA where substantial personal property is at play.

It will take time, and ongoing application of the law, before the full implications of UCRERA are known. Since 2017, uniform commercial real estate receivership statutes have also been passed in Michigan, Nevada, Oregon, Tennessee, Utah, Kentucky, Oklahoma and West Virginia. Thus, reliance on precedent in these states may provide insight and have some force in light of the fact that they are largely drafted with the uniform language.  As threats to collateral continue to grow in the wake of the pandemic, UCRERA appears to now provide welcome predictability for Florida commercial receiverships, and effective new options for creditors working to protect their interests.

If you have any questions or concerns pertaining to how UCRERA may impact your interests in commercial real property, please contact the authors listed below or your Foley relationship partner.  Foley’s Bankruptcy & Business Reorganizations practice is among the largest and most robust in the nation, and Foley attorneys stand ready to assist you with the implications of this new law.

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¹ Under UCRERA, a “mortgagor” means a person who grants a mortgage or a successor in ownership of the real property described in the mortgage. The distinction in UCRERA between “owner” and “mortgagor” recognizes that scenarios arise where, legally, the mortgagor is not the owner of the property.