Overview of Florida’s New Uniform Commercial Real Estate Receivership Act

On July 1, 2020, the Uniform Commercial Real Estate Receivership Act (“Act”) became law in Florida as part of the newly created Chapter 714 of the Florida Statutes. The Act codifies existing common law in Florida regarding the right to have a receiver appointed by the court in commercial foreclosure actions, and provides much needed clarity, predictability, and uniformity on the standard for the appointment of a receiver and the powers of receivers. This new legislation is likely to be important to lenders and borrowers due to the anticipated higher volume of commercial foreclosures due to economic effects of the current COVID-19 pandemic.

receivership real estate receivership commercial foreclosure florida uniform commercial real estate receivership act

What is a Receiver, and Why are They Important?

A receiver is defined in the Act as a “person appointed by the court as the court’s agent, and subject to the court’s direction, to take possession of, manage, and, if authorized . . . sell, lease, license, exchange, collect, or otherwise dispose of receivership property.” § 714.02(14), Fla. Stat. The purpose of a receiver is to preserve the status quo, preserve the property that is subject to litigation, and manage the mortgaged property expenses during the pendency of the foreclosure proceedings. This can be particularly important in commercial foreclosures involving income producing properties, as well as properties that may be subject to loss of value if not properly maintained, insured, and managed by the borrower during the pendency of the foreclosure lawsuit.

What is the Purpose of the Act?

Prior to the enactment of the Act, Florida did not have a uniform procedure for the appointment of a receiver for commercial real estate property. The appointment of a receiver was left to inconsistent case law and the trial court judge’s discretion, which created significant uncertainty for lenders in protecting their interests in the commercial property through receivership. The new Act expands the right of receivership and provides a uniform procedure, which may allow for a more uniform and predictable process for appointment of a receiver.

It’s important to note that the Act does not create an independent cause of action, and only applies to a receivership initiated in a court in Florida for an interest in commercial real estate property or incidental personal property used in operating the commercial real property, and therefore does not apply to homestead property or residential foreclosures.  § 714.04, Fla. Stat. In addition, it does not apply to receivers that were appointed prior to July 1, 2020.  § 714.04, Fla. Stat.

When Can the Court Appoint a Receiver Under the Act?

While the traditional common law grounds for the appointment of a receiver remain, the Act also offers additional grounds and provides lenders with valuable options to protect their interests in the commercial property, including the right of receivership after judgment. Pursuant to the Act, the court is authorized to appoint a receiver in the following situations:

  • Before judgment, if the property is: (1) subjected 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;
  • After judgment: (1) to carry the judgment into effect; or (2) to preserve the 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;
  • In an action which a receiver may be appointed on equitable grounds, subject to the two requirements above; or
  • During the time allowed for redemption, to preserve real property sold in an execution or foreclosure sale and secure its rents to the person entitled to the rents. 714.06(1), Fla. Stat.

When deciding whether to appoint a receiver, the court must consider the following facts and circumstances enumerated in the Act, together with any other relevant facts:

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

Before a receiver can be appointed, the receiver must submit to the court a statement under penalty of perjury that the receiver: is not an affiliate of a party; does not have an interest materially adverse to an interest of a party; does not have a material financial interest in the outcome; does not have a debtor-creditor relationship with a party; and does not hold an equity interest in a party. § 714.07(3), Fla. Stat. The receiver will also be required to post with the court a bond that is conditioned on the faithful discharge of the receiver’s duties, is issued by one or more sureties approved by the court, is in an amount specified by the court, and is effective as of the date of the receiver’s appointment. § 714.08(1), Fla. Stat.

What are the Powers and Duties of a Receiver?

Receivers have broad duties and powers under section 714.12 of the Act. Once appointed by a court, receivers may, without a further court order:

  • Collect, control, manage, conserve, and protect receivership property;
  • Operate a business constituting receivership property, including preservation, use, sale, lease, license, exchange, collection, or disposition of the property in the ordinary course of business;
  • In the ordinary course of business, incur unsecured debt and pay expenses incidental to the receiver’s preservation, use, sale, lease, license, exchange, collection, or disposition of receivership property;
  • Assert a right, claim, cause of action, or defense of the owner which relates to receivership property;
  • Seek and obtain instruction from the court concerning receivership property, exercise of the receiver’s powers, and performance of the receiver’s duties;
  • Upon subpoena, compel a person to submit to examination under oath, or to produce and permit inspection and copying of designated records or tangible things, with respect to receivership property or any other matter that may affect administration of the receivership;
  • Engage a professional, such an accountant or attorney;
  • Apply to a court of another state for appointment as ancillary receiver with respect to receivership property located in that state; and
  • Exercise any power conferred by court order, the Act, or the laws of Florida.

In addition, with a further court order approving such action, a receiver may also:

  • Incur debt for the use or benefit of receivership property other than in the ordinary course of business;
  • Make improvements to receivership 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 to each professional engaged by the receiver;
  • Recommend allowance or disallowance of a claim of a creditor; and
  • Make a distribution of receivership property.

A receiver’s power to “use or transfer receivership property other than in the ordinary course of business” is a new and important departure from the common law powers of a receiver to sell property before judgment. Under the Act, a receiver may, with court approval after notice to all parties with an interest in the property, sell receivership property before a judgment is entered, if the owner either consents in writing or fails to timely object to the sale. The court may also order the sale to proceed free and clear of all liens, but any liens valid at the time of transfer will attach to the proceeds of the transfer.  § 714.16, Fla. Stat.

The Act also establishes mandatory duties for the receiver, including:

  • Preparing and retaining appropriate business records;
  • Accounting for receivership property;
  • Filing with the recording office of the county in which the real property is located a copy of the order appointing the receiver and, if a legal description of the real property is not included in the order, the legal description;
  • Disclosing to the court any fact arising during the receivership which would disqualify the receiver; and
  • Performing any duty imposed by court order, the Act, or the laws of Florida. 714.12, Fla. Stat.

In addition, the Act requires that the receiver file a final report with the court upon completion of the receiver’s duties, which must include:

  • A description of the activities of the receiver in the conduct of the receivership;
  • A list of receivership property at the commencement of the receivership and any receivership property received during the receivership;
  • A list of disbursements, including payments to professionals engaged by the receiver;
  • A list of dispositions of receivership property;
  • A list of distributions made or proposed to be made from the receivership for creditor claims;
  • If not filed separately, a request for approval of the payment of fees and expenses of the receiver; and
  • Any other information required by the court. 714.23, Fla. Stat.

How is a Receiver Compensated?

A receiver may be compensated from the receivership property for reasonable and necessary fees and expenses for performing their duties and exercising their powers. A receiver may also be compensated by the person who requested the appointment of the receiver, if the receivership does not produce sufficient funds to pay the fees and expenses. § 714.21, Fla. Stat.

What is the Court’s Role After Appointment of a Receiver?

 Even after appointment of the receiver, the court retains the right to expand, modify or limit the powers of the receiver by court order, or to remove the receiver to the extent necessary. § 714.12(4), Fla. Stat.  The court is also responsible for reviewing the receiver’s reporting, and for ultimately discharging the receiver upon court approval of the receiver’s final report and distribution of all receivership property.  § 714.23(2), Fla. Stat.  Importantly, the Act gives the court a new power to, similar to as in bankruptcy proceedings, stay certain actions to enforce claims against receivership property. Specifically, after notice and opportunity for a hearing, a court may order a stay, applicable to all persons, of any act, action or proceeding: (a) to obtain possession of, exercise control over, or enforce a judgment against all or a portion of the receivership property; and (b) to enforce a lien against all or a portion of the receivership property. § 714.14, Fla. Stat.

Conclusion

Before the Act, there was no statute that uniformly addressed the process for court appointment of a receiver for commercial real estate foreclosures, or the duties and powers of receivers. The Act offers a more uniform procedure that will hopefully provide lenders with a more predictable way to protect the lenders’ interests in the commercial property where appointment of a receiver is appropriate.


Authors:

CATEGORY: Banking & Financial Services Industry Blog, Florida Business Litigation Blog Practice Areas: , ,