Mitigating Risks Associated with Hotel, Restaurant and Entertainment Industry Economic Challenges: Part 6 – Considerations for the Appointment of a Receiver During Commercial Foreclosures

As discussed in parts 1-4 of this series, lenders have several options prior to instituting a commercial foreclosure action.  Additionally, as briefly discussed in part 5 of this series, during the foreclosure action, lenders have options to try to preserve the value of the underlying collateral and to minimize further losses.  One of those options is the appointment of a receiver.  This article discusses the appointment of receivers during the commercial foreclosure action and provides considerations for whether to seek appointment of a receiver.

The Uniform Commercial Real Estate Receivership Act

Receivership had previously been governed by common law principles.  Until recently, there was no statute that uniformly addressed the process for court appointment of a receiver.  Effective July 1, 2020, the Florida Legislature enacted the Uniform Commercial Real Estate Receivership Act (the “Act”), which is found at Chapter 714 of the Florida Statutes.  The Act offers a more uniform procedure for the appointment of receivers and the powers and duties imposed on receivers.

The Act applies to receivers that were appointed on or after July 1, 2020.  §714.28, Fla. Stat. (2020).  Common law principles would apply to receivers appointed prior to July 1, 2020.  While the traditional common law grounds for appointment of a receiver remain, the Act provides additional grounds and valuable options to lenders.

My colleague, Ryan Maloney, Esq. recently wrote a great article on this new Act and its impact on commercial foreclosures. See Overview of Florida’s New Uniform Commercial Real Estate Receivership Act.

Although the Act governs the appointment of receivers after July 1, 2020, it is important to understand the common law purpose and considerations for the appointment of receivers.   While some of the considerations may be replaced or supplemented by the Act, since the Act is in its infancy, Courts may still look to the common law in situations where the Act is silent on a particular topic.

General Powers of a Receiver

Generally, a receiver is either passive or active, depending on the authority given to the receiver by the appointing court.  A passive receiver is generally appointed to conserve and maintain the status quo of property during the commercial foreclosure process.  On the other hand, an active receiver can assume a much more active role in the subject property.  For example, the receiver may be able to reject executory contracts of the receivership estate during the receivership, sell receivership property free and clear of existing liens, settle claims with the approval of the court and assert rights held by the borrower.  The Act also provides additional statutory powers that are now afforded to receivers.   See §714.12, Fla. Stat. (2020).

Business Reasons to Seek Appointment of a Receiver

There are a number of reasons why a receivership may be attractive to a lender.  For example, the appointment of a receiver may remove the borrower from possession or control of property and operation of a business.  If a lender believes the borrower is a poor manager or untrustworthy, bringing in a professional could help right a sinking ship, or at least preserve the status quo and prevent further losses during the pendency of the foreclosure proceedings.

Additionally, a receiver can audit the borrower’s records to determine whether there has been any type of fraud or mismanagement.  The receiver can then provide accurate information to the lender and the court during the foreclosure proceeding.

Common Law Circumstances That May Warrant Appointment of a Receiver

Traditionally, the appointment of a receiver was considered to be an extraordinary remedy, which must be exercised with caution as it is in derogation of the legal owner’s fundamental right to possession of the property.  See Barnett Bank, N.A. v. Steinberg, 632 So. 2d 233, 234 (Fla. 1st DCA 1994).  Thus, even a contractual provision providing for the appointment of a receiver has been found insufficient on its own to justify the appointment of a receiver. Carolina Portland Cement Co. v. Baumgartner, 128 So. 241, 247 (1930).  Nevertheless, trial courts have been afforded broad discretion to appoint a receiver.  See Colley v. First Fed. Savs. & Loan Ass’n, 516 So. 2d 344, 345 (Fla. 1st DCA 1987).

At common law, receivers were generally not appointed unless there was a strong reason to believe that the party asking for a receiver would recover or prevail in the action.  See Carolina Portland, 128 So. at 248.  Further, the party seeking a receiver was required to state sufficient verified allegations or provide evidence supporting the need for appointment of a receiver.   See Colley, 516 So. 2d at 346.

With this said, there were certain situations in which courts would typically appointment a receiver.  For example, courts have permitted receivers when mortgagors had pledged rents and profits but refused to hand them over.  See Colley, 516 So. 2d at 345-46 (citing Carolina Portland, 128 So. at 248).  Courts have also appointed receivers in order to assist in winding up or dissolution of an LLC or corporation.  See Wenzel v. Burman, 76 So. 3d 1005, 1006 (Fla. 3d DCA 2011) (affirming the appointment of a receiver because a corporation’s directors were deadlocked).

Additionally, courts have appointed receivers in an effort to mitigate the risk of loss, waste, destruction, or serious impairment of property.  See MB Plaza, LLC v. Wells Fargo Bank, Nat’l Ass’n, 72 So. 3d 205, 207 (Fla. 2d DCA 2011) (“Waste would have provided a justifiable basis for the trial court to exercise its discretion.”); U.S. Bank Nat’l Ass’n v. Cramer, 113 So. 3d 1020, 1024 (Fla. 2d DCA 2013) (holding that it was an abuse of discretion for the trial court not to appoint a receiver where the mortgage contained a provision providing for a receiver upon default and the property could not be sold in a timely manner because of environmental contamination); see also Alafaya Square Ass’n, Ltd. v. Great W. Bank, 700 So. 2d 38, 40 (Fla. 5th DCA 1997) (reversing the appointment of a receiver because the mortgagor requested release of sequestered rents by the court in a timely manner to make necessary repairs to the parking lot and paint, but the mortgagor refused to authorize use of the sequestered funds).

Conclusion

Appointment of a receiver is a valuable tool in a lender’s arsenal during a commercial foreclosure proceeding.  Understanding the common law on receivers and the newly enacted Uniform Commercial Real Estate Receivership Act will allow a lender to make informed decisions during the commercial foreclosure process to protect assets and potentially limit further losses.  Hopefully, the new Act will make it easier for the appointment of receivers and streamline the process.

Next, part 7 of this series will discuss how to expedite the commercial foreclosure process by requesting an order to show cause under Section 702.10, Florida Statutes.

Continued Reading in this Mitigating Risks Associated with Hotel, Restaurant and Entertainment Industry Economic Challenge Series:

• Part 1: Introduction and Considerations When Hotels and Restaurants Default on Their Mortgages
• Part 2: Pre-Foreclosure Loss Mitigation Options
• Part 3: Commercial Mortgage Default Options Including Acceleration and Enforcement of Personal Guaranties
• Part 4: Assignment of Rents Under Section 697.07, Florida Statutes
• Part 5: Commercial Foreclosures 101
• Part 7: Expediting the Commercial Foreclosure Process Under Section 702.10, Florida Statutes
• Part 8: Post-COVID-19 Considerations for Lending in the Hospitality Industry