NOVEMBER 14-15, 2014, DRAFTING COMMITTEE MEETING IN
CHICAGO, IL
SUMMARY PREPARED BY GORDON E. DUNFEE, ESQ. ON BEHALF OF THE CALIFORNIA
RECEIVERS FORUMTwice a year for the past
few years, the Uniform Law Commission has assembled a group of attorneys,
title insurance experts, receivers, law professors and bankruptcy trustees
in a concerted effort to craft a uniform receivership law. The proposed
new law would be submitted to all fifty states to standardize the statutes
that apply to the creation of receivership estates, their powers, their
relationship to the parties, as well as other nuances that are near and
dear to the heart of all receivers and the courts. If enacted by the
majority of states, its effect would be dramatic in that, instead of
hundreds of laws in all of the different jurisdictions, there would
actually be some uniformity, some logic, if you will, to the madness that
presently exists in many states that have little direction (other than
Common Law) to assist the practitioners and the courts to properly and
efficiently move forward with the appointment of receivers.
At this meeting in Chicago, I had to run into
battle with the CRF flag solo without the intellect, wit, and experience
of my colleague Beverly McFarland. Unfortunately, Beverly - who has
attended and, in the recent past, successfully lobbied for sanity in the
ULC’s approach to the MCRERA - was unable to attend the Chicago meeting
due to a planned knee replacement surgery. Kudos also to CRF’s own Peter
Davidson who provided a very detailed written analysis of the MCRERA.
Similar to prior ULC committee meetings, there
were 18-20 attendees from all over the country including from New Mexico,
California, Kentucky, Virginia, Colorado, Minnesota, Utah, Missouri,
Oregon, and Alabama, all led by Chair Tom Hemmindinger and Reporter Wilson
Freyermuth.
Literally every single line and section of the
proposed MCRERA was discussed, debated, rehashed and edited as the meeting
rolled on. All attending either agreed, or agreed to disagree, on all
provisions contained in the Model Act. It is noteworthy to point out that
while there are many different types of receivership actions (rents and
profits, equity, SEC, family law, etc.), this MCRERA is narrowly focused
only on commercial real estate receiverships.
It would literally take up the entire year of
Receivership News to chronicle the entire meeting, so I will try to
summarize some of the salient points of discussion below:
Exclusions
Perhaps one of the more interesting provisions is Section 3. The committee
was clear that the Act was to apply to receiverships that were commercial
property only, i.e., this was not intended to include single family homes.
Therefore the issue of “Exclusions” was discussed. Homestead statutes in
every state will need to reconcile with this proposed uniform law. How
about home offices as a “hook” to bring the property into this Act, as a
commercial use of the real estate? Presently the MCRERA excludes single
family residences up to four units. Issues were discussed of possible
abuse of this exclusion by judgment debtors moving family members into
extra units. Unless the owner is collecting rents from the other units,
this would then fall under the commercial designation and the Act would
apply. Another persistent challenge to enactment will be the cases
involving large agricultural businesses that defaulted on their secured
loan(s), yet the borrower lives on the property. While this point was not
resolved, it was suggested that there be a “carve-out” provision allowing
the court to carve out the homestead and permit the receiver to sell the
remaining real property.
Power of the Court
We had a fascinating discussion about Section 4: Power of the Court. The
Kentucky attorneys lamented the practice of “traveling” judges and the
fact that an order from one county may not be enforced in another county
within that same state. Another issue raised was the power of the court
over commercial properties subject to a receivership order but located
outside the state of the appointing court.
Appointment
Our discussion on Section 5 helped clear up some misunderstandings on
issues of the effect of an order on property and the individual owner.
Identity of Receiver
We again had debate over Section 6: Identity of Receiver, Disclosure of
Interest. We discussed that the receiver has to be an independent, neutral
third party, unrelated in any way to the party seeking the appointment.
Many of the smaller populated states were concerned about the potential
circumstance that the parties could not produce a “neutral” person. As it
turns out, the more likely driver on this point was that the appointing
party wanted someone in their camp, and foreseeably (albeit forcibly), to
have the opposing party stipulate to that individual. Of course, I talked
myself blue in the face on this issue, that the appointment had to remain
independent.
Bond
After notice and hearing, the court will release the plaintiff’s bond
(post ex parte hearing). We discussed the timing of the receiver taking
action under the court order when a condition was the posting and filing
of the receiver’s bond: Should it be before any acts are undertaken; five
days after the order is signed; or as soon as is reasonably possible? It
was the group’s consensus that the receiver should wait until the bond is
filed with the court before acting, unless there are exigent
circumstances, under which the bond could relate back to the time of
signing of the order.
What about claims against the receiver’s bond
after discharge? Those claims may be brought only against the assets of
the estate, then the bond company. The receiver’s personal assets are
generally not available, per final order, to settle any claims against the
estate. Therein lies that very practical and frightening prospect that the
receiver generally has signed an indemnification condition to the bond
issuance and therefore, if the bond company pays any claim…..time for the
receiver to rethink career choice.
Receiver Services
Included in the Act were services the receiver could provide, if licensed
to do so: an attorney, accountant, auctioneer, or broker. I was troubled
by language giving the receiver authority to act as a broker, which in
turn entitles the receiver to make commission on a sale of receivership
estate real property. How can that not be a conflict of interest?
Automatic Stay
The discussion on Section 13 focused on the need to keep exceptions to the
stay very narrow in order to protect the receivership estate. As drafted,
this section is overly broad.
Sale of Property
Issues arose about Section 15 regarding the sale of receivership real
property and what happens to liens. The MCRERA proposed that the
receiver’s sale of commercial real estate would emerge free and clear of
liens as long as those liens are junior or subordinate. At one point,
there was talk that there should be the consent of the owner before a
receiver sale could take place. The consent requirement was ultimately
shelved. Other sale of real property by receiver issues that were
discussed included mechanics lien treatment; leasing (tenants’ rights);
and licensing. If a party can establish diversity, and move the action to
federal court, that could allow the receiver to sell real property
regardless of the underlying state’s foreclosure laws.
Executory Contracts
In Section 17, the ULC committee wanted to include a 90 day window within
which a receiver had to assume or reject a contract. If no action was
taken within that time period, it would be deemed accepted. I opposed that
specific time period, and ultimately it was removed from the Act. We also
discussed the rights of receivers to assume or reject an executory
contract. The committee wanted to have it subject to a noticed court
hearing. I argued it should be part of the receiver’s rights under the
appointing order. Other assumption/rejection issues of executory contracts
relate to franchise agreements (as the appointment in and of itself could
be grounds for cancellation by the franchisor); leases with
non-disturbance provisions; as well as insertion of “commercially
reasonable” leases that should not be rejected. However, what about
“sweetheart” leases crafted to circumvent the Act by giving below market
deals to favored tenants or to simply interfere with the appointing party?
The meeting concluded with a discussion on the
enactability of the MCRERA. Would it make a difference to the various
states’ analysis if it were titled a “Model Act” or a “Uniform Act” in
their consideration?
*Gordon Dunfee, Law Office of Gordon Dunfee, is a member of the
CRF San Diego Board of Directors and the Acting President of the
California Receivers Forum State Board of Directors. He is a receiver and
counsel to receivers. |