Michigan's Uniform Commercial Real Estate Receivership Act: Creating clarity or new issues?
Receiverships have been utilized in Michigan to address both distressed businesses and commercial real estate for decades. Historically, there was little clarity regarding the process for having a receiver appointed, the appropriate timing for the appointment, and what the receivership process would entail. This was due to the limited statutory authority from the Construction Lien Act and court rules regarding post judgment supplementary proceedings. In May 2014, the Michigan Supreme Court began to address this uncertainty by amending Michigan Court Rules 2.621 and 2.622 to establish:
- Rules relating to the appointment of receivers and the orders appointing them
- The criteria receivers must meet in order to be qualified for appointment
- The duties of receivers
- The appropriate procedures for the payment of receivers and professionals.
UNIFORM COMMERCIAL REAL ESTATE ACT
On May 7, 2018, a version of the Uniform Commercial Real Estate Act adopted by the Michigan legislature and signed by Gov. Rick Snyder will go into effect. The act is designed to clarify some aspects of receivership proceedings for commercial real estate and establish clear guidelines for the receivership process. However, portions of the act are not consistent with the Michigan Court Rules amended in 2014, which apply to all receiverships – not just receiverships for commercial real estate. These inconsistencies may create additional uncertainty and disputes in the future.
Specifically, Section 5 of the Uniform Commercial Real Estate Act provides that the “procedure for the selection, appointment, removal, and compensation of a receiver under this act is as established by rule of the supreme court.” For those four topics, it would follow that the Michigan Court Rules govern. However, in Section 7, the act sets forth criteria and a procedure for the selection of a receiver that are inconsistent with the rules. For example, Section 7(4) of the Uniform Commercial Real Estate Act provides that “a person seeking appointment of a receiver may nominate a person to serve as a receiver, but the court is not bound by the nomination.” It could be argued that the act essentially gives the court the unfettered ability to ignore the requests of the parties with skin in the game to appoint previously screened, highly experienced professionals who were selected to maximize the value of the nominating creditor’s collateral.
Contrast this with the Rule 2.622(B), which provides that:
- The party or parties shall nominate a receiver by stipulation or by the party seeking the appointment, if the other party does not raise an objection within 14 days.
- The nominating party or parties must describe how the nominated receiver has the required competence, qualifications, and experience.
- The court “shall appoint the receiver nominated by the party or parties, unless the court finds that a different receiver should be appointed.”
- If the court makes an initial determination that a different receiver should be appointed, it must “state its rationale” after considering the same factors used by the parties in their proposal for the receiver.
The process established in Rule 2.622(B) is much more stringent than the directive set forth in Section 7 of the Uniform Commercial Real Estate Act, and requires the court to justify its decision not to appoint the receiver nominated by the party or parties.
Additional inconsistencies can be found in:
- Section 7 of the Uniform Commercial Real Estate Act and Rule 2.622(B)(6) and (7), which set forth the respective circumstance that would disqualify a potential receiver. Although there is some overlap between the disqualifying circumstances, there are notable differences.
- Section 21 of the Uniform Commercial Real Estate Act and Rule 2.622(F), which set forth directives regarding compensation of the appointed receiver. Section 21(1) provides that the “court may award a receiver from receivership property the reasonable and necessary fees and expenses of performing the duties of the receiver and exercising the powers of the receiver.” Section 21(2) provides that the court can order that the fees and expenses be paid by the party requesting the appointment of the receiver, if the receivership does not produce sufficient funds to cover the fees and expenses, or by the person whose conduct justified or would have justified the appointment of the receiver. Contrast this with Rule 2.622(F)(2), which provides, in part, that the order appointing the receiver shall specify “the source and method of compensation of the receiver.” Rule 2.622(F)(5) goes on to specify the application process for the payment of interim or final fees and expenses. It is unclear which portions of Rule 2.622(F) must be followed by a receiver to receive compensation for fees and expenses in a commercial real estate receivership.
- Section 22(1) of the Uniform Commercial Real Estate Act, providing that the court may remove a receiver “for cause,” and Rule 2.622(I), providing that: “[a]fter notice and a hearing, the court may remove any receiver for good cause shown.”
One inconsistency of particular importance relates to the fiduciary duties of the receiver. The 2014 amendment to the Michigan Court Rules included a clarification to formally establish to whom the receiver owes fiduciary duties, an area in which case law was inconsistent. Rule 2.622(A) limits these fiduciary duties to “all persons appearing in the action or proceeding.” The act makes no mention of the fiduciary duties of a receiver, which may cause confusion and reopen this as a potential area for litigation by unsecured creditors when they perceive receivers to be acting solely for the benefit of the lenders that sought their appointment.
Furthermore, it is unclear why the clarity intended to be provided by the Uniform Commercial Real Estate Act was limited to commercial real estate receiverships when clarity, as well as other benefits of the act such as the provisions on the rejection or assignment of executory contracts and the stay of actions against receivership property, would also be beneficial for receiverships over financially distressed entities that are not in the commercial real estate business.
In fact, because of unclear drafting, the argument could be made that the Uniform Commercial Real Estate Act may be applicable in the case of a business that leases, but does not own, commercial real estate. Section 4(1) of the Act provides that it “…applies to a receivership for an interest in real property…” As such, it would (and perhaps should) apply to a business with a lease or leases of real property. This application would be particularly appropriate in the case of multi-location retail businesses, where the leases may in effect be the businesses’ most valuable assets and the lenders’ primary collateral. This is especially true given the ability to reject and to assign executory contracts given to receivers under Sections 12 and 17 of the act, which can be used as a tool to maximize the value of a debtor’s leases.
It would seem that if the provisions of the Uniform Commercial Real Estate Act are to truly clarify the receivership process, the act should be made applicable to all business receiverships, not just those involving commercial real estate. In the meantime, the inconsistencies between the Uniform Commercial Real Estate Act and the Michigan Court Rules may lead to additional confusion and disputes, and will likely result in some creative legal arguments in commercial real estate receiverships until they too are addressed.