United States: From Ad Hoc Tools To Procedural Rules

The Nevada legislature recently made Nevada the third state to adopt the Uniform Commercial Real Estate Receivership Act (the "Act" or "UCRERA").Time will tell whether a comprehensive statutory scheme for receivership will change prior practice under what was an ad hoc, case-by-case development of commercial real estate receivership practices in Nevada.

Historically, receivership has been an equitable tool of Nevada courts for decades. Before UCRERA, receivership was a remedy with limited authoritative procedural guidance – with few statutes and hardly any rules. Receivership is barely mentioned in the Nevada Rules of Civil Procedure. Receivership was provided by statute, such as Nevada Revised Statutes (NRS) Chapter 32. The statutes generally described circumstances for appointment of receivers such as avoiding fraudulent transfers, in aid of foreclosure (NRS 107.100), to enforce an assignment of rents (NRS 107A.26) and enforcement of judgments. Corporate law has a receivership remedy for insolvent and dissolving corporations.

Although a regularly used tool, the absence of procedural rules, and the lack of authority for use of remedies such as a receivership sale, created uncertainty, delay and expense. The arbiter of what was possible in a case was each judge, informed at times by the parties in court filings and argument at hearings. The ultimate arbiter of the receiver's power to sell real estate was the underwriter for title insurance.

UCRERA Highlights

The Act is effective for receiverships on or after October 1, 2017. While not comprehensive, it is a start.

  • Notice The statute presumes judicial action after notice and an opportunity for hearing, although ex parte receiverships are authorized in limited circumstances, subject to a bond requirement.
  • Commercial The statute applies to commercial real property, including related personal property, but excludes residential property. The statute does not explicitly address other types of receivership, such as corporations. The procedural suggestions would be useful in other types of receiverships.
  • Receivership Grounds Although the statute lays out grounds for appointment of a receiver, these largely mirror existing Nevada statutory and contractual bases.
  • Rules The statute directs the Nevada Supreme Court to adopt rules to fill in gaps, including protection against receiver self-dealing.
  • Receiver Authority The statute makes explicit routine receivership order provisions for the receiver to have exclusive possession and control over receivership property.

New Provisions for Nevada Practice

  • Looks like bankruptcy Provisions that mimic bankruptcy law are adopted, including giving the receiver the status of a lien creditor (to avoid borrower unauthorized transactions), and validating revolving liens on receivership property. The Act adopts the bankruptcy dichotomy between ordinary course of business transactions, which do not require court approval, and out of the ordinary course transactions, which do.
  • New Powers Powers that were utilized in the last recession, under the Act requiring court approval, include incurring debt, breaking borrower contracts, using or transferring receivership property.
  • Stay Continuing the adoption of bankruptcy concepts, the Act imposes a stay automatically to protect receivership property, subject to several of the exceptions provided in the Bankruptcy Code.

Receivership Sales The sale provision allows sale free and clear of the lien of the entity obtaining the appointment of a receiver, and junior interests. Unfortunately, there is no attempt to integrate this sale power into Nevada's extensive anti-deficiency and one form of action laws, leaving uncertainty as to possible borrower deficiency liability. A receivership sale is subject to credit bidding and the liens extinguished attach to proceeds. The Act adds a statutory mootness protection for buyers from receivership sales, which will comfort title insurers that previously have insured titles from receivership sales largely on faith and a lack of objection or appeal.

Contract Assumption and Breach The power to adopt (assume) or reject (breach) borrower contracts is both a bankruptcy concept and potentially powerful. The Act voids contract provisions terminating rights due to appointment of a receiver or the owner's financial condition. The implications of contract rejection on a counterparty to a timeshare or lease of residential property are addressed in the Act to avoid undue hardship.

Procedure Additional procedural provisions of the Act concern compensation and reporting by the receiver. Since the proposal of the Act, Nevada, Utah and Oregon adopted the UCRERA and it has been introduced in three other states. Although limited and not yet codified, Nevada judges may well appreciate being relieved of lengthy, opaque receivership orders in favor of clear statutory provisions.

Originally published in Nevada Bankers Association

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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