Commercial borrowers across the state of Florida continue to grapple with liquidity issues in the wake of the COVID-19 pandemic. Most industries have experienced a sharp decline in revenue over the last several months, and, by now, businesses have exhausted available CARES Act funding and loan deferrals used in an effort to bridge the gap back to economic normalcy. Even as Florida’s economy continues to reopen with nearly every county in Florida entering Phase 2 on June 5th, many companies are facing a new harsh reality — returning to financial normalcy will take far longer than the economic shutdown. And as businesses struggle to manage their financial circumstances, commercial lenders must be prepared to effectively navigate Florida’s distressed real estate market.
Fortunately for lenders, Florida’s Uniform Commercial Real Estate Receivership Act (“UCRERA”) can provide remedies and procedures to effectively handle the looming increase in commercial real property foreclosures. In March 2020, Florida’s legislature passed CS/HB 873 slating it as the eighth state to adopt UCRERA. If Governor DeSantis signs the bill, UCRERA will become effective July 1, 2020, and will provide a framework under which lenders can streamline the commercial foreclosure process and effectively protect their interests in commercial real property and any incidental personal property related to or used to operate the real property.[1] Previously governed by Florida common law and decisional authority, UCRERA codifies the right to appoint a receiver and incorporates rights and protections similar to those under the Bankruptcy Code. Below is a general overview of the differences between the appointment and administration of commercial real property receiverships under Florida common law and UCRERA.
The Authority to Appoint a Receiver and Jurisdiction
Pre-UCRERA, Florida law has long recognized that the appointment of receiver is extraordinary equitable relief.[2] Absent a showing of waste or mismanagement of the subject property, commercial lenders ordinarily cannot obtain the remedy as a matter of course because the relief is in derogation of the mortgagor’s legal right to possess the property.[3] Because of the inherent tension between the lender and mortgagor’s interests, courts must balance, on the one hand, the mortgagor’s right to own and possess the property, and, on the other hand, the commercial lender’s interests in protecting its security in the property.[4]
Before the entry of a final judgment, UCRERA largely preserves the common law principles for the appointment of a receiver.[5] Under UCRERA, a court may appoint a receiver to protect a party that demonstrates an apparent right, title, or interest in the subject real property, and its revenue producing potential or the property (i) is “subject to or in danger of waste, loss, substantial diminution in value, dissipation, or impairment,” or (ii) “has been or is about to be the subject of a voidable transaction.”[6]
After the entry of a final judgment, UCRERA significantly expands the authority for the appointment of a receiver.[7] Florida courts have traditionally found the post-judgment appointment of a receiver serves “no good purpose,” and, therefore, should only occur in limited circumstances to protect the interests of parties in the proceeding.[8] However, UCRERA expressly authorizes the appointment of a receiver after a court enters a final judgment: (i) to execute a judgment; (ii) to preserve nonexempt real property pending appeal, or after an execution returns unsatisfied and the owner refuses to apply the property in satisfaction of an outstanding judgment; (iii) to preserve real property sold in a foreclosure sale and secure its rents during the mortgagor’s right of redemption; or (iv) on equitable grounds.[9]
In pre- and post-judgment scenarios, UCRERA also provides factors to determine whether the appointment of a receiver is appropriate during the pendency of a foreclosure action or an alternative action to enforce a mortgage (such as the enforcement of entitlement to rents) — including whether: (i) the receiver’s appointment is necessary to protect the property from waste, loss, substantial diminution in value, transfer, dissipation, or impairment; (ii) the mortgagor provided written consent to appoint a receiver upon default; (iii) the owner gave written consent to appoint a receiver after default; (iv) the property and collateral securing the mortgage is of insufficient value to satisfy the outstanding obligation; (v) the owner fails to turn over to the mortgagee proceeds or rents if required under the loan documents; and (vi) a subordinate lienor successfully appoints a receiver.[10]
UCRERA codifies the common law rule granting exclusive jurisdiction to the court appointing the receiver.[11] Under UCRERA, the appointing court possesses exclusive jurisdiction to direct the receiver and determine any controversy related to the receivership or receivership property.[12]
The Receiver’s Scope of Authority
Presently, receivers in commercial foreclosures are typically appointed for limited purposes before entry of a final judgment.[13] Receivers generally preserve the status quo, preserve the property, and collect and apply rents and profits to the payment of property expenses and the mortgage.[14] However, the scope of their authority to effectuate these purposes is largely determined on a case-by-case basis.[15] Unlike the Bankruptcy Code which establishes the powers of a trustee, Florida lacks a true statutory framework under which a real property receiver operates.[16] Under current practice, the court order appointing the receiver, as limited by decisional authority, defines the scope of a receiver’s authority.[17]
Enter UCRERA, which expands the scope of a receiver’s authority.[18] UCRERA authorizes the receiver, without court approval, to, among other things: (i) collect, manage, and protect receivership property; (ii) operate a business constituting receivership property, including the preservation, use, or transfer of the property in the ordinary course of business; (iii) incur unsecured debt and pay expenses incidental to the receiver’s use or transfer of the receivership property in the ordinary course of business; (iv) assert a right, claim, cause of action, or defense of the owner relating to receivership property; (v) obtain court instruction concerning receivership property, the receiver’s powers, and the receiver’s duties; and (vi) conduct discovery relating to receivership property or any matter that may affect the administration of the receivership.[19] UCRERA permits the receiver, with court approval, (i) to engage a professional; (ii) to incur debt for the use or benefit of receivership property other than in the ordinary course of business; (iii) to improve receivership property; (iv) to use or transfer receivership property other than in the ordinary course; (iv) to adopt or reject an executory contract of the owner; (v) to pay the receiver’s compensation; (vi) to pay the compensation of each professional employed by the receiver; (vii) to recommend the allowance or disallowance of a creditor’s claim; and (viii) to distribute receivership property.[20]
UCRERA also imposes several mandatory duties on the receiver — including : (i) prepare and retain appropriate business records, including a record of each receipt, disbursement, and disposition of receivership property; (ii) account for receivership property; (iii) file with the recording office of the county in which the real property is located a copy of the order appointing the receiver with the property’s legal description; and (iv) disclose to the court information that would constitute grounds for the receiver’s disqualification.[21]
Receiverships’ New Protections––Cues From the Bankruptcy Code
Stay and Turnover Provisions
UCRERA takes several cues from the Bankruptcy Code and provides receivers and receivership property certain rights and protections normally afforded to trustees and property of the estate. UCRERA safeguards and allows the receiver to recover receivership property under provisions similar to the automatic stay and turnover provisions of sections 362 and 542 of the Bankruptcy Code.[22] Under UCRERA, the court may enter an order, after notice and a hearing, staying any act, action, or proceeding (i) to obtain possession of, (ii) to exercise control over, or (iii) to enforce a judgment or lien against receivership property;[23] and the court may enter an order enjoining any act, action, or proceeding relating to receivership property, if the injunction is necessary to protect against the misappropriation of, or waste relating directly to, receivership property.[24]
Furthermore, on demand by the receiver: (i) a person owing a matured debt or a debt payable on demand or order that constitutes receivership property shall pay the debt to or on the order of the receiver; and (ii) a person that has possession, custody, or control of receivership property shall turn the property over to the receiver, unless the property is subject to a validly perfected lien that depends on the creditor’s possession, custody, or control of the property.[25] In those circumstances, the creditor will relinquish the receivership property to the receiver after the court enters an order providing the lienor with adequate protection.[26]
Use or Transfer of Property Outside the Ordinary Course of Business
Under UCRERA, the receiver may also, with court approval, use or transfer[27] receivership property outside the ordinary course of business similar to a trustee under section 363 of the Bankruptcy Code.[28] While Florida law generally prohibits a receiver from selling receivership property, except in the rare case where the owner agrees,[29] UCRERA authorizes the pre- and post-judgment sale of receivership property free and clear of liens.[30] In either context, valid liens extinguished by the transfer attach to the sale’s proceeds with the “same validity, perfection, and priority.” [31]
However, UCRERA codifies different requirements for pre- and post-judgment sales of receivership property outside the ordinary course of business.[32] Pre-judgment, a receiver’s transfer of receivership property free and clear of liens, with the liens attaching to the sale’s proceeds, is subject to heightened requirements.[33] UCRERA expressly requires the court to hold a hearing after the receiver notifies all parties with an interest in the property, including all lienholders.[34] Furthermore, the court may approve the transaction, only if (i) the owner provides written consent of the receiver’s proposed use or transfer of receivership property; or (ii) the owner fails to object after the receiver provides reasonable advanced written notice to the owner, and the receiver establishes the transfer will prevent (a) a voidable transaction involving the property, or (b) waste, loss, substantial diminution in value, dissipation, or impairment to the property or its revenue producing potential.[35]
Post-judgment, UCRERA imposes a less stringent standard to sell receivership property outside the ordinary course of business free and clear of liens.[36] The receiver may, subject to court approval, transfer receivership property, free and clear of liens, with the liens attaching to the sale’s proceeds, (i) to execute the judgment, or (ii) to preserve nonexempt real property pending appeal, or after an owner refuses to satisfy an outstanding judgment with the property.[37] In addition, a post-judgment transfer by a receiver does not require a public auction.[38] UCRERA does, however, authorize a creditor secured by the property to credit bid on the asset subject to certain conditions.[39] The creditor may purchase the property and offset part or all of the allowed secured claim against the purchase price, if the creditor tenders funds (i) for the transfer’s expenses and (ii) for any senior secured claim extinguished by the transfer.[40]
Adoption and Rejection of Executory Contracts
Under current Florida law, receivers traditionally determine whether or not to continue performance under an executory contract relating to receivership property analogous to the trustee’s determination under section 365 of the Bankruptcy Code.[41] And like section 365 of the Bankruptcy Code, a receiver may, upon court approval, adopt or reject an owner’s executory contract relating to receivership property.[42] If the receiver adopts the contract, the court may condition the continued performance on terms “appropriate under the circumstances.”[43] In most circumstances, the receiver may, with court approval, assign the executory contract, to the extent applicable state law authorized the owner to assign the contract at the time of the receiver’s appointment.[44] In the alternative, if the receiver rejects the contract, the election (i) terminates the receiver’s right to possess or use the receivership property, (ii) constitutes a breach of the contract “effective immediately before the receiver’s appointment,”[45] and (iii) creates a third-party claim for rejection damages.[46]
UCRERA also adopts the common law rule that a receiver generally “is not obligated to carry out the executory contracts of the estate being administered.”[47] However, UCRERA appears to provide no definitive deadline by which a receiver must adopt or reject an executory contract.[48] UCRERA requires the receiver to adopt or reject an executory contract within a “reasonable time” (undefined term) after the initial appointment.[49] And the receiver’s continued performance before requesting court approval of its adoption or rejection does not preclude the receiver from subsequently seeking approval to reject the contract.[50] In short, it appears the receiver’s continued performance under the contract at the case’s onset may temporarily suspend UCRERA’s deadline to adopt or reject an owner’s executory contract.
In addition, under UCRERA, the receiver may not reject an unexpired lease on real property under which the owner is landlord if: (i) the property is the tenant’s primary residence; (ii) a person other than the mortgagee moved to appoint the receiver; or (iii) the mortgagee moved to appoint the receiver, and: (a) the lease is superior to the mortgage’s lien; (b) the tenant and mortgagee or lienholder executed a non-disturbance agreement under which the tenant will remain in possession of the property to the extent the tenant performs its obligations under the lease; (c) the mortgagee consented by a signed record or by failing to timely object that the lease violated the mortgage; or (d) the lease’s terms were commercially reasonable at the date of execution and the tenant did not know or have reason to know that the lease violated the mortgage.[51]
Attorneys’ Fees and Costs; Distribution of Receivership Property
UCRERA also provides clear guidance relating to the receiver’s compensation.[52] The court may award the receiver from receivership property the “reasonable and necessary fees and expenses” incurred during the course of performing her duties and exercising its powers.[53] In the alternative, the court may order one or a combination of the following persons to pay the receiver’s “reasonable and necessary fees and expenses” — including: (i) the person who requested the receiver’s appointment, if the receivership lacks sufficient funds to pay the fees and expenses; or (ii) a person whose conduct justified or would have justified the appointment of a receiver before entry of a judgment.[54] In other words, to shift the cost on the mortgagor, the court must find the property or its revenue producing potential was subject to or put in danger of (i) waste, loss, substantial diminution in value, dissipation, or impairment; or (ii) a voidable transaction.[55]
Conclusion
Although the promulgation of UCRERA was unrelated to the COVID–19 pandemic, its existence — if signed into law — will provide lenders a substantially better framework in contemplating the entitlement to the appointment of a receiver and the scope of her authority once appointed.
[1] § 714.04(1), Florida Statutes.
[2]See Edenfield v. Crisp, 186 So.2d 545, 548 (Fla. 1966) (“The power of a Court of equity to appoint a receiver will not be exercised merely because it can do no harm.”).
[3] Barnett Bank of Alachua County, N.A. v. Steinberg, 632 So. 2d 233, 234 (Fla. 1st DCA 1994).
[4] ANJ Future Investments, Inc. v. Alter, 756 So. 2d 153, 154 (Fla. 3d DCA 2000) (“The appointment of a receiver, as an equitable remedy, is not a matter of right even if the mortgage so provides.... [T]he trial court must balance the mortgagor's right to own and possess its property against the interests of the mortgagee in protecting its security in the property.”) (quoting Seasons Partnership I v. Kraus–Anderson, Inc., 700 So.2d 60, 61 (Fla. 2d DCA 1997)).
[5] See § 714.06(1)(a)1., 2., Florida Statutes. UCRERA also preserves the common law requirement that the receiver post a bond upon appointment. Id. § 714.08(1)(a)–(d). In most circumstances, the receiver must post a bond with the court (i) conditioned on the “faithful discharge" of its duties; (ii) with one or more court-approved sureties; and (iii) effective as of the date of the receiver’s appointment. Id. § 714.08(1)(a)–(d). However, UCRERA allows the court to approve the receiver’s use of an alternative security in lieu of a bond, such as a letter of credit or deposit funds. Id. § 714.08(2). Furthermore, the court may authorize a receiver to act before posting a bond or alternatively a security, if the action is necessary to prevent or mitigate “immediate injury, loss, or damage” to the party who sought the appointment, or “immediate waste, dissipation, impairment, or substantial diminution in value” to the receivership property. Id. § 714.08(3).
[6] See id. § 714.06(1)(a)1., 2. Prejudgment receivers can also be appointed on equitable grounds. Id. § 714.06(1)(c).
[7] See id. § 714.06(1)(b)–(d).
[8] U.S. Bank Nat. Ass’n v. Cramer, 113 So. 3d 1020, 1023 (Fla. 2d DCA 2013) (quoting Fed. Land Bank of Columbia v. Evans, 143 So. 403, 404 (Fla. 1932)).
[9] § 714.06(1)(b)–(d), Florida Statutes.
[10] Id. § 714.06(2)(a)–(f).
[11] Knickerbocker Tr. Co. v. Green Bay Phosphate Co., 56 So. 699 (Fla. 1911).
[12] § 714.05, Florida Statutes.
[13] DeSilva v. First Cmty. Bank of Am., 42 So. 3d 285, 290 (Fla. 2d DCA 2010).
[15] See, e.g., O’Neal v. Gen. Motors Corp., 841 F. Supp. 391, 398-399 (M.D. Fla. 1993).
[16] In alternative contexts, the Florida Statutes provide guidance on a receiver’s substantive powers and duties. See, e.g., § 608.4492, Florida Statutes (providing procedures for receiverships of limited liability company and short nonexclusive list of powers receiver may possess); see also § 617.1432, Florida Statutes (providing procedures for receiverships of nonprofit corporations).
[17] See Shubh Hotels Boca, LLC v. Federal Deposit Ins. Corp., 46 So.3d 163, 167 (Fla. 4th DCA 2010).
[18] § 714.12(1)(a)–(h), Florida Statutes.
[19] Id. § 714.12(1)(a)–(f). The court may enter an order limiting the receiver’s statutory authority. Id. § 714.12(1).
[20] Id. § 714.12(2)(a)–(g).
[21] Id. § 714.12(3)(a)–(e).
[22] Id. §§ 714.11(1), 714.14(1).
[23] Id. § 714.14(1)(a), (b).
[24] § 714.14(2). UCRERA also enumerates certain exceptions. § 714.14(5)(a)–(d). Any order does not operate as a stay of or injunction against (i) any act, action, or proceeding to foreclose or enforce a mortgage by the movant seeking appointment of the receiver; (ii) any act, action, or proceeding, to perfect, or maintain, or continue the perfection of, an interest in receivership property; (iii) the commencement or continuation of a criminal proceeding; or (iv) a governmental unit establishment of a tax liability against the receivership property or the owner of such receivership property. Id.
[25] Id. § 714.11(1)(a)–(b), (3).
[27] UCRERA authorizes the receiver’s use or transfer receivership property by sale, lease, license, exchange or other disposition. Id. § 714.16(2).
[28] Id. § 714.16(2), (3).
[29] Shubh Hotels Boca, LLC v. FDIC, 46 So.3d 163 (Fla 4th DCA 2010).
[30] § 714.16(4), Florida Statutes.
[32] See id. § 714.16(2), (3).
[33] Id. § 714.16(2)(a)-(b), (4).
[35] Id. § 714.16(2)(a)-(b).
[37] Id. § 714.16(3), (4).
[40] Id. Florida common law generally grants a secured creditor the right to credit bid on real property. See Tucker v. Crown Corp., 183 So. 740, 745 (Fla. 1938). However, UCRERA does not expressly authorize the right to credit bid before entry of a final judgment. See § 714.16(5), Florida Statutes. Despite no express statutory authority, it is unlikely that the Florida Legislature intended to eviscerate a lien creditor’s pre-judgment right to credit bid. The legislative history makes no distinction between pre- and post-judgment credit bidding. See generally Fla. H.R. Comm. on Jud., Subcomm. on Civil Justice, Post-Meeting Analysis 3 (Mar. 24, 2020), https://www.flsenate.gov/Session/Bill/2020/783?Tab=Analyses. Moreover, UCRERA’s broad language authorizing the receiver to transfer receivership property by “other disposition” outside the ordinary course of business may provide an alternative statutory basis for a secured creditor to credit bid on real property before entry of a final judgment. § 714.16(2), Florida Statutes.
[41] See Bayshore Executive Plaza P'ship v. Fed. Deposit Ins. Corp., 750 F. Supp. 507, 511 (S.D. Fla. 1990).
[42] § 714.17, Florida Statutes.
[46] Id. § 714.17(5)(a), (b).
[47] See Real Estate Marketers, Inc. v. Wheeler, 298 So. 2d 481, 483 (Fla. 1st DCA 1974).
[48] See id. § 714.17(2), (3).
[51] Id. § 714.17(8)(a)–(c).
[54] Id. § 714.21(2)(a)–(b).
