A Brave New World for Lenders Under the North Carolina Commercial Receivership Act

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2020. What a year! While many of us were expecting that an economic downturn was due after so many years of positive economic growth, none of us were expecting it to come in quite this fashion. But one positive change has come about (and just in time too) – the passage of North Carolina’s new Commercial Receivership Act. What’s the big deal, you ask? Well, considering the fact that portions of the old receivership act had not been updated since 1885 (the same year the Statue of Liberty arrived in New York Harbor), it was high time for an upgrade. And what an upgrade it was!

Facts

The process for implementing a new receivership statute in North Carolina has been ongoing since 2015. Yours truly was one of the two members of the Bankruptcy Section of the N.C. Bar Association tasked with putting together a first draft of the new legislation. After five years of work by numerous people, the new Receivership Act was finally signed into law on June 25, 2020. It becomes effective on January 1, 2021 and applies to all receiverships commenced on or after that date. The text of the new act can be found here.

Highlights

The new Receivership Act has numerous provisions of interest to lenders. Those include:

  • Expanded grounds for appointment of receiver. To get a pre-judgment receiver appointed under the old statute, a lender typically had to prove that its collateral was “in danger of being lost, or materially injured or impaired” (which was a pretty tough standard). The new law now provides for the appointment of a receiver if the debtor is insolvent or failing to pay its debts when they become due. It also provides that in a foreclosure proceeding, a receiver can be appointed simply because the debtor “agreed in a signed record to the appointment of a receiver on default” (standard language in most deeds of trust). 
  • The ability to sell assets free and clear of liens. The new law permits a receiver (with court approval) to sell receivership property free and clear of the liens of creditors, with the liens attaching to the sale proceeds. This concept is familiar in bankruptcy but was not previously a feature of North Carolina state law. The addition of this mechanism will make state court receiverships much more appealing to first priority lenders who would prefer to avoid the bankruptcy process and also liquidate collateral without a foreclosure. 
  • Requirement for persons who owe money to the debtor to pay the receiver. The law specifically provides that anyone who owes money to the debtor and has notice of the receivership must pay their obligation directly to the receiver. The statute is clear that payment to any other party will not satisfy the debt.  (I can just see a tenant saying “I already paid my rent,” and the receiver gets to say, “No you didn’t, cause you didn’t pay it to me!”)
  • Consolidation of actions. The law provides that when a receiver is appointed and lawsuits are pending against the debtor, the receiver can have all of those lawsuits transferred to the court in which the receivership is pending. 
  • Limited automatic stay. Upon the appointment of a receiver, the new law provides for an automatic stay (similar to bankruptcy). That stay prohibits any party from trying to obtain possession of receivership property or enforcing a judgment against the property. Unlike in bankruptcy, however, the stay does not prohibit a lender from exercising its right of setoff (e.g., against bank account balances). 
  • North Carolina Business Court. Receiverships involving more than $5 million in assets can now be designated to the North Carolina Business Court. Given the high level of sophistication of business court judges (and the preference to stay in front of a single judge for the life of the receivership), this is a welcome change that will make large receiverships function much more like bankruptcy cases. 

The Moral

Receiverships are an important arrow in a lender’s quiver and can often be used to good effect, particularly when dealing with income-producing real property (e.g., multifamily, retail, office, and industrial) or companies that have much greater value while operational (e.g., convenience stores and manufacturers). The new Receivership Act finally brings North Carolina into the 21st century and provides an attractive alternative to bankruptcy. Expect to see renewed interest and activity in this area starting in January.  

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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