Commercial Lenders “Receive” Good News with Michigan’s Adoption of the Uniform Commercial Real Estate Receivership Act

On May 7, 2018, Michigan’s version of the Uniform Commercial Real Estate Receivership Act (the “Act”) will go into effect—bringing long-overdue clarity to the laws surrounding receivers and receiver-managed properties. For decades, lenders, borrowers, owners, property managers, and other parties in business (or litigation) with receiver-managed properties in Michigan have had to rely upon a patchwork of case law and the limited guidance offered by MCR 2.622 in trying to predict how a court will appoint, empower, and oversee a receiver. The Act attempts to resolve many of these issues by providing clearly stated standards and rules governing the powers and judicial oversight of receivers in Michigan. Michigan now becomes the fifth state to adopt the Act, joining Utah, Oregon, Nevada, and Tennessee (with West Virginia, Kentucky, and Oklahoma also introducing legislation in 2018 to adopt the Act).

Perhaps the most important issue that appears to have been largely settled by the Act is the long-debated question: Is a court-approved sale of a property under a receivership made free and clear of existing junior liens and rights of redemption? The Act answers “yes” to this question by empowering the receiver to sell, lease, license, exchange, or otherwise dispose of the receivership property free and clear of junior liens and any rights of redemption; however, senior liens will be unaffected. Any lienholder with a junior lien extinguished by the sale will acquire a lien over the sale proceeds. This means that receivership sales will now be a more viable alternative to foreclosures in Michigan that allow lenders to both minimize the delays often associated with the foreclosure process and to dispose of their secured collateral without ever taking title to the property. However, lenders should be mindful of the potential costs associated with a receivership sale, including broker commissions, receiver compensation, legal fees, and closing fees which could, in some cases, exceed the costs and fees associated with the foreclosure by advertisement process.

The Act also provides a standard set of rules for courts to apply in the appointment of receivers and in the receiver’s powers to manage the property, including the receiver’s ability to receive, collect, or dispose of proceeds from the property. Other notable features of the Act include:

• Upon entry of an order appointing a receiver, an automatic stay shall go into effect prohibiting further actions or proceedings related to obtaining possession or control of, or enforcing a judgment against the receivership property (NOTE: The Act provides for a few exceptions to the automatic stay, including an exception allowing the party seeking the appointment of a receiver to simultaneously pursue an action for judicial foreclosure).
• With court approval, a receiver may use receivership property other than in the ordinary course of business by sale, lease, license, exchange, or other disposition.
• Receivership property may be transferred by means other than a public auction sale.
• A creditor holding a valid lien may purchase the receivership property by bidding part or all of its debt against the purchase price so long as the creditor tenders sufficient funds to cover both the expenses of the sale and any amounts secured by any senior lien extinguished by the transfer.
• The Act also reforms Michigan’s “one action” rule for foreclosures by advertisement by providing that a mortgagee’s request for appointment of a receiver is not an “action” within the meaning of MCL 600.3204(1)(b). Now, a mortgagee that elects to seek the appointment of a receiver will not be barred by Michigan’s “one action” rule from later initiating a foreclosure by advertisement. (NOTE: Through separate legislation that also becomes law on May 7, 2018, MCL 600.3204(1)(b) was revised to provide that “an action or proceeding for the appointment of a receiver is not an action or proceeding to recover a debt.”)
• Receivers shall have the same status as a lien creditor under Article 9 of the UCC for personal property/fixtures and the same status as a properly recorded lienholder for a receivership over real property.

While it remains to be seen how Michigan Courts will interpret and apply these statutory changes, the Act will undoubtedly have a wide-sweeping impact on the efficiency and effectiveness of using receiverships as a remedy to protect, manage, and/or dispose of commercial real estate in Michigan. Dykema will continue to monitor this developing area of the law and observe how Michigan courts apply the Act. If you have questions about the matters raised in this alert, you may contact Michael Vogt at 248-203-0739, Adam Fishkind at 248-203-0749, or your regular Dykema contact.