There is good news for commercial lenders in Maryland seeking the appointment of a receiver over a borrower or solely over real estate collateral. On April 30, 2019, Governor Hogan signed into law HB 1065, which creates an entirely new set of rules when a commercial lender wishes to have a receiver appointed as one of its default remedies. The Maryland Commercial Receivership Act (the “Act”), which will go into effect on October 1, 2019, is based in large part on the Uniform Commercial Real Estate Receivership Act, which has been enacted in a number of states since its promulgation in 2015.
The Act is a radical change from the limited receivership laws currently in effect in Maryland, which include a few references to receivership proceedings in the Corporations & Associations Article and in the Commercial Law Article, but which establish no clear rules governing receiverships. It brings structure to an area of the law which has remained unstructured, where most issues in a receivership case including, but not limited to, whether a receiver should be appointed pointed, the receiver’s powers and how the case should proceed, is dealt with on an ad hoc basis. The Act is a comprehensive statute covering grounds for obtaining a receivership, powers of a receiver, priorities of claims, and the authority of the court, including, but not limited to, the authority to approve a sale (as an alternative to foreclosure). The Act is designed to provide a more cost effective, flexible and timely alternative to a federal bankruptcy proceeding. The Act also covers an assignment for the benefit of creditors.[1]
HB 1065 initially repeals and reenacts two sections of the Commercial Law Article which grants to a receiver full title to all assets of the person or party in receivership (the “Owner”) and the power to enforce all liabilities and obligations. Furthermore, all payments, transfers and obligations incurred by the Owner which would be preferential, fraudulent, void or voidable under the Bankruptcy Code are similarly avoidable by the receiver. The Act continues present law involving: (i) a receiver’s status as a judicial lien creditor, a creditor with an unsatisfied execution and a bona fide purchaser; and (ii) the priorities of various claimants set forth in §15-102 of the Commercial Law Article.
The Act applies to: (i) a receivership relating to an interest in real property and any personal property relating thereto; (ii) a receivership established under the Corporations and Associations Article; and (iii) any other receivership in which a receiver is appointed to take control over the liquidation of the Owner’s property to wind up its affairs.[2] It does not apply to a receivership for an interest in real property improved by one to four dwelling units, with certain exceptions including, but not limited to, if the Owner is planning to sell or lease the units in the ordinary course of business or the Owner is collecting rent from a party other than an affiliate.
A court may appoint a receiver:
- before judgment, if the movant demonstrates that it has a right to property and the property or revenue-producing potential of the property: (a) is in danger of waste, loss or impairment; or (b) has been or is about to be subject of a fraudulent conveyance;
- after judgment, to effectuate the judgment or preserve non-exempt property;
- when a corporation is being dissolved; or
- to take control over the liquidation of the Owner’s property to wind up its affairs.
Under the Act, a mortgagee is entitled to a receiver in connection with a foreclosure or anticipated foreclosure. Furthermore, a receiver solely for mortgaged real estate shall be appointed if there is a default under the mortgage and:
- appointment of a receiver is necessary to protect the property;
- the mortgagor agreed in writing to such as a default remedy;
- the mortgagee is under-secured;
- the mortgagee fails to turn over rent to the mortgagor; or
- the holder of a subordinate lien obtains a receiver.
A person is disqualified from serving as a receiver if the person: (i) is an affiliate of a party; (ii) has a material financial interest in the outcome; (iii) has a debtor-creditor relationship with a party; (iv) has an equity interest in a party; (v) is or was a director, officer or employee of the Owner within the last 2 years; (vi) has been convicted of a felony; (vii) has been found liable in civil court for fraud or similar misconduct; or (viii) otherwise has a material adverse interest to a party or the estate. The person moving the court for the appointment of a receiver may nominate a receiver but the court is not obligated to accept the recommendation.
No court approval is needed by a receiver to: (a) manage receivership property; (b) operate a business, use, sell or lease property, incur unsecured debt in the ordinary course of business; (c) employ agents; (d) assert causes of action; (e) obtain a subpoena to compel an examination or production of documents; and (f) bring avoidance actions permitted under the Bankruptcy Code if the receivership relates to a corporate dissolution or otherwise is one in which a receiver is appointed to take control over the liquidation of the Owner’s property. With court approval, a receiver may: (g) incur secured debt subject to existing liens other than in the ordinary course of business; (h) use or transfer property other than in the ordinary course of business; (i) assume, reject and assign an executory contract; and (j) make distributions.
Of great importance is the receiver’s power to sell property. With court approval, the receiver may sell property out of the ordinary course of business. Subject to the following two sentences, the court in its order approving the sale may authorize a sale free and clear of a lien or other interest including, the lien of the party which initiated the receivership, any subordinate lien, any right of redemption, and any other legal or equitable interest. In a real estate receivership, the receiver can sell property free and clear of the lien of the party who requested the receivership or of a senior lienor only with the consent of the lienor; provided however that the transferred property will not be free and clear of a residential lease or commercial lease if a foreclosure would not have terminated such lease. In a corporate dissolution or receivership in which a receiver is appointed to take control over the liquidation of the Owner’s property, property may only be sold free and clear of liens if: (i) the receiver obtains the consent of the party who obtained the receivership or a senior lienholder; or (ii) the sale price is greater than the amount owed to the party that obtained the receivership plus any senior lien.
The rules relating to the assumption and rejection of executory contracts are very similar to those under the Bankruptcy Code. Assumption or rejection may be done by the receiver on notice to affected parties any time prior to the approval of the receiver’s final report. If the receiver has not taken any action by such time, the executory contract shall be deemed rejected. The rejection shall be treated as a breach of the contract immediately prior to the entry of the order appointing the receiver. An executory contract may not be assumed if: (i) applicable law would excuse a party other than the Owner from accepting performance from or rendering performance to anyone other than the Owner; (ii) the contract is one to make a loan or issue a security; or (iii) the contract expired prior to the assumption.
Another important feature of the Act is the imposition of an automatic stay (as under the Bankruptcy Code) which operates as a bar to any act to: (a) collect a debt created pre-receivership; (b) obtain possession of receivership property; or (c) create, perfect or enforce a lien or claim that arose prior to the receivership. A court may also order a stay of an act relating to the Owner if the stay is needed to protect receivership property or facilitate the receivership. What is not stayed includes: (i) a foreclosure by the party who sought the receivership; (ii) an act to perfect, maintain or continue the perfection of an interest in receivership property; (iii) setoff; and (iv) any act which would not be stayed if the proceeding was one under the Bankruptcy Code. A party may apply to the court for relief from the stay for “cause”.
Unlike a bankruptcy proceeding, if the receivership estate does not produce sufficient revenues to reimburse the receivership for its reasonable and necessary fees and expenses, the court may order such fees to be paid by: (a) the party who requested the receivership[3]; or (b) a person “whose conduct would have justified the appointment of a receiver” based on: (i) the Owner’s property being in danger of waste, loss or impairment or (ii) a fraudulent conveyance having occurred or being about to occur.
It remains to be seen to what extent the Act will be seen as a useful substitute for a bankruptcy proceeding by both lenders and borrowers. While many lenders are reluctant to file involuntary bankruptcy petitions, lenders may be more willing to file complaints for the appointment of a receiver because of the absence in the Act of penalties for frivolous requests to appoint receivers. Presumably failed complaints to appoint a receiver would be subject to the same standards currently existing with regard to frivolous pleadings, which make obtaining sanctions very difficult.
[1] As a general matter, an assignment for the benefit of creditors will be handled in the same manner as a receivership.
[2] This provision presumably refers to receivership proceeding involving an individual or a business entity other than a corporation.
[3] This raises a question as to what extent this may discourage petitions to create receiverships.
For more information, contact Louis Ebert at 410-727-6600 or email lebert@rosenbergmartin.com.