By Gary Freedman, Frank Terzo and Daniel Halperin

Law360 (July 10, 2020, 5:12 PM EDT) --

Gary Freedman

Frank Terzo

Daniel Halperin

Commercial borrowers across 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 the Coronavirus Aid, Relief and Economic Security Act funding and loan deferrals used to bridge the gap back to economic normalcy.

Even as Florida's economy continues to reopen, many companies now face a new harsh reality: Returning to financial normalcy will take far longer than the economic shutdown.

Fortunately, Florida's Uniform Commercial Real Estate Receivership Act can provide remedies and procedures to effectively handle the looming increase in commercial real property foreclosures. On June 27, Gov. Ron DeSantis signed the bill slating it as the eighth state to adopt the UCRERA.

The UCRERA, which became effective July 1, provides a framework under which lenders can streamline the commercial foreclosure process and effectively protect their interests in commercial real property.[1]

The Authority to Appoint a Receiver

Pre-UCRERA, Florida common law recognized that the appointment of a receiver as extraordinary equitable relief.[2] Absent a showing of waste or mismanagement of the property, commercial lenders could not obtain the remedy as a matter of course because the relief was in derogation of the mortgagor's legal right to possess the property.[3]

The inherent tension required courts to 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]

Prejudgment, the UCRERA preserves the common law principles for the appointment of a receiver.[5] Under the UCRERA, a court may appoint a receiver to protect a party that demonstrates the real property, or its revenue-producing potential (1) is "subject to or in danger of waste, loss, substantial diminution in value, dissipation, or impairment," or (2) "has been or is about to be the subject of a voidable transaction."[6]

However, the UCRERA expands the authority for the appointment of a receiver post-judgment.[7] Florida courts traditionally found the post-judgment appointment of a receiver served no good purpose, and, therefore, should only occur in limited circumstances to protect the interests of parties in the proceeding.[8]

But the UCRERA expressly authorizes the appointment of a receiver post-judgment based on traditional equitable grounds and (1) to execute a judgment; (2) to preserve nonexempt real property, or (3) to secure its rents.[9]

The Receiver's Scope of Authority

Before the UCRERA, Florida lacked a true framework under which a real property receiver could operate.[10] Receivers in commercial foreclosures were appointed prejudgment for limited purposes.[11] Receivers preserved the status quo, preserved the property, and collected and applied rents and profits to the payment of property expenses and the mortgage.[12]

However, the scope of their authority to effectuate these purposes was determined on a case-by-case basis.[13] The court order appointing the receiver, as limited by decisional authority, defined the scope of a receiver's authority.[14]

Enter the UCRERA, which expands and provides certainty to the scope of a receiver's authority.[15] The UCRERA authorizes the receiver to carry out certain functions absent court approval, including among other things:

• Collecting receivership property;
• Operating a business comprised of receivership property;
• Incurring unsecured debt and paying expenses in the ordinary course of business; and
• Asserting a right or claim of the owner relating to receivership property.[16]

The UCRERA permits the receiver, with court approval, to, among other things:

• Incur debt for the use of receivership property outside ordinary business;
• Improve receivership property;
• Use or transfer receivership property outside the ordinary course;
• Adopt or reject an executory contract of the owner; and
• Distribute receivership property.[17]

Receiverships' New Protections: Cues From the Bankruptcy Code

Stay Provisions

The UCRERA takes several cues from the Bankruptcy Code and provides certain rights and protections normally afforded to trustees and property of the estate. The UCRERA safeguards receivership property under provisions similar to the automatic stay under section 362 of the Bankruptcy Code.[18]

Under the UCRERA, the court may enter an order, after notice and a hearing, staying any act, action, or proceeding (1) to obtain possession of, (2) to exercise control over, or (3) to enforce a judgment or lien against receivership property.[19]

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.[20]

Use or Transfer of Property Outside the Ordinary Course of Business

Under the UCRERA, the receiver may, with court approval, use or transfer[21] receivership property outside the ordinary course of business similar to a trustee under Section 363 of the Bankruptcy Code.[22]

While Florida law prohibited a receiver from selling receivership property, except in the rare case where the owner agrees,[23] the UCRERA authorizes the pre- and post-judgment sale of receivership property free and clear of liens.[24] In either context, valid liens extinguished by the transfer attach to the sale's proceeds with the "same validity, perfection, and priority."[25]

However, the UCRERA codifies different requirements for pre- and post-judgment sales of receivership property outside the ordinary course of business.[26]

Prejudgment, the court may approve the transaction, after notice and hearing, only if (1) the owner provides written consent; or (2) the owner fails to object, and the receiver establishes the transfer will prevent a voidable transaction involving the property, or waste, loss, substantial diminution in value, dissipation or impairment to the property or its revenue producing potential.[27]

Post-judgment, the UCRERA imposes a less stringent standard to sell receivership property outside the ordinary course of business free and clear of liens.[28] The receiver may, subject to court approval, transfer receivership property, free and clear of liens.[29]

In addition, a post-judgment transfer by a receiver does not require a public auction.[30] The UCRERA does, however, authorize a creditor secured by the property to credit bid on the asset subject to certain conditions.[31]

The creditor may purchase the property and offset the allowed secured claim against the purchase price, if the creditor tenders funds (1) for the transfer's expenses and (2) for any senior secured claim extinguished by the transfer.[32]

Adoption and Rejection of Executory Contracts

Under the UCRERA, a receiver may, upon court approval, adopt or reject an owner's executory contract relating to receivership property.[33] 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.[34]

In the alternative, if the receiver rejects the contract, the election (1) terminates the receiver's right of possession, (2) constitutes a breach of the contract "effective immediately before the receiver's appointment,"[35] and (3) creates a third-party claim for rejection damages.[36]

Attorney Fees and Costs

The UCRERA also provides clear guidance relating to the receiver's compensation.[37] 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 her powers.[38]

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: (1) the person who requested the receiver's appointment, if the receivership lacks sufficient funds to pay the fees and expenses; or (2) a person whose conduct justified or would have justified the appointment of a receiver before entry of a judgment.[39]

Conclusion

Although the promulgation of the UCRERA was unrelated to the COVID-19 pandemic, its existence 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.

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Gary Freedman and Frank Terzo are partners, and Daniel Halperin is an associate, at Nelson Mullins Riley & Scarborough LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[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] 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).

[11] DeSilva v. First Cmty. Bank of Am. , 42 So. 3d 285, 290 (Fla. 2d DCA 2010).

[12] Id.

[13] See, e.g., O'Neal v. Gen. Motors Corp. , 841 F. Supp. 391, 398-399 (M.D. Fla. 1993).

[14] See Shubh Hotels Boca, LLC v. Federal Deposit Ins. Corp ., 46 So.3d 163, 167 (Fla. 4th DCA 2010).

[15] § 714.12(1)(a)–(h), Florida Statutes.

[16] Id. § 714.12(1)(a)–(f). The court may enter an order limiting the receiver's statutory authority. Id. § 714.12(1).

[17] Id. § 714.12(2)(a)–(g).

[18] Id. §§ 714.11(1), 714.14(1).

[19] Id. § 714.14(1)(a), (b).

[20] § 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.

[21] UCRERA authorizes the receiver's use or transfer receivership property by sale, lease, license, exchange or other disposition. Id. § 714.16(2).

[22] Id. § 714.16(2), (3).

[23] Shubh Hotels Boca, LLC v. FDIC , 46 So.3d 163 (Fla 4th DCA 2010).

[24] § 714.16(4), Florida Statutes.

[25] Id.

[26] See id. § 714.16(2), (3).

[27] Id. § 714.16(2)(a)-(b).

[28] Id. § 714.16(3).

[29] Id. § 714.16(3), (4).

[30] Id. § 714.16(5).

[31] Id.

[32] 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.

[33] § 714.17, Florida Statutes.

[34] Id. § 714.17(6).

[35] Id. § 714.17(5).

[36] Id. § 714.17(5)(a), (b).

[37] Id. § 714.21.

[38] Id. § 714.21(1).

[39] Id. § 714.21(2)(a)–(b).

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