By: Anissa Hudy, Esq. and Sara MacWilliams, Esq.
On February 6, 2018, Governor Snyder signed legislation which adopts the Uniform Commercial Real Estate Receivership Act in Michigan. The Act takes effect 90 days after it is enacted. You can read the entire text of the Act here:
Link this language: http://www.legislature.mi.gov/(S(oa5uy1bbqlmnakmrq54szas4))/documents/2017-2018/billcurrentversion/House/PDF/2017-HCVBH-4471-9229.PDF
Once a topic relegated to foreclosure cases, suddenly everyone is talking about receiverships. This is the first in a series about Michigan receivership basics that all business and property owners need to know.
What Property and Business Owners Need To Know About Receivership: The Basics
1. What is a receiver? A receiver is someone appointed by the court to oversee the management and/or disposition of property usually as part of a lawsuit. Basically, the receiver takes control of the property to ensure proper management, preservation and stabilization during the pendency of the receivership.
2. Do receivers have to be appointed if a property is the subject of litigation? Absolutely not. Sometimes, if the property has an equity cushion or a competent management team in place, spending money to bring in a receiver depletes resources. In other situations, however, the existing management may be allowing fraud, devaluations or waste to occur to the property, and getting a neutral third party (receiver) in to competently manage the property is necessary to stabilize it and protect against devaluation. Typical times a receiver would be appointed are in commercial lending cases involving foreclosures, shareholder disputes or divorces involving significant assets or property.
3. What other situations are appropriate for receivers? In the case of death of the property owner, a receiver may be appointed while ownership is being resolved through probate court. In divorces, where property or a business is owned by two spouses going through a divorce, a receiver may be very beneficial in maintaining neutral control of the property and/or business and stabilizing those operations. Also, receivers are commonly appointed in white collar criminal cases where the management is accused of fraudulent conduct.
4. How, if at all, does the new Michigan law change in Michigan? The new rules provide for uniformity regarding receiverships, including:
(a) Uniformity regarding the appointment, removal, and discharge of court-appointed receivers. For example, the receiver cannot be someone who is also a lien creditor;
(b) Clarification regarding the receiver’s duties and powers with respect to the receivership property;
(c) Uniformity regarding rules about notice to parties impacted by the receivership;
(d) Uniformity regarding rules about the property owners’ duties with respect to the receiver;
(e) Uniformity regarding requiring that a receivership order operate as a stay (similar to a stay in bankruptcy).
Prior to this legislation, typically, these issues were handled ad hoc, and the new rules are intended to standardize the process throughout the state.
5. How do you know if you need a receiver? Deciding whether to seek the appointment of a receiver is no simple task and requires consideration of the unique factors of each situation:
(a) How will a receivership affect property value? Consider the impact of the news that the property or business is in receivership on the overall value.
(b) What is the debt to equity ratio? Receivers are appointed to avoid waste, stabilize assets and maximize their value. If the property is already stabilized, avoiding waste and in a position to maximize value, a receiver may not be a good use of resources.
(c) Is current management or control an issue to preserving the property and maximizing its value? If so, a receiver is likely appropriate.
(d) Are the parties so far apart, or the relationship so frayed that without a receiver, the assets will depreciated or be destroyed, such as in shareholder disputes or divorces involving business operations? This weighs in favor of appointing a receiver.
(e) Is pertinent information regarding the property being suppressed or withheld? If so, a receiver is likely appropriate.
(f) Will the receivership cost deplete the value of the property? Receivers are not free, and if there is no income coming into the property or business, this will make it difficult to attract a receiver. Additionally, keep in mind that many receivers bill by the hour, so consider what level of receivership management makes sense for the case and whether the costs are justified. Receivers who bill a flat fee may be a good solution.
(g) Is there a receiver who is experienced in the property or business at issue who can competently serve as a neutral? There are very good receiver options for standard commercial property, even property that has environmental or other complex concerns. Specialized businesses often require specialized receivers.
To learn more about this topic, or other legal issues, please contact Anissa C. Hudy, 248.417.9154 or email at email@example.com.
Anissa Hudy focuses her practice on general business, real estate and commercial contracting and litigation; and before starting her own law practice, she practiced law through large firms for 16 years.
This article nor any of the other articles posted on my page are intended to constitute legal advice and may not be construed to as providing legal advice or forming an attorney-client relationship.