July 26, 2023
By: Adam F. Zweifler and Meghan A. Hayden
During the 2021 Legislative Session, Connecticut adopted a new receivership law based on the Uniform Commercial Real Estate Receivership Act (“UCRERA”) which became effective on July 1, 2023. The UCRERA was drafted by the National Conference of Commissioners on Uniform State Laws (also known as the “Uniform Law Commission” or the “ULC”) which is a nonpartisan, nonprofit organization whose goal is to bring consistency, clarity and stability to areas of state statutory law through model or uniform legislation. The ULC adopted the UCRERA in the summer of 2015 and since then 12 states nationally (including Connecticut) have adopted the law or a substantially similar version thereof.[1]
The UCRERA sets forth a uniform set of rules and procedures regarding receiverships for an interest in real property and any personal property related to, or used in, operating the real property. As the name implies, the law governs receiverships of commercial property, residential properties with greater than four dwelling units and, in certain specified circumstances, real properties improved by one to four dwelling units.
Some notable features of the legislation include:
Appointment of a Receiver
Under prior law, the standards for the appointment of a receiver were subjective and created uncertainty about whether a receivership was available for a particular property.
Prior to the enactment of the UCRERA, the general rule regarding appointment of receivers was set forth in the Connecticut Appellate Court case Antonio v. Johnson, 113 Conn. App. 72, 77-78 (2009). The Antonio Court set forth several equitable factors for consideration when deciding whether to appoint a receiver, including (i) whether loss or waste is occurring, (ii) the risk that the foreclosing party will receive less than the full amount of its debt and (iii) whether the provisions of the loan documents provide for such appointment.
The UCRERA addresses the uncertainty created by the subjective common law standard and establishes specific criteria for when a receivership is available in connection with a foreclosure or other enforcement of a mortgage. The UCRERA provides for such appointment under any one of the following circumstances: (1) the appointment is necessary to protect the property from waste, loss, transfer, dissipation or impairment; (2) the mortgagor agreed in a signed record to appointment of a receiver on default; (3) the owner agreed, after default and in a signed record, to the appointment of a receiver; (4) the property and any other collateral held by the mortgagee are not sufficient to satisfy the secured obligation; (5) the owner fails to turn over to the mortgagee proceeds or rents the mortgagee was entitled to collect; or (6) the holder of a subordinate lien obtains appointment of a receiver for the property.
For lenders, the most straight forward approach is to include in the loan documents a clause whereby the borrower agrees in advance to the appointment of a receiver upon default and which includes a reference to the UCRERA and specifically Connecticut General Statutes Section 52-624(b). Under the UCRERA, so long as this language is included in the loan documents, the lender will be entitled to the appointment of a receiver, creating a more consistent and reliable mechanism for appointment of a receiver.
Receiver Powers and Procedures
The UCRERA provides that a receiver can be an individual or a business entity, which addresses the uncertainty presented under the prior law when certain courts would require that the receiver always be an individual.
In addition, Section 52-625 of the UCRERA provides that the court may not appoint a person as a receiver unless the person submits to the court a statement under penalty of perjury confirming that the person is not disqualified.
Under the new law, a potential receiver would be disqualified if it is an affiliate of a party; has an interest materially adverse to an interest of a party; has a material financial interest in the outcome of the action; has a debtor-creditor relationship with a party; or holds an equity interest in a party, other than a noncontrolling interest in a publicly traded company. However, the law does not automatically consider a party disqualified if the party was appointed as a receiver or is owed compensation in an unrelated matter involving a party or was engaged by a party in a matter unrelated to the receivership. These standards help create certainty and predictability. The parties will no longer be at the mercy of unpredictable standards whose application will depend upon the court, the case and the particular judge.
The UCRERA also provides that receivers must post a security bond and are subject to court supervision and removal. Regular reporting and review mechanisms are also required to maintain transparency and accountability throughout the receivership process. Receivers are granted rights that allow them to operate the property in order to preserve and maximize its value. For example, the new law gives the receiver the ability to sell receivership property free of certain liens, such that a sale by a receiver may produce a higher sale price than a foreclosure. Such a remedy would only have been available under the prior law if all lienholders were paid in full from the sale proceeds.
Standards for Property Owners of Receivership Property
The UCRERA also establishes specific statutory standards for the owners of real estate that is the subject of the receivership. While under prior law such standards may be included in a receivership order, under the UCRERA these standards apply in all contexts and require the property owner to assist and cooperate with the receiver, preserve and turn over receivership property and make available to the receiver records relating to the receivership property including passwords or similar authorizations.
The UCRERA also imposes certain obligations that were not commonly required under the prior law such as the “obligation to be examined under oath concerning the acts, conduct, property, inabilities and financial condition of the owner or any matter relating to the receivership property or the receivership.” Further, additional remedies are available if an owner knowingly fails to comply with these standards, including the award of actual damages that were caused by the owner’s failure and the sanction of civil contempt.
Automatic Stay
Under Section 52-632 of the UCRERA, an order appointing a receiver operates as a stay applicable to all persons of an act, action or proceeding. Similar to the automatic stay following a bankruptcy filing, the entry of a receivership order enjoins all creditors from seeking to obtain possession of, exercising control over or enforcing a judgement against property subject to a receivership and prohibits any creditor from enforcing a lien secured pre-receivership against the property subject to a receivership. There are mechanisms in place for parties to seek relief from the stay, but the initial framework of the automatic stay will present secured lenders with an opportunity to get a handle on the management of the property in order to maximize cash flow in an orderly and consistent fashion.
What’s Next
Connecticut’s new receivership law may have gone into effect just in time. A consensus among many industry experts is that a page has turned in commercial real estate during the last 12 months. The dual challenges of a post-pandemic hangover and rising interest rates are increasing the difficulty of making deals work. This sentiment was highlighted by a recent cover story in Bloomberg Businessweek featuring the lead headline, “Commercial Real Estate is Getting Scary.” In light of these market uncertainties, borrowers and lenders are increasingly considering the “what ifs” and making preparations for “Plan B.”
The UCRERA should help borrowers and lenders work through the challenges of the current market by modernizing the receivership process, providing a more efficient and transparent mechanism to resolve distressed real estate and creating a more structured and orderly framework for asset recovery. This in turn may have the effect of boosting investor confidence and helping the real estate market work through troubled times more efficiently.
At Murtha Cullina, we have a team of attorneys who are experienced in representing both lenders and borrowers dealing with distressed properties who are able to help.
Please feel free to contact Adam F. Zweifler at azweifler@murthalaw.com or Meghan A. Hayden at mhayden@murthalaw.com, if you require assistance.
[1] The following states have enacted the UCRERA: Arizona, Connecticut, Maryland, Michigan, Oregon, Nevada, Rhode Island, Tennessee, Utah and West Virginia. In addition, Florida and North Carolina have adopted acts substantially similar to the UCRERA.
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