Florida's New Commercial Real Estate Receivership Act: A Roadmap for Judges and Practitioners.

• Author: Coffey, Kendall

Areceiver is "a person appointed by the court to take control, custody, or management of property involved in litigation and to preserve the property, and receive rents, issues and profits." (1) The right to the appointment of a receiver is a long-recognized equitable remedy, tracing its lineage to the English chancery courts, protecting real property and rents and profits arising therefrom. (2)

A receiver pendente lite acts to preserve property that is the subject matter of pending litigation to prevent waste. Post judgment, a receiver can be utilized to preserve property pending an appeal or to enforce the judgment. Receivers are also used in a context of corporate disputes, preserving the assets during dissolution or winding up, or in the case of deadlock in management. Additionally, by statute, states may provide for receivership to protect the public interest in regard to insurance companies, financial institutions, or utilities.

Receiverships for income producing real estate continue to be utilized, frequently at the request of a foreclosing mortgagee. Mortgagees may be motivated by various considerations to seek the appointment of a receiver. Where the realty generates rental income, the foreclosing mortgagee may seek receivership so that the rents are not diverted to the owner or other creditors. Further, a mortgagee who assumes control of the collateral is exposed to liability, and the appointment of a receiver shields the mortgagee from that exposure. A mortgagee may wish to avoid taking title to the real estate due to potential exposure to liability for environmental contamination on the property. Additionally, empowering a receiver to sell the mortgaged property may bring about an arms-length market value sale price, as opposed to a distress sale at foreclosure.

Prior to July 1, 2020, the substantive and procedural aspects of receiverships in Florida were governed by a combination of decisional law and reference to Fla. R. Civ. P. 1.610 and 1.620. However, effective July 1, 2020, Florida's legislature enacted H.B. 783, "An act relating to the Uniform Commercial Real Estate Receivership Act," creating F.S. Ch. 714 (the act). As indicated, Ch. 714 is based upon the Uniform Commercial Real Estate Receivership Act (the Uniform Act), which was completed by the Uniform Law Commission in 2015. (3) To date, the Uniform Act has also been adopted in North Carolina, Maryland, Arizona, Michigan, Tennessee, Utah, and Oregon.

By way of overview, the act eliminates the need to wade through case law by providing a statutory road map to follow, from commencement to termination of a receivership. As listed below, the act adopts familiar injunction and bankruptcy procedures, and in some respects expands the powers of a receiver beyond those recognized in prior decisional law. It also is structured to conform to the procedural due process protections found in Rules 1.610 and 1.620.

Scope of the Act

With certain exceptions, the scope of Ch. 714 covers receiverships initiated by a court in Florida for an interest in real property and any incidental personal property related to or used in operating the real property. However, it does not apply to a receivership for which the receiver was appointed prior to July 1, 2020. (4) Moreover, [section]714.28 does not address the application of the new statute to receivership actions filed after July 1 based on contract provisions signed before that date. Florida recognizes the general principle that contracts are construed based on the governing law in effect when the contract is signed. (5) As to procedural provisions of the new law, there could arguably be issues concerning separation of powers because ordinarily procedural rules are to be promulgated by the Florida Supreme Court rather than the legislature. (6) Generally, the legislature has the power to enact substantive laws creating substantive rights and obligations while the Florida Supreme Court has the power to enact procedural law. Although there is a presumption against retroactive application of substantive law especially if existing rights are implicated, remedial statutes are more readily construed retroactively. (7) As a general matter,... [p]rocedural law concerns the means and methods to apply those duties and rights. (8)

While these principles may be implicated by the Receivership Act, its procedural provisions largely track existing Florida Rules of Civil Procedure, and it is therefore unlikely that significant constitutional problems will arise from these enactments. As the Supreme Court has observed:

Of course, statutes at times may not appear to fall exclusively into either a procedural or substantive classification. We have held that where a statute contains some procedural aspects, but those provisions are so intimately intertwined with the substantive rights created by the statute, that statute will not impermissibly intrude on the practice and procedure of the courts in a constitutional sense, causing a constitutional challenge to fail. (9)

The act is intended to apply to commercial--not residential--real estate. Where use is mixed, the act does not apply where the principle use is not commercial. Example: Borrower lives on the property in a single-family home with a garden providing vegetables for his personal use; the statute is inapplicable. Example: duplex is subject to a mortgage; owner occupies one unit as his personal resident and leases the other unit to a non-relative. Owner defaults on the mortgage. The court may appoint a receiver because the owner has the right to collect rent. Where the commercial use is incidental to residential use, the act does not apply. (10)

The categories in [section]714.04(2) are intended to draw a line of demarcation between residential and commercial use. (11) The act does not apply to the following: 1) Actions in which a state agency or officer is expressly authorized by statute to seek or obtain the appointment of a receiver; 2) actions authorized by or commenced under federal law; 3) real property improved by one or two dwelling units which include the homestead of an individual owner or an affiliate of an individual owner; 4) property of an individual which is exempt from forced sale, execution or seizure under the laws of Florida; or 5) personal property of an individual that is used primarily for personal, family, or household purposes.

Initiating the Receivership

* Notice and Opportunity To Be Heard--Generally, decisional law requires that a person moving for the appointment of a receiver must have a legal or equitable right to apply for the relief, such as holding a lien or property right in the property in question or a right to payment therefrom. (12) A judgment creditor whose execution remains unsatisfied has standing to seek receivership. (13) A stockholder may apply for the receivership for an existing corporation. (14) Where corporate property is being mismanaged or is in danger of being lost through mismanagement, collusion, or fraud, a minority stockholder may secure the appointment of a receiver. (15) However, where the corporation is a going concern, in the absence of fraud, significant self-dealing or loss of corporate assets, a minority stockholder cannot obtain a receivership. (16)

The appointment of a receiver is a not a matter of right. (17) As receivership is an extraordinary remedy, being in derogation of a titleholder's rights to possess his or her property, it is a remedy exercised with caution. (18) Its purpose is to enable the court to accomplish justice between the parties, including the preservation and proper disposition of property that is the subject of the litigation. The receiver, therefore, is a custodian for the court through which the court controls the assets of the receivership. A receivership clause in a mortgage does not guarantee that the court will appoint a receiver, (19) although such provisions are accorded "considerable weight." (20)

F.S. [section]714.06, "Appointment of Receiver," follows these concepts, providing the court with discretion in regard to appointing a receiver. The court may appoint a receiver before judgment to protect a party who demonstrates an apparent right, title, or interest in the real estate that is the subject of the action if the property or its revenue--producing potential is being subject to or is in danger or waste, loss, dissipation, or impairment; or has been or is about to be the subject of a voidable transaction. Subsection 6(a)(2) thereof also provides that the court may appoint a receiver after judgment to carry a judgment into effect or to preserve non-exempt real estate pending an appeal, or where an execution has been returned unsatisfied and the owner refuses to apply the property in satisfaction of the judgment.

A receiver may be appointed in connection with foreclosure of a mortgage if necessary to protect the property from waste, loss, transfer, dissipation or impairment; the mortgagor agreed in a signed record to the appointment of a receiver on default; the owner agreed after default and in a signed record to the appointment of a receiver; in the event the property and other collateral held by the mortgagee are not sufficient to satisfy the secured obligation; or the owner has failed to turn over to the mortgagee proceeds or rents to which the mortgagee is entitled; or the holder of a subordinate lien obtains appointment of a receiver for the property. (21)

The court may also appoint a receiver on "equitable grounds," provided that the "equitable grounds" include protecting against waste, loss, substantial diminution in value, dissipation or impairment, or when the property is about to be the subject of a voidable transaction. (22) Failure to keep taxes current, (23) or defaults in payments to a senior mortgage holder, (24) can be raised as "waste."

Although the act lists substantive criteria for granting a receivership, there does not appear to be a...