Introduction and Types of Receiverships (Chapter 1 of Receiverships in Michigan)
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Chapter 1: Introduction and Types of Receiverships
Patrick E. Mears, Barnes & Thornburg LLP; Hon. John T. Gregg, United States Bankruptcy Court - Western District of Michigan; Daniel J. Yeomans, Amicus Management; Michael David Almassian, Keller & Almassian
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I.   A Brief History of Receiverships

§1.1   The legal device of receivership was developed over time in medieval English courts, reaching its maturation during the reign of Queen Elizabeth I. Receiverships began as an equitable remedy for creditors seeking sequestration and disposition of their debtor’s assets to satisfy their claims. This creditors’ remedy accompanied the English colonists in their migrations to the New World and was adopted by the equity courts of the American colonies. After independence of the American colonies and their formation into states, American courts continued to invoke receiverships as one aspect of their equity powers. See, e.g., Patrick E. Mears & Dustin Daniels, Sales of Receivership Assets Free and Clear of Liens and Interests, 38 Mich Real Prop Rev 112, 112–113 (2011).

Early Michigan constitutions and statutes explicitly recognized and affirmed the equity powers of state courts, and a number of Michigan Supreme Court decisions in the 1800s involved disputes in which receiverships were sought by the parties and imposed by the courts. See generally Hon. Mark A. Goldsmith & Gregory J. DeMars, Receiverships in the Real Estate Setting, Mich Bus LJ, Summer 2008, at 36–37; Myron Keys, Appointment of Receivers in Mortgage and Land Contract Cases, 2 Det L Rev 157 (1931–1932). Because receiverships are primarily a creditor’s remedy, instances of their invocation and imposition generally multiplied during periods of economic recession and depression, such as the Panic of 1893 and the Great Depression of the 1930s. The onset of the world financial crisis in September 2008 traumatized the American economy, especially the Michigan economy that was (and is) dependent in large part on the automotive industry. The crisis caused consumer purchases of motor vehicles to plummet, ultimately resulting in the bankruptcies of General Motors Corporation and Chrysler Corporation and the extensive out-of-court restructuring by Ford Motor Company.

The economic sectors in the United States that appeared to be among the hardest hit by this crisis, however, were residential and commercial real estate. See, e.g., Binyamin Applebaum, Family Net Worth Drops to Level of Early 90s, Fed Says, New York Times (June 11, 2012). Consumers defaulted en masse on their residential home mortgages, thereby resulting in their foreclosure and the ultimate loss of billions of dollars in homeowners’ equity. Mortgage defaults also mushroomed in the commercial real estate sector with special servicers foreclosing on commercial mortgage backed securities loans and portfolio lenders (e.g., regional and community banks) liquidating their commercial real estate (CRE) mortgage loans. This tsunami of commercial mortgage loan defaults caused special servicers and portfolio lenders to begin judicial and nonjudicial mortgage foreclosure proceedings and, in many cases, to seek concurrently with those proceedings the appointment of receivers to take possession of, protect, and operate the mortgaged CREs pending their disposition either via foreclosure or receiver sales.

On March 26, 2014, the Michigan Supreme Court adopted amendments to MCR 2.621 and 2.622 to govern certain aspects of receivership cases commenced in Michigan circuit courts. These amendments became effective on May 1, 2014. The aspects addressed by these amendments are the following and will be discussed in detail in later chapters:

  • procedure for appointment of receivers
  • qualifications for appointment as a receiver
  • orders appointing receivers
  • duties and powers of receivers
  • compensation of receivers
  • required bonds for receivers
  • removal and discharge of receivers

Finally, a receivership is not the only remedy for creditors and other parties affected by the financial difficulties of a debtor. Creditors may obtain a money judgment and execute on it under Michigan law or may file an involuntary petition under Chapter 7 or Chapter 11 of the federal Bankruptcy Code. Exhibit 1.1 is a chart comparing the advantages and disadvantages of the various remedies.

II.   Basic Elements of Receivership Actions and Procedure for Appointment

§1.2   A receiver is an officer of the court that appoints him or her to take possession, custody, and control of specified real estate and/or personal property, commonly referred to as the “receivership estate,” and to dispose of that property through its sale, abandonment, or other means. See, e.g., Fidelity Trust Co v Saginaw Hotels Co, 259 Mich 254, 242 NW 906 (1932); Cohen v Cohen, 125 Mich App 206, 335 NW2d 661 (1983). See also MCR 2.622(A), defining the term receivership estate as “the entity, person, or property subject to the receivership,” and MCR 2.622(E)(1), (2), recognizing a receiver’s general power “to sue for and collect all debts, demands, and rents of the receivership estate” and to liquidate its real and personal property. On collection of the property by the receiver, it is then held in custodia legis by the appointing court, with the trustee stepping into the shoes of the owner of that property. See, e.g., Livingston v Southern Surety Co, 262 Mich 438, 247 NW 712 (1933); HG Vogel Co v Original Cabinet Corp, 252 Mich 129, 233 NW 200 (1930).

The appointment of a receiver takes place in the context of pending litigation, often in the context of a judicial mortgage foreclosure action commenced by a mortgagee under MCL 600.3101 et seq. Before the 2014 amendments to MCR 2.622, a court entertaining a request to appoint a particular person as a receiver was not bound to honor it and could appoint another person instead, even a person whom the court selected sua sponte. See, e.g., Ypsilanti Fire Marshal v Kircher, 273 Mich App 496, 730 NW2d 481 (2007). However, as amended effective May 1, 2014, MCR 2.622 prescribes a detailed procedure for the appointment of a receiver in pending litigation and a determination of qualifications for this post. This procedure permits a party to raise an objection to the appointment of a receiver solely selected by the court.

Normally, the party seeking the appointment of a receiver in litigation will typically file early in the action a motion to appoint a person nominated by that party to act as a receiver. The motion should specify (1) the grounds justifying the appointment, e.g., waste with respect to real or personal property subject to the moving party’s lien; (2) the person nominated to act as a receiver; and (3) that person’s qualifications for the position and his or her competence, and experience. Affidavits often accompany the motion detailing the facts supporting the appointment request and the nominee’s suitability for the position.

Certain persons, however, are disqualified from serving as receivers or “in any other professional capacity representing or assisting the receiver” under amended MCR 2.622(B)(6). This amendment bars the following persons or entities from serving as a court-appointed receiver or from rendering professional assistance to a receiver in a civil action pending in state court:

  1. a nominee who is a creditor or a holder of an equity interest in the receivership estate
  2. a nominee who is or was an investment banker for any outstanding security of the receivership estate
  3. a nominee who has been, within three years before the date the receiver was appointed, an investment banker for a security of the receivership estate, or an attorney for such a banker, in connection with the offer, sale, or issuance of a security of the receivership estate
  4. a nominee who is or was, within two years before a receiver was appointed, a director, officer, or employee of the receivership estate or an investment banker within the scope of (b) or (c) above, unless the court determines that “the appointment is in the best interest of the receivership estate and that there is no actual conflict of interest” on account of the proposed employment
  5. a nominee who has a materially adverse interest to any class of creditors or equity security holders due to “any direct or indirect relationship to, connection with, or interest in the receivership estate or an investment banker,” or for any other reason
  6. a nominee who has or represents an interest adverse to the receivership estate or occupies a position with respect to the receivership litigation “that would tend to interfere with the impartial discharge of duties as an officer of the court”
  7. a nominee who has, at any time within five years before the appointment of a receiver, represented or been employed by the receivership estate or any secured creditor of the receivership estate “as an attorney, accountant, appraiser, or in any other professional capacity” and the court determines that an “actual conflict of interest” exists on account of the representation or employment
  8. a nominee who is an insider, as that term is defined in the Uniform Fraudulent Transfer Act as adopted in Michigan, MCL 566.31(g), and which includes a director, officer, or person in control of a corporation when that entity is the subject of the receivership litigation
  9. a nominee who represents or is employed by a creditor of the receivership estate and, on an interested party’s objection, the court finds an “actual conflict of interest” would result from the proposed representation or employment
  10. a nominee who holds a relationship to the receivership litigation that “will interfere with the impartial discharge of the receiver’s duties”

Notwithstanding the foregoing disqualifications, any person who has represented or been employed by the receivership estate may serve for a “specified limited purpose” if the court finds that (1) the employment or appointment is in the best interest of the receivership estate and (2) the professional does not represent or hold a materially adverse interest to the receivership estate. MCR 2.622(B)(7).

Accompanying the motion should be a proposed “order of appointment” that must include the following provisions in accordance with amended MCR 2.622(C):

  1. the proposed bonding amount for the receiver, which will be determined by the court after considering the various factors enumerated in MCR 2.622(C), e.g., the value of the receivership estate, the amount of cash or cash equivalents anticipated to be received by the estate during the case, the extent to which any secured creditor is undersecured, and whether the parties have agreed to a nominal bond
  2. the identification of real and personal property of the estate
  3. a recitation of the procedures and standards relating to reasonable compensation of the receiver as described in amended MCR 2.622(F)
  4. a description of the reports that must be produced and filed by the receiver, including the final report and accounting
  5. a description of the duties, authority, and power of the receiver
  6. a listing of property to be surrendered to the receiver

In addition, the proposed order should also contain any other provisions that the particular court deems necessary and/or appropriate. These orders often contain provisions (1) permitting the sale or other disposition of estate property and a waiver of the estate’s redemption rights, (2) authorizing the receiver to retain real estate brokers and appraisers to facilitate the disposition of real property, and (3) mandating the cooperation of officers, directors, and other control persons of the subject defendant with the receiver and its professionals. Orders of appointment should be tailored to the needs of the particular case and any special circumstances that may exist.

The 2014 amendments to MCR 2.622 prescribe a detailed procedure on the filing of a motion to appoint a receiver in a pending action. Once such a motion is filed or on the court’s own initiative, the court may appoint a receiver “as provided by law” and “for good cause shown.” MCR 2.622(A). If the court finds that good cause exists for the appointment, the court must insure that the receiver that is appointed “must have sufficient competence, qualifications, and experience to administer the receivership estate.” MCR 2.622(B). In this regard, the party seeking the appointment of a receiver must describe in the motion (or in a stipulation of the parties consenting to the appointment) how the receiver nominee meets these competence standards. In doing so, the moving party in its motion or in the parties’ stipulation must consider the following factors listed in MCR 2.622(B)(5):

  1. the nominee’s experience in the operation and/or liquidation of the type of assets subject to administration
  2. the nominee’s relevant business, legal, and receivership knowledge
  3. the nominee’s ability to obtain the required bonding if more than a nominal bond is ordered
  4. any objections to the receiver’s appointment
  5. whether the nominee is disqualified from appointment under MCR 2.622(B)(6)

MCR 2.622(B)(1).

If the parties not moving for the appointment of a receiver do not object to the nominated receiver within 14 days after the motion for appointment is served (or within a shorter time period ordered by the court), or if the parties stipulate to the selection of a receiver, the court will appoint the nominee “unless the court finds that a different receiver should be appointed.” MCR 2.622(B)(1). If a party objects to a motion for the appointment of a receiver, that party must serve the objection on all other parties to the action as required by MCR 2.107 along with a notice of hearing. MCR 2.622(B)(4).

If the court orders the appointment of a receiver on its own initiative and not in response to a motion for appointment, any party to the action may file an objection to the receiver selected and submit an alternative nominee by no later than 14 days after service of the order for appointment. The objection must describe the competence, qualifications, and experience of the alternative receiver as required by MCR 2.622(B)(5). MCR 2.622(B)(2).

On the filing of an objection to the court’s sua sponte appointment of a receiver described above or on the court’s appointment of a receiver other than the person nominated by the moving party, the court is required to “state its rationale for selecting a particular receiver” after considering the following factors:

  1. the selected receiver’s experience in the operation and/or liquidation of the type of assets subject to administration
  2. the selected receiver’s relevant business, legal, and receivership knowledge
  3. the selected receiver’s ability to obtain the required bonding if more than a nominal bond is ordered
  4. any objections to the selected receiver
  5. whether the selected receiver is disqualified under MCR 2.622(B)(6)
  6. any other factor the court deems appropriate

MCR 2.622(B)(5).

In Casa Bella Landscaping, LLC v Lee, 315 Mich App 506, ___ NW2d ___ (2016), plaintiff filed a motion pursuant to MCR 2.622(B)(1) for an appointment of a receiver for defendant, nominating a particular person and listing the nominee’s qualifications. Although defendant did not object to the nomination in the required time, the trial court appointed a different receiver. The court of appeals vacated the appointment and remanded for further proceedings. The trial court failed to comply with MCR 2.622(B)(1) and (5) by failing to make findings that plaintiff’s nominee was not qualified to serve and failing to state its rationale for appointing a different person as receiver. The court further stated that plaintiff’s nominee was no longer qualified under MCR 2.622(B)(6) to serve as receiver because he represented plaintiff on the appeal.

The order appointing a receiver must contain the various items listed in MCR 2.622(C), along with any other provisions the court deems appropriate. The court may hold an evidentiary hearing on the motion to appoint a receiver or may rule on the motion based on arguments of counsel and the papers supporting and opposing the motion. After a receiver is appointed, he or she will proceed to fulfill the duties specified in the OAR, which may include selling the assets of the receivership estate and winding up the debtor’s business. Once these tasks are completed, the receiver will normally file a final report and account with the appointing court and serve this document on all interested parties. If any surplus remains in the estate after distributions are made to secured creditors, the final report should contain a proposed distribution schedule to creditors and other entities. The receiver’s motion for approval of the final report and account will typically seek the allowance and payment of the receiver’s final compensation, the receiver’s discharge from his or her position, and the closing of the case. Once the order is entered terminating the receivership, the court will close the case.

Forms and Exhibits

Exhibit 1.01 Comparison of Receiverships with Other Alternatives
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