The New North Carolina Commercial Receivership Act
With the anticipated continuing economic downturn, many creditors will be weighing options for pursuing delinquent borrowers. Creditors seeking to enforce a borrower’s obligations have a limited number of options for protecting their rights under North Carolina state law. One of the more effective but infrequently used options is having a receiver appointed. Recent amendments to North Carolina receivership statutes have increased the desirability of seeking appointment of a receiver and have provided more certainty in how the process works. The Commercial Receivership Act (“Act”) was signed into law on June 25, 2020 and is effective January 1, 2021.
Some background will be helpful to understanding the significance of the new Act. A receiver is a court-appointed agent who is responsible for taking possession of, managing and controlling property, including an operating business. North Carolina statutes and common law permitted a receiver to be appointed in limited circumstances. The statutes provided for the appointment of a receiver and addressed matters such as required bonds, but provided very little guidance with regard to the specific powers of a receiver. The new Act provides significant clarity with regard to a receiver’s powers and also creates new rights which greatly enhance the desirability of seeking the appointment of a receiver.
Where It Applies
The Act applies only to corporations, limited liability companies, partnerships and individual business debtors. In order to be considered an individual business debtor, an individual’s debts must be comprised of less than 50% consumer debt. A receivership can be general or limited. A general receivership is imposed over all or substantially all of the nonexempt property of a debtor. A limited receivership is any receivership that is not a general receivership, and places a receiver in control of less than all of a debtor’s property. A receivership based on a foreclosure or enforcement of a security agreement or judgment is generally a limited receivership.
A receivership is begun by filing a civil action which may seek only the appointment of a receiver or which may be ancillary to a civil action, such as in support of a foreclosure. The Act expanded the grounds for appointment of a receiver. Under the former statutes, a creditor had to demonstrate that its collateral was in danger of being lost or materially injured or impaired. The Act provides for the appointment of a receiver if the debtor is insolvent or simply failing to pay its debts when they become due. In a foreclosure proceeding, a receiver can be appointed if the debtor agreed to such appointment in a signed record. Most deeds of trust provide for the appointment of a receiver, easily satisfying this requirement.
How It Applies
The Act provides clarification with regard to the specific powers of a receiver. A receiver can: 1) take possession, collect, control, manage, conserve and protect receivership property; 2) incur and pay expenses; 3) assert rights, claims and causes of action or defenses related to receivership property; and 4) seek instruction from the court with regard to any matter related to receivership property. In addition, a general receiver can, inter alia: 1) operate a business constituting receivership property; 2) compromise and settle claims involving receivership property; 3) enter into contracts necessary for the management, security, insuring or liquidating receivership property; and 4) file a bankruptcy case related to receivership property. A new feature of the Act is that it permits a receiver to sell receivership property free and clear of liens.
An important addition to the powers of a receiver is the granting of lien creditor status as of the time of appointment. This treats the receiver as a creditor with priority over other creditors with claims that are not secured by liens or security interests.
A significant new feature of the statute is the imposition of an automatic stay (similar to that in bankruptcy) with regard to any action to obtain possession of receivership property or to perfect a lien against such property. This prevents creditors from improving their positions without court approval once a receivership is in effect. In addition, the statute now provides that a single judge can retain jurisdiction to oversee the receivership.
The clarifications provided by the Act represent welcome changes to existing North Carolina law. Many of the new features of the Act are parallel to provisions of the Bankruptcy Code. With the changes, a receivership becomes a more effective tool for creditors seeking to protect their rights without having to attempt to force a borrower into an involuntary bankruptcy.