What is Receivership? What You Need to Know about the Recent Changes to the Michigan Receivership Act

Effective May 7, 2018, Michigan adopted what was previously called the “uniform commercial real estate receivership act”, MCL 554.1011, et seq., which was described as: “AN ACT to enact the uniform commercial real estate receivership act; to provide for the appointment of receivers to take possession of commercial real property of another and to receive, collect, care for, and dispose of the property or proceeds of the property; and to provide remedies related to the receiverships.” On October 15, 2020, the statute was amended and the name was changed to the “receivership act”, along with several other substantive amendments. This article will discuss some of the relevant provisions of the new Receivership Act and their application to commercial and residential real estate.

How Receivership Works in Commercial Real Estate

A receiver is a neutral third-party that is appointed by a court to take possession of property or to take control of a business. Under Michigan law, “the purpose of appointing a receiver is to preserve property and to dispose of it under the order of the court. Cohen v Cohen, 125 Mich App 206, 214; 335 NW2d 661 (1983). When a court appoints a receiver, the court specifies the powers and responsibilities that are being given to the receiver, which typically include the power to take control of management of the business and assets of the receivership estate, file and defend lawsuits to protect the receivership estate, sell property or assets of the receivership estate, and distribute any available funds to creditors and shareholders with an interest in the receivership estate. A creditor or shareholder of a company may seek to appoint a receiver when the people in charge of the property or business are committing fraud, mismanagement, or have subjected the property to waste. “A receiver may be appointed where necessary to prevent fraud or to protect property against imminent danger of loss.” Weathervane Window, Inc v White Lake Const Co, 192 Mich App 316, 322; 480 NW2d 337 (1991).

A receiver can be appointed over a business entity, such as a corporation or limited liability company, and this is often requested in a situation where there has been mismanagement of a company, embezzlement, or fraud. See Van Wie v Storm, 278 Mich 632, 636; 270 NW 814 (1937). See also Flemming v Heffner & Flemming, 263 Mich 561, 568; 248 NW 900 (1933). Receivers can also be appointed to take possession of real and personal property for a large number of possible reasons, including to pay off delinquent taxes, to complete construction, and to sell the property. See Stock Bldg Supply, LLC v Crosswinds Communities, Inc, 317 Mich App 189, 194; 893 NW2d 165 (2016). See also Boucher v Boucher, 34 Mich App 213, 217; 191 NW2d 85 (1971). Finally, a receiver can even be appointed over a governmental entity, such as a public school district. See Petitpren v Taylor Sch Dist, 104 Mich App 283; 304 NW2d 553 (1981). It has been noted by Michigan Courts that “the appointment of a receiver is a harsh remedy which should only be resorted to in extreme cases.” Petitpren v Taylor Sch Dist, 104 Mich App 283, 295; 304 NW2d 553 (1981).

Legal Authority Governing Receiverships in Michigan

There is a vast array of different sources of authority concerning the appointment of receivers in Michigan. As a preliminary matter, MCL 600.2926 provides Circuit Courts in Michigan with jurisdiction to appoint receivers and states as follows:

Circuit court judges in the exercise of their equitable powers, may appoint receivers in all cases pending where appointment is allowed by law. This authority may be exercised in vacation, in chambers, and during sessions of the court. In all cases in which a receiver is appointed the court shall provide for bond and shall define the receiver’s power and duties where they are not otherwise spelled out by law. Subject to limitations in the law or imposed by the court, the receiver shall be charged with all of the estate, real and personal debts of the debtor as trustee for the benefit of the debtor, creditors and others interested.

The court may terminate any receivership and return the property held by the receiver to the debtor whenever it appears to be to the best interest of the debtor, the creditors and others interested.

Once a receiver is appointed, MCR 2.622 provides a detailed overview of the process for appointment of a receiver, how receivers are selected, requirements to be contained in the order appointing the receiver, duties and powers of the receiver, compensation of the receiver, bond requirements, and the removal of a receiver. In addition to MCR 2.622 and the large volume of caselaw concerning receivers, Michigan’s new Receivership Act, MCL 554.1011, et seq., provides a comprehensive framework governing receivership involving commercial real estate.

Recent Amendments to the Receivership Act in Michigan

MCL 554.1014(1) provides that the Receivership Act applies to a receivership for: “an interest in any of the following commercial property: (a) Real property, fixtures, and any personal property related to or used in operating the real property. (b) Personal property.” Although the use of the word “commercial” is not defined in the Act, the plain language of the statute indicates that the Act applies to all receiverships involving real property, with the exception of “real property improved by 1 to 4 dwelling units” unless 1 of 4 exceptions applies. Thus, if a receiver is appointed over real property that is improved by more than 4 dwelling units, for example a 100 unit apartment complex or a 5 unit condominium project, the Receivership Act will apply. The exceptions are set forth in MCL 554.1014(2) and each of them include commercial purpose interests where the property was or is to be used to generate income.

The Receivership Act sets forth many detailed provisions that may not apply to other types of receiverships. For example, MCL 554.1015(2) provides that “The court that appoints a receiver under this act has exclusive jurisdiction to direct the receiver and determine any controversy related to the receivership or receivership property.” MCL 554.1024 creates an automatic stay or injunction preventing anyone from obtaining possession of, exercising control over, enforcing a judgment against receivership property, or enforcing certain liens against receivership property. MCL 554.1028 requires a party to obtain leave of the appointing court before the institution of any action against a receiver or a professional engaged by the receiver. Finally, MCL 554.1031 gives the court broad authority to order different types of parties to pay the reasonable and necessary fees and expenses of the receivership and fees of professionals.

The Receivership Act also imposes more specific requirements on owners of the property and creditors or lien holders. For example, MCL 554.1021 requires debtors of the receivership estate to pay their debts upon demand from the Receiver, and to turn over any receivership property to the receiver upon demand. MCL 554.1021 likewise prohibits debtors of the receivership estate from making payment to satisfy debts to the owner of the property. The statute provides the court with the power to sanction as contempt a person’s violation of these provisions.

Under MCL 554.1023, the owner of property subject to a receivership must assist and cooperate with the receiver in the administration of the receivership, preserve and turn over to the receiver all receivership property in the owner’s possession, identify all records and other information relating to the receivership property and make available to the receiver the records and information in the owner’s possession, and deliver to the receiver a list containing the name and address of all creditors and other known interested parties of the receivership estate. Importantly, the statute applies to each officer, director, manager, member, partner, trustee, or other person exercising or having the power to exercise control over the affairs of the owner of property subject to the receivership. Once again, if a person knowingly fails to perform a duty imposed by MCL 554.1023, the court may award the receiver actual damages caused by the person’s failure, reasonable attorney fees, and costs and sanction the failure as contempt.

MCL 554.1021 also requires receivers to prepare and retain appropriate business records, account for receivership property, file with the appropriate real property recording office a copy of the order appointing the receiver, disclose to the court any fact arising during the receivership that would disqualify the receiver under, and perform any duty imposed by court order or Michigan law. MCL 554.1025 governs the process by which a receiver can hire a professional to assist in the receivership estate. MCL 554.1029 requires the receiver to file quarterly interim reports that include the activities of the receiver during the reporting period, receipts and disbursements, fees and expenses of the receivership, and any other information required by the Court.

Potentially the most powerful tool given to creditors under the Receivership Act is MCL 554.1026(3) which provides:

With court approval, and after notice and an opportunity for a hearing is given to all creditors and other known interested parties unless the court orders otherwise for cause, a receiver may transfer receivership property other than in the ordinary course of business by sale, lease, license, exchange, or other disposition. Unless the agreement of sale provides otherwise, a sale under this section is free and clear of a lien of the person that obtained appointment of the receiver, any subordinate lien, and any right of redemption but is subject to a senior lien.

As set forth above, a receiver can seek court approval to sell receivership property free and clear of liens of the person that obtained appointment of the receiver and any subordinate liens. The recent amendment to this provision added the requirement that notice and an opportunity for a hearing be provided to all creditors and known interested parties before the receiver transfers such property free and clear of certain liens.

Summarizing Receivership and How a Michigan Condo Lawyer at Hirzel Law Can Help

Although receivers are typically only appointed in extreme cases, receiverships are a powerful tool for creditors, minority shareholders/members of business entities, and persons with interests in real estate. While receiverships were historically a matter of equitable jurisdiction by the appointing court, Michigan’s new Receivership Act standardizes many of the issues that regularly present themselves and provides parties with more clearly defined procedures in receiverships. Individuals and businesses with interests in real estate may consider seeking the appointment of a receiver if the property is being subjected to waste, or if there has been fraud or other mismanagement committed by the persons in control of the property. Similarly, individuals with interests in real estate that is made part of a receivership must be diligent in protecting their rights and careful to comply with the many requirements of the new Receivership Act.

Brandan A. Hallaq is an attorney with Hirzel Law, PLC where he litigates cases involving defective construction, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, enforcement of restrictive covenants, real estate foreclosure actions, and bankruptcy matters representing creditors. Mr. Hallaq is also a licensed Real Estate Broker in the State of Michigan and leads the real estate transactions department at Hirzel Law, PLC where he negotiates and prepares the necessary documents for business and real estate transactions, including purchase agreements, franchise agreements, loan/financing documents, and commercial and residential leases and mortgages. In each year from 2018 through 2020, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. He was also recognized as a 2020 Up & Coming Lawyer by Michigan Lawyer’s Weekly, an award given to no more than 30 attorneys in the state each year, and he was recognized in the inaugural issue of the 2021 Best Lawyers in America: “Ones to Watch” list for professional excellence in real estate law. Mr. Hallaq obtained his Juris Doctor degree, cum laude, from Wayne State University Law School where he served as an editor on the Wayne Law Review. Prior to joining Hirzel Law, PLC, Mr. Hallaq worked for a Federal Judge and in a Fortune 500 corporation’s in-house legal department. He can be reached at (248) 478-1800 or at bhallaq@hirzellaw.com.