In the last post — The Uniform Commercial Real Estate Receivership Act (Part 1) — Pathway to “Receiver Sales” of Real Estate Security? — we previewed the “Receiver Sale” provisions of the proposed Uniform Commercial Real Estate Receivership Act (UCRERA) against the backdrop of current California receivership law.
This post explores those provisions in more detail, including examining the purposes and public policy objectives behind receiver sales, and potential conflicts with California’s One Action rule and anti-deficiency framework.
UCRERA’s Receiver Sale Provisions
As a reminder from the last post, Section 16(c) of the UCRERA states:
With court approval, 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.
Section 16(e) adds that a receiver sale “may occur by means other than a public auction sale.”
Finally, Section 25 provides that a receiver’s application of receivership property or proceeds to the secured obligation is not an “action” under the One Action rule, and that after a receiver sale is completed the creditor’s ability to obtain a deficiency judgment is governed by existing state law.
Policy Objectives Underlying UCRERA Receiver Sales
The UCRERA’s comments and prefatory notes explain why receiver sales might be a good thing:
- Higher Sale Price. The UCRERA comments observe the well-known fact that “public foreclosure sales do not consistently produce prices that approximate the market value that might be obtained in an arms-length, non-distress sale.” Foreclosure sales are truly “distress” sales, in which the entire sale process can take only minutes (or as long as the public auction bidding process lasts), and buyers generally have no meaningful opportunity to conduct due diligence. In contrast, a receiver could conduct the sale privately, and would be able to market the property over a reasonable time period targeting the most qualified potential buyers. Potential buyers could conduct thorough due diligence, making them more comfortable with the purchase, resulting in a higher purchase price.
- Decreased REO. As a result of increased bidder interest and higher offers, lenders could avoid taking property back via credit bid. Lenders could thus avoid all of the headaches of ownership: liability, carrying costs, accounting issues, regulatory issues, etc.
- Flexibility and Lender Convenience. The UCRERA gives courts “the flexibility to authorize a sale either free and clear of liens or subject to one or more liens, depending on the priority and the direction of the person seeking appointment of the receiver.” The receiver sale process could also benefit commercial mortgage-backed security (CMBS) lenders operating within mortgage loan pools, who are often dissuaded from taking ownership of property through foreclosure credit bids due to IRS regulations forbidding the issuance of new loans or debt, at the risk of losing their tax status as pass-through entities. A receiver sale would make it easier for the buyer to assume the existing loan, thereby avoiding IRS headaches for the lender.
- Consistency with federal law. Allowing receiver sales under state law would be consistent with federal law, which authorizes a receiver appointed by a federal court to sell mortgaged property in either a public or private sale. (28 USCA §2001 et seq.; see also 11 USCA §363(b) [bankruptcy law].)
The policy objectives seem reasonable.
But how would UCRERA’s receiver sales fit with current California law?
Sales of Real Property by a Rents & Profits Receiver Would Depart from Existing California Law
UCRERA’s prefatory notes acknowledge that the provisions authorizing receiver sales constitute a departure from existing law in many states.
The notes first describe that under the existing receivership laws in many states, while a general equity receiver may be empowered to sell assets of a debtor, a rents and profits receiver’s “role is more typically viewed as custodial. For this reason, receivers appointed for mortgaged property are often viewed as having the power to operate, maintain, and preserve the property pending a foreclosure sale, but not to sell the property[.]”
That’s certainly the case in California, as fully described in the prior post: Is a “Receiver’s Sale” a Foreclosure Sale?
But are the differences irreconcilable? Would UCRERA, if adopted in its proposed form, upend California law?
It depends on how the UCRERA is interpreted, and whether it is modified by California lawmakers before being adopted.
Deficiency Liability is the Key
The UCRERA could be integrated within California’s existing foreclosure law framework fairly seamlessly if — and ONLY IF — the borrower is NOT subjected to deficiency liability following a receiver sale.
Taking into account all of the following provisions of UCRERA …
- a receiver sale is not an “action” within the meaning of CCP §726 (UCRERA §25(a)(6))
- there is no post-receiver sale right of redemption (UCRERA §16(c))
- the receiver sale can be done privately rather than by public auction (UCRERA §16(e)); and
- deficiency liability following a receiver sale is governed by existing state law (UCRERA §25(b),
… it seems readily apparent that there could be NO deficiency liability following a receiver sale in California. California CCP §726 and well-established interpretive case law make emphatically clear that deficiency liability and the post-sale right of redemption go hand in hand, and that the ONLY way for a lender to obtain a deficiency judgment is to include all security property in a single “action” for judicial foreclosure, with the sale conducted by public auction, followed by an evidentiary fair value determination.
The only wrinkle here is that the comments to UCRERA section 25 suggest that if a state has any “fair value” limitations governing deficiency liability, then those would apply following a receiver sale.
The comments state: “If a receiver sells receivership property free and clear of a lien under Section 16(c), Section 25(b) would provide the obligor with the benefit of the state’s ‘fair value’ rule in a subsequent action on the debt by the holder of the extinguished lien.”
When read in a vacuum, this comment seems to suggest that following a receiver sale in California, the lender could obtain a deficiency judgment against the borrower simply by initiating a fair value proceeding under CCP §726(b).
But that would stand California law on its head, since none of the other prerequisites to a deficiency judgment — i.e., a judicial foreclosure action, a sale by public auction, and a post-sale right of redemption — would exist.
It will be interesting to see how the California Legislature tackles adoption of the UCRERA. We will monitor and keep you posted….