In 2019, Arizona became the latest state to adopt the Uniform Commercial Real Estate Receivership Act (UCRERA) at A.R.S. § 33-2601 et seq. UCRERA contains some very powerful tools for lenders; surprisingly it has seen little use in Arizona since being adopted in 2019. With the economic uncertainty of 2020 expected to continue into 2021, lenders are well advised to look to this alternative tool as a method to exercise an increased degree of control over collateral in order to recoup the maximum amount possible on a troubled asset.
When UCRERA was adopted, Gammage & Burnham provided an overview of the new law, predicting that it would be incredibly useful for lenders. See https://www.gblaw.com/tool-for-arizona-lenders/. After successfully utilizing UCRERA to obtain results for lenders, the Creditor’s Rights team at Gammage & Burnham has found substantial benefits that lenders should be aware of, particularly as economic uncertainty continues and the possibility of defaults in lending portfolios loom large.
Conceivably the most useful feature of UCRERA to a lender is the imposition of the automatic stay on collection actions upon receivership property at A.R.S § 33-2613. Originating in bankruptcy law and codified at 11 U.S.C. § 362, the automatic stay stops a wide variety of collection actions against a debtor’s property by creditors. The stay is “automatic” because no motion or court order is required — once a bankruptcy petition is filed, this stay is in place. UCRERA takes this concept and applies it to receiverships. Once a UCRERA receivership is in place, actions against receivership property are automatically stayed. Creditors must then enforce their rights through the receivership action.
In bankruptcy, this benefits and protects the debtor, but in a UCRERA receivership, this can be used to the benefit and protection of a lender’s interest. For example, if a dispute arises between a senior and junior lender, each lender may be pressured to “enforce now, worry later,” potentially choosing enforcement at a disadvantage, such as immediately taking steps to take possession of property rather than a possibly more viable solution to secure income streams from an operating business. A UCRERA receivership prevents these potentially rash decisions from being undertaken by requiring the approval of a neutral third-party, maximizing the value of the property and best protecting the lenders.
Sales Free and Clear
Comparable to a foreclosure, under A.R.S. § 33-2615(B), UCRERA allows a receiver to sell property free and clear of liens, including those of junior lenders and judgment creditors. Any junior liens will attach to the proceeds of the sale, but the buyer will receive the property free and clear. Additionally, while foreclosures have some significant restrictions on the sale process, particularly relating to advertising the property, receivership properties can be sold and marketed through additional methods (such as traditional channels). This means that a UCRERA receivership sale is more likely to attract additional buyers who are willing to pay a price closer to market price for the property, as there is no uncertainty whether a lien will remain.
Senior lenders, in particular, should note this powerful tool. If a senior lender is secured up to the full amount of the sale, a sale free and clear can essentially remove a junior lender. This is particularly useful to prevent judgment creditors from potentially interfering with secured property. A senior lender, secured to the full sale price, can appoint a receiver and sell the property free and clear of a substantial judgment liens while receiving the full proceeds of the sale. This tool, combined with cross-collateralization and future advances provisions, can be one of the strongest protections a senior lender can have.
Incurring Debt Outside the Ordinary Course of Business
UCRERA grants several expanded powers to receivers under A.R.S. § 33-2611. Among those powers is the ability to incur debt or transfer property outside the ordinary course of business with court approval. A.R.S. § 33-2611(A). As with the automatic stay, this power derives from concepts in bankruptcy, and can be used in unique ways to benefit and protect receivership property and a lender’s interest.
A lender opting for a receiver can potentially use this tool to further protect its interests without needing to sell the receivership property. If a property is subject to multiple liens or claims, a lender may be able to use this power to engage in take-out financing to consolidate other creditors or otherwise maximize its liens. This can be a “win-win” for lenders, because the junior lender or other party may replace a defaulted borrower with a reputable one, and the senior lender may maximize its lien position with the receiver then selling the property or operating the business in a more profitable manner.
Junior Lenders Beware!
The powerful tools of UCRERA may potentially operate at the peril of a junior lender. Junior lenders may find themselves fighting an uphill battle to protect their interest in property with limited options. In the event of a UCRERA sale, a junior lender who is inattentive may find themselves completely “wiped out” with no lien and no proceeds available. While a junior lender has the opportunity to object to actions taken during UCRERA receivership process, it must carefully monitor its assets and be prepared to quickly take action.
UCRERA is an underutilized and powerful tool for lenders, particularly in light of the economic uncertainty of 2021. As Gammage & Burnham’s Creditor’s Rights team has discovered, these tools can provide a viable and substantial alternative to traditional foreclosure proceedings, trustee sales, or bankruptcy. Lenders can, and should, add this option to their portfolio management toolbox.
If you are a senior lender looking to maximize the value of collateral, or a junior lender looking to best protect yourself and your interests, the Creditor’s Rights team at Gammage & Burnham is ready to use all available tools, including UCRERA receiverships, to assist you. For more information, contact Brian Fullmer at (602) 256-4459 or Mike King at (602) 256-4405.