The What, When, and Who of a Receivership – An Introduction to the North Carolina Commercial Receivership Act
By: Samantha Simpson – North Carolina & South Carolina Licenced Litigation Managing Attorney with Brownlee Whitlow & Praet, PLLC
The North Carolina Commercial Receivership Act was introduced to the Senate in March 2019 and went into effect January 1, 2021. Prior to the Act, receivership legislation in North Carolina was limited and failed to provide sufficient procedures for the administration of receiverships.
What is a “receivership”?
By definition, a receivership is a situation in which the assets of a business owner (corporation or business) are held by a “receiver” – a person or entity tasked with the custodial responsibility for the property of others, including assets and rights. There are a variety of reasons a commercial property (an asset of a business organization including real estate) could find itself in a receivership situation –mismanagement and poor economic conditions are two.
When may a receivership be necessary?
A receiver may be appointed when an entity or an individual business debtor meets any of the following:
1. The person is insolvent.
2. The person is not paying its debts as they become due unless such debts are the subject of a bona fide dispute.
3. The person is unable to pay its debts as they become due.
4. The person is imminent danger of insolvency.
5. The person suspends its business for want of funds.
6. The person has forfeited or has suspended its legal existence.
7. The person had its legal existence expire by limitation.
8. The person is the subject of an action to dissolve the person.
North Carolina General Statute § 1-507.24(e). To be clear, the term “person” used throughout the statute is referring to either an individual or a business.
Who can serve as a receiver?
A commercial real estate receivership can be an alternative to a foreclosure – where a lender takes ownership, and bankruptcy – where a trustee takes control. With a commercial real estate receivership, a court appointed neutral third-party is given control of the real estate that serves as collateral. Typically, the receiver will be an individual who can analyze, appraise, and effectively market the property’s value and/or make changes as part of the management of the asset to get the insolvency turned around for the benefit of creditors.
The Act states any person may serve as a receiver provided that the court concludes that the person proposed as the receiver meets the criteria as enumerated in N.C.G.S. § 1-507.25, specifically,
1. The proposed receiver is qualified to serve as receiver and as an officer of the court.
2. The proposed receiver is independent as to any party in interest and the underlying dispute.
The receiver is not required to be a resident of North Carolina. However, the court, when determining whether a proposed receiver is qualified shall consider all relevant information, including:
1. The proposed receiver has knowledge and experience sufficient to perform the duties of receiver.
2. The proposed receiver has the financial ability to post the bond required by G.S. 1-507.26.
3. The proposed receiver or any insider of the proposed receiver has been previously disqualified from serving as receiver and the reasons for disqualification.
4. The proposed receiver or any insider of the proposed receiver has been convicted of a felony or other crime involving moral turpitude.
5. The proposed receiver or any insider of the proposed receiver has been found liable in a civil court for fraud, breach of fiduciary duty, civil theft, or similar misconduct.
What are the powers and duties of a receiver?
Pursuant to N.C.G.S. § 1-507.23, a receivership may be either a limited receivership or a general receivership. If the order appointing the receiver does not specify the type of receivership, then the receivership shall be limited. At any time, the court may order a general receivership to be converted to a limited receivership and vice versa.
What is the difference? A general receiver has control over all of an entity’s assets, likely with the intent to liquidate the business and/or assets. Whereas a limited receivership controls only one or more specific assets. The Act enumerates the powers afforded to both general and limited receivers as well as several additional powers granted to general receivers. Both types of receivers have the power to manage, collect, and control receivership property; the power to incur and pay expenses; and the power to assert rights, claims and defenses that relate to receivership property. See N.C.G.S. § 1-507.28.
Regardless of the type, a receiver must act in the best interests of both the creditor and debtor. The duty to act in the best interests of both the creditor and debtor is a unique quality of a receiver and can lead to greater proceeds from a property’s sale. Once appointed, a receiver may:
– Run the company to maximize the value of the company’s assets, sell the company as a whole, or sell part of the company and close unprofitable divisions;
– Secure the assets of the company or entity;
– Realize the assets of the company or entity; and
– Manage company affairs to pay debts.
Once appointed, the receiver will takeover management of the collateral whether it is a hotel, a farm, or a multifamily community. The debtor’s management team will likely be removed, and the receiver will take over operations for the duration of the receivership. A receiver’s compensation should be reasonable and determined by various factors relating to the receivership including the value of assets; number and amount of claims; time and labor expended; novelty and complexity; etc.
You can review the entire Act to find out more about receiverships in North Carolina. The Act can be found in Article 38A of Chapter 1 of the North Carolina General Statutes.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information in this article is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Viewers of this material should contact their attorney to obtain advice with respect to any particular legal matter. No viewer of this material should act or refrain from acting on the basis of information in this presentation without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader and Brownlee Whitlow & Praet, PLLC or any contributing law firms. All liability with respect to actions taken or not taken based on the contents of this article are hereby expressly disclaimed.