Alabama Enacts Uniform Commercial Receivership Act

On May 15, 2024, Alabama became the thirteenth state to adopt a version of the Uniform Law Commission’s Uniform Commercial Real Estate Receiver Act (the “Act”). The Act seeks to bring more direction and clarity to receivership law than Alabama’s current receivership statutes.  

But before jumping into a discussion of the Act, let’s answer a question you may be asking: “What exactly is a receiver?”  A receiver is a third party appointed by a court to take control of property.  The receiver is an arm of the court which in part means it is not aligned with the plaintiff (most often the party requesting a receiver) or the defendant (most often the party losing control of its property). Though used in various contexts, receivers most often are appointed when a lender wants to remove a borrower from control of the lender’s collateral.

Alabama statutes have provided for receivers since at least 1896 so the concept is by no means new.  However, Alabama statutory law has been sparse on the specifics when it comes to receivers.  For example, while a statute exists allowing a court to appoint a receiver, the statute does not provide a standard by which a court is to decide if a receiver should be appointed.  The Act seeks to fix that. Below is a general overview of the Act.  Because the Act contains a number of nuances to the general concepts discussed below, you should read the Act itself before taking action. 

• Applies to receivership cases in which a receiver is appointed after January 1, 2025.
• Generally, the scope of the Act covers real property and related personal property used by the owner for commercial purposes or securing a loan related to commercial purposes. 
• The Act does not replace Alabama’s existing receivership statutes and those statutes will continue to govern receiverships used in contexts outside commercial real property.
• With certain exceptions, a receiver is to be appointed only after notice and an opportunity for hearing, but a court may issue a preliminary order without either notice or a hearing if the circumstances require such. Appointment of a receiver without prior notice or a hearing may be conditioned upon the party requesting a receiver posting security for damages (including legal fees) if it later is determined a receiver should not have been appointed. 
• A receiver may be appointed (a) before judgment in a lawsuit to protect a party’s right, title, or interest in property if the property is in danger of waste, loss, dissipation, or impairment or if the property has been or is about to be the subject of a fraudulent transfer; (b) after judgment to enforce the judgment or to preserve property pending appeal; or (c) in an action in which a receiver may be appointed on equitable grounds.
• When considering whether to appoint a receiver over collateral in connection with a foreclosure of collateral, a court is to consider all relevant facts including whether a receiver is needed to protect the collateral and whether a party agreed in writing to allow a receiver to be appointed (a common remedy found in loan documents).
• A proposed receiver must not be affiliated with the parties or the subject property and the proposed receiver must attest to that in writing.  Being appointed a receiver in an unrelated case involving one or more the parties in the instant action does not disqualify a receiver.
• A receiver is required to post a bond or similar security in an amount set by the court, but the court may also allow the receiver to take actions as receiver before a bond is posted. Any claim against the bond must be made before the receiver is discharged of its duties.
• A receiver is given the status of a lienholder under Article 9 of the UCC as well as a purchaser for value without notice under Alabama’s real property statutes. Similar to that of a trustee in bankruptcy, this gives a receiver the ability to assert a superior interest in receivership property than creditors without a properly perfected interest in the same property.
• Property of the receivership estate must be turned over to the receiver upon demand with certain exceptions.
• A receiver’s powers are broad and generally include managing receivership property, selling assets in the ordinary course of business, and incurring debt and paying expenses in the ordinary course of business.
• Effective upon the recording of a receivership order with the probate court or upon the actual knowledge of the receivership, all persons are stayed from obtaining possession of receivership property or enforcing a junior lien against receivership property (though relief for the stay can be granted by the court for cause).  The court can also enter an injunction of an action if the injunction is necessary to protect receivership property. Knowingly violating a stay or injunction can result in an award of damages including attorneys’ fees.
• With court approval, a receiver may sell receivership property free and clear of the lien of anyone who sought appointment of the receiver together with junior liens and any rights of redemption. Extinguished liens attach to the proceeds of the sale.
• A receiver’s sale need not be through a public auction and creditors holding liens on property being sold may use their debt to credit bid the property.
• With court approval and with certain exceptions, a receiver may “adopt” or “reject” contracts and leases similar to the assumption/rejection process of executory contracts and unexpired leases in bankruptcy cases. If the receiver does not seek to adopt a contract or lease within a reasonable time, the contract or lease is deemed rejected.
• Contractual provisions allowing the termination of a contract or lease in the event a receiver is appointed do not prevent the receiver from adopting a contract or lease.
• Leases of property used by a tenant as their primary residence cannot be rejected.
• In receiverships commenced at the request of a mortgage lender, leases subject to non-disturbance agreements with the lender are not subject to rejection.
• To address property in another state, a court may appoint a receiver appointed in another state as an “ancillary receiver” regarding property in that state. 

While the Act codifies many things that until now were addressed in the order appointing a receiver, the Act also introduces concepts into Alabama receivership law that were not always used in receiverships before now. These concepts include the ability to sell property free and clear of liens as well as the ability to reject contracts and leases. As is the case with any new set of statutes, many will be interested to see what parts of the Act become subject to multiple interpretations. Fortunately for Alabama, we can look to court rulings from the other states who have enacted the uniform Act (including neighboring Florida and Tennessee) for guidance.