Rhode Island Modernizes Its Receivership Law by Enacting Commercial Receivership Law | Partridge Snow & Hahn LLP

On June 20, 2022, Rhode Island Governor Daniel J. McKee signed into law the Rhode Island Commercial Receivership Act (“CRA”), which updates and modernizes Rhode Island’s receivership practice. Pub. L. 2002, c. 107 and 108. The CRA is based on the Uniform Law Commission Commercial Real Property Receivership Act of 2015. The uniform act has now been adopted in twelve states, including Rhode Island. However, Rhode Island’s enactment is broader and applies to receiverships of not just real estate, but entire business entities. The ARC will not affect existing receiverships, but will apply to cases in which a receiver is appointed on or after June 20, 2022.

Existing Rhode Island law governing commercial receiverships had been broken down into the organic bylaws of each type of business entity. These laws are often inconsistent or leave important questions unanswered, such as the circumstances that warrant the appointment of a receiver in the first place. See for example GL 1956 § 7-1.2-1314 (corporate receiverships); § 7-6-61 (receiverships of not-for-profit corporations); § 7-16-45(b) (winding up of LLCs); § 7-12-48 (dissolution of the general partnership). While court rules such as Super. A. Civil. P. 66 and court opinions filled some of these gaps, they frequently resulted in costly litigation and uncertain outcomes.

The CRA fills many of these gaps. In particular, Section 6(a)(c) clarifies that for any business entity – i.e. a “non-individual” – judicial redress is always available in the event of dissolution or revocation of the charter. of the entity, impasse in management, oppressive or fraudulent acts. conduct and insolvency. The CRA also makes explicit many of the rules and procedures that already implicitly govern Rhode Island’s receivership practice. It codifies existing procedures regarding notice to interested parties, bond requirements for receiverships, claim filing procedures, engagement of professionals, stay of creditor actions, asset distribution, multi-jurisdictional receiverships , processing of enforceable contracts and periodic reporting requirements.

The CRA is also codifying the existing concept of an appointed non-liquidating temporary receiver to assist Rhode Island businesses affected by a public emergency. This concept originated in a March 31, 2020 order of the Rhode Island Judiciary that was issued in response to the COVID-19 pandemic. See Rhode Island Superior Court Administrative Order No. 2020-04. The CRA is continually codifying this concept into the general laws of Rhode Island so that it will be available in the future. Whenever the Governor declares a public emergency and that emergency results in the closure of businesses or substantial loss of revenue for businesses that were not insolvent prior to the emergency, those businesses may seek relief from the CRA. . These businesses enjoy protection from creditors while developing a business plan to repay debts incurred during the public emergency.

The scope of ARC set out in Section 4(a) is broad and covers receiverships of virtually all types of property. However, two exceptions limit this otherwise broad scope. First, section 4(b) generally excludes immovable property containing four or fewer residential units from the scope of the ARC unless certain specific criteria are met regarding the use of such property for commercial purposes. , agricultural, industrial or mining. Second, under section 4(c), the ARC does not apply to a receivership “in which the receiver is a government unit or a person acting in an official capacity on behalf of the unit”. This has the effect of excluding receiverships of insurers and financial institutions from the scope of the CRA, as the Director of the Department of Business Regulation has the legal responsibility to act as receiver. for these organizations. See GL 1956 § 27-14.4-3 (insurers) and § 19-12-1 (financial institutions).

Although much of the ARC simply codifies existing practice, several provisions represent a substantial change to existing law. First, ARC fixes an important issue that was the subject of a recent PS&H article. See How to Prevent Frivolous Appeals from Derailing Receivership Sales of Rhode Island Real Estate, Daniel E. Burgoyne and Christian R. Jenner, June 15, 2022. Until recently, it was easy for an aggrieved party to thwart the sale of real estate by a receiver simply file a notice of appeal and pay a $150 filing fee. Unless the receiver or creditor responds, the mere filing of a notice of appeal could prevent a title insurer from issuing a title clean policy and delay or thwart the sale, whether the appeal has merit or not. . The CRA now provides in section 16 that

[a] rescission or variation of an order approving a transfer…does not affect the validity of the transfer to a person who acquired the property in good faith or revive against the person any lien extinguished by the transfer, whether or not the person knew before the transfer of the application to rescind or vary, unless the court stayed the order before the transfer.

This new law operates similarly to 11 USC § 363(m) of the United States Bankruptcy Code. Therefore, for sales regulated by the CRA, title insurers should now have sufficient assurance that they can issue a title clean policy for a receivership sale of real estate, even if a notice of appeal is filed. . Unless the appellant persuades a court to stay the sale pending appeal, a sale to a bona fide buyer will not be invalidated even if the appeal is ultimately successful. The CRA rightly places the onus on the opponent to demonstrate that an appeal is valid before a sale is delayed by an appeal.

Finally, in a new and potentially controversial addition to Rhode Island’s receivership practice, the CRA gives secured creditors greater control over collateral in cases where they have not requested receivership. Section 16(c) of the CRA provides that when a receiver sells property, the property is generally sold free and free from the liens of any creditor “who has obtained the appointment of the receiver”, from any subordinate lien and from the owner’s right of redemption. However, the sale is not free and clear of the privilege of the senior creditor unless the senior creditor consents thereto. Without consent, the senior creditor’s lien will remain attached to the security, and the senior creditor’s obligation would not be affected by the sale of the receiver. This characteristic presents disadvantages for a borrower or a junior creditor who wishes to see the guarantee liquidated by the receiver. However, it is useful for a senior creditor who opposes having his assets transferred to receivership. Sometimes a senior secured creditor reasonably believes that it can more effectively liquidate its security outside of receivership proceedings. Under the CRA, it now has more power to demand this outcome instead of acquiescing to a receivership sale.

The author also thanks Thomas S. Hemmendinger, Esq., whose June 24, 2022 presentation to the Rhode Island Bar Association informed this Customer Alert.

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