September 15, 2020

Automatic Stay.

A significant innovation of UCRERA adopted in the Act is an automatic stay of any actions to obtain possession of or control over receivership property or to enforce a judgment or a prereceivership lien on such property with only five exceptions.   See A.R.S. §33-2613(A).  Accordingly, a lender, other than the person who filed the receivership action, is stayed from foreclosing on its collateral or enforcing any other of its rights, even if it is a property different from the real property which is collateral for the creditor who brought the receivership action.  A lessor of personalty that is receivership property also is stayed from repossessing its assets.

This Section raises a couple of troubling constitutional issues.   First, the due process clause of the Fifth Amendment would appear to be violated by the stay of an act of a lender who has not even been served with a complaint and summons. Second, the State of Arizona has no power to pass laws affecting or exercising jurisdiction over property or persons located in different states.  International Shoe v. Pinkus, 278 U.S. 261, 263 – 64, 49 S.Ct. 108, 73 L.Ed. 318 (1929); World-Wide Volkswagon v. Woodson,  444 U.S. 286, 291 – 92, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980)(Observing that “[t]he sovereignty of each State, in turn, implied a limitation on the sovereignty of all of its sister States—a limitation express or implicit in both the original scheme of the Constitution and the Fourteenth Amendment.”).

Accordingly, despite the explicit language in Section 33-2613(A), the attempted imposition of a stay by the simple entry of an order appointing a receiver would be unconstitutional as to nonparties and persons not subject to the jurisdiction of the court and property not located in Arizona.   A plaintiff should, therefore, name any person he believes asserts a lien or interest in receivership property as a defendant in the complaint and serve her with a summons and complaint and the receivership order as soon as possible.  She must be prepared to demonstrate the reasons that the Arizona court may exercise personal jurisdiction over any nonresident defendant in order to effectively assert the application of this statutory stay to that person.  

The court also may enjoin an action or proceeding against receivership property or relating to such property if an injunction “is necessary to protect the [receivership] property or facilitate administration of the receivership.”  Section 33-2613(B).   Therefore, a lawsuit against receivership property or the owner of receivership property is not automatically stayed.   Rather, either the receiver or the person who obtained the receiver must seek an injunction under Rule 65, Ariz.R.Civ.P.   The comments to UCRERA note that a court would not be authorized by this section “to stay an action against a guarantor or co-obligor.”  UCRERA, at §14, p. 45.

Pursuant to Section 33-2613(C), a person has the right to seek relief from either the stay or an injunction imposed by Section 33-2613(B).  The comments to this section in UCRERA provide the following useful guidance to courts and parties regarding the grounds for granting such relief.

Nevertheless, “cause” under subsection (c) certainly includes the right of a senior lienholder to obtain the appointment of a receiver under this Act or to proceed with a foreclosure after default. Under traditional law, rents collected by a receiver appointed at the request of a junior lienholder could be applied to the reduction of the junior lienholder’s debt until the senior lienholder took appropriate steps to enforce its right to collect rents. See, e.g., Restatement (Third) of Property: Mortgages § 4.5(b). If a junior lienholder obtains the appointment of a receiver for mortgaged property, the court must allow a senior lienholder to enforce its right to collect rents. Cf. Section 6(b)(6) (appointment of receiver at request of junior lienholder justifies appointment of receiver at request of senior creditor).

UCRERA, §14, at pp. 45 – 6 (emphasis supplied).

The lesson for senior lenders from these comments is to seek immediate relief from the automatic stay if a junior lender files a receivership action.  That may deprive the receivership of any cash to fund ongoing operations.  As a result, a receiver in that situation may need to obtain a loan from either of the lenders or a third party in order pay employees, utilities, taxes and the receiver’s fees.

There is no clear authority in the Act similar to 11 U.S.C. §363(e) which would provide authority for a court permit a receiver to use a senior lender’s rents conditioned upon a finding of “adequate protection” of that creditor’s interest in this cash collateral.  A receiver may be able to get to the same place under the Act, however, in a somewhat elliptical manner.

A receiver has the right to seek permission use rents which are receivership property under Section 33-2615(a). Although there is nothing in that section conditioning use on providing a creditor with adequate protection, a receiver also has the right to obtain an order that a senior lender must surrender “control” of receivership property, for this analysis, the senior lender’s cash collateral – the rents, if she is able to prove that creditors is “adequately protected”, pursuant to A.R.S. §33-2610(c).  A portion of the commentary to UCRERA §11 (the analog to this section of the Act) is particularly useful.

The Act does not specifically define “adequate protection” or specify what constitutes adequate protection under subsection (c), but leaves this determination to the discretion of the court based on the circumstances of the case. In general, however, any form of payment or security that would constitute adequate protection under the Bankruptcy Code, 11 U.S.C. § 361, would suffice to constitute adequate protection under this Act.

UCRERA §11, at p. 37.   As a result, judges and lawyers may look to and use the substantial case law on the issue of adequate protection of cash collateral under the Bankruptcy Code in deciding whether and under what circumstances a receiver may use a senior lender’s rents in a proceeding under the Act.

The Act provides that a foreclosure or other mortgage enforcement proceeding by the person who brought the receivership action, any action to continue the perfection of a lien and certain actions by a governmental entity are not subject to the stay under the Action.  See Section 33-2613(D).

An act in violation of the statutory stay is voidable by the court.  It is not automatically void.   A.R.S. §33-2613(E).  As a result, the receiver must obtain a court order setting aside any action violative of Section 33-2613(A).  There is nothing in the Act or the comments to UCRERA to guide a court in deciding whether to void an act taken in violation of the stay.  

A court, pursuant to A.R.S. §33-2613(F), may impose civil contempt sanctions or award actual damages, fees and costs against a person who knowingly violates a stay or injunction imposed under this section.   The court also may grant other equitable relief for any violation.  Any money awarded is receivership property.  See comments to UCRERA §14, at p. 47.

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