On July 1, 2020, Governor Cooper signed the North Carolina Commercial Receivership Act, which will take effect on January 1, 2021. This new law provides previously non-existent guidance to Receivership, an appealing alternative to lengthy bankruptcy proceedings. Below is a summary of some of the key provisions that lenders should be aware of.

Two Types of Receivership

The Act creates two categories of receivership: general and limited. A general receivership is over all or substantially all of the nonexempt property of a debtor for the purpose of liquidating that property and distributing it to creditors. A limited receivership applies to specific portion of the nonexempt property of a debtor. Limited receiverships most often apply in scenarios involving a secured creditor.

What can a Receiver do?

Under the Act, both general and limited receivers have all the powers and priority that a creditor with a judicial lien would have. A receiver can take possession of, collect, control, manage, and protect receivership property, as well as assert rights, claims, causes of action, or defenses that relate to receivership property.

General receivers also have the power to sue for and collect all debts, demands, and rents constituting receivership property; the power to compel any person by subpoena with respect to any receivership property or any other matter that may affect the receivership. They also have the power to enter into contracts as necessary for the management of receivership property.

When can a Receiver be Appointed?

Receivers can only be appointed in cases that involve business debtors and entities. Consumer debts are not eligible, however, an individual business debtor can file a voluntary receivership. Receivers can be appointed after the filing of a civil action through a standalone claim for appointment of a receiver, or as ancillary relief amongst other claims.

Specifically, either a limited or general receiver can be appointed in the following scenarios:

(1) The debtor is insolvent;

(2) The debtor is not paying its debts as they become due unless such debts are the subject of a bona fide dispute;

(3) The debtor is unable to pay its debts as they become due;

(4) The debtor is in imminent danger of insolvency;

(5) The debtor suspends its business for want of funds;

(6) The debtor has forfeited or has suspended its legal existence;

(7) The debtor had its legal existence expire by limitation;

(8) The debtor is the subject of an action to dissolve such debtor.

On the other hand, only a limited Receiver can be appointed in the following circumstances:

(1) The appointment is necessary to protect the property from waste, loss, spoilage, transfer, concealment, dissipation, or impairment;

(2) The debtor agreed in a signed record to the appointment of a receiver on default;

(3) The debtor agreed, after default and in a signed record, to the appointment of a receiver;

(4) The property and any other collateral held by the secured party are not sufficient to satisfy the secured obligation;

(5) The debtor fails to turn over to the secured party the collateral or proceeds of collateral, including rents, the secured party was entitled to collect;

(6) The holder of a subordinate lien obtains the appointment of a receiver for the same collateral held by the secured party.

Who can be a Receiver?

While receivers are generally professionals such as attorneys or accountants, any person can serve as a receiver. Under the Act, the receiver does not even need to be a resident of North Carolina. Rather, the Act only requires that a court finds that the receiver is qualified to serve both as a receiver and an officer of the court, and that they are independent to any party and interest in the underlying dispute.

Actions Consolidated and Limited Stay

Once a receiver is appointed, the receiver can transfer any lawsuits pending against the debtor to the court in which the receivership is pending.  The receiver’s appointment will also result in an automatic stay that will prevent any party from obtaining possession of receivership property or enforcing a judgment against the property. Importantly, this stay would not prevent a lender from exercising its right of setoff.

Judicial Oversight

Under the Act, a single judge will oversee the receivership, and the court that appoints a receiver has the exclusive authority over the receiver and will determine all controversies related to the receivership. Superior court judges can appoint receivers over entities, but either a Superior Court or a District Court judge can appoint receivers over individual business debtors. Receiverships involving more than $5 million in assets can be designated to the Business Court.

Overall, the Act law gives creditors an attractive option when dealing with commercial debtors. Should you have any questions about how this new law applies to your business please contact Nathan Duggins at Nduggins@tuggleduggins.com or (336) 271-5246, Jeff Southerland at Jsoutherland@tuggleduggins.com or (336) 271-5251, or Matt Hoyt at Mhoyt@tuggleduggins.com or (336) 271-5203.