As of August 1st, the legal landscape for receiverships in the State of Minnesota will change dramatically. Receiverships have long been used a remedy for mortgage lenders to preserve commercial property in foreclosure, but a lack of clear guidance under Minnesota law has been problematic for all parties. The Minnesota State Bar Association convened a panel of experienced debtor creditor attorneys to create a new statutory framework, which was eventually passed by the Legislature and signed by the Governor this spring. The new receivership statute, codified under Minnesota Statutes Chapter 576, establishes a framework for receiverships under Minnesota law that is designed to help formalize what had been an often ad-hoc process.

The new statute establishes two types of receiverships: general and limited. Limited receiverships are designed with the primary purpose of holding property for safekeeping, such as a commercial building in foreclosure. If not otherwise established in a court’s order, a receivership is presumed to be limited. A general receivership is significantly broader and places all of the assets of the entity into receivership, those assets to be liquidated and distributed to creditors. 

Even though the new receivership law is not designed to be a bankruptcy substitute, it nevertheless borrows heavily from bankruptcy concepts.  While Minnesota’s receivership statute is nowhere near as comprehensive of the federal Bankruptcy Code, it does include many similar structures. For example, a receiver has powers to assume, assign, or reject executory contracts with court approval, although the receiver’s assignment powers may be limited by anti-assignment provisions in the contract. The new statute allows the receiver to sell property free and clear of liens, including the free redemption rights of the receivership respondent.  While a receiver does not have all the powers of a trustee in bankruptcy, the new statute provides receivers with significant authority to gather assets and liquidate a receivership estate.

At the same time, the new statute defines new duties for receivers that help manage the receivership process and ensure that the rights of other creditors and parties-in-interest are recognized and respected. The new statute sets up specific guidelines that must be met for a prospective receiver to be eligible to serve as receiver, requires a bond in an amount set by the court, and provides that the receiver must give notice of the receivership to all known creditors and parties-in-interest. Further, the receiver is obliged to maintain adequate business records and to serve all interim and final reports on creditors and parties-in-interest. The statute also sets up guidelines concerning receivership claims, including provisions relating to objections and the allowance of claims and procedures for handling distributions.

There are numerous other changes included in the newly-amended Chapter 576, and many of the practices and procedures will be ironed out over time as courts grapple with these new changes. However, this new framework provides much more guidance on all sides in an area of the law that had previously been subject to few formal guidelines. Whether the new statute will result in receiverships becoming more frequently used will be settled in time, but both creditors and potential debtors are well-advised to know these new rules exist and when it may be appropriate to deploy them.