On March 28, 2012, the Minnesota Legislature gave final passage to HF 382, a comprehensive revision of Minnesota statutes governing receiverships and assignments for the benefit of creditors (ABCs) in the state. Following signature by the governor (which is expected), the new statutes will take effect on August 1, 2012. Sponsored by the Minnesota State Bar Association and its Business Law and Real Property Sections, the new statutes are the product of more than two years of work by a committee of Minnesota lawyers and receivers, including Gray Plant Mooty attorneys Steve Grinnell and Phil Kunkel.
The use of receiverships has been growing in Minnesota and in other states. Long a mortgage lender’s remedy for preserving commercial property and rents during foreclosure, receivership has grown in popularity as a potentially speedier and lower-cost alternative to bankruptcy in a variety of other situations. These include its use as a vehicle for liquidating a fraudulent enterprise and distributing proceeds to creditors, for taking control of a corporation or other business entity where the owners are deadlocked or those in control have acted fraudulently or unfairly toward other owners, and as an individual creditor’s remedy to seize and prevent dissipation of assets prior to judgment or to satisfy a judgment. However, current Minnesota statutes provide little guidance to courts and practitioners regarding the substantive law and procedures to be applied. New chapter 576 of Minnesota Statutes is intended to provide clear rules and procedures governing receiverships.
New chapter 576 establishes two primary types of receiverships: (1) the limited receivership, in which the primary purpose is to preserve and protect property while some process or proceeding is pending (for example, a receivership involving a commercial building during foreclosure), and (2) the general receivership, in which all or substantially all of the property and assets of the person or entity over which the receivership is imposed are subject to the receivership, for the purpose of liquidation and distribution to creditors. The statute provides that a receivership may change from one type to the other and may be customized to use elements of each. Although the receiver’s powers and duties will vary depending on the type of receivership, the statute makes clear that the receiver is appointed by and is an officer of the court in all cases.
The new statute addresses a number of procedural issues relating to the appointment of receivers and the administration of receivership proceedings. Although a discussion of all of these procedures is beyond the scope of this alert, some are discussed below:
In addition to these and other procedural issues, new chapter 576 also addresses various substantive matters relating to the powers of receivers and the administration of receiverships. A number of these concepts have been borrowed from federal bankruptcy law. Some of these substantive provisions include:
An ABC is a procedure in which a debtor voluntarily transfers all or substantially all of its property to a third party—the “assignee”—who is responsible for liquidating the property and distributing the proceeds to the debtor’s creditors in full or partial satisfaction of their claims. Although ABCs are commonly used in other states to efficiently liquidate business assets and distribute proceeds to creditors, various limitations in Minnesota’s current statute render them virtually unworkable here, and statutory ABCs are almost never used in the state.
New chapter 577 supersedes current statutes governing ABCs in Minnesota. The new statute treats ABCs under the same statutory framework that governs a general receivership under new chapter 576.
Under new chapter 577, an ABC is commenced by filing the assignment with the district court for the county in which the assignor resides or in which its principal place of business is located. The statute specifies the form of assignment and provides that the assignee must be a Minnesota resident who is otherwise eligible to be a receiver under new chapter 576. The assignee is required to give notice of the assignment to all known creditors and other parties in interest. Thereafter, the statute provides that the assignee is treated as a general receiver and all of the proceedings in the ABC are governed by new chapter 576.
New chapters 576 and 577 make substantial procedural and substantive changes to the laws governing receiverships and ABCs in Minnesota. Receiverships have been on the rise even before these changes, and new chapter 576 may accelerate this trend. ABCs have nowhere to go but up. Whatever the impact, however, on the number of these proceedings in the future, the rules are about to change, and creditors and potential debtors will be well-advised to become familiar with them.
This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.
Gray Plant Mooty is recognized as one of the leading corporate law firms in Minnesota and one of the top franchise firms in the world. Our roots go back to 1866. Today, we are a full-service firm with nearly 180 attorneys and offices in Minneapolis and St. Cloud, Minnesota; Washington, D.C.; and Fargo, North Dakota.