Receivership Without Foreclosure: A New Law Gives Lenders More Power

Effective January 1, 2026, Illinois will implement the most significant overhaul of its receivership laws in decades. The newly enacted Illinois Receivership Act (Public Act 104-0034), codified at 765 ILCS 1090 (the “Act”), creates a comprehensive statutory framework for receiverships in commercial contexts across the state.

Much of the early commentary has focused on how the Act benefits lenders, courts, and the restructuring community. But for borrowers and guarantors, the Act introduces new enforcement risks and shifts leverage in ways that will impact every stage of a real estate loan — from documentation through default.

Receivership as an Enforcement Tool, Not a Safeguard

Before the Act, Illinois courts generally required a lender to demonstrate “good cause” to obtain the appointment of a receiver. That showing often included evidence of waste, fraud, or mismanagement, and courts retained significant discretion. Receivership was traditionally an ancillary remedy used to preserve the status quo, typically in connection with a foreclosure or dissolution proceeding, rather than to facilitate the sale of assets.

The new Act fundamentally changes this framework. Section 6(b)(2) authorizes a court to appoint a receiver if the debtor agreed in a signed record to receivership upon default. In that scenario, Illinois courts may appoint a receiver without a separate showing of waste or other “good cause,” which makes appointment far faster and more predictable for lenders, but riskier for borrowers.

Receivers Can Now Sell the Property — Without a Foreclosure

One of the most borrower-impacting provisions in the Act is Section 16, which allows receivers, with court approval, to sell, lease, or otherwise transfer receivership property outside the ordinary course of business. These sales can occur free and clear of liens, including the lien of the lender that requested the receiver, provided that senior lienholders are not extinguished unless they consent.

While the Act preserves credit bidding rights for secured creditors, it permits sales to proceed with much less structure than a foreclosure, which may lead to faster dispositions. Borrowers lose the opportunity to ensure broad marketing of the property, protect against undervaluation, or pursue cure or reinstatement options that exist in foreclosure.

New Obligations for Borrowers and Guarantors

Section 13 imposes significant affirmative duties on property owners following the appointment of a receiver. These include:

• Turning over all receivership property.
• Cooperating with the receiver.
• Producing records and providing access to financial information.
• Filing a complete schedule of assets, liabilities, liens, and estimated values within 14 days.

The court can impose sanctions for noncompliance, including contempt, injunctive relief, or the imposition of a constructive trust. These obligations, which previously existed only through case law or court discretion, are now mandatory and time sensitive.

Guarantors must also be vigilant. In full-recourse loans, receivership expenses or operational losses that reduce net sale proceeds could directly increase the borrower’s and guarantor’s deficiency exposure.

For non-recourse loans, the risk lies in the “carveouts.” Most carveout guaranties include liability for interfering with a lender’s remedies. Under these provisions, a borrower who challenges or obstructs a receiver’s control or sale may unintentionally trigger springing full-recourse liability. Importantly, this risk exists even if the borrower disputes the appointment or sale in good faith, as standard carveouts do not always distinguish between wrongful interference and legitimate legal challenge.

Negotiating in a New Receivership Landscape: Borrower-Side Strategies

Counsel representing borrowers and guarantors should revisit standard loan provisions in light of the Act’s new powers. Receivership language that once seemed boilerplate can now determine whether and how quickly control over the asset shifts to the lender.

Key considerations include:

1. Narrow the Receivership Appointment Triggers

Borrowers should push for more limited receivership provisions that:

• Require a showing of harm, waste, or mismanagement, rather than automatic appointment.
• Include notice and cure periods before a receiver may be appointed.
• Limit pre-judgment appointment to defined emergency situations.

2. Restrict Sale Authority and Timing

Borrowers should consider provisions that:

• Prohibit sales outside of foreclosure, or require borrower consent.
• If sales are permitted, ensure adequate time to market the property and obtain the highest possible price.
• Create redemption or repurchase rights, even in receivership.

While public sale procedures may not guarantee a better result, ensuring sufficient market exposure and negotiation time can help preserve asset value and reduce guarantor liability.

3. Carefully Evaluate Carveout Guaranties

For non-recourse loans, guarantors and their counsel must carefully review how standard “bad boy” carveouts interact with receivership. Common triggers such as interference with remedies, concealment of records, or failure to cooperate now have a clearer path to enforcement. Counsel should seek to:

• Limit carveout liability to actual damages where possible.
• Avoid springing full recourse based solely on disputes over sale timing or price.
• Clarify whether objections to the receiver’s actions are considered interference.

These revisions may not eliminate exposure, but they can prevent overbroad interpretations that turn every disagreement into a recourse event.

Borrowers Face Reduced Leverage in Workouts and Enforcement

The Act brings Illinois in line with modern commercial receivership laws, but it also gives lenders a powerful new tool that can reduce the borrower’s leverage in loan workouts and disputes. Lenders now have the ability to sidestep traditional foreclosure proceedings and take control of the collateral through expedited receivership.

This change may make pre-default negotiations more difficult for borrowers. When lenders have a faster path to control and liquidation, they may be less inclined to extend forbearance, restructure debt, or agree to modifications. Borrowers must account for this shift in leverage at the front end of every transaction.

Prepare at the Documentation Stage

Beginning in 2026, receivership will no longer function as a procedural afterthought. It will serve as a primary enforcement mechanism that lenders can use not only to preserve property, but to operate, liquidate, and distribute proceeds from distressed assets, often before a foreclosure even begins.

Borrowers and guarantors should respond by scrutinizing loan provisions during the negotiation phase, particularly those related to receivership triggers, sale authority, and carveout liability. The best defense under the Act is a proactive one. Counsel must remain vigilant, anticipate how these provisions will operate under the Act, and ensure that loan documents reflect a fair allocation of risk.

Questions about how the Illinois Receivership Act may impact your business? Reach out to Benjamin Altshul or another member of LP’s Real Estate Group.