Spring 2020 • Issue 68, page 18

Reference: Receivership Process Terms

By Poltrick, Bruce*


Receiverships Generally

The appointment of receivers has become much more popular over the past ten years as to investment frauds and secured creditors' demand for more efficient liquidations, as courts become more familiar with the process • Secured creditors have become frustrated with the high cost of bankruptcy and view receivership as a more efficient liquidation process.

The Role of A Receiver

A receiver has a similar role as a bankruptcy trustee, but entirely different laws apply to the fiduciary's actions • A receiver is appointed ancillary to a primary cause of action and the Receiver serves as new management whose primary responsibility is to marshal, manage and maintain the status quo of a business or asset until the primary subject of the lawsuit is resolved • A receiver can provide quick, interim equitable relief, as well as longterm preservation and management of property • A receiver is a fiduciary to all stakeholders in a case who reports to the appointing court • A receiver's duties and powers are defined by the Receiver Appointment Order, and Judges have very broad discretion in fashioning the receiver’s duties and powers.

Reasons for Appointment of a Receiver
Rescue deteriorating collateral • Enforce secured creditor's rights under loan documents • Eliminate mismanagement and intentional misconduct • Insulate the secured creditor from lender liability • Freezing and ceasing other creditors actions • Stabilize and establish a controlled structure • Develop a procedure for marketing the property • Convey property free and clear of liens.

Breadth of Receiverships
A receivership's breadth depends on the needs of the particular circumstance and is only limited by the equity powers of the Court • A receivership can be for limited purposes – for example, to simply take possession of and preserve property pending judgment, foreclosure or sale of the property • A receivership can be utilized as a foreclosure alternative for secured creditors not wishing to take title to secured property • A receivership can be utilized to a bankruptcy alternative for stakeholder wishing to liquidate the property of a debtor and adjudicate claims against the debtor.

Change in Control Without Ownership

Among the options available to secured creditors in dealing with a distressed property or business is to have a receiver appointed, an option included in virtually every commercial loan agreement • A receivership offers the benefit of control of a troubled asset or business without the secured creditor foreclosing and taking ownership of the asset and without the secured creditor being deemed to be in possession of the property prior to foreclosure and taking ownership • Insulates the secured creditor from liability associated with the operation of the property • Receivership law is not well-defined and is limited only by the equitable powers of a Court, so receivership may be advantageous to a bankruptcy and offer more options than moving forward with a foreclosure.

Top Ten Benefits of Appointing a Receiver

1) Appointed quickly to safeguard and preserve assets. Stop the fraud. 2) Provided with broad powers to quickly institute change. 3) Operate and stabilize a business in anticipation of a sale. Maintain or even increase the value of the underlying assets. 4) Empowered to take control of all assets, books, and records, thus allowing for a quick investigation of the debtor’s financial affairs. This information can then be shared with secured creditor and other stakeholders to help determine the best way to proceed. 5) Court fiduciary provides greater credibility and authority in dealing with employees, customers, vendors, and other creditors. 6) Empowered to institute litigation to recover fraudulently conveyed assets, can freeze and compel the return of debtor property and can issue subpoenas to investigate asset transfers. 7) Cost effective – Receiverships are typically a fraction of the cost of a bankruptcy filing – no committees, extra counsel, US Trustee, costly delays, etc. 8) Streamline reporting requirements and fewer court hearings. Saves time and provides for more focus on the task at hand. 9) Less Publicity – generally not picked up by the media unless major fraud case. Some Defendants simply do not want the publicity. 10) Asset sale or bar dates published. 11) The laws governing receiverships are less well-defined and broad, thus providing more flexibility and creativity than a bankruptcy.

Stakeholder Considerations

Appoint receiver when the eventual sale or liquidation is required. The secured creditor has a non-performing loan which cannot be serviced by continuing the operation of the Borrower • Appoint receiver when the underlying business or management activities are alleged to be illegal/fraudulent and/or the stakeholders have lost faith in management • The secured creditor is concerned with the continuing erosion of its collateral and the need to continue funding the Borrower’s underlying operation • There is a lack of credible financial information • There are concerns over the physical loss of assets (cash, inventory, etc.) and/or the diminution of value of the debtor and its associated business. Source of The Receiver’s Authority: Derived from the Court’s inherent equitable powers • Federal Case - receiverships are ancillary to a primary cause of action, so subject matter jurisdiction must independently exist (federal question or diversity jurisdiction). Once subject matter jurisdiction exists, 28 U.S.C. Sections 754 and 1692 provide the appointing Court with territorial jurisdiction over all matters related to receivership regardless where the property is located • State Case – jurisdiction under applicable state laws--limited to the territorial jurisdiction of the State • The Order of Receiver Appointment Controls: Tailored to specific circumstances • Defines appropriate duties and authority • Provides structure and minimize “chaos”.

Equity/Business Receivers

Appointed over an entity, but sometimes are appointed over an individual • Many receiverships are just over the property to avoid legacy issues with the individual or entity (taxes, benefits plans, etc.) • A receiver for an individual or entity requires special considerations including living expenses, control of defendant’s mail, and filing defendant’s personal tax returns.

Receiver’s Powers

Officer of the court • Manages and operates the property according to the laws of the state where the property is located • Court has broad discretion to determine appropriate relief in an equity receivership, including to stay actions against entity in receivership • Governed by equity in most instances.

A Few Key Issues for A Receiver Order

The Order Appointing Receiver governs all aspects of the receivership • Right to remove senior management and operate business • Right to obtain possession of and freeze assets of the receivership estate • Right to divert mail • Right of investigative authority • Right to employ counsel and other professionals • Right to stand in shoes of insured and the debtor's interest in property.

Scope of Authority Defined by Court Order

Collect, marshal, take custody, control or possession • Sell assets • Have access to premises and books and records.

* Information was compiled by Bruce Poltrock from various sources.