10.1 The Receivership: an Overview

• Library: Enforcement of Liens and Judgments in Virginia (Virginia CLE) (2019 Ed.)

10.1 THE RECEIVERSHIP: AN OVERVIEW

10.101 Introduction.

A. Definition. A receivership is a judicial proceeding in which the court appoints a receiver to take control of an entity's property. Receiverships are creatures of state statutes as well as decisional law.

B. Involuntary Proceeding. Certain creditors can file an action to place an entity into receivership involuntarily. There is no authority for a debtor to place itself into receivership.

C. Relation to Bankruptcy Proceedings. Federal bankruptcy laws have for the most part supplanted receiverships as the preferred choice of creditors seeking a judicially supervised procedure. The greater flexibility of the Bankruptcy Code ¹ and the availability of "reorganization" as an alternative have played a great part in this evolution. Moreover, under the Bankruptcy Code, a state court receivership is automatically suspended upon the filing of a bankruptcy petition, subject to the bankruptcy court's authority to abstain to allow the state court proceedings to go forward. ²

D. Absence of a Clearly Defined Body of Law. A major feature of the receivership remedy is the underdeveloped and often confusing state of the law, especially in comparison with bankruptcy law. Two factors contributed to this situation:

1. Lack of Case Law. The equity court's developing jurisprudence on creditors' remedies through receivership was largely halted as federal bankruptcy laws became more dynamic at the beginning of the twentieth century. As a result, only a handful of decided receivership cases involving creditors' rights are of recent origin.

2. Applicability of Corporate Law. Corporate law intervened to provide for a statutory receivership remedy in specific types of cases, such as

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corporate dissolution or when a corporation faces irreparable injury due to a director deadlock or the fraudulent acts of directors. ³ Although the principles applicable to corporations were borrowed from the equity courts, the statutes governing creditors' rights against insolvent corporations were not incorporated into later statutes governing partnerships, limited partnerships, limited liability companies, and other types of corporations. The applicability of receivership principles to these entities is unclear at best.

The Virginia receivership statute is almost entirely procedural, made applicable "[w]henever the pleadings in a suit make out a proper case for the appointment of a receiver." ⁴ It therefore falls back on a hodgepodge of decisional and statutory law to identify a "proper case."

In July 2015, the National Conference of Commissioners on Uniform State Laws approved and recommended for enactment in all states the Uniform Commercial Real Estate Receivership Act ("UCRERA"). ⁵ To date, UCRERA has been enacted in Michigan, Tennessee, Nevada, Utah, and Oregon. Virginia has not adopted UCRERA, but UCRERA may be informative in circumstances where Virginia statutory and case law are silent.

E. Disadvantages. Receiverships have other drawbacks, such as:

	1.	They cannot be initiated by a debtor without shareholder approval, and they may be commenced only by certain creditors; 6
2.	A debtor does not receive a discharge; 7
3.	They are not vehicles for "internal reorganization" of the debtor, but rather are directed toward liquidation;

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	4.	Claims may not be paid if they are contingent, unliquidated, or unmatured; 8 and
5.	Avoidance actions based on Virginia fraudulent conveyance law may be preempted by the Bankruptcy Code and disallowed.

F. Advantages. Receiverships nevertheless provide useful vehicles for creditors:

1	Assets of the receivership estate can be consolidated through a more lenient standard than those in a bankruptcy proceeding and disbursed through the court's discretion;
2.	Certain entities are not eligible for voluntary or involuntary relief under the Bankruptcy Code; 9
3.	Creditors may not want to subject themselves to the procedural and substantive rigors and risks of initiating an involuntary bankruptcy petition; 10
4.	The creditor may hope to accomplish a liquidation without triggering the avoidance powers or the priority scheme of the Bankruptcy Code;
5.	An

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