10.10 The Creditor’s Right to Be Compensated for Its Claim when a Receiver Has Been Appointed

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

10.10 THE CREDITOR'S RIGHT TO BE COMPENSATED FOR ITS CLAIM WHEN A RECEIVER HAS BEEN APPOINTED

10.1001 In General. After a receiver reduces receivership property to cash, a creditor must be paid on its claim. The amount that a creditor will receive for its claim depends on whether the creditor is secured or unsecured.

10.1002 The Secured Creditor.

A. The Chancery Rule. Under the Bankruptcy Code, a secured creditor, in most situations, has a secured claim for the value of its collateral and an unsecured claim for any deficiency between the value of the collateral and the amount of the debt. Virginia, however, applies the "chancery rule," in which a creditor of the insolvent corporation is entitled to receive full payment on the full amount of its claim, regardless of the value of the security. ¹⁷² The creditor will thus receive the value of the collateral plus distributions from the estate sufficient to fully satisfy its claim against the entity, subject only to the limitation that it may not be paid more than its debt. ¹⁷³

The Supreme Court of Virginia explained the basis for the chancery rule as follows:

Under the chancery rule, the accident of insolvency does not take from the creditor any vested right. The remedy in rem remains as to the assets of the debtor's estate. The collateral

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remains as security for the payment of the whole of the contracted debt. Neither the insolvent estate, nor other creditors have any claim upon the collateral or any part thereof until the entire debt of the secured creditor is satisfied, or thereafter, except as to so much as may prove to be in excess of the amount required to satisfy the secured creditor's claim in full. The entire debt is the amount the creditor is entitled to collect from the debtor at the time of payment, and not the amount due at the date of insolvency.

The secured creditor's claim, for the purpose of receiving dividends from the receiver's assets, is fixed as of the date of the receivership. The effect of a receivership upon a creditor holding collateral security is to give to him, in addition to his right of action in personam, a substitute for his right of action in rem, theretofore existing, a right to a proportionate share of the impounded assets, a right to receive such a part thereof as his total proved demand bears to the total of all demands against the insolvent estate, unaffected by the fact that he holds security for a part of his debt. He still has, however, by virtue of the special contract under which he obtained the collateral, the right to collect, through liquidation of the collateral, the full amount of his debt, principal and interest. ¹⁷⁴

Under the chancery rule, the secured creditor may liquidate the collateral in satisfaction of the obligation. If this is not sufficient to satisfy the obligation, the secured creditor may proceed in personam against the receivership for the collection of the remaining amount due under the secured loan. The secured creditor is entitled to receive the full...