10.6 The Three Types of Special Receivers and Their Duties

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

10.6 THE THREE TYPES OF SPECIAL RECEIVERS AND THEIR DUTIES

10.601 The Permanent Receiver. If appointed to serve as a permanent receiver, the receiver may (i) operate the corporation in contemplation of liquidating the business at a later date; or (ii) immediately liquidate the corporation. ⁹³

A. Operation of the Corporation until a Liquidation Is Effectuated at a Later Date.

1. Active Receiver. A receiver sometimes assumes a more active role in the management of the corporation rather than serving as a passive monitor

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or liquidator of the corporation. ⁹⁴ Indeed, in State Bank of Virginia v. Domestic Sewing Machine Co., ⁹⁵ the court described the trial court's appointed receiver as an "active" receiver. ⁹⁶ The court defined an "active receiver" as one who is given the management functions of the company and who, consequently, is given much broader powers than that of a "passive" receiver. ⁹⁷ While the appointment of a receiver is clearly left to the court's discretion, there are two circumstances that typically justify the appointment of an active permanent receiver.

a. Railroad or Public Utility.The first circumstance in which a permanent receiver will be appointed to become actively involved in the management of the entity is where the entity is a public railroad or other public utility. ⁹⁸ The justification for the receiver's active role is that the maintenance of these entities as a going concern is in the public's best interest. ⁹⁹

b. Threat of Serious Property Damage and Loss. An active receiver will also be appointed when the ceasing of the entity's operations may result in serious damage to the value of the property. ¹⁰⁰ For example, a receiver may continue to run a factory that has large quantities of unfinished raw materials or unfilled contracts. ¹⁰¹ In Domestic Sewing Machine Co., ¹⁰² the receiver was appointed to preserve and protect the corporation's assets and goodwill because "it was the opinion of the creditors that great loss and damage would result if the affairs of the company were closed at once." The court granted the receiver powers to conduct the business as necessary, including the authority to incur debt as necessary to effectuate the sale of the corporation. ¹⁰³ The court noted that the receiver was in the nature of "an active receivership" in light of the need for the receiver to protect the corporation's assets. ¹⁰⁴ Moreover, the court granted the receiver the authority to issue receiver's certificates to enable it to continue and protect the business. ¹⁰⁵

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c. The Receiver's Powers. The case of Steingold v. Seaton ¹⁰⁶ illustrates the powers of a permanent receiver to operate the business in contemplation of liquidating the corporation. In Steingold, the trial court authorized the receiver to continue to operate a laundry as a going concern until it could be sold at a more "profitable disposition." ¹⁰⁷

Bethlehem Steel Corp. v. Williams Industries ¹⁰⁸ suggests the limits on an "active" receiver. The trial court appointed a receiver to monitor a liquidation plan and "prepare and develop the real property . . . for the purpose of sale, liquidation, transfer, or other use." The receiver was appointed to a three-year term with indefinite extensions. The Supreme Court of Virginia, noting that the appointment of a receiver is a temporary device to accomplish the specific ends of liquidation, ruled that the trial court erred in appointing the receiver for such indefinite periods and purposes. ¹⁰⁹

In Peoples National Bank v. Virginia Textile Co., ¹¹⁰ the Supreme Court of Virginia affirmed the surcharge of collateral for the payment of the receivership's debts. In dicta, the court described without comment the broad, indeterminate powers given the receiver:

[A] decree was passed by the court, appointing the president of the bank receiver, with direction to take possession of all the company's property, which included not only the plant on which the plaintiff had the first lien, but other property, some of which was primarily liable for supply claims. The decree also invested the receiver with large powers, authorizing him to carry on the business and operate the property as a textile mill, "at the cost and risk of the fund," using the assets as a basis of credit; and, in order that he might be free-handed in the discharge of his duties, he was protected by injunction from interference either by the company, its agents and officers, or by creditors; the latter being required to litigate their demands in that suit. ¹¹¹

B. Immediate Liquidation. The following cases illustrate the powers of a permanent receiver when appointed to liquidate the corporation immediately.

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In Drake v. National Bank of Commerce, ¹¹² the court compared the appointment of a receiver to the "executor as a representative of a dead man." ¹¹³ Accordingly, it defined the receiver's duties as collecting the debts and property due the corporation, paying the outstanding debts, and allocating the remaining proceeds to the shareholders. ¹¹⁴

In Gilbert v. Edward H. Winks Architecture, P.C., ¹¹⁵ the court appointed a receiver and gave him "all the powers to immediately liquidate the corporation, collect its final receivables, and pay its debts and to distribute its remaining assets to the shareholders." ¹¹⁶ The court also vested in the receiver "the power to approve any compromises reached between the two shareholders as to the liquidation of the corporation and disposal of its assets." ¹¹⁷ Notably, the court approved the receiver's work in which he "coordinated the dissolution and winding up of the corporate affairs, including the management of open accounts and the transfer of...