§66.6 Analysis

• Jurisdiction: Washington

§66.6ANALYSIS

This section discusses the more substantive legal issues related to receiverships. For details on the purposes and procedural aspects of receiverships, see §66.5, above.

(1)Grounds for appointment of receiver

The receivership statute enumerates 40 separate grounds on which a receiver may be appointed. RCW 7.60.025(l)(a)-(nn). Most of these grounds are highly specific or otherwise obscure and therefore outside the scope of this chapter. Interested practitioners are encouraged to review the relevant statutory provisions directly, which can be found at RCW 7.60.025(l)(a)-(nn).

The majority of receiverships are based on the following grounds:

(a)On application of any party, when the party is determined to have a probable right to or interest in property that is a subject of the action and in the possession of an adverse party, or when the property or its revenue-producing potential is in danger of being lost or materially injured or impaired. A receiver may be appointed under this subsection (l)(a) whether or not the application for appointment of a receiver is combined with, or is ancillary to, an action seeking a money judgment or other relief;

(b)Provisionally, after commencement of any judicial action or nonjudicial proceeding to foreclose upon any lien against or for forfeiture of any interest in real or personal property, on application of any person, when the interest in the property that is the subject of such an action or proceeding of the person seeking the receiver's appointment is determined to be probable and either:

(i) The property or its revenue-producing potential is in danger of being lost or materially injured or impaired; or

(ii) The appointment of a receiver with respect to the real or personal property that is the subject of the action or proceeding is provided for by agreement or is reasonably necessary to effectuate or enforce an assignment of rents or other revenues from the property.

RCW 7.60.025(l)(a)-(b). The general upshot of these provisions is that a receivership may be appropriate when a debtor is in financial distress and when the property securing creditors' interests—or that property's revenue-producing potential—is "in danger of being lost or materially injured or impaired." RCW 7.60.025(l)(a), (b)(i). Practice Tip:

Practice Tip: The default rule is that the court must find—in addition to an applicable ground on which the receivership may be based— that "the appointment of a receiver is reasonably necessary and that other available remedies either are not available or are inadequate." RCW 7.60.025(1). Significantly however, this default rule does not apply when the receivership is based on RCW 7.60.025(l)(b)(ii). See RCW 7.60.025(1). In other words, when foreclosure proceedings have commenced and when the loan documents call for the assignment of a receiver in the event of foreclosure, the foreclosing creditor may procure a receivership without having to show necessity or a lack of other available and adequate remedies.

Other grounds on which receiverships are commonly based are enumerated in RCW 7.60.025(c)-(g), which provides as follows:

(c)After judgment, in order to give effect to the judgment;

(d)To dispose of property according to provisions of a judgment dealing with its disposition;

(e)To the extent that property is not exempt from execution, at the instance of a judgment creditor either before or after the issuance of any execution, to preserve or protect it, or prevent its transfer;

(f)If and to the extent that property is subject to execution to satisfy a judgment, to preserve the property during the pendency of an appeal, or when an execution has been returned unsatisfied, or when an order requiring a judgment debtor to appear for proceedings supplemental to judgment has been issued and the judgment debtor fails to submit to examination as ordered;

(g)Upon an attachment of real or personal property when the property attached is of a perishable nature or is otherwise in danger of waste, impairment, or destruction, or where the abandoned property's owner has absconded with, secreted, or abandoned the property, and it is necessary to collect, conserve, manage, control, or protect it, or to dispose of it promptly, or when the court determines that the nature of the property or the exigency of the case otherwise provides cause for the appointment of a receiver[.]

The common thread in these provisions is that a receivership may be appropriate in various circumstances to give effect to judgments and/or to protect the interests of judgment creditors.

(2)Powers of receiver

The general powers of a receiver are enumerated in RCW 7.60.060, while other specific powers are scattered throughout the receivership statute. Note that the court may expand, modify, or limit any of the receiver's statutory powers "for good cause shown." RCW 7.60.060(3).

(a)General powers

A receiver's general powers are set forth in RCW 7.60.060. Under that section, receivers enjoy the following powers:

(1)to incur or pay expenses related to the preservation and use of estate property, RCW 7.60.060(l)(a);

(2)to use or sell estate property, or incur or pay expenses on behalf of the estate, in the ordinary course of business, RCW 7.60.060(l)(b);

(3)to assert claims or rights that are property of the estate, or that arise out of the receiver's transactions, RCW 7.60.060(l)(c), (e);

(4)to intervene in actions brought against the debtor, RCW 7.60.060(l)(d);

(5)to pursue fraudulent transfer claims, RCW 7.60.060(l)(f);

(6)to seek advice or instruction from the court, RCW 7.60.060(l)(g);

(7)to obtain appraisals of estate property, RCW 7.60.060(1) (h); and

(8)to subpoena persons for examinations under oath, RCW 7.60.060(l)(i).

The court may confer additional powers on the receiver as it deems appropriate. RCW 7.60.060(l)(j).

(b)Power to employ professionals

Under RCW 7.60.180, the receiver may employ professional persons, such as attorneys, accountants, appraisers, and auctioneers "to assist the receiver in carrying out the receiver's duties." RCW 7.60.180(1). The only qualification is that the professional must not "hold or represent an interest adverse to the estate ...."Id. With respect to this qualification, the statute clarifies that a professional person is not disqualified on the sole basis that the person is employed by or represents a creditor or other party in interest, as long as the receiver discloses the employment or representation to the court, and the court finds there is no actual conflict "or inappropriate appearance of a conflict." RCW 7.60.180(2). For a discussion of the procedures relating to the payment of professional persons, see §66.5(2)(j), above.

(c)Power to abandon estate property

RCW 7.60.150 empowers the receiver, with court approval after notice and a hearing, to abandon any estate property that is either burdensome or of inconsequential value or benefit. However, the receiver may not abandon hazardous or potentially hazardous property when doing so would violate a state law or regulation intended to maintain public health or safety. RCW 7.60.150.

(d)Power to use, sell, or lease estate property

Under RCW 7.60.260, the receiver is authorized, with court approval after notice and a hearing, to use, sell, or lease estate property outside the ordinary course of business. RCW 7.60.260(1). Note that, pursuant to RCW 7.60.060(l)(b), these actions are permitted without court approval when done in the ordinary course of business. See §66.6(2)(a), above.

(e)Power to obtain financing

The receivership statute enables the receiver, without court approval, to incur unsecured debt or obtain unsecured credit in the ordinary course of business. RCW 7.60.140(1). Furthermore, with court approval after notice and a hearing, the receiver may incur secured or unsecured debt or obtain secured or unsecured credit outside the ordinary course of business. RCW 7.60.140(2).

(f)Power to assume or reject executory contracts and unexpired leases

RCW 7.60.130 establishes the power of a receiver, subject to certain limitations, to assume or reject executory contracts and unexpired leases. The term "executory contract" is defined as "a contract where the obligation of both the [debtor] and the other party to the contract are so far unperformed that the failure of either party to the contract to complete performance would constitute a material breach of the contract, thereby excusing the other party's performance of the contract." RCW 7.60.005(4). (The term "unexpired lease" is not defined by the statute.)

To assume or reject an executory contract or unexpired lease, the receiver must obtain court approval after notice and ahearing. RCW 7.60.130(1). The court may condition its approval on terms it believes "are just and proper under the particular circumstances ...." Id. The receiver's power to assume an executory contract or unexpired lease exists even if the contract or lease contains a term that would "effect or permit a forfeiture, modification, or termination" of the contract as a result of the receivership, the debtor's financial condition, or an assignment for the benefit of creditors. RCW 7.60.130(3). In limited circumstances, the receiver's power to assume an executory contract or unexpired lease is contingent on obtaining the consent of the other party to the contract or lease. See RCW 7.60.130(4)(a)-(c).

(3)Duties of receiver

The receiver's general duties are set forth in RCW 7.60.060(2), while other specific duties are scattered throughout the receivership statute. As is the case with respect to...