Receiverships

• Author: David J. Cook
• Pages: 167-184

Receiverships

The Short Story

Synopsis

Receivers are no friend to the creditors of the underlying debtor. Courts

appoint receivers at the behest of a specific aggrieved party to take pos-

session of the debtor’s property usually for the purpose of satisfying the

aggrieved party’s claim or interest. For example, courts appoint receivers

to preside over partnership disputes, corporate dissolutions, family law

proceedings, or other matters that require a third party to liquidate assets

and distribute proceedings.

Sometimes, receivers do appear in the prosecution of pre- and post-

judgment remedies on behalf of creditors. These receivers are appointed

by the court to liquidate a debtor’s property for the benefit of the specific

creditor at hand. These receivers are relatively rare given their significant

expense and the fact that the creditor can execute upon the debtor’s prop-

erty. In the enforcement of a judgment, a receiver is required to liquidate the

debtor’s interest in a liquor license, patent, trademark, copyright, domain

name, and other intellectual property. Receivers might serve the interest of

a creditor in collecting large-scale portfolios of receivables.

The most common receivers are sought by banks, financiers, and hard

money lenders who seek to foreclose upon real property. This real property

is more than just raw land, but includes apartment buildings, commercial

properties, industrial properties, farms, developments, hotels, hospitals,

and other health facilities. These receivers are necessary to operate the

businesses attached to the real property, not only for the benefit of the

secured party and to avoid waste, but for the protection of all parties con-

cerned to avoid any risk of personal injury, damage, vandalism to the prop-

erty, or other calamity. A secured creditor might seek to appoint a receiver

to recover personal property collateral, including intellectual property,

inventory, equipment, furniture, fixtures, furnishings, and the like. Such a

receiver would take possession of this collateral and arrange for an orderly

sale, possibly as a going business. Any collection by a receiver would be

remitted to the secured party after judicial approval and an accounting. The

IRS and Securities & Exchange Commission routinely seek the appointment

of a receiver pending the outcome of an enforcement or regulatory action.

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INSOLVENCY EXPLAINED

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State Attorney Generals likewise seek receivers similarly for enforcement or

regulatory actions. This list is illustrative, not exhaustive.

A debtor might stipulate to the appointment of a receiver, but will

almost never actually seek the appointment of a receiver to operate its

business in the face of insolvency. In the event of insolvency, nearly every

debtor will exercise its rights under the Bankruptcy Code, or pursue a

non-bankruptcy alternative, such as an assignment, bulk sale, or voluntary

workout. Receivers are by and large an adjunct to the court engaged to

properly care for and maintain a specific asset for the benefit of a specific

party. Obviously, from time to time, the receivership estate might generate

sufficient funds to be applied to the claims of creditors, but this is unusual.

Legal Basis

Receivership came from English Common Law. Proportional distribution

to creditors originated in the English Bankruptcy Act of 1542. Federal law

(FRCP 66) and every state authorizes the appointment of a receivership. The

U.S. Internal Revenue Code and the Securities and Exchange Commission

statutes, among many others, authorize the appointment of a receiver. The

court has the right under common law to appoint a receiver separate and

apart from FRCP 66 and/or state law.

A receiver is a creature of equity, which authorizes the court to appoint

a receiver. Most post-judgment enforcement statutes authorize a judge to

appoint a receiver in aid of enforcement. Depending upon the exigency,

some judges demand an exhaustion of other remedies before appointing a

receiver. A court may appoint a receiver based upon exigent circumstances,

which tend to arise out of the operation of a business, including, but not

limited to, an apartment building, hotel, agricultural property, commercial

property, or retail store, particularly if the owner (i.e., the debtor) is unable,

unwilling, or incapable of managing the business.

As a direct agent and officer of the court, the receiver takes legal title to

the receivership estate for the purpose of administration. This is a moment

for pause. The receiver takes “receiver’s title” to the debtor’s property to the

extent that the receiver, subject to an order of the court, has the legal right

to sell, lease, dispose, encumber, transfer, assign, liquidate, or abandon the

property of the debtor. Upon the order of the court, a receiver can sign the

debtor’s name to a contract, deed, note, bill, transfer agreement, or even

endorse the debtor’s name to checks, drafts, or money orders. The receiver

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