The ABCDs of Equitable Receivership, 0619 COBJ, Vol. 48, No. 6 Pg. 24

Author:BY JACK TANNER
Position:Vol. 48, 6 [Page 24]
 
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48 Colo.Law. 24

The ABCDs of Equitable Receivership

Vol. 48, No. 6 [Page 24]

The Colorado Lawyer

June, 2019

BUSINESS LAW

BY JACK TANNER

This article covers the fundamentals of equitable receiverships, including tips for best practices.

A receivership can be an efficient and economical equitable remedy. This article covers the basics and explains best practices for effective equitable receiverships.

A is for Appointment

One of the most powerful remedies available to a litigant is the appointment of a receiver. There are many different types of receivers, but this article concerns itself with a receiver "pendente lite" (pending litigation), sometimes called an "equity receiver." This receiver is appointed via the inherent power of a court sitting in equity, and not pursuant to any statute.1 The test for appointment is simply that, considering all the factors a court sitting in equity should consider, the appointment of a receiver is appropriate to preserve the assets of the estate.2 A court's appointment is review able only upon an abuse-of-discretion standard.[3]

Generally, the moving party must "have an interest" in the property sought to be put into receivership.[4] While the circumstances in which a receiver might be a good idea are nearly limitless, there are recurring situations where an equity receiver is typically appointed, including:

■ Ineffective management of a business. This occurs where management is not effective and the usual methods of replacement or accountability do not work. Examples of ineffective business management are deadlocked equity holders that cannot agree on how the company is to be run (or perhaps cannot even agree on the selection of management); bad management not accountable to equity holders via the usual types of litigation; or mistrusted management (e.g., a receiver might be used to conduct elections to find out who properly is management).5

■ Trusts. A receiver is useful where there are intra-beneficiary disputes or disputes between the trustee and the beneficiaries.6

■ Divorce. Where business assets are subject to a divorce action, a divorce court can appoint a receiver to operate the business assets during the divorce action.[7]

■ Pending dissolution of a business or trust. When a business or trust is being dissolved, a receiver can operate it until the dissolution is complete.

■ After judgment. CRCP 66(a)(2) expressly provides that a receiver may be appointed after judgment to dispose of the property subject to the judgment.

A receivership action is commenced by filing a complaint seeking the appointment of a receiver. A federal receiver can be appointed if federal jurisdiction otherwise exists, and only as a remedy incident to another claim for relief.8 CRCP 66(d)(1) allows the request for a receiver to be the only claim for relief in a complaint. The rules regarding notice pleading apply to a receivership complaint, but it is better to provide greater detail and specificity in setting out the grounds for a receiver. A verified motion is usually filed to support the appointment, which brings the issue of whether a receiver should be appointed to the court's attention immediately.

The movant (not necessarily the plaintiff) must propose a specific receiver to the court; there is no "panel" of receivers as there is for bankruptcy trustees. The movant should bear in mind it has no control over the receiver once the receiver is appointed. The receiver is an arm of the court with a fiduciary duty to the court and to whomever the court ultimately determines to be the proper beneficiaries (usually creditors and equity holders).9 The receiver does not and cannot owe the party responsible for its appointment any more duty than it owes others.10

The ability to choose the receiver is one of the most useful aspects of receiverships because it allows the selection of a receiver with particular expertise. If possible, the plaintiff should find a receiver who already knows the business, rather than worrying about finding a receiver with legal expertise. The receiver can always retain counsel to help with the legal aspects. The court does not have to appoint the proposed receiver, but can ask other parties for their suggestions, or even select a receiver sua sponte. As a general rule, a receiver does not have to be licensed in the business being put into receivership.11

A receivership estate (the res) is created by the order appointing the receiver. What constitutes the res depends on the property in which the movant has an interest. Usually, but not always, a company shareholder asks that the company itself be put into receivership. In these instances, the receiver takes over management of the entire concern with an eye toward recapitalization or a sale as a going concern. And usually, but not always, a secured creditor asks for its collateral only to be put into the res. These instances often result in liquidation of the collateral, because there is usually not a going concern to recapitalize or sell.12

Unlike a bankruptcy, which is given structure by the Bankruptcy C ode, there are few statutes regarding receiverships because receiverships are within the court's inherent power. This flexibility, while one of the greatest advantages of a receivership, comes with a price: the equity receiver's effectiveness will depend on the order of appointment. Because the order appointing a receiver sets out the scope of the receiver's authority,13 it requires careful thought and consideration, and the order appointing a receiver should be as detailed as possible. An order appointing a receiver should contain at least the following boilerplate items:

■ a finding regarding jurisdiction and venue;

■ findings of fact that support the appointment of the receiver;

■ a conclusion of law that a receiver should be appointed;

■ a requirement that the appointment is subject to the receiver filing an oath and posting bond;

■ a detailed description of the res;

■ a statement that the receiver is directed and empowered to take into custody all assets that will be within the estate;

■ a statement that the receiver is given those powers traditionally and customarily held by receivers (an "including but not limited to" list is a good idea);

■ a provision allowing the receiver to sell receiver's certificates to raise money;

■ a provision fixing the receiver's compensation and setting the priority in which bills are to be paid (generally following the absolute priority rule, discussed below);

■ a provision allowing the receiver to hire and pay professionals, staff, and other personnel as required to effectively manage the estate;

■ a stay of actions against the companies or property in the estate, including requiring that all actions against the receiver be brought in the appointing court;

■ a provision stating all actions taken by the receiver are in its capacity as such, and not individually; and

■ a provision protecting the receiver's agents.

The language in the orders should be tailored to the specific matter. The plaintiff and the proposed receiver should discuss and negotiate other orders that would be helpful. These will vary from case to case, but may typically include:

■ if difficulty in collecting the assets is anticipated, an order that the sheriff or U.S. marshall will assist with collections;

■ if difficulty with the defendant or its principals is anticipated, an order that the defendant (and its principals) is prohibited from holding itself out as the defendant and taking any action on its own behalf;

■ how often reports should be filed (rarely more often than monthly); or

■ an order naming parties who maliciously damaged the property going into the...

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