Receivership is foreign to most of the general public, and many attorneys and other professionals as well. Receiverships are not a common topic that people are discussing, but that may soon change. In the past decade or so, over 15 states have improved their state receivership statutes, making them more comprehensive and accessible. This fact, coupled with current economic conditions, suggests that state-level receiverships may become more common in the near future.
Each state has its own receivership laws and procedures. Some states have distinct, comprehensive statutes. Others have more general legal principles that are to be followed. These matters affect how receiverships are conducted state by state.
In Missouri, for example, it is the Missouri Commercial Receivership Act (MCRA). With the codification of the MCRA, judicial applications for receiverships are more common because the act provides clear rules and circumstances for appointing a receiver. This article will examine the common applications of receivership based on the MCRA and other state statutes, with the recognition that despite statutory differences or procedural rules that vary from jurisdiction to jurisdiction, receiverships are centered on the preservation of asset values, the opportunity of creditors to be heard, and the effective, efficient administration of property placed into the hands of a court-appointed receiver.
Receiverships are most commonly used with the intention of protecting assets and creating visibility for creditors and the court as to how assets are being handled. A receiver can be appointed to secure an asset and protect its value. A common example of this application is the collateral of creditors.
Below, we see the circumstances in which a receiver can be applied to protect a creditor’s assets. Not only can a receiver protect the value of tangible assets, but they can protect and continue to use an apparatus that would pay debts such as a business’s revenue production or rent collection. There are many reasons why a receiver is needed to protect assets. In this instance of appointment, the court has found that a company needs immediate assistance and supervision in order to “keep, preserve, and protect” the assets of the business for the benefit of the creditors.1
There are many threats to asset values that can arise in the business context. For instance, a business could suddenly lose leadership or key personnel. Alternately, particularly in closely held firms, it is not uncommon for an owner to mismanage the business’s revenue, keep poor accounting records, or lack discipline in distinguishing personal property from business property. There could even be a dispute amongst the leadership in which disputes among owners threaten to impair company operations. A receiver can protect the value of a business in scenarios such as this rather than let operations suffer as leaders sort out disagreements or overcome business operational interruptions. In this way, a receiver enables creditors to be protected rather than be forced to sit idly by as value degrades.
Most states recognize that a receivership can be an appropriate means of protecting the collateral securing a credit facility. In Missouri, that concept is captured in statute. Specifically a receiver may be appointed:
(2) In an action in which the person seeking appointment of a receiver has a lien on or interest in property or its revenue-producing potential, and either:
(a) The appointment of a receiver with respect to the property or its revenue-producing potential is necessary to keep and preserve the property or its revenue-producing potential or to protect any business or business interest concerning the property or its revenue-producing potential; or
(b) The appointment of a receiver with respect to the property or its revenue-producing potential is provided for by a valid and enforceable contract or contract provision; or
(c) The appointment of a receiver is necessary to effectuate or enforce an assignment of rents or other revenues from the property2
As another example, Arizona’s statute provides:
When a receiver is appointed by the court pursuant to this article, he shall have the power to sue for, collect, receive, or take into his possession all the goods, and chattels, rights and credits, monies and effects, lands and tenements, books, records, documents, papers, choses in action, bills, notes and property of every description, including property with which such property has been mingled if it cannot be identified in kind because of such commingling, and to sell, convey, and assign the same and hold and dispose of the proceeds thereof under the direction of the court. Any person who has suffered damages as a result of the use or employment of any unlawful practice, and submits proof to the satisfaction of the court that he has in fact been damaged, may participate with general creditors in the distribution of the assets to the extent he has sustained out-of-pocket losses. The court shall have jurisdiction of all questions arising in such proceedings and may make such orders and enter such judgments therein as may be required.3
In Arizona, as in Missouri and other states, receivers have broad statutory powers to control various properties, rights, and authorities for the entity to which they are assigned. While crafted differently, states with commercial receivership statutes typically recognize statutes with similar concepts giving receivers broad scope of access and authority. Backed by the court and empowered by statutes such as these, receivers are able to effectively secure, protect, and even turn around properties in various conditions.
Procedurally, receivership can also be very efficient. A receivership is highly beneficial in this application because creditors can petition the court for a receiver and may only need to give relatively short notice to the debtor. Other states also have advantageous notice requirements for petitioning the court for a receivership. Where time is of the essence, a brief notice period allows a receiver to quickly secure an asset. Additionally, the receiver can potentially improve the value of an asset and bring fresh ideas to a business. A receivership provides the opportunity for experienced and innovative management for a business that is struggling, potentially leaving it in a better place than before the receivership.
Insolvency is also a common theme in receivership administration.
By way of example, Missouri’s statute expressly provides the opportunity to petition the court for a receiver in the event that an entity is insolvent, making receiverships an accessible remedy where an entity holding significant collateral is insolvent.
In an action against any entity if that person is insolvent or is not generally paying the entity’s debts as those debts become due unless they are the subject of bona fide dispute.4
Insolvency is a key reason many states have commercial receivership statutes in the first place. The reason for this is logical and is based on the recognition that when there is an insolvency, decision-making internal to a company can change. Owners may be incentivized to take greater risks in search of greater rewards for themselves, or they may be tempted to get what they can and get out. Receivership, however, mandates that decision-making run first to the benefit of creditors, not equity holders. Consequently, high-risk strategies can be avoided in favor of more certain realizations on asset values. Receivers offer a flexible and rapid bankruptcy alternative to creditors.
Minnesota, one of the first states to join the CRA, similarly provides access to receiverships as a remedy when an entity is insolvent:
In addition to those situations specifically provided for in statute, a limited or general receiver may be appointed when a corporation or other entity is dissolved, insolvent, in imminent danger of insolvency, or has forfeited its corporate rights and in like cases of the property within the state of foreign corporations and other entities.5
Conceptually, appointing a receiver due to insolvency is a measure that creditors in many states can take rather than attempt to force involuntary bankruptcy upon a debtor.
In the end, a receivership is faster, cheaper, and overall, less risky in many situations. Creditors can motion for a receiver when a business’s debts exceed the value of their assets and they are failing to pay debts as they come due. The receiver will secure the collateral and business and prevent further harm to the creditors’ assets. This process can often result in dissolution, liquidation, and a claims process. In some cases, the debtor may not truly be insolvent and is simply not paying debts as they come due; having a receiver in place can verify the state of the business and easily share that information due to the transparency of the receivership process. Of course, where the broader power of a federal court is necessary to secure assets, bankruptcy may be a better option. However, in cases where more generalized federal jurisdiction is unnecessary, receivership may be a valuable alternative for creditors.[Editors’ Note: To learn more about the differences between these processes and how a receivership benefits creditors, read Receivership vs. Involuntary Bankruptcy: How They Work and Dealing with Corporate Distress 07: Chapter 11 is Not Always the Answer: Strategic Alternatives For and Against Distressed Businesses.]
Often interwoven with the use of a receivership to treat insolvency, using a receiver to dissolve an entity highlights more of the speed and flexibility of a receivership. When an entity cannot be turned around from the brink, winding it down may be the only path forward. When winding down and liquidating assets to pay debts, a receiver is highly adept to locating, marketing, and selling assets on a short timeline because of the authority vested in it by the court.
In Missouri and in other states, this concept is recognized statutorily.
(1) In an action brought to dissolve an entity the court may appoint a receiver with the powers of a custodian to manage the business affairs of the entity and to wind up and liquidate the entity.6
In this application of receivership, the receiver secures the entity and winds it down. The appointment for dissolution is closely related to an appointment for insolvency as it is the reason for dissolution. Most circumstances involve a business that is insolvent, and the receiver is unable to return the company to profitability. They begin winding down the entity by collecting all outstanding receivables, liquidating assets, and determining the priority of creditors in order to pay off debts. A clear claims process greatly benefits the effectiveness and efficiency of a receivership responsible for paying debts and ensures no creditors are improperly preferred.
The Ohio statute also contains statutory language on this score.
A receiver may be appointed […]
When a corporation, limited liability company, partnership, limited partnership, or other entity has been dissolved, is insolvent, is in imminent danger of insolvency, or has forfeited its corporate, limited liability company, partnership, limited partnership, or other entity rights;7
In Ohio, receivers have the general authority to carry out orders of the court and “may be appointed to manage all the affairs” of the entity to which they are assigned.8 This sort of language is common in states with commercial receivership laws. Many state statutes empower receivers with the authority to carry out the directions of the court, giving them broad authority to conduct a variety of actions (i.e., turnaround services, paying debts, winding down and liquidating, etc.)9
In the hands of a skilled professional, receiverships can be highly effective at securing and protecting the value of assets of creditors, creating transparency, reducing risk, and efficiently administering property. The use of a receiver is dynamic flexible and can be deployed in many evolving situations. Creditors and debtors can gain the benefit of an experienced industry professional leading their business or managing their assets. Where there is clear statutory law, specialized courts, or both, judges have the ability and confidence of clarity to appoint a receiver and the receiver has be afforded clear directives regarding their powers and responsibilities to all parties.
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[Editors’ Note: While the authors incorporated several state statutes into their discussion, there are too many for one single article. The authors are members of the Commercial Receivers Association, which seeks to develop a nationwide network of professionals who play key roles in receiverships. Members of the Commercial Receivers Association are quite familiar with the ins and outs of receiverships.
You can access the pertinent receivership statutes for all 50 states at the Commercial Receivers Association website. Just choose your state from the drop-down list. If you are interested in learning more about receiverships or the Commercial Receivers Association, please visit www.commercialreceiver.org.
To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):
©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Eric Peterson represents corporate clients in bankruptcy and non-bankruptcy insolvency proceedings, such as receiverships, assignments for the benefit of creditors, commercial collection matters, and out-of-court debt restructurings, and I defend banks in relation to lender liability and other claims. He has graduate level training in accounting, finance, and operational management and serves as the Vice-Chair…
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