How Geography Shapes the Receivership Process: Washington State Ain’t Minnesota

Geography Matters When it Comes to Receiverships

Ian Rubenstrunk’s recent article, Minnesota Commercial Real Estate Receiverships: Nuts and Bolts, touches on an issue that causes considerable confusion within the U.S. receiver field: how receiverships are formed and managed.

While the article, written by a Minnesota-based advisor, makes several interesting and educational points, the editors take great care at the end to emphasize the geographic limitations of the information provided. In doing so, they explicitly underscore the importance of understanding key differences between jurisdictions – including the rules of the state where the receivership is requested. It is not a small distinction.

For example, the article begins by stating receiverships are most often commenced by creditors but can also be commenced by an equity holder as well. Further, it mentions that the first step toward a receivership is to initiate a lawsuit. Most commonly, the lawsuit is filed for breach of contract and is seeking foreclosure or repayment of collateral.

[EDITOR’S NOTE: Mr. Rubenstrunk’s article specifically addresses commercial real estate receiverships which are most commonly commenced with a lawsuit. Other receivership cases may see other methods of commencement and may see lawsuits with different causes of action.]

Appointment can also be sought as an independent action but is less common. Not so in the state of Washington.

The State Receivership Process: How it Works in Washington

Many receiverships in the state of Washington are initiated through an Assignment for the Benefit of Creditors (ABC). This process, while separate from a receivership, allows a company to initiate insolvency proceedings without either a lawsuit or court process. Once the assignee accepts the assignment, it is the assignee that initiates the receivership.

The DailyDAC article goes on to state that the next step is to bring a motion for the appointment of a receiver. It suggests that to maintain a good relationship with the lender, it’s a great idea to seek a mutual appointment.

[EDITOR’S NOTE: Mr. Rubenstrunk’s article does not state that a receiver and a lender should seek mutual appointment in order for a receiver to maintain a good relationship with a lender. Instead, Mr. Rubenstrunk stated that lenders will often interview receivers prior to seeking the receiver’s appointment to evaluate the receiver’s qualifications and experience. In Minnesota, Mr. Rubenstrunk explained receivers are independent third parties and serve as an arm of the court.]

It’s important to note that where an ABC is used in Washington, the assignment is required to be on behalf of all creditors.

[EDITOR’S NOTE: Mr. Rubenstrunk explained that Minnesota has the same requirement that receivers are fiduciaries of all creditors].

Section 7.08.010 of the statute states:

“No general assignment of property by an insolvent, or in contemplation of insolvency, for the benefit of creditors, shall be valid unless it be made for the benefit of all of the assignor’s creditors in proportion to the amount of their respective claims.”

Once converted to a receivership, the receivership statutes in Washington address the order and priority of the payments made by the insolvent estate. Creditors with properly perfected UCC filings have the highest priorities.

Key Decision Variables For Distressed Businesses

When considering options, be certain that the attorney you select has experience with both processes. Be sure your attorney explains which is best for the company and for you personally. While moving from an assignment or receivership to bankruptcy is relatively straightforward, going in the other direction is highly problematic.

Another issue is affordability. The federal process is generally more expensive than a state receivership due to certain costs mandated in the bankruptcy code. An experienced assignee/receiver may be able to provide creative solutions to fundthe process. If funding does not become available, it is a relatively easy process to terminate a receivership. Federal bankruptcy statutes provide solutions for dealing with a lack of funding but are more complex.

Finally, it is important to select an assignee/receiver that you can work with as the process moves forward. Knowing that your selected assignee/receiver has the experience to manage the sometimes competing objectives of each party is critically important. These professionals can work with stakeholders to maximize returns in accordance with the statutes, providing peace of mind in what is always a stressful situation.

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We think you’ll also like:

1. 90 Second Lesson: What is a state law receivership?
2. Minnesota Commercial Real Estate Receiverships: Nuts and Bolts
3. Application for Receivership

[Editors’ Note: To learn more about this and related topics, you may want to watch the State Court Receivership 101 series.]

©2023. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.