Receivership 101: Costs in a Receivership

There are two types of costs in a receivership, direct and indirect. Direct costs are the costs incurred and paid for by the receivership. Indirect costs are costs related to the receivership but aren’t paid for by the receivership, this would mostly be attorney’s fees for the plaintiff and defendant. When considering the direct costs one thing should be kept in mind, if the funding falls short in a receivership typically the plaintiff is turned to for funding.

The initial costs in a receivership are typically indirect costs to the receivership, a plaintiff hires counsel to review the problems involved. These reviews and initial approaches are funded by the plaintiff. At this same time, typically a Defendant begins to prepare for their defense and hires counsel.

As the receivership starts to form, the initial costs involved are engaging the receiver. The receiver is likely the largest cost in the receivership. It’s important to remember that the receiver will also engage counsel who cannot be working with either the plaintiff or defendant.

Following the receiver’s engagement, the next immediate cost is for a bond in the receivership, either paid in cash to the court systems or covered through sureties. The receiver pulls the bond, but the receivership pays for the bond. Immediately following appointment, the next cost is preparing and sending out notices. There are a number of groups that must receive notice like governmental organizations. Especially in wind down or claims scenarios the receiver is likely to send out notices to accounts payable and accounts receivable, ensuring that collections take place in an expedient manner and that all accounts payable is accounted for properly.

After these standard actions that occur in nearly every receivership there are often specialties engaged which may not apply to every receivership. These include doing and paying taxes, which would typically involve hiring an accounting firm. Other cases might include logistics, especially if winding down a business, to protect the assets of the company.  Auctioneers might be engaged especially in a wind down. Auctioneers often work on a percentage of sales so perhaps no upfront costs to the receivership, but still a cost upon sale of the items that needs to be accounted for within the receivership. Professional Service firms might be engaged depending on the needs of the receivership, this might include a forensic accountant to clean up the books or verify fraudulent activity, a property manager might be engaged to ensure the property is kept up. Specialties might also be engaged to assist with the receivership, one of the more common specialties being engaged right now is cannabis expertise, but other receiverships might include a hotel property and a hotel management company might be engaged. Most important to all of this is to remember that these costs need to be in the best interest of the receivership. Meaning, if something is not going to benefit the receivership it should not be pursued. The simplest example of this is if there is a piece of equipment that more is owed on it than the resale value, the best approach is likely to surrender the equipment instead of spending receivership resources for a net loss to the receivership.

One point that often gets forgotten with plaintiffs and defendants is that even though these costs can start to add up, it is still likely considerably faster and cheaper than a Chapter 7, 11, or Involuntary Bankruptcy proceeding.

How do we minimize the costs of a receivership? There are actually a few actions that typically occur that create added costs and by minimizing these efforts the costs of the receivership will come down dramatically.

• Litigation – Going in to court again and again is the leading cause of increased costs, largely because it brings together the receiver, all three counsels, and often times other professionals to testify.  It also takes time to get into the courts system which begins to create delays in the receivership.
• Depositions – Similar to litigation, bringing together the receiver and all three counsels can have exponential costs begin to develop.
• Fraud – In some cases this is the reason for the receivership in the first place and cannot be avoided, but when other professional service firms like forensic accountants need to get involved other costs are going to come into the receivership.

One thing to remember is that if plaintiffs and defendants are cooperative this typically can minimize these costs. When plaintiffs and defendants aren’t focused on winning the fight, but seeking the best outcome of the receivership, the receivership moves faster and costs less.

This article and it’s accompanying video are part of the Receivership 101 series, created in partnership with the Commercial Receivership Association.