Court-Appointed Receiverships

 

Overview of a Court-Appointed Receivership

A receivership is an equitable remedy authorized by federal or state statute. The receiver is the person appointed by a court to take possession and to preserve property or a business that is involved in pending litigation. The receiver protects the property rights of the parties until the court reaches a final decision.

Petitioning creditors may also ask the court to place a person or a for-profit business in an involuntary bankruptcy under Chapter 7 (liquidation) or Chapter 11 (reorganization) pursuant to 11 U.S.C. § 303. Appointment of a bankruptcy trustee may not occur as quickly as appointment of a receiver because the debtor can oppose the bankruptcy and demand an evidentiary hearing.

When A Receivership is An Appropriate Equitable Remedy

The purpose of a receivership is to prevent fraud or to preserve property during litigation. Courts are cautious as this remedy usually interferes with established property rights. Only circuit courts have jurisdiction to appoint a receiver under state law. The movant must serve notice to all interested parties, except in an emergency. Courts generally schedule a hearing because, except in extreme circumstances, lack of notice and a hearing may violate the Due Process Clause of the Fourteenth Amendment to the United States Constitution.

For a court to appoint a receiver, the movant must properly plead that:

-    The movant has a recognizable interest in the property.

-    Irreparable harm (i.e., loss or destruction) to the property will likely occur if this relief is not granted.

-    No adequate legal remedy is available.

-    The movant has a likelihood of success on the primary relief requested in the complaint.

-    Insolvency may be an important consideration to be pled by the movant. However, insolvency alone will not justify a receivership.

Examples of Cases Where Receivership is Available:

-    Action for an injunction to prevent removal of property in a business.

-    Action for ejectment from real property.

-    Action for judicial foreclosure (to intercept rents being wasted).

-    Action for a corporate accounting by minority shareholders.

-    Action to dissolve a partnership.

-    Action to dissolve a corporation.

-    Action to set aside a fraudulent conveyance.

Examples of Cases Where Receivership is not Available:

-    Unsecured creditors wanting to seize a defendant’s property.

-    Refusal by an officer to let minority shareholders review corporate books.

-    Business dispute not involving fraud or imminent loss of assets.

The Requirement of a Bond

A bond is required by statute, and it is usually supplied by the movant, not the appointed receiver. (Note that in a federal case, the receiver or a trustee in bankruptcy must supply his/her own bond.) Failure by the court to require a bond is reversible error, but it can be waived. Persons damaged by wrongful appointment of a receiver may bring a separate action for damages up to the amount of the bond. However, no bond is necessary if the court has already entered judgment for the moving party.

Compensation

There is no set schedule for a receiver’s compensation as there is for a trustee in bankruptcy; a receiver’s “reasonable” compensation is determined by the appointing court in its sound discretion. A receiver’s compensation and reimbursement of expenses is typically paid from the funds in the case as a first priority claim, even before payment of liens and owners’ claims. The court can also divide the costs of the receivership among the parties. There is specific statutory authority for the court to compensate the receiver’s attorney in a corporate dissolution case.

Receiver’s Duties

1.    Initial Duties

     a.    Establish a Bank Account

     b.    Take Control of Books and Records

     c.    Make Periodic Reports to the Court

     d.    Investigate the Company’s or Individual’s Financial History

2.    Valuation of Property

3.    Demands for Turnover of Property

4.    Sale of Assets

5.    Employ Professionals

6.    Set a Claims Bar Date

7.    Pay All Claims in Order of Priority

8.    File a Final Report and Accounting