Complex commercial and property cases can turn on issues that are not easily resolved by conventional litigation. But the law offers a path out of the thicket. Receivership is a tool that is often overlooked in complex disputes.
Working with the court, receivers can provide the structure, guidance, and legal remedies that parties cannot marshal on their own. Receivers are the court’s eyes and ears; they can gather missing information and transcend dysfunctional relationships. Receivers can stabilize and manage businesses, gather and secure fugitive property, sell operating entities, liquidate assets, pursue and defend lawsuits (including fraudulent transfers), and create a claims-resolution process. In short, receivership offers an expedient exit ramp on the long road of litigation.
Properly engaged, receivers offer courts and parties the opportunity to achieve accurate, fair, and efficient outcomes without bogging down in the expense and delay of conventional litigation. This article explains the power and uses of receivers and describes the limitations inherent in receiverships.1
The concept of receivership arose in English chancery courts to create a flexible remedy that would not be bound by the rigidity and formality inherent in common law. The role and function of the receiver has evolved over time and varies from state to state. (A brief federal receivership statute also exists.2). Some states retain receivership laws heavily influenced by historical experience and common law. Others, including Minnesota, Missouri, and Washington, have passed comprehensive statutes to adapt to contemporary business disputes.3 Although this article highlights Minnesota law, most state and federal receiverships have similar remedial authority.
A receiver is usually appointed by a court upon motion by one of the parties or is included in relief requested in a complaint. Because receiverships can be a coercive, intrusive remedy, the threshold for appointing a receiver is high, and some courts are reluctant to use such a powerful tool.
Receiverships are subject to the same basic principles in most states. For example, to qualify for appointment, a receiver must be independent and neutral as to both the parties and the underlying action. The receiver’s powers, duties, and authority are described in state statute, rules of civil procedure, or case law, but can also be modified in the order of appointment. A receiver is an agent of the court and is entitled to judicial immunity for any actions taken within the scope of the appointment.
Minnesota’s receivership statute, like other receivership statutes, includes a few additional noteworthy details:
The court may also adopt specific powers and authority to fit the facts of a case, including instructions to the sheriff to assist the receiver, if necessary, in gathering receivership property and in enforcing other provisions of the order for appointment.
In general terms, receivers can be used to accomplish a variety of legal and business objectives, ranging from preserving value to unwinding fraud schemes to collecting loans and judgments.
Value Preservation. Historically, courts created receiverships when one party had possession of a disputed asset that was wasting or diminishing in value. The primary role of a receiver in such instances is to take custody of the asset and preserve its value during the pendency of the litigation, as in the classic use of a receiver in a mortgage foreclosure case. But receivership can also be an effective remedy in divorce cases and family disputes over property ownership.
Secured Creditor Default Remedy. Secured commercial lenders often require a borrower to “pre-agree” to the appointment of a receiver through a provision in the loan agreement of a receivership remedy in case of default. Lenders often include similar provisions in forbearance agreements. This gives the lender the option to appoint a receiver if a borrower’s financial situation is deteriorating and the secured lender doubts the debtor will protect the value of the collateral or repay the loan.
Fraud. Creditors often seek the appointment of receivers in fraud cases to take custody of books and records needed to determine the extent of the fraud and identify victims. The receiver’s ability to subpoena third parties to investigate where receivership property may be stashed is a powerful tool. Moreover, the receiver usually has broad powers to take possession of assets purchased with proceeds from the fraudulent scheme and to liquidate them for the benefits of the victims and other creditors. The receiver also has authority to sue third parties and recover assets transferred for less than equivalent value. Finally, a receiver manages a claims process and seeks court approval for the proposed distribution method.
Insolvency. Receivers can also be appointed for insolvent entities. Typically, the receiver takes control of either the entity or its assets, subject to any prior liens, and has authority to sell them for the benefit of creditors in accordance with their priority. This includes managing operations and selling assets free and clear of liens in Minnesota and other states.
In the case of a shareholder dispute that gridlocks a corporation, a receiver can be appointed with authority to make the corporate decisions necessary to preserve the value of the company for all parties. The litigation between the shareholders may then proceed without jeopardizing the value of the company.
Divorce. In divorce cases in which one spouse controls a business, financial information about that business can be concealed or manipulated to the detriment of the other spouse. A receiver can be appointed with the authority to investigate the finances of the company and report back to the court and the parties on the findings. Other cases involve gridlock over the sale of assets, including primary and vacation homes, where one party has possession of those assets and has an economic or emotional disincentive to sell them. A receiver can be appointed to run a fair and transparent sale process to bring closure to the case.
Post-Judgment Receiverships. If the execution of a writ served by the sheriff is returned unsatisfied, a receiver can be appointed with authority to investigate the debtor’s assets and execute on them, including pursuing actions where assets were transferred for less than fair value. This can be an efficient solution, especially when judgment debtors are concealing or transferring assets out of the reach of a creditor. The receiver is empowered by the order of appointment to take possession of the judgment debtor’s nonexempt assets. The receiver’s collection efforts are not limited by cumbersome (and at times arcane) collection procedures, such as obtaining individual writs of execution, serving garnishments, or executing till-taps. A receiver may also be in a better position than a creditor to execute on intangible assets, such as intellectual property and investments in limited partnerships, among others.
Enforcing Court Orders. In extreme cases when one or more parties flouts or ignores court orders, a receiver can be appointed with specific powers to deal with the issues. This has occurred particularly in fraud and divorce cases.
Receivership is no panacea for every troublesome case. Some of the most obvious limitations on the use of a receivership mostly relate to cases involving insolvent entities. They include:
As the costs and complexity of civil litigation rise, courts must find innovative means of serving the public and addressing the challenges of their caseloads. For some cases, the time-tested remedy of receivers is precisely the answer. Their powers can be neatly tailored to the specific challenges of a case. A well-defined, well-managed receivership can cut through the complexities of litigation and bridge the gaps of dysfunction to find practical solutions for polarized parties. Wise courts and prudent parties can generate efficient solutions to complex disputes in receiverships.
Many judicial officers tread lightly when parties propose receiverships. To some, receivership is too bold a remedy because receivers have strong statutory powers that allow them to take coercive and intrusive steps to manage and resolve commercial disputes. This makes judges cautious.
But excessive caution can be misplaced. In deciding receivership motions, judges should consider risks and rewards. Receivers can be coercive, but the opportunity for reward is great. Moreover, the court retains control of the receiver and the receivership process. The court can impose a bond to protect the parties against foreseeable risks and require transparency by ordering regular public reports that advise the court and all parties what steps the receiver is taking.
Perhaps most important, the receiver is the agent of the court; the court controls the receiver and can limit or focus the steps the receiver is taking. On balance, the court must consider whether the special actions a receiver can undertake will yield results that justify the risks of this strong equitable remedy.