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Receiverships: An Often Overlooked Tool for Resolving Complex Disputes

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:

  • Types of Receiverships. The statute distinguishes between a limited receiver and a general receiver. The limited receiver is usually charged to preserve the value of the assets during the pendency of the action. A general receiver usually has broader powers, which may include general powers of control over an entity, particularly when appointed to liquidate insolvent entities. In entity receivership cases, the receiver has authority to act directly on behalf of the entity and may replace and appoint management.

  • Free and Clear Asset Sales. Subject to court approval, a receiver can sell assets free and clear of liens. Secured creditors can object to a proposed sale, which places the burden on the receiver to prove that the objecting creditor would receive an amount equal to or greater than what it would receive within a reasonable time in the absence of the proposed sale. Secured creditors can credit-bid if they have valid and perfected liens in the assets.

  • Stays Upon Appointment. Upon commencement of a receivership, the statute stays actions taken against receivership property, including the fixing of new liens or attachments. But the stay does not prevent the commencement or continuation of any process to enforce pre-existing valid liens. The court may, however, impose stays beyond the statutory provisions to address case-specific issues. A court-appointed receiver has the powers and priority as if it were a creditor that obtained a judicial lien. Further, receivership property is in the custody and supervision of the court, subject to any existing valid liens or rights to file liens at the date of appointment.

  • Executory Contracts. The receiver succeeds to the rights and obligations, including contracts, of the respondent (i.e., the entity over whose property the receiver is appointed). The order for appointment can provide that the receiver may reject contracts, which may result in an unsecured damage claim for the counterparty. The receiver may also assign contracts, but the assignment is subject to the terms of the contract, including any requirement to obtain consent of the counterparty.

  • Subpoena Power. A general receiver has the power to compel any person by subpoena to give testimony or produce records with respect to receivership property or any other matter that may affect the administration of the receivership.

  • Attorney-Client Privilege. Upon appointment as a general receiver or when otherwise ordered by the court, the attorney-client privilege transfers to the receiver.

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.

Practical Uses

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.


 

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.

 


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.

Limitations

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:

  • Jurisdiction. Because most receiverships are state court-based, their jurisdiction is limited to assets located in the host state. Some states provide a process for recognizing a foreign receiver, which requires a separate filing in the state where receivership property is located, but the receiver is most useful in the state that appoints the receiver.

  • Limited Stay. As compared to the automatic stay in bankruptcy, a state court stay is much more limited and usually does not stay the actions of valid and perfected lien claimants existing at the date of the appointment.

  • Financing. Although receivers can obtain financing, receivership law typically does not empower a receiver to provide a new lender with a “priming” or superpriority lien over existing secured creditors, as may occur in a bankruptcy case.

  • Free and Clear Sales. Because of jurisdictional limitations and lack of prior experience, buyers of assets may prefer or require an order from a bankruptcy court over one from a state court.

  • Executory Contracts. The U.S. Bankruptcy Code allows for assignment of contracts without the consent of the counterparty to the contact. Receiverships usually require the consent of the counterparty to assign an executory contract to a third-party purchaser, unless the contract includes an assignability provision.

  • Limitations on Damage Claims. State court receiverships do not provide for any limitation on damage claims, as is specifically provided for in the Bankruptcy Code. The prime example of this is the limitation on a claim for rejection of real estate leases, which often is a significant issue in retail cases.

  • Substantive Expertise. Bankruptcy courts regularly adjudicate complicated commercial issues and emergency situations, and routinely apply insolvency concepts in these cases. In contrast, state courts are courts of general jurisdiction, and the assigned judge’s docket may range from civil to criminal to family law disputes.

  • Discharge of Debt. Debts are not discharged in a state court receivership, as is provided for in bankruptcy cases.

Risk vs. Reward

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.


  1. This article was inspired by the authors’ experience in receiverships under Minnesota law. The details of statutes, rules, and case law vary from jurisdiction to jurisdiction, but the concepts discussed are representative of receivership practice across the United States.
  2. See, e.g., 28 U.S.C. Section 3101 (Prejudgment Remedies); 28 U.S.C. Section 3103 (Receivership); Fed. R. Civ. P. 66 (Receivers).
  3. Minn. Stat. Section 576.21; Wash. Rev. Code Section 7.60; Mo. Rev. Stat. Section 515.500
James Bartholomew

James A. Bartholomew, CTP

Lighthouse Management Group Inc.

James A. Bartholomew, CTP, is president of Lighthouse Management Group Inc. He serves as court-appointed receiver in federal and state courts and as a liquidating agent in U.S. Bankruptcy Court, and provides interim management and advisory services in financial restructurings. Bartholomew is a CPA and a fellow of the American College of Bankruptcy, and a member of the Minnesota Society of CPAs, the AICPA, and TMA. He can be contacted at 651-323-2257 or JBartholomew@lighthousemanagement.com.

The Hon. Edward T. Wahl

Hon. Edward T. Wahl

Hennepin County (Minnesota) District Court

The Hon. Edward T. Wahl was appointed Hennepin County District Judge, Minnesota, in 2012 and elected in 2014. He served on the committee that drafted the current Minnesota statute on receiverships. Wahl was previously a partner with Faegre Baker Daniels and before that with Oppenheimer Wolff & Donnelly LLP. He holds a law degree from the University of Chicago Law School and master’s and bachelor’s degrees from the University of Virginia and Northwestern University, respectively.

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