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Beware of the Receiver you choose

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Scott A. Chernich & Patricia J. Scott
Foster Swift Banking, Finance & Real Estate E-News
November 1, 2012

Due to current economic challenges, many creditors seek the appointment of a state court Receiver to manage property in which it holds an interest.1  The appointment of a Receiver has often been referred to as "State Court Bankruptcy." In this regard, Receivers are known as "arms of the court."

Similar to a bankruptcy, creditors must keep in mind that Receivers are appointed to manage all of the Debtor's assets and liabilities – creating what is called a "Receivership Estate."  Even though it is often the debtor's largest secured creditor that seeks, and benefits from, the appointment of a Receiver, the Receiver's obligations and duties are to the entire estate and to all creditors.

It is important for a creditor to thoroughly research the background and experience of a Receiver and ask for credentials and references before seeking his or her appointment.  Once appointed, it is difficult to have a Receiver removed or a receivership terminated if the Receiver is "reasonably" fulfilling his or her duties.  Generally, a Receiver is appointed by the Court pursuant to state statute.  As a result, a Court order is required to terminate a receivership. In the instance of a debtor's business being mismanaged, the last thing a creditor wants to do is have a Receiver appointed who will continue to mismanage the business. The expense of a receivership is far too great to end up "stuck" with a mediocre Receiver.

After choosing a Receiver, a creditor should make sure all duties are clearly spelled out in the order appointing the Receiver.  In particular, the order should at a minimum define:

  1. the Receiver's duties, authority and obligations in managing and preserving the property;
  2. when and how the Receiver will be compensated;
  3. who will be responsible for pursing litigation matters and seeking the Court's approval for the sale of property and for other various circumstances;
  4. who will pay the attorney fees associated with litigation matters and obtaining Court approval; and
  5. the format and frequency that accountings will be produced to the Court and creditors.

The appointment of a Receiver can be a very effective tool, particularly when there are assets to be managed.  However, if the wrong Receiver is appointed, the receivership can be less than effective, and can become detrimental to the creditors' interests.

1 Receivers can also be appointed for several other reasons, such as to: enforce judgments, enforce construction liens, dissolve corporations, and operate establishments possessing liquor licenses.