The receiver’s responsibilities may include:
- Taking possession and control of the assets
- Identifying, valuing, and preserving the assets
- Managing and operating the assets in order to generate revenue
- Selling or disposing of the assets
- Paying the company’s or individual’s debts and obligations
- Preparing and submitting reports to the court or other authorized party
Receivership services can be an effective way to manage and preserve the assets of a company or individual that is in financial distress. The receiver is appointed by the court or other authorized party and acts as an independent third party, which can provide a measure of objectivity and impartiality to the process.
It’s important to note that the receivership process is typically a court-supervised process and the receiver’s actions and decisions are subject to court approval. In some jurisdictions, the receivership process may be subject to different laws and regulations.
Our Court-Appointed Receivership Services
A federal receiver is an independent third-party neutral appointed by a federal district court at the request of a regulatory agency to prevent irreparable harm. Once appointed, the receiver is usually charged by the court to protect and preserve assets, locate additional assets, claw-back ill-gotten gains, file third-party litigation, liquidate estate assets, establish a claims procedure, and develop a distribution plan to provide restitution to victims in the case.
UNDERSTANDING THE STRATEGIC BENEFITS OF FEDERAL RECEIVERSHIPS IN THE US
Receiverships are typically not a dish on the proverbial litigation menu. Often overlooked, receiverships can be an extremely valuable and potent tool that litigants can use to change the dynamics in a case, protect potential litigation recoveries, and prevent further fraud, waste and dissipation of assets.
While most practitioners think of receiverships as a creature of state law, receiverships are also available under federal law in certain circumstances – and not just in connection with bank failures or securities enforcement actions.
This article discusses the requirements for appointing a federal receiver in the US, how the appointment process works, and the scope of the receiver’s authority, as well as providing some suggestions for situations where litigants may want to consider seeking a federal receiver.
What is a federal receivership?
When disputes regarding a company’s operations or property arise, the parties involved could initiate and engage in litigation – where litigants argue about their rights and courts rule and make decisions – or even seek bankruptcy to gain leverage or maximize value. While such processes can produce equitable outcomes, they are often expensive and time-consuming.
A federal receivership, however, is an alternative that provides cheaper, time-efficient options for the parties involved. When a court appoints a receiver, the court empowers an individual to act as an officer of the court. That officer is neither an agent nor an employee of the parties but, rather, is appointed to be an independent neutral who reports to the court. A receiver is empowered to safeguard disputed assets, administer the property, and assist the court in achieving a final, equitable distribution of the assets if necessary. In essence, the court appoints someone to ensure disputed assets do not disappear and are not mismanaged or dissipated.
How is a federal receivership created?
Every federal receivership starts with the filing of a verified complaint. Once a complaint is filed, any party may request the appointment of a neutral receiver, either on an emergency basis – akin to a temporary restraining order in which the court appoints the receiver ex parte – or on notice to the other party.
While receivers come in various forms and with authority derived from multiple sources, federal receiverships generally are governed by Rule 66 of the US Federal Rules of Civil Procedure. Under that rule, the Federal Rules apply to receivership actions, but the establishment and administration of the receivership must accord with historical practice in federal courts or with local rule. Therefore, when administering receiverships, courts are guided by precedent from other federal courts.
Although courts consider the appointment of a receiver an ‘extraordinary remedy’, they recognize that it is appropriate to do so when clearly necessary to protect the plaintiff’s interests in property. When a contract specifically contemplates the appointment of a receiver, as is often the case in loan agreements and mortgages, courts generally will honor the parties’ agreement.
Without clear contractual language, courts consider several other factors, including fraudulent conduct on the defendant’s part, the imminent danger of the property being lost, concealed, injured, diminished in value or squandered, and the inadequacy of available legal remedies. After analyzing these factors, the allegations, and possibly some evidence, a court will decide whether a receivership is an adequate remedy.
What powers does a federal receiver have?
The powers of a federal receiver are outlined in the court’s order of appointment. The appointing court may authorize a receiver to take possession of real and personal property and sue for, collect, and sell obligations based on the conditions and purposes the court directs. Additionally, the property could also be administered, collected, improved, leased, repaired or sold based on possessing demonstrable expertise in such areas. Importantly, the authority of a receiver is limited to that of the entity or entities in the receivership. The receiver’s power to sue, for example, would only be provided insofar as the entity already possessed that right in the first instance.
When is a federal receivership a good option?
Receiverships may be appropriate in numerous situations. A few of the more common scenarios are outlined below.
Real estate projects where there is diversity jurisdiction. Disputes over real estate projects are particularly good candidates for receiverships – because ensuring continued maintenance of the property is a paramount concern. More specifically, federal receiverships are available where there is diversity of citizenship among the parties (that is, the plaintiff and the defendant are citizens of different states). In the most common situations, lenders and borrowers may be residents of different states.
And, when real estate projects involve property located in multiple states or districts, the use of the federal process is especially useful. First, even in diversity cases, uniform federal law governs the appointment of the receiver. Second, a federal statute provides that a receiver appointed in any federal court is vested with complete jurisdiction and control of all property, wherever located, with the right to take possession. Parties to a dispute over property (e.g., land, equipment and product) in multiple states can thus benefit from the relative simplicity of a uniform receivership process governed by a single court.
Insolvent operating businesses where fraud may exist. Disputes arising from fraudulent activities in operating businesses are good candidates for receivership because they involve the possible concealment or dissipation of assets. Primary considerations on appointing a receiver include a focus on the necessity to protect, conserve and administer property pending final disposition of a suit. Fraudulent activities are concealed from creditors, making it difficult to uncover evidence necessary to reveal such behavior. Thus, while there may be an urgent need to prevent the
dissipation of assets from fraudulent activity, the nature of fraud makes it more difficult to uncover the deception and proving the need for court intervention.
“While there are more well-known and established methods of securing assets, federal receiverships are relatively straightforward.”
A federal receivership provides unique value in these instances because parties are capable of appointing receivers on an ex parte basis. While the appointment of a receiver on an ex parte basis requires exceptional circumstances, receiverships are an option to prevent irreparable damage or potential abscondment of assets without alerting the opposing party.
Business divorce cases. Business divorce cases are also often ideal candidates for federal receiverships. When business owners have an unfortunate falling out, there is a risk that assets of the business could be dissipated by one co-owner to the detriment of other owners. The concerned counterparty may want to ensure that partnership assets are not discarded by the whim of angered parties. A receiver would safeguard the assets and protect them for the mutual benefit of both parties, leading to a more equitable result compared to leaving the parties to decide among themselves.
When bankruptcy is too expensive. Federal receiverships should also be considered as an alternative to bankruptcy proceedings when the latter proves to be too costly. On a fundamental level, one of the key differences between a bankruptcy and a receivership is that bankruptcy requires a debtor or lender to engage in significant motion practice and a greater number of court actions. Despite the existence of fees and reporting requirements in a receivership, they are generally significantly less compared to a bankruptcy proceeding. Thus, the time saved and the reduced expenses in a receivership case often make receiverships a more attractive alternative to bankruptcy.
In each of the situations outlined above, a federal receivership may be strategically advantageous. While there are more well-known and established methods of securing assets, federal receiverships are relatively straightforward. And most importantly, they provide an attractive option for parties who need an independent party to ensure assets do not disappear, are not concealed and are protected from degradation in value.
CORPORATE DISPUTES Jan-Mar 2024
State Court Receiverships
A state court receiver is appointed by the court to take possession of specific assets, including property or businesses, and to administer them for the benefit of all parties. State court receiverships are usually used as an alternative to bankruptcy, in business disputes, to enforce a judgment, or under state regulatory action. EDS has extensive experience being appointed by state courts and working with many state and federal agencies and law firms.
Regulators frequently require the appointment of a corporate monitor to ensure compliance with the terms of a settlement between a company and a regulator. The appointment of a monitor allows a company time to take corrective actions pursuant to a settlement with the regulator in place of more severe punishment or fines. EDS has deep experience serving as an independent monitor while also working to minimize the impact on the operating business.
Trustee in Bankruptcy
A trustee is an independent third-party neutral assigned to administer a bankrupt estate for the benefit of creditors of the estate. As trustee, EDS has decades of experience in marshaling, protecting, preserving, and administering assets for the benefit of creditors.
And as a trusted Court-Appointed Custodian/Special Master/Liquidator.