Overview

A receivership is the appointment of a disinterested person or organization (a receiver), by a court or by a corporation or a person, for the protection or collection of property that is the subject of creditors’ claims. Receiverships exist at both the state level, through RCW 7.60, and the federal level, through Rule 66 of the Federal Rules of Civil Procedure. Receiverships serve to usher a business through difficult times with the hope of restoring profitability. While debtors can voluntarily choose to enter a receivership through an assignment for the benefit of creditors (commonly referred to as “ABC”), receivership is primarily another tool available for creditors to recoup value when a business is in financial distress.

In essence, a receiver is appointed by the court as the court’s agent, and subject to the court’s direction, to take possession of, manage, or dispose of property of a business for the benefit of creditors. A receiver has the ability to take possession of a failing business liquidate, and distribute the proceeds of the business in accordance with the priorities set forth by law.

If a receivership sounds like a bankruptcy, it should. They are comparable. In fact, the Washington State Legislature enacted RCW 7.60 to “create more comprehensive, streamlined, and cost-effective procedures applicable to proceedings in which property of a person is administered by the courts of this state for the benefit of creditors”; similar to the purpose of bankruptcy.  Statistics show that receiverships are an increasingly popular alternative to bankruptcy. And once you peel back the layers, it is not hard to imagine why. For both creditors and debtors, receiverships cost less and give more control over the outcome.

Costs & Control

Receiverships are generally cheaper than a bankruptcy. Receiverships are not held to the strict deadlines observed in a bankruptcy case and do not involve the burdensome filing requirements from interested parties. Both of these features help reduce the combativeness of bankruptcy litigation and shorten the time frame. Even still, receiverships maintain some of the primary benefits as bankruptcy proceedings such as an automatic stay of many types of actions and the sale of assets free and clear of liens.

Additionally, creditors typically collect more from a receivership than a bankruptcy. In a typical chapter 11 bankruptcy, company management typically remains in control of the debtor company (the classic “debtor in possession” bankruptcy), or the bankruptcy estate is overseen by a trustee selected from a standing panel of bankruptcy trustees. However, in a receivership, creditors can propose a potential receiver who meets the qualifications of RCW 7.60.035. This means creditors can maximize their returns by choosing individuals that will protect creditor interest and choosing individuals who have specialized knowledge in the subject matter of the business going through the receivership.

Key Points to Consider

There are key issues to be aware while considering a receivership. First, while there are federal receiverships (28 U.S. Code § 3103), most receiverships are operated and controlled by state courts, and therefore subject to state court judges and their rules. While receivership law can look like bankruptcy law, a state court judge may not always agree with such comparison and bankruptcy case law is not necessarily binding on the state court. Some businesses, particularly those who own assets in multiple jurisdictions, will find a federal receivership more appropriate as it gives more power to receivers to manage assets across state lines, but the majority of businesses will find themselves in state court.

Second, receiverships are not always an independent process. While a receivership can be invoked to assist a business in winding up affairs, it can also be “combined with, or [] ancillary to, an action seeking a money judgment or other relief.” RCW 7.60.025 lists 38 reasons to appoint a receiver, the majority of those reasons are a receiver being appointed as part of other legal proceedings. In 2004 the Washington legislature codified receivership law into a single chapter. While that may seem recent, it was the legislatures attempt to clean up over 150 years of separate and distinct uses for receivers in all manner of roles, from caretaking to liquidation of assets.

The multi-faceted application of a receivership is apparent when you consider purpose of a receivership. Unlike bankruptcy, which is designed to protect the debtor, a receivership is designed to protect assets (particularly a lender’s assets), income, real estate, cash, business assets, etc.

Conclusion

Overall, federal and state receiverships are underutilized. They provide a flexible and efficient method of overseeing business transitions while protecting the assets of creditors and lenders alike. While bankruptcies are down in 2021, following the same downward trend in 2020, some have expressed concern about the continued strength of economic conditions that allow for low bankruptcy filings. The fear now is the conditions and programs supporting businesses through the Covid-19 pandemic will dry up, and a wave of bankruptcy will follow. If this is the case, the receivership may find itself being used more often in the coming years.

The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Coleman Scroggins at coleman@apexlg.com.