Secured creditors are increasingly seeking quicker, more cost efficient alternatives to bankruptcy in an effort to better protect collateral and maximize proceeds in the event liquidation of collateral is necessary. One often overlooked mechanism is the appointment of a receiver to manage a debtor's business, which is an alternative frequently provided for in loan agreements in the event of a borrower's default. When evaluating the range of options in the face of a borrower's default, a secured creditor, with the assistance of competent and experienced counsel, should consider the appointment of a receiver. Our experience confirms that, in the right situation, a receivership can offer secured creditors a more timely, less expensive alternative, by having a court-empowered third party – typically selected by the creditor – operate the debtor's business and/or collect, preserve and liquidate collateral, so that the creditor's interests are protected.
A receiver generally is appointed under one or more state statutes authorizing the appointment of a receiver. When a basis for federal jurisdiction exists, a federal court can also appoint a receiver under Rule 66 of the Federal Rules of Civil Procedure or pursuant to a variety of statutes, although those appointments are rare and may result in increased costs due to the application of federal procedural rules. Nonetheless, a federal receivership may be most useful when a debtor has operations in multiple states.
A receiver is an officer of the court whose rights and duties are established by the appointing court and applicable state or federal statutes. The court has wide discretion in deciding who to appoint as a receiver and in establishing the rights, duties, and manner in which the receiver will manage the assets under its care, including limiting the access of unsecured pre-receivership creditors to post-receivership revenues. Given this flexibility, a receiver can be appointed for a broad purpose, for example, to take over and operate a business, or for a more specific purpose, such as to take possession and preserve specific real or personal property. The order appointing the receiver therefore should be specific in identifying the rights that are critical to the creditor seeking the receiver, including the extent to which the debtor's management is being displaced in favor of the receiver and the form and timing of reports required to be filed by the receiver. The nature and extent of the default and of the business' operations, along with the applicable state or federal statute, will dictate what specific powers should be requested from the court. The cost of the receiver can be paid from the business' cash flow rather than by the creditor, so long as that provision is included in the order.
A secured creditor contemplating a receivership should consider, and discuss with experienced counsel, the following factors: the nature of the collateral; the nature and complexity of the business of the debtor; the extent of the debtor's solvency and assets; any improper actions by the debtor; the existence or non-existence of other/opposing interest holders; the forums in which the receivership may be sought; the desired "exit strategy" for the lender; the degree of clarity in the relative rights of creditor classes; and the necessity of resort to reorganization tools or remedies unique to bankruptcy law.
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