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A receiver is a court-appointed, disinterested third party, tasked with managing, preserving, or liquidating property for the benefit of a class of claimants in accordance with court-mandated instructions.
A receiver is an officer of the court whose creation is derived from the court’s equitable powers or under statutorily prescribed circumstances, such as in connection with judicial dissolution of an entity pursuant to state law. Unlike a trustee appointed pursuant to Chapters 7, 11, or 13 of the Bankruptcy Code, a receiver does not take title to the property of the debtor, but rather holds the property as a custodian during the pendency of the receivership. Both federal and state courts have broad discretion to appoint receivers for a variety of purposes, and have a great amount of flexibility in determining the receivers’ duties, function and scope of authority.
Receiverships have traditionally been sought by aggrieved parties for the purpose of protecting asserted property interests during litigation, or state or federal government agencies in connection with civil enforcement actions in regulated areas (e.g., winding down banking, insurance, or securities firms). But receiverships have also been used by secured creditors and distressed companies as a means of effectuating a workout, administering the sale of particular estate assets, or as an alternative to an involuntary bankruptcy For example, a receivership may be sought upon a borrower’s default on a secured obligation to ensure continued management of income producing assets (e.g., real estate) during the course of workout negotiations between the borrower and lender. Alternatively, a receivership may be employed as a means of winding up and ultimately dissolving a company pursuant to state dissolution proceedings.
Although receiverships may be attractive for limited purposes because of their inherent flexibility and perceived advantages to bankruptcy proceedings (specifically, with respect to speed and costs of administration), it is important to note that receiverships also have drawbacks. For one, as with other bankruptcy alternatives, the law of receiverships is inherently less predictable than bankruptcy law. In addition, while courts have equitable discretion to grant the receiver many of the same powers as those given to a bankruptcy trustee (such as, in limited circumstances, the right to sell estate property free and clear of liens), there are state law variations and jurisdictional limits to any receiver’s authority to administer the assets of a distressed company, and a receivership does not prevent the commencement of an intervening bankruptcy case.
A proponent of a receivership must provide proper grounds for appointing the receiver to obtain an initial judicial determination. Receivership is an equitable remedy, so there are certain equitable factors that courts will consider in making this determination. In addition, many states have statutes governing the appointment of receivers in certain circumstances, and courts will sometimes enforce contractual consent provisions with respect to appointment of a receiver in certain situations.
The decision to appoint a receiver lies within a court’s broad equitable discretion and there is generally no clear test or requirement that a movant seeking such an appointment must satisfy. New York City Bar at 23. However, appointment of a receiver is considered an extraordinary remedy only to be imposed to avoid imminently impending harm or manifest wrong. See Friedland § 13:5. A court will likely look to a number of factors when determining the appropriateness of appointing a receiver. Parties seeking the appointment of a receiver may improve their chances of success by demonstrating:
In addition to a showing of potential harm to the creditor, courts may also require a showing of the defendant’s insolvency and a reasonable probability that the creditor’s claim is meritorious.
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