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The Intersection of Receiverships and Bankruptcy

The Intersection of Receiverships and Bankruptcy

What is a receivership? A receivership is recourse available to secured creditors or lenders who seek the appointment of a court authorized neutral party to receive, preserve, or liquidate collateral pending the court’s resolution of the creditor’s claims. A receivership is an involuntary proceeding initiated by secured creditors. For example, a mortgage lender may choose to seek the appointment of a receivership to maintain the value of a cooperative building in New York City that has fallen into foreclosure.

Each of the 50 states and the federal government have statutory laws that provide their respective courts with the equitable power to establish a receivership estate. While the statutory schemes for receiverships are not as comprehensive as the Bankruptcy Code, several aspects are quite similar to a bankruptcy case. These aspects include the consolidation of control over the debtor’s assets, injunction against asserting claims against the receivership estate – much like the automatic stay in bankruptcy, though the injunction is not automatic, the exercise of asset sales and dispositions that are subject to creditors’ claims, and the bringing of avoidance actions for fraudulent transactions.

Receiverships are often a prelude to bankruptcy. Corporate debtors can file bankruptcy during an ongoing receivership, though the authority to file is based on applicable state corporate law. Therefore, the right to file bankruptcy and manage day-to-day operations of a corporate debtor remains vested in corporate management. However, receivership orders present challenges because they include modifications to management rights that may conflict with state law.

What happens to the receiver when a bankruptcy petition is filed? Once a bankruptcy case is filed, the receiver must cease active administration of the estate, except as necessary to preserve the property. The receiver must also deliver the property to the bankruptcy estate representative and, if required to turn over the property, file an accounting with the court. A court may decide to appoint the receiver as the bankruptcy trustee or custodian if it is in the best interest of creditors, and if the debtor is not insolvent and equity security holders are better served. When a case is filed during a receivership, a party in interest may request that the court abstain under section 305 of the Bankruptcy Code from taking jurisdiction or dismiss the bankruptcy case. Courts evaluate several factors when faced with an abstention request, including whether the receivership can achieve an equitable distribution of assets, and the efficiency of the receivership’s administration and avoiding duplicative efforts to achieve a similar result. A bankruptcy court may abstain when a receivership is operating properly and moving toward a sale. Also, a bankruptcy court’s decision to abstain is not appealable so it is viewed as an extraordinary remedy.

Finally, a receiver is entitled to receive from the estate reimbursement for expenses and compensation for services rendered which benefit the estate. Compensation is treated as an administrative priority claim. The receiver may also be entitled to compensation of its professionals.

If you are a secured creditor whose rights are in jeopardy, contact KI Legal’s Bankruptcy and Restructuring attorneys to find out how your interests can be protected. Call us at (212) 404-8644 or email to discuss.



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