Receivership: The Right Tool For Some Jobs

Every lender is looking for a good way to improve the return on non-performing assets in its loan portfolio. One frequently overlooked tool is use of a receivership as a method for controlling and liquidating the assets of a delinquent borrower's assets. A courtappointed receiver frequently represents the most direct and cost-effective method for maximizing the potential for recovery. Thus, especially where there is substantial collateral to control and dispose of, the broad powers and authority accorded court-appointed receivers makes a receivership the right tool for the job.

Receiverships also address a vexing but unavoidable fact. Some delinquent borrowers do not negotiate to arrive at an equitable resolution of their financial problem, but instead look for the lender to make a mistake or miss an opportunity, thereby allowing the borrower to avoid liability or spirit valuable collateral away from the lender's enforcement efforts. Some borrowers may tempt a lender to use questionable enforcement methods in hopes of creating defenses or claims they would not otherwise have. Use of a court-appointed receiver can be a forceful collection tool without exposing the lender to new claims or defenses. In these cases, a receivership is the right tool for the job.

Getting a Receiver Appointed

Receivers are appointed by courts on the application of interested parties, typically creditors. Anyone can be a receiver although most are professional fiduciaries or business managers selected for their knowledge of the business or assets involved. Receivers are usually compensated on an hourly basis and reimbursed for their expenses. The petitioning party nominates the receiver but the appointment is up to the supervising court. The receiver begins to act after filing an oath of office and fidelity bond. Receivers are usually appointed in court-filed lawsuits; however, many states authorize the appointment of a receiver by a court as an ancillary remedy in arbitration matters. See, e.g., California Code of Civil Procedure 1281.8.

The Operation of the Receivership

Initially the receiver makes certain that he/she has secure control of the business or assets of the receivership estate and then manages or liquidates the assets using good business judgment, reporting monthly to the court and creditors. Like a bankruptcy trustee, the receiver is not responsible for unpaid expenses incurred by the debtor prior to the receiver's appointment. See, e.g., 39...