Receiverships 101

Receiverships 101

For a company struggling to pay its bills and avoid defaulting on its obligations, the appointment of an unknown receiver can appear to be an awful imposition; while to a creditor faced with a troubled borrower, a receiver can be a possible healthy alternative to an expensive bankruptcy. Knowing what a receiver is and what his duties are, knowing what is expected of the parties, and most importantly, cooperating, will help successfully get you through the receivership process.

In Ohio, the receivership statutes are very truncated. There is no robust or well-developed body of statutory or case law that guides receiverships. In Ohio, it is important to know that appointing a receiver is a “tag-along” right – it is not enough that a creditor merely request the appointment of a receiver. The receivership request must attend (or tag along with) another underlying cause of action (like a foreclosure or dissolution of a company, for example).

A receiver is often appointed due to a lack of trust between creditor and borrower – whether perceived or warranted. When a lack of trust exists, the appointment of a neutral receiver can ease tensions and help facilitate a favorable outcome. The introduction of an outside party can diffuse tense relationships between borrower and lender. Both sides may be more willing to consider avenues suggested by a neutral party.

Under Ohio’s laws, a receiver’s appointment is an extraordinary measure used to preserve and protect the parties, creditors, and the assets of the entity in receivership. Before a receiver is appointed, the subject entity or parties must be served with notice. If the subject of the proposed receivership believes that a receivership is not in its best interest, now is the time in the process to object. If the receivership is consensual, no responsive filing is needed.

The Ohio receivership statutes place next to no limits on the powers that may be granted to a receiver. This means that when a petitioning creditor requests the appointment of a receiver, the order appointing the receiver becomes very important as it becomes the guiding law for the case. A receiver can be appointed to run the operations of the troubled company to liquidate assets, or any number of varying levels of involvement. Each receivership is unique which gives the parties and court a great amount of flexibility when crafting the order appointing the receiver. This flexibility can be a great benefit depending on the type of receivership required and what the goals of the receivership are.

However, there is no automatic stay in a receivership like there is in a bankruptcy proceeding, nor are there many of the other benefits of bankruptcy. These considerations, among others, particularly with respect to asset and going concern sales, the ability to review and reject executory contracts, and additional receiver capabilities should be built into the order appointing the receiver.

The appointing order drives the case and a well-thought and well-planned order is essential. Even so, while the petitioning creditor may expect a timely disposition of the assets, the market conditions may dictate otherwise. This is why it is particularly important to build protections into the order to allow the receiver the authority and discretion required to preserve and maintain the collateral which maximizes the value for all parties.

Once appointed, a receiver has fiduciary obligations to the parties involved in the case, as well as to the assets entrusted to the receiver’s care. The receiver’s typical first item of business is to take possession of the assets and begin an inventory of the estate. The receiver will require access to books, records, computers, files, personnel, and the more cooperation the receiver has, the easier, faster, and cheaper the process will be. The receiver is an arm of the court, acting as a kind of surrogate for the court. Even though a creditor may have requested the appointment of a specific receiver, that receiver may not unlawfully favor the appointing creditor because the receiver is a neutral. If necessary and warranted by law to preserve and protect the assets under his control, the receiver may file suit against any creditors. Conversely, the receiver could also file suit against the owners or managers of the troubled company when or if needed after his investigation is complete.