Federal Receiverships: A Guide to the Process
A federal receivership is a legal process in which a neutral third-party, called a receiver, is appointed by a federal court to take control of a business or individual's assets.
A federal receivership can be an effective way to preserve, protect, or sell assets or property at issue. This article addresses many of the important issues that arise in connection with a federal receivership.
The Court’s Authority to Initiate a Receivership
The authority for a federal court to initiate a federal court receivership is derived from the Federal Rules of Civil Procedure, specifically Rule 66, and receiverships are governed by 28 U.S.C. § 3103 et seq.
Under this rule, a federal court may appoint a receiver to take possession of property or assets that are the subject of a lawsuit, in order to preserve or protect those assets pending resolution of the lawsuit. The authority to appoint a receiver is discretionary and may be granted only if the court finds that it is necessary to protect the interests of the parties involved.
Additionally, the court may also set forth specific guidelines and requirements for the receiver to follow, such as filing periodic reports with the court or obtaining court approval before taking certain actions related to the receivership.
Appointment of a Receiver
The process of appointing a federal receiver begins with a court order. A federal receiver may be appointed in a variety of cases, including securities fraud, breach of contract, and environmental violations, provided the federal court has jurisdiction. For example, the Dragich Law Firm has served as legal counsel to receivers in federal court receiverships involving many different businesses and business assets, such as ________. Typically, in the types of cases we are involved in, the process begins when a lender files a lawsuit against a borrower seeking the appointment of a receiver.
Duties and Responsibilities of a Receiver
Once a receiver is appointed, they are given specific duties and responsibilities. These duties may vary depending on the case, but typically involve taking control of the assets or property at issue, managing and preserving the assets, and distributing any proceeds from the sale of assets to creditors or stakeholders.
In addition to these core duties, a receiver may also have other responsibilities. For example, the receiver may be authorized to operate the business or asset during the receivership if it is in the best interest of the parties involved.
The receiver is accountable to the court and has the responsibility to update the court and parties involved on the status of the receivership.
The Receiver's Rights to Sell Assets
One of the primary functions of a receiver is to sell assets or property at issue. The receiver is authorized to sell these assets, subject to court approval. The proceeds from the sale are then used to pay creditors or stakeholders, according to the priorities established by the court.
Litigation in a Receivership
A receivership may involve litigation, such as lawsuits or other legal proceedings. The receiver may be required to defend against claims made by creditors, stakeholders, or other parties. The receiver may also be required to bring lawsuits on behalf of the receivership estate, to recover assets or property at issue.
Avoidance Actions in a Receivership A receivership may also involve avoidance actions, which are legal actions taken to recover property or assets that were wrongfully transferred or conveyed. Avoidance actions may be taken against parties who received assets or property from the entity at issue, and may involve complex legal issues and analysis.
Compensation for a Receiver
The receiver is compensated for their services, which may come from the proceeds of the sale of assets or from the entity at issue. The compensation for a receiver is typically approved by the court and is based on the receiver's qualifications and experience in the relevant industry or field. The compensation for a receiver may include a fee for their services, reimbursement for expenses, and payment for any staff or advisors hired to assist in the receivership.
Termination of a Receivership
A receivership may be terminated in a variety of ways. In some cases, the receiver may be able to complete their duties and responsibilities, and the receivership may be terminated. Alternatively, the court may terminate the receivership if it is no longer necessary or if it is not in the best interest of the parties involved.
Challenges to a Receivership
While a federal receivership can be an effective way to maximize the value of assets and resolve complex legal issues, it can be challenged by the parties involved. Challenges to a receivership may arise if there are disagreements about the appointment of the receiver, the scope of their duties and responsibilities, and actions taken, among other issues.
The federal receivership process can be complex. To learn more about the process, please contact David Dragich.