Federal Receiverships: An Effective Restructuring Alternative

Federal receiverships are an effective, but often underutilized, option for creditors to enforce their rights. In many instances, a federal receivership can lead to more favorable results for a creditor relative to bankruptcy or a state court receivership.

Receiverships in federal court are permitted under Rule 66 of the Federal Rules of Civil Procedure and codified in 28 U.S.C § 3103. A federal court may appoint a receiver upon “reasonable cause to believe that there is a substantial danger that the property will be removed from the jurisdiction of the court, lost, concealed, materially injured or damaged, or mismanaged.” Additionally, unlike most state receivership laws, federal receiverships apply to both personal and real property (although Michigan and North Carolina recently amended their state receivership laws to make them applicable to more business and asset types). As with all federal court actions, federal receivership proceedings require either a federal question or diversity citizenship between the parties.

There are many similarities between receiverships in state and federal courts. Receivers in both state and federal receiverships act as officers of the appointing court and enjoy similar rights and duties regarding the control and disposition of receivership property. Also, both federal and state receiverships require the receiver to file periodic reports accounting for any expenditures or disposition of receivership property.

Similar to state receiverships, federal courts consider a number of factors before appointing a receiver, including the probability that fraudulent conduct has or will frustrate the creditors claim, imminent danger that collateral property will be lost or will diminish in value, inadequacy of legal remedies, lack of equitable remedies, and the likelihood that appointing a receiver will do more harm than good.

Receiverships in federal court, however, can provide certain advantages over receiverships in state court. Generally, the federal court process is more streamlined and moves faster. Federal courts can also empower receivers to act across state borders, wherever assets are located. This allows the receiver to effectively manage and monetize receivership property without having to receive authorization from multiple jurisdictions.

Additionally, federal receivers are authorized to conduct both public and private sales of receivership property. Unlike most state receiverships, which typically require the receiver to sell receivership property at public auction, the ability to conduct private sales of receivership assets, subject to certain statutory requirements such as obtaining three independent appraisals, streamlines the liquidation process in federal receiverships. The ability to sell assets without taking possession of them, as may be required in a traditional foreclosure, also makes the federal receiver remedy an attractive one for secured creditors. Lastly, creditors have substantial input into the selection and appointment process of receivers in federal court, especially in the absence of an objecting debtor.

A federal receivership also may be more advantageous to a Chapter 11 bankruptcy restructuring because it is not subject to the same procedural requirements as a bankruptcy proceeding, typically involves fewer parties and professionals, no committees, and no plan and confirmation process, among other things. As a result, the federal receivership process tends to be faster and less costly than bankruptcy. At the same time, many of the benefits of bankruptcy, such as the imposition of an automatic stay and rejection of executory contracts, can be obtained through a well-crafted federal receivership order.

In short, federal receiverships offer many of the benefits of state receiverships and federal bankruptcy proceedings, as well as additional advantages in certain cases. In particular, in situations where a creditor is seeking to enforce its rights across multiple jurisdictions, but doesn’t want to incur the time and expense of a bankruptcy proceeding, a federal receivership can be an effective option.

If you have additional questions regarding federal receiverships and how they can be used to enforce a creditor’s rights, please contact David Dragich at ddragich@dragichlaw.com or Amanda Vintevoghel at avintevoghel@dragichlaw.com.