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Published Articles by David Balovich

Published in: Creditworhty News
Date: 3/18/98

Many of you have sent inquiries requesting topics for discussion. Thank you for doing so and I encourage you to continue to do so, as I would prefer to write about the interests that you have.

A frequently asked question is what is receivership and upon notification what should we do?

A receiver is a person appointed by the court to take possession and charge of designated assets or property and to administer them in accordance with court directives. Receivership can be an alternative to bankruptcy for the liquidation of assets of a corporation, however debt can only be discharged through bankruptcy. Receivership can be administered through both the federal and state courts. Receivership does not apply to individuals or general partnerships.

In the majority of states receivership cannot be ordered unless an adversarial proceeding has already commenced (i.e. lawsuit) and the court has determined that receivership is necessary and proper. A receivership is not always utilized to liquidate assets of corporations. In certain cases where there are disputes between officers, directors or stockholders, courts may appoint receivers to serve as custodians.

Upon notification that a corporation has been placed in receivership, creditors should investigate as to why the receivership was created and the duties of the receiver. The duties of the receiver are normally contained in the court instructions appointing the receiver. If the creditor is unsure of the wording in the document they should ask for clarification.

The primary difference between a federal receivership and one initiated by the state is that federal receiverships are rare unless requested by a federal agency or the IRS. Unlike state court receiverships that may or may not be prescribed by state statute, federal receiverships are governed by The Federal Rules of Civil Procedure. Under Rule 66, federal jurisdiction is limited to liquidating or operating the business for the benefit of a government agency that is owed fines or taxes. The receiver is generally not interested nor do the court instructions provide for protecting the interests of trade creditors. State receiverships vary from state to state depending on state laws. Receiverships under state law may be appointed for the following reason:

1) Insolvency; 2) Not paying debts in a timely manner; 3) Disputes between internal factions (this may include divorce where the parties hold equal shares of equity in the corporation).

The creditor upon receiving notification of receivership should determine whether the filing of a claim is necessary. Some states require claims to be filed and the creditor who fails to do so may be unable to share in the liquidation of assets or payments of bills in the case of a custodial receivership.

When receivers are authorized to continue the operation, they are usually authorized and empowered to pay debts in the ordinary course of business as they come due. However, there is no guarantee this will occur. A receiver is only the custodian of the assets and bound by the orders of the court that created the receivership. Creditors should not only try to work with the receiver but should also be cautious and not assume that because a receiver is in place all is going to be OK.

Receivers, as fiduciaries of the court, are obligated to acknowledge and respond to creditor questions. Creditors should always inquire about past, present and future obligations and if not satisfied take the necessary steps to protect their firms' interests. Several years ago a large rancher in North Texas was convicted of drug trafficking and the DEA and Texas Rangers seized all of his ranching operations. Federal and State receivers were appointed, through mutual agreement, to manage the seized properties for the benefit of both state and federal government in order to collect the fines imposed.

Trade creditor payments were not included in the court orders and subsequently were not paid by the receivers. The trade creditors filed an involuntary petition in bankruptcy in order to have the case administered by the Bankruptcy Code where they were afforded some protection and a voice in the distribution of assets.

In all cases, notification of receivership should be reviewed with legal counsel to determine the appropriate action to take.

I wish you well.

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