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The Life Cycle of a Court Receivership

From limited purpose cases that may only last weeks, to a full-blown equity receivership in federal court that may last years, each case is fact-driven, impacted by the conduct of the parties and their counsel, court orders as well as state law and local rules. 

Notwithstanding the foregoing, there are similarities within virtually every case as well as the role played and the need for state or federal receivership. 

The following is a brief synopsis of the role of a receiver from beginning, middle and end of a receivership case.

First, the lawsuit must be filed. A receivership is not a cause of action; therefore, an underlying lawsuit for a variety of causes of action must first be filed before a party can seek to employ the remedy of having a receiver appointed by the court. 

Generally, one party or another will seek the services of a qualified receiver initially through a phone call or email. The receiver is interviewed to verify his/her qualifications and suitability for the case. Conflicts are run, hourly rates are discussed, and the purpose of the case is explained to the proposed receiver.

Thereafter, the receiver may end up reviewing a copy of the complaint and any declarations or additional pleadings filed in connection with the underlying litigation. This will give the receiver of an understanding as to the basis for the and the background information regarding the dispute itself. 

A receiver will then generally execute a declaration in support of appointment of receiver and one party formally nominates the receiver, including a copy of the receiver’s CV and fee schedule in the nominating documents.

An opens in a new windowex parte hearing or a hearing on noticed motion will occur, at which time the receiver will be appointed either through a minute order or execution of the actual order appointing receiver. In some cases, the court may defer appointment of receiver until a later court date. In some instances, the proposed receiver may attend the initial hearing in order to provide background to the court as well as answer any questions the court may have.

After the order appointing receiver is signed and circulated, the receiver will then generally have to post a bond, if the receiver was appointed on an ex parte basis, and he/she will also file a receiver’s oath. The oath of receiver confirms the receiver’s neutrality as well as suitability for performance under the order appointing receiver.

At this point, the receiver has qualified to serve as the receiver and often the first step they take is to record a copy of the order appointing receiver as well as reaching out to the parties and taking over the assets over which he/she has been appointed. It is important to do so on an immediate basis and to effectuate service on all interested parties as well as tenants, employees etc. as needed to effectuate jurisdiction.

At this time, the receiver begins to investigate. Depending upon the case, this can include an evaluation of accounts receivables, payables, cash, liabilities, taxes, real estate, personnel and payroll, life safety issues, environmental concerns, existing litigation as well as day-to-day operations of the business or real property and company assets.

The receiver will then administer the estate which could end up involving a sale of the assets, commencement of litigation for fraudulent transfer or other causes of action, day-to-day operations, interaction with creditors and finally a proposed plan to wind down the estate after the assets are sold. 

In some cases, the limited purpose receiver will simply administer the assets pending foreclosure by the secured creditor. Once a trustee sale has occurred, possession of the asset transfers to the successful bidder at the trustee sale.

If the property or asset is sold, prior to distributing sales proceeds, creditors must be contacted. This includes taxing agencies. 

If a receiver distributes funds to creditors without first contacting taxing agencies, a receiver may have personal liability for failure to pay such taxes. An order approving sale and distribution is obtained. Sometimes, the sale of real property will occur with an accompanying order which permits the sale of the property to occur free and clear of liens with the liens attaching to the sales proceeds.

After the proceeds are distributed, a hearing to approve the receiver’s final report and account occurs. This occurs after creditors have been contacted which will enable them to submit an objection to the proposed final report and account. 

Thereafter, the court will rule and issue an order terminating the receivership. Once the court signed such order, the receiver’s bond, if any is exonerated, all final payments are made to creditors and professionals including the receiver’s professionals and the receiver himself or herself and the case is thereafter officially terminated.

Cases involving federal receivers typically involve notices to creditors, taking possession of assets, and seeking guidance from the court regarding asset distribution and sale proceeds. Other considerations include taxes, litigation, and creditor claims. The adherence to best practices will generally protect the receiver and will a more successful outcome of the receivership estate.

To learn more see our visual guide of the receivership process.

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