Receivership Is A Strong Bankruptcy Alternative

WHY WOULD A BUSINESS FILE FOR RECEIVERSHIP?

Receivership in Washington is typically faster, less contentious, and less costly than a Chapter 11 bankruptcy proceeding. Receivership provides professional asset management, protection, and disposition. A receiver is an advocate for the interests of creditors and equity holders, who will often recover more through a receivership than through a Chapter 11 restructuring.

Although a state court receivership has many similarities to a Chapter 11 case, the receiver is independent from former management, and serves as an officer and agent of the Superior Court. In contrast, existing management typically remains in control a Chapter 11 bankruptcy, acting as a “debtor in possession” with the rights and responsibilities of a bankruptcy trustee.

A WASHINGTON RECEIVERSHIP MUST INVOLVE A GENERAL RECEIVER OR A CUSTODIAL RECEIVER

Under the Washington Receivership Act, a receiver must be either a general receiver or a custodial receiver.

A general receiver has the authority to wind up the affairs of a business.  A general receiver takes possession and control of property of an entity with the authority to liquidate that property.

A custodial receiver takes charge of limited or specific property of an entity, and does not have authority to liquidate property except by court order.

Either a general receiver or a custodial receiver will distribute the proceeds of the Washington receivership estate in accordance with the priorities set forth by law. The court may convert a general receivership or a custodial receivership into the other.

WHAT ARE THE GROUNDS FOR ESTABLISHING A RECEIVERSHIP IN WASHINGTON?

The Washington statute governing Assignments for the Benefit of Creditors requires the Assignor to consent to the appointment of the Assignee as a general receiver over the Assignee’s property.

This provision allows the use of an Assignment for the Benefit of Creditors as a “stepping-stone” to a general receivership without meeting the procedural hurdles that are set forth elsewhere in the Washington receivership statute.

Either the Assignor, the Assignee, or any creditor of the Assignor may file a petition with the clerk of the superior court to appoint the Assignee as receiver of the assets of the Assignor. That petition must include a copy of the assignment; the schedules of assets and liabilities; and a request for the court to fix the amount of the receiver’s bond.

The superior court can also order the appointment of a receiver as relief following a lawsuit filed for that purpose, or as part of a lawsuit seeking further relief, such as judicial foreclosure or dissolution of a partnership.

The court should only appoint a receiver if the court determines that the appointment of a receiver is reasonably necessary, and that other remedies are either not available or are inadequate.

The more common grounds for appointment of a receiver include the following:

• When property at issue in the case is in danger of being lost, injured or impaired.

• When required to give effect to a judgment, or to dispose of property.

• When the object of an action is dissolution of an entity.

• If an entity is insolvent or is not generally paying debts as those debts become due.

• When a party has made a general assignment for the benefit of creditors.

• In connection with a proceeding to recover a fraudulent transfer

ELIGIBILITY TO SERVE AS A RECEIVER IN A WASHINGTON RECEIVERSHIP

Generally, any individual or entity may serve as a receiver, unless they have been convicted of a felony or other crime involving moral turpitude; or are a party to the action; or are materially adverse to the interests of entities to be affected by the receivership.

A receiver must execute a bond in the amount the court specifies, conditioned that the receiver will faithfully discharge the duties of receiver in accordance with orders of the court and state law.  The court, in lieu of a bond, may approve the posting of alternative security, such as a cash deposit to be held by the clerk of the court to secure the faithful performance of the receiver’s duties.

JURISDICTION OVER RECEIVER AND RECEIVERSHIP

The court appointing the receiver has exclusive authority over the receiver.  Unless pre-empted by statute, that court also has the exclusive possession and right of control with respect to all real and personal property with respect to which the receiver is appointed. 

The receivership court also has exclusive jurisdiction to determine all controversies relating to the receivership and the receivership assets.

POWERS OF RECEIVER IN A WASHINGTON RECEIVERSHIP

A receiver has the following powers, among others:

• The power to incur or pay expenses incidental to the receiver’s preservation and use of the property, including the power to pay obligations incurred prior to the receiver’s appointment.

• The power to do all things that the owner of the business or property might do in the ordinary course of the operation of the business as a going concern or use of the property.

• The power to assert any rights or claims of the entity over whose property the receiver was appointed,

• The power to seek and obtain advice or instruction from the court with respect to any course of action with respect to which the receiver is uncertain in the exercise of the receiver’s powers or the discharge of the receiver’s duties.

TURNOVER OF PROPERTY TO THE RECEIVER

Unless excused, any entity shall turn over any property over which the receiver was appointed that is within the possession or control of that entity upon demand.

DUTIES OF ENTITY OVER WHOSE PROPERTY THE RECEIVER IS APPOINTED

The party over whose property the receiver is appointed must assist and cooperate fully with the receiver, and comply with all orders of the court.  That party must also supply to the receiver information necessary to enable the receiver to complete any schedules that the receiver may be required to file, and otherwise assist the receiver in the completion of the schedules.

The party over whose property the receiver is appointed must deliver into the receiver’s possession all of the property of the estate in the entity’s possession, custody, or control.  That property includes all accounts, books, papers, records, and other documents

When the party over whose property the receiver is appointed is an entity, each of the officers, directors, managers, members, partners, or other individuals exercising or having the power to exercise control over the affairs of the entity are subject to these turnover requirements

RECEIVERSHIP SCHEDULES OF PROPERTY AND LIABILITIES

Within twenty days after the date of appointment of a general receiver, the receiver shall file a true list of all of the known creditors and applicable regulatory and taxing agencies, their mailing addresses, the amount and nature of their claims, and whether any claims are disputed.

The receiver must also file a true list of all property of the estate identifiable by the receiver, including the estimated liquidation value and location of that property.

FILING OF RECEIVERSHIP REPORTS

A general receiver shall file a comprehensive monthly report of operations and financial affairs unless otherwise ordered by the court.  Except as otherwise ordered by the court, each report of a general receiver shall be due by the last day of the subsequent month.

A custodial receiver shall file with the court all such reports the court may require.

AUTOMATIC STAY OF CERTAIN PROCEEDINGS IN RECEIVERSHIP

The entry of an order appointing a general receiver or a custodial receiver with respect to all of an entity’s property shall operate as an automatic stay of:

• The commencement or continuation of a proceeding against the party over whose property the receiver was appointed that was or could have been commenced before the entry of the order of appointment.
• A proceeding to recover a claim against the party over whose property the receiver was appointed that arose before the entry of the order of appointment.
• The enforcement against the party over whose property the receiver is appointed or any estate property, of a judgment obtained before the order of appointment.  The entry of an order appointing a receiver does not operate as a stay of a judicial action or non-judicial proceeding if the action or proceeding was initiated by the party seeking the receiver’s appointment.
• Any act to obtain possession of estate property from the receiver, or to interfere with, or exercise control over, estate property.
• Any act to create, perfect, or enforce any lien or claim against estate property except by exercise of a right of setoff, to the extent that the lien secures a claim against the entity that arose before the entry of the order of appointment.
• Any act to collect, assess, or recover a claim against the entity that arose before the entry of the order of appointment.
• Most provisions of the stay automatically expire sixty days after the entry of the order of appointment unless, before the expiration of the sixty-day period the receiver, for good cause shown, obtains an order of the court extending the stay.  A party whose action or proceeding is stayed by motion to the court may seek relief from the stay for good cause shown.

The entry of an order appointing a receiver does not operate as a stay of certain acts, including:

• The commencement or continuation of criminal proceeding; proceedings to establish paternity;
• To establish or modify an order for alimony, maintenance, or support, or to collect alimony, maintenance, or support under any order of a court;
• Any act to perfect, or to maintain or continue the perfection of, an interest in estate property.
• The commencement or continuation of an action or proceeding by a governmental unit to enforce its police or regulatory power;
• The exercise of a right of setoff.
• The establishment by a governmental unit of any tax liability and any appeal thereof.

ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES BY RECEIVER

A general receiver may assume or reject any executory contract or unexpired lease upon order of the court following notice and a hearing.

The court may condition assumption or rejection of any executory contract or unexpired lease on the terms and conditions the court believes are just and proper under the particular circumstances of the case.

Any obligation or liability incurred by a general receiver arising from the receiver’s assumption of an executory contract or unexpired lease is an expense of the receivership.

A general receiver’s power to assume an executory contract or unexpired lease shall not be affected by any provision in that contract or lease that would permit forfeiture, modification, or termination due to the receiver’s appointment; the financial condition of the entity over whose property the receiver is appointed; or an assignment for the benefit of creditors by that entity.

A receiver may not assign an executory contract or unexpired lease without assuming it, absent the consent of the other parties to the contract or lease.

If the receiver rejects a seller’s executory contract or unexpired lease for the sale of real property, or a lessor’s lease of real property, then the purchaser or lessee may treat the rejection as a termination of the contract or lease, or alternatively, the purchaser or lessee may remain in possession.

RECEIVERSHIP FINANCING

If a receiver is operating the business of an entity or managing an entity’s property, the receiver may obtain unsecured credit and incur unsecured debt in the ordinary course of business as an administrative expense of the receiver without order of the court.

The court, after notice and a hearing, may authorize a receiver to obtain credit or incur indebtedness other than in the ordinary course of business.  The court may allow the receiver to mortgage, pledge, hypothecate, or otherwise encumber estate property as security for repayment of any indebtedness that the receiver may incur.

ABANDONMENT OF PROPERTY FROM RECEIVERSHIP ESTATE

The receiver, upon order of the court following notice and a hearing, and upon the conditions or terms the court considers just and proper, may abandon any estate property that is burdensome to the receiver or is of inconsequential value or benefit.

A receiver may not abandon property that is a hazard or potential hazard to the public. Property that is abandoned is no longer estate property.

LEGAL ACTIONS INVOLVING THE RECEIVER OR AFFECTING RECEIVERSHIP PROPERTY

The receiver has the right to sue and to be sued in the receiver’s capacity as such, without leave of court.  An action seeking to dispossess the receiver of any estate property or otherwise to interfere with the receiver’s management or control of any estate property may not be maintained or continued unless permitted by order of the court obtained upon notice and a hearing.

PARTICIPATION OF CREDITORS AND PARTIES IN INTEREST IN A WASHINGTON RECEIVERSHIP

Creditors and parties in interest that received written notice of the receivership, and creditors or other entities submitting written claims in the receivership or otherwise appearing and participating in the receivership, will be bound by the acts of the receiver with regard to management and disposition of estate property whether or not they are formally joined as parties.

Any entity having a claim against or interest in any estate property or in the receivership proceedings may appear in the receivership, either in person or by an attorney.

The receiver shall maintain a master mailing list of all entities joined as parties in the receivership and of all entities serving and filing notices of appearance in the receivership.  A creditor or other party in interest has a right to participate in all matters affecting that party.

ADMINISTRATION OF CLAIMS AGAINST A RECEIVERSHIP

A general receiver shall give notice of the receivership by publication in a newspaper of general circulation in the counties in which estate property is known to be located once a week for three consecutive weeks. 

The first notice must publish within thirty days after the date of appointment of the receiver, and by mailing notice to all known creditors and other known parties in interest within thirty days after the date of appointment of the receiver.

Creditors must submit claims to the general receiver within thirty days after notice unless the court reduces or extends the period for cause shown.  An unsecured creditor must submitted a claim to participate in any distribution to creditors in a general receivership.

A claim, executed and submitted, constitutes prima facie evidence of the validity and amount of the claim.

At any time prior to the entry of an order approving the general receiver’s final report, the general receiver or any party in interest may file with the court an objection to a claim, setting forth the grounds for the objection.

Claims properly submitted and not disallowed by the court are entitled to share in distributions from the estate in accordance with the priorities provided by law.

PRIORITIES AMONG RECEIVERSHIP CLAIMS

Allowed claims in a general receivership shall receive distribution in the following order of priority:

• Creditors with perfected liens on property of the estate shall receive the proceeds from the disposition of their collateral.
• Actual, necessary costs and expenses incurred during the administration of the estate, including allowed fees and reimbursement of reasonable charges and expenses of the receiver and professional entities employed by the receiver.
• Creditors with unperfected liens on property of the estate shall receive the proceeds from the disposition of their collateral if and to the extent that unsecured claims are subject to those liens under applicable law.
• Claims for wages, salaries, or commissions, including vacation, severance, and sick leave pay, or contributions to an employee benefit plan, earned by the claimant within 180 days of the date of appointment of the receiver or the cessation of the estate’s business, whichever occurs first, but only to the extent of $10,950.00.
• Allowed unsecured claims, to the extent of $2,425.00 for each individual, arising from the deposit with the entity over whose property the receiver is appointed in connection with the purchase, lease, or rental of property or the purchase of services for personal, family, or household use by individuals that were not delivered or provided.
• Claims for a support debt, but not to the extent that the debt is assigned to another entity, voluntarily, by operation of law, or otherwise; or includes a liability designated as a support obligation unless that liability is actually in the nature of a support obligation.
• Unsecured claims of governmental units for taxes that accrued prior to the date of appointment of the receiver.
• Other unsecured claims.

If all of the above classes are paid in full, any residue shall be paid to the entity over whose property the receiver is appointed.

RECEIVER’S DISPOSITION OF PROPERTY

The receiver, with the court’s approval after notice and a hearing, may use, sell, or lease estate property other than in the ordinary course of business.

With limited exceptions, the Washington Receivership Act also provides for the sale of assets free and clear of liens, whether or not the sale will generate proceeds sufficient to fully satisfy all claims secured by the property, with the proceeds to be held pending further order of the court.

The receivership requirements for a sale free and clear of liens are less far less technical that the requirements for such a sale under the Bankruptcy Code.

Upon any sale free and clear of liens, all security interests and other liens encumbering the property transfer and attach to the proceeds of the sale, net of reasonable expenses incurred in the disposition of the property, in the same order, priority, and validity as the liens had with respect to the property immediately before the conveyance.

The court may authorize the receiver at the time of sale to satisfy, in whole or in part, any allowed claim secured by the property out of the proceeds of its sale if the interest of any other creditor having a lien against the proceeds of the sale would not be impaired.

A creditor with an allowed claim secured by a lien against the property to be sold free and clear of liens may submit a credit bid.

The reversal or modification on appeal of an authorization to sell or lease estate property under this section does not affect the validity of a sale or lease under that authorization to an entity that purchased or leased the property in good faith, whether or not the

entity knew of the pendency of the appeal, unless the authorization and sale or lease were stayed pending the appeal.

RESIGNATION OR REMOVAL OF RECEIVER

The court shall remove or replace the receiver on application of the entity over whose property the receiver is appointed, the receiver, or any creditor, or on the court’s own motion, if the receiver fails to execute and file a bond, or if the receiver resigns or refuses or fails to serve for any reason, or for other good cause.

Upon removal, resignation, or death of the receiver, the court shall appoint a successor receiver if the court determines that further administration of the estate is required.  Upon executing and filing a bond, the successor receiver shall immediately take possession of the estate and assume the duties of receiver.

TERMINATION OF A RECEIVERSHIP IN WASHINGTON

Upon distribution or disposition of all property of the estate, or the completion of the receiver’s duties with respect to estate property, the receiver shall move the court to be discharged upon notice and a hearing.  The receiver’s final report and accounting setting forth all receipts and disbursements of the estate shall be annexed to the petition for discharge and filed with the court.

Upon approval of the final report, the court shall discharge the receiver.  The receiver’s discharge releases the receiver from any further duties and responsibilities as receiver under this chapter.

Upon motion of any party in interest, or upon the court’s own motion, the court has the power to discharge the receiver and terminate the court’s administration of the property over which the receiver was appointed.

If the court determines that the appointment of the receiver was wrongfully procured or procured in bad faith, the court may assess against the entity who procured the receiver’s appointment: (a) all of the receiver’s fees and other costs of the receivership, and (b) any other sanctions the court determines to be appropriate.