Question: When appointing a receiver, what is the difference between using a State court versus a Federal court?
Answer: Receiverships offer a lender the opportunity to appoint a court empowered neutral party to receive, preserve, and/or liquidate its collateral –pending the court’s resolution of the secured creditor’s claims.
Special issues may arise within receiverships when the collateral is located in multiple states or jurisdictions. Receivership actions are commonly filed in the state court in the county in which the debtor — or a significant portion of the secured creditor’s collateral — is located. State court jurisdiction, however, is confined to the state in which the court and property are located, while Federal receivership actions are conducted in the Federal district court. Because of this, Federal receiverships allow a receiver to exercise nation-wide jurisdiction, which ultimately, can provide more flexibility and be less costly. However, a secured creditor is afforded a choice between Federal and State court only if jurisdiction exists in both courts.
Both Federal and State courts make clear that appointment of a receiver is an exceptional remedy — warranted only in cases in which there is a clear necessity to protect interest in property.
Question: What issues need to be addressed when deciding which court to be in?
Answer: If you have the choice between a State or Federal court, important considerations include:
1. Location Utilizing a state court to gain control and manage secured assets in multiple states or jurisdictions can be complicated. No uniform law exists through which a receiver, by direction of one state court, can gain jurisdiction and control of receivership assets in another state. In some instances, the appointment of an ancillary receiver must be sought in the other state.
Once the court is granted permission to appoint an ancillary receiver, the secured creditor must then follow the new state’s law in seeking the appointment. Depending upon the state, the secured lender should file a complaint seeking primary relief, plus a motion to appoint an ancillary receiver. To streamline the process, the secured creditor should seek appointment of the same receiver in all states – if possible. Managing multiple receivership estates presents problems of uniformity and expense. To this extent, Federal receiverships offer a less complicated solution.
2. Collateral A receiver can be appointed for a broad purpose — for example to take over and operate a business, or to preserve specific real or personal property.
The nature of the receivership will dictate what specific powers should be requested from the court. For example, with operating businesses, certain specific powers are recommended, including seizing bank accounts, intercepting mail, avoiding utility shut-offs, dealing with vendors, and discretion to pay pre-receivership debts. For more information on what to include in the order appointing receiver, see January eTips.
The collateral, the business of the debtor, the nature of debtor’s improper actions, the existence or non-existence of other/ opposing interest holders, and the forum in which the receivership is sought will influence as the role the receiver will play. A secured creditor will encounter local practices; some jurisdictions have a standard receivership order, while others will require that a local receiver be appointed, and these variables must be explored.
3. Sale Federal receivership rules have a specific provision for allowing the receiver to sell assets in the receivership estate, subject to court approval. But most state courts’ receivership rules are less specific and do not automatically provide the receiver with the power to sell.
There are circumstances in which a State court may allow a sale, the most common being a stipulation from both sides that such a transaction is beneficial to all. When borrowers have personal liability or a guarantee, they are more likely to cooperate, which reduces potential loss. In some cases the court will allow the sale — even over the objection of the borrower — when the recovery from an early sale will be higher and there is "no foul" to the borrower.
It is important to note that every case and every state is different, and the lender should speak with their counsel and the receiver to determine the possibility – and consequences — of an early sale.
The bottom line? A secured creditor is best advised to examine all courts at its disposal when seeking appointment of a receiver. If collateral is in multiple jurisdictions, whether or not to file the action in Federal court is a critical consideration.
Receivership law is relatively under-developed — which presents opportunities for creativity in pursuing remedies to preserve and maximize return on secured collateral.
Bill Hoffman, President of Trigild, was appointed Receiver for a 152 room Holiday Inn located in Georgia. Trigild is operating the hotel. The receiver has approval to market the hotel for sale and with court approval, execute the sale.
Bill Hoffman was also appointed Receiver for three truck stops in Arizona and Texas. Trigild’s affiliate company, Interim Management, is managing the truck stops. The receiver’s order has given the receiver the authority to market and execute the sale of the three properties.
Jurisdiction: A government’s general power to exercise authority over all persons and things within its territory; esp., a state’s power to create interests that will be recognized under common-law principles as valid in other states 2. A court’s power to decide a case or issue a decree 3. A geographic area within which political or judicial authority may be exercised.
Federal Jurisdiction: The exercise of federal-court authority. 2. The area of study dealing with the jurisdiction of federal courts.
Ancillary Receiver: One who is appointed as a receiver in a particular area to help a foreign receiver collect the assets of an insolvent corporation or other entity.
Black’s Law Dictionary (8th ed. 2004), fiduciary