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Receivership reforms, part two: Establishing and empowering receivers

David Warfield September 16, 2013

Note: This post is part of a four-part series on the Credit Report Blog. Click here to view all related posts.

In our last post, we gave a broad overview of Missouri receivership law and why it needs to change. In the next two posts, we’ll dive deeper, provide background on receiverships, and detail specific reforms that could provide much-needed updates to the process.

Types of receiverships

Many modern statutes recognize two basic types of receiverships. The first, called a “limited” or “custodial” receivership is one where the receiver is appointed to hold specific identified property pending a more complete resolution of the respective parties’ rights in the property. The second, called a “general” receivership, involves all assets of the entity with the stated purpose of selling or liquidating the entity. The “limited” or “custodial” receivership is ideal for a situation where a lender with a lien on the specific asset is foreclosing on the property and a receiver is needed to protect and preserve the property during the foreclosure. The “general” receivership is useful in a non-real estate enterprise with employees, bank accounts, accounts receivable and other similar types of assets. Missouri law should be reformed to recognize specifically both types of receivers.

Standards for appointment

Missouri law should be reformed to be far more specific on when a receiver should be appointed. Some possible standards include (a) if there is a material danger of loss or impairment of value, (b) upon a deadlock that prevents the governing body of the entity from properly maintaining and caring for assets or otherwise threatens the value of the assets or enterprise, (c) to facilitate a properly conducted foreclosure sale when the value of the collateral would otherwise be materially diminished during the foreclosure process, or (d) after judgment, to facilitate the collection of the judgment, or (d) to resolve conflicting creditor claims to the same res of assets.

Qualification of receiverships and professional compensation

Current law requires that a receiver post a bond in some unspecified amount and that the receiver may be compensated “as may be reasonable” (RSMo § 515.250-260). The law should be reformed to require that the receiver must also be disinterested and not hold or represent any interests that are materially adverse to parties. The law should also be reformed to provide a receiver with the explicit authority to retain other professionals, such as attorneys, accountants, brokers and appraisers, with court approval. Compensation for the receiver and other professionals should be subject to review and approval by the court.

Authorization to operate in the ordinary course of business

Current law says that a receiver’s duty is to “keep, preserve and protect” the subject assets. At least one older Missouri case, Naslund v. Moon Motor Car Co., (from 1939, in fact) has suggested that a receiver “does not manage the property in the sense of carrying on the trade or business by buying and selling or otherwise.” The statute should be reformed to empower a duly appointed receiver to operate the business in the ordinary course, including the buying and selling of goods, services and products. The statute should clearly authorize the receiver to open and close bank accounts, file tax returns, and submit other governmental reports. This latter point is crucial. Governmental offices are often reluctant to accept any filings made by a receiver and instead insist that a duly authorized corporate director or officer sign the report. Frequently, however, the officers and directors are uncooperative and they can frustrate the purpose of the receivership by their obstinacy.

Authorization to sell assets outside of the ordinary course of business

Since current law does not expressly authorize a receiver to sell property outside of the ordinary course of business, some title insurance companies are reluctant to write title insurance policies for sales of real property by a receiver. The law should be reformed to specifically authorize such sales upon approval by the court. A sale of assets outside the ordinary course of business should be allowed only after the receiver files a motion with the receivership court that explains the transaction and seeks approval.

Sale 'free and clear' of liens and claims

Under federal bankruptcy law, a debtor or debtor in possession can, with prior court approval, sell assets of the bankruptcy estate free and clear of all liens and encumbrances, with such liens and encumbrances to attach to the proceeds. This provision has led to a robust marketplace for distressed assets that has resulted in higher distributions for creditors. A similar “free and clear” provision should be included in receivership law.

All creditors holding liens or interests in the property to be sold should receive notice of the proposed sale, and their liens or interests should attach to the proceeds of sale to the same extent and with the same priority as they existed before the filing. Any creditor that believes the property is being sold at an insufficient price should be given every opportunity to bid for the property, and secured creditors should be given the right to credit bid their claims on the same basis as in a normal foreclosure sale. The receiver’s ability to sell “free and clear” should not be limitless. For example, real estate and personal property ad valorem type taxes should generally be satisfied from the sale proceeds. Federal bankruptcy law is frequently used to deal with other types of claims, such as successor liability claims, labor claims or environmental claims, but these more esoteric types of claims are probably not appropriately dealt with in a state receivership statute because of due process and preemption issues.

In Part 3 of this receivership series, we’ll continue our discussion of specific needed reforms to Missouri’s receivership laws.

David Warfield is the co-chair of Thompson Coburn’s Financial Restructuring Group. You can reach David at (314) 552-6079 or dwarfield@thompsoncoburn.com.