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State Court Receivership: A Powerful Creditor’s Tool Image

State Court Receivership: A Powerful Creditor’s Tool

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A receivership is often labeled as the state court’s version of bankruptcy, though there are many differences between the two. The device of receivership is primarily a creditor’s remedy and is typically invoked in various circumstances including the collection of a money judgment, liquidation, and managing assets. A creditor is typically the party requesting the court for appointment of a receiver and the lender is the respondent in the case and whose property is being subjected to a receivership. Because of the fundamental nature of a receivership, the imposition of a receiver is more prevalent during periods of economic recession and depression including the Great Recession of 2008. Not surprisingly, and seemingly in response to the Great Recession, Minnesota revised and enacted an updated receivership statute in 2012 which can be found at Minnesota Statutes sections 576.21-576.53.

The Life of the Receivership

The inception of a receivership begins when a party in a suit, typically a creditor, brings a motion to appoint a receiver. Thereafter, the receivership is established when the court grants the motion. It is generally within the discretion of the court whether a receiver is appointed—but where a creditor is seeking a mortgage foreclosure—the court must appoint a receiver after the creditor moves for one. A receiver may be appointed to enforce a prior judgment, preserve property pending an appeal, as a creditor’s remedy, or in all other cases, under the general equity powers of the court. The party seeking the receivership will recommend a receiver, and a court will generally appoint the recommended receiver if the recommended person or entity is qualified and independent. Accordingly, the court will examine whether the recommended receiver is independent from the parties in the underlying litigation and has the sufficient experience and knowledge to adequately manage and control the receivership property in question.

Once appointed, the receiver takes control of the receivership property, which may include real estate and other assets of the respondent, but it is the court that has ultimate and exclusive authority over the receivership property. During the course of the receivership, the receiver is required to make interim reports to the court providing an update of the receivership and receivership property. Similar to bankruptcy, once the receivership is ordered, an immediate stay puts a halt to anyone from interfering with, taking possession of, or exercising control over the receivership property. The stay expires 30 days form the time of the appointment of the receiver unless the court orders otherwise, and the stay may be extended if the receiver or another party brings a motion seeking an extension. However, the commencement of a bankruptcy proceeding falls outside the receivership stay, and as such, when a receivership is ordered, the respondent may still file for bankruptcy which would halt the state court receivership proceedings. Finally, the receivership ends once the receivership’s goals are achieved or by court order, operation of law, or by resignation by the receiver.

Limited Versus General Receiver and Their Respective Powers

One of the key distinctions the Minnesota receivership statutes make is between a limited and a general receiver. When a receiver is appointed and has control over an entity or all of the assets of the respondent, the receiver is a general receiver. In contrast, and in the usual circumstance, when a receiver is appointed over a particular asset of the respondent, the receiver is a limited receiver. The general receiver has the same powers as the limited receiver plus some powers that the limited receiver does not enjoy.

A. Both Receiver’s Powers

The powers provided to both types of receivers include, in part, the power to: incur and pay expenses in connection with the receivership; control, manage, and conserve the receivership property, including leasing real estate; and assert rights, claims, and defenses relating to the receivership property. Further, the receiver has the power to sue and be sued, though the receiver is immune to claims against it relating to its duties as receiver. The receiver may demand that persons possessing control over the receivership property turn it over to the receiver and may obtain necessary credit for the benefit of the receivership. These powers are not exclusive, and the court may provide a receiver with a power beyond what is specified in the Minnesota receivership statutes.

B. The Power to Sell Free and Clear of Liens

Among other things, a general receiver has the power to sell receivership property free and clear of liens after prior approval provided by the court. A receivership sale is not a foreclosure and consequently, the receiver may sell the receivership property free from statutory redemption rights. Though, a general receiver’s power to sell may not be used to exclusively avoid redemption rights. The receiver may also sell the receivership property free and clear of liens, with some exceptions including liens for unpaid real estate taxes. But a receiver may not sell receivership property free and clear if the real property to be sold is agricultural or is a homestead, unless all owners of the property consent to the sale. Lastly, if an owner or holder of a lien on the property objects to the sale, and the court determines that the amount to be likely realized from the sale is less than the objecting person would realize without the sale, the court will deny the receiver’s power to sell the property.

In conclusion, a receivership is different than bankruptcy in many respects. However, a receivership is a powerful tool afforded to a creditor, especially when management over collateral would be beneficial during the pendency of an action relating to debt collection or foreclosure.

This information is general in nature and should not be construed as tax or legal advice.