Receivership can be a beneficial tool. A receiver provides a level of control over the debtor’s assets and oversight over the debtor’s business.
In recent years, secured creditors have become more familiar with using receivers as one method of protecting and liquidating collateral. In 2016, Missouri enacted the Missouri Commercial Receivership Act (MCRA), which provided a comprehensive statutory framework for receiverships.
MCRA has increased creditors’ comfort with receivership. This article will provide some helpful background information and tips for effectively utilizing a receiver.
I. Overview
Receivership can be a beneficial tool. A receiver provides a level of control over the debtor’s assets and oversight over the debtor’s business. Rather than simply foreclosing on collateral, a receiver can continue to operate a business under court supervision. A receiver may also sell a business as a going concern.
In Missouri, the appointment of a general receiver1 stays non-receivership litigation and the exercise of creditor remedies for a limited period. MCRA also provides a process for claims administration if there are funds to be distributed after secured creditors are paid.
There are drawbacks. Among them are the costs of paying for the receiver and its professionals. Generally, receivership expenses are paid from the assets of the receivership estate. Additionally, while the secured creditor may be the one proposing the appointment of a specific receiver, the receiver is an arm of the court, not the secured creditor. There is, therefore, a potential for some reduction of influence over the secured creditor’s collateral.
II. Selecting a Receiver
The receiver can be an attorney or an accountant, but it does not have to be.
Under MCRA, almost any qualified non-insider who meets the “disinterestedness” test can serve as a receiver. Who a creditor selects as its proposed receiver will depend on the circumstances of the case. The secured creditor will consider the individual’s previous experience in serving as a fiduciary or operating a business. The creditor will also consider whether any particular expertise is necessary, such as experience with real estate or agricultural property.
III. Preparing to go to court
Before heading to court to seek the appointment of a receiver, the secured creditor and its attorney should do a thorough review of the creditors’ loan documents and collateral position. If the creditor discovers any issues, the creditor may consider entering into a forbearance agreement with the debtor to resolve them. This review will also help prepare the creditor for arguments that the debtor may raise to contest the appointment of a receiver.
IV. Receivership Administration
In Missouri, the appointment of a receiver begins with the complaint, application to appoint a receiver, proposed order and related documents. After filing the initial pleadings, there will be a hearing on the application to appoint a receiver. In addition to MCRA and applicable case law, the receivership will be governed by the terms of the order appointing the receiver.
Throughout the case, a general receiver will file monthly reports of its operations and financial affairs. A receiver can also sell the property of the receivership estate. MCRA specifically grants an available receiver the power to sell property free and clear of liens2, with liens attaching to proceeds. If necessary, the receiver can administer claims of other creditors. When the receiver has finished liquidating the assets and distributing proceeds, the court will discharge the receiver from its duties.
Andrea Chase is an associate in the Kansas City, Missouri, office of Spencer Fane LLP. Eric Peterson is an of counsel attorney in St. Louis, Missouri, office of Spencer Fane LLP. They are members of the firm’s Bankruptcy, Restructuring, and Creditors’ Rights Group.
(1) Under MCRA, there are two types of receivers – general and limited. General receivers control substantially all of the debtor’s non-exempt property. Limited receivers control a limited portion of the debtor’s property.
(2) There are some exceptions to the general receiver’s ability to sell free and clear, which are set forth in the statute.
