Hello, my name is Jack Tanner. I'm a lawyer in Denver, Colorado. I'm a civil litigator and I've been a civil litigator for about 35 years. My favorite part of my practice is equity receiverships. I do plenty of defendant work, but equity receiverships are really, to me, the most interesting. And the big picture. You can make an argument that the most they're the most beneficial civil procedure to society because they can fix a broken company. It's basically a different remedy to fix a broken company. So today we're going to talk about Equitable Receiverships. I titled it ABCDs because it started as a four part series written on our firm website, and then I just decided to call. Each part by a letter, and then I organize it accordingly. So the abcd's of Equitable Receiverships. So a we're going to start with is for ancient history, which is the origin of Receiverships. I'm starting here because every once in a while when you get confused on a receivership, if you think back to how they originated, it actually helps you a good bit. I So Receiverships began in chancery practice in England back in the late 1600s and early 1700s. The first receiverships were actually over ships. You've probably all heard the phrase Britain ruled the waves and most people, when they think of that, think of the Royal Navy as well. They should. But there was also a huge commercial fleet in England, which is what drove the British Empire was all that commerce. So the problem that arose was some ship would be in port and someone would have a lien against that ship. Maybe it was somebody who'd lent the owner money. Maybe it was a tradesman who'd done repair work on the ship, but somebody had a lien against the ship. And under English law at the time, if you had to lean against the ship, you could prevent it from leaving port. Because, of course, once the ship was out of port, the chances of getting paid were pretty slim. On the other hand, the owner would say, Wait a minute, if my ship can't leave port, I can't go make the money to pay off this lien. And that seems like a waste. But but worst of all, from the chancery court's point of view, is the way the English government made money was off commerce. And if the ship is sitting in port, it's not engaging in commerce. So we've got this problem. And the solution was just a genius of English common law. The chancery, not the courts of law. The chancery which applied equitable principles, not legal principles, came upon the idea of a court appointed receiver to go on the ship. The receiver was a court officer and reported only to the court. Now, the captain was still the captain of the ship and the ship was still owned by the owner. But the receiver was kind of the boss and the receiver would make some strategic decisions regarding what the ship would do and then the captain would do as directed. But most importantly, the way the receiver got its name was because it received the money when it came in. So now the ship is engaged in commerce and it makes it does some transaction which generates money and the receiver pays himself. He pays the ship captain and crew. Now he maybe pays whoever that lien holder is, and then anything left over would go to the go back to the owner. But in this way, this is how receiver ships began. They were actual ships and the idea was to avoid waste of a ship sitting in port. You want to get the ship back in commerce? So that it can be beneficial to the whole empire. So modern practice is a lot like this, except it's usually not a ship. It still can be a ship. And actually admiralty practice is very similar to receivership practice in some ways. Um, but usually now what's put into receivership is not an actual ship. What happens is a court appointed receiver, um, appointing a receiver is an inherent power of a court that has equitable powers. And this can be important because there are times throughout American history where, um. Receiverships have kind of ebbed and flowed in their popularity. And there have been times when courts, legislatures in fact have tried to rein in the powers of equitable receivers and the courts have sort of protected against that. And the courts have said no, appointing a receiver like an injunction and like the power of contempt of court is an inherent power of a court that sits in equity and the legislature is not really allowed to monkey around with it except very slightly and under very specific circumstances. So the courts have pushed back against legislative attempts. The courts have noted that. Legislatures can expand and allow receive more things called receivers to be appointed. But this fundamental equity receiver is a power of the A court that sits in equity. A chancery in England or a few states left still have chancery courts, but most states have a the marriage of law and equity. But a court has equitable powers. That court can the court can appoint a receiver. That is why if you start looking for statutes on receivers, you'll find a handful, usually in connection with dissolution of companies, but nothing like you look at the statutes in the bankruptcy code or the bankruptcy code and rules and none of that stuff because it's just an inherent power of the court. So it is operated by rule and decision and not by statute. So when a receiver is appointed, that creates an estate which is called the race, which is Latin for thing. So basically a thing is taken into the custody of the court. Again, it could be a ship, it could be a lot of other stuff we'll talk about in a minute. But the race is created and the receiver is a court appointed fiduciary that has custody of everything in the race. Now, this is an important point. The receiver doesn't get title. The receiver is not doesn't own it. The receiver may not even have possession. But. But the receiver has legal custody of whatever is put into the receivership estate. The receiver's job is to preserve the estate and avoid waste. So again, think back to the ship. The job is to make the ship useful again rather than just sitting in port doing nothing. The receiver is only responsible to the court that appointed it. This is important and we'll talk about it later. The receiver is actually an arm of the court. It is not in that regard. It's analytically different than most other fiduciaries. A bankruptcy trustee, for example, is appointed in the executive branch. The trustee in a bankruptcy case is appointed by the United States trustee who's appointed by the attorney general for that state, who's appointed for or the attorney general who's appointed by the president. So this is all executive power. For a trustee any. But of course they act in front of a court which is part of Article three. Receiver is Article three, top to bottom. It's appointed by the court and it's only responsible to the court. You might think of it as kind of like a special master on steroids. Special masters usually do forensic work for something that already happened, but receivers are ongoing and operating. But the receiver is an arm of the court and as long as the receiver is doing what the court tells it to do, then the receiver generally has the same judicial immunity the judge has. So this is a very powerful position. The standard to appoint a receiver is that in equity, court supervision is needed to avoid waste. That's about it. Again, there are statutes in many states that talk about appointing a receiver. There's actually some federal statutes that talk about appointing receivers, and in some regards that's kind of a synonym or a homonym for the kind of receiver we are talking about today. Most receiverships, most receivers are appointed by a secured creditor pending a foreclosure sale. Almost all commercial deeds of trust or mortgages say, hey, if you're in default, the the lender can go get a receiver appointed. And and that's true also of residential properties. It's true in some asset based lending documents. So this is the most common type of receiver, one where a secured creditor is worried about the value of what's being secured and there's been a default. Now, those cases are not very interesting. We're not going to spend a lot of time talking about those. That's that's the vast majority of receiverships today. But a lot of those don't even get lawyers. They don't they don't need them at all. They're not very interesting. Again, the lawyer I'm sorry, the receiver simply takes the property pending the sale and then distributes the money as directed by the court after the the foreclosure sale. If the borrower comes back out and cures the defaults, then the money the receiver has been gathering gets turned over to the borrower. If the foreclosure goes forward, the the the money usually gets turned over to the secured creditor. But we're not going to talk about that so much. We're going to talk about is good old equity receivers, which is, in my view, one of the most powerful and most underutilized civil remedies available. Again, any court with equitable powers can appoint a receiver if under all the facts and circumstances, it's necessary to avoid waste. A receiver can be appointed in numerous situations. One of the most common for equity receiverships is I'm going to lump together ineffective management and why the management is ineffective could be a bunch of different things. For example, you've got a small company that's owned 5050 and the two owners cannot agree that today ends in the letter Y and so they can't get anything done. One wants to expand, one wants to shut down whatever. They just can't agree on anything. And so the company is rudderless. They can't decide where to go. Um, it doesn't have to be a 5050 case, but just any time when management is being ineffective and the usual methods of changing management don't apply or aren't effective, I had a case once where it required a the majority owner owned 60% of the company, but it required a two thirds vote to change management, and the 40% was the management and it refused to resign or be replaced. And the 60% owner then said, I'm not going to put any more money in. There's real danger of waste. Um, another example of ineffective management might be incompetent management, where the management is just not doing the right thing. It can be corrupt management. If you find management is self-dealing, it can be just absent management, which would kind of be a subset of corrupt management. It can be when you don't even know who management is. And this comes up in small companies and not just companies, but in small companies a good bit where there's a fight as to whether some, you know, shareholder election or equity owner election was proper. And there's two groups both claiming to be management now what now How can the company operate if you don't even know who management is? Well, that might be a good case to get a receiver appointed until you sort out who management really is. I've been involved in multiple cases where a receiver was appointed. Basically just just to run things until an election could sort out who the new management was. Um, and it doesn't have to be just a business. A receiver can be appointed over an individual, over a trust, over a marital estate, over a not for profit entity, or really just about anything else to avoid waste again. The the pole star for an equity receiver is there's a danger of waste. Think again about the ship sitting in port. Can't go. Can't make any money for anybody. When you see there's waste, that's when you might think about appointing a receiver. A receiver can often be appointed pending dissolution of a business or trust. So it could be that the owners agree. We got to wrap things up. We're going to wind up this company and dissolve it or this trust. We're going to dissolve a trust, but somebody needs to operate it pending the dissolution. Rule 66 Federal Rule 66 and the state courts that copy it specifically say you can get a receiver appointed after judgment over a judgment debtor. Now, this type will tell you you can't usually do it right out of the box when you get your judgment. Most courts will require you to require the now judgment creditor to pursue usual methods of collection and fail at that before they'll the judge will appoint a receiver. So, you know, you do your post judgment discovery, you try to discover assets and you and then you maybe you take depositions under Rule 69 to collect to gather information on assets. And it's just very peculiar, your Honor, because you've had this judgment for nine months now and the company is still operating. The doors are open every day. All the employees are coming. They got customers, but nobody's paying our judgment. That might be a time you could go get a receiver appointed post judgment, But again, usually not immediately upon judgment. It takes a while. You can get a receiver appointed for certain specific functions. I represent a receiver once that was going back to who runs the company. He was appointed over an HOA just to conduct an election because there were two different elections that had been held, resulting in two different factions that both claimed to be the management. It wasn't clear who was management. It was causing great waste because, for example, I live here in Denver. Both of these management factions had hired separate snow removal companies and separate trash removal companies and things like that. And so the costs were just astronomical. So the court appointed a receiver just to conduct an election to figure out who the real receiver was. And there were a myriad of other examples of when you might want to appoint a receiver. Again, the crucial thing is there's waste going on and that the usual remedies don't work. I mean, a receivership is a is a rare remedy. It's hard to get a receiver appointed in equity if you don't have a contract allowing for it. You've got to really show there's a problem. But it could be any really any kind of problem. Okay. Who can seek appointment of a receiver? Generally, the moving party has to have an ownership interest in the collateral or the company. So again, going back to the secured creditor situation, having a security interest in either assets of the company or the company itself is considered an equity interest, an ownership interest. So generally the moving party has to has to have that. In rare circumstances, a general unsecured creditor can get a receiver appointed, but there's got to be clear fraud. I mean, it can't be just the debtor is not paying their bills. It's got to be, you know, the debtor is taking assets of the company and moving them offshore and not paying, you know, legitimate bills, things like that. You've got to show you got to show real fraud. If you're an unsecured creditor. In this regard. Again, if there's a contractual right to appoint a receiver, then it's easier. If none. If there's no contractual right, then you're going to have to show that the usual methods of changing management don't work. And this goes back to the 5050 deadlock is the parade case. You can't change management because the owners are deadlocked 5050. There's no push pull agreement in the in the partnership or operating agreement for the LLC. So, you know, you can't force a buy sell. So in that circumstance, you might be able to go to the court. You know, they're very I shouldn't say very common, but they're becoming more common in marital estates now that, you know, in a divorce, especially a high. I value marital estate. Comes along and the divorce may take multiple years. And in the meantime, both the husband and the wife are concerned that the other one is wasting money. So you accord in equity, which is usually where divorce courts sit in equity. Will appoint a receiver over marital estate because that's an example of sort of ineffective management because nobody's really the boss of the whole estate. Hey, how to start a receivership action? Because a receivership is is an order of a court in equity. You've got to have an action, a lawsuit pending. And now you can file your motion to appoint a receiver simultaneously with filing a complaint. Or it can be a pre-existing action. But the trigger to appoint a receiver is a motion to appoint a receiver. It should be noted that in the federal courts and in most state courts, a receiver is considered a remedy. So you'll sometimes see complaints where someone lists appointment of a receiver as a claim for relief in a complaint or in a petition. I'm not sure that's technically right because generally a receiver is a remedy. Colorado is a little different. Colorado has where I practice has a. A non-judicial foreclosure process where a secured lender can do a foreclosure without the court really being involved at all, except for a couple of very minor things. But the vast majority of the foreclosure property is done by a a county official. And doesn't involve the courts at all. So. Shortly after those proceedings were developed here in Colorado, somebody figured out that, well, wait a minute, if we want to receive our pending the foreclosure, we're going to you know, we have to go to court. And if and if the claim to appoint a receiver can't be the only claim for relief, then this nonjudicial foreclosure serves no purpose because nobody's going to be using it because you got to go to court to get a receiver appointed. So you got to be in court anyway. So Colorado Rule 66, which is the rule of civil procedure that regards receivers, specifically says your sole claim for relief can be appointment of a receiver. And that's done in tandem with our non-judicial foreclosure approach. But that's rare. The usual rule is a receiver is a remedy and you've got to have some other claim pending to ask for a receiver. Now, ex-parte appointment of receivers is extremely rare absent loan documents that allow it. Again, I would guess the vast majority of commercial deeds of trust are mortgages in the United States provide for an ex-parte appointment of a receiver. If the borrower is in default, the lender can go into court and get a receiver appointed without notice and the receiver goes in and grabs all the assets and throws the borrower out with without with very little ceremony. But that's because the the lending documents usually allow for it. If you don't have a document that allows for it, the plaintiff really has a very high burden. Basically, it's akin to a prejudgment writ of attachment. So you have to go into court and show the same things you have to show to get any other kind of ex-parte relief. So, you know, there's it's imminent danger that the assets are going to be moved outside the jurisdiction. And you can show that the borrower is fixing to take the money that's owed to you and and move it offshore or move it into another country. And you can show all that the same way you'd get a prejudgment writ of attachment. If you can meet that level, then you might be able to get one ex-parte. But it's it's very rare. When you're starting a receivership. One of the biggest questions is what is going into the receivership? As I said, the appointment of a receiver creates a race. And there's two approaches. One is you can put just the secured collateral into the receivership or you can put the entire company or trust or estate or whatever into receivership. This is this is a real fork in the road. And these two things require some thought. There are advantages and disadvantages to both. You know, if you put a receivership over the whole company, then the receiver takes over and is now the boss, the receiver. Even if he doesn't fire or she doesn't fire all the officers and directors, the order appointing receiver usually says the receiver now speaks for the company. The officers and directors have no. No authority anymore. The receivers making all the decisions. This is one of the great things about Receiverships and one of the times they can be a much more powerful remedy than bankruptcy, which is another way to fix a broken company. What happens often? All too often, in my view, people don't think these things through. Lawyers don't think these things through is when a creditor or an investor in a company that's having all kinds of problems, they they run and go throw the the company into bankruptcy. Well, the problem is that with the debtor in possession, that you've now taken the same management that may well have caused the the mess you're in and given even more power and more authority and management might be the problem. So if you put the entire company into receivership. This is a great thing because it gets it replaces management instantly. What I say. The the kind of rule of thumb I often use when I'm trying to figure out whether we want to go with bankruptcy or receivership is. Is the problem really? Cash If the problem is really cash, you've got good management, you've got a good business plan, but for whatever reason, you've just got a cash problem, then bankruptcy is a great idea. That may be the right remedy, but if the cash is really just a symptom, the cash problem is just a symptom of bad management or a bad business plan. Maybe that's when you want to receiver because the receiver is going to replace that bad management instantly. So this is this is something to think about upfront. Do I want to put the whole company into receivership or do I just want to put certain assets into receivership? If you put just the assets into receivership, it kind of you can end up with like the zombie company that continues to operate, even though it doesn't have any assets or maybe not maybe has some assets, but not crucial assets. Because if you just generally if you just put the assets into receivership now the receiver has control of those assets and maybe the receiver can sell those assets or retask them and do something else with them to make them more profitable. But all parts of the company that other than those assets generally continue on outside the jurisdiction of the receiver. Now, this this can be problematic. And sometimes if, you know, I've seen cases where the 95% of the company's operations are subject to, say, a lien of some kind, and the court says, well, look, I'm going to appoint a receiver over this 95%, but in fact, this is such a big part of it to make my 95% at all meaningful. I'm going to just give the receiver control over the whole company, even though technically only the assets are in receivership. Because if I don't, then those assets are subject to waste, which is what the court is supposed to avoid by appointing the receiver. So this is a fork in the road you need to think about early on. Do I want to? Appointed receiver over the whole company or just over assets. Okay. Once you decide that you file your motion. You've got to submit a you've got to nominate a receiver. And this, again, is one of the great geniuses of this receivership practice and incredible flexibility as compared to bankruptcy. So in bankruptcy, again, we talked already about the bankruptcy trustee who supported from a panel of trustees by the United States trustees And those those trust panel trustees are almost always bankruptcy lawyers who aren't busy enough. So they agree to become a panel trustee to get their name out there, to get a little bit of work. They don't make very much money. No such panel for receivers. The moving party gets to pick anybody they want as long as they're neutral. You should not and most places cannot appoint anybody with an interest in the race because this is again, the receiver is a branch of the court as an arm of the court, and the court has to be neutral. So the nominating party can propose anybody they want as long as they're neutral. There are professional receivers that have done a bunch of receiverships, but you can also, for example, appoint somebody who knows something about the business. Somebody who is not a lawyer who's not busy enough. One of my biggest receivership clients used to own a record company. He sold it, and then while he was semi-retired, he got hired by the company he had sold to to come back because they ran into problems. He came back and fixed it and he realized he was really good at fixing broken companies. So his first couple of receiverships after that were for other record companies because he knew how to run a record company. He had previously run a record company and he was able to fix and this is 40 years ago he was able to fix those broken record companies. So you can think about when appointing a receiver. You know, somebody who already knows the industry, knows what they're doing. I represent a couple of receivers that are property managers. And so when a big office building or a shopping center goes into receivership, they get nominated to be the receiver because they're basically acting as a property manager. So this is one of the great things about receivership is you get to pick the receiver you want, but at least you get to nominate the receiver you want. Now the defendant or the responding party may nominate somebody else and say, well, we're you know, we don't think there should be a receiver. And if you do, don't. Pick, nominee, nominee from the plaintiff, pick our nominee or we agree there should be a receiver, but it should be a different receiver and the court can reject both. I've seen cases where the court says, I don't want either of these. I'm going to pick somebody I know and I'm going to sue a spot, pick a receiver. So unlike bankruptcy where there's a trustee or a panel of trustees, you can pick anybody you want to be receiver. Now, this is really important part of what you do when you nominate. When you move to appoint a receiver and you nominate somebody is you've got to submit a proposed order. So again, as I mentioned before, bankruptcy, there's the bankruptcy code, which is written by Congress. But that is not the way Receiverships work. Receivership is a judicial remedy and there's no receivership code. So the the authority that a receiver has is only as set out in the order appointing receiver. It can be amended later, but you really want a very thorough order up front. This sets out the receivers, powers and duties, what the receiver is supposed to do. And it takes a lot of thought. One of the great frustrations my clients who are receivers have is when somebody goes and gets them appointed receiver without letting them look at the proposed order in advance because a bad receivership order is worse than no receivership order at all. So when you appoint a receiver or when you seek to have a receiver appointed, you've got to spend a lot of time on the order more than you would on typical proposed orders you submit with motions. So we're going to talk for a little bit now about. What a good receivership order should have. It should have a finding. The court has jurisdiction and venue. It should have a finding of findings of fact that support the appointment of a receiver. Again, to avoid waste in under the principles of equity, there should be a conclusion of law that a receiver should be appointed. Then as sort of pro forma these days. But you still need the receiver has to file an oath because they're an officer of the court and the receiver usually has to post a bond, um, in case they, there's some kind of malfeasance involved. So that bond is negotiable. The bigger the estate, the bigger the bond that's required to be posted. Most regular receivers have good relationships with bonding companies and they can get one pretty easy. Um, the order appointing receiver should have a detailed description of the race. Exactly what's going into receivership. And this one, this is really important because it is very frustrating for receiver to not know what's in the receivers custody. Okay. The order appointing receiver should also direct and empower the receiver to take into custody all the assets that are in the race. Now. Again, the receiver doesn't get title, the receiver doesn't own the assets that but the receiver has legal custody of them. And that's the phrase is in Custodia Legis, which is Latin for in the custody of the law. So the order appointing receiver should say exactly what the receiver is supposed to take into his custody. Now, often a receiver does go get physical possession, especially if any asset that's easily movable. I mean, if if it's real property, you don't have to worry too much because the real properties aren't going anywhere but the receiver. First thing you're going to do is go grab all the cash that that a company in receivership has. Then there's other assets, personal property assets that are that are movable. The receiver may want to actually get possession of them to make sure they don't move. In the order. Appointing receiver should also have a phrase that says, you know, the receiver has all the powers and authorities traditionally and customarily held by receivers. And this goes back to it being equity practice. It's case law that sets out what a receiver can do. There's no statutes. So what you probably want to do is say this. This is the common language receiver has those powers traditionally customarily held by receivers and then you've got about 15 sub paragraphs under that or maybe 30 talking about what the receiver can do. The receiver can change locks on real estate, the receiver can go get insurance there, the receiver can get the help of the sheriff if he needs it. Whatever you think the receiver might need to do, you put it in there. You should be a provision saying a receiver certificate are used to sell money. We'll talk about receiver certificates a little more later, but basically you sell receiver certificates to raise money to operate the estate if there's not a lot of liquidity in it. Um. Now receivers got to get paid. Usually the receiver gets paid by the estate. If you've got an operating company, great. The receiver can just get paid first out of the till. But if you've got a company that doesn't generate cash, then the receiver, then there's got to be a different way to pay the receiver. But the receivers compensation should be set out in the order. Appointing receiver. As a general rule, it cannot be any kind of contingency because that gives a receiver a stake in the outcome. It's usually got to be hourly. I've seen a couple of receiverships where right at the tail end where there was nothing left but some assets. A court said, Well, I'll let the receiver get a percentage of these assets left. The receivers got to liquidate, but that's very rare. And at the end of the case, usually receiver gets paid by the hour or by the day or week or something by the task, but can't have a contingency interest. Your reporting receiver should have a provision allowing the receiver to hire and pay professionals such as the lawyer. So again, back to the captain of the ship metaphor. You got to pay the captain, you got to pay the crew. So the receiver gets gets the power to do the same thing. You get to pay employees of the company. Or maybe you need to hire a CPA, or maybe you need to hire lawyers. So the. The receipt. The order appointing receiver should give the receiver all the that power. Um, now, also, when a company is starting to receivership, there's a bunch of stuff that happens. There's often already pending litigation because the companies going into receivership because it's struggling. But even if there's not pending litigation, the sharks smell blood in the water and they come. And so. The order. Appointing receiver should have some kind of stay against actions of the property and the estate. And it should say if you've got a if you've got a claim against these assets or if you've got a concern about what my receiver is doing, you can bring it to this court. I'm not saying you have no remedy, but don't sue my Colorado receiver in Tennessee. Um, and we're going to get into more detail on the scope of that stay later. But there's no statutory automatic stay like there is in a bankruptcy. So this is something the court has to do by court order. Um. A provision in the order. Appointing receivers should say all the actions taken by the receiver are taken as receiver, not individually. Similarly, a similar column protecting the receivers agents. A similar provision protecting the receivers agents. The common law says that the receiver is immune, but it doesn't hurt to kind of do belt and suspenders and put a. Uh, put that in the order as well. Okay. One thing to remember, if you're in state court, the jurisdiction of a state court stops at the state line. You know, you can have regular plaintiff defendant litigation and the court has jurisdiction over defendants in other states if they're if long arm jurisdiction, works on a in persona matter personal jurisdiction. But but a receivership functions in REM. It creates a race and the jurisdiction over race stops at the state line. So as part of the order of appointment, if you're aware that there's assets in other states, you should probably empower the receiver or if necessary, the receiver can raise it with the judge later, say, Hey, we're here in Colorado, but we found some assets in Maine. So what you do is you go to Maine and you file a new case and say, Hey, I'm a Colorado receiver and I know there's assets of the company in receivership here in Maine and I need to get custody of them and do something with them. And typically, the main judge in that situation will, under comedy, just say, hey, there's a Colorado judge is looking at what's going on in this receivership and we'll just do as he says. There's there's there's cooperation and respect between the two state court judges. Not always, but usually federal receivership works a little differently because federal jurisdiction is nationwide. A federal receiver doesn't need ever to open an ancillary matter in another jurisdiction. However, there actually is a statute on this in Title 28 that says if a federal receiver appointed in one district finds property in another district, there's a just a form you fill out, the receiver fills out a form and files it in the district where the property is. And that gives a property I'm sorry, a receiver appointed by a federal court in one state jurisdiction over property in a different judicial district. The statute actually says it's got to be done within ten days and there's a split of authority on that. There are some courts that say that means it's got to be done within ten days of appointment. Even if you're unaware that there is jurisdiction, there is property in another district. The better reasoned approach is you've got to file it. The receiver's got to file it within ten days of becoming aware of property in that other jurisdiction. That's the the better approach. Okay, so now we're through the letter A, the receiver has been appointed and now what's going on? Once appointed, the receiver follows the oath and bond, as we talked about. Now the receiver has legal custody of the assets in the race and basically takes over operations. Think back to the ship Origin. The receiver gets to tell the captain what to do. The captain is still captain of the ship, but the receiver gets to decide what port the ship is going to or leaving or when it's leaving and things like that. Again, if it's a company receivership, it functions a little differently than an asset receivership. Asset Receiverships are almost always just looking for a liquidation sale. But a company receivership may well be looking for a reorganization, a recapitalization, where the company comes out, the other side still functioning just after having fixed some problems. Okay, so the receiver has exclusive control over these assets and doesn't answer to the plaintiff or anyone else except the appointing court. This sometimes is a splash of cold water for the plaintiff because sometimes think plaintiffs think once they get the receiver appointed, the receiver is still going to answer to them again, in some extreme cases involving. Asset receiverships where the debt far exceeds the value of the collateral, then the secured creditor is generally plain with his own money. And so the receiver will be deferential to the requests of the secured creditor. If again, the debt is far more than the value of the assets, but if it's a straight equity receivership or even if it's a secured creditor receivership, if it looks like there's any chance of payment to be on the secured creditors, then the receiver has to be absolutely, completely independent. So usually when a receiver takes over in an equity receivership, they don't do very much at first. They kind of get the lay of the land, figure out what's going on, figure out how to make operations better. The receiver's goal is usually to try to recapitalize the company. If recapitalization is unlikely, then maybe they they look at a sale. But the first goal of an equity receiver should be to fix the existing company, not to sell it. And again, this goes back to the great advantage of Receiverships that who did you get appointed? You receive or maybe you you appointed somebody who really understands the interest and is a workout specialist or understands this stuff. This is somebody that can really help you fix the business rather than just liquidating, because liquidation, of course, just fetches a fraction of the price that a sale is a going concern can, or even much less than the value of investment in the existing company. So business operations, the receiver operates as it makes best sense to the receiver, aiming for an exit strategy of recapitalization or sale as a going concern or sort of as a last resort liquidation. Now the receiver's job again is to preserve going back to the ship. It's supposed to preserve value of the estate, but case law over the centuries has said preserve can be pretty, um, pretty liberally interpreted. Um, some of the biggest merger railroad mergers in the history of the United States occurred during Receiverships. There were companies in receivership that were buying competitors because that was the best way to preserve the value of what was in the estate. So preservation doesn't mean doing nothing. Sometimes you generally have you can certainly continue to do what has been done before. Sometimes you can expand, uh, do new things. The more new things you got to do, the more important it is to get the blessing from the court that what you're doing is right, because again, it has to go back to avoiding waste and preserving value. Okay. While the receiver is running operations, the receiver has an obligation to keep the court informed as to what's going on because again, the receiver is just an arm of the court. Receiver is no standalone authority. The way a receiver does it is typically receivers report for some estates. They're filed every month. For some estates they're filed quarterly, whatever the judge wants to do. But the point of a receivers report, which is usually filed under oath, it's sworn testimony before the court, it's evidence. First of all, you tell the court what's what you've been doing. This is what I've been doing and this is how much it cost. And this is these are the bills I want to pay and you get all that approved. Secondly, this this really helps if later on somebody says, well, wait a minute, instead of doing what the receiver did, the receiver should have done something else. You say, well, look, I filed a report. You had a chance to object to the report. It's just like any other pleading. You didn't object. The court approved my action, so don't come back later. It's now essentially law of the case. The other thing a report can do is give signals to the court what the receiver is thinking about doing. And this is a really valuable thing. Most, you know, most litigants, courts, courts don't give advisory opinions and most litigants don't like asking the court what needs to be done. Usually you argue what the court should be done, but. A receiver can suggest to the court, Hey, here's what I'm thinking about doing, Judge. Is that okay? And sometimes a judge usually says yes. Usually a receiver is appointed. The courts tend not to micromanage their receivers. But every once in a while you get a receiver chip judge that says, No, don't do that. I don't I don't want you acquiring that competitor. It's time to to to get to an exit strategy and this estate or whatever. So a receiver's report does all these things and it's just part of business operations for a receivership. Okay. So operationally, again, the company runs the way the receiver wants it to run, but that includes paying the bills. So the first thing happens is the receiver gets to pay itself first and its counsel second. They jump ahead of all the creditors, all the claimants, everybody, the receiver, receivers, counsel are first in line now the receivers fee application process. So the receivers counsels fee application process is similar to bankruptcy, but it's much, usually much, much less complicated. You don't have these fee application and fee application hearings and blah blah blah. The receiver usually submits its timesheets sworn to under penalty of perjury. That's all true and correct. The lawyer for the receiver. That's me. Redacts those for any attorney client privilege information. The receivers counsel's lawyer fees are also submitted also usually redacted, all presented to the court for approval. There are times people come in and object, but that's actually relatively rare. Then after the receiver pays itself as part of business operations, the receiver pays other administrative creditors. Maybe you've got you've hired a CPA. If this is an ongoing concern, you've got employees that are coming to work every day. You've got to pay them. So in this regard, business operations and receivership is. Very similar to any other kind of business operation. The biggest difference is this extra layer of expense of the receiver, and that's why this is such a drastic remedy. And you've got to really have a good case before a court will do it. Um, so now you're thinking about what kind of exit strategy are we going to do? If it's a sale, the receiver may need to engage brokers and other consultants. So typically a good order reporting receiver will give the receiver authority to do that, but usually you want to have that approved separately if it's going to be a material amount of money, if you know, if it's a standard real estate, if you're selling some real property and you want to bring in a real a real estate agent at standard rates, you know, court's going to approve that and it hurts you nothing to tell the Court That's what you're doing. If you're selling a business and you want to bring a business broker, that's a little different. And so you should probably get that approved by the court. Other major expenditures should be prosecuted to the court, either in reports or in separate standalone motions. I worked on a big receivership a few years ago for a property that was completely dilapidated and broken down, and it actually had become like a. Um, a magnet for. There were there were drug deals and there was a killing. And the judge and the receiver went to the judge and said to preserve the value of this property, I want to raise it to the ground. There were some environmental issues. I want to remediate the environmental issues because by doing that, I will increase the value of this from a vacant, clean. Vacant lot is worth more than the lot is currently worth. Uh, even factoring in the count, the cost of that, the razing and remediation of the soil. So anything like that, you should go to the court and get approved. Uh. Now what happens a lot is when the receiver gets appointed. People who have been owed money come out of the woodwork and say, hey, what am I going to get paid? What am I going to get paid? And that's a claims process. Typically, the receiver does not pay pre appointment claims out of operations. That's by a claims process. So when he's operating the business, sometimes that's a good reason to appoint a receiver and he can he can hold off on paying the past bills. Um. So let's say you've got a company that's got a good business model. Cash is just a symptom, but you need to catch up. How are you going to pay the receiver or the receiver's agents in the meantime until until you get operations back on line so they generate enough money to pay everybody. And the answer is a receiver certificate. I mentioned these before. Receiver certificate works like a super priority lien in bankruptcy. Basically, someone the receiver is going to borrow money from, someone the lender gets in exchange. A receiver certificate. The receiver certificate. It carries interest, usually above market interest. The receiver certificate may have another kicker, like if you're doing a recapitalization of the company, maybe you get the receiver certificate, carries some little token amount of stock, but the receiver certificate, again, you sell it. It's evidence of a loan. And then those the holders are holders of the receiver certificates jump in line ahead of all the pre appointment creditors, including the secured creditors, to get repaid at the time of the sale so they know their money is safe. So in that regard they function very much similarly to a super priority lien bankruptcy. So. You're operating, but you're still looking for an exit strategy. The goal of the receivership is usually recapitalization or failing that sale as a going concern. So again, the receiver may want to streamline operations, reduce redundancies if you're doing a sale, even a going concern sale. The buyers usually want an asset sale to leave the liabilities behind. They don't worry about hidden tax bombs or whatever. So what the receiver gets to do is sell the assets, whether it's assets or the whole company, free and clear of claims, liens and encumbrances. However, those claims, liens and encumbrances are not discharged. Generally, a receiver cannot discharge debt. What happens is the claims, liens and encumbrances on those assets just transfer to the cash that was generated by the sale. So it's essentially a collateral substitution. You're a lender, you had to lean on all the equipment in an office. Hey, that equipment has been sold at a bunch of cash brought in. You've now got to lean on that cash. That way the buyer, because that's the only way you're going to find a buyer or a buyer is not going to buy either assets or a company that have all these liens attached to them. So the sale is free and clear, but the claims leans and encumbrances on what's being sold attached to the proceeds they attach in the same order of priority. The only difference is they're now junior to receivership expenses. So again, this is essentially a collateral substitution is what's occurred. A sale by a receiver always has to be approved by the court after notice to all interested parties. And this is this is way more than just the parties that are parties to the case. This is. All the equity holders and anybody who might care. You have to give you want to give notice to the whole world because about the worst thing that can happen in receivership is after the sales occurred, somebody pop up and say, Hey, I didn't know about all this and I've got all these objections and you didn't know about them. Um, that's a really bad thing. It's very expensive and it's a disaster. So you want to give notice, You want to be the receiver wants to be the biggest target possible. Give notice to everybody. Okay, so what happens to all those claims against the assets you just sold? Well, you've got a claims process. It works very much like a bankruptcy claims process, but it's often simpler. So the receiver files a motion with the court and says, Hey, issue an order to present and file claims, and then you send that order. The receiver sends that order to everybody in the whole world that could possibly have a claim against the assets. Then everybody files their claims. It's a simpler process than bankruptcy. They are filed under oath. Usually if the claim appears valid on its face, the receiver. Approves them now. Other claimants or equity holders have the right to object to a claim. There might be if there's an objection. Typically the court has to have a hearing. But it's a it's a limited hearing. Um, what the parties get is notice and an opportunity to be heard. They don't get the full blown ABA manual on complex litigation. You get sometimes you get discovery and if you do, it's limited. Sometimes you don't get any discovery. Sometimes you just have a hearing and the court decides whether the claim is any good or not. The receiver usually stays out of that process. The receiver doesn't take a position on whether a claim is valid or not after its initial recommendation to the court. You leave that for the other parties to fight about. Um, the other aspect to. The Order of Saint Paul claims is that by filing a claim, a claimant submits themselves to the jurisdiction of the court. And this goes back to the jurisdiction of a of a receiver compared to a bankruptcy bankruptcy statutory nationwide automatic stay of all actions and receivership law. The receivership court can stay assuming a state court receivership can stay equitable actions against the estate. Anything trying to get the estate to do or not do something and trying to get the receiver to do or not do something. The appointing court can stay that, but the appointing court cannot stay legal claims in another jurisdiction. So one of the other advantages of the. Order to present and file claims is that by submitting an order. Present and file claims, the claim is now submitted themselves to jurisdiction of the court. And the court says, Hey, if you want to participate in the distribution from this claims process, you got to drop all those other claims and that usually works. This makes the entire estate more efficient, less expensive. You just do a claims resolution process rather than having 15 different or 500 different trials all over the country on what is owed. Sometimes. Sometimes the other litigants won't stop. They don't participate in the claims process and the receiver has to then go hire lawyers to defend claims. And that can be expensive. But, you know, a receivership is an equitable remedy, but it's not all powerful. So sometimes you just have to bite the bullet as the receiver or the receivers lawyer and hire lawyers to fight about claims. But keep in mind on those other claims that that ancillary jurisdiction, if the whole distribution process we're about to talk about is done before those reach judgment, it doesn't matter. So sometimes you're just kind of holding those cases at bay until you can finish up your case. Okay. Just like when I talked about a report said the receiver could telegraph what it wants to do and ask the court if that's all right. Another thing a receiver gets to do is simply ask for instructions because the receiver is an arm of the appointing court. So receivers are allowed to ask for instructions where the receiver says, I don't know what to do. I'm working for you, Judge. Tell me what to do. Sad thing to say is about, I would say about two thirds, three quarters of the time. The judges say request for instruction is denied. I'm not going to micromanage my receiver. Use your best judgment. But but a good bit of the time a receiver will tell you, I mean, receiver judge will tell the receiver, here's how I want you to handle this problem you don't quite know how to do. Okay. D is for disposition, distribution and discharge. Okay, so you've had the sale and you're sitting now on a pile of money. You don't want to pay that out to the whole case is over because that payment to those pre-appointment creditors, which is money is now for is junior to payments for all the administrative expenses, including the receiver, the receiver's lawyer and so on. So usually you don't make distributions to pre appointment creditors till the end of the case, until the receiver is ready to be discharged. Sometimes you make partial payments, but that that's expensive and it's an accounting problem and you will get people pestering you for quick discharges but often. Often you don't say yes to that. You wait until the end of the case and make all the distributions. Sometimes the distribution of assets is in-kind, especially if you're dividing up a company. Maybe you just you just divvy up the shares of stock or real estate or something like that. If it's something that can be distributed in kind and doesn't need to be cash. You can skip the whole sale process and just make an in-kind distribution. Okay. So after the claims are resolved, the receiver has to pay those claims consistent with what's called the absolute priority rule, which is the same general priorities in bankruptcy. And just as a historical note, the absolute priority rule originated in Receiverships and the bankruptcy code copied it. It's not a bankruptcy concept that the receiver receivership law is copying. It was the other way around. This was originally a receivership concept. So first you pay the administrative creditors, the receiver if he's not already been paid or she's not already been paid, she's his lawyer. She's not already been paid. Other administrative creditors, if they've not already been paid, they all get paid first out of the sales process. The law is that if there's not enough money to pay the administrative expenses of a receiver. Whoever got the receiver appointed has to pay them because, again, the receivership is an operation of the court and you can't have the court officers not being paid. After you make sure all the current administrative expenses are paid in full, then you pay the receiver certificate holders that we talked about before. Those people who loaned money to the estate so it could operate and only after that's done do you start paying everybody else. You pay the pre appointment, secured creditors, you pay the pre appointment priority creditors who are usually that's usually employee wage claims. There can be some other priority creditors sometimes like taxing authorities have priority then you pay pre appointment unsecured general unsecured creditors. Then finally anything that's left gets distributed back to the equity holders. Under the absolute priority rule. Again, like in bankruptcy, you've got to pay all of any of these levels I just talked about before. The next level gets a penny. So all the administrative creditors got it paid in full before any pre appointment debts are paid and all the pre appointment creditors have to be paid in full before there's any distribution to equity. If you get to the point that a category can be paid only in part, then generally the claimants are paid pro rata. Although when you get if you run out of money in the secured creditor level, then the secured creditors may be paid in order of priority because that matters. But if you're down to general unsecured creditors and everybody gets $0.05 on the dollar, then everybody gets $0.05 on the dollar. And it doesn't matter if they've been owed their dollar for ten years or they just got owed their dollar the day before the receiver was appointed. Chronological priority doesn't matter for general unsecured creditors. Okay, so after all the distributions are made, the sale is over. Then the receiver files a final report. You say, Hey, this is all the stuff I did, Judge, didn't I do a great job? And you want an order from the court saying, Hey, my receiver did a great job, the receiver did everything she was supposed to do. The receiver did nothing she was not supposed to do. The order should say nobody can sue that receiver for anything the receiver did. If you've got a concern, then come back to my court and I'll of course entertain it. But you can't collaterally attack the actions of a receiver in another court. Okay. Depending on the way the case is structured, the case could continue after the receiver is discharged. But once the receiver is discharged, if you're the receiver's lawyer, you don't care anymore. If an appeal is possible, maybe the receiver reserves money to defend that appeal. And then there's an instruction only to pay out that money when all appeals are exhausted. Um. Okay. In conclusion and ideas for deductions because I couldn't think of a synonym for conclusion that started with the D. So I looked in the thesaurus and it said deduction. So that's what we're going with. Receiverships are extraordinarily powerful remedies. They're not utilized nearly enough. A receiver can be appointed in a myriad of situations, limited only by your creativity and ingenuity and the patience of a judge to avoid waste a receivership, a receiver can immediately eliminate effective or bad management unlike bankruptcy, which will tend to entrench that bad management. Receiver can be especially chosen for their knowledge of the industry or their talents as a workout consultant. So receiver ships have to be pursued with great care, but the results can really be worthwhile. There are far more flexible and cost effective than bankruptcies. So in conclusion, in case you can't tell, I really find this interesting. I enjoy this. This is my favorite part of my practice. So if you've got a receivership question, reach out to me. Here's my contact info. My bio is there on the URL and I'd be happy to talk to you about Receiverships. I kind of feel like I'm a it's almost it's not not a religion. No offense intended, but I really am. I'm a believer in the value of receiverships They should be used more often than they are. And I'm happy to to help you out if you've got some thoughts about one. So thank you very much.