Receiverships are increasingly used by secured lenders to maximum collateral value on troubled loans. Receiverships, in appropriate cases, can be less expensive and time-consuming than a bankruptcy filing.

A receivership is commenced by filing a lawsuit. The secured lender is the plaintiff and the borrower is the defendant. There may be other defendants, like guarantors. Most receiverships are filed in state court and use state procedural and substantive law. While some states, such as New York or California, have detailed and well reasoned receivership statutes, other states, like Missouri, do not. 

There is an alternative to state court in some cases, however. A receivership case may be filed in federal court if there is a basis for federal jurisdiction. In most cases, this means that the plaintiff and defendant are citizens of different states and the amount in controversy exceeds $75,000. This is so called “diversity jurisdiction”, and it can be very useful in receivership cases. So long as “diversity jurisdiction” is present, the plaintiff may file the receivership case is federal court.

The federal courts will require the plaintiff to demonstrate good cause for the appointment of a receiver. Federal courts look at the following factors in determining whether a receiver is appropriate:

 

Once appointed, and after posting a sufficient bond, a federal court receiver is vested with complete jurisdiction and control of all property, real, personal or mixed. 28 U.S.C. § 754. Significantly, the receiver enjoys this control even if the property is physically located outside the district where the receivership case is pending   The federal court receiver can collect receivership assets anywhere in the United States regardless of whether the defendant has had any contact with the receivership forum state. Select Creations, Inc. v. Paliafito America, Inc., 852 F. Supp. 740, 780 (E.D. Wis. 1994).   Any suit that a federal receiver brings in the appointment court in furtherance of his duties is ancillary to the main case and the receiver court has ancillary subject-matter jurisdiction of every such suit irrespective of diversity, amount in controversy or any other factor that would normally determine jurisdiction. Haile v. Henderson Nat. Bank, 657 F.2d 816 (6th Cir. 1981), cert denied, 455 U.S. 949 (1981). 

A federal court receiver with control over property located in multiple judicial districts, however, must be very careful. Federal law requires such a receiver to file the receivership complaint and the appointment order in every judicial district where receivership property is located within ten days of his appointment. 28 U.S.C. § 754.   Most courts permit receivers to file these papers after the ten day period so long as the rights of others were not prejudiced by the delay.

The federal court receiver’s ability to control property in multiple states is a significant advantage over the state court receiverships. Normally, a state court receiver will have no jurisdiction outside of the state where the receivership case was filed. In fact, some state court receivers have had problems controlling property within the state where they were appointed if the property is located outside of the county where the case was filed. Moreover, federal receiverships are ideal in a situation where a receiver that must sue numerous account debtors located throughout the country to collect on amounts owed to the company in receivership. In short, the lender with collateral in multiple states should probably file the receivership case in federal court if there is basis for federal court jurisdiction.

A federal receiver does have some limits in how he manages the property under his control. For example, a federal receiver must manage and operate the property in his according to the requirements of the valid laws of the State in which such property is situated. 28 U.S.C. § 959. At a minimum, this means the receiver must comply with all relevant ordinances, zoning requirements, and environmental rules.

A federal receiver may sell receivership property. While federal law permits either public or private sales, there are quite different, and detailed, statutory requirements for each. For example, if real property is to be sold by a public sale, notice of the sale must be approved by the court and must be published at least once a week for four weeks prior to the sale in a newspaper in general circulation in the county, state or judicial district where the property is located. 28 U.S.C. § 2002. On the other hand, a federal court may approve a private sale of receivership real property only if the price is at least two-thirds of the appraised value of the property as determined by three disinterested persons.   The same procedures will apply for the sale of personal property, unless the court orders otherwise.  28 U.S.C. § 2004.

Federal law on the sale of receivership property provides some certainty. A federal receiver clearly has the statutory authority to sell property. This is an advantage over some state’s law, such as Missouri, where the receivership statutes are vague or extremely skeletal. For example, the author has encountered Missouri title insurance companies that refuse to insure title for a buyer from a Missouri state receiver because Missouri’s receivership statute only says that a receiver may “use” property. On the other hand, the very specific notice and time requirements for a federal court receivership sale can be limiting in some cases where a more prompt sale is necessary. However, there is at least one federal receiver case that permitted a receiver to sell property without complying with the federal statutes because of extraordinary circumstances. Tanzer v. Huffins, 412 F.2d 221 (3d Cir. 1969).

Federal receivership law does not replace bankruptcy law. For example, there is no automatic stay in federal receiverships. Moreover, there is no clear authority permitting a federal receivership court to order the sale of property free and clear of liens. A federal receiver cannot assume and assign a lease or executory contract.

Nevertheless, a federal receivership is frequently a superior alternative to a state receivership. If there is diversity jurisdiction, a lender is well advised to consider seriously filing the case in federal, rather than state, court.