Creditors seeking to exercise control over a borrower or collateral may utilize a number of remedies. They may seek a foreclosure or UCC sale, assignment for the benefit of creditors, file an involuntary bankruptcy petition under Section 303 of the Bankruptcy Code (if they hold unsecured claims), or, seek the appointment of a receiver.
Bankruptcy and receivership provide a particular advantage because they allow creditors to take control of the debtor or collateral without the risk of taking possession. (See the prior post by my colleagues Jay Krystinik and Keith Aurzada on ways lenders may minimize risk in wresting control of a property away from a obligor, here.) Receiverships provide the additional benefit of flexibility and, often, are more easily obtained and less costly than an involuntary bankruptcy. Both federal and state laws provide for the appointment of receivers.
Receivership laws vary from state to state and, indeed, most states provide a veritable cornucopia of receivership statutes. Here, we will look at the receivership laws in the State of Texas to demonstrate the breadth and scope of state receivership laws.
Availability of Receivership
Texas law provides for the appointment of a receiver in many ways:
- by a vendor to vacate a fraudulent purchase of property (Texas Business Organizations Code section 11.403(1));
- by a creditor to subject property or funds to the creditor’s claim (Texas Business Organizations Code section 11.403(2));
- between partners or others jointly owning or interested in property or funds (Texas Business Organizations Code section 11.403(3));
- by a mortgagee of the property for the foreclosure of the mortgage and sale of the property (Texas Business Organizations Code section 11.403(4)):
- for a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights (Texas Civil Practices and Remedies Code 64.001(5));
- “in any other case in which a receiver may be appointed under the rules of equity” (Texas Civil Practices and Remedies Code 64.001(6));
- to rehabilitate a domestic or foreign entity (Texas Business Organizations Code section 11.404, 11.409);
- to liquidate a domestic or foreign entity (Texas Business Organizations Code section 11.405, 11.409);
- to preservation and protection marital property during a divorce proceeding (Texas Family Code 6.502);
- over the assets of a missing person (Texas Civil Practices and Remedies Code 64.001(d));
- to preserve mineral interest or leasehold interest under a mineral lease owned by a nonresident or absent defendant (Texas Civil Practices and Remedies Code 64.091);
- to sell property incapable of division (Texas Rule of Civil Procedure 770);
- over property in a municipality that is not in compliance with certain life, health, and safety ordinances (Texas Local Government Code 214.0031); and
- over property of a nonprofit housing organization that presents a life, health, or safety risk (Texas Local Government Code 214.0031).
Flexibility of Remedy
In addition to their widespread availability, state law receiverships are also valued for their flexibility and adaptability. Under the Texas general receivership statute, a receiver is authorized to take charge and keep possession of property, receive rents, collect and compromise demands, make transfers, and perform other acts as authorized by the court. Texas Civil Practices and Remedies Code 64.031. Indeed, Texas courts are authorized to broadly define a receiver’s powers to accomplish the objectives of the receivership and to modify the scope of the receiver’s powers. Texas Business Organizations Code 11.406(5) (“[The Receiver] has the powers and duties that are stated in the order appointing the receiver or that the appointing court: considers appropriate to accomplish the objectives for which the receiver was appointed and may increase or diminish at any time during the proceedings.”). A receiver’s authority and duties are governed by the receivership order and, thus, can be tailored to each particular circumstance and the needs of the creditor. It is this flexibility that makes receivership uniquely useful to creditors.
Receivership is one of several remedies creditors may utilize in seeking to exercise control over a borrower or collateral. Receiverships may be particularly attractive to creditors because they avoid the need to take possession of the property, are available in a number of circumstances, and offer flexibility that is not available under bankruptcy or other remedies.