Post-Judgment Receivers

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One of the tools used by creditors to defeat sophisticated asset protection plans is the receiver. Unfortunately, who receiver are and what they do are often poorly understood and relatively few asset protection plans are designed to deal with those situations in which receivers are appointed. This article will attempt to give the rudiments of the office of the receiver for those not versed in post-judgment enforcement. For background, I've been appointed as a receiver in a couple of high-profile judgment enforcement cases, and as a creditor-debtor attorney I've dealt with receivers more times that I can even remember, so what follows comes by way of actual experience and not theoretical musing.

Receivers can be very effective against many sophisticated asset protection plans. The reason for this goes to a fundamental problem with asset protection planning in that clients want their asset protected from creditors, but they are also reticent about giving up control of those assets. Thus, asset protection planners will often build in various mechanisms for debtors to divest themselves of legal title to assets, but retain control over those assets. This control, however, creates a weakness that a receiver may uniquely exploit.

The Three Concurrent Roles Of A Receiver

It is important to understand that a receiver wears three hats: The receiver is an officer of the court, an agent for the debtor's estate (really, creditors), and an agent of the debtor. Each of these roles deserves more greater examination.

First, the receiver is an officer of the court. A receiver is appointed by the court, and serves at the pleasure of the court. Usually, the receiver is required to take an oath to the effect that the receiver will follow the orders and instructions of the court, and also post a bond against any misconduct. The receiver has no power to do anything unless and until authorized by the court, which is usually part of the original order appointing the receiver. If the receiver desires permission to do something not authorized, the receiver must seek that permission from the court. The receiver reports to the court, and is typically required to submit periodic reports, often monthly, and these reports include a description of the receiver's activities, expenditures, and collections, etc. Also, it is not unusual for a receiver to approach the court ex parte for many matters, often without notice to the parties involved in the litigation. When the receiver's work is done, the receiver applies to the court for an order of discharge. In other words, the receiver is basically an appendage of the judge hearing the case.

Second, the receiver is an agent of the debtor's estate, in fashion that is very similar to how a trustee is the agent of the debtor's bankruptcy estate. The debtor's estate consists of those assets of a debtor which are available to creditors for collection, which means that exempt assets are not included. When a receiver is appointed, the receiver will obtain a tax identification number for the estate, and open a bank account for the estate. As the debtor's assets are collected and liquidated into cash, the receiver will cause this cash to accumulate in the account. Payment to the receiver for the receiver's fees, expenses, and also counsel for the receiver will be paid from this account. Either as ordered by the court, or at the end of the receivership, the receiver will pay cash to the creditors. Because the receiver is ultimately acting for the benefit of creditors, the receiver may be said to be, quite practically, the agent of the creditors although the creditors may not give instructions to the receiver (only the court can do that).

Third, the receiver is the agent of the debtor. This agency, however, is very different from that of the debtor's estate. As the agent of the debtor, the receiver legally becomes the debtor for nearly all purpose and (again, as authorized by the court) can take any legal action that the debtor could take. Essentially, the receiver is the debtor's judicially-appointed alter ego.

For instance, the receiver can execute deeds using the debtor's name, exercise any voting rights the debtor might have as to shares of stock or demand redemptions of that stock, and cancel contracts. A receiver can also show up at a bank and demand the debtor's bank statements, thus negating the ordinary subpoena process. A receiver can also take much more personal steps, such as giving the U.S. Post Office notice that the debtor's mail will henceforth be delivered to the receiver at the receiver's address. The receiver can demand the debtor's cellular phone records, utility bills, credit card statements, and every like thing. If the debtor is a business, the receiver can literally take over the business and lock out the owner and anybody else who the receiver finds annoying. With the court's permission, the receiver can liquidate the assets of the business, pay off business creditors, and then cause the entity to be dissolved with the Secretary of State's office.

It is this legal intrusiveness which is so intolerable to a debtor that, if they do have assets squirreled away, the average debtor can take no more than a couple of weeks of a receiver's activity before they cry "Uncle!" and settle with their creditors just to get rid of the receiver. It is also this intrusiveness which most asset protection plans don't take into account when being designed.

General Purpose Receivers And Limited Purpose Receivers

One must also understand that there are fundamentally two types of receivers: General receivers and limited purpose receivers. As its name suggests, a general receivers have general powers to liquidate the debtor's assets until either the judgment is satisfied or the debtor's assets have been exhausted. By contrast, limited purpose receivers are meant to do a particular thing, usually to take control of and liquidate a particular asset, and have no general powers. Sometimes limited purpose receivers are appointed under a particular statute, such as ULLCA § 503 (to accept distributions from a charging order) or UVTA § 7(a)(3)(ii) (to take possession of and liquidate fraudulent transferred property). Other times, receiver can be appointed under the general receivership statutes to take possession of and liquidate various assets of the debtor, including licenses, patents, businesses of the debtor including professional corporations, cryptocurrency, and other assets which are difficult for a creditor to execute against.

Courts are typically loathe to appoint a general receiver, i.e., a receiver who has general powers over the debtor's affairs, for a variety of reasons.

First, receivers are supposed to be a "remedy of last resort" which technically means that the creditor has totally exhausted all possible avenues of collecting the judgment other than a receiver (in practice, the standard is closer to the creditor just giving it "the good ol' college try" and doing at least the most typical things such as attempting to levy on bank accounts).

Second, receivers take up a great deal of the court's energy, since the court has to review and approve the monthly receiver reports, rule on the receiver's various requests, and hear out the objections to the receiver's activities by whatever party seems aggrieved by the receiver at the particular moment. Dealing with receivers is often so burdensome for the court that many of the larger metropolitan courts have a special "receiver department" (often combined with "writs and receivers") which have no or few responsibilities other than to deal with receivers. Federal courts in particular are reluctant to authorize receivers, and when they are appointed are quickly kicked down to a U.S. Magistrate Judge for their oversight.

Finally, third, the courts realize that receiver are the most expensive method of collection, since the receiver will generate fees and the receiver's counsel will generate fees, and the burden of these fees ultimately falls upon the debtor who may end up paying a lot more than the face value of the judgment for the receiver's and the receiver's counsel's efforts. Probably the main reason that receivers are denied in most cases is that the court considers their cost to be too high. Indeed, the high cost of a receiver restricts their use by creditors, since a receiver's fees (and the fees of their counsel) will very quickly exceed the assets of the average debtor, and even in medium judgment enforcement cases a creditor may worry about receiver fees cutting into their own collection. Thus, receivers ― at least general receivers ― are typically restricted to only the larger judgment enforcement cases, i.e., where the recovery is anticipated to exceed $1 million. Moreover, the creditor seeking the receiver will usually be required to advance the receiver money ("prime the pump") until the receiver is able to collect enough that the receivership becomes self-sustaining.

By contrast, limited purpose receivers who are authorized to just do one specific thing are frequently appointed by the courts. As a practical matter it is much easier for a court to get a receiver appointed because a limited purpose receiver's cost will be limited, and a limited purpose receiver is not apt to take up as much of the court's time overseeing the receivership. This creates an opportunity for creditors.

A standard creditor tactic is to get a limited purpose receiver appointed on some ground of another so that the receiver "gets his foot in the door", and then the creditor will look for opportunities to expand the receiver's powers. Ultimately, a creditor may be successful in getting a limited purpose receiver authorized to act as a general receiver in situations where a court might not otherwise have appointed a general receiver. Thus, from a debtor-defense perspective, it is critically important not to create any opportunity for the creditor to get a receiver appointed for any purpose, however limited, and that might indeed require turning over title to assets or self-liquidating assets for the benefit of the creditor just to avoid the receiver.

Receiver Coordination With The Creditor

As mentioned earlier, one of the hats worn by a receiver is that of the agent of the debtor's estate, which effectively makes the receiver an agent in fact (but not in law) of the creditors who are collecting the judgment. Note that creditors have no power over the receiver and cannot give the receiver instructions; if a creditor desires that a receiver do something, the creditor must apply to the court for an order to the receiver. This does not mean, however, that receivers and creditors do not coordinate; in fact, receivers and creditors often closely coordinate to get at particular assets of a debtor.

A good example of this is how a receiver and a creditor may coordinate to get at the assets of a single-member limited liability company (SMLLC). The creditor will apply for a charging order which creates a lien against the debtor's interest in the SMLLC. The creditor will then nudge the receiver to exercise the receiver's powers as the agent of the debtor to cause the SMLLC to make a distribution (if not cause it to be wound up completely) which distribution is then picked up by the creditor's charging order lien. Voila! Now the creditor has the assets of the SMLLC without having to go through the long and complex process of foreclosing on the SMLLC.

A more strategic coordination of a receiver and a creditor involves the interruption of the debtor's cash flow. In this situation, a creditor may seek to put pressure on a debtor to settle the judgment by interfering with the debtor's sources of cash flow. A creditor could try to do with by levying on the debtor's accounts, but this would require serving a bank levy while the debtor's account is flush (and it never is). A creditor could also attempt to get an assignment order for the debtor's revenue streams, but this is a long process that requires serving each payor with a copy of the assignment order and enforcing it only by way of contempt. In this situation, the creditor can get the receiver to contact the payors and require that payments be forwarded to the receiver instead, and the receiver can more easily police this process as the agent of the debtor. The result is often that that the debtor's cash flow is effectively cut off, and the debtor can no longer make payments on the debtor's other obligations or continue to conduct business. About this time, the debtor will become much more amenable to settle.

In one of the cases in which I acted as a receiver, one morning I put on my blue jeans and cowboy boots and went to the Venice Beach boardwalk where the debtor had a number of properties that were leased out to various shops. I walked into a number of these business with copies of my receiver order and told the proprietors, "Hello, I'm your new landlord. Tomorrow is the 1st, and you'll pay me instead." Long story short, by the time I went to lunch at a local cafe, the debtor's attorney called me up complaining that the debtor desperately needed the rent payments to pay his banks. By the time I finished my lunch, the creditor's attorney called me so say that the debtor had settled. That in a nutshell is the power of a receiver.

Receivers can be very effective against many sophisticated asset protection plans. The reason for this goes to a fundamental problem with asset protection planning in that clients want their asset protected from creditors, but they are also reticent about giving up control of those assets. Thus, asset protection planners will often build in various mechanisms for debtors to divest themselves of legal title to assets, but retain control over those assets. This control, however, creates a weakness that a receiver may uniquely exploit.

For instance, say that a particular asset protection trust has been structured with the client as a trust protector who has the ability to hire and fire trustees and appoint new beneficiaries. In such a situation, a receiver may be able to put on his hat as the debtor's legal agent and appoint the creditor as a beneficiary and then fire the existing trustee and install a trustee who makes a distribution to the creditor. Voila! The receiver has just circumvented what the debtor thought was a viable asset protection trust. The threat of a receiver taking such an action is why clients must be counseled to immediately give up any control (and the sooner the better) over an asset protection structure when creditors begin to circle. Of course, the better alternative is to simply counsel the client not to attempt to retain control at all.

Receivers And Asset Protection Planning

All this illustrates what asset protection planners should be asking themselves at every point in the planning: What if a receiver is appointed for the debtor? Frankly, much of the same analysis that goes into answering this question is the same that goes into what might happen with an asset protection plan in bankruptcy, since receivers and bankruptcy trustees have many of the same powers. One might say, not too inaccurately, that a bankruptcy trustee is really just a receiver on steroids. The point being that most asset protection plans are adequate so long as the wolf is kept out of the henhouse, but then quickly fall apart when the fox gets into the henhouse by way of a receiver or a bankruptcy trustee because that result is not anticipated when perhaps it should be.

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