A recent article published in the web-based insolvency newsletter DailyDAC (Distressed Asset Central) touches on an issue about which I believe there is considerable confusion: how receiverships are formed and managed.1
While the article, written by a Minnesota-based advisor, makes several interesting and educational points, the editors take great care at the end to emphasize the geographic limitations of the information provided. In doing so, they explicitly underscore the importance of understanding key differences between jurisdictions — including the rules of the state where the receivership is requested. It is not a small distinction.
For example, the article begins by stating receiverships are most often commenced by creditors but can also be commenced by an equity holder as well. Further, it mentions that the first step towards a receivership is to initiate a lawsuit. Most commonly the lawsuit is filed for breach of contract and is seeking foreclosure or repayment of collateral. Appointment can also be sought as an independent action but is less common. This may be true in Minnesota — but, not so in Washington.
How it Works in Washington
Many receiverships here are initiated through an Assignment for the Benefit of Creditors (ABC). This process, while separate from a receivership, allows a company to initiate insolvency proceedings without either a lawsuit or court process. Once the assignee accepts the assignment, it is the assignee that initiates the receivership.
The DailyDAC article goes on to state that the next step is to bring a motion for the appointment of a receiver. It suggests that to maintain a good relationship with the lender, it’s a great idea to seek a mutual appointment.
It’s important to note that where an ABC is used in Washington, the assignment is required to be on behalf of ALL creditors. RCW 7.08.010 states: No general assignment of property by an insolvent, or in contemplation of insolvency, for the benefit of creditors, shall be valid unless it be made for the benefit of all of the assignor’s creditors in proportion to the amount of their respective claims.
Once the assignment is converted to a receivership, the receivership statutes in Washington address the order and priority of the payments made by the insolvent estate. Lenders with contractually secured UCC filings have the highest priorities, followed by other creditors with UCC filings. Where there are conflicts, the priority is established by the date of the UCC filing. Following these priorities come unsecured debt (trade debt) and, last, equity.
Key Decision Variables
When doing internet searches, especially related to insolvency and state laws, it is important to focus on a number of key aspects. One of the major questions is whether a federal bankruptcy or state receivership is the right decision for your organization. To make that decision, be certain that the attorney you select has experience with both processes. Make certain that your attorney can explain which is best for the company and for you personally. While moving from a receivership to bankruptcy is relatively straightforward, going in the other direction is highly problematic.
Another issue is affordability. The federal process is generally more expensive than a state receivership due to certain costs mandated by the Bankruptcy Code. A qualified assignee/receiver will make certain that funds are available or will become available during the process. If funding does not become available, it is a relatively easy process to terminate a receivership. Federal bankruptcy statutes provide solutions for dealing with a lack of funding, but are more complex.
Finally, it is important to select an assignee/receiver whom you can work with as the process moves forward. The objective is to maximize the returns from the estate to the creditors. The debtor is represented by counsel, the secured lender is most probably represented by counsel. Some trade creditors and those owing the estate have counsel. Each of these is seeking the best returns for their particular situation.
Knowing that your selected assignee/
receiver has the experience to manage the sometimes-competing objectives of each party is critically important. These professionals can work with stakeholders to maximize returns in accordance with the statutes, providing peace of mind in what is always a stressful situation.
Al Davis serves as Principal at Revitalization Partners LLC, a corporate and board advisory firm that specializes in restructuring and receiverships. He is a Court Appointed General Receiver in the State of Washington as well as an interim CEO and advisor to middle market companies. He can be reached at adavis@revitalizationpartners.com or 206.903.1855.
1 https://www.dailydac.com/minnesota-commercial-real-estate-receiverships-nuts-and-bolts/.
