Using Receiverships to Investigate and Combat Fraud – Insolvency/Bankruptcy/Restructuring
In this article, Joe Wielebinski and Matthias Kleinsasser of Winstead PC provide an overview of US receivership law and how this equitable remedy can be used to fight fraud alone or in concert with other creditor remedies. The article outlines the basics of what a receivership is and what legal tools are available to a receiver to administer a receivership estate when fraudulent conduct is involved. The article further discusses practical considerations for people who suspect (but may not be able to confirm) that they have been the victim of fraud and wish to seek the appointment of a receiver.
The appointment of a receiver originated centuries ago in the English courts of chancery under the principles of equity. Broadly speaking, a receivership is a common law-derived equitable remedy under which a court appoints a person (the receiver) as the officer of the court to administer and protect the property (the estate or estate in receivership, which often consists of a corporation and its assets), usually because the property is threatened with dissipation or depreciation.1 A receiver is usually granted broad powers by the appointing court to manage assets, file claims, recover transferred property, and take other actions intended to preserve the receivership estate. For this reason, the appointment of a receiver is a flexible remedy that can be adapted to particular circumstances. However, since the appointment of a receiver generally results in the displacement of an entity’s management, courts generally require significant evidence of fraudulent conduct or, at a minimum, that the value of an entity or asset is gravely threatened, to grant this remedy.
2. Basics of U.S. Federal and State Receiverships
Receiverships are available under US federal and state law, although the availability of recourse and the factors required to be satisfied to appoint a receiver vary by US jurisdiction. 2 For example, most U.S. jurisdictions permit the appointment of a receiver for fraudulent conduct on the part of management persons, particularly if such persons have fraudulently transferred assets or taken other actions that threaten the rights of creditors or shareholders. . 3The appointment of a receiver is also a common remedy sought and obtained by government regulators when fraudulent conduct is suspected and/or the interests of investors are threatened, for example in proceedings brought by the Securities & United States Exchange Commission.4 The existence of fraud is generally not a prerequisite for the appointment of a receiver. Where the entity is insolvent or at risk of insolvency and the assets of the business are threatened with a severe decline in value that would seriously harm creditors, a court will often appoint a receiver whether or not fraud is suspected. .5Some US jurisdictions have also enacted laws allowing a receiver to be appointed for certain types of property, such as commercial real estate.6 In addition, the relevant statutes or the common law of many jurisdictions permit a receiver to be appointed for any reason warranted by the rules of equity, thus giving the courts wide discretion in applying this equitable remedy. 7 Also, loan documents and other contracts often give a party the right to have a receiver appointed in its sole discretion, although the courts are divided as to whether such a contractual provision is enforceable.8
The scope of a receiver’s potential powers is perhaps the most important aspect of this equitable remedy. The powers of the receiver are usually set out in the court order appointing the receiver, which means that courts can often tailor the extent of the receiver’s authority to the circumstances of the case. In general, most courts that appoint a receiver tend to grant the receiver sweeping powers unless the receiver’s powers are circumscribed by statute (for example, because the receiver is appointed under a statute authorizing appointment only for a specific purpose, such as seizing a lender’s lien on land). This could include the power to sell assets, sue and/or initiate bankruptcy proceedings, often without further approval from the nominating court. 9 In most cases, the receiver stands in the place of the entity under receivership and can act to protect the interests of any party with an interest in the entity, such as creditors and shareholders. ten Under the law of most jurisdictions, the receiver generally has the power to sell property or take other actions regarding a business that could have been taken by management of the entity, as long as those actions are authorized by court order appointing a receiver. For example, receivers are routinely authorized to consolidate assets, collect rent, pursue entity-owned claims, and review and pay creditor claims. Usually, an order appointing a receivership will prohibit creditors of the receivership estate and other third parties from taking action against the receivership outside of the court-sanctioned claims submission process.11 By doing so, the court effectively streamlines the process of winding up or rehabilitating the receivership estate and ensuring that similarly situated parties are treated fairly. Of course, the order is limited by the jurisdiction of the court and enforcement of the order against third parties may require the intervention of foreign courts.
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1. The potential scope of res is very broad. When a business entity is in receivership, res will often include accounts receivable, real and personal property, causes of action and intellectual property, in short, the entire assets of the business.
2. To see, for example, Fed. A. Civil. P. 66 (declaring that an action in federal court in which the appointment of a receiver is sought is governed by the Federal Rules of Civil Procedure);
Brill c. Harrington Invs. V. Vernon Savs. & Loan Ass’n, 787 F. Supp. 250, 253 (DDC 1992) (listing several factors to be considered when appointing a receiver, such as fraudulent conduct on the part of the defendant and the imminent danger of loss, concealment or impairment of the value of the goods).
3. To see, for example, Tex. Civil. Practice & Rem. Code §64.001(a)(1) (permitting the appointment of a receiver in an action brought by a seller to void a fraudulent purchase of property);
Brill, 787 F. Supp. at 253 (listing fraudulent conduct on the part of the defendant as a factor to be considered in appointing a receiver).
4. See, for example, Securities and Exchange Commission v. Stanford International Bank, Ltd., et al.3-09CV0298-N, in the United States District Court for the Northern District of Texas, Dallas Division (“Stanford Receivership”), documents available at
5. To see, for example, Tex. Civil. Practice & Rem. Code § 64.001(a) (allowing a Texas court to appoint a receiver in several situations, including for an insolvent corporation or for a corporation facing imminent danger of insolvency).
6. To seefor example, Maryland Commercial Receivership Act, codified as Title 24, 2019 Maryland Code, available at https://law.justia.com/codes/maryland/2019/commercial-law/title-24/.
7. To see, for example, Tex. Civil. Practice & Rem. Code § 64.001(a)(6) (allowing a receiver to be appointed for any reason justified by the rules of equity).
8. To see, for example, LNV Corp. vs. Harrison Family. Bus., LLC, 132 F. Supp. 3d 683, 690-91 (D. Md. 2015) (discussing the division of powers on whether a receiver can be appointed under a contract).
9. To see, for example, Tex. Civil. Practice & Rem. Code §§ 64.031-64.034 (listing receiver’s power to sue, take possession of property, and take similar actions).
ten. To see, for example, Reid v. United States, 148 Fed. Cl. 503, 523 (2020) (the receiver “understands” the receiver and has fiduciary duties to creditors). Although the receivership will act for the benefit of all stakeholders, most receiverships pay creditors before providing a return on equity, in accordance with good business practices and US bankruptcy law. In large receiverships where assets have a value greater than the debt of secured creditors, creditors are usually notified of a deadline by which they must submit their claims. Claims that are filed and authorized on time are then paid pro rata to the estate in receivership according to an established priority scheme. If assets have been transferred fraudulently (as in a Ponzi scheme) or need to be recovered, the claims administration process can take years to complete while a fraudulent transfer litigation is ongoing.
11. See, p. Receivership”), available at Amended_Order_Appointing_Receiver.pdf (stanfordfinancialreceivership.com) (prohibiting the parties from asserting liens, seizing assets, pursuing claims, and taking other actions against the Stanford International Bank Received Estate). (Accessed October 11, 2021).
Originally posted by iccfraudnet.org
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.