By Heather Culp
I have served as an attorney for court-appointed receivers and as a receiver in North Carolina courts over the past 10 years. The law in North Carolina authorizes the appointment of a receiver under certain circumstances. For those who have questions about how and when a receiver be useful and how receiverships work, read more here.
- When can a receiver be appointed? The most common reasons are to preserve property that is in danger of loss or impairment; after judgment, to carry a judgment into effect, or to preserve property during an appeal; and to wind up and dissolve an insolvent business. “Business divorces” are prime opportunities for the appointment of a receiver: a receiver is a neutral party, appointed by the court and qualified to preserve the status quo or wind up the business as needed. “Business divorce” occurs where business partners decide to part ways, and can include married couples who have equitable distribution rights in property or a business and are at odds such that the property is at risk.
- Who appoints a receiver? Any North Carolina superior court or district court judge, except only a superior court judge can appoint a receiver of a corporation.
- How is a receiver selected and appointed? The party requesting the appointment of a receiver recommends to the court a candidate who has agreed to serve, and that candidate demonstrates her qualifications and experience through an affidavit accompanying a motion to appoint a receiver. Receivers are often attorneys with debtor/creditor, litigation, and business law experience, but in the right circumstances can be accountants, property managers, or other professionals appropriately tailored to the facts and needs of the case.
- What powers and responsibilities does a receiver have? A receiver has the powers and responsibilities set out in the order of appointment. Typical powers include taking possession and control of receivership property (such as bank accounts, business records, real estate, causes of action, and receivables), managing and liquidating property, filing suit on behalf of the individual or entity subject to receivership, collecting sums owed, paying operating expenses, opening and maintaining bank accounts, and retaining appropriate professionals such as realtors or accountants. Disobedient parties can be sanctioned for failure to comply with a receivership order.
- Who does the receiver answer to? The receiver is subject to the oversight of the court that appointed her.
- How do the parties and the court know what the receiver is doing? Unless the receivership order waives these requirements, the receiver provides monthly reports of activities, receipts and disbursements, and files a final accounting of all activity. When an insolvent corporation is in receivership, the receiver must file an initial inventory and accounting within 30 days of appointment. To take any action outside of the ordinary course of business, the receiver must have prior approval of the court and may tender a confirming order afterward. In addition, a receiver is generally responsive to inquiries from interested parties.
- How is a receiver paid? Unless otherwise agreed by the parties, a receiver is paid a commission of 5% on receipts and 5% on disbursements, plus costs and expenses, including attorney fees, where the receiver is an attorney and renders professional services as an attorney. Sometimes the parties instead agree that the receiver will be paid an hourly rate.
- What are the pros and cons of a receivership? Pros include: court oversight of a neutral professional for those who don’t trust what has been happening or may otherwise happen (such as when one business partner siphons off business assets to start a competing business); flexible method to preserve or liquidate property; cessation of action against the entity in receivership, so that claims can be handled in an orderly fashion by the receiver; in post-judgment collections, a receiver may command a higher liquidation price than through the traditional execution process by the sheriff, thanks to more time and marketing; and, unlike under bankruptcy law, a receiver does not have authority to pursue preference actions (actions to recover from a creditor who, during a specific “look back” period, received more from an indebted party than similarly situated creditors). Cons include: the expense of the receiver’s work; a public judicial process; the receiver may pursue fraudulent conveyance (transfer for less than adequate consideration), breach of fiduciary duty, or other claims against insiders, in the context of a corporate wind up or dissolution; and a receivership doesn’t prevent a creditor from filing an involuntary bankruptcy against an insolvent entity that is in receivership, or that has property in a receivership.
- What are the alternatives to a receivership? Alternative actions to receiverships include bankruptcy (voluntary or involuntary; see title 11 of the United States Code), an assignment for the benefit of creditors (a state court proceeding in which an individual or corporate debtor assigns to a trustee substantially all of the debtor’s property, for the benefit of its creditors), and temporary restraining orders and preliminary and permanent injunctions (North Carolina Rule of Procedure 65).
- How and when does a receivership end? The receiver or an interested party files a motion for termination of the receivership and discharge of the receiver when the work set forth in the order of appointment is finished or becomes futile.
Have questions? Heather Culp is an experienced bankruptcy and civil litigation attorney at the law firm of Essex Richards, P.A., in Charlotte, NC. Contact her at 704-377-4300 and learn more about her here. Federal law also allows for the appointment of a receiver in appropriate circumstances. See, e.g., Fed. R. Civ. Pro. 66. This article focuses solely on North Carolina receivership law.