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Washington’s Receivership Act: How and When to Use It and How it Might Potentially Be ImprovedBy Alexander S. Kleinberg Introduction Washington’s receivership act was enacted in 2004 and is codified at RCW 7.60 (the “Act”). The Act defines a receiver as being “a person appointed by the court as the court’s agent, and subject to the court’s direction, to take possession of, manage, or dispose of property of a person.” The Act is largely modeled after the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. The Act provides a receiver may be appointed by the superior court in numerous specified circumstances when the appointment of a receiver is reasonably necessary and other available remedies either are not available or are inadequate. While receivers are perhaps most commonly appointed to collect rents and manage property while it is in foreclosure, the Act specifically provides that receivers can also be appointed for literally dozens of other reasons, including but not limited to after judgment to give effect to the judgment; to dispose of property according to the provisions of a judgment dealing with its disposition; in connection with a proceeding to recover a fraudulent transfer; in aid of a charging order; in an action to dissolve and wind up a corporation; and in such other cases as may be provided by law, or when, in the discretion of the court, it may be necessary to secure ample justice to the parties. It appears that receivers are increasingly being appointed to operate a wide variety of businesses in the hope of extricating the businesses from financial trouble or to wind the businesses down and dispose of their assets in a proper and orderly fashion.Overview of the Receivership ActThe Act provides a receiver must be either a general receiver or a custodial receiver. A receiver must be a general receiver if the receiver is appointed to take possession and control of all or substantially all of a person’s property with authority to liquidate that property and, in the case of a business over which the receiver is appointed, wind up affairs. A receiver must be a custodial receiver if the receiver is appointed to take charge of limited or specific property of a person or is not given authority to liquidate property. A petition for appointment of a receiver may be filed in an underlying proceeding, as provided by the Act, or as a new action as otherwise provided by statute. While the Act specifically states at least seven days’ notice of any application for the appointment of a receiver must be given to the owner of property to be subject thereto, it also provides the notice period may be shortened or expanded upon good cause shown. Some Washington courts have held a temporary receiver may be appointed ex parte and without notice in appropriate circumstances. For example, one court held it was appropriate to appoint a temporary receiver ex parte to take control of and manage a building in winter in order to prevent the building’s pipes from freezing when the building’s owner could not be located at his residence out of state. A receiver may, among other things, compel the turnover of estate property. The person over whose property the receiver is appointed is required to cooperate with the receiver, supply necessary information to the receiver, deliver possession of all property of the estate, and submit to examination by the receiver. In addition, within twenty days after the date of appointment, a general receiver is required to file a true list of all of the known creditors and applicable regulatory and taxing agencies of the person over whose assets the receiver is appointed, their mailing addresses, the amount and nature of their claims, and whether their claims are disputed and list all identifiable property of the estate, among other things. General receivers are also required to file monthly reports with the court that reflect the receiver’s operations and financial affairs unless otherwise ordered by the court. These reports can include a balance sheet, statement of income and expenses, statement of cash receipts and disbursements, statement of accrued accounts receivable of the receiver, statement of accounts payable, and a tax disclosure statement, among other things. The Act also provides for the automatic stay of certain proceedings against the person over whose property the receiver is appointed and any act to obtain possession or enforce a claim against estate property, among other things. The automatic stay automatically expires sixty days after the receiver is appointed unless the court orders otherwise. Unlike the federal Bankruptcy Code, the Act does not automatically stay the exercise of a right of setoff. A general receiver may assume or reject executory contracts and unexpired leases, abandon estate property that is burdensome to the receiver or is of inconsequential value or benefit to the receivership estate, and sue and be sued in the receiver’s capacity without leave of court in all cases necessary or proper for the conduct of the receivership. The receiver may also, with the court’s approval, employ one or more attorneys, accounts, appraisers, auctioneers, or other professional persons who are not disqualified from working for the receiver. A general receiver must notify creditors of the receivership by publishing notice of the receivership in a newspaper of general circulation published in the county or counties in which estate property is known to be located, and by mailing notice to all known creditors and known parties in interest within twenty days after the date of the appointment of the receiver. Receivership vs. Bankruptcy: Some Pros and Cons to Each ApproachThere are advantages and disadvantages to proceeding with a receivership in state court as opposed to a bankruptcy proceeding in federal court. For one thing, receiverships are oftentimes less expensive than a Chapter 11 bankruptcy because the administrative expenses tend to be lower, and there are fewer hearings and meetings than in bankruptcy. Also, receiverships are quite flexible compared to bankruptcy proceedings since many statutory requirements in the Act can be modified or waived, and there are fewer restrictions when it comes to the sale of assets free and clear of liens. In addition, the petitioning creditor can generally select the receiver, and the receiver can, with court approval after notice and a hearing, “short sell” certain property free and clear of liens over the objection of the property’s owner and also secured creditors. As for the advantages of proceeding with a bankruptcy as opposed to a receivership, bankruptcy courts have extensive experience in addressing complex issues of commercial law and insolvency, and there is substantially more bankruptcy case law that is available to guide practitioners and courts, along with a comprehensive set of procedural and substantive rules at both the federal and local level. Further, debtors in bankruptcy or bankruptcy trustees can avail themselves of avoidance or “claw back” actions in bankruptcy under federal law that are not available under the Act or other Washington law. Moreover, sales of real property through bankruptcy are not subject to excise tax, but sales of realty made by a receiver might be subject to excise tax. How the Receivership Act Might Potentially be ImprovedThe Act is a very well-designed and comprehensive statute that has undoubtedly helped resolve a number of cases without undue expense, litigation, and uncertainty. The virtues of the Act have also likely led a number of parties to proceed with a receivership as opposed to a bankruptcy. Even so, as seen from the following, the Act might potentially be improved in at least a few ways.As seen above, the entry of an order appointing a receiver operates as a stay of the assertion or pursuit of many different kinds of claims against the party in receivership and against property of the receivership estate. Although the Act’s automatic stay is modeled after the automatic stay in the Bankruptcy Code, the stated grounds for seeking relief from stay under the Act are limited to “for good cause shown.” In contrast, the Bankruptcy Code specifically provides for a number of situations where the automatic stay can be lifted for reasons other than “cause,” which reasons include a lack of adequate protection in property and cases where the debtor has no equity in the property and the property is not necessary for an effective reorganization, among other things. Amending the Act to specifically provide for stay relief in certain specified situations like these could provide useful clarity and guidance to parties, practitioners, and the courts. A preference or preferential transfer is a transfer of property made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its proportionate share of the debtor’s assets. The Act might also be improved by adding a provision that enables a receiver to recover preferential transfers on behalf of the receivership estate just the same as a bankruptcy trustee can recover preferential transfers on behalf of the bankruptcy estate. A number of states already allow receivers and others to pursue preference claims under state law. However, while the Act states a receiver can pursue fraudulent transfer claims, it does not specifically allow a receiver to pursue preference claims. Although former RCW 23.72.030 provided any preference made by an insolvent corporation within four months before the date of application for the appointment of a receiver could be avoided, this statute was repealed in 2004. Amending the Act to incorporate a preference statute therein or enacting a separate preference statute could ultimately benefit creditors by leading to larger recoveries and distributions in receivership proceedings. Finally, the Act states actual, necessary receivership costs and expenses incurred during the administration of the estate, including allowed fees and expenses of the receiver and professional persons employed by the receiver, have priority over the secured claim of any creditor obtaining or consenting to the appointment of the receiver. Some receivers have used this provision to “short sell” secured parties’ collateral over their objection in order to pay for the receivers’ expenses, costs, attorneys’ fees, and other administrative expenses. Presumably, secured creditors can protect themselves at least to some extent by negotiating an agreement with the receiver at the outset of the case to the effect that despite the verbiage of the Act, the parties agree the secured creditors reserve their right to object to the compensation requested by the receiver and its professionals even if the creditors have obtained or consented to the appointment of the receiver. Nevertheless, amending the Act to prevent receivers from potentially having what appears to be carte blanche when it comes to disposing of encumbered collateral in order to pay administrative expenses seems like a good idea. ................
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