Fall 2018 • Issue 64, page 1

Selling Remnant Assets in Receivership Cases

By Nach, Adam & Kopman, Sharon*

A Receiver is a court-appointed officer charged with certain duties, including, but not limited to, operating businesses, pursuing causes of action, dissolving entities, complying with health, safety and welfare statutes and/or winding up companies and selling assets. This article focuses on the collection and sale of certain types of receivership assets (“Assets”) in state court receivership cases1.

Receivership Laws

Each state has a receivership statute, but the statutes are not uniform and some states give Receivers more rights than others. To the extent the state statute is silent on a receivership issue, then the appointment Order (“Appointment Order”) issued at the beginning of the case dictates the rights and remedies of the Receiver. Generally, the Appointment Order is drafted by the interested parties and approved by the Court. The extent of the receivership estate property is also determined by the appointing court. Typically, receivership property will include:

  • accounts receivable, earned future income and unearned future income;
  • causes of action;
  • real property;
  • claims and rights to payment;
  • licenses, copyrights, business names;
  • bank accounts, certificates of deposit; and
  • personalty, equipment, vehicles, furniture/fixtures, and equipment

The lack of consistency with receivership statutes throughout the states is a problem, particularly when it comes to real estate. In July 2015, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) approved the Uniform Commercial Real Estate Receivership Act (“UCRERA”) and recommended it for enactment in all states.

As of September, 2018, the following states have enacted a form of the UCRERA statute: Michigan, Nevada, Oregon, Tennessee, and Utah, and the following states have introduced the statute to legislation: Kentucky, Oklahoma, West Virginia2.  The UCRERA addresses the receivership issues of, inter alia, the Appointment Standards, Stay of actions, and Power of the Receiver including the sale of real property.  As a result of the UCRERA, the Receivers in states that have passed the UCRERA have a much easier time with selling real property and personal property related to the real property.

The Receivership Estate

The state statute or Appointment Order will determine the assets that comprise the Receivership Estate. The attorneys drafting the Appointment Order must be careful in providing a detailed list of assets that the Receiver will control and preserve. Generally, the Appointment Order is broadly drafted and usually includes ALL the company’s assets or assets that are subject to the secured lender that appointed the Receiver or owned by the entity under the Receiver’s control.

The Receiver has a fiduciary duty with regards to locating the assets, selling the assets and maximizing the value of the Receivership estate. The Receiver can, among other things, review company records, public records (County Recorder, UCC, USPTO, water craft, MVD, and aircraft public records) and may order a private investigator to locate assets. Notwithstanding the Receiver’s due diligence, there may be assets that cannot be located.

Sales of Receivership Property

In most states, a Receiver may sell assets by statutory authority or pursuant to a Court Appointment Order (See, e.g., Cal Code Civ Proc § 568 ); see also Resolution Trust Corp. v. Bayside Developers, 43 F.3d 1230, 1242-3 (9th Cir. 1995); People v. Stark, 131 Cal. App. 4th 184, 202-3 (Ct. App. 2005). Receivers are appointed to preserve and monetize any type of collateral held by a secured lender.

Section 16 of the UCRERA addresses sales of receivership real property. A summary of Section 16 is as follows:

Use, Sale, Lease, License, or Other Transfer of Receivership Property Other than in Ordinary Course. With court approval, the Act permits the receiver to use, sell, lease, license, exchange or otherwise transfer receivership property other than in the ordinary course of business. § 16(b), (c). Unless the agreement of transfer provides otherwise, the transfer is free and clear of rights of redemption and liens other than liens that are senior to the lien of the person who obtained the receiver’s appointment. § 16(c). Liens extinguished by the receiver’s sale attach to proceeds with the same validity, perfection, and priority as they had with respect to the property sold. § 16(d). The sale may be conducted as a private sale, and creditors with valid secured claims may credit bid. § 16(e). The Act also provides a safe harbor for purchasers, in case a party objects to the sale but fails to get a stay of the order approving the sale. § 16(f). Secured creditors are entitled to the proceeds of their collateral according to the priority rules established by law other than this Act, § 20(g), although the court may award the receiver the reasonable and necessary fees and expenses for carrying out the receiver’s duties. § 21(a).

UCRERA at  p. 7.

A problematic issue in most cases is whether the Receiver may sell the asset free and clear of liens.  Some courts will allow for the sale of assets free and clear of junior liens under certain circumstances. Park National Bank v Cattani, Inc, 187 Ohio App. 3d 186, 189 (2010). In the alternative, the Court may allow for a sale free and clear of liens although the case law and statutes are not clear on the issue. In such circumstances, the parties will draft an order at the beginning of the case which provides for the parameters of such sale, subject to the court’s views. The starting point for orders with free and clear language may be using Bankruptcy Court orders and using the Bankruptcy Code § 363 language (11 U.S.C § 363(f)). Again, these types of sales depend on the facts and circumstance, the state, and most importantly, knowing your judge. Notwithstanding the Order provides for a sale free and clear of liens, the title company that insures title may not agree to insure when the sale is free and clear of liens and the lien is not paid in full. Therefore, before getting too far in the sales process where liens are involved, care should be taken to establish whether a sale free and clear of liens is feasible or permissible.

 Sale of Remnant Assets

When a Receivership case is wrapping up, there may be a few remaining known assets that the Receiver deems unworthy to pursue because the costs outweigh the benefits.

Known Assets:

Typical assets that fall into this category are as follows:

  1. default judgments;
  2. litigation claims that are otherwise not cost-effective to pursue
  3. accounts receivable;
  4. notes;
  5. equity interests; and
  6. insurance refunds3

The Receiver will weigh the risk and time of any potential recovery with the costs of keeping the estate open for only those assets. There are companies that can assist the Receiver in the exercise of his or her fiduciary duty by purchasing these known remaining assets. By doing so, a Receiver is eliminating risk and bringing cash into the estate while stopping the hemorrhaging caused by the costs from the ongoing administration of the estate.

Unknown “Remnant Assets”:

Even if all known operating assets of value having been monetized and any viable claims and causes of action having been prosecuted, there may be an opportunity to sell unknown residual assets that may arise after the Receivership is closed. These unknown Remnant Assets may include, among other things, the following:

  1. unscheduled refunds;
  2. overpayments;
  3. deposits; and
  4. claims or other payment rights that would accrue sometime in the future.

Typically, these are small checks that can show up many years after a Receivership case closes and are too small to warrant re-opening a case to make a distribution. As such, they create an administrative hassle for the Receiver who has to return the checks. The cost of postage is not as much an issue as is loss of a professional’s time. As we all know, time is money. A Receiver can alleviate this hassle while bringing money into the estate for these unknown Remnant Assets. 

Earlier in this article, we discussed the importance of ensuring that the Appointment Order contains broad sale language. To ensure that a Receiver has an option to do a Remnant Asset deal at the end of the case, the Receiver should ensure that the Appointment Order contains broad language authorizing the sale of all assets of the Receivership estate, whether known or unknown, that may arise at any time. This will prevent the Receiver from taking extra steps at the end of the case to adjust the Appointment Order if the Receiver chooses to do one of these deals.

The process for selling these known and unknown Remnant Assets is the same as any other sale in a Receivership case and as mentioned above, if permissible under applicable laws, should include a provision selling the assets free and clear of liens, claims and encumbrances.

These Remnant Asset deals are a win-win for the Receivership estate. They help the Receiver to (i) generate more funds for the estate; (ii) expeditiously administer the assets; and (iii) eliminate the administrative hassle associated with handling small straggling assets that may appear post-closing.

This article should not be considered or construed as legal advice on any fact or circumstance. You should consult your own attorney regarding your own personal situation or any legal question you may have.

1 Sales of assets in Receivership cases brought in Federal court are governed by 28 U.S.C. sections 2001 and 2004 and the Federal Court order.
2 http://www.uniformlaws.org/LegislativeFactSheet.aspx?title= Commercial % 20 Real%20Estate%20Receivership%20Act.
3 An example is a small insurance refund that is not expected to be paid out until 6 months to a year after a case is ready to close.

*Adam B. Nach is an attorney with over 25 years experience. He represents Receivers, Trustees, Lenders and Landlords and is admitted to the Arizona State Bar, 9th Circuit Court of Appeals and U.S. Supreme Court. Adam.Nach@lane-nach.com.

*Sharon M. Kopman has been a restructuring attorney for over 25 years. She works for the private investment firm, Oak Point Partners, which pioneered the "Remnant Asset" concept over 10 years ago. Oak Point Partners has completed over 600 Remnant Asset deals across the U.S. in commercial bankruptcy cases, receiverships, ABCs, and out-of-court restructurings. Sharon@oakpointparnters.com.