Times Of Change: The Receivership Insolvency Alternative

Denial is a significant impediment to resolving challenging insolvency situations. A debtor in financial crisis may understandably hold out hope for a new contract or a change in a depressed economic cycle. Employees struggle when paychecks are delayed or the demands to work longer and harder exceed reasonable expectations. Because the debtor is unwilling to consider alternatives, the creditor is forced to act unilaterally to protect its interests. In such situations, creditors are left with few options other than forcing the filing of a bankruptcy case or starting a judicial foreclosure action. The creditor often understands these alternatives could terminate the operation of a formerly profitable business and result in significant expense for everyone. After the recent economic recession, denial often resulted in the loss of an operating business, jobs, and generated large losses for financial institutions.

The involvement of a third party can provide an important option to overcome the impediments of denial in challenging financial situations. Until recently, the use of a third party appointed by the court, called a receiver, was difficult to obtain. Oregon lacked significant guidance for the courts when appointing or overseeing a receiver creating inconsistent and variable outcomes among courts and counties. The lack of clear outcomes or guidance other than limited case law dating back to the 1880s commonly eliminated consideration of the use of a receiver as a tool to address when denial of a difficult fiscal situation was present.

Fortunately, aware of the limitations under Oregon law, the Oregon Law Commission established a Work Group, including this author, to address the deficiencies that existing receivership laws reflected. The result of the Work Group’s efforts is Senate Bill 899A (2017) (the “Bill”). This Bill was recently approved by the Oregon legislature and signed by Governor Brown. Following the passage of Senate Bill 899A, Oregon’s receivership options will be significantly clarified, expanded, and improved starting on January 1, 2018.

The powers of a receiver are broad and rooted in equity. The Bill provides important guidance to lenders, debtors, receivers and the court on the proper scope and consequences of the court’s orders and the receiver’s actions. For example, Section II of the Bill provides a menu of powers from which a court may select to give a receiver. Not all options are appropriate for every situation and the court and the parties will have the ability to identify the powers that are needed in any given situation. The options are broader than under existing law and permit a number of options allowing an operating business to continue under the supervision of the court and with the consent of the creditors. Instead of an overwhelmed business owner facing financial ruin, a receiver can be appointed to objectively assess ways to improve and enhance the value of the business and its assets for everyone involved.

Importantly, the Bill also provides protections similar to those found under the U.S. Bankruptcy Code to ensure the preservation of an operating business. For example, Section 22 of the Bill provides for an automatic stay of certain actions against the receiver upon appointment. This stay was not something clearly defined or provided for under existing law. The stay prohibits a number of actions for a period of time including continuing pending legal cases, judgment enforcement activities, lien perfection and other actions against a debtor’s property. With important exceptions, this stay provides the newly-appointed receiver the breathing room to gain control of a business or rental property and to assess the viability of continuing operations.

Section 25 of the Bill also addresses a significant limitation under existing Oregon law. This section of the Bill permits the receiver to use or sell the property of a business placed within its control outside of the “ordinary course of business.” This new power allows a receiver to sell that property when the court decides it’s appropriate to do so. Before the Bill, a receiver was often determined to have a custodial role only, meaning that a sale was not possible other than in mutually consensual situations among all of the parties. Now, a receiver could sell all or some of the property within its control with court approval. Doing so will limit or eliminate the need for a creditor to then foreclose upon these assets through a judicial execution process, preserving assets for the creditors and increasing the chance for an economic return to the debtor.

Section 25 of the Bill also provides important protections for any prospective purchasers of assets sold by a receiver. Under existing law, the uncertainty of such sales often deterred third party consideration and could decrease the ultimate recovery and return for the parties involved. Now any sale is free of the continuing rights of the business or property owner—so-called redemptive rights— ensuring that the purchaser from the receiver takes immediate title and ownership of the purchased property. In addition, all such sales occur free and clear of all liens and encumbrances. Those liens will then attach to the sale proceeds in the same order as existed against the property, creating liquidity for the receiver but preserving the claims of creditors. Finally, even if a sale order and/or the receivership are determined to be invalid on appeal, the order permitting the sale will remain valid so long as good faith existed as part of the transaction.

With the involvement of a receiver, the opportunity for recovery and distribution of funds to creditors and the borrower may increase. Therefore, the Bill also contains important provisions concerning the process for filing of claims and distribution of liquidated assets to creditors of the receivership estate. Similar to the U.S. Bankruptcy Code, the Bill establishes a priority schedule for payments to creditors and a process to obtain court approval for payment or denial of contested claims.

The new and important revisions to Oregon receivership law create a comprehensive new tool to avoid the consequences of denial. By providing clear guidance to the courts and permitting the involvement of a third party, the receivership process can be effectively used to preserve operating businesses and manage financial outcome to benefit all affected parties. As a revised and comprehensive alternative to bankruptcy, the revised receivership options in Oregon can also provide a cost effective and timely option for addressing the challenging insolvency situations. The lawyers at Saalfeld Griggs P.C. have the experience and knowledge to ensure that affected parties are well positioned to take full advantage of Oregon’s updated and revised receivership process.[/vc_column_text][/vc_column][/vc_row]