Appointing a Receiver Over a Business

A receivership takes an asset, or a whole business, out of the hands of the people who control it and places it with an officer of the court. Nothing else in the provisional remedies catalogue goes that far. Attachment freezes property but leaves the owner in place; replevin moves one object; a receivership substitutes management. Courts describe it as a drastic remedy and mean it, which is why most applications are refused and most successful ones are narrow.

The showing that has to be made

State statutes supply the grounds and they converge on a single idea: risk to the property. New York permits appointment of a temporary receiver, on motion of a person with an apparent interest in property that is the subject of an action, where there is danger that the property will be removed from the state, or lost, materially injured or destroyed. The motion may be made before or after service of the summons and at any time before judgment or during an appeal.

California takes a longer route to the same place. Its statute lists categories: an action by a creditor to subject property to a claim or between persons jointly interested in property, where the property is in danger of being lost, removed or materially injured; foreclosure actions where the property is in danger and probably insufficient to discharge the debt; dissolved or insolvent corporations; unlawful detainer; and a residual category covering all other cases where a receiver is necessary to preserve the property or rights of a party.

Federal courts sitting in diversity apply the equitable standard, informed by the same considerations. The factors that recur are the existence of a valid claim to the property, the probability that it will be diminished or dissipated, the inadequacy of legal remedies, the harm to the defendant from displacement, and the plaintiff's probability of success. No single factor controls, and courts routinely refuse appointment where a narrower order would answer the risk.

The federal machinery

Rule 66 does not create the remedy; it administers it. The rule provides that an action in which a receiver has been appointed may be dismissed only by court order, that federal practice governs the administration of estates in the hands of receivers as far as practicable, and that the civil rules apply to actions involving receivers. The substantive question of whether to appoint is left to the equity power and to any statute conferring it.

Two statutes solve the geographic problem. A receiver appointed in an action involving property in different districts is vested with complete jurisdiction and control of all of it, upon giving bond as the court requires. The receiver must then file copies of the complaint and the order of appointment in the district court for each district where property is located, within ten days of the entry of the appointment order. Failure to file in a district divests the receiver of jurisdiction and control over the property in that district.

A companion provision allows process to issue and be executed in any such district as if the property lay wholly within one district, requiring only that orders affecting the property be entered of record in each. Together the two sections make a single national receivership workable, and the ten-day filing deadline is one of the shortest and least forgiving in this area.

The order and the scope it sets

The appointing order is the receiver's charter and it should be drafted as one. It identifies the property, states the powers granted, fixes the bond, sets the reporting obligations and defines the period. New York provides that the court may authorize the receiver to take and hold real and personal property, sue for, collect and sell debts or claims, and compound or compromise them, upon such conditions and for such purposes as the court directs, and that powers may later be extended or limited on motion.

Limits belong in the order rather than in the general law. New York states that a receiver has no power to employ counsel unless expressly authorized by order, which is the kind of provision that prevents a dispute later. Duration should be addressed too: a temporary receivership in New York does not continue after final judgment unless the court directs otherwise. What a receiver may then do day to day is treated in the account of what a receiver may and may not do.

Reports, and the route to challenge

Reporting is how the court retains control of an officer it cannot supervise directly. Orders typically require an initial inventory of the property taken, periodic financial reports, notice before any transaction outside the ordinary course, and a final account. The receiver holds property for the court rather than for the plaintiff, and reports are the mechanism by which that distinction remains real.

Review is available immediately. The interlocutory appeal statute gives the courts of appeals jurisdiction over orders appointing receivers and over refusals to wind up a receivership or to take steps such as directing sales of property, which places these orders alongside injunctions rather than with ordinary interlocutory rulings. The general framework for that route is described in the interlocutory appeal from an injunction ruling.

In the trial court the defendant's route is a motion to vacate or modify the appointment, argued on the same factors and often on evidence that the feared dissipation has not occurred. That motion resembles the applications described in the motion to dissolve a writ already issued, and where the appointment was obtained on a defective showing the security posted may answer the loss, as set out in the bond and damages for a wrongful writ.