Going Long: The Role of Receiverships in Asset Recovery

Welcome to the August 2020 edition of our newsletter!  In this issue, we’ll examine the role of receivers in bankruptcy, why they’re appointed and warning signs to look for in a company where receivership may be a possibility.

Court-appointed Receivers and the Quest to Recover Assets

When fraud is discovered at a company that has entered bankruptcy – most often, but not exclusively, for liquidation purposes – the bankruptcy court may appoint a receiver, or aggrieved parties may file an adversary proceeding (a civil suit within the bankruptcy court) and petition the court to appoint one.  The goal of the receiver is to protect any remaining assets from being placed outside the scope of the bankruptcy court, such as in an offshore tax haven.  Additionally, once allegations of fraud are levied and a receiver appointed, the receiver must attempt to identify and recover as many relevant assets as possible, in an effort to make creditors whole.  If you or your client have an existing security agreement with a company you fear may enter bankruptcy, language in that agreement may give you the explicit right to appoint a receiver.

In larger, more intricate frauds – such as the Ponzi scheme of Bernie Madoff – the receiver’s job can take years, even decades, and simply identifying the assets can require investigations that span multiple continents.  There are often warning signs that a lender or other creditor may witness before a firm enters bankruptcy which may suggest a more complex recovery process.  Unfortunately, some of the trend lines that can indicate the siphoning of assets is imminent also overlap with generally distressed businesses.  If the company’s industry as a whole has slowed down, for example, that may compel a desperate – and perhaps unscrupulous – owner to begin moving assets, or taking on large sums of debt, before filing for bankruptcy.  That indicator, however, can be hard to read in a time of crisis, when many other businesses have also seen declines in revenue.

Although bankruptcies are the most well-known vehicle under which receivers are appointed, many states also permit their use in civil fraud actions brought by shareholders or creditors.  In many of these instances, the court can impose a “constructive trust” into which assets are placed while a matter is litigated.  As the name implies, this places the assets outside of the control of company management or ownership to prevent any relocation or liquidation of assets.

Recovery of lent monies, or the collateral pledged against them, is typically a difficult process.  Before seeking a court’s intervention, parties who believe they have been defrauded would do well to fully research public records about the company and its principals to identify assets held by the company as well as companies, or other parties such as spouses, to which disputed assets may have been transferred.  By tracing the assets as much as possible via  the public record, you or your clients can bolster the case for asset recovery, and increase the likelihood of a court appointing a receiver should one be necessary.