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Washington's Receivership Act

WASHINGTON'S RECEIVERSHIP ACT

Kevin P. Hanchett

 

Summary of Provisions

The following is a summary of the Washington Receivership Act's major provisions. For purposes of this summary, the person as to whose property the receiver is appointed will be referred to as "debtor," although receivers are appointed in various settings, not necessarily involving insolvency.

 

Types of Receivers

RCW 7.60.015 provides a distinction between two types of receiverships - a general receivership and a custodial receivership. A general receiver is appointed to take possession and control of "substantially all of a person's property with authority to liquidate that property." A custodial receiver is "appointed to take charge of limited or specific property of a person or is not given authority to liquidate property."

Receivership appointments made solely to collect rents during the pendency of a judicial or non-judicial real property foreclosure are expressly designated as custodial receiverships. As various provisions of the Act only apply in general receiverships, the court is required to specify in the appointment order whether a receiver is a general or custodial receiver but may later convert one type of receivership to the other.

 

Appointment of Receiver

RCW 7.60.025(1) (a)-(nn) enumerates in one location the various statutory grounds for appointment of a receiver previously scattered throughout the Revised Code of Washington. It also clarifies that, except where a receiver's appointment is expressly mandated by statute or is made in connection with a real property foreclosure to enforce an assignment of rents, a receiver shall only be appointed if the court finds that the appointment is "reasonably necessary" and that other available remedies are inadequate. A seven-day notice requirement for receivership applications is established, but may be shortened or expanded for good cause shown.

 

Eligibility to Serve as a Receiver

Receiver eligibility requirements are set forth in RCW7.60.035 and preclude

appointment of a convicted felon, a party to the receivership action, certain insiders, as defined, and parties having a materially adverse interest to persons affected by the receivership.

 

Receiver's Bond

RCW 7.60.045 requires a receivership bond (or cash deposit in lieu of bond) except where expressly provided by statute or court rule but does not require a minimum amount.

 

Turnover of Property

RCW 7.60.070 provides that a receiver, by motion, may seek to compel turnover of receivership estate property from any person unless the receiver's interest in the property is in bona fide dispute, in which case a lawsuit by the receiver is required.

 

Schedules of Property and Liabilities; Inventory of Property, Appraisals

RCW 7.60.090 requires the completion of a schedule of assets and liabilities on a

prescribed form. For an assignment for benefit of creditors ("ABC"), the schedules are to be included with the assignment document. In the case of a general receivership, the schedules are to be filed by the receiver within twenty days of the general receiver's appointment. The person making an assignment for benefit of creditors is required to verify the schedules. Under RCW 7.60.080, the debtor has the duty to cooperate with the receiver, provide information necessary for completion of the schedules, deliver control of property and records to the receiver, and submit to an examination by the receiver (equivalent to a Bankruptcy Rule 2004 examination).

 

Automatic Stay of Certain Proceedings

RCW 7.60.110 provides a limited automatic stay of certain proceedings. Unless

otherwise ordered by the court, entry of an order appointing a general receiver or a custodial receiver with respect to all of a person's property (i.e., like a general receiver but without the power to liquidate) creates a stay of actions against the debtor or actions to obtain possession of receivership property. The stay automatically expires sixty days after the appointment unless continued for good cause shown. Affected parties may move for relief from or modification of the stay. The stay does not prevent prosecution of criminal proceedings, proceedings regarding support obligations, regulatory actions, or issuance of a notice of tax deficiency. Although the automatic stay is a new addition to the state's receivership law, assets of the receivership's stay are already considered to be in the custodia legis of the receivership court and not generally subject to new liens or transfer other than after order of the receivership court. There are no specific grounds for relief from the limited duration stay or grounds for continuation of the stay past the initial sixty-day period. The Act is also indefinite as to who, other than parties to the receivership action, are required to receive notice of motions for relief from stay or motions to continue the stay. Presumably parties will argue by analogy to bankruptcy case law as to grounds for relief from the automatic stay.

 

Utility Services

RCW 7.60.120 provides restrictions on discontinuance of utility service. These are not as extensive as the utility provisions of 11 U.S.C. 366. RCW 7.60.050(14) defines "utility" as "a person providing any service regulated by the Utilities and Transportation Commission." This is more specific and presumably more narrow than the equivalent term used in 11 U.S.C. 366. RCW 7.60.120 is also more limited than 11 U.S.C. 366. It prohibits a utility from discontinuing service without providing the receiver at least fifteen days notice of default. RCW 7.60.120 stops short of enjoining utilities from termination of service, but instead states "[t]his section does not prohibit the court, upon motion by the receiver, to prohibit the alteration or cessation of utility service if the receiver can furnish adequate assurance of payment (for service to be provided after entry of the order appointing the receiver)." RCW 7.60.120 applies to any utility providing service to receivership estate property regardless of whether it is a general or custodial receivership.

 

Executory Contracts and Unexpired Leases

RCW 7.60.130 codifies, clarifies, and amends the common law power of a receiver to assume or reject executory contracts and unexpired leases. This section only applies to a general receiver. RCW 7.60.130 allows a general receiver to assume or reject contracts after notice and opportunity for hearing. To assume a contract, as in bankruptcy, the receiver must cure defaults but does not have to cure financial condition or "ipso facto" clause violations. A receiver may assign executory contracts or unexpired leases after assuming them, but has no express power to override anti-assignment provisions. Additionally, contracts which are inherently non-assignable (such as personal service contracts, certain intellectual property license agreements, and certain governmental contracts), remain non-assignable in receiverships, absent the counterparty's consent.

 

As in Section 365 of the Bankruptcy Code, the counterparties to certain kinds of

executory contracts or unexpired leases are provided special protections in the event of contract rejection. These include buyers of real property in possession of the real property, timeshare buyers, intellectual property licensees, and real property lessees. The protected parties are allowed to retain the benefits of their contracts, but must continue paying rent, royalties, or performing other obligations arising after rejection and may offset against such payments damages occurring as a result of rejection.

 

Receivership Financing

RCW 7.60.140 clarifies that a receiver operating a business or managing a person's property may obtain unsecured credit in the ordinary course of business without order of the court and may otherwise be authorized by court order to incur indebtedness on a secured or unsecured basis. There are no provisions authorizing priming of existing security interests by lenders to the receivership.

 

Abandonment of Property

RCW 7.60.150 allows a receiver (whether a general or custodial receiver) to, after notice and hearing, abandon estate property that is burdensome or of inconsequential value. A receiver may not abandon property that is a hazard or potential hazard to the public in contravention of state statute. This is similar to the restriction on abandonment under 11 U.S.C. 554, following the Supreme Court's decision in Midlantic Nat'l Bank v. New Jersey Dept. of Environmental Protection, 106 S.Ct. 775 (1986).

 

Personal Liability of Receiver

RCW 7.60.170 clarifies the standard for liability of a receiver. A receiver will only be liable if loss or damage is caused by a failure of the receiver to follow a court order or by an act or omission which would expose a member of a board of directors to liability, assuming such director's liability is limited to the maximum extent permitted under RCW 23B.08.320. The range of persons to whom the receiver may be personally liable is also limited. Only the debtor or persons who would otherwise have valid claims against officers of a business corporation organized under the laws of the State of Washington under the same circumstances will have potential personal claims against the receiver. A receiver will have no personal liability to any person for acts or omissions specifically contemplated by an order of the court.

 

Employment and Compensation of Professionals

RCW 7.60.180 specifically provides for appointment of professionals by the receiver after court approval. Such professionals must not "hold or represent an interest adverse to the estate" but are not disqualified by representation of or relationship with a creditor or other party in interest if the relationship is disclosed in the application and the court determines that there is no actual conflict of interest or inappropriate appearance of conflict. RCW 7.60.180 also provides for notice and opportunity for hearing as to payment of the professionals' bills. Fee applications must provide an itemized billing including the rates of persons performing the work to be compensated. In a custodial receivership in aid of foreclosure, the fees and expenses may be allowed by stipulation of the secured creditor affected by the appointment. If objections are filed, the receiver or professional seeking compensation may request a hearing on at least five days notice to persons having filed the objections.

 

Participation of Creditors and Parties in Interest in Receivership Proceeding; Effect of Court Orders on Non-Parties

RCW 7.60.190 clarifies that a creditor or certain other parties in interest may participate in the receivership proceeding without formally joining as a party. Orders regarding sale free and clear of liens or other matters affecting real property are effective as to persons having actual knowledge of receivership whether or not they appear and participate in the receivership. RCW 7.60.190 also provides certain notice periods, including a ten-day notice for receiver's examination of the debtor referred to above and a thirty-day notice regarding claims allowance, abandonment, creditor distributions, dispositions of estate property, compromises, or settlements which may affect distributions to creditors, compensation of receivers and professionals, or

applications for termination of the receivership or discharge of the receiver.

 

Submission of Claims in General Receiverships

RCW 7.60.210 provides that, in a general receivership, creditors must file claims to receive a distribution. A general receiver must provide at least thirty days notice to creditors of a claims bar date except in the case of state agencies. State agencies must receive at least one hundred eighty days notice, equivalent to that required in the Bankruptcy Rules.

 

Priorities

RCW 7.60.230 provides that claims in a general receivership shall receive distributions in a set priority generally equivalent to that under the Bankruptcy Code. Secured creditors are to be paid from the proceeds of their collateral, after payment of the "reasonable necessary expenses of preserving, protecting or disposing of the property to the extent of any benefit to the creditors." This is a receiver's equivalent of a bankruptcy trustee's right to surcharge collateral under 11 U.S.C. 506(c). The undersecured portion of a creditor's claim is treated as an unsecured claim. Salary claims within ninety days of the appointment of the receiver or cessation of business are limited in priority to $2,000. Consumer deposit claims are limited in priority to $900. Support obligations, as defined in RCW 74.20A.020(10), receive a priority below wage and consumer deposit claims but above tax claims of governmental units. The priority for governmental unit tax claims is not limited as to the type of tax but is limited to unsecured claims.

 

Secured Claims Against After-Acquired Property

RCW 7.60.240 clarifies that prepetition security interests which include an after-acquired property clause will attach to after-acquired property of the receivership. This is significantly different than the limitation on after-acquired property provided in 11 U.S.C. 552.

 

Receiver's Disposition of Property; Sales Free and Clear

RCW 7.60.260 codifies the receiver's common law right to sell assets of the receivership free and clear of liens. The court may authorize a general receiver to sell estate property free and clear of liens and rights of redemption whether or not sale proceeds would be sufficient to satisfy all secured claims. Sale notices require 30 days notice under RCW 7.60.190(4). Absent consent of the owner, farm property and homestead property may not be sold by the receiver. Additionally, if the owner or a creditor secured by an interest in the property objects to the sale, the court must determine that "the amount likely to be realized by the objecting person from the

receiver's sale is less than the person would realize within a reasonable time in the absence of the receiver's sale." Secured creditors are allowed to bid their debt but must provide for payment of senior secured creditors. This is the equivalent of 11 U.S.C. 365(k).

The receiver is given the right as a co-owner to seek partition of property to the extent provided under applicable state or federal law but is not given the equivalent of a trustee's right to force the sale of both a debtor and non-debtor's jointly owned property as provided under 11 U.S.C. 363(h).

RCW 7.60.260 also provides protection to a good faith buyer from reversal or

modification on appeal of the order of sale equivalent to that provided in 11 U.S.C. 363(m).

 

Assignments for the Benefit of Creditors

The Act substantially replaced RCW Chapter 7.08 regarding assignments for the benefit Of creditors. RCW 7.08.010 provides that general assignments of the property of a person who is insolvent or "in contemplation of insolvency" for the benefit of the creditors must be for the benefit of all of the assignor creditors in proportion to their claims. RCW 7.08.030 provides that assignments must be in substantially the form provided which includes an articulation of the duties of an assignee to take possession of and administer estate assets, liquidate assets, and pay, to the extent of available funds, the costs of administration and debts due from the debtor/assignor. Through the assignment form, the assignor declares under penalty of perjury that the list of creditors and property is true and correct to the best of the assignor's knowledge and the assignee accepts the assets in trust and agrees to faithfully carry out the assignee's duties.

RCW 7.08.030(3) provides that the assignee shall be appointed as a general receiver with respect to the assignor's property by the superior court upon the filing of a petition by the assignor, assignee, or any creditor of the assignor with the clerk of the superior court. Venue is provided for in the county of the assignor's residence or, for non-individual assignors, the assignor's principal place of business or registered office within the state. In effect, all ABCs must now be converted after the execution of the assignment into receivership actions. This also provides a clear avenue for debtors to initiate receiverships.

Once such an order is entered, the assignment proceeding is, in effect, converted to a general receivership. Two or more creditors may file a motion within thirty days of the mailing of a notice of assignment for benefit of creditors, directing the clerk of court to order a meeting of creditors to determine whether the assignee should be appointed as general receiver or whether an alternative party should be appointed as general receiver. These provisions are generally equivalent to those providing for election of trustees in bankruptcy.

 

Elimination of Preference Statute

The state's corporate voidable preference law found at RCW 23.72.030 was repealed. This will eliminate the use of RCW 23.72.030 in Washington corporate bankruptcies.

 

CONCLUSION

The Act is easier for practitioners to utilize and provides greater certainty

in judicial application. This greater clarity should make both judicial receiverships more

attractive than prior law as an alternative to bankruptcy liquidations in appropriate

circumstances. The changes to the ABC laws also should make the hybrid ABC/receivership procedure a viable alternative to bankruptcy liquidation.