WASHINGTON RECEIVERSHIP ACT
Kevin P. Hanchett
Resource Transition Consultants, LLC
Types of Receivers 7.60.015
General: takes possession of all of the assets of the entity or person in receivership. A general receiver has the power of sale of the assets, subject to the statute.
Custodial: takes possession of a specific asset of the entity or person in receivership. Typically, does not have the power of sale.
Hybrid: Custodial with power of sale. Used where the debtor has many assets and either the creditor or the debtor want to limit the scope of the receivership.
Not specifically provided for under the statute, but 7.60.055 provides:
Except as otherwise provided for by this chapter, the court in all cases has exclusive authority over the receiver, and the exclusive possession and right of control with respect to all real property and all tangible and intangible personal property with respect to which the receiver is appointed, wherever located, and the exclusive jurisdiction to determine all controversies relating to the collection, preservation, application, and distribution of all the property, and all claims against the receiver arising out of the exercise of the receiver's powers or the performance of the receiver's duties.
And 7.60.060 Provides:
Other duties as the receiver may be directed to perform by the court or as may be provided for by statute or rule.
The various powers and duties of a receiver provided for by this chapter may be expanded, modified, or limited by order of the court for good cause shown.
The appointment order must specify the type of receiver.
Sales of property by custodial receiver should include notice to all parties on title, the parties to the action and those requesting notice.
Coordinate with the title company.
If debtor is a Washington resident or is incorporated in Washington, property in other states is subject to the Washington Receivership. Title companies may require ancillary proceedings relative to real property sales in another state. Ancillary proceedings are allowed. RCW 7.60.270.
Appointment of a Receiver 7.60.025
40 specific reasons for appointment.
A receiver shall only be appointed if the court finds that the appointment is "reasonably necessary" and that other available remedies are inadequate.
Generally, for an involuntary petition, at least 7 days’ notice needs to be given, typically done through an order to show cause.
Much safer than filing an involuntary bankruptcy under section 303 (attorney’s fees, punitive damages, need for 3 creditors, only available for unsecured debt, no gap period).
Reasons for filing: condos, environmental, warranties on sale of REO.
ABC can be filed by the debtor voluntarily under 7.08. No notice necessary. Assignee becomes the general receiver of the assets and the assets are administered under 7.60.
The case rolls into a general receivership.
Venue for individual is where they reside.
Venue for a business is the principal place of business or registered office.
If the appointment of the receiver has occurred as a result of a complaint with one cause of action being the appointment a receiver, make sure to suspend the case management schedule.
Assignment for the Benefit of Creditors 7.08
In addition to the provisions of RCW. 7.60.025 a receivership can be voluntarily commenced by the debtor by executing an Assignment for the Benefit of Creditors under RCW 7.080.010.
Every assignment shall be effective when a petition to appoint the assignee as receiver has been filed with the clerk of the superior court in the county of the assignor's residence if the assignor is an individual or a marital community, or in the county of the assignor's principal place of business or registered office within this state if the assignor is any other person.
A person to whom a general assignment of property for the benefit of creditors has been made shall be appointed as general receiver with respect to the assignor's property by the superior court upon the filing of a petition under this section. Except as provided for by subsection (5) of this section, following the assignee's appointment as general receiver, all proceedings involving the administration of the assignor's property and the claims of the assignee's creditors shall be governed by the provisions of chapter 7.60 RCW applicable to general receiverships and court rules applicable thereto.
The form for an Assignment for the Benefit of Creditors is statutory and should be used. See Appendix A and RCW 7.08.030.
Appointment of the Assignee as the receiver is automatic. Thus the debtor can direct the selection of the receiver. The receiver may be replaced by motion of two or more creditors if filed within 30 days of the date of the notice to creditors. RCW 7.08.030(5).
Powers of the Receiver
The receiver is an officer of the Court and its duties are to the Court. Efforts to impose upon receivers fiduciary duties to the debtor or to parties in interest have been rejected.
RCW 7.60.060 sets forth the powers and duties of the receiver generally. Such powers can be expanded or further defined by the Court on motion (RCW 7.60.060(3) or set forth in the Order Appointing Receiver. See sample Order Appendix B.
The receiver can seek direction from the Court on its own motion RCW 7.60.060(1) (g).
It is prudent to obtain a court order on notice regarding any significant activity or act of the receiver.
Turnover of Property 7.60.070
Like a bankruptcy liquidation, a general receiver’s job is to recover and liquidate property of the estate.
Property of the estate is broad and is covered under 7.60.005 (a) and means the entirety of the property with respect to which a receiver's appointment applies, but does not include trust fund taxes or property of an individual person exempt from execution under the laws of this state. Estate property includes any nonexempt interest in property that is partially exempt, including fee title to property subject to a homestead exemption.
One use of a receivership is to collect a judgment, but individual exemptions still apply in the receivership.
Receiver can compel the turnover of property and can seek a court order in the event a party does not cooperate.
If there is a dispute, the receiver can file an “ADJUNCT” action, like an adversary proceeding in a bankruptcy.
All actions are before the judge assigned to the receivership action. In King County, the commissioner hears all matters unless a request is received under local rule 4 (b)(20). If you do request assignment, be sure that the clerk does not issue a case management schedule.
Receiver can substitute as a party in interest and can remove an action to a receivership proceeding through a motion to change venue. Removal must occur within 30 days of following service of original process upon the receiver. Cannot remove matters involving state agencies without consent.
Judgment against receiver. Is not a lien and the judgment creditor cannot execute against assets of the estate, but it is an allowed claim.
Failure to obey court order is punishable by contempt.
Schedule of Assets and Liabilities 7.60.090
7.60.090 requires the completion of a schedule of assets and liabilities.
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 thirty-five 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 7.60.110
RCW 7.60.110 provides a limited automatic stay of certain proceedings.
Entry of an order appointing a general receiver or a custodial receiver 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. But it does not expire as to stays against actions against property of the receivership estate. RCW 7.60.110(1)(c).
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.
Assets of the receivership's estate 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.
Utility service has to give receiver 15 days’ notice before terminating service.
Executory Contracts and Leases 7.60.130
A general (not custodial) receiver may assume or reject executory contracts and unexpired leases 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.
In a sale of property which includes leases, like an apartment or shopping center the leases assigned must be first assumed. RCW 7.60.130 (5).
Receivership Financing 7.60.140
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, however, if a secured creditor has the right to make protective advances, this may allow for priming.
If no priming, still possible to have administrative priority if receiver can prove value to estate.
Abandonment of Property 7.60.150
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.
Helps to conclude estate administration.
Statute silent as to who the property can be abandoned to but absent a very clear order on notice and for good cause, the abandoned property is returned to the debtor. The stay against actions to foreclose or perfect a lien against the property terminate with the Order of Abandonment.
Personal Liability of Receiver 7.60.170
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.
A Receivership Order may provide that the attorney for the assignor or the attorney for the petitioning creditor may be compensated by the receiver for services beneficial to the receivership estate.
Participation of Creditors and Parties in Interest in Receivership Proceeding
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.
Like bankruptcy, failure to file a claim can result in no right to participate in distributions.
No set form in statute, use form similar to bankruptcy proof of claim.
Date receipt stamp.
Claims are not processed in a custodial receivership.
Priorities RCW 7.60.230
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).
Creditors with liens on property of the estate, which liens have not been duly perfected under applicable law, shall receive the proceeds from the disposition of their collateral if and to the extent that unsecured claims are made subject to those liens under applicable law.
The undersecured portion of a creditor's claim is treated as an unsecured claim.
Salary claims within 180 days of the appointment of the receiver or cessation of business are limited in priority to $10,950.00.
Consumer deposit claims are limited in priority to $2,425.00.
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.
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.
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). (a scrivener’s error limited this protection to “entities,” eliminating the protection to individual buyers).
Preferences and Avoidable Transfers
There is no specific provision for recovering preferences in a Washington receivership.
However, pursuant to RCW 7.60.060(1)(f) a receiver has the power to pursue in the name of the receiver any claim under chapter 19.40 RCW (fraudulent conveyance) assertable by any creditor of the person over whose property the receiver is appointed, if pursuit of the claim is determined by the receiver to be appropriate.
NOTE: A preference to an insider can be an avoidable transfer under RCW 19.40.041(2)(a).