Receiverships May Prove to be Flexible Business Tools

October 2006

Receiverships are flexible and valuable tools for businesses, property owners and lenders alike, providing a vital service. When a company or partnership is unable or likely to become unable to pay its debts, one solution may be the appointment of a receiver.

In Colorado real estate, receivers are appointed by the court to take possession of real property while the parties resolve any number of disputes. The receiver’s role is to protect, maintain and operate the property during this period. Colorado law also authorizes the appointment of a receiver in situations such as the dissolution of a corporation, the failure of an insurance company and the closure of a health care facility. The unifying factor in these court appointments, is that the power of the court is engaged to enforce the authority of a receiver.

The motion requesting the appointment of a receiver is the instrument which effectively creates the wide scope of receivership rights and duties. This pleading is the roadmap of the receivership estate and it is crafted by the party seeking to have the receiver appointed. It should be carefully considered, and drafted with the particulars of the specific receivership estate in mind.

When appointing a receiver, one important component to consider is clearly distinguishing whether the receiver is being appointed to take possession of an entity, or of the assets of that entity. If a receiver is appointed as the receiver of an entity, then to the extent of the receivership estate, the receiver must make good on all current and past obligations of that entity. The receiver steps into the shoes as it were, of the prior financial obligations of the business of its estate, and, to the extent of the financial capability of the receiver’s estate, the receiver must strive to meet the same financial obligations with which the borrower just struggled.

However, if the receiver’s obligation is to preserve the assets of an entity, then the receiver’s obligations are limited to those goods and services which are prospective in nature. Still, since the receiver’s duty is to preserve the receivership estate, even a receiver appointed to take possession of assets will likely find it prudent to cure or make current those obligations related to senior encumbrances, so as to maintain the integrity of the estate. Additionally, as a practical matter the receiver of assets will likely want to keep current the entity’s utility bill, along with its payroll.

While there is no prohibition in Colorado against appointing a lender as the receiver, there are some important legal and practical disadvantages to doing so. In any event, the receiver should be personally and professionally qualified to operate the particular estate in question, and the party seeking the appointment should consult with the receiver in preparing the Motion and other receivership pleadings.

The powers granted the receiver vary widely with the task at hand, but often include the ability to hire professional assistance, to pay some pre and all post receivership expenses, to conduct an inventory of the property, to operate bank accounts and modify insurance policies, to assume certain contracts, and to manage, maintain and operate the property.

This legal update is for informational purposes only as a service to clients and other friends, is not a complete summary of the rules relating to the subject matter discussed above, and is neither to be construed as legal advice nor intended as basis for decisions in specific situations. For more information about this subject matter or other recent developments, please contact the attorneys in our Real Estate practice group or any other attorney in our firm with whom you normally consult by calling (303) 825-4200.