Receiver Not Excused From Obligation to Turn Over Property to Debtor The appointment of a receiver can be an effective remedy under state law

Receiver Not Excused From Obligation to Turn Over Property to Debtor The appointment of a receiver can be an effective remedy under state law

protect a secured creditor’s collateral. In fact, lenders frequently require a provision in the loan documents under which the debtor

consents to the appointment of a receiver in the event of default. However, a bankruptcy filing usually ends a receivership. This is because, among other reasons, under 11 U.S.C. § 543(b) a receiver must deliver to the debtor in possession (or trustee, as the case may be) any property of the debtor held by the receiver.

A bankruptcy court may allow a receiver to maintain possession of an insolvent debtor’s property if it is in the best interests of creditors. In making such determination, courts examine the following (non-exhaustive) list of factors:

1. likelihood of reorganization;
2. probability that funds required for reorganization will be available;
3. if there are instances of mismanagement by the debtor;
4. if turnover would be injurious to creditors;
5. if the debtor will use the turned over property for the benefit of its creditors;
6. if there are avoidance issues raised with respect to property retained by a receiver, because a receiver does not possess avoiding powers for the benefit of the estate; and
7. if the bankruptcy automatic stay has deactivated the state court

receivership action. In MJS Las Croabas Props., Inc., No. 12-05710 (Bankr. P.R. May 29, 2013), Judge Lamoutte considered these factors and concluded that it was in the best interest of creditors for the receiver to retain control of the debtor’s property.

In that case, the court found that the following factors supported the continuation of the receivership: (1) the debtor’s inability to show a reasonable likelihood of rehabilitation within a reasonable time; (2) debtor’s pre-petition consent to the appointment of the receiver; (3) that the creditor requesting retention of the receiver was by far the largest and was funding the receiver’s operating costs, and (4) the receiver’s good performance.

In a recent case, the U.S. Bankruptcy Court for the N.D. of Illinois examined the same factors but reached the opposite conclusion. In contrast to Judge Lamoutte, in this case Judge Cleary noted that “[i]t [was] not Debtor’s burden to demonstrate to the court that a successful reorganization is likely.” With respect to likelihood of rehabilitation, the court was satisfied with the debtor’s allegation that the debtor would double the property’s rental income if it were in possession thereof.

The court also rejected the creditor’s contention that the debtor’s prior failure to promptly pay real-estate taxes amounted to mismanagement, and noted that the debtor had cured any amounts in arrears.

Interestingly, the court also refused to excuse turnover of the property because it saw the request as tantamount to the appointment of a trustee without complying with the applicable requirements.