Lessons Learned From Jerry Jones: Consider a Receiver for Your First Round Pick

06/03/2010

In today’s distressed economy, secured creditors are continually faced with the situation in which a borrower is unable to meet its payment obligations, and the value of the underlying collateral is less than the amount owed. Upon the borrower’s default, the secured creditor must quickly evaluate the situation and decide which remedy allows the creditor to enforce its security interest efficiently and maximize its return on collateral. Many secured creditors mistakenly believe that the only options available are foreclosing and liquidating the underlying asset, or pushing the borrower into bankruptcy. Secured creditors often overlook a very powerful remedy that may offer practical and real advantages in managing and disposing of distressed collateral – the receivership.

A receivership is an equitable remedy by which a court appoints a neutral third party (a “receiver”) to take possession of property and, under supervision of a court, preserve the property’s value for the benefit of the person or entity so entitled. Developed in the English courts of equity, receiverships were consistently used in the United States in the late 19th Century to liquidate, and in some instances reorganize, insolvent companies. Receiverships were a mainstay of American jurisprudence until the addition of reorganization provisions to bankruptcy law in the mid-1930s.

The concept of receivership is extremely broad, spanning multiple areas of law and federal and state jurisprudence. Numerous federal statutes now authorize receiverships in a variety of proceedings, including receiverships initiated by: the Federal Deposit Insurance Company (FDIC), the Federal Savings and Loan Insurance Company (FSLIC), the Securities and Exchange Commission (SEC), and the Federal Trade Commission (FTC). Additionally, receiverships are available in most states in various situations, including: divorce proceedings, insurance company insolvencies, criminal proceedings, distressed real estate situations, corporate and partnership insolvencies, and any situation in which a court deems it necessary, in equity, to appoint a receiver.

Outlining the various types and purposes of receiverships is beyond the scope of this paper. Rather, this paper serves as a general overview with respect to receiverships established under Texas Civil Practices and Remedies Code § 64.001, specifically the situation in which a secured lender seeks the appointment of a receiver to manage and/or dispose of distressed real estate collateral.

Presentation to the 25th Annual Real Estate Law Conference, June 3-4, 2010. To read the full article, click on the PDF linked below.

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