by
Deborah Jackson We've all heard
about financial scandals like the Ponzi scheme perpetrated
on investors by Bernie Madoff, now serving a 150-year jail
sentence. Yet in that case a court-appointed receiver was
able to recover at least some funds for investors by selling
off assets. In addition to closing the company and freezing
bank accounts, the receiver evicted Madoff's wife from her
penthouse apartment and sold several of their homes.
"The perfect time
to seek out a receivership is when a lender knows it's about
to lose money on a loan or because a company can't pay its
creditor. At that point the lender or creditor needs someone
to find out if the distressed company can be saved or if
it's time to toll the death knell," said Eric Shaw, a
court-appointed receiver and the owner of New York Credit, a
finance company specializing in accounts receivable
collections in Southern California. Proactive
Receivership In fact, a
receivership can take the place of bankruptcy in dealing
with troubled businesses. Lenders aware of a problem loan or
creditors that know a business is struggling can use a
receivership proactively to protect their interests and
recover a larger percentage of their investment than they
might if they wait for a business to file bankruptcy. This
is true whether a company is in financial distress through
no fault of its own or because its officers have been
involved in criminally fraudulent practices. Karen Cordry of the
Bankruptcy Counsel has indicated that the banking and
insurance industries commonly use receiverships rather than
bankruptcy proceedings. In those cases, the receivers often
come in and replace the management in troubled companies.
Creditors can force a debtor into bankruptcy, but a
receivership allows creditors to do more than merely react
to a debtor's choice to file bankruptcy. The worry with
bankruptcy, Cordry stated, is that involuntary Chapter 7
cases could easily be converted to Chapter 11, allowing a
company to regain control of its assets. Additionally, for
either Chapter 7 or 11, filing an involuntary bankruptcy
requires that the debtor must not be generally paying its
bills as they come due, which may not always be the case.
Receiverships are
governed by bankruptcy laws, but are used instead of a
regular bankruptcy. The initial purpose is to rehabilitate a
company by management and reorganization, but if that is not
possible, the receiver gathers up whatever assets are left
and liquidates them. A receiver is considered a neutral
party granted powers as an officer of the court to benefit
all parties involved. The receiver gives regular reports to
the court and eventually disburses the collected funds to
secured creditors. New York Credit
Receiverships "The two most
attractive things that we do at New York Credit are to offer
a competitive hourly rate and our expertise managing and
liquidating accounts receivable. The hourly cost for an Eric
Shaw receivership is $150 an hour," Shaw said. Typically, the
receiverships Shaw handles involve the liquidation of
accounts receivable, inventory, and equipment for
manufacturers, wholesalers, distributors and service
companies. But in the current recession, with the real
estate markets in chaos, what happens when a commercial
building goes into foreclosure? In that case, the lender can
also bring a receiver in to manage the building, whether
it's an apartment complex, a strip mall, or an industrial
unit. The receiver will collect the rents and perform other
management functions. "A lot of banks are
getting killed in this market," said Shaw, who has been a
court-appointed receiver for 20 years and has personally
liquidated more than 100 companies. Real Estate
Receiverships Shaw was recently
the receiver for a lender whose borrower defaulted on a
mortgage secured by a gas station, where there was also a
food mart and four garage stalls, each housing a separate
business. He collected the rents from those businesses, but
after some investigation discovered that no gas could be
pumped at the station due to an environmental concern.
"Through my real
estate networking group, I found an environmental company to
see what it would cost to get the gas pumping to make the
station profitable again," he said. Shaw is also the
president of All Cities Network, an organization of business
networking groups that meet monthly throughout Southern
California. Shaw indicates that
those who join Shaw's All Cities networking groups do so to
give and receive recommendations, create business deals, and
to more easily check a company's credit. He believes
receiverships are a viable option for All Cities members.
"Members can look
at the All Cities website as a personal pre-screened
financial directory. You can read a bio, see a photo, and
read about a person's business and other activities. It's
very beneficial to use All Cities as a directory for all
your financial needs," Shaw said. As the receiver in
the real estate case, Shaw had the right to go into the
property to do whatever was needed to preserve it and
perform the same general functions as the owner or manager,
such as making sure the property was properly insured,
collecting rents and, if necessary, marketing the property
to potential tenants or buyers. In many instances a
receiver will work closely with real estate brokers to
market the property. The receiver is then paid from the
proceeds from the property, whether from rents or a sale. A
receiver can often sell a property even before a sheriff's
sale is conducted, resulting in more funds going to the
secured lender. A receiver's sale can also mean that the
lender does not need to put a property in its portfolio.
Receiverships
Can Collect More for Your Business Another case in
which Shaw acted as receiver involved a bank that realized
its borrower wasn't doing business properly and its assets
did not equal the amount of its $10 million loan. Both the
bank and the borrower agreed to hire Shaw as a
court-appointed receiver to close down the company and
liquidate the assets in order to pay back the secured
creditor (the bank). A secured creditor
holds a lien or a security interest in a business's accounts
receivable, its inventory, and/or its equipment, furniture
and fixtures. Businesses typically also have unsecured
creditors who are much less likely to get paid when a
company goes out of business. In that instance,
Shaw liquidated the company's inventory for $4.2 million and
liquidated the accounts receivable for about $2 million, all
within 120 days. The bank received a total of about $6.2
million. After expenses, the bank was still owed about $5
million, for which it sued the owner. Shaw indicated that
receivership lasted longer than many because the company's
owner fraudulently moved about $1 million in inventory,
forcing the lender into further litigation to recover that
property. But once the litigation was done, the monies
collected were paid to the secured creditor and the
receivership case was closed. "Everything gets
settled in a receivership case," Shaw said. Receivers are
typically paid with the assets of the company or estate,
which relieves the lender or creditor from funding the cost
alone. Receiverships can happen quickly, if necessary. In
some cases the necessary paperwork can be completed within a
few days. Additionally, it may be beneficial to be the first
person to request a receivership, since courts are often
inclined to grant that party's nomination of the receiver.
Receivers who handle such cases often go into a company
unannounced and ready for just about anything. Cases can
last a day, a few weeks, or years. According to
receivers.org, federal courts are using receivers more
frequently. Smart Business, a business magazine, also
indicates that court-ordered receiverships are becoming more
common due to the current state of the economy and a
resulting increase in consumer distrust. The
Proactive Value of Receiverships article © 2009 Deborah
Jackson All Rights Reserved
For
more information about receiverships, call New York Credit
at (310) 827-0076.