The appointment of a receiver to add independence and objectivity to maximize value in various business situations is becoming more commonplace in Texas. As people recognize the benefits of a receivership in Texas, professional receivers have become more skilled and plentiful. Similarly, as courts become more experienced with receivership cases, the results have become more efficient and predictable; therefore, the receivership remedy is more likely to be used.
Texas is currently experiencing growth in each of these areas:
- Total number of receivership cases filed, including an increase in the dollar amount in controversy;
- The number of financial and/or legal professionals who specialize in serving as a receiver, and
- The number of courts in different jurisdictions across the state presided over successful receivership cases.
This article expands upon our prior piece, Unlocking the Essential: What is Receivership? to provide further practical experiences regarding receiverships and the role of court-appointed receivers.
Receiverships can occur across various industries to address the diverse and complex financial and legal challenges businesses (and their owners) may face. Below are several sectors to illustrate the broad applicability of receiverships Texas.
- Real Estate Development: In real estate, a property or development project may encounter financial difficulties, leading to a court-appointed receiver to manage and oversee the property until financial stability is restored or the project is sold.
- Healthcare and Senior Living: Healthcare providers facing financial distress may undergo receiverships to ensure the continued operation of critical medical services while addressing financial challenges.
- Manufacturing and Industrial Sectors: Manufacturing companies facing insolvency or financial mismanagement might utilize receiverships to navigate the complexities of asset management and ongoing operations.
- Financial Services: Financial institutions grappling with insolvency or regulatory issues may go into receivership to protect the interests of depositors and stakeholders while resolving financial challenges.
- Hospitality and Tourism: Hotels or tourism-related businesses facing economic downturns or unforeseen challenges may undergo receiverships to navigate the industry’s complexities and protect the interests of creditors.
- Technology and Startups: Even in the innovative world of technology, startups facing financial difficulties may enter receiverships, allowing for the orderly management of assets and potential restructuring.
- Oil and Gas Industry: The cyclical nature of the oil and gas industry may lead companies to utilize receiverships when facing challenges such as fluctuating commodity prices or regulatory hurdles.
- Retail and Consumer Goods: Retail businesses encountering financial distress or operational issues may undergo receiverships to manage inventory, protect creditors, and ensure the continuity of business operations.
- Transportation: With the volatility of fuel prices and persistent increases in labor rates and insurance expenses, trucking and other transportation companies facing financial setbacks may undergo receiverships to manage ongoing operations and maximize the return to all stakeholders.
Legal Requirements for Appointing A Receiver in Texas
Case law in Texas states that “the appointment of a receiver is an extraordinary remedy.” A receiver may only be appointed when the facts show receivership is reasonably necessary to protect property in litigation that is likely to be lost, removed, or materially injured. Below are some of the more common practical or procedural questions implicated by the appointment of a receiver.
Types of Responsibilities of A Court-Appointed Receiver in Texas
A court-appointed receiver in Texas can have a range of responsibilities to be tailored by the parties and the court to fit the needs of each situation. Their role can range from being responsible only for specific property to taking full and exclusive corporate control of all assets and management activities. The court appoints receivers to bring expertise and impartiality to the management of assets in legal proceedings. A Receiver for an entity, as opposed to specific assets, assumes full management responsibility for the entity. This includes all business operations, regulatory compliance, tax matters, litigation, and other legal responsibilities. A successful Receiver most often has a wide range of skills and experience as well as a cadre of trusted professionals (attorneys, tax specialists, appraisers, auctioneers, etc.) to provide additional subject matter expertise when necessary.
Objection to Appointment of Receiver Texas: Navigating Legal Hurdles
While the number of consensual receiverships is increasing, legal challenges to the appointment of a receiver are more common. The granting of a receivership, according to controlling case law in Texas, is an “extraordinary remedy,” and one that will likely remove current ownership and/or management from control. To avoid being displaced, defendants in receivership actions will fight vigorously to defeat the plaintiff’s efforts. Objections may arise due to various reasons, such as whether the statutory standard for the appointment of a receiver has been met, disputes over the qualifications of the proposed receiver, or concerns about their impartiality. Resolving these objections involves a detailed legal process, requiring careful consideration of the arguments and positions put forth by all involved parties.
Property in Receivership: Legal Implications
A unique aspect of a receivership rests in the legal doctrine of custodia legis whereby all assets subject to the receivership order are held in custodia legis, or “in the custody of the law.” This prevents any party from taking adverse action, such as seizure, garnishment, or foreclosure, against all property subject to the receivership order without leave of the appointing court.
The Receiver and the Court: What’s the Relationship?
The receiver acts under the appointed court’s delegated authority, which creates a special relationship. Distinguishable from other parties in the receivership litigation, the court may interact with the receiver regarding case matters on an ex parte basis as it would other parties under its direct control, such as constables, coordinators, and clerks.
Treatises have been written about the legalities and practicalities of receivership, but our takeaway for this article is that receivership is a very flexible tool with broad application that can bring order, transparency, and professional management to complex financial and legal situations and can help to maximize value in difficult circumstances. Please contact the authors if you have questions about how receivership might work.
FEATURED CASE STUDY: Longstanding Shareholder Dispute Resolved Through Appointment of State Court Receiver
For a comprehensive understanding of receivership in Texas and to make informed decisions regarding this complex process, it is crucial to consult experienced professionals in corporate advisory and restructuring. If you need our receivership services or have questions about the process, please do not hesitate to contact our team of experts at Harney Partners for guidance. We are here to help you navigate the intricacies of receivership and other financial strategies, empowering you to make the best decisions for your unique situation.