Statutory Receiverships as Alternatives to Bankruptcy in Fraud Cases

Articles in theABI Journal, [1] committee newsletters [2] and conference materials [3] have been addressing various circumstances in which nonbankruptcy alternatives, such as receiverships and assignments for the benefit of creditors (ABC), offer strategic benefits to bankruptcy proceedings. One alternative that does not appear to have been given significant attention is the category of various special or limited receiverships provided for under state or federal law for specific circumstances.

Receiverships are most commonly associated with distressed real estate — and for good reason. After all, most receivers are appointed pursuant to the terms of a deed of trust after a borrower defaults. The receiver is then charged with managing and/or stabilizing the property, collecting rent and other income (as applicable), and readying the real property for sale or other disposition.

Receiverships, however, are not limited to being put into place pursuant to loan documents or other agreements between private parties. Instead, state and federal laws provide for receivers to be appointed in various circumstances. One such example under Virginia law is the ability of a court to appoint a receiver to assume control of a common-interest community manager where the manager misused funds and/or breached its fiduciary duty to the community association(s) it manages:

If the [common-interest community] Board has reasonable cause to believe that a common interest community manager is unable to properly discharge its fiduciary responsibilities to an association to which it provides management services, the Board may file a petition with the circuit court of the county or city wherein the subject common interest community manager maintains an office or is doing business. The petition may seek the following relief: (i) an injunction prohibiting the withdrawal of any bank deposits or the disposition of any other assets belonging to or subject to the control of the subject common interest community manager; and (ii) the appointment of a receiver for all or part of the funds or property of the subject common interest community manager. The subject common interest community manager shall be given notice of the time and place of the hearing on the petition and an opportunity to offer evidence. The court, in its discretion, may require a receiver appointed pursuant to this section to post bond, with or without surety. The papers filed with the court under this subsection shall be placed under seal until such time as the court grants an injunction or appoints a receiver. The court may issue an injunction, appoint a receiver, or provide such other relief as the court may consider proper if, after a hearing, the court finds that such relief is necessary or appropriate to prevent loss of property of one or more of the associations to which the subject common interest community manager provides management services. Va. Code Ann. §54.1-2353(C).

In order to help a receiver for a common-interest community manager recover assets for the community association, Virginia law provides the receiver with a number of statutory tools and duties:

• Prepare and file with the Common Interest Community Board a list of all associations managed by the subject common interest community manager;
• Notify all of the associations to which the subject common interest community manager provided management services of the appointment and take whatever action the receiver deems appropriate to protect the interests of the associations until such time as the associations have had an opportunity to obtain a successor common interest community manager;
• Transfer records and information to a successor common interest community manager;
• Identify and take control of all bank accounts, including without limitation trust and operating accounts, over which the subject common interest community manager had signatory authority in connection with its management business;
• Attempt to collect any accounts receivable related to the subject common interest community manager’s business;
• Identify and attempt to recover any assets wrongfully diverted from the subject common interest community manager’s business as well as any assets acquired with funds wrongfully diverted from the subject common interest community manager's business;
• Terminate the subject common interest community manager's business; and
• Reduce to cash all of the assets of the subject common interest community manager. [4]

Critically, while the Virginia Code sets out various duties and obligations of the receiver, it also empowers the Court to draft and amend, as necessary, its order appointing the receiver specifically to address the facts of a case. [5]

Most cases involving fraud or defalcation of fiduciary duties result in the recovery of limited assets for creditors. Virginia’s statutory scheme mitigates that risk through a Common Interest Community Management Recovery Fund. [6] A receiver appointed for a common interest community manager in Virginia can supplement the other assets he or she recovers with the monies available from the recovery fund. Fortunately, as of March 2022 only one receiver has been needed to be appointed in Virginia at the request of the Common Interest Community Board. [7]

In sum, receiverships and assignments for the benefit of creditors (ABC) may offer strategic benefits to bankruptcy proceedings, and agreements between private parties provide the most common bases for these alternatives. However, state and federal statutory schemes provide an additional and important set of alternatives not set forth in a contract that may, in many cases, provide unique benefits to creditors.