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Alternative Legal Remedies: Receiverships

Posted by attorney Robert Dean

In bankruptcy, debtors complete a Statement of Financial Affairs which asks them if they have recently used any legal alternatives to bankruptcy. One of these alternatives is a receivership. It’s usually an option for business debtors, not individual debtors.

Title 13 of the Maryland Rules explain how receiverships work in state court. Sections 3-413 and 414 of the Corporations and Associations Article of the Maryland Code explain how a receiver can be appointed.

The Bankruptcy Court is authorized to appoint a receiver in an adversary proceeding (but not in the main bankruptcy case) under 11 USC 105(a), according to In re Memorial Estates, 797 F.2d 516 (7th Cir. 1986). The federal district court can appoint a receiver under Fed. R. Civ. P. 66.

The court considers a number of factors in deciding whether to appoint a receiver. The receiver assumes control of the business’s assets, and his task is to preserve or liquidate those assets.

Normally, creditors seek the appointment of a receiver (whereas the debtor is normally the one to file a bankruptcy petition).

Receiverships are more flexible than Chapter 7 business bankruptcies (which are liquidations). A receivership can allow the business to keep running. The administrative costs are lower than in Chapter 11 cases, but Chapter 11 also offers protections that receiverships don’t offer.

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