What is a Receivership in North Carolina?
In some instances, creditors can recover what they’re owed through a process and procedure called “receivership.” This is a state court process that allows for the preservation of assets and the equitable distribution of an insolvent debtor’s assets. This often includes the appointment of a receiver, who will be responsible for managing and distributing specific property that might be collateral for a debt, the subject of litigation, or enforcing a court decree.
When Could a Receiver Be Appointed?
One or more creditors could file an application to appoint a receiver when an individual, partnership, or corporation is in serious financial distress. In North Carolina, the authority to appoint a receiver is given to both district and superior courts. A judge who can grant injunctions or restraining orders will also have the power to appoint receivers. However, only a superior court judge will have the jurisdiction to appoint a corporate receiver.
As a creditor, you have the right to request that the debtor and their assets be placed into receivership if you are concerned about their long-term financial stability and aware that they are in trouble financially. This is also useful to have a neutral party in charge of cash distributions from an operating business to insure that the business can continue to operate, while also ensuring the principals of the business are not able to pull the cash out of the business for anything not in the normal course of business, potentially freeing money to be used for the payment of a debt held by the creditor(s).
The following circumstances might warrant the appointment of a receiver:
- Before obtaining a judgment, a creditor could request a receivership if they have an apparent right to the property and are concerned that it may be lost or “materially injured”
- If a judgment has been previously rendered and the creditor needs a receiver to effectuate the judgment
- To preserve property that is pending appeal when the debtor refuses to satisfy the judgment
- To preserve foreign corporation-owned property within the state
- If the North Carolina Unfair Trade Act has been violated and a creditor needs to seek restitution
- To manage cash distributions for an operating business to ensure that money can be used for the payment of debts owed
What is the Insolvency Test?
To be eligible to appoint a receiver, it might be necessary to establish that the borrower is insolvent. Under North Carolina law, to be “insolvent,” a person or entity’s debts must be equal to or exceed their total assets in value.
However, the insolvency test does not always have to be satisfied in every instance. If the creditor can show that the danger of insolvency exists, a receiver could still be appointed.
Appointing a Receiver
For a receiver to be appointed, a lawsuit must be filed. One or more creditors could also take action and ask the court to take control of the debtor’s property to determine what debts are owed and assist in distributing payment to all creditors according to their rights. Once a summons and complaint are filed, the plaintiff could apply to the court for a judicial order to appoint a receiver.
A judge will typically hear the application, issue notice to the parties, and appoint a receiver. The judge will also be empowered to determine which individual will be appointed as receiver. This will usually be someone who is not involved in the action. It is against the North Carolina State Bar rules for an attorney to represent the judgment creditor and act as a receiver. Typically, the receiver will not have any personal stake in either side of the matter.
What Does the Receiver Do?
Under North Carolina law, the receiver has the power to take control of, preserve, and settle the assets and property of an insolvent debtor. The receiver must first post a bond that the appointing judge will set. Once the bond has been posted, the receiver can take possession of all of the debtor’s assets.
However, it’s important to note that the receiver can only take possession of property in North Carolina. For assets located outside of North Carolina, the creditors will need to get receivership in that state or seek attachment.
Ultimately, receivership can be a vital tool for creditors who wish to preserve and distribute assets from an insolvent debtor.
Crawford & von Keller, PLLC, is a full-service creditors’ rights and litigation law firm serving clients in a wide range of practice areas throughout the State of North Carolina. For assistance, contact us by phone or online to schedule a time to discuss your legal matter with a knowledgeable member of our team.