Collecting Accounts Receivable Part IX: Obtaining a Receiver Over the Debtor’s Property
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This Blog is Part IX in a series of Blogs designed to provide business owners with a high-level overview of the legal process for collecting on past-due accounts receivables. Specifically, Part IX focuses on the ability of creditors to obtain a receiver over the debtor’s business and/or property as a method for satisfying the outstanding judgment balance.
Often times a creditor will find it difficult to collect on its judgment against the debtor, even when the creditor discovers that the debtor owns a business interest or owns other personal property. This difficulty can arise because sophisticated debtors, who understand collections law, can delay or hinder attempts to collect by an unsophisticated creditor. To illustrate, let’s say that through post-judgment discovery a creditor uncovers that the debtor has an ownership interest in an LLC. The creditor then issues a charging order to that LLC but the LLC responds that the debtor has not been receiving distributions or disingenuously states that the debtor’s distributions are far less than they actually are.
As another example, what if the creditor discovers that the debtor owns substantial rental properties, but is not using the rents collected to pay toward the judgment debt owed. What is the creditor to do in these situations? One solution afforded under Florida law is for the creditor to petition the court for an order granting the appointment of a receiver over the debtor’s property. McKinnon-Young Co. v. Stockton, 55 Fla. 718 (1908); Edenfield v. Crisp, 186 So.2d 545, 549 (Fla. 2d DCA 1966).
A receiver is a person designated by the court to take control and possession of certain property owned by the debtor and to dispose of it as directed by the court. To take advantage of this collection tactic, the creditor must file with the court a Motion for Appointment of Receiver. The Court will consider the creditor’s motion on equitable considerations, which can include, but are not limited to, the following factors:
- Whether the creditor has a sufficient interest in the subject property. Warshall v. Price, 617 So.2d 751 (Fla. 4th DCA 1993). The creditor establishes sufficient interest when it properly records a judgment with the Florida Secretary of State or within the county that the debtor’s real property is located. Id.
- Has the creditor demonstrated that the debtor does indeed have an ownership interest in the subject property?
- Is there sufficient evidence that the debtor is wasting assets or fraudulently transferring assets that should be used to satisfy the judgment debt? See Smilack v. Slizyk, 812 So.2d 591 (Fla. 4th DCA 2002).
- Whether the creditor has an inadequate remedy at law due to the debtor’s waste, mismanagement, fraud, etc.
If a receiver is appointed, that court-appointed receiver acts as an agent of the court, meaning that, in essence, the court itself takes possession of the property. The receiver is usually required to provide the court with an accounting of the subject property. After that, the receiver is delegated the duty of overseeing the property and using the assets to satisfy the judgment debt.
Before the creditor can successfully obtain a receiver over the debtor’s property, Florida law places some requirements on the creditor. Unless it is an unusual, emergency circumstance, the creditor must provide notice to the debtor of its intention to obtain a receiver by the court. The creditor must then appear before the court at a hearing on the motion for appointment of a receiver. After the debtor has been given notice and an opportunity to be heard at the hearing, the court will usually require the creditor to furnish an indemnity bond prior to appointing the receiver. The indemnity bond is intended to protect the debtor against loss or damages resulting from wrongdoing by the receiver.
Once a court-appointed receiver has control over the debtor’s property, it can then use that property to satisfy the judgment balance. This is done through the receiver liquidating personal property or by collecting rents and/or business revenue and using those funds to pay toward the judgment balance. Stay tuned for Part X, which will be the final Blog in this series and will focus on proceedings supplementary as another collection tool.