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The Expanding Role of Receiverships in the Commercial Division
Hon. Elizabeth H. Emerson (Ret.)
Previously published in The Legal Brief, The Magazine of the Suffolk County Bar Association.
I recently had the privilege of presenting on the topic of Receiverships during the annual Judicial Seminars. The summer seminars are organized by the New York State Judicial Institute where the Honorable Kathie E. Davidson serves as Dean. In a recent letter addressed to panelists thanking them for their participation, Dean Davidson described the annual seminars as providing trial judges with timely legal updates, innovative perspectives on emerging issues and practical education on the many developments that continue to shape judicial practice. My panel was entitled General Overview, Appointment and Oversight of Receivers. My fellow presenters included Meredith Jones Esq. Special Counsel for Fiduciary Matters and the Honorable Cenceria P. Edwards, Justice of the New York State Supreme Court Commercial Division, Kings County. Each of us covered a specific aspect of this important topic. Meredith Jones began with a discussion of Part 36 which covers a myriad of appointments by the court and provides the rules for the appointment, oversight and compensation of receivers. Justice Edwards discussed the various sources of authority for the appointment of receivers by the court, and I covered many of the practical aspects of receiverships including when to appoint a receiver, how to choose the right receiver and how to make an appointment when the court’s selection is governed by other regulations or the contractual rights of other parties such as a lender or franchisor. I also discussed how the court can effectively use a receiver and what alternatives might exist to avoid the appointment of a receiver when such appointment is problematic or opposed.
While the use of receivers within the Commercial Division is not a new or novel concept, such appointments continue to present challenges that are not easily addressed. Requests for receiverships are a frequent occurrence within the Commercial Division, particularly when dealing with closely held entities or entities that have taken on secured debt. Even when the need for a receiver is apparent and the parties concur, the court must proceed with caution. Although Part 36 is well intended, its provisions can create unintended problems.
Examples of these issues include preventing a judge from hiring the most experienced or appropriate individual due to limits imposed by Part 36, requirements of Part 36 that conflict with contractual provisions or the business model of providers and the inability to compensate a receiver under caps imposed by Part 36. These circumstances have become even more prevalent as receiverships have evolved beyond the original concept of managing rental property. Now receivers must be prepared to run entire businesses in complicated industries. This means that receivers must possess a wide range of skills that allow them to function as de facto CEO of an ongoing business, making it even more important to appoint the right individual and to offer compensation that will allow such individual to accept such assignment. In addition, a receiver may be brought in when principals can no longer effectively work together to make important business decisions. Therefore, the receiver must be able to work well with many different people and personalities and to bring together, in an effective way, competing perspectives to ensure that the business at the center of the receivership continues to run smoothly. Often receivers who are appointees of the court must address intentional or unintentional financial improprieties and must know how and when to bring issues to the court for its consideration. Finally, the appointment of a receiver is an extraordinary event which can create a cascade of unhelpful consequences, including, without limitation, reputational risk so a receiver must be able to handle these circumstances as well.
Notwithstanding the foregoing concerns, receivers are a vital tool for the Commercial Division and for the lawyers who practice before it. When the right receiver is appointed and the scope of such receiver’s authority is properly delineated, the receiver can help to right the ship by providing all parties access to information, interfacing with third parties, raising issues for the court’s consideration and assisting the court in moving the case forward by avoiding unnecessary motion practice or resolving discovery disputes. Finally, being appointed as a receiver is a good source of work for qualified members of the bar.
The Suffolk County Bar Association will be sponsoring a program on Receiverships in December or January. Meredith Jones is expected to attend, as well as panels who have great experience in this area. The session will address some of the questions raised and will provide valuable training for future receivers. I encourage all to attend.
Hon. Elizabeth H. Emerson (Ret.) is a FedArb arbitrator, mediator, and special master with extensive experience resolving commercial disputes. She served for 28 years as a New York State Supreme Court Justice, including 21 years presiding over the Suffolk County Commercial Division, which she helped establish. Before joining the bench, she was a partner at Shearman & Sterling, representing financial institutions and Fortune 100 companies in domestic and cross-border transactions. Her experience includes banking, secured transactions, corporate governance, mergers and acquisitions, real estate, securities, and shareholder disputes. Learn more about her practice.