Bankruptcies and Receiverships: Comparing Stakeholder Perspectives

0:00Hello, everyone. My name is Shantal Malfad, and I'm going to be the moderator for this panel. This is Beverly Hills Bar Association's Banker Pse section panel on bankruptcies and receivers, comparing stakeholder perspectives. And I'm joined by our lovely panelists, the honorable judge Victoria Kaufman of the US Banker Pse court, central to his Drick of California, Byron Moldo, partner at Irving Cohen and Jessup, and Kira Androssi, a partner at Reince Feldman, LaTrell. And this panel is presented by Stephen Maught and associate at Reince Feldman, LaTrell, and myself. I'm an associate at Irving Cohen and Jessup. And I think I'll go ahead and actually allow our panelists to give a little quick introduction of their practices and how they've touched on bankruptcies and receiverships throughout. Their practices starting with Judge Kaufman. Okay. Hello, this is Judge Kaufman. I'm really excited to be here today, and I hope to learn a little bit more about receiverships myself.

1:05I've been at bankruptcy judge for 20 years, pointed in 2006 before that as a bankruptcy lawyer for 16 years. And mostly for, and receiverships I get involved when there's a receiver ship that's pending before the bankruptcy is filed. So I've had a little bit of that. I've had a lot of bankruptcy experience and all the different chapters with individuals and corporations. I'm in Woodland Hills now. I've been in downtown LA before. Thanks Judge Kaufman. Now turning to Byron. Thanks, Chantal. I'm Byron Moldo. I'm a partner in the law firm of Irving Cohen and Jessup in Beverly Hills. I'm the chairperson of the receivership bankruptcy and creditor rights practice group. I have practiced in the receivership area for my entire career serving both as a receiver and as counsel for receivers. And I was a bankruptcy trustee for about 10 or 12 years. And I also serve in various fiduciary capacities and various types of batters in state and federal court.

2:16I'm here in Dressy. I'm a partner in the new port beach office of rain spelled in the trial. And I do chapter 11 work. I also represent trustees and bankruptcy cases. And I represent federal and state court receivers. I have a lot of experience with federal equity receiverships in the context of regulatory enforcement actions usually brought by the SEC. And I have a case right now with Byron as receiver that you're going to be hearing about later on. I'm so excited to hear all about it. And with that, let's jump into it. So I'm going to be sharing my screen. Okay, perfect. So this panel is going to be focused on five different discussion topics. First, we're going to go over both bankruptcies and receiverships generally and provide a brief overview of both of them.

3:21And then we're going to go into the similarities and differences between them and the trade offs within them for lenders and borrowers as well as the mechanisms within them and the goals that are presented within both of them. Then we're going to go into a little bit about receiverships in California and specifically the governing statutes that actually give the receiver his powers and allow him to do what he he or she needs to do to Marshall and property of the receivership state. And then we're going to be going into the effect of filing a bankruptcy on a pending receivership action specifically looking to bankruptcy code sections 541 and 362. And then we're going to go into the turnover duties under bankruptcy code 543 and how those play out in under a state court receivership action with regard to a receiverships receivers obligations during a bankruptcy. So let's jump into it.

4:31So the different types of bankruptcies and receiverships and where each is filed. So first, there's many different types of bankruptcies. Each one is filed in a federal bankruptcy court, whether it's governed by one uniform bankruptcy code nationwide. There's a chapter seven bankruptcy that's a liquidation where trusty sells non exempt assets and distributes those proceeds and individual debtors typically get a discharge. Chapter 11 bankruptcy that is a reorganization bankruptcy where the debtor often a debtor in possession proposes a plan to restructure while continuing to operate and that is subject to creditor voting and court confirmation. And then there's a chapter five chapter chapter chapter five chapter 11 bankruptcy, which is typically called a small business reorganization bankruptcy where there's a limit on the debtors secured and unsecured debt, but no US trustee fees are required.

5:31Standing trustee is appointed to help facilitate the process and only the debtor not the creditors can propose a plan, although that plan is subject to creditor voting and confirmation by the court. And then there's a chapter 13 bankruptcy, which is a consumer bankruptcy available for individuals with regular income that typically have high consumer debt. Then we go to receiverships there's split into two broad top broad types. There's regulatory enforcement receiverships that typically involve the SEC the FTC or Ponzi schemes. And then there's private litigation receiverships where a party typically a lender business partner or shareholder moves to a point of receiver in a state court action. There's no single receivership code actually the receivers powers come about their invested in through the employment order and any governing statute that we're going to go into and another couple of slides. And then you as a choice, although a receivers authority generally stops at the state's borders. If they would like to exercise their power possession over receivership assets in a different state, they will need to file an anslai receivership in that state.

6:45And nationwide reach is not automatic under 28 USC 754 receiver must file an appointment order in every federal district where assets sit within 10 days or lose jurisdiction there. So with that said, I'd like to ask I'd like to ask Byron Byron, you do a lot with receiverships. What are the different types? I mean, can you go into a little bit about the different types of state court receiverships. And what they look like and how they differ. Certainly actually it can happen both in state and federal court. The different types of receiverships. They generally fall into two different categories. You might have one where a secured creditor will file an action and see the appointment of a receiver over a specific property that's generally referred to as a rent, see she's in profits receiver. The receivers appointed primarily to protect the secured creditors collateral oftentimes pending the completion of a non judicial foreclosure.

7:52The other type is what's referred to as an equity receivership. And in an equity receivership, a receiver is appointed over an entire entity or more than one entity oftentimes. And order appointing a receiver which provides the receiver is appointed over a corporation, including their subsidiaries affiliates. And oftentimes the receiver has to take possession and control of many, many entities. And there's very distinct differences between the two types of receiverships. And the receiver is more akin to a chapter 11 trustee having been appointed over a particular entity and it requires the receiver to do much more tax reporting. And the right to initiate avoid the sections. It's more similar to a chapter 11 trustee, whereas the rent issues and profits receivership is much more limited and the receivers role is to protect the property that's the collateral for a lender.

9:02And as I said, pending the completion of a non judicial foreclosure. Very interesting. And Judge Kaufman, can you actually going back to bankruptcy? Can you talk a little bit about the different types of bankruptcies there are and how they differ? Well, I guess in addition to what's on the slide. Chapter sevens. There's a trustee that's there right from the very beginning. They can be filed by businesses or individuals. They can also be involuntary theoretically. That's not necessarily the best way to go. It's very risky move, but for the credit that's filing them, but they can that's there's a trustee that's there to sell assets. Chapter 11 can be also individuals or businesses. There's no debt limits. So regular chapter 11 case. It starts off with the debtor and control. But a trustee can be appointed or there are ways in which a court could authorize a receiver to keep operating if there was a receivership ahead of time.

10:08But they would need permission from the bankruptcy court to do that. Sub chapter five has become a very popular subsection of chapter 11. It's subject to debt limits. Right now those debt limits are a little over $3 million in non contingent liquidated. Security or debt combined. That doesn't exclude affiliated debt. People like debtors like them because the only a debtor can file a plan. There's no US trustee fees. There's different confirmation requirements for the plan. There's no need for a disclosure statement as well as a plan unless the court requires a disclosure statement specifically. So they are meant to move fast and a debtor is supposed to file their plan within 60 days. Generally speaking, there is a sub chapter five trustee, but it has a very limited role. I'm mostly to facilitate. It doesn't have the same powers as a chapter seven trustee or a regular chapter 11 trustee if one were to be appointed.

11:10And chapter 13 is you know, is for individuals also with debt limits. And there's a chapter 13 trustee, but that person mostly is involved in a monitoring confirmation of the plan and distributing funds that are paid through the plan. Nice. Great. Well, with that, let's move on to the second slide and go over these similarities and differences. Of receiverships and bingerpsies. So similarities. There's a fiduciary in both of them and a receivership. It's the receiver and a bankruptcy is the bankruptcy trustee that acts for the benefit of the creditors. Both receivers and bingerpsies trustees can pause collection efforts against property in their custody. And both fiduciaries owed duties of care and impartial administration to the estate and with the receivership as a whole, although as the panelists know we've talked about that doesn't always mean that the fiduciary is always impartial.

12:14Now the difference is there's many the initiation of a of a receivership usually entails a single secured lender that obtains a receiver by way of motion moving to a point of receiver unilaterally based on a loan default. And where by where a lender would like to have an entity file for bankruptcy three three creditors, three petition creditors file that entity under involuntary bankruptcy. The costs are vastly different. The cost of a receiverships is the receiverships principal recurring costs, which are the receivers bond premium and compensation with comparatively little court appearances. Where by a regular chapter 11 bankruptcy touches on US trustee quarterly fees, professional fees and in a reorganization. The fees associated with preparing and filing a disclosure statement and a chapter 11 plan, which can be very hefty.

13:16Lenders remedies in a receivership versus a bankruptcy are also different in a receivership. The lender can hand pick a receiver by way of their motion and but in a bankruptcy obviously no one can hand pick the to chapter on trustee, who usually does not really know any of the party stepping into the case. And finally the bars and that debtors and that sort of entails different remedies and the panelists can kind of go into that. And so the borrowers and debtors remedies in a bankruptcy versus a receivership kind of touching on credit bidding differ whereby in a bankruptcy a lean holders rights a credit bid at a 363 sale is statutorily guaranteed. But in a receivership credit bidding depends entirely on the receivership order and and state procedures. So credit bidding is not really guaranteed in a receivership. Now stepping back a little and looking at all these factors.

14:21I was wondering, Cara, can you walk through all these factors with us cost speed control and availability of a discharge and kind of walk us through what actually drives the choice between between a party. Moving to a point or see reverses trying to put together an involuntary petition for an involuntary bankruptcy for an entity. Yeah, so a couple of things I want to start with first going back to the similarities. In a chapter 11 case you don't automatically get a trustee appointed and in fact what you have is a debtor and they're actually called a debtor in possession and they're vested under the bankruptcy code with the authority of a trustee and they are a fiduciary. You get trustees appointed in a chapter of 11 case for fraud or mismanagement. And you know with respect to other similarities like the pausing of collection efforts. It's actually a little bit broad, it's a lot broader in a bankruptcy case than it is in a receivership.

15:26So in a bankruptcy case you get the automatic stay that applies to attempts to collect any pre-potation debt from the debtor. It also protects the property of the bankruptcy estate and that's any interest that the debtor has in property under state law as a date that it files. You don't have an automatic stay you sometimes have injunction provisions in the order appointing the receiver that limit parties ability to exercise control over assets or to say so the receiver but it's not typically as broad as in a bankruptcy case. So that is federal equity receiverships because those are administered a lot like bankruptcy cases. So just wanted to add that for some color. You know in terms of how they differ and what people are evaluating the obvious thing is that bankruptcies are typically voluntary. So if I may creditor trying to figure out how best to protect my asset and I think or the business and I think a receiver would be beneficial.

16:30And probably not thinking of a bankruptcy case and the reason for that is number one to force a company into a bankruptcy case you have to file an involuntary petition against it. And there are statutory requirements on the number of creditors you have to have. And that their debts can't be contingent, unliccudated or disputed. So you also have to prove that the debtor is insolvent either on a balance sheet basis or that they're generally not paying their debts as they come do. And if you lose on any one of those the repercussions are pretty severe. You can have sanctions issued against you and also would probably be liable for the attorney's fees incurred by the alleged debtor inventing all the involuntary petition. So that's a huge disincentive together with the fact that if you put it into a seven you're going to have some trustee randomly appointed you don't have any control over who that party is. Another thing is that all of the property that the debtor owns becomes property that bankruptcy estate.

17:36And it gets distributed in accordance with the priorities that forth in the bankruptcy code. If you're looking at a receivership, you have a lot more control over that process because you may just have the receiver appointed over a particular piece of property. Say like in the rents and profits context or over a business to preserve it pending the outcome of some litigation between the parties. So it's a lot more discreet and you have control over these scope. You don't have that control in a bankruptcy case. And so those are factors I think that are certainly taken into consideration. You know, one other thing that can be powerful though in a bankruptcy. This is sometimes why receivers file bankruptcy cases is if you see that there was a lot of money going out the door and the 90 days prior to the filing. Because you might be able to get those back as preferential payments in a bankruptcy case. It goes back 90 days for regular creditors in a year for insiders. You don't have that ability to there's no preference equivalent in a receivership case.

18:39So that can be one instance where bankruptcy might actually be beneficial. And there's also a statute in California that said it's said in the event of a bankruptcy filing rate of attachment leans are void within their obtained within 90 days of the bankruptcy filing. So that can be another reason why bankruptcy might be better. But you know, generally when you're talking about it from a creditor perspective. And creditor remedies you're looking at a receivership because the risks of an involuntary are great. And there's a lot of drawbacks. No, that's really insightful. Yeah, very insightful. And the rate of attachment sort of piece of the puzzle you were talking about is actually actually I think a really good reason to look at a bankruptcy. Very, very in a sort of more broad way than in a receivership, because I see that happening all the time. Very interesting. Okay, so next slide.

19:44We're going to go into the statutes that kind of govern state court receiverships in California. So there's a few. The most important are I think 564, 567, 568, say 568.5. So just touching on those section 564 is the grounds for the receivers appointment usually authorizes a receiver in actions involving fraudulent purchases for closures corporate dissolution and unlawful detainer, where whenever appointment is necessary to preserve the property or rights of any party. And that usually entails a lender or a party moving for appointment of that receiver. Section 567 deals with the oath and undertaking. So before a receiver, it can actually act under, as a receiver, they need to actually take an oath in an undertaking.

20:45They need to be sworn in and post an undertaking to faithfully discharge the duties of the office and in a sum that court directs. Section 568 I think is the most important statute that applies to receivership because it gives the receiver his or her powers. So under that statute, the receiver can sue or be sued in their own name, take possession of property, collect rents and debts, compromise claims, make transfers and otherwise perform such acts, respecting the property as the court may authorize. And that's generally the language that best the receiver with the power they need to do things like file you de actions and potentially sue people that violate the appointment order. Section 568.5 is also really, really valuable statute because it actually allows a receiver to sell real or personal property in the receivership estate, free and clear of all leans.

21:52Obviously, after court confirmation and the horse pull case touches on that and is very important to look at and sections 569 to 570 deal with receivership funds. So looking at all those statutes, I want to ask Byron. So Byron, in your practice, Section 568's grant of authority, it's really broad, but it still requires court authorization for anything beyond those, those enumerated powers in practice. How specifically do you draft the appointment order to avoid a second trip back to court for further instructions? Well, it's very important for an attorney that is considering seeking the appointment of receiver to consult with the proposed receiver in advance and to share a proposed order of pointing receiver with the proposed receiver because my recommendation is always to include as many powers as possible in the initial appointment order.

23:01Because that's just going to be much more cost effective and will avoid the receiver having to go back to court to seek further instructions or to seek further authority. One of the unique powers that a receiver has unlike a bankruptcy trustee is a receiver can go to the court and say, here's the situation, here's the problem. I need to ask for instructions or I need to ask for specific authority since it's a court of equity, a receiver has that luxury of going to the court and essentially asking for what might be considered a comfort order in terms of protecting the receiver from attack further on or later down when the case is further litigated. I'd also add that in addition to the statutes that you've shown on the screen, there are other statutes that provide for the appointment of receiver, for instance, the family code provides for the appointment of receiver or there are corporations, code statutes, there are government code statutes, and there are penal code statutes that allow for the appointment of receiver.

24:11We're only touching upon some of them right here. I mean, there are many, many statutes that provide for the appointment of receiver, but again, going back to what I said before, it may be an appointment of a receiver over specific property or it could be the appointment of receiver over a particular entity, which is considered a equity receivership. Do you think that section 568.5, I mean, do you think that that's a pretty significant statute, because I think maybe not a lot of people know that a receiver can sell free and clear, because that's a pretty, that's a, in my eyes, that's a pretty significant thing to be able to do. So, obviously, after court confirmation, do you think that that sort of that sort of make change how lenders perhaps or other parties might see their remedies in our state court receivership versus a bankruptcy?

25:19I would say that prior to the city of Riverside versus Horseball case coming out that there was the belief that receivership courts didn't have the power to approve sales free and clear of leans. There was some authority going back to, I believe, the 1920s. There was a case called Spreckles involving the old Spreckle Sugar Company. But that was not exactly the most clear authority. I used it a few times, but most judges in my experience didn't feel comfortable issuing orders selling free and clear of leans. Since the Horseball case was decided in 2014, it now provides a definite authority for judges in state court, and for that matter, in federal court to approve the sales free and clear of leans prior to the horseball case coming out, it certainly was the common belief that state courts didn't have the authority to approve sales free and clear of leans.

26:27And that's why if there was a possible sale being considered that bankruptcy was probably considered the only option until the horseball case did come out. I have a question, I just because I read the case. It seemed like such a compelling situation. The lenders didn't oppose the sale. We can clear the property was a mess. It was a hazard to the public. The owners kept litigating about they didn't have to fix it. And the receiver didn't have the right. I mean, it just seems I just wonder how broadly is it applied outside of the context of a particular property that's dilapidated and a hazard and the county's moving to have it be like fixed and the owners are doing everything they can to get in the way and have been labeled vexatious lit against. And the lenders know that it's not I mean, they don't want to spend money fixing it and they don't want to close on it either.

27:27Unlike the bankruptcy code where you've got specific a statute that allows you to sell free and clear and you need to make a certain showing. My experience has been that in state court, it generally is in the context of perhaps when you've got a property that has been tagged for health and safety code violations. The issues with many times public policy reasons for that might form the basis for which allows the court to approve the sale free and clear of leans. That's my experience. So I mean, it isn't like something like if you were a junior lender, I don't think right and you thought that there was value to the property. It's not going to get sold free and clear of your lean right. I mean less right if you're. That's that that's correct. Yeah, just just because you're in his junior position, you're not going to get sold out that's correct. Yes, but I mean it's possible it's pop I mean these it's now it's an option.

28:28Yes, but it's not like it's a guarantee and every situation it has to be equitable and you know correct, but at least now there is authority for a state court judge to approve a sale free and clear of leans. And transfer the leans to the proceeds. Yes. Right. And I think something I've learned because I just started practicing and learning more about receivership to start practicing in receivership actions is that there's not a lot of case law that actually deals with state court receiverships is very different than the bankruptcy world where there's so many different cases that that are always cited and various. Regular motions there are not a lot of cases outside of maybe horse pulls and a few others so I think it's it's a completely different world and the fact that there is this sort of case that specifically talks about our the receiver's ability to sell free and clear is it's very very important and.

29:31It just helps helps makes things the receivership world and the language within it just a bit more clear i'm sure you can attest to the fact that it's just very sometimes hard to persuade by an a judge. One way or another based on state state court law in a receivership versus bankruptcy judge right well I think that's right but again in a receivership court you are in a quarterback, but he if you make out a good faith argument and support your motion seeking authority to sell free and clear my experience has been that if you make a good faith argument and support it as to the value of the property. Being supported that you've marketed the property adequately you're probably going to get a court to agree with you. Right, chantal the one thing I would add to this is with respect to the federal laws governing receivers so if you have an equity receivership and federal court you know those little rise in the context of private disputes where there's allegations of fraud usually you see them an investment fraud.

30:45But I've had them in breach of contract type actions as well. There's a complete lack of there's like literally two statutes in the US code on receivers there's one governing how they sell property and there's another I got an ancillary and kind of like what the general scope is but the order is is the Bible in federal equity receiverships and it also is in state court. But there's like you said there's not a lot of case law in California and that's in the federal courts you know there's actually not a ton of published case law there's I mean I'm in federal court I'm often citing to unpublished decisions because there's such a lack of case law in this area. But it the federal world there is case law to support that you draw on the bankruptcy code when it's helpful and it would achieve an equitable result but otherwise you're just relying on equitable principles. So it's really kind of the wild west and what you're trying to achieve is really just is always equity and and carry it just to follow up on that I I one of the rules that applies is that if you're selling real estate you're supposed to get three appraisals of a piece of property unless the court excuses that requirement.

32:00I did have one situation many years ago where a federal judge required us to get three appraisals and it obviously took a lot of time and we came back and the ultimate sale of property or the purchase price was exactly what we had proposed after the property had been marketed for sale with the license real estate broker. So I think the fact that I was a little bit more careful in my opinion all it did was cause delay and cause the receivership of state to incur a lot of expense to obtain three appraisals. Yeah and I'll just note that I'm five for five on getting federal court judges to not require the three appraisals. So they don't want to impose unnecessary burdens on on receivers. So if you can make a case for why you shouldn't have to do that. So I'm not going to adequately marketing the property otherwise you may be able to get that order. I would agree with you this was a this was the unique situation I'll leave it at that. Well really it sounds like the wild wild west and compared to bankruptcy's.

33:01Okay so let's jump into the next slide. So the filing of a bankruptcy on a pending receivership what freezes the moment of bankruptcy case lands on top of the the receivership action and so looking at bankruptcy code sections 541 and 362. 541 deals with what actually is pulled into this state at the moment of the bankruptcy filing and it includes all legal and equitable interests of the debtor in property as of the petition date and section 362 deals with the automatic stay and all legal proceedings. So if you can make a case of the case or collection efforts being paused during the bankruptcy what once the bankruptcy is filed. And it doesn't reach separate interest that does not belong to a debtor and in the in resource in that bankruptcy case in the first district.

34:01So the bankruptcy is a very important consequence of that so a filing of bankruptcy filing freezes further action and a pending state court receivership us to a state property effectively pausing the receivership for that property. And in that case the court held out of state courts post petition default and foreclosure orders violated the automatic stay. So they weren't they weren't just ministerial acts or errors and that retroactively annulling the state to validate them required compelling facts that the creditor had not shown. This is pretty much like what happens when when there's already a receivership in place and a bankruptcy is filed and the two sort of start to interact it's really this interesting zone doesn't really happen. And so I kind of wanted to ask so looking at sections 541 at 362 I wanted to ask judge Kaufman if section 541 really is the gatekeeper for the bankruptcy state and the stay the automatic stay.

35:09How much diligence does a receiver or should a receiver do on a debtor's property interest before assuming that the automatic state automatically reaches that property interest. So well the 541 is very broad includes like I want to make an equitable interest right so that could be the debtors saying well I help pay the mortgage or I contribute you know I mean it could be very you know like or I helped with other expenses and so now I have an equitable interest so it's kind of hard to. But I honestly know what that is also it includes community property so I wanted to mention that because it's not mentioned on the slide so community property also comes into the estate even if the spouse doesn't file if it's a individual so I the thing about the automatic stay is it's automatic and anything you do that's contrary to it is void plus you can get into trouble for violating the stay.

36:09So if you're not sure that you mean like one thing I would do definitely is wait for the debtors schedules look at the debtors schedule see if it's something that's scheduled because if it's scheduled you definitely don't want to get in the way before asking the bankruptcy court for approval and the best the best situation honestly either go get court approval based on relief from the next day or get excuse get excused from turnover which is the obligation of a custodian to turn. Turn over property to a trustee or a debtor in possession and a bankruptcy case so we're going to talk about that but I would never I think if if if when in doubt go for one of those two things any doubt go for one of those two things okay and also I'm like we mentioned the interest are defined by state law so you want to keep in mind that it's state law that defines a debtors interest but it's the bankruptcy code that governs the protections for that interest.

37:09And you see so and you mentioned yeah community property interest is included in the bankruptcy estate yes okay yeah also proceeds product you know things that you know result from you know things that are anything that's an offshoot of the property in the estate is also included as property of the estate. Got it okay. When we're considering property of the estate your your honor if a receiver has been appointed at the request of a secured creditor and there's funds and a receiver's possession those funds though are the collateral for the secured creditor correct. They can be I mean they can be collateral but that doesn't mean they're not property of the estate I I agree yes so yeah I mean there's when there's a bankruptcy there could be a cut off to certain extent depending on what the security interest you know is and that but but yeah those are they still nothing changes whether it's collateral but unless it's become.

38:21Property of the lender in some way you know it's it's still subject to the stay and and so it can be if it's frozen in a bank account or if it's been you know if it's the subject to a lean it doesn't change the fact that the debtor has an interest in it which would be subject to the stay. And and state court I mean state state case law would govern I mean like you mentioned obviously state case law or yeah state case law does govern in a sense like what really is the definition of what the debtor's interest in the property is so so we mentioned the slide this brace brace and brace was about and it was community property comes in and it was really about but it was held and joined. It was it was titled in both the husband and wife's name as far so it was really about what governs that the form of title presumption under state law or the community property presumption and the the night circuit said well we have to you know look at state law as to what is going to govern is it just does only that the husbands half interest come in because it was only his case or does the whole community property

39:42interest come in of the husband and the wife and so they had to go to actually the California Supreme Court to decide which of the state law presumptions governed the interest of the estate in the property was it just the half or was it the entire community property interest and so that's an example of where state law was used to determine what you know what was what was actually property of the estate you know based on. Those two competing concepts. What's helpful I mean it's it's it's I think it's helpful that there's a there's a different like yeah a different sort of authority that you can look at because sometimes the bankruptcy code is is not always like the definitions or the language within it is not always very clear so I think it's. Things helpful that sometimes we we do look at state state law yeah Dennis property interests are yeah to usually define by state law unless there's a conflicting bankruptcy code provision specifically which then would would govern.

40:50Okay. Okay I think we should get to the next slide which is actually the last slide. We saved the best for last. The best for last exactly I was just going to say. So turnover duties turnover duties under bankruptcy code section 543. That section basically says that once a custodian including a state court receiver acquires knowledge of a bankruptcy filing that section 543 a through B requires that custodian to deliver a state property plus any proceeds rents profits to the receiver or the debtor and possession file and accounting. And stop making further just just for the disbursements except to preserve the property. And we there's actually a case that deals with this is a Supreme Court case called United States versus Whiting Pools and it shows just how broadly courts read that turnover concept under section 543.

41:57The supreme. Oh, I wrote 542 that should be 543 the Supreme Court in that case held that it. The turnover obligation which is basically anyone that holds a state property including a creditor that already seized a pre petition in service of the codes reorganization and fresh start goals. You see that language all the time in bankruptcy case law. In the case the court held that the IRS even the IRS was required to turn over a tax payers equipment. It had seized pre petition to satisfy a tax lien because property of these state under sections 541. 542 reaches the debtors possessor interest even when a creditor already holds the property. And again, that's in furtherings of the the fresh start goals chapter 11 bankruptcy. And pursuant to section 11 USC 541 D1 actually as judge coffin was kind of touching on earlier after notice in a hearing.

43:00A bankruptcy court can actually excuse compliance with sub sections a B or C if the interest of the creditors and if the int the debtor is not insulvent. Of equity security holders would be better served by permitting a custodian to continue in possession custody or control of such property. So it's kind of like yeah, basically what judge coffin was talking about earlier was this excusing this turnover obligation. And so I kind of wanted to ask our panelists given how broadly white in pools reads the turnover concept. And also looking at obviously 541 D1 where should a receiver draw the line between property it has to immediately hand over and property can. Hold while the parties sort out an exemption. Let me first say it should be 543 D. Yes, I noted that I was trying to.

44:03So that's that's right. The typical situation is a receivers in possession of property and the bankruptcy is filed and the receiver will get a phone call from the debtors council or the. Data demanding turnover that's that's the typical situation if if it's a situation where a secured creditor has sought and obtained the appointment of a receiver and the property maybe had been mismanaged or had fallen into disrepair and maybe was cited for health or safety code violations. I would expect that the secured creditor would file a motion under 543 D1 seeking to preserve the receiver in possession in the meantime while that motion is being prepared. The receiver would typically remain in possession of the property pending the court hearing the secured creditors motion that's generally the way it would would work.

45:12Here and I had or have a recent case right now where I was appointed receiver and it was the day of the scheduled foreclosure sale and the owner of the property filed bankruptcy to prevent the foreclosures from being completed. I've remained in possession of the property I never obtained a demand for turnover of possession. The property was riddled with problems the secured creditor has continued to fund the shortfall during the receivership and the bankruptcy court has been fine with. Allowing me to remain in possession is essentially being done by way of consent I would say this is the atypical situation in my experience there usually is either a stipulation for the receiver to remain in possession or the secure credit or files emotion and the court issues in order excusing the turnover.

46:22This in my experience is the only one where it's literally been done by way of oral consent. Cure any comments. Yeah, I mean, I definitely think it's the exception and should not be the rule. I mean, a couple of things. First of all, if any of you practice in state court and you've ever looked at the form receivership order that some judges require be used, it has a provision that's really not consistent with the bankruptcy code that provides that the receiver can hang on to stock and see if the party that sought their appointment within 10 days is going to file a motion in the bankruptcy court to excuse turnover. I mean, really, when you know, typically when I represent a chapter 11, debtor where there's been a receiver appointed I'm making demand immediately on the receiver. And and you know, I'm looking to I'm on the phone with the council for the party who stopped their appointment saying when are you going to be filing emotion and if so when. And the practical way you do it is you you know, generally the receiver remains in possession, pending the outcome of that motion and can spend only that amount of money that's necessary to preserve the property.

47:34And then you've got a determination. So my case of Byron right now is unusual because we're doing it just basically my client contact is is kind of a mess. And so we're happy to have the receiver in possession running the property dealing with the issues and the lender is funding the delta that my client can't afford to fund. And so it's sort of an unusual situation into other cases that are related to the one where Byron is there's a different receiver who is appointed and in those cases the lender actually filed really quickly emotion to excuse the turnover requirements. And what we've done is that allowed me some time to bring in new management for my company because it needed a new fiduciary at the home. And so we did that we've done a stipulation transitioning the receiver out over a certain amount of time because everybody satisfied that the new management I'm bringing in is basically I can do the receiver and we don't want to pay for both.

48:36So there's different ways you can do it. You know, I've had another situation where I represented the receiver and it was a hotel that suffered from like the management was at odds with each other subject to a shareholder dispute and everybody was accusing everybody else of having stolen money. And so the party is a very early on stipulated with the secured creditor to keep my client in place pending a sale of the property. And then when that was done, we returned to state court and got our you know receiver got discharged after the property was done. So I definitely would say that if you find yourself in this situation, you know, you're the party seeking the appointment who sought the appointment of the receiver should be the one who files the motion and they should do it pretty quickly. And if they don't, you know, 543 a says as soon as the custodian knows about the case, they're supposed to start the process of turning over a possession. There's not a 10 day thing built into 543 a. So there's you know, a little bit of give and take and there's some flexibility, I think in terms of tying and so forth, but really you need to be on the phone right away.

49:45And one more thing that I'll add is that it's usually not the receiver who files the motion to excuse turnover because the receiver is considered a neutral party. And agent of the state court and so it does happen if this you know party who seeking the appointment isn't doing it and the receivers needing instructions. But I think usually it's the party who saw the receivers appointment where the honest should fall to file the motion to excuse turnover. I would agree. Judge Coppin have you had instances where you've had a superseded receiver who then files and application for compensation before you. I think it's usually been where we look at whether the state quarters the right court to be reviewing the fees of that receiver. So I haven't actually that I can recall dealt with the fees of a receiver and the receiver was left in place. I did just briefly want to mention there's another provision which is this which is the abstention provision under section 305 which sometimes comes into play.

50:51Which is where you can ask the bankruptcy court to suspend the bankruptcy case or dismiss the bankruptcy case because basically it's being handled well somewhere somewhere else in the best interest of creditors and the debtor to let it stay where it is. So that's why a lot of debtors will try and beat the receiver because once the receivers in there's a greater chance that a bankruptcy court will excuse turnover or will theoretically even abstain under section 305. By post you know by not by putting everything in bankruptcy on hold or by dismissing the bankruptcy case because it's being handled appropriately in the state court with a receivership or I mean. So when you've found abstention was appropriate do you schedule periodic status conferences just to kind of check in and find out what's going on in the state court. I would if it wasn't just I would if it wasn't dismissed. Yeah. Okay. Okay. Yeah.

51:51And by and I have had that situation with the one the hotel example that I gave the bankruptcy judge because that's an open question. There really isn't a statute on it. The only thing you know is that the receivers expenses are entitled administrative priority and that includes by the way the fees and costs of the receiver and the professionals hired by the receiver prior to the bankruptcy filing. If the receiver is forced or required to turn over the property the receiver gets an administrative claim for the reasonable fees and costs of that receivership estate. So all is not lost if a receiver finds themselves in that position. But back to my hotel case the judge in that situation really wanted to be able to because it was ultimately going to get paid from the proceeds of the so tell in the estate. And so she wanted to have control over the fees and so during the case we had to file a with the end what's the property was sold. We had to file a mission to allow the attorneys fees and costs and she evaluated it under the standards that you would any other fee application in a bankruptcy case.

52:53And then we had to go back to state court after we got really from state to do that in the bankruptcy case to file something with the state court saying you know bankruptcy judge bless the fees for this period. We're done we sold the property. Can you please discharge us. Right because that's typically the way I've done it as well is that the receiver would need relief from state from the bankruptcy court in order to go back to the state court to be discharged because it was the state court that appointed the receiver it was the state court that required the receiver to post a bond. And it should be that court that discharges the receiver and exonerates the receivers bond. Yeah, agreed. I'm learning so much. This is really insightful is really interesting and I just realized that I misspoke and Byron we are premature in our our error.

53:54So the 542 section 542 reference I made in paragraph two that's actually correct. The court in that case was analogizing the custodians turnover obligations under 543 not analogizing that section to the expansive definition of turnover generally to section 542 so that's correct for all of our viewers. The third bullet point should be 542. 543. Yes. Yes. Yes. Yes. There's actually a question for Kira in the questions board. This is pertaining to the federal securities. I think we have a little bit of time so I think I can read it to to Kira. Since we're done now and actually we have we so we do have like four more or three more minutes for questions. So if there are questions, you know, you can type a question and we'll answer it.

54:57But I'll go to this question because this was this was sent a bit ago. So for Kira would violation would a violation of federal securities laws be sufficient grounds to a pointer receiver on application of an injured creditor as opposed to the SEC. Yeah. I mean, you just see that in private. You know, you would probably presumably be suing the company for fraud. And for some private right of action that you would have. And in those situations, you mean, yes, like depending upon the level of it and the evidence that you have. That fraud generally it's really just a fraud theory, you know, that fraud was committed by the entity that's a defendant or the person who's a defendant. And that there's something to be done. I mean, it can't just be you want to receiver pointed over an asset just because usually it would be there's an operating business. And there's got to be some evidence of dissipation of assets or that mismanagement in addition to just the fraud that he lied to me.

55:57So it's a kind of it's a high level of evidence because you're putting somebody in control of a business at that point and ousting management. So it's not necessarily easy. I think you have to have the be able to establish those things and meet your evidentiary burden. But the answer is yes. I mean, it actually it does happen and I've been involved in cases like that. And it might be a bigger fraud. There may be a bunch of investors, for instance, who who were defrauded and maybe it ends up being more than just one party that seeks the appointment of receiver. And there are statues that provide for involuntary dissolution and insert situations. So it might be appropriate in state or federal court to seek the appointment of a receiver. Right. So similar to like a Ponzi scheme situation possible. Yes.

56:59But it is, you know, in those situations that you just want to emphasize, it's a pretty high bar that you have to show in order to get a receiver appointed because the ramifications in that context are pretty significant. So it can't just be an allegation of fraud. It's really got to be something a little I think a little bit more than that. Yeah, because all all the cases would talk about the appointment of receiver referred to it as a drastic remedy. And oftentimes the court will deny applications or motions seeking the appointment of receiver. And judges will suggest that there are there's a lesser lesser owner is remedy that might be appropriate. Sometimes perhaps it's seeking a rid of attachment. Sometimes it's seeking a rid of possession. Judges in my experience will go out of their way trying to fashion some some other remedy. If in fact it could at least solve the problem temporarily. So we just read straight time. So I wanted to think I want to thank all of our panelists for making this such a insightful discussion. I certainly learned a lot.

58:09And we don't. Yeah, I think we. Oh, you know what? There are a couple more questions. If we have a couple minutes, do you do you guys would you guys be okay answering a few more questions? Sure. The Seth Freeman question, which says sometimes the receivership runs out of money to pay all the fees. Does the party that wanted the receivership have to pay the fees? The answer generally is yes. There there's case law to the effect that in the event that there are insufficient the receivership estate to pay all the expenses of the receivership. Generally, the receiver will look to the party that sought the receivers appointment to pay the shortfall. And then there's one other question. I mean, anyone can answer this is a receivership question that applies to bankruptcy.

59:09Is there a strong language you suggest to include in a receivership appointment order to instruct the receiver or underlying parties to direct them to seek relief from the bankruptcy court. To abstain and find the receivers doing a good job. So basically, is there a language that you would suggest, including in the appointment order that basically if a bankruptcy is filed that directs the parties to to in the bankruptcy to abstain. And the court and the bankruptcy to abstain and allow the receiver to continue performing their tasks in the receivership and get things moving along. Well, I think you have a federalism problem. So the bankruptcy code is going to trump anything that the state court says in its order. So it's going to be governed by 543 and by the case law. And that standard no matter what the big the state court judge tries to say. I think when he's saying, should you put in this in the in the order of putting the receiver that if there's a bankruptcy, you need to move to, you know, somebody needs to move for abstention.

1:00:15That I think you could do. No, like I think or I guess any, I mean, authorizations to sequel. I mean, I don't know if you need to have that in the pointing order, but authorizations to secretly from, you know, the next day, from turnover. I think you should just consult with competent counsel who will advise you appropriately. Yes. Yeah, no, they, I mean, the order isn't going to govern what the bankruptcy judge does. I mean, the sense of like it's not going to, you know, it's like, well, we said in the order that the, but I don't think that was the intent of the question. Yeah, I don't, I'm reading it now again. I don't think so either. I understand so. Yeah, I think. And I'm just going back to that question. If the question was, you know, should you put language in an order, like directing the receiver or some party to file a motion if a bankruptcy court gets filed, I think the form order actually says something similar to that, but, you know, that's what I was referencing earlier where it says, you know, within 10 days of a bankruptcy filing, I think it says the party appointing the receiver should file a motion for turnover if they're going to do that.

1:01:23And it's a bit of a conflict with the code because the code says immediately the receiver needs to turn things over. So, but like as I've indicated, I mean parties work that out. But that is in the form, receivership order. So I do think you can spell that out in advance. I just query the enforceability of that provision. Well, it's certainly not binding on the bankruptcy court. Yeah. I don't think they need the author. I don't know if I would necessarily need to be authorized to seek relief. You know, I mean, if they're a party. I mean, I don't. Yeah, I don't think it's necessary either. But I, you know, but, you know, I mean, it can't. I guess if you're worried that they won't, I don't know, maybe you're worried that they're going to just be like, you take it bankruptcy court. I'm not going to have a problem now. I am. Maybe you want to encourage them to be proactive.

1:02:24And I, in my experience, there's always some time lag immediately. I think it's just a contrast between a custodian versus other parties that may be in possession of property. Where there's a sense that for other people that are in possession of property, they may need, you know, you're not sure if there's an adversaries or contest matter. But for custodians, it's meant to be like, you are now being replaced by someone else. You are now being replaced by a trustee or you're now being replaced by a type of possession. So you're not allowed to wait around. Like you have a more of an affirmative turnover obligation. And, but in my experience, there's usually, yeah, sometimes there's like no judges been like, well, you didn't do it, you know, like five minutes after getting the bankruptcy petition information. I mean, there's an understanding that's going to take a little bit of time. But as long as they're being, they're not just sitting on it. They're doing something to get, you know, either some, some kind of relief, like by filing relief from stay filing, you know, excuse from turnover. Something that they're doing and that just holding on till the debtor or some other trustee takes action. Right. So.

1:03:29Green. Okay. Well, I think, I mean, we have no, we don't have any more questions and we are past time. Yeah, we don't have any more questions. Thank you, Shantal. Thank you guys so much. Yeah. This is really very insightful and I've learned a lot. Thank you guys so much for your time and for taking all of your experiences and imparting them on us. I'm sure all our viewers agree. Thank you so much. And thank you for all for joining. Thanks. Bye. Thanks. See you later.