Receivership – A Collections Tool Gaining Popularity

In this economy, many businesses and entrepreneurs find themselves falling behind with creditors and bills.  While they fully intend to pay these obligations, and frequently see money coming in the near future to satisfy these obligations and get caught up, aggressive creditors often file suit and secure judgments for their obligations.  In Texas, collecting a judgment can be difficult.  As the proverbial saying goes, you can’t get blood from a turnip.  One of the current new collection tools creditors are using are receivers.  A receiver is someone appointed by the Court to take possession of non-exempt assets of  the judgment debtor and arrange for their sale to satisfy the judgment.

There are two different types of receivers, and each is appointed pursuant to a specific statutory scheme.  Chapter 64 of the Texas Civil Practices and Remedies Code is the general receivership statute.  It permits the appointment of a receiver under certain, specific circumstances.  One of those circumstances is “in an action by a creditor to subject any property or fund to his claim.”  However, when a creditor seeks appointment of a receiver based upon this statutory circumstance, the right to a receiver applies only to funds and property on which the creditor has a lien for satisfaction of the debt.  This provision would apply to creditors with perfected security interests, such as purchase money or perfected UCC-1 liens.  However, a general unsecured judgment creditor does not satisfy the requirements of this statute and therefore receivership under this statute would not be permissible for a general unsecured judgment creditor.

A judgment creditor does have the option of seeking turnover and receivership pursuant to Chapter 31 of the Texas Civil Practices and Remedies Code.  In order to secure a receiver under this statutory provision, the judgment creditor must show the Court that:

  • the Plaintiff is a creditor under a valid and enforceable judgment;
  • the Judgment Debtor owns property;
  • the Judgment Debtor’s property cannot be reached by ordinary legal processes and applied to satisfy the judgment;
  • the property is not exempt from forced sale;
  • the Plaintiff needs the Court’s aid to collect the judgment; and
  • Reasonable attorney’s fees have and will be incurred in the process.

These requirements are important, because if they are not met then receivership is not warranted or appropriate.  Texas law does not per se require that a Plaintiff execute on a judgment, abstract a judgment, undertake post-judgment discovery, or other action before seeking turnover and receivership relief.  However, the statutory requirements for receivership practically necessitate some less severe post-judgment collection efforts be undertaken before turnover and receivership is sought.  Otherwise, a Plaintiff is not able to prove elements two through four.

Additionally, a receiver has limited powers and many collection lawyers seek to give receivers powers that vastly exceed those allowed by Texas law.  A Chapter 31 receiver may not step into the shoes of a business owner and take over the running of a business.  Nor may such a receiver seize and sell assets that have not been determined to be non-exempt.  Texas law has held that a trial court abuses its discretion when it signs a turnover order that does not identify specific non-exempt property subject to the order.  “Such an order must be definite, clear, and concise leaving the person enjoined in no doubt about his duties, and should not be such as would call upon him for interpretations, inferences, or conclusions.”  Bergman v. Bergman, 828 S.W.2d 555, 557 (Tex.App.—El Paso 1992, no writ) (citations omitted).  Such an order also may not extend to property owned by third parties.

While receivership may be the “hot new tool” used by collection lawyers, it is subject to many specific requirements and must be used properly.  Failure to meet the elements may result in having receivership set aside, expensive trial court and appellate actions, and many distractions and delays in securing payment of judgments or otherwise resolving the issues so both parties can get back to business.  There are many pitfalls to seeking receivership in collecting a judgment.  My firm has successfully defended attempts to appoint receivers, and we handle post-judgment collection matters for both creditors and debtors.  It would be a wise investment to seek the advise of an attorney if you are seeking to collect a judgment, or if you are seeking to defend aggressive collection efforts.

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