Commercial Litigation Update

In the June 2024 edition of the American Bankruptcy Institute Journal the authors of “Why State Court Receiverships Are Becoming the Norm for Smaller Companies,” write that “state court receiverships are now poised to take center stage . . . as the preferred method for addressing financial distress of small companies.” The authors assert that for smaller middle-market businesses, receiverships are rebounding in popularity due to the expense associated with bankruptcy proceedings. The authors conclude: “With the difficult choice of filing for bankruptcy increasingly becoming a nonviable alternative for smaller companies due to the cost and complexity of doing so, the spreading adoption of model receivership statutes is poised to increase receivership in popularity as a method by which companies can address underlying insolvency issues on a simplified, more cost-effective basis while retaining the best features of federal bankruptcy law.”

I agree that receiverships will increase in popularity. While the spreading adoption of model receivership statutes may increase the uniformity of receivership law and thereby make the remedy more popular, I believe several advantages of receivership proceedings are already driving an increase in the number of receivership proceedings. As mentioned in my prior article, “Receiverships provide many of the protections afforded by bankruptcy proceedings, while having the added benefit that: (a) a receivership can be commenced by a lender; (b) the costs associated with a receivership can be less than in a bankruptcy proceeding; (c) in a receivership a lender has more control over who will be operating the business and the timing of decisions related to the disposition of the lender’s collateral; and (d) recoveries can be enhanced by instituting improvements in the business operations and the pursuit of claims against third parties.”