Can a State Court-Appointed Receiver Act Across Different Jurisdictions?

A state court receivership can be a viable and effective alternative to a federal bankruptcy proceeding which often costs more, takes longer, and involves more oversight than a receivership. However, because it is a state court proceeding—as opposed to a federal bankruptcy or receivership—a state court-appointed receiver must sometimes grapple with the extent of his or her power to act across jurisdictions.

In this article, we will explore a particular situation that often must be addressed during the course of a state court receivership proceeding: What issues must be considered and steps that should be taken to enforce a state court receivership order authorizing the sale of assets with regard to assets that lie outside of the state court’s jurisdiction.

State Court Receivership Overview

A receivership involves the court appointment of a receiver to oversee and, in most cases, operate and/or liquidate a business. A receiver is a neutral and independent third party appointed to act on behalf, and for the benefit, of all interested parties. Receiverships are often sought by secured lenders as a liquidation-alternative to bankruptcy.

A receiver’s duties and responsibilities, such as monetizing assets and distributing funds, are outlined in an order entered by the court overseeing the receivership.

Multi-State Issues

A state court receivership order typically authorizes a receiver to sell or otherwise liquidate assets for the benefit of creditors. It is not uncommon, however, for assets of the business subject to a receivership to be located in other states. Since one state’s courts don’t have jurisdiction over assets located within another state, the power of a receiver to enforce a receivership order by liquidating assets doesn't automatically transfer across state lines.

This long standing legal principle was addressed by the U.S. Supreme Court in 1854 in the case of Booth v. Clark, in which the Court explained that a receiver “has no extra-territorial power of official action.” Further, the Court stated that a state court that appoints a receiver has no “authority to enable [the receiver] to go into a foreign jurisdiction to take possession of the debtor's property.”

That doesn’t mean, however, that a receiver has no recourse. As a number of cases across jurisdictions have made clear, a receiver may seek to appear in another state’s courts to address assets located in that jurisdiction as a matter of comity. In other words, while a receiver may not be able to simply seize or sell assets located in another state, it can seek to work through that state’s court system to receive approval to do so based upon the power granted in a receivership order.

For example, in Wright v. Philips, a case decided by the California Court of Appeals, the court stated that:

“Receivers appointed under a jurisdiction other than that of the state forum may be permitted to sue in a stranger state as a matter of comity only. That this privilege of comity will be extended, wherever the rights of local or domestic creditors are not prejudiced, is now the general rule in the United States.”

A state court receiver who has to deal with assets in a different state must consider a number of issues. If a receiver is seeking to sell or otherwise take possession of assets located in another state, the receivership order, and any applicable sale order, should be domesticated in the state in which the asset is located. To the extent that an asset is subject to the claim of a creditor, such as a lien holder, notice of the receivership proceedings and any sale order should be provided to such creditor.

In some situations, it is advisable and/or necessary to seek the appointment of an ancillary receiver in another jurisdiction to deal with out-of-state issues. If this course of action is decided upon, the receiver should first seek approval from his or her appointing court before proceeding in the foreign state. In some cases, the primary receiver can also be appointed as the ancillary receiver, but the statutes and rules of the foreign state should be reviewed to determine whether appointing the same person (as opposed to an in-state resident) is permitted.

Finally, before a state court receivership is pursued, multi-state asset issues should be carefully considered. In situations involving assets located across many states, a federal court receivership may be the best option, provided that the requirements of federal court jurisdiction are met.

If you have any questions about these issues, or receiverships in general, please contact David Dragich at [email protected] or 313-886-4550.