QUESTION:  I am a receiver in a case where the court issued an injunction staying all litigation and creditor action against the entity and assets in receivership. A secured creditor wants to foreclose on one of the estate’s assets. Can it do that? What is the procedure for the creditor to obtain relief from the stay?

ANSWER: The first thing to remember is that receiverships are not bankruptcy cases. Too often, parties to receivership cases analogize to bankruptcy proceedings. While this is understandable, e, especially given the local rules in some courts which provide the receiver is to administer the estate like bankruptcy estates (See Local Rule 66-8, USDC Central Dist. Calif.), the rules are not the same and often the differences are significant. The requirements for relief from a blanket receivership stay order differ from those to obtain relief from the automatic stay under the Bankruptcy Code. The most obvious difference is the bankruptcy automatic stay is statutory (11 U.S.C. § 362), and the grounds for obtaining relief from the automatic stay are also statutory (11 U.S.C. § 362(d) et. seq.). A court’s power to issue a receivership stay order “falls within the court’s inherent power to prevent interference with the administration of th[e] estate” SEC v. Credit Bancorp., Ltd., 93 F. Supp. 2d 475,477 (S.D.N.Y. 2000).

The grounds for relief under the Bankruptcy Code depend on the action the creditor wants to take. The rules for obtaining relief from a receivership stay are different. In SEC v. Universal Financial, 760 F.2d 1034 (9th Cir. 1985). The Ninth Circuit adopted three factors to consider in deciding whether to lift a receivership stay: “(1) whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving parties underlying claim.” Id. at 1038. The Ninth Circuit was relying on its prior decision in SEC v. Wencke, 622 F.2d 1363 (9th Cir. 1980). It points out that the traditional preliminary injunction test would require a receiver to show a probability of success on the merits and the possibility of irreparable harm to the receivership if the stay is not continued. The test under Wencke, however, simply requires the court to balance the interest of the receiver and the moving party. However, “the interests of the Receiver are very broad and include not only protection of the receivership res, but also protection of defrauded investors and considerations of judicial economy.” Universal Financial, supra. at 1038. It notes that when a motion for relief from a receivership stay is made early in the case, it will be harder for a movant to obtain relief from the stay. It cites to the second Wencke case, SEC v. Wencke, 742 F.2d 1230 (9th Cir. 1984), and states: “Where the motion for relief from the stay is made soon after the receiver has assumed control over the estate, the receiver’s need to organize and understand the entities under his control may weigh more heavily than the merits of the party’s claim. As the receivership progresses, however, it may be less plausible for the receiver to contend that he needs more time to explore the affairs of the entities. The merits of the moving party’s claim may then loom larger in the balance.” Id. at 1038- 1039. The cases are significant by what they mean by “early in the case.” When the Ninth Circuit heard the original Wencke case, the receivership had been pending for two years. It denied relief from stay and sent the matter back to the district court to reexamine the necessity for the stay. Upon remand, the district court continued the stay in effect and the movant again appealed. When the Ninth Circuit heard the Wencke case again, the receivership had been pending for six years. The Ninth Circuit felt that was long enough and, therefore, lifted the stay. In Universal Financial the stay had been pending for four years when the Ninth Circuit ruled, yet it kept the stay in place because it felt, unlike in the Wencke case, there were still material facts coming to light through discovery and testimony that might affect the underlying issues in the case.

Other circuits have adopted the three Wencke factors for determining whether relief from a receivership stay should be granted. See e.g., SEC v. Vescor Capital Corp., 599 F.3d 1189 (10th Cir. 2010); United States v. Acorn Tech Fund, L.P., 429 F.3d 438 (3d Cir. 2005). In the Petters’ receivership case, the district court recently denied a relief from stay motion which would have permitted certain investors to obtain a default judgment against Petters in other litigation, so they could use it for pursuing claims against third parties. Despite the fact that the Petters receivership case was seven years old, the receiver was still actively marshaling assets and pursuing litigation and, hence, the court held continuing the stay was necessary to protect and preserve receivership assets, relying on Universal Financial. See U.S. v. Petters, 2015 WL 5333806 (D. Minn. Sept. 14, 2015).

Whether to lift a receivership stay, therefore, is case specific. It will depend on the timing of when a motion for relief is filed and the status of the receivership. The decision on whether to grant relief from a receivership stay will only be overturned if the court of appeal finds that the trial court abused its discretion. Universal Financial, supra. at 1038.

This blog is intended to discuss current trends in receivership law and practice.  It should not be construed as representing advice on specific, individual legal matters, but rather as an overview of the subject discussed. Your questions and comments are always welcome. Please do not hesitate to contact me at pdavidson@ecjlaw.com or (310) 281-6363 to further discuss this blog or to answer any questions.   Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP.  His practice includes all aspects of receivership and bankruptcy law.  He also acts as a receiver, conservator and monitor in state and federal court.