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Washington Governor Signs Sweeping New Receivership Statute

By Mark D. Northrup and Aaron E. Kornblum
April 13, 2004

With a stroke of his pen, Washington's Governor Gary Locke last month signed into law a sweeping new receivership bill, significantly overhauling the procedures regarding receivership and assignments for the benefit of creditors. Effective June 10, 2004 (and applicable to all state courts), the new law represents some 14 years of effort by debtor-creditor counsel to create a unified, comprehensive and easily discernable set of rules governing such proceedings.

Appointment of a receiver is one of the oldest equitable remedies available in the courts. A receivership is the means by which a court takes property into custody pending litigation.

Washington's existing five-section receivership act - most of which was enacted by the Territorial Legislature more than 150 years ago - fails to address many issues faced in modern troubled business situations. In addition, Washington courts have issued a number of opinions addressing issues of receiverships not explicitly governed by statute, leading to a patchwork of law. The new law creates a single receivership chapter in the Washington statutes and repeals duplicative and inconsistent Washington law.

Essentials of the New Law
Under the old receivership statute, the specific powers of a receiver were typically set forth, on a case-by-case basis, in the court order appointing the receiver at the outset of the case. The order appointing the receiver also established the administrative procedures that would apply to the case, such as how and when the receiver would be compensated.

Instead of leaving these issues to an initial court order, the new statute sets forth in detail the legal powers that receivers may exercise. It also establishes administrative procedures that will apply in all receivership cases, such as procedures for providing lists of assets, submitting creditor claims, and providing notices to creditors and parties affected by the receivership.

Perhaps the most striking feature of the expansive new law is the extent to which it borrows from federal bankruptcy law. The following powers and procedures are imported directly from the Bankruptcy Code and will now become elements of state court receivership law:

 

The new statute also reforms the procedure known as an "assignment for the benefit of creditors" (or "ABC"), in which a debtor transfers all of his assets to a receiver, who liquidates the assets and pays creditor claims.

Significance of the New Statute for Creditors
The new statute is a significant piece of legislation and will have a direct impact on secured creditors, landlords, and franchisors. Receiverships have always been a tool for lenders. For example, lenders routinely use receiverships in aid of real property foreclosures and, on occasion, use them to liquidate or assume control over operating businesses. Similarly, landlords and franchisors often resort to receiverships when they need to take control of a troubled property or managed asset, such as a hotel. In recent decades, however, creditor/debtor disputes have most frequently been relegated to the bankruptcy courts. Unfortunately, the administrative costs of a bankruptcy case - for all parties - are significant.

The new statute gives state court receiverships many of the attributes afforded by the bankruptcy laws. As a result, secured creditors, landlords, and franchisors may find that a state court receivership can now give them almost all of the benefits they seek, once they have concluded that taking control over their borrower, a franchisee operation in default or their real property asset is necessary. Particularly in cases where the borrower is cooperative (and will therefore not seek bankruptcy court protection), a receivership is likely to be attractive for the following reasons:

 

Graham & Dunn Attorneys Involved with the Legislation
The new receivership statute is the product of an effort that began in 1990 under the leadership of Graham & Dunn's Irvin W. Sandman, then Chair of the Washington State Bar Association's Creditor Debtor Executive Committee. Irv sought and obtained the Executive Committee's approval to form a subcommittee to draft a new receivership statute. Irv chaired the subcommittee and established its two principal objectives: bring organization to Washington State's receivership laws and provide a less expensive, streamlined alternative to liquidating business cases under the Bankruptcy Code. After the committee's work was well underway, Irv passed on the chairmanship position, and Graham & Dunn's Mark D. Northrup joined and continued to serve as a member of the subcommittee.

Up Close and Personal
For years, Graham & Dunn's lawyers have represented clients in all aspects of bankruptcy cases, debt restructurings, liquidations, out-of-court workouts, receiverships, and other insolvency proceedings. Upon request, Graham & Dunn is pleased to provide a more detailed analysis of the new receivership law, whether prior to or after the law's June 10, 2004, effective date.

For additional information about the new receivership law and related issues, please contact Mark D. Northrup (206.340.9628 or mnorthrup@grahamdunn.com).

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