Receivership and Bankruptcy

Imagine this, prepetition, Debtor owns and operates 50-unit Apartment upon which Wells Fargo holds a note and deed of trust.  Debtor defaults on the note and WF commences foreclosure.  The state court appoints you Receiver to take possession of and operate the Apartments.  The Apartment is mismanaged and you begin improving the Apartments and collect $100,000 in new rent and the bank, WF, gives you additional funds also in your capacity as Receiver.   As you are running the Apartments and holding onto a substantial amount of funds — debtor files Chapter 11 bankruptcy and orders you, as the Receiver, to turnover the funds to him since it is property of the estate now.

Will the court grant Debtor’s Motion for Turnover such that the funds you hold as Receiver have to be turned over to the scumbag Debtor who will likely dissipate the funds?  

No.  The bankruptcy court will not require the Receiver to turnover the estate’s funds that are in possession of the Receiver.   Where the interest of creditors would be better served by allowing the “custodian” (here Receiver) to continue possession of the funds.  Courts will look at several factors to determine whether the Receiver is excused from the Code’s strict compliance with turnover.  These factors include: (a) whether there will be sufficient income to fund a successful reorganization; (b) whether debtor will use funds for benefit of creditors; (c) whether there was mismanagement by the debtor; (d) whether there are avoidances raised with respect to the property retained by the receiver; and the fact that the automatic stay has deactivated state court receivership action.

The above facts are from In re Lee, 163 B.R. 221 (E.D.N.Y 1991), where that court concluded that the bankruptcy court properly excused the Receiver from turning over mortgage properties taken from and any rents collected also, to the new Chapter 11 debtor.

Thanks for reading,

Law Office of Sevan Gorginian




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