Can Bankruptcy Help Creditors?

Yes. In some situations, not in all situations.

The appointment of a receiver over a borrower’s assets is a powerful tool for the secured creditor when included as a default provision in a well-crafted loan document. Pursuant to Utah law, a receiver “protects and preserves the property” serving as the creditor’s collateral. The law effectively gives the receiver control over the debtor’s property and allows the secured creditor, which sought the appointment, to obtain information regarding the day-to-day usage of its collateral and ensures that payment of net cash flow from the property will be paid to the lender.

Often the borrower will seek to regain control of its business by filing a Chapter 11 bankruptcy petition. The Bankruptcy Code sets forth certain duties and rights for the receiver as a custodian of the debtor’s property once the bankruptcy petition is filed. The Code also creates a procedure for the bankruptcy court to determine whether the receiver should turn over the property to the debtor or continue in “possession, custody or control of the property.”

WHEN A DEBTOR TURNS TO BANKRUPTCY, A SECURED CREDITOR CAN USE THE BANKRUPTCY CODE AND MAY GET RELIEF

The Bankruptcy Code makes it clear that once a receiver learns of the bankruptcy case, the receiver is obligated to stop administering the debtor’s property, except to the extent necessary to preserve that property.1Thus, once the bankruptcy petition is filed, the receiver generally has an affirmative duty to return control of the business to the defaulting debtor.

Despite this general requirement mandating the receiver turn over the property to the debtor, the secured creditor may file a motion to allow the receiver to maintain control over the property serving as its collateral. This motion is typically styled as a Motion for Excusal of Turnover by the Receiver.

After reviewing the Motion for Excusal of Turnover by the Receiver and, perhaps, taking evidence, the bankruptcy court will decide whether the interests of the creditors will be better served by leaving the receiver in possession and control of the debtor’s property. In addition, in the rare case in which the debtor is solvent, the bankruptcy court will consider whether the interests of the owners would be better served by permitting the receiver to remain in place.

Therefore, if the creditor is successful in getting a receiver appointed, but the borrower files bankruptcy and tries to regain control of the business and the collateral, the Bankruptcy Code provides a legal basis for the creditor to take prompt action in order to maintain the receiver’s control of the collateral. With this in mind, the Motion for Excusal of Turnover by the Receiver should be filed as quickly as possible after the bankruptcy petition is filed setting forth the reasons the creditors will be better served by the receiver’s continued possession and control of the debtor’s property serving as the collateral.

Our firm has been successful, recently, on several occasions in obtaining these orders protecting the rights and property of lenders in bankruptcy cases. These actions helped provide the lenders with a more positive outcome to the entire bankruptcy case.

Free Consultation with Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have many years of experience in bankruptcy law. We can help you now. Come in or call in for your free initial consultation.

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— Tim Cella (@TimCella2) October 10, 2022

Michael Anderson

People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust. That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust. I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014. I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high. Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.

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