Day one of a federal court receivership is an exciting and critical day. A Federal District Court has appointed you (or your client) as receiver over something; it may be an ongoing business, a property, monetary funds, an asset, or something else. This article addresses receiverships over an ongoing business allegedly operating an investment or consumer-related fraudulent enterprise, brought by federal civil enforcement agencies such as the Securities and Exchange Commission, Federal Trade Commission and/or Commodity Futures Trading Commission. However, many of the below concepts will apply in any receivership, including those in State Court. Although the order appointing receiver, commonly called the “appointment order,” will define the scope of the receiver’s appointment and duties, there are typically a handful of “Do’s” that every receiver should strive to accomplish immediately.
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First, determine if there is a premises, and if so, secure it…
The typical appointment order will authorize the receiver to secure the premises of the receivership entity. The receiver and his agents (i.e., counsel and/or accountants) should secure the premises within 24 hours of the appointment. The receiver will typically secure the premises with the assistance of local law enforcement, which has been contacted by the governmental agency that sought the receiver’s appointment. The receiver should contact a locksmith to change the locks at the premises after securing it. The receiver should also ensure that all files, whether hard copy or electronic, remain on the premises so no evidence is removed. This should include safeguarding all personal computers or laptops to ensure any and all company files are preserved. Any personal property can be returned later to employees. In addition, some time should be spent reviewing the hard copy files on the premises to identify the files and assets to freeze, including bank accounts. Finally, any electronic access to the receivership entity’s files should be immediately disabled, so an IT forensic specialist is necessary on the scene. The IT forensic specialist should also image all electronic files relating to the receivership entity.
- Second, speak with the principals and employees…
When the receiver secures the premises, typically there will be employees on site. And the principals of the receivership entity, who are usually named defendants, may be there as well. If principals are not there, a meeting should be promptly scheduled with them. The receiver and/or counsel should speak with principals and employees immediately upon entering the premises and ask as much as possible about the nature of the business, the location of and amount of funds in the bank accounts, the company’s assets, and the company’s files. Appointment orders typically have cooperation provisions requiring the named defendants and any third parties to cooperate and provide information and documents requested by the receiver. Bring enough copies of the appointment order to serve. Twenty copies should be sufficient. Explain that the company is in receivership, its funds and assets are frozen, and the Court’s order requires each person’s cooperation to provide the information and documents requested. Typically the receiver will decide that first day that the business is being shut down and will convey that decision to employees. Finally, make a copy of each person’s driver’s license to know who was there.
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Third, serve the appointment order on the banks…
The receivership entity should have bank accounts with funds that must be frozen. If you know the banks before securing the premises, have the appointment order served in person on the banks at the local branch and/or served electronically on their litigation/garnishment department (if you know this information) at the time of entering and securing the premises. If you do not know the banks before securing the premises, you will have to learn of them by speaking with principals and employees on the premises or reviewing the files there. Then, have the appointment order served on the banks as discussed above. The typical appointment order will have provisions freezing accounts and assets in the name of the receivership entity and requiring prompt transfer of funds to the receiver. Time is always of the essence because principals or employees may leave to withdraw or transfer funds. Once funds are frozen, the receiver can serve a demand letter on the banks to transfer the funds to the receiver’s account.
- Fourth, meet with the landlord…
If there is a premises to secure, there will be a landlord to deal with. The receiver should request a copy of the lease agreement to determine the monthly lease amount and whether there is a security deposit. A security deposit is owned by the receivership entity and is, therefore, a receivership asset. In most instances, the receiver will immediately decide to shut down the ongoing business, meaning there will be no need to continue the lease. The receiver should negotiate with the landlord to minimize the monthly lease amounts and determine when to vacate the premises and remove the files.
- Fifth, serve subpoenas and demand letters…
The receiver will need bank records – i.e., account statements, canceled checks, wire details, and deposit slips – to perform a cash-in/cash-out analysis of the accounts and to determine if there were any improper transfers of funds, typically to the receivership entity’s principals and insiders. If there were improper transfers, such transfers would be the basis for fraudulent transfer (or “clawback”) claims. The only way to ensure that the receiver obtains all of the necessary records is to subpoena the banks for them. In addition, the receiver should serve demand letters on the defendants and any third parties for relevant information or documents, as well as for turnover of any assets which are owned by the receivership entity or derived from the receivership entity. Be sure to include the appointment order as part of the demand letter for purposes of service.
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Conclusion
Although every receivership is different, the five above-described tasks will typically be necessary upon the receiver’s appointment in Federal Court. Divide the tasks among the receiver and his or her professionals (i.e., counsel and/or accountants). Everyone should be constantly communicating with each other to ensure bank accounts or other assets are immediately identified and frozen, as well as to ensure that files are identified and tagged. Also, communicate all key findings with the enforcement agency. Time is always of the essence, so be prepared and organized to ask the most important questions to the most knowledgeable people on the premises, and be ready to act.
