Judgment Enforcement Receivers: Locating hidden assets belonging to the receivership estate:

Post-Judgment receiverships are often some the most difficult and high risk assignments undertaken by receivers. Besides dealing with an upset debtor and creditors competing for a “piece of the pie”, the receiver often has the difficult task of ascertaining the nature and location of assets properly belonging in the receivership estate. This challenge is worsened by the fact that the extended time between the filing of a motion to have a receiver appointed and the actual appointment (if granted) gives the debtor ample time to transfer and hide assets.

Discovering the assets of the debtor business is of the utmost importance. In a post judgment receivership, not only does the receiver need to control sufficient assets to compensate their own time and expenses, but to fulfill the underlying goal of the receivership: The recovery of assets into the estate to satisfy the judgment and other priority debts. .

After serving their appointment order on all known financial institutions where the debtor has accounts, the next priority should be to immediately take possession of documents and electronically stored information that might reveal hidden or transferred assets. Bank account records, credit card statements, accounts payable invoices and tax documents are just some of the documents to establish the exact nature of assets owned by the debtor company.

I had an experienced receiver tell me that she had located four storage units containing more than 2 million dollars in inventory that had been hidden by the debtor within days of receiving notice of the creditor’s pending receivers’ motion. The receiver taking notice of one single charge within a credit card statement resulted in an excellent recovery for the estate.

A physical inventory should quickly be performed to determine if assets owned by the debtor are still present on the business premises. This will help the receiver to immediately focus their recovery efforts on high value assets that may have been misappropriated by the debtor prior to the receiver taking possession.

Often overlooked is the value of interviewing employees of the debtor business and other third-parties to obtain information on assets and their current locations. Anyone from the company bookkeeper to the forklift operator may have important information regarding company assets and their current whereabouts. CPA’s, tax professionals, bankers and other professionals may also have valuable information regarding the assets of the debtor company. In addition, many jurisdictions will allow a receiver to conduct an examination (under oath) on his/her own behalf, or intervene in a creditor’s examination of the debtor’s principal or key staff. While, it is certainly possible that examinees will not be truthful or forthcoming, it is not uncommon for these examinations to produce useful information for the receiver.

An expansive an open-minded approach to what constitutes receivership property is also helpful: At a recent conference, a receiver told me that he took possession of a failing business with limited assets and almost no hope of achieving any meaningful recovery for the creditors. Through interviews and formal examinations the receiver learned that the debtor business had excellent claims for professional negligence against an attorney and a financial advisor. These two claims resulted in settlements with three different insurance carriers, totaling 3.5 million dollars. Thus, despite the fact that these “claims” did not appear on a balance sheet or did not otherwise manifest themselves in the physical realm, the receiver had the wherewithal to recognize the potential value of the causes of action, resulting in an excellent recovery into the estate.

Last but not least, if for any reason the receiver believes time constraints, available resources or other factors might prevent them from discovering all of the debtor’s assets, they should strongly consider retaining a professional investigative research company to locate hidden assets.

Although not a replacement for a review of the debtor’s business records, interviews and other “internal” techniques; the use of a reputable investigative research vendor will often yield asset “finds” that would have been missed by other methods. For a relatively low cost, these companies do an excellent of job of finding hidden financial accounts, safe deposit boxes, real property, alter-ego or successor entities owned or controlled by the debtor or their principals, vehicles, airplanes, equipment, intellectual property (patents, copyrights and trademarks) and other valuable property.

Future articles will delve into more detail on the exact methodology of locating different types of assets.

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