Published on March 10, 2021
It is an open secret that in the last year there has been a dearth of chapter 11 reorganization cases filed in bankruptcy courts in both the Eastern and Western District of Washington despite the fact that chapter 11 filings rose nearly 20% nationwide. So where did all the Washington chapter 11s go?
Most local cases involving distressed businesses and property have made their way to superior court to take advantage of Washington’s receivership laws. When the legislature enacted the Washington Receivership Act (the “Act”) in 2004, much was written about how it was a streamlined and cost-effective method for a state court to administer assets for the benefit of creditors. Little did those early commentators know that a single provision of the Act would eclipse the remainder of the statute and in turn supplant many Washington chapter 11 filings. That provision? A state court receiver’s ability to sell assets free and clear of liens. It is not hyperbole to say receiverships have overtaken chapter 11 filings in Washington. By way of illustration, in 2020 there were more receiverships filed in King County (59) than chapter 11s filed in the entire Western District of Washington (45).
The drafters of this sale provision intended it to be a state court analog to § 363 of the Bankruptcy Code. Historically, § 363 sales started as a way for a debtor-in-possession to dispose of insignificant property that would not be treated in a plan of reorganization. Over time the power of a § 363 sale grew to a point that during the Great Recession these sales became the tail that wagged the dog in the reorganization process. Soon all types of assets were being sold using the § 363 process ranging from individual pieces of industrial equipment, intellectual property, to entire companies. However, with the bankruptcy judges closely monitoring the debtor’s estate, the actions of creditors, and maintaining the integrity of the bankruptcy code, chapter 11s were, and continue to be, expensive and time-consuming.
It is not all that surprising that Washington insolvency professionals soon began to test the Act to see if there was a less formal alternative: could a state court receiver sell assets in a way similar to § 363 with the same finality? Consequently, many recent receiverships under the Act have focused on a creditor commencing a receivership action with the singular focus of teeing-up a sale free and clear of liens. Why? State court receiverships are faster, more nimble, and more professional driven. Most Washington receivership filings are the result of pre-filing negotiations on the scope of the order appointing the receiver. Oftentimes, the parties’ attorneys work closely with the receiver to draft an order appointing the receiver that will reference the receiver’s power to sell free and clear of liens and, in most cases expand the receiver’s ability to sell beyond the plain language of the statute. That is why it is important to hire an insolvency lawyer with specific receivership experience – those cases proceed on a completely different trajectory than general commercial litigation.
Receiverships are not for the faint of heart. Receiverships move fast, on a moment’s notice for most creditors and potential purchasers, and are led by a specialized group of insolvency lawyers who know both the Act and their preferred form of order for appointment of receiver inside and out. These highly skilled lawyers use their specialized knowledge to outflank even the best litigators and business lawyers. In fact, many practitioners refer to the Act as Washington’s “mini bankruptcy code”. And, ironically, they approach sales free and clear with the same complexity as a § 363 sale; chapter 11 terms of art like stalking horses, over-bids, break-up fees, etc. are becoming common in Washington state court receivership sales. A party must fight fire with fire by working with its own insolvency attorney who knows the Act, latest receivership orders, and auction process well enough to see around corners.
Attorneys in Ryan Swanson’s Corporate Bankruptcy, Receivership & Finance Group have successfully represented parties in Washington State receiverships since 2004.
Contact Joe or Patricia to learn more about Ryan Swanson’s receivership practice in Washington, Oregon, and California and how we can support you.