STATE COURT RECEIVERSHIP ACTIONS: AN ALTERNATIVE TO INVOLUNTARY BANKRUPTCY

In representing commercial creditors, one of the most interesting parts of this job is examining the facts presented to us by our client and fashioning a remedy that not only achieves our end: namely, maximizing our recovery with the least expense to our client and within the shortest space of time. We may be faced with a situation in which the debtor corporation has no real defense to an action but where we feel that any suit will be vigorously fought for purposes of delay. In this event, where we have the right fact situation we may be able to invoke a procedure that forces the debtor to respond to a legal action that allows for immediate relief to the creditor and that could sound the death knell to the debtor unless our claim is satisfied. This action is the state court corporate receivership.

Illinois statutes provide as follows in Ch. 32, section 12.5:

A circuit court may dissolve a corporation, in an action by a creditor, if it is established that: the corporation has admitted in writing that the creditor's claim is due and owing, and the corporation is insolvent or if the creditor's claim has been reduced to judgment..... and the corporation is insolvent.

On a number of occasions we have been able to use a debtor corporation's N.S.F. check as evidence that a claim is due and owing and sought dissolution of the debtor corporation. In many instances, where the debtor has sought an extension of time to pay a substantial claim, we have requested, and obtained, as a condition to the extension an admission that the debt is due and owing and that the debtor is insolvent. When the debtor defaulted we were able to seek appointment of a receiver.

One reason for seeking a receiver instead of filing for Bankruptcy may be that we only represent one creditor, and three creditors are generally needed to file an involuntary petition. in general, when a state court action is instituted, the debtor pays the petitioning creditor rather than allow the action to continue. If the debtor is going out of business anyway, it will often respond by filing a voluntary bankruptcy which will supersede the state court's jurisdiction.

An involuntary petition in bankruptcy is a class action brought by members of the creditor class, as such it is unlawful to bargain to dismiss an involuntary on condition that debtor will pay our clients. This is not the case with the receivership action. The state court action can be dismissed at almost any time before the appointment of a receiver. It is a basic principal of good commercial practice to attempt to get written admissions of liability from account debtors. This kind of documentation is invaluable for a number of reasons. It can be used to confront the debtor or its attorney when defenses are asserted in pre-suit negotiations. It can be used in court to support summary judgment and to impeach the defendant's witnesses. We now have another reason, the written admission, can, if properly phrased, constitute a basis for an additional remedy to the benefit of the creditor by supporting an action for dissolution.

At every step of the process in dealing with a defaulting debtor we should be thinking not only of the present, but of the future and the possibility that litigation will be needed. The more we secure the claim both actually and figuratively by good documentation, the less likely it becomes that any litigation will be protracted. The claim of any creditor is like fresh fruit, if it sits around it gets rotten. If we all work together to document the claim, spoilage is reduced to a minimum.

The material contained herein is not to be relied upon as a substitute for consultation with your attorney.