This is part of our seven part series. This series covers when to close a nonprofit, methods of dissolving, methods of reorganizing, insolvency, deepening insolvency, receivership, and tips for nonprofits involved in receivership cases.
If a creditor or Attorney General has involved your nonprofit in a receivership case, there are a few points you should take into consideration. But first, read up on what receivership is, and its basic benefits and downsides.
- The Board loses power over the assets. The receiver stands in the shoes of the owner(s) of the assets. This means that the Board of Directors no longer exercises authority or oversight over the nonprofit, as that power belongs to the receiver. The receiver may even be given power to set aside or undo certain actions taken or transactions entered by the nonprofit corporation before the receiver was appointed.
- There are limits on a receiver’s power. A receiver can only act in accordance with the instructions and authorizations of the court that appointed them. If the general appointment order does not give specific authorization, then the receiver must seek additional approval before pursuing a certain course of action.
- With the court’s permission, the receiver can sue parties on behalf on the nonprofit. With the court’s authority, a receiver may file claims against third persons or entities—including the Board—to recover monies paid or assets transferred to them if the receiver believes the transactions and circumstances were unlawful.
- The receiver’s fees are paid by the money from the nonprofit or the sale of assets. The receiver is paid from the assets placed in their custody, and the receiver’s fees have priority over most other claims. Fees earned by the receiver must be approved by the court before they are paid, and typically are based upon rates and parameters set forth in the order of appointment. Likewise, other costs incurred by the receiver are reimbursed only after approval by the court.
- The receiver is often motivated differently than parties in a traditional lawsuit. In most civil litigation, parties reach a settlement because of: (a) the burden of legal expenses; and (b) the desire to avoid prolonged litigation. In a receivership action, the receiver often does not feel those motivations as would a part to a typical lawsuit. The receiver does not have a client who is paying legal expenses from its own funds, but instead the receiver is being paid from the assets of the receivership estate. In addition, being a court-appointed officer, the receiver does not have a personal connection to the issues of the case, and therefore, does not face the emotional burden that often weighs upon a traditional civil litigant. Though the receiver has incentive to pursue all claims, he or she is still supervised by the court to keep things in check.
While bankruptcy is a word most people know, receivership can be daunting at first if you don’t know what to expect. Keep these five things in mind if your nonprofit is faced with a receivership case and you’ll be more prepared and empowered to lead your nonprofit into brighter days.