As part of Ward and Smith’s Special Assets Summer School Series, we presented on the North Carolina Commercial Receivership Act and the power of court-appointed receivers.
As if on cue, the North Carolina Business Court issued an order echoing the issues we covered in the webinar. The case involved an infuriating scenario: after spending years and tens of thousands in legal fees to get a judgment, the creditor tried to collect, only for the sheriff to come back empty-handed. The judgment debtor states, under oath, that it has no assets or ability to pay. And yet the owner is still cashing checks, running the business, paying for the family’s trips to Disney World, and treating the corporate checkbook like a personal ATM.
What could the creditor do? In this case, it convinced the court to appoint a receiver to dispossess an owner of control of his or her company. Seasoned special assets officers will have heard these facts before. During litigation, the owner of the defendant company incorporated a new company, same insurance business, same customers, same employees, and began quietly funneling checks made out to the old company into the new one’s bank account. An employee even emailed one of the old company’s clients to explain that the business had “rebranded” under a new corporate name. Checks made payable to the original company were being deposited into the new company’s account for years afterward.
Then, four months after judgment, the original company let itself be administratively dissolved by the Secretary of State. When the creditor sent post-judgment interrogatories asking about assets, bank accounts, and property, the company answered under oath that it had virtually nothing, some paper files, old brochures, and about $1,500 in the bank. It also failed to mention a bank account it maintained under a “doing business as” name tied to the new company, or another account at a different bank.
Meanwhile, money kept flowing to the owner’s wife, to his adult children, to a new car, to vacations, and to a $316,000 paydown on the couple’s personal home equity line. The owner testified at his deposition that “yeah, we’re going” to Disney World again this year, while facing questions about the account used to pay for past trips.
The owner was hiding his bad behavior in plain sight. Sometimes, you don’t need a Cayman Islands trust to frustrate collection. It’s often simpler and cruder to keep operating under a new company, keep collecting revenue, keep paying yourself, and keep ignoring the judgment. Dissolve the company on paper while running it in practice. Answer discovery requests with non-answers. Bank on your creditors throwing up their hands in frustration, writing off the debt, and closing the file.
But for the persistent creditor, receivership can come to your rescue. In the Business Court case, the court first froze the company’s bank accounts. Then, the court installed a receiver over both companies, giving the receiver immediate control of the bank accounts, the books and records, the customer files, and the day-to-day operations. The receiver, not the former owner, now decides which bills get paid, which employees get retained, and where the money goes. The owner may still interact with customers to keep policies in force, but he answers to the receiver now, not the other way around. No more Mickey Mouse ears or Lightning Lane passes on the company dime.
Courts don’t reach for a receiver lightly. Judges routinely say that wresting a business from its owner is a “harsh remedy,” and they will rarely do it to a company that is solvent and operating honestly. But this court found several red flags too obvious to ignore: the payments kept flowing to the owner’s family and to an “insider” company he also controlled; the sworn interrogatory answers were demonstrably false; the company let itself go dark with the Secretary of State right after judgment; and the timing of transfer after transfer lined up suspiciously with the lawsuit and the judgment. Together, the court concluded that only a third-party neutral like a receiver could keep the money from being siphoned off.
If you are a lender or special assets officer managing a troubled credit, a landlord chasing a judgment against a faltering tenant, or a business owner who has finally won a lawsuit against someone who won’t pay, this case offers a concrete lesson: a judgment is not the end of the fight, and a debtor’s claim of poverty is not the end of your options. When a debtor pleads poverty while continuing to operate, that inconsistency is evidence you can use. When money moves to family members, related companies, or the owner personally after a lawsuit is filed or a judgment entered, document the timing, as courts look closely at what happened and when. And when an injunction alone won’t cut it because you don’t trust the debtor to comply, a receiver is a real remedy available to you. Not only can a receiver stop the bleeding by taking control of the checkbook, he or she also can file lawsuits to recover money from friends who family who had not business receiving it.
You can use supplemental interrogatories and subpoenas to discover bank accounts, which will provide evidence of financial bad behavior. If you conclude that that the company is viable enough to satisfy some or all of your judgment, more if it continues to operate, assume freezing accounts is your only option. If the facts show a debtor can’t be trusted to run the business honestly while the case is pending, ask the court to put a receiver in charge.
