Where federal court jurisdiction exists, savvy creditors can leverage the federal courts for several purposes aside from the straightforward obtaining of a money judgment, including property foreclosures[1], execution of judgments[2], and adversary proceedings filed in the bankruptcy courts. But the federal court system also offers another, oft-overlooked mechanism for secured creditors who seek to sell property of a debtor, a receiver appointed by a federal district court.
Why Federal District Court?
Receivership arises from a court’s equitable powers and exists in both the state and federal court systems. A receiver appointed by a federal district court offers some advantages over the more traditional route of seeking the appointment of a receiver in state court. The primary advantage occurs when receivership property located in multiple states. Unlike a receiver appointed in state court, which may be hampered by the Court’s territorial jurisdiction, a single federal court receiver can administer a receivership when assets are scattered across state lines. State courts have a variety of procedural rules and statutes governing the powers the receiver can exercise, and how the receiver can liquidate property. By contrast, a receiver appointed by a federal district court offers a streamlined process. A single district court judge, applying a single set of receivership rules and law, can exercise jurisdiction over all the receivership property located in multiple states.
A federal court receiver also offers the benefit of a more efficient resolution to issues that require the attention of the Court. Many trial courts remain overburdened by a considerable post-COVID backlog of unresolved civil cases. Using the author’s home county as an example, in 2023, an average of 12.38% of complex civil cases remained pending in the Franklin County Common Pleas Court more than three years after the complaint was filed.[3] For all civil cases, Franklin County reported that, on average, 8.9% of cases remain pending for longer than the guideline established by the Ohio Supreme Court. Franklin County is not unique among the more urban common pleas trial courts in Ohio.
This contrasts with the efficiency of many federal district courts. For fiscal year 2023, the Administrative Office of the Federal Judiciary found the Southern District of Ohio (which covers three of the five most populous counties in Ohio) to be among the most efficient districts in the country, ranking in the top 15 out of 94 federal district courts.[4] When facing substantial backlogs in state trial courts, civil litigators may be able to find a more efficient route to resolution by tapping their highly qualified and efficient federal district courts.
Nuts and Bolts of Appointment of a Federal Court Receiver
A three-step process should be followed to ensure that a federal court’s appointment of a receiver meets the applicable requirements.
Establish Jurisdiction
First, as in all cases, the plaintiff should establish on the face of its pleading that the federal district court has subject matter jurisdiction and personal jurisdiction over the parties. Typically subject matter jurisdiction is accomplished through diversity of citizenship. If the secured creditor is a federally-chartered bank, then it is deemed a citizen only of the state in which the “bank’s main office [is] located, not of every state in which bank maintain[s] [a] branch office.”[5]
Obtain a Judgment
Second, a receiver should not be appointed until an underlying judgment has been obtained. When a receiver is sought in order to preserve property of the defendant, “the party seeking such relief must first obtain a judgment against the defendant before seeking the appointment of a receiver.”[6] Once a judgment is obtained, a motion to appoint a receiver becomes ripe for filing.
Bring Your Evidence
Let there be no mistake: the standard applicable in federal court for appointing a receiver is a high one. Appointment of a receiver is an “extraordinary remedy that should be employed with the utmost caution.”[7] Like a party seeking an injunction, a party seeking the appointment of a receiver must have its evidence ready and be prepared to make a compelling showing that equity tips in its favor. Trial courts apply a balancing test, considering evidence of fraudulent conduct by the debtor/defendant, danger of dissipation of assets or irreparable injury, likelihood of success on the merits by the movant, and whether the moving party has a less drastic alternative.[8] While no factor is dispositive, Courts also consider key language found in the underling loan documents – whether the borrower has expressly consented to the appointment of a receiver after a default.
If the movant is successful at having a receiver appointed, federal law and the Civil Rules outline how a receivership proceeds. Rule 66 of the Federal Rules of Civil Procedure and 28 U.S.C. § 3101 and 3103 govern the receivership process in federal district courts. Rule 66 is charitably characterized as “barebones.” The Rule offers only a general statement confirming that a district court has the power of appointment of a receiver and that the receiver shall remain in place until dismissed by order of the Court. The statutory law, primarily 28 U.S.C. § 3103, provides the “nuts and bolts,” describing when the appointment is proper, the powers of a receiver, the duration, compensation, and the expected reports to be filed by the receiver.
Federal Court Receivership Can Be A Secured Creditor’s Friend
A receiver appointed by a federal district court judge is generally not the first idea that pops into the mind of a secured creditor’s counsel when seeking to liquidate collateral. It requires the creditor to jump through several hoops (establishing jurisdiction, obtaining a judgment, and preparing the evidentiary support). But when the receivership property is likely to be located in multiple states, a receiver appointed by a federal district court can provide a more efficient mechanism to adjudicate the matter. This is especially true where the alternative state court system faces a backlog of its civil docket.
[1] See, e.g., Northern District of Ohio, Amended General Order No. 2006-166 (citing the “increased number of private foreclosure actions being filed” and appointing a master commissioner to handle foreclosures filed in the Northern District of Ohio).
[2] See Rule 69 of the Federal Rules of Civil Procedure.
[3] Statistics provided by the Ohio Supreme Court’s State of Ohio Court Statistics online tool found at: https://www.supremecourt.ohio.gov/courts/services-to-courts/court-services/dashboards/
[4] https://www.ohsd.uscourts.gov/news/ohio-southern-district-ranked-among-most-productive-country
[5] Wachovia Bank, Natl. Assn. v. Schmidt, 546 U.S. 303, 306, 126 S.Ct. 941, 163 L.Ed.2d 797 (2006)
[6] Cabatech, LLC v. Nextlight, LLC, S.D.Ohio No. 1:22-cv-59, 2023 U.S. Dist. LEXIS 52432, at *11 (Mar. 27, 2023) quoting Compound Prop. Mgmt., LLC v, Build Realty, Inc., No. 1:19-cv-133, 2020 U.S. Dist. LEXIS 265587, at *10 (S.D. Ohio June 19, 2020) (citing Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 322, 119 S. Ct. 1961, 144 L. Ed. 2d 319 (1999)).
[7] Mori v. Furry-Mongold, S.D.Ohio No. 2:24-cv-3723, 2024 U.S. Dist. LEXIS 190374, at *2 (Aug. 12, 2024) (quoting Wright & Miller, Fed. Prac. & Proc. Civ. § 2983 (3d ed.)).
[8] Pappas v. Medas, N.D.Ohio No. 1:18CV1514, 2019 U.S. Dist. LEXIS 10884 (Jan. 23, 2019).