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Read MoreLenders are faced with difficult circumstances when a borrower’s business and the bank’s collateral are deteriorating. The downward spiral often includes declining or negative earnings, insufficient cash flow, declining enterprise value, escalating trade debt, and “tripped” financial covenants. Furthermore, management has not been able to reverse these negative trends, and worse, has likely not been able to forecast these problems before they were reported. This will certainly erode trust between a borrower and their banker. When a lender is primarily concerned with protecting its collateral in a deteriorating situation, measuring alternative options can be considered relative to control, time, exposure, and cost.
An overview of some common strategic options facing the lender includes:
The borrower typically maintains control as the Debtor in Possession, and timing is also driven by the borrower and its circumstances. A Chapter 11 case is often expensive and paid from the lender’s cash collateral. Professional fees often include the debtor’s professionals and depending on the case size, they may also include an unsecured creditors committee and their professionals (attorneys, financial advisors, etc.). The lender will also be represented by their legal counsel and financial advisors, and the U.S. Trustee’s office will be paid a quarterly fee based upon disbursements. On the beneficial side, the lender will gain additional visibility into the borrower’s liquidity and can place limits on the use of cash. From a timing perspective, a bankruptcy doesn’t have to be lengthy, but they often march down a long, winding road.
Often a less appealing option, as it can be time-consuming, and the process may or may not generate a buyer. Buyers will certainly discount their offers based solely on the foreclosure process, and they will heavily discount the value if they believe they are the only serious buyer. A major drawback of foreclosure in Michigan is the six-month redemption period after the sale, during which the borrower/debtor remains in control of the property. In the event a buyer doesn’t materialize, the lender may run the risk of having to credit bid and take title to the property, which could also bring additional unwanted risks to the lender.
A receiver is an officer of the court focused on the management, protection, and operation of the business and property within the receivership. Typically, a receiver protects the interests of the creditors, shareholders, and all others who claim an interest in the receivership’s property. Courts have generally held that the appointment of a receiver does not alter the ownership rights or change title to the property. Rather, a receiver stands in the shoes of the person or persons whose assets are contained in the receivership.
The powers of the receiver are typically identified in the Order Appointing the Receiver, but they are generally not limited to:
Receiverships offer a lender the opportunity to appoint a court-empowered neutral party to receive, preserve, and/or sell/liquidate its collateral. Special issues may arise within receiverships when the collateral is located in multiple states or jurisdictions. Receivership actions are commonly filed in the state court in the county in which the debtor is located. State court jurisdiction is confined to the state in which the court and property are located, while federal receivership actions are conducted in the federal district court. Federal receiverships allow a receiver to exercise nationwide jurisdiction. Having said that, in order to seek the appointment of a receiver in a federal court, there must be federal jurisdiction and a cause of action. The motion to appoint a receiver is not by itself a cause of action, but rather ancillary to the complaint.
Secured lenders wrestle with alternative choices when borrowers experience declining enterprise value and collateral values. Time is typically short, and, more often than not, confidence in ownership and management to effectuate a turnaround or discontinue the deterioration is low. In these circumstances, the margin for moving forward to repay the bank’s credit is often slim and none. When the loan documents were signed, the lender held up its end of the bargain by funding the transaction, but the borrower has fallen short of its expectations, promises, and responsibilities. The time for action is now.
In the right circumstances, placing the borrower’s assets into a receivership can be an excellent vehicle to maximize recoveries through a sale process, a wind-down, or a combination of the two. A receivership combines bankruptcy-like benefits with greater control and less cost. Receivership control is shifted to a court-appointed receiver (often suggested by the lender), who in turn reports to the court. The receivership process is typically shorter than bankruptcy and contains less exposure to the secured lender for potential successor liabilities associated with foreclosure. Receivership also avoids the six-month redemption period consistent with a foreclosure sale.
Plan for success by identifying a receiver with both turnaround and industry experience. The turnaround professional has the skill set to establish a plan, solve liquidity and cash-flow issues accordingly, and measure the variances from the plan to establish next steps. f Additionally, the turnaround professional will have experience marketing the company to identify numerous potential buyers and marching a sale process to a close. Furthermore, if a wind-down of operations is the best path to recovery, then the turnaround professional has the expertise to maximize value in this arena as well.
We would like to thank our colleague, Michael Boudreau, CPA, CTP, CFF, for his insights and expertise that greatly assisted this research.
Michael Boudreau, CPA, CTP, CFF, is a Director in J.S. Held’s Strategic Advisory practice. He joined the practice in July of 2025 as part of J.S. Held's acquisition of MorrisAnderson, a financial consulting firm focused on restructuring and workouts, court-appointed receiverships, debt refinancing, performance improvement, CRO and interim management, transaction advisory, and other fiduciary services. Mr. Boudreau has operated and sold numerous business enterprises as a court-appointed receiver for manufacturing operations, senior living facilities, and real estate developments. He has more than 25 years of experience in the automotive supply chain as a financial advisor, CFO, and Treasurer. Mr. Boudreau also has extensive experience in numerous Commercial & Industrial (C&I) and real estate matters. Other industries where he has experience and expertise include health care, construction and contractors, aerospace, restaurant chains, plastics, agribusiness, consumer products, and logistics.
Mike can be reached at [email protected] or +1 248 227 0978.
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