Receivership is a court-ordered remedy, often used when a lender or creditor wants a neutral third party, a receiver, to take control of a business or property that’s struggling financially. This is done to preserve value and manage operations. The idea behind a ‘free and clear’ sale within a receivership is simple: sell the asset without the baggage of old liens, with those claims transferring to the sale proceeds. But execution is anything but simple.

While receiverships are available at both the state and federal levels, this article concerns state court receiverships and the use of ‘free and clear’ sales within that context. Unlike in federal bankruptcy, where the path is well-worn, selling assets ‘free and clear’ in a state court receivership can feel like forging your way through a legal thicket. That’s why understanding the landscape is critical, especially as more and more businesses turn to receivership as an alternative to bankruptcy.

State Court Receivership and ‘Free and Clear’ Sales

Generally speaking, state court receiverships are subject to the laws of the state in which they’re initiated. For example, according to Robert Hammeke of Dentons, “Some states allow you to initiate a receivership with a standalone petition. Others require an underlying cause of action, like a breach of contract claim.” The situation is no different when it comes to ‘free and clear’ sales within such a receivership. State courts will look to state statutes and common law to guide how such a sale is conducted.

As Eric Peterson of Spencer Fane LLP, explains, “A free and clear sale can preserve — and sometimes enhance — value. But it has to be done right.”

Roadmap for a Successful ‘Free and Clear’ Sale

While ‘free and clear’ sales will be governed by the law in which the receivership is initiated, as mentioned above, the following provides a basic outline for navigating a successful sale.

1. Motion for Sale Procedures: Transparency is key. Get court approval of how the sale will be conducted, including any bidding process or ‘stalking horse’ bidder.
2. Notice to Stakeholders: Notify all known lienholders and interested parties, and publish notice if appropriate.
3. Motion for Approval of Sale: Once a buyer is selected, file a motion to approve the final sale, making sure the order includes the ‘free and clear’ language the title company needs.
4. Wait Out the Appeal Period: No title policy will issue until the window to appeal closes, typically 30 days. If someone objects, the sale may be delayed or derailed.

“Consent is always helpful,” Hammeke notes. “If the debtor or a junior lienholder is on board, it goes a lot smoother.”

Common Pitfalls To Avoid

1. Failing To Involve the Title Company Early

Real estate cannot be sold ‘free and clear’ without a title insurer on board. Therefore, the title company should be involved as early as possible, particularly during the sale planning stage, and especially if the asset involves complex ownership, easements, or leased parcels. Leaving title insurers in the dark until after court approval is a recipe for delay.

As Stephanie Fogelson of First American Title puts it, “Early and often. That’s the rule. Don’t toss a court order at us on closing day and expect a clean policy. We don’t want to insure over a clouded title. So we’ll often ask to review drafts of the sale order, escrow instructions, and lien releases before anything goes to court.”

A title company will look for the following documents as part of the process:

• A court order authorizing the sale
• Proper notice to all interested parties
• Expiration of appeal periods
• Clarity about the receiver’s authority to convey title
• Satisfactory title and lien searches
• Any consents (debtor, other creditors) needed for comfort

2. Inadequate or Defective Notice

If a lienholder isn’t notified, they can object or challenge a sale after closing. Therefore it is best to ‘over-notice’ rather than ‘under-notice.’ To that end publish the sales notice widely, serve known parties directly, and keep records.

3. Incomplete or Vague Court Orders

Sale orders need to explicitly state that the sale is ‘free and clear,’ that the buyer is a good faith purchaser, and that the court has reviewed proper notice and objections.

4. Ignoring Appeal Rights

Even a perfect sale can unravel if someone appeals, and the closing goes forward prematurely. Build in time for the appeal period to expire and get confirmation from the court clerk that no appeal was filed before funding.

Case Study

Doug Charboneau, of Ampleo Turnaround & Restructuring, offers the following real-life example from Washington state, where his firm was appointed receiver for a multi-generational family farming operation spanning more than 1,500 acres. The property included a patchwork of fee-owned land, leased plots from third parties, and tribal land administered through the Bureau of Indian Affairs (BIA).

According to Charboneau, the BIA leases couldn’t be easily transferred, which made it nearly impossible to sell the entire operation as a unit. Therefore, his firm broke the property up into parcels that could be sold to generate liquidity. The team focused on residential properties that were easier to sell and generated proceeds to pay down the debt. Eventually, with enough debt retired, the family was able to refinance and keep the core business alive.

“Ultimately, the sale of non-core assets gave the family a shot at survival, and the bank got paid in full. That’s the definition of a win. We got in and out in a year. It wasn’t easy, but it worked. And the family’s still farming today.” Charboneau notes.

Done Right, Everyone Wins

‘Free and clear’ sales in state court receivership can be incredibly effective, but they require a deep understanding of state procedure and law, careful planning and coordination, and constant communication between all parties involved. When done properly, they can lead to excellent outcomes. As Fogelson reminds us, “You can pull off the deal, even the messy ones, if everyone’s aligned early.” Doug Charboneau’s example is a case in point.

To learn more about this topic, view State Court Receiverships Advanced Issues / Issues Associated with Free and Clear Sales. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about state court receiverships.

This article was originally published here.

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