By James Billingsley and Geoffrey A. Heaton
When a loan goes into default, one remedy that a secured lender may have is to seek the appointment of a receiver over its collateral. However, if the lender succeeds and a receiver is appointed, the defaulting borrower’s “counterpunch” may be to file for Chapter 11. A borrower’s bankruptcy filing opens the door to potentially significant delay, uncertainty and expense for the secured lender in its efforts to recover on its loan. A recent bankruptcy court decision highlights one potential way to reduce the risk of a bankruptcy proceeding following the appointment of a receiver: through language in the receiver’s appointment order that divests the debtor’s management of authority to act on behalf of the debtor.