One of the larger fire districts in Rhode Island has announced plans to file for receivership. The Central Coventry Fire District, which operates five stations and covers roughly 26 square miles, announced yesterday that it is completely out of money.
The district has been in financial distress but was pushed over the edge following a vote by taxpayers on October 1, 2012 to table passage of a new 2012-2013 budget. That move halted the distribution of tax bills to residents of the district.
The district sought an extension of its line of credit until a new budget could be approved, but when that was declined by the bank the district was out of options.
Here is more on the story.
Over the past day, many folks have asked me to explain what a receivership is, and how it differs from bankruptcy. That gives us two burning questions:
What is receivership?
A receivership is a legal proceeding where a court is asked to appoint a “receiver” to take custody of property, assets, or a business in order to protect, preserve, and if necessary liquidate it. Receiverships are often used for troubled businesses that are unable to pay their bills and more recently have been used to aid municipalities on the brink of bankruptcy.
In a receivership, the “receiver” is appointed to oversee and manage the property or business. The receiver works for the court and must report back to the court with a plan to resolve outstanding debts. In the process the receiver works with various creditors to reach an acceptable resolution of outstanding debts and related issues. In the mean time the court retains jurisdiction over the assets and property involved. This prevents creditors from seizing assets without court approval – which in the case of a fire department would prevent creditors from seizing fire trucks and equipment.
Receiverships may be established under both state and federal law, depending upon the jurisdictional issues in the case. Municipal insolvencies are typically handled under state law.
Is receivership the same as bankruptcy?
No. While both bankruptcies and receiverships commonly involve parties who cannot pay their bills, they are quite different. First of all, bankruptcy is governed by federal law and trumps virtually all other types of legal proceedings. Once bankruptcy is filed, all other civil proceedings involving the debtor (the entity being placed into bankruptcy) are stayed and most creditors will have to refile their claims with the bankruptcy court who then has jurisdiction over the claim. That does not happen in receivership.
Bankruptcy courts also have broad discretion to force creditors to accept a settlement of their claims, whereas receivers have considerably less latitude to force a settlement.
At the end of bankruptcy, all of the debts of the debtor are discharged (with very few exceptions that we won’t go into here). That is not that case under a receivership where any debts that were owed remain on the books. Thus after a receivership a creditor can continue to pursue a debtor although as a practical matter that is often not worthwhile because the debtor has no assets from which to collect.
Here is a web site that can provide additional details – and certainly any receivership or bankruptcy attorneys out there – feel free to correct me on any of the details. Its been a while since I took Bankruptcy in law school.