Receivership in a Minnesota Business Owner Dispute

What Is a Receiver Under Minnesota Law?

A receiver is the court’s agent, not either owner’s agent. Under § 576.21, the receiver acts “subject to the court’s direction,” and Minn. Stat. § 576.23 gives the court “the exclusive authority to direct the receiver and the authority over all receivership property wherever located.” In practice, the receiver answers to the judge, and an owner who disagrees with a receiver’s decision takes that disagreement to the same judge. Section 576.21 calls the person whose property the receiver takes over the respondent, defined as “the person over whose property the receiver is appointed.” In an owner dispute, the respondent is ordinarily the company.

Minnesota law recognizes two kinds of receivership, and the difference matters to an owner. Under § 576.21, a general receivership covers “all or substantially all of the nonexempt property of a respondent for the purpose of liquidation and distribution to creditors and other parties in interest,” and the statute names a receiver appointed in a corporate dissolution case as one example. The same section defines a limited receivership as “a receivership other than a general receivership.” A general receivership is built to wind a company down. A limited receivership can be confined to a bank account, a disputed asset, or the books while the business keeps operating.

When Does a Minnesota Court Appoint a Receiver in an Owner Dispute?

A Minnesota court can appoint a receiver over a corporation when a shareholder establishes a ground for relief under Minn. Stat. § 302A.751, subd. 1, which lets a court “grant any equitable relief it deems just and reasonable in the circumstances.” The receivership statute, Minn. Stat. § 576.22, expressly governs receiverships “pursuant to sections 302A.751, 302A.753,” and several other entity statutes. The shareholder grounds in § 302A.751 include a board deadlock “the shareholders are unable to break” and corporate assets that “are being misapplied or wasted.” They also include fraudulent or illegal conduct by those in control toward one or more shareholders, and, in a corporation that is not publicly held, unfairly prejudicial conduct. Once a dissolution case is filed, Minn. Stat. § 302A.753, subd. 1 lets the court “appoint receivers with all powers and duties the court directs” and “carry on the business of the corporation until a full hearing can be held.”

Chapter 576 adds its own grounds, which any party can invoke. Before judgment, and except where a default judgment may be had without applying to the court, Minn. Stat. § 576.25, subd. 2 allows a limited receiver for a party who shows “an apparent right to property that is the subject of the action and is in the possession of an adverse party, and that the property or its rents and profits are in danger of loss or material impairment.” Subdivision 4 reaches an entity that is “dissolved, insolvent, in imminent danger of insolvency, or has forfeited its corporate rights,” and subdivision 6 reaches “other cases as are provided by law, or in accord with existing practice, except as otherwise prescribed.”

An LLC owner faces a different statutory map. The list in § 576.22 does not name chapter 322C, Minnesota’s LLC act, and chapter 322C has no receiver section for a member dispute. An LLC receiver can rest on grounds including the chapter 576 grounds above and court-supervised winding up after dissolution. Minn. Stat. § 322C.0702, subd. 5 lets a court order “judicial supervision of the winding up of a dissolved limited liability company, including the appointment of a person to wind up the company’s activities.” A member can seek that order on showing good cause, or in a judicial dissolution case brought under Minn. Stat. § 322C.0701. For a receivership not on its list, § 576.22 provides that the court “in its discretion, may apply provisions of this chapter to the extent not inconsistent with the statutes establishing the receiverships.” The grounds that start these cases are covered in detail on the pages on deadlock remedies and on bringing a shareholder oppression claim.

What Does a Receiver Control, and What Do the Owners Keep?

A receiver controls the property the appointing order describes, and an order that describes no property gives the receiver control of all of the respondent’s nonexempt property until the court orders otherwise. Under Minn. Stat. § 576.25, subd. 8, “If the order does not so describe the receivership property, until further order of the court, the receiver shall have control over all of the respondent’s nonexempt property.” Within that property, Minn. Stat. § 576.29, subd. 1 gives every receiver “the power to collect, control, manage, conserve, and protect receivership property.” A general receiver also may “operate any business constituting receivership property in the ordinary course of the business,” which includes “hiring employees and appointing officers to act on behalf of the business.” A step outside the ordinary course, such as selling a building or a product line, requires “an order of the court following notice and a hearing.”

The receiver can also step into the company’s executory contracts, which § 576.21 defines as contracts “where the obligations of both the respondent and the other party to the contract are unperformed to the extent that the failure of either party to complete performance of its obligations would constitute a material breach of the contract.” An owner’s employment agreement with the company is covered when it meets that definition. Under Minn. Stat. § 576.45, “Unless a court orders otherwise, a receiver succeeds to all of the rights and duties of the respondent under any executory contract,” and “For good cause, the court may authorize the receiver to terminate an executory contract.” A claim for that termination “shall be presented or filed in the same manner as other claims in the receivership no later than the later of: (1) the time set for filing of claims in the receivership; or (2) 28 days after the notice by the receiver of the termination of the executory contract.” Check the current text of § 576.45 before relying on this period.

The owners keep their ownership. Receivership property is the respondent’s property, so when the company is the respondent, the owners’ shares or membership interests are not themselves receivership property. Each owner remains a party in interest, a term § 576.21 says “includes the respondent, any equity security holder in the respondent, any person with an ownership interest in or lien on receivership property,” and, in a general receivership, creditors. Under Minn. Stat. § 576.35, subd. 1, “It is not necessary for a party in interest to be joined as a party to be heard in the receivership.” Under the same subdivision, “Any party in interest may make an appearance in a receivership by filing a written notice of appearance, including the name, mailing address, fax number, email address, if any, and telephone number of the party in interest and its attorney, if any, and by serving a copy on the receiver and the receiver’s attorney, if any.”

An owner who has appeared gets notice of the final report. Under Minn. Stat. § 576.38, subd. 4, “The receiver shall give notice of the filing of the final report and request for discharge to all persons who have filed notices of appearance. If there is no objection within 21 days, the court may enter an order approving the final report and discharging the receiver without the necessity of a hearing.” A distribution schedule has its own notice and objection period. Under Minn. Stat. § 576.53, “Before any interim or final distribution is made, the receiver shall file a distribution schedule listing the proposed distributions,” and “The receiver shall give notice of the filing of the distribution schedule to all persons on the master mailing list or that have filed proofs of claim. If there is no objection within 21 days after the notice, the court may enter an order authorizing the receiver to make the distributions described in the distribution schedule without the necessity of a hearing.” Check the current text of these statutes before relying on these periods.

Owners may get access to the receiver’s records, at the receiver’s discretion or by court order. The receiver must keep records of cash receipts and disbursements, and Minn. Stat. § 576.36, subd. 1 provides: “After due consideration of issues of confidentiality, the records may be provided by the receiver to parties in interest or shall be provided as ordered by the court.” Under subdivision 2, the court may also order the receiver to file interim reports on its activities, its cash receipts and disbursements (including payments to its professionals), “receipts and dispositions of receivership property,” and “other matters.” That order “may also provide that the failure to object constitutes a waiver of objection to matters addressed in the interim reports.” I suggest asking for a reporting schedule in the appointing order, because the appointing order sets the receiver’s duties and a schedule set at the start avoids a later motion. An owner may also take discovery of the receiver “after obtaining an order authorizing the discovery” under Minn. Stat. § 576.28. If the receiver is not doing the job, Minn. Stat. § 576.37, subd. 1 lets the court remove it “for other good cause.”

What Must the Company and Its Owners Do After a Receiver Is Appointed?

The company must hand over the covered property at once, including the digital keys to it. Minn. Stat. § 576.31 requires the respondent to “immediately upon the receiver’s appointment, deliver to the receiver all of the receivership property in the respondent’s possession, custody, or control, including, but not limited to, all books and records, electronic data, passwords, access codes,” together with account statements, titles, and financial statements. The respondent must also “assist and cooperate fully with the receiver” and supply the information the receiver requests. In a closely held company, the logins for the bank portal, the accounting software, and the payroll service may sit with one owner, and under this section those logins go to the receiver. An owner holding company property personally has a direct duty as well: under Minn. Stat. § 576.40, subd. 1, “Except as expressly provided in this section, and unless otherwise ordered by the court, upon demand by a receiver, any person shall turn over any receivership property that is within the possession or control of that person.” The same subdivision adds, “Unless ordered by the court, a person in possession of receivership property pursuant to a valid lien perfected prior to the time of appointment is not required to turn over receivership property.”

The appointment also stays acts by anyone to take or control receivership property. Under Minn. Stat. § 576.42, subd. 3, “Except as otherwise ordered by the court, the entry of an order appointing a receiver shall operate as a stay, applicable to all persons,” of “any act to obtain possession of receivership property, or to interfere with or exercise control over receivership property.” That stay binds the owners as well as outsiders. An owner who keeps company property may face contempt: under § 576.40, subd. 2, “In the absence of a bona fide dispute with respect to the receiver’s or the respondent’s right to possession of receivership property, the failure to relinquish possession and control to the receiver may be punishable as contempt of the court.” The same subdivision provides that “If there exists a bona fide dispute with respect to the existence or nature of the receiver’s or the respondent’s interest in the property, turnover shall be sought by means of an action under section 576.39.” Under Minn. Stat. § 576.39, subd. 2, “Unless applicable law requires otherwise or the court orders otherwise,” that action “shall be commenced in the court and assigned to the judge before whom the receivership is pending.”

Section 576.31 also keeps the respondent responsible for filing all tax returns, including returns for periods while the receivership is in effect. When a receiver holds “all or substantially all the property or business of a corporation,” though, 26 U.S.C. § 6012(b)(3) requires the receiver to make the corporation’s income tax return “in the same manner and form as corporations are required to make such returns.” Minnesota has its own rule for state returns. Under Minn. Stat. § 289A.08, subd. 2, “The receivers, trustees in bankruptcy, or assignees operating the business or property of a taxpayer must file a return with respect to the taxable net income of the taxpayer if a return is required.” For individual income, fiduciary income, mining company, and corporate franchise taxes, Minn. Stat. § 289A.31, subd. 1 provides that “the tax due from a taxpayer whose business or property is in charge of a receiver, trustee in bankruptcy, assignee, or other conservator, must be paid by the person in charge of the business or property so far as the tax is due to the income from the business or property.”

I suggest keeping a dated list of everything handed over, because the receiver’s final report under Minn. Stat. § 576.38, subd. 3 must include “a schedule of all receivership property at the commencement of the receivership,” and your own list lets you check it.

Who Pays for a Receivership?

The company pays, out of the property the receiver controls. Minn. Stat. § 576.32, subd. 2 provides that “The receiver and any professional retained by the receiver shall be paid by the receiver from the receivership property in the same manner as other expenses of administration and without separate orders, but subject to the procedures, safeguards, and reporting that the court may order.” The receiver may hire “attorneys, accountants, appraisers, auctioneers, and other professionals that do not hold or represent an interest adverse to the receivership,” and their bills come from the same pool. Under subdivision 1(b), “the professional or the receiver shall file with the court a notice of the retention and of the proposed compensation. Any party in interest may bring a motion for disapproval of any retention within 21 days after the filing of the notice of retention.” Check the current text of § 576.32 before relying on this period. Interim payments to the receiver remain subject to approval with its final report under subdivision 2(b), except where the court already approved them or an owner is deemed to have waived objection. When the property is distributed, Minn. Stat. § 576.51, subd. 1 pays the receivership’s “actual, necessary costs and expenses,” including the receiver’s allowed fees and reasonable expenses. Those costs come right after claims secured by valid pre-appointment liens and ahead of unsecured creditors. Only what is left after all of those is “returned to the respondent,” so every dollar of receivership cost comes out of the value the owners share.

The receiver also posts a bond. Minn. Stat. § 576.27 requires a bond “in the sum, nature, and with the conditions that the court shall order in its discretion consistent with section 574.11.”

Two statutes let a court shift money onto a party after a finding about that party’s conduct. Under Minn. Stat. § 576.38, subd. 1, “If the court determines that the appointment of the receiver was procured in bad faith, the court may assess against the person who procured the receiver’s appointment” both “all of the receiver’s fees and expenses and other costs of the receivership” and “any other sanctions the court deems appropriate.” In a corporate case, § 302A.751, subd. 4 provides: “If the court finds that a party to a proceeding brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including attorneys’ fees and disbursements, to any of the other parties.” Neither award happens automatically.

How Can an Owner Oppose a Receiver Motion?

An owner opposes a receiver by answering the motion, contesting the grounds, the person proposed, and the breadth of the order. Under § 576.25, subd. 7, “The court may appoint a receiver upon a motion with notice to the respondent, to all other parties in the action, and to parties in interest,” and “A motion to appoint a general receiver shall be treated as a dispositive motion.” Under the same subdivision, a court may act first and hear later only “if it is clearly shown that an emergency exists requiring the immediate appointment of a receiver.” Even then, subdivision 7 requires the court to set a prompt hearing, and “at the subsequent hearing, the burdens of proof shall be as would be applicable to a motion made on notice that is not expedited.” In plain terms, a dispositive motion is one that seeks “to dispose of all or part of the claims or parties” under Minn. Gen. R. Prac. 115. Under Minn. Gen. R. Prac. 115.03(b), “The party responding to the motion shall pay any required motion filing fee, serve the following documents on all opposing counsel and self-represented litigants, and file the documents with the court administrator at least 14 days before the hearing,” and Rule 115.04(b) uses the same words for a nondispositive motion. Under Minn. Gen. R. Prac. 115.06, “If responsive documents are not properly served and filed in a nondispositive motion, the court may deem the motion unopposed and may grant the relief requested without a hearing. For a dispositive motion, the court, in its discretion, may refuse to permit oral argument by the party not filing the required documents, may allow reasonable attorney’s fees, or may take other appropriate action.” Check the current text of the rule before relying on these periods.

The opposition can attack three points:

1. The grounds. The moving owner must prove a statutory basis, such as a § 302A.751 ground or the § 576.25, subd. 2 showing of property “in danger of loss or material impairment.” That subdivision applies except where a default judgment may be had without applying to the court. Evidence about the books, the bills, and account access goes to those elements, such as whether corporate assets “are being misapplied or wasted.”
2. The person. Under Minn. Stat. § 576.26, subd. 1, the order must contain written conclusions that the proposed receiver “is qualified to serve as receiver and as an officer of the court” and “is independent as to the parties and the underlying dispute.” Subdivision 3 directs the court to weigh any relevant information, including any relationship to a party and any “interest materially adverse to the interests of any of the parties to the action.” It also includes any material financial interest in the outcome, other than court-allowed receiver pay, “including any proposed contingent or success fee compensation arrangement,” and whether the proposed receiver is “a debtor, secured or unsecured creditor, lienor of, or holder of any equity interest in” a party.
3. The scope. In a limited receivership, receivership property is “that property of the respondent identified in the order appointing the receiver, or in any subsequent order,” under § 576.21. Section 576.29, subd. 3 also lets the court modify a receiver’s statutory powers and duties, except as the chapter otherwise provides. An owner can therefore propose an order that names less property and fewer powers.

In a corporate case where dissolution is sought, § 302A.751, subd. 3b adds: “In deciding whether to order dissolution, the court shall consider whether lesser relief suggested by one or more parties, such as any form of equitable relief, a buy-out, or a partial liquidation, would be adequate to permanently relieve the circumstances established under subdivision 1, clause (b) or (c).”

The owners can sometimes resolve the concern behind the motion by agreement. Suppose the motion rests on a fear that one owner will drain the accounts. The owners can agree to interim controls that address that fear without a receiver, such as two signatures on large payments, monthly statements to both owners, or an outside accountant who reviews the books. A direct conversation between the owners, or a mediation, can produce that agreement faster than a contested hearing, and it costs the company less than a receiver whose fees it would pay. I suggest putting a concrete proposal in writing before the court rules on the motion, because a written proposal gives the court a specific alternative to the receiver it was asked to appoint. The company-side strategy for the underlying claim is covered in defending a shareholder oppression claim.

What Makes a Limited Receiver a Better Fit Than a General Receiver?

A limited receiver fits when the problem is one account, one asset, or one function, because under § 576.21 a general receivership exists “for the purpose of liquidation and distribution to creditors and other parties in interest.” Minn. Stat. § 576.24 makes limited the default: “If the order appointing the receiver does not specify whether the receivership is a limited receivership or a general receivership, the receivership shall be a limited receivership unless and until the court by later order designates the receivership as a general receivership.” The court can also change course later: “At any time, the court may order a general receivership to be converted to a limited receivership and a limited receivership to be converted to a general receivership.”

A limited receiver can be shaped to the actual dispute. Examples include a receiver over the company’s bank accounts and accounting records while the owners keep running sales and operations, or a receiver over one disputed property. Under § 576.29, subd. 3, “Except as otherwise provided in this chapter, the court may modify the powers and duties of a receiver provided by this section,” so a later order can change those powers as the case develops.

The order’s description of property and powers sets the receivership’s reach. A limited receivership’s property is what the order identifies. I suggest that an owner who cannot defeat the motion outright submit a proposed order naming the specific property and powers, because the court then has a narrower order ready to sign.

How Does a Receivership End?

A receivership ends when the court discharges the receiver. Under § 576.38, subd. 1, “The court may discharge a receiver and terminate the receivership.” Subdivision 2 requires the receiver, on finishing its duties, to “file a final report and . . . request that the court approve the final report and discharge the receiver.” Under subdivision 5, “A discharge removes all authority of the receiver, excuses the receiver from further performance of any duties, and discharges any lis pendens recorded by the receiver.” Where property remains, the route decides where it goes: under § 576.51, subd. 2, “If all of the amounts payable under subdivision 1 have been paid in full, any remaining receivership property shall be returned to the respondent,” while the corporate liquidation and discontinuance routes below carry their own rules.

Owners reach that point by three main routes:

• A negotiated buyout or settlement. When the owners resolve the dispute themselves, the reason for the receiver ends with it. In a corporate dissolution case, Minn. Stat. § 302A.761 requires the proceeding to be “discontinued at any time during the dissolution proceedings when it is established that cause for dissolution no longer exists,” and the court then directs the receiver “to redeliver to the corporation all its remaining property and assets.”
• A court-ordered buyout. Under § 302A.751, subd. 2, “In an action under subdivision 1, clause (b), involving a corporation that is not a publicly held corporation at the time the action is commenced and in which one or more of the circumstances described in that clause is established, the court may, upon motion of a corporation or a shareholder or beneficial owner of shares of the corporation, order the sale by a plaintiff or a defendant of all shares of the corporation held by the plaintiff or defendant” if the order “would be fair and equitable to all parties.” In plain terms, once a shareholder ground such as deadlock is established in a shareholder’s action, the corporation or a shareholder can move for an order that one side’s shares be sold. The price is fair value, unless the shares are subject to sale under “the bylaws of the corporation, a shareholder control agreement, the terms of the shares, or otherwise,” in which case the court uses those terms unless the court finds those terms unreasonable. The mechanics are covered in the page on court-ordered shareholder buyouts. In an LLC oppression proceeding, § 322C.0701, subd. 2 allows “a remedy other than dissolution.” That remedy can include a fair-value sale of a member’s interests to the company or one or more of the other members, as explained on the LLC member buyout page.
• Liquidation. In a corporate dissolution, § 302A.753, subd. 2 lets the court appoint a receiver “After a full hearing has been held,” and gives that receiver authority, subject to court order, “to continue the business of the corporation and to sell, lease, transfer, or otherwise dispose of all or any of the property and assets of the corporation either at public or private sale.” Under subdivision 4, after “the expenses of receivership and claims of creditors duly proved,” the remaining assets are distributed to the shareholders.

A settlement reached early preserves more value, because receivership costs come out of the company before the owners see anything.

Receivership in an Owner Dispute

A receiver in a Minnesota owner dispute is the court’s agent, paid from the company, controlling whatever property the order describes or, if the order is silent, all of the respondent’s nonexempt property. The owners keep their ownership and their right to be heard, and they shape the outcome through their response to the motion, the choice of receiver, and the scope of the order. A less costly exit can be one the owners negotiate themselves, whether that is interim controls instead of a receiver or a buyout that ends the receivership. More on resolving disputes between co-owners is collected under ownership disputes. If a co-owner has asked for a receiver over your Minnesota company, email [email protected] with a short description of the dispute. I can then start an intake and conflict check before you send any confidential documents.