Rhode Island Superior Court Establishes Non-Liquidating Receivership Calendar in Response to COVID-19 Crisis

On March 31, 2020, the Rhode Island Superior Court announced the creation of its COVID-19 Receivership Program. The Program establishes a unique non-liquidating receivership calendar intended to assist Rhode Island businesses that are unable to pay their debts as they become due as a result of the coronavirus pandemic. The Program is designed to give struggling businesses time to obtain emergency funding under the CARES Act or other source, to resume paying its ongoing obligations under Court supervision, and repay its prepetition debt. It is not intended to cancel or restructuring preexisting debt, or to take the place of a traditional bankruptcy filing. It is a state law alternative to the Small Business Reorganization Act (SBRA), recently amending the U.S. Bankruptcy Code.

Generally speaking, to participate in the Program a business must allege in a verified petition to the Superior Court that, as of January 15, 2020, it was not in default of its financial obligations, and that since then time it has either: 

1. suffered a 20% year-over-year loss of revenue over a sixty (60) day period;
2. been forced to cease a substantial portion of its operations as a result of a government shut-down order; or
3. that the COVID-19 pandemic has created such an adverse impact on the business as a result of either government-ordered closure or interruption in its cash flow that it has become unable to pay its debts as they become due in the usual course of business.

Once the petition is filed, the Court appoints a temporary, non-liquidating receiver, who is required to notify the business’s creditors that the petition has been filed. Unlike a traditional liquidation receivership, the non-liquidating receiver does NOT take over and operate the business, so long as the business is following the Operating Plan. Rather, the non-liquidating receiver reviews and revises the operating plan, similar to a trustee appointed under the SBRA.

The business remains in control, is permitted to operate in the ordinary course of business, and has ten days to submit an Operating Plan to the temporary receiver. The Operating Plan must address the business’s plans for the business to pay its debts as they become due, its pre-petition debts, and its plan to exit the receivership. Creditors have only ten days to comment on the Plan, and must be alert, as a hearing on the Operating Plan will be scheduled 15 days after it is mailed. Both the Receiver and the Court must approve the Operating Plan. Standards for confirmation are flexible, and considerably less complex than under the Bankruptcy Code.

Participation in the Program affords the business broad protections against creditors, similar to the automatic stay under the Bankruptcy Code. The Court issues an injunction that prohibits a creditor from taking “any act to obtain possession of . . . or to exercise control over” any of the business’s property. Creditors are further enjoined from seeking to enforce any lien against the business’s property and from taking “any act to collect, assess, or recover a claim against the [business] that arose before the commencement of the receivership.” In addition, creditors may not file suit against the business to recover a claim that arose before the commencement of the receivership, or to enforce a judgment obtained before commencement of the receivership. As in a bankruptcy, a creditor that desires to take any act enjoined by the receivership order must obtain permission from the Court, and only after a hearing.

In practical terms, this means that once the non-liquidating receiver is appointed, a creditor may not seek to collect past-due rent, foreclosure a mortgage, or file suit alleging breach of any contractual obligation against the business in receivership. All such issues (including, for example, a failure to pay rent due on April 1) must be addressed within the context of the receivership, and subject to the Court’s control. This new calendar has the potential to “put the brakes” on all collection activities until the business can obtain emergency funding to stay in operation and resume paying its debts. The Program may be especially attractive to sole proprietorship, which would otherwise be required to seek protection under bankruptcy law, which along with the negative impact to the business owner’s credit could also lead to the business’s liquidation.

The business must comply with its Operating Plan, or risk being placed into a liquidating receivership. The deadline for remedying defaults is brief - five days - but the transition from non-liquidating to liquidating receivership requires a court order.

Finally, the administrative order implementing the Program is only ten pages, and confers broad discretion on the non-liquidating receiver and the court, including a catch-all provision that permits the court to “address specific issues in matters on a case-by-case basis.” The court may look to the SBRA for guidance or craft its own remedies.

There are other important aspects of this Program not covered in this memo. Any business considering filing a petition or any creditor of a business in receivership should seek advice of competent counsel before proceeding and should consider preparing its operating plan before filing. Seyfarth has experience with Rhode Island receiverships. Should you have any questions please do not hesitate to contact a Seyfarth attorney.