Companies facing financial difficulties often utilize Chapter 11 to help effectuate a restructuring or sale as part of a case filed in the United States Bankruptcy Court. In other instances, a company’s lender – impatient with a company’s efforts to respond to financial challenges – may apply to a United States District Court for appointment of a federal receiver for the company.
The appointment of a federal receiver is an extraordinary remedy allowed only after a judicial finding that such a step is clearly necessary to protect a lender’s interest in its collateral.
Recently, in an order dated August 14, 2025, a United States District Court judge determined that the appointment of a federal receiver was appropriate in a suit instituted by Farm Credit Mid-America, PCA (“Lender”) against its fast-growing whiskey company borrower Uncle Nearest, Inc. and affiliates (“Borrower”).[1]
The dispute offers an excellent case study into the type of circumstances in which a lender may seek the remedy and considerations a court will make in determining whether or not to grant. As noted below, not every factual dispute will justify appointment. Rather, a court will evaluate several factors in making its decision.
The Lender’s Allegations
The Lender filed a complaint against the Borrower on July 28, 2025, alleging breach of certain loan agreements. Specifically, the Lender alleged that the Borrower was in default on more than $100 million in loans and had failed:
- to provide financial information (including accurate borrowing base statements);
- to pay principal and interest on multiple occasions including on a recent maturity date;
- to properly use proceeds of the borrowing which resulted in a third party/non loan party acquiring (and mortgaging) a residence on Martha's Vineyard valued in excess of $2 million; and
- to honor a litany of financial and other covenants in the loan documents.
The Lender argued that it was forced to seek a receiver as its effort to engage with the Borrower on a solution to the above issues had not succeeded. According to the Lender, certain provisions of the loan documentation expressly provided the Lender the right to seek appointment of a receiver in the event of Borrower’s default.
The Lender’s extension of financing to the Borrower occurred over several years. The Lender alleged that financing included a $2.3 million term loan intended to be used by the Borrower to acquire a home on Martha’s Vineyard for marketing purposes. The Lender alleged that the Borrower did not acquire the home – rather allowed an entity that was not a loan party to use the proceeds to put title in its name – then subsequently mortgaged the property to another lender.
In its motion seeking appointment of a receiver, the Lender indicated that it first sent a notice of default in May 2024 followed by an additional notice in November 2024. At that time, the Lender indicated it was prepared to exercise its rights including the right to seek appointment of a receiver. Although the parties executed a forbearance agreement in April 2025, the Lender alleged that the Borrower defaulted under that agreement as well – in particular by failing to provide cash flow budgets and reporting against those budgets among other items.
In particular, the Lender alleged that the Borrower has failed to produce reliable financial information and failed to demonstrate that it has a functional cash management program. The Lender argued that a received was necessary to assume managerial control.
The Borrower’s Response
The Borrower vigorously opposed the Lender’s request for appointment of a receiver. The Borrower filed a response to correct what it called “multiple salacious and inaccurate allegations” in the Lender’s motion ahead of a hearing held on August 7, 2025. The response laid blame for the miscalculation of inventory on its former chief financial officer. The Borrower contended that the Lender was “uniquely positioned to know that the former CFO had engaged in fraudulent activity” that led to a “technical default” and that the request for the appointment of a receiver failed to describe the background fully.
With respect to the Lender’s allegation concerning the Martha’s Vineyard property, the Borrower contended that the Lender was fully aware of the purchase, acquiesced to it, and failed to take any action to obtain a mortgage on the property. The response then details a visit by the Lender’s officials and regular updates provided to the Lender about renovations – painting a different picture of the property acquisition than set forth in the motion seeking the appointment of a receiver.
The Borrower also argued that its decision to halt payments to the Lender came as the result of certain advice rendered by a financial advisory firm selected with the knowledge and approval of the Lender. The Borrower indicated that the temporary pause ultimately led to an agreement on a future path that was accompanied by a $7.5 million payment. In sum, the Borrower argued that it was a victim of fraud – not a perpetrator or conspirator in wrong-doing.
The Borrower noted that although the documents “technically allow for a receiver to be appointed” that relief was not warranted. The Borrower contended that the Lender’s collateral was not in jeopardy and the drastic and extraordinary remedy of receivership both was unwarranted and inappropriate.
Court Order
After the hearing the arguments of both sides, the Court took the matter under advisement and, a week later, rendered a decision allowing the appointment of a receiver. After noting the background facts and the high hurdle to granting a motion for receiver, the court laid out the following factors that it needed to consider considering Sixth Circuit precedent:
- Whether the property at issue is in imminent danger of being lost, concealed, injured, diminished in value, or squandered;
- Whether the Borrower has engaged in fraudulent conduct;
- Whether legal remedies are inadequate;
- Whether less drastic equitable remedies are available;
- The likelihood that the appointment of a receiver would do more good than harm;
- Whether there is inadequate security for the debts; and
- Whether the Borrower is insolvent.
The Court noted too whether the parties had negotiated in advance for consent to the appointment of a receiver was a strong factor to be evaluated.
In evaluating these factors, the Court noted that the property was not in imminent danger due to the Court’s entry of an order immediately following the hearing prohibiting the Borrower from dissipating any assets. However, the Court also noted that an injunction was not an effective substitute for a receiver and thus this factor tipped in the Lender’s favor. Similarly, with respect to consideration of any Borrower fraudulent conduct. While the Borrower attempted to distance itself from its former employee who allegedly mispresented inventory, the Court noted that the Borrower was responsible for the actions of its employee and thus consideration of this factor leaned in favor of appointing a receiver.
With respect to other factors, the Court determined that the Lender’s breach of contract remedy was not fully adequate, no less drastic equitable remedy existed, that a receiver would do more good than harm (especially if the company’s founders remain involved in marketing and building the brand), that the Lender lacked adequate security and the Borrower’s solvency was very much in question. The Court also noted express consent to the remedy of a receiver contained in certain loan documents.
In evaluating these factors and making its decision, the Court noted that the cumulative weight of the factors supported appointment of a receiver at this time – but that the court would revisit the issue if a material change in circumstances eliminated the need. In making its decision, the court also discounted the factual allegations made by the Lender about the Martha’s Vineyard property. The Borrower’s response disputed the Lender’s allegations. The Court noted: the Lender “also asserts that [Borrower] misrepresented the nature of a real estate purchase in Martha’s Vineyard. The Court, however, finds that this alleged misrepresentation does not weigh either in favor or against the appointment of receiver given the outstanding factual disputes surrounding it.”
Conclusion
Courts have made clear that the appointment of a federal receiver to operate a company is a remedy to be used only in rare circumstances. The remedy, though rare, does exist and will be awarded when warranted as in the Uncle Nearest case as emphasized by the court there. Disputed factual allegations over one aspect of a complicated borrower/lender relationship will not alone suffice to justify the appointment of a receiver. A lender that can convince a court of the weight of several factors together has an excellent chance of invoking the remedy. Both lenders and borrowers – as well as other parties dealing with a distressed situation – should understand the potential for the appointment of a receiver and consequences flowing from such appointment.
[1] Farm Credit Mid-America, PCA v. Uncle Nearest, Inc. (E.D. Tenn) (Case No. 4:25-cv-38).
