Receivership Law Handbook

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  1. 1.1 Protection of Property or an Interest in Property

    “A receiver appointed by the court is a person who by such appointment becomes an officer of the court to receive, collect, care for, administer, and dispose of the property or the fruits of property of another or others brought under the orders of court by the institution of a proper action or actions.” Ralph Ewing Clark, Law of Receivers § 11(a) (3rd ed. 1959).

  2. 1.2 History of Receivers

    It is unknown exactly when receiverships were first used as remedy, but it became commonplace for courts of chancery in England to appoint receivers during the reign of Queen Elizabeth I (1558-1603) when the court was concerned about a party’s willingness or ability to comply with court orders. § 2981 History and Purpose of Rule 66, 12 Fed. Prac. & Proc. Civ. § 2981 (2d ed.)

  3. 1.3 Receiver Qualifications

    As a general rule, a receiver should be impartial and disinterested. Northwest Bank of Nebraska, N.A. v. Bellevue Bridge Com’n, 607 N.W.2d 207, 210 (Neb. Ct. App. 2000) (citing 75 C.J.S. Receivers § 71 at 721-22 (1952)). The qualifications of a receiver, if any, are sometimes defined by state statute. For instance, Neb. Rev. Stat. § 25-1086 states that “[n]o person shall be appointed receiver who is party, solicitor, counsel, or in any manner interested in the suit.” In Northwest Bank, the court evaluated the qualifications of a receiver who had previously worked for the company now in receivership but appeared to have left with some tension. Id. at 211. The court determined that although the parties approved of the receiver’s handling of the assets, it was not appropriate for him to serve as receiver because of his interest and connections to the company. Id. at 211-12.

  1. 2.1 Protection of Property or an Interest in Property

    • (a) Gravel Resources of Arizona v. Hills, 217 Ariz. 33, 170 P.3d 282 (Ct. App. 2007).

      The Gravel Resources case sets forth the standard for the appointment of a receiver under Arizona law. 217 Ariz. 33, 170 P.3d 282 (Ct. App. 2007). In Gravel Resources, the Arizona Court of Appeals affirmed the appointment of a receiver appointed to protect the assets of a company pending the resolution of litigation between the two owners. Id. The party requesting the receiver alleged that the other owner, who was acting as the general manager, was using his position to waste partnership assets and had refused to make the company's records available. Id at 37-38, 170 P.3d at 286-87. The court agreed that the appointment of a receiver was appropriate, because the general manager was misusing partnership assets to try and squeeze out the other partner. Id. The court pointed to the trial court's finding that “as equal co-partners in Gravel, neither one of the partners has a greater right than the other to cause the partnership to further his position over that of the other.” Id. (internal quotation marks omitted).

      Thus, in Arizona, the Court can appoint a receiver if it simply “determine[s] that the property or the rights of parties need protection” regardless whether the applicant can show irreparable harm or lack of a legal remedy. Id. at 37, 170 P.3d at 286 (“On its face, A.R.S. § 12-1241 requires no showing of irreparable harm or lack of an adequate legal remedy.”).

  2. 2.2 Post-Judgment Receiver in Aid of Execution

    • (a) Grounds for the Appointment of a Post-Judgment Receiver

      “[A] receivership is ‘an equitable remedy’ with ‘flexibility’ to ‘cover[] a wide variety of situations.’” Hon. James J. Brown, Judgment Enforcement § 7.01 (3d ed. 2013). “A receivership is[,] [therefore,] one of the more powerful weapons in the lawyer’s debt collection arsenal. By its nature, it affords a flexible and effective approach to both the preservation of a debtor’s assets and the liquidation of those assets for maximum value.” Id.

      “A receiver may be appointed ‘to protect a judgment creditor’s interest in a debtor’s property when the debtor has shown an intention to frustrate attempts to collect the judgment.’” Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 317 (8th Cir. 1993) (quoting Leone Indus. v. Associated Packaging, Inc., 795 F. Supp. 117, 120 (D.N.J. 1992)); see also Olsan v. Comora, 73 Cal. App. 3d 642, 140 Cal. Rptr. 835 (Ct. App. 1977) (the court may appoint a receiver to aid in collection of a judgment).

      The Court may also appoint a receiver over all of the property owned and/or controlled by a judgment debtor pursuant to its general equitable authority. As the Seventh Circuit noted, “[s]ince very early days, courts of equity have appointed receivers at the request of judgment creditors when execution has been returned unsatisfied.” Pittsburgh Equitable Meter Co. v. Paul C. Loeber & Co., 160 F.2d 721, 728 (7th Cir. 1947). The appointment of a post-judgment receiver “is a branch of equity jurisdiction not dependent upon any statute[;] [instead,] [t]hat right is based primarily on the ground that equity will come to the aid of anyone who has exhausted his remedies at law.” Id. (citing Pusey v. Jones Co. v. Hanssen, 261 U.S. 491, 43 S.Ct. 454 (1923)).

      In First Nat. State Bank of New Jersey v. Kron, 190 N.J. 510, 464 A.2d 1146 (1983), for example, a New Jersey appellate court held that a trial court abused its discretion when it refused to appoint a receiver over a recalcitrant judgment debtor. In Kron, the judgment debtor individual refused to pay a $20,000 judgment to the judgment creditor bank. The judgment debtor evaded service of process, failed to produce financial documents (tax returns, etc.), refused to provide information about his income and/or expenses, lived a very comfortable lifestyle, and “flouted” the trial court’s prior discovery orders. Based on this frustrating conduct, the judgment creditor applied to the trial court to appoint a receiver over the judgment debtor. The trial court denied the application because, among other things, the trial court felt that the “appointment of a receiver was inappropriate in the case of an individual.” Id. The appellate court reversed, noting that: (i) the appointment of a receiver was less drastic than civil incarceration; and (ii) “[a]ny inconvenience to [the judgment debtor] from a receivership is by his own invitation.” Id. at 516, 464 A.2d at 1150. Accordingly, the appellate court reversed the trial court and ordered it to appoint a receiver over the individual judgment debtor.

    • (b) The Bond Required for a Post-Judgment Receiver

      In the post-judgment context, a judgment creditor should not be required to post a bond to protect a judgment debtor. As one court noted, “[t]he only possible rationale for requiring a receiver’s bond in a postjudgment turnover proceeding is to indemnify the receiver against possible claims.” Schultz v. Cadle Co., 825 S.W.2d 151, 155 (Ct. App. Tex. 1992).

  3. 2.3 Standards for Appointment of a Receiver under Federal Law

    Rule 66, Fed. R. Civ. P., governs the appointment of a receiver under federal law. Although Rule 66 does not provide any “‘precise formula for determining when a receiver may be appointed’”, Canada Life Assur. Co. v. LaPeter, 563 F.3d 837, 844 (9th Cir. 2009) (quoting Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993)), federal courts generally consider a variety of factors in making this determination, including, for example:

    1. whether the party seeking the appointment has a valid claim;
    2. whether there is fraudulent conduct or the probability of fraudulent conduct, by the defendant;
    3. whether the property is in imminent danger of being lost, concealed, injured, diminished in value, or squandered;
    4. whether legal remedies are inadequate;
    5. whether the harm to plaintiff by denial of the appointment would outweigh injury to the party opposing appointment;
    6. the plaintiff's probable success in the action and the possibility of irreparable injury to plaintiff's interest in the property; and
    7. whether the plaintiff's interests sought to be protected will in fact be well-served by receivership.

    Canada Life, 563 F.3d at 844 (internal quotations and citations omitted). Foremost among these factors is whether the property is of insufficient value to insure payment, and whether the defendant is of doubtful financial standing. Id. (citing View Crest Garden Apartments, Inc. v. U.S., 281 F.2d 844, 847 (9th Cir. 1960)). Nevertheless, “the district court has broad discretion in appointing a receiver, [and] it may consider a host of relevant factors, and that no one factor is dispositive.” Id. at 845.

  4. 2.4 The Appointment of a Receiver in Federal Courts in Diversity Actions

    In diversity actions, federal courts will look to federal law to determine whether to appoint a receiver – even if state law would provide a different result. Canada Life Assur. Co. v. LaPeter, 563 F.3d 837, 842 (9th Cir. 2009); Nat'l P'ship Inv. Corp. v. Nat'l Hous. Dev. Corp., 153 F.3d 1289, 1291 (11th Cir. 1998); Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993) (“The appointment of a receiver in a diversity case is a procedural matter governed by federal law and federal equitable principles.”).

  1. 3.1 The Litigation Stay

    Although an appointment of a receiver does not create an automatic stay that prevents litigation against the company, courts can — and often do — enjoin actions against the receivership estate. S.E.C. v. Wencke, 622 F.2d 1363, 1369-70 (9th Cir. 1980) (holding that the district court did have authority to issue a stay preventing non-parties from bringing actions against the receiver). The injunction, often called a receivership litigation stay, stops all actions against the receivership company.

    • (a) Rationale Behind the Receivership Litigation Stay

      In Acorn Tech., the Third Circuit explained that the purpose of a litigation stay is to allow the receiver to have a chance “to do the important job of marshaling and untangling a company’s assets without being forced into court by every investor or claimant.” United States v. Acorn Tech, Fund, L.P., 429 F.3d 438, 443 (3rd Cir. 2005). Indeed, “[t]he interests of the Receiver are very broad and include not only protection of the receivership res, but also protection of defrauded investors and considerations of judicial economy.” Id. Thus, the receivership litigation stay provides a receiver with the opportunity to maximize the receivership estate without spending assets defending against other litigation. The stay, however, is not indefinite and may be lifted.

    • (b) Lifting the Litigation Stay

      When deciding whether to lift the litigation stay, courts will consider three factors: (1) whether the stay maintains the status quo or if the moving party will suffer substantial injury if the stay is not lifted; (2) the time in the course of the receivership; (3) the merit of the moving party’s underlying claim. United States v. Acorn Tech, Fund, L.P., 429 F.3d 438 (3rd Cir. 2005). In evaluating the third factor, the merit of the party’s claim, the court only has to consider if the party has a colorable claim to assert. Id. at 444. This means that if the court determines that a claim has no merit on its face, the inquiry is over. Id. But, if the claim does have merit the court will need to evaluate the remaining factors. Id.

    • (c) Partially Lifting a Litigation Stay

      Courts may partially lift litigation stays if the receiver does not object, for instance, a court lifted the stay for a foreclosure action because there was no objection and it would be “painless for all concerned.” United States v. Acorn Tech, Fund, L.P., 429 F.3d 438, 443 (3rd Cir. 2005).

    • (e) Appeal from an Order Regarding the Litigation Stay

      On appeal, the court will review the district court’s decision regarding a litigation stay on an abuse of discretion standard. United States v. Acorn Tech, Fund, L.P., 429 F.3d 438, 444-45 (3rd Cir. 2005).

  1. 4.1 Judicial Immunity

    • The receiver enjoys quasi-judicial immunity so long as his action are authorized by the court. In Mashni v. Foster, the court held that “a receiver is immune from suit unless the appointing court finds that the receiver has acted outside the scope of the order of appointment.” 234 Ariz. 522, 524, 323 P.3d 1173, 1175.

      In Mashni, a secured creditor obtained entry of an order appointing a receiver over its collateral, consisting of an apartment complex qualified as a low-income-housing project under I.R.C. § 42. Rather than continue renting to low-income households, the receiver elected to rent at market rates in contravention of the requirements of I.R.C. § 42 because he believed it was in the best interests of the receivership estate to do so. The order appointing the receiver expressly authorized the receiver to rent at market rates.

      The owner of the property requested authority to file a complaint against the receiver, arguing that the change in status of the complex constituted mismanagement of the estate, and compromised the owner's ability to earn substantial tax credits through the low-income-housing program. The trial court, without finding that the receiver violated the receivership order, subjected the receiver's decision to a business judgment review and allowed the owner to file the lawsuit. The receiver appealed.

      Based on the principle that a receiver “‘share[s] the judge's judicial immunity’ so long as the receiver acts within the scope of the appointment order”, the Court of Appeals reversed. 234 Ariz. at 526, 323 P.3d at 1177 (quoting Kohlrautz v. Oilmen Participation Corp., 441 F.3d 827, 836 (9th Cir. 2006)). Because the trial court never found that the receiver acted outside the scope of the appointment order, the trial court improperly allowed the owner's suit to proceed. “Like the court itself, the receiver's immunity from suit exists by virtue of the context in which he acts, not the content of his actions.” Id. at 527, 323 P.3d at 1178. Put succinctly,

      a receiver's duty of fidelity is to the court and its orders – it is not a classic fiduciary duty to any party. Like the court itself, the receiver is a neutral whose actions may redound to the benefit of some and the detriment of others. When parties' interests are adverse, it is simply impossible to hold a receiver to a fiduciary duty to advance the private interests of all. A receiver may therefore be liable to interested parties for harm caused by deviation from the order of appointment, but cannot be liable for actions taken pursuant to that order that benefit some more than others. 234 Ariz. at 528, 323 P.3d at 1179.

      Thus, a receiver cannot be held liable, even for negligent violations of his duties, so long as the receiver does not act outside the scope of his order.

  1. 5.1 Court’s Authority to Control Claims in the Receivership Estate

    • “The trial court has broad authority to control claims brought against a receivership estate, and the principles of equity govern whenever applicable…. Fashioning an equitable remedy is within the trial court's discretion, and such remedies will not be disturbed on appeal absent an abuse of that discretion.” Hiatt v. Shah, 238 Ariz. 579, 582, 364 P.3d 1138, 1141 (Ct. App. 2015).

  2. 5.2 Standing to Assert Claims of the Company

    • Courts often grant a receiver standing to bring suits on behalf of the receivership entity. However, a receiver may not sue on behalf of creditors of an entity in receivership. Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995). Similar to a trustee in bankruptcy, a receiver may only sue “to redress injuries to the entity in receivership.” Id.

      In a “Ponzi scheme” situation, multiple third party victims ordinarily exist. These victims usually consist of the individuals that invested in the corporation under fraudulent circumstances. When an equity receiver is appointed over the corporation that the investors invested in, a dispute may arise as to whether the receiver is asserting claims that belong to defrauded investors, or claims that belong to the company in receivership.

      Although a receiver generally does not have standing to assert claims belonging to third-parties, the receiver does have standing to bring claims for wrongs committed against the corporation in receivership. In Warfield v. Alaniz, for example, a district court found that when the fraudulent transfers removed funds from a corporation for an unauthorized purpose, the corporation was injured. 453 F.Supp.2d 1118, 1127 (D. Ariz. 2006). Therefore, the court authorized the receiver to seek return of the funds for the benefit of the receivership estate, to reimburse creditors/victims. Id. The Warfield court determined that if the claims the receiver asserted were successful, it would benefit the receivership estate as a whole. Id.

  3. 5.3 Status of Receiver as “Lien Creditor”

    • Section 9-102(52)(D) of the Uniform Commercial Code defines the term “lien creditor” to include “a receiver in equity from the time of appointment.” Thus, an equity receiver takes priority over unsecured pre-receivership creditors, Zirot v. Gilmer, 336 So.2d 680, 682-83, 20 UCC Rep. Serv. 535 (Fla. Ct. App. 1976), and may take priority over unperfected security interests, In re Fed. Wholesale Meats & Frozen Foods, Inc., 43 Wis.2d 21, 168 N.W.2d 70 (1969).

  1. 6.1 Duties to the Parties

    • A receiver is not a traditional fiduciary in that he owes no specific duty of fidelity to the parties to the litigation – instead, he owes his fidelity to the court, and the court alone. For example, Mashni v. Foster holds that “[a] receiver is a ministerial officer of the court who acts under the appointing court's authority, and not to promote the interest of any specific party.” 234 Ariz. 522, 527, 323 P.3d 1173, 1178 (Ct. App. 2014). The receiver, like the court, acts as a neutral “whose actions may redound to the benefit of some and the detriment of others.” Id. at 528, 323 P.3d at 1179. Thus, even though a receiver may attempt to maximize the receivership estate for the benefit of all parties, his duty flows ultimately to the court.

  1. 7.1 Selling Receivership Property Free and Clear

    A court may order the sale of receivership property free and clear of liens and encumbrances under the appropriate circumstances. Darley v. Alabama Public Utilities Co., 183 So. 447, 448 (Ala. 1938). Historically, courts have determined it was necessary when the property is rapidly depreciating in value, when an unencumbered sale is the only way to get a reasonable return from the property, or when a sale free from liens is necessary in the interest of the public. David L. Abney, Selling Equity Receivership Property Free and Clear of Liens and Encumbrances, REAL EST. L. J. 364, 365 (1988).

    In Darley, for example, the court authorized the sale of a telephone company free and clear because of the need for an immediate sale so that the company could continue to provide telephone service to the customers. 183 So. at 448. The Alabama Supreme Court upheld the sale because of the customers' need for telephone services, and the immediate sale would reasonably compensate the creditors. Id. at 448-49.

    In another case, Home Mortgage Co. v. Sitka Spruce Pulp & Paper Co., a court determined that to get a fair value of a lumber and paper mill, it had to allow a receiver to sell the mill free and clear because selling it off piece by piece would return little money for the company. 36 P.2d 1038 (Or. 1934).

  2. 7.2 When no Statute Specifically Authorizes a Receiver's Sale

    • “In the absence of a specific statute governing sales by receivers, such sales are governed by statutes or court rules regulating court ordered sales.” 16 Fletcher Cyc. Corp. § 7876. In U.S. Bank v. Palmilla Dev. Co., for example, the Nevada Supreme Court held that “a receiver sale of real property that secures a loan is a form of judicial foreclosure.” 131 Nev. Adv. Op. 9 (2015). Thus, even though no specific Nevada statute specifically governed a receiver's sale of real property, the Nevada court could nevertheless authorize the sale as a form of judicial foreclosure. As an aside, the Nevada Supreme Court also held that the sale qualified as a “judicial foreclosure” for the purposes of Nevada's deficiency judgment statute, and that the date the sale actually closed was the date that began the running of the statute of limitations for the deficiency action following the sale.

  1. 8.1 Purpose of Receiver’s Distribution Plan

    • The goal of a receivership is to make an equitable distribution to those creditors who appear and present viable claims. Acad. Life Ins. Co. v. Odiorne, 165 Ariz. 188, 192, 797 P.2d 727 (Ct. App. 1990).

  2. 8.2 Standard for Approval

    • The court should ensure that a receiver’s distribution plan is fair and reasonable. SEC v. Wealth Management, LLC, 628 F.3d 323, 332 (7th Cir. 2010) (citing Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 84 (2d Cir. 2006)) (“In supervising an equitable receivership, the primary job of the district court is to ensure that the proposed plan of distribution is fair and reasonable.”). In Wealth Management, the Seventh Circuit affirmed a pro rata distribution of assets to investors holding that “where investors’ assets are commingled and the recoverable assets in a receivership are insufficient to fully repay the investors, ‘equality is equity.’” Id. at 333 (quoting Cunningham v. Brown, 265 U.S. 1, 13, 44 S.Ct. 424, 68 L.Ed. 873 (1924)).