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A Highlight of a few recent opinions dealing with receiverships. By Davidson, Peter* Despite all the news about sub-prime lenders and single family home foreclosures or short sales, things seem to be pretty slow in the receivership world. No one has posed any questions to "Ask the Receiver". As a result, instead of answering questions I will highlight a few recent opinions dealing with receiverships which, although not earth shattering, highlight a number of well established receivership concepts. In In re Zayas, 347 B.R. 466 (Bankr. M.D. Fla. 2006) the issue was whether the receiver was the agent for the creditors who had the receiver appointed, under Texas law, so that notice of the debtor's bankruptcy proceeding sent to the receiver would be sufficient notice to the creditors to bar any complaints by the creditors objecting to the debtor's discharge. The court held that under Texas law, like in California, a receiver does not act as the agent of the party that had him appointed or any of other party, instead the receiver is an "officer of the court, the medium through which the court acts. He is a disinterested party, the representative and protector of the interests of all persons, including creditors, shareholders and others, in the property in receivership". Id. at 448-49. The court went on, citing an Ohio case, that "a receiver is not an agent, but an officer of and controlled by the appointing court, and subject alone to its directions. Wholly independent of, and not subject to the control of the either debtor or creditor, entirely indifferent as between the parties to the cause, he exercises his functions under the order of the court appointing him, for the common benefit of all parties in interest". Id. at 449. As a result, the bankruptcy court held the receiver had no duty to the creditors who had him appointed to inform them of the debtor's bankruptcy filing and, hence, notice to the receiver of the filing was not notice to the creditors. The creditors were, therefore, given additional time to file a complaint objecting to the debtor's discharge. In In re Wayne Engineering Corp., 2007 WL 704521 (Bankr. ND. Iowa). The issue was the obligation of the debtor to pay on a contract the receiver had entered into with a consultant and the priority of the consultant's claim in the debtor's bankruptcy case. The receiver had entered into an agreement providing that the consultant would take steps to sell the entity in receivership or find an alternative loan to take out the existing lender and would act as the receiver's exclusive sales agent in connection with any transaction. The consultant was to get a fixed fee of $15,000 and a 5% success fee. Prior to the bankruptcy the bank, which had the receiver appointed, sold its debt to a third party. The consultant was not involved in the sale of the bank's debt. Both the bank and the receiver refused to pay the consultant under the agreement. In resolving the issue, the bankruptcy court acknowledged that under 11 U.S.C. §543(c)(1) where a custodian (i.e. a receiver) is superseded by a bankruptcy filing, the court, after notice of a hearing, shall protect all entities to which a custodian has become obligated which respect to such property of the debtor or of the estate. "Thus, the court is required to provide for the payment of all the receiver's unpaid bills". However, the court noted, "An entity providing services to a receiver, which were beneficial to the succeeding estate in bankruptcy, is entitled to an administrative expense only to the extent the receiver would be entitled to such treatment under §503(b)(3)(E). The burden is on the claimant to show entitlement to an administrative expense priority". The court held that because the bank sold its debt, the consultant was not entitled to a fee under its contract with the receiver, because the receiver received nothing from that transaction and, hence, there was no tangible benefit to the succeeding bankruptcy estate. As a result, the consultant was not entitled to an administrative claim in the bankruptcy case. In a prior Ask the Receiver column, the issue of allocating
the costs of a receivership was discussed. It was there pointed out that
although normally the costs of a receivership are paid out of the property
under the receiver's custody and control, the court has the discretion to
allocate the costs to either the plaintiff, the defendant or both. In a
slightly unusual application of that rule, the Ninth Circuit, in an
unreported decision, affirmed the district court's adding the costs of a
SEC receivership to a disgorgement judgment obtained by SEC against the
defendant. In SEC v. Presto Telecommunications, Inc., 2007 WL
1695875 (9th Cir.) the defendant argued the district court erred in
imposing these costs on him, citing the Supreme Court's decision in
Atlantic Trust Co. v. Chapman, 208 U.S. 360, 375-76 (1908) which
recognizes the general rule that liabilities a receiver incurs are
chargeable to the property under the receiver's custody and control. The
Ninth Circuit, however, held that the district court did not abuse its
discretion in imposing the fees and costs of the receivership on the
defendant, reasoning that the investors the defendant defrauded should
not, in effect, be liable for the receiver's fees and costs. Instead, it
would be more equitable to impose those costs on the defendant. The Ninth
Circuit held the district court's ability to allocate the receiver's fees
and costs "derives from the inherent power of a court of equity to fashion
effective relief." |