Summer 2008 • Issue 29, page 17

Fees, Fees, Fees-Who Pays the Fees?

By Rense, Kirk*

Recent Unpublished California Court of Appeals Decisions Illustrate Receivership Fee Problems and Pitfalls

Although the following cases are not published and may not be cited as authority for any of the issues discussed and ruled upon, each nevertheless illustrates points that every careful receiver should take to heart lest he or she become the victim of a similar fact pattern. All three concern payment of a fiduciary’s fees – a subject of at least passing interest to the receivership community.

Must the Party Seeking the Receiver’s Appointment Pay Any Shortfall?
In Fassler v. Pacific Star, 2008 Cal. App. Unpub. Lexis 2879 (filed April 8, 2008) the party seeking appointment of a receiver told the court it would pay any shortfall – “We realize there is an expense to the [receivership] and the statute provides that if there is not enough money in the case to pay for the receiver that we’ll pay and that’s fine.” – to overcome the court’s fears that the expense of a receivership would overwhelm the small winery business in dispute. The court was persuaded, appointed a receiver, put a $10,000 cap on receivership fees, later uncapped that cap, and ultimately awarded $77,448.43 to the receiver. $20,000 of this amount was to be taken from the business accounts and the balance was to be paid by the party that sought the receivership. Complicating matters was the fact that the parties settled the corporate liquidation suit in the interim – a settlement that apparently did not address payment of the receiver’s fees.

On appeal counsel for the party seeking the appointment argued that their client hadn’t really agreed to pay any shortfall – they (the counsel) had just recited to the trial court what they believed the law to be. Appellant’s counsel also argued that fees should be paid from potential future business revenues or by taxing the underlying real property not owned by the business (owned by a principal of the business entity). Finally they trotted out the U.S. Supreme Court decision Atlantic Trust Co. v. Chapman (1908) 208 U.S. 360 for the proposition that “no such liability [i.e. for paying a receiver fee shortfall] could arise from the simple fact that it was on plaintiff’s motion that a receiver was appointed….”

The appellate court affirmed the trial court. It first cited language familiar (and comforting) to every receiver: “’Courts generally are vested with large discretion in determining who shall pay the cost and expenses of receivership.’” (Baldwin v. Baldwin (1947) 82 Cal.App.2d 851, 856.) “As a general proposition the costs of a receivership are primarily a charge upon the property in the receiver’s possession and are to be paid out of said property. However, this is not an invariable rule. In many cases a direct liability is imposed upon the parties to the action, or upon some of them, for the remuneration of the receiver.” (Andrade v. Andrade (1932) 216 Cal. 108, 110; [citation omitted] “’This may result from the irregularity of the appointment, or from the insufficiency of the fund, or out of the agreement between the parties.’” (Ephraim v. Pacific Bank (1900) 129 Cal. 589, 592.)”

The appellate court held that requiring fees to be paid from future business revenues “could seriously impact its ability to continue as a going concern” and distinguished Atlantic Trust Co. v. Chapman on the basis that there had been no discussion of payment of fees in the Atlantic case, unlike the case at bar, where there was an express agreement by the party seeking appointment to be responsible for any shortfall.

The lesson? Although things turned out well for this receiver, this controversy (and its attendant uncertainties) could have been avoided by a careful receiver who made sure that responsibility for paying receivership fee shortfalls was addressed and allocated in the appointing order.

Receiver, Heal Thyself
Butterwick v. Fitzpatrick, 2008 Cal. App. Unpub. LEXIS 1293 (filed February 15, 2008) was a messy case involving the unwinding of a professional medical corporation and a companion partnership (involving many of the same principals) that leased medical equipment to the medical corporation. The receiver was appointed upon stipulation of the parties.

The receiver ultimately realized that there were two distinct receiverships, began maintaining separate accountings for each, and ultimately sought (and obtained) authority to place the medical corporation in bankruptcy. The receiver ultimately asked the court, among other things, to tax payment of some receivership fees incurred in one case to the other entity in receivership, and also asked that the individuals / principals of both be made personally liable for payment of fees.

The trial court refused these requests, and the appellate court confirmed. Although the discussion is lengthy, two issues were highlighted. The first was the receiver’s failure to seek clarification of apparent ambiguity in the appointing order and the second was his continuing administration of the insolvent professional corporation (taking interim fees from the other entity). The appellate court stated:

“The Receiver argues the language of the order was ambiguous because it did not directly address the allocation issue and therefore it should be construed against each of the physician parties who stipulated to the appointment of the receiver. However, the court had a reasonable basis to conclude that to the extent there was any ambiguity, the Receiver had the affirmative obligation to seek clarification from the court. ‘If the receiver’s powers are in doubt, the receiver should petition the court for instructions.’ (Well & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2007)P9:762.)”

The second error concerned the receiver’s failure to disclose operating losses. The appellate court agreed with the trial court that the receiver did not act in an appropriate manner when, rather than seek instructions, he continued to provide services to the professional corporation despite knowing the entity had insufficient assets to pay his fees without seeking instruction. The appellate court stated:

“Although the receiver now contends that he acted in good faith, the court had a reasonable basis to conclude that the Receiver’s conduct did not fully meet the high standards expected of a fiduciary under the circumstances. The Receiver could easily have protected himself and the parties by discontinuing his services until he had been given direction by the court.”

The lesson? Clarify and disclose, clarify and disclose.

Receiver or Referee? Does it Matter?
The last case, Padilla v. Serino, 2008 Cal. App. Unpub. LEXIS 1306 (February 19, 2008) concerns a stipulated receiver who was later appointed a referee pursuant to stipulation of the parties to resolve certain issues. Unfortunately for the gentleman, the parties caused the underlying action to be dismissed with prejudice before the referee brought his motion for payment of his referee fees. The trial court granted his fee motion and the parties subsequently appealed. On appeal the referee argued that, as in a receivership case, the court retained jurisdiction to enter an order awarding his referee fees even after dismissal of the underlying action. The appellate court disagreed, found orders entered after the dismissal to be void, stating that there is a material difference between receivers and referees.

In a receivership case the receiver remains in charge of the property until discharged by the court regardless of a dismissal of the action by the parties (the appellate court reasoned); dismissal of an action does not discharge the receiver from accountability to the trial court, nor does it deprive the trial court of jurisdiction to settle the receiver’s account (citing to Pacific Bank v. Madera Fruit & Land Co. (1899) 124 Cal. 525, 525-527). But there is no such rule allowing post-judgment recovery of referee fees, the court held. The referee was , not entrusted with control of property (as is a receiver). Dismissal of the case divested the trial court of all jurisdiction and any orders entered after dismissal were void.

The lesson? Pay close attention, and never assume. –Ed.