Winter 2008 • Issue 31, page 4

RN's "Ask the Receiver" Expert Answer Man Peter Davidson Surveys Use of Receiverships in Non Traditional-Settings

By Davidson, Peter*

(This is Part II of a survey of the expanding uses of receivers by California courts that first appeared in the March 2008 issue of Los Angeles Lawyer magazine published by the Los Angeles County Bar Association. Part I appeared in our Fall 2008 Issue. It is reprinted with the permission of Mr. Davidson. Ed.)

Criminal Receiverships (Continued)
Another unusual requirement for criminal receiverships involves the notice of the petition to appoint the receiver, which must be served by personal service or registered mail on every person who may have an interest in the property specified in the petition. In addition, the notice of the petition must be published for three successive weeks in a newspaper of general circulation.

The receiver appointed under this section can file a motion to sell the property that the receiver will possess as a result of his or her appointment. The statute also provides the manner in which the assets taken into possession by the receiver must be distributed.

Penal Code Section 186.6, the other section that authorizes the appointment of a receiver in criminal cases, provides for a receiver to take possession of, care for, manage, and operate assets and property if the assets and property are subject to forfeiture due to “criminal profiteering activities,” as defined in Penal Code Sections 186 et seq.

Among the notice requirements of Section 186.6 is the necessity to provide notice to interested parties. Although these statutes were enacted more than 10 years ago, case law interpreting them was practically nonexistent until recently. In 2005, the court of appeal addressed the statutes in People v. Stark,¹ which focused on the receiver’s sale of assets in a criminal receivership case.

The Stark court noted that little case law has developed under the criminal statutes, and the law governing sales by receivers in civil actions should govern sales by receivers in criminal actions. Last year, the California Supreme Court issued its first opinion concerning the statutes in People v.Semaan.²

The facts in both Semaan and Stark illustrate the usefulness of the appointment of a receiver in criminal cases. In Semaan the defendants were engaged in a credit card “bust-out” scheme, in which the defendants used fraudulently obtained credit cards to purchase goods that the defendants would then sell and pocket the proceeds. When the defendants were arrested, they had a variety of assets, including a house, a car, and retail gift cards with a value of $83,800 from commercial establishments that included Nordstroms, Ralphs, and Benihanas.³

The receiver sold the house through a broker, sold the car, and liquidated the gift cards by either returning them to the merchants when that was possible or selling them on Ebay to obtain funds for the payment of restitution. In Stark the defendant was operating a car dealership. The receiver liquidated the dealership and sold the franchises.

These type of activities are best handled by an experienced receiver rather than prosecutors. Receivers with expertise can devote the necessary time and skill to maximizing the value of the assets placed under their control.

Receivers have an unusual right in these cases vis à vis secured creditors. Assets liquidated by the receiver must be used first to pay all the receiver’s expenses—ahead of the interests of secured creditors with valid liens or security interests in the property sold.⁴

Receivers in Aid of Execution
Code of Civil Procedure Section 708.620 provides the circumstances in which a receiver in aid of execution may be appointed.5 Many judges are reluctant to appoint receivers to enforce judgments because of the perceived costs as well as the unfortunate language used by the state legislature in amending the statute in 1982. Ironically, the 1982 amendment was intended to make the appointment of postjudgment receivers easier to achieve, but it appears to have had the opposite effect.

The 1982 amendment eliminated a prerequisite for appointing a receiver in aid of execution. Under the prior law, those seeking the appointment of a receiver in aid of execution had to show that a writ of execution had been returned unsatisfied or that the judgment creditor refused to apply property in satisfaction of the judgment. When the statute was amended, the legislature added the language that the court should consider the “interests of both the judgment creditor and the judgment debtor.”⁶

The strongest argument to use in seeking the appointment of a receiver in aid of execution is that the judgment debtor has assets that could be liquidated to satisfy the judgment, in whole or in part, but those assets cannot be reached by a writ of execution.⁷ Prime examples of circumstances ripe for this type of receiver include those involving an alcoholic beverage license, because Code of Civil Procedure Section 708.630 provides that the appointment of a receiver is the only method to apply a judgment debtor’s interests in such a license to the satisfaction of a judgment.⁸

Other examples include cases involving intellectual property—such as patents, trademarks, copyrights, and Web sites and domain names. This is because no method of levy exists for general intangibles such as intellectual property.⁹

These assets, which some may describe as exotic, are not the only ones for which no collection procedure exists other than the use of a receiver. In Sheridan v. Sheridan,¹⁰ a court had ordered the defendant to pay child support, but the defendant failed to do so. The plaintiff could not move to execute upon the defendant’s wages because the defendant was employed by the federal government. The court, at the plaintiff’s request, appointed a receiver and ordered the defendant to endorse and deliver his paychecks to the receiver, who was to deposit the checks and pay the child support. The defendant appealed, contending that the order was merely a back door means of garnishing his wages—an action that was prohibited. The court disagreed, holding that since the federal government was not being required to take any action, the procedure was acceptable.¹¹

A receiver can also be used to collect certain other types of postjudgment payments. Code of Civil Procedure Section 708.510(a) authorizes the court to order a judgment debtor to assign to a receiver in aid of execution all or part of a right to payments—whether due at the time of assignment or at a later date—including rents, commissions, royalties, payments due from a patent or copyright, the loan value of an insurance policy, or wages due from the federal government that are not subject to an earnings withholding order. Thus, when the judgment debtor has income-producing property, the judgment creditor may find it advantageous to have a receiver appointed to collect the income and apply it to the judgment while pursuing an execution sale of the underlying property or as an alternative to such a sale.

The appointment of a postjudgment receiver may also be useful regarding partnership interests. To reach a debtor’s partnership interest, the judgment creditor must obtain a court order charging the partnership interest with the amount of the judgment.¹² The court may appoint a receiver as part of charging order to aid in the collection of the interest.¹³

A receiver in aid of execution is vested with the same powers as the judgment creditor to collect the judgment. The receiver can conduct examinations of the judgment debtor as well as third parties, subpoena records, serve postjudgment discovery, garnish wages, and execute on the judgment.

A postjudgment receiver has the ability to maximize efforts to collect on the judgment—particularly when an experienced receiver is dealing with an ongoing business.

Nevertheless, the greatest advantage of a postjudgment receiver is the fact that the cost of the receiver collecting the judgment is added to the judgment.¹⁴ Thus a judgment debtor must pay for the receiver and collection costs. If an attorney is used for collection purposes instead of a receiver, the cost of collection is paid by the judgment creditor.¹⁵

Family Law, Regulatory, and Other Receiverships
Under the Family Code, a receiver may be appointed to enforce any family law order or judgment.¹⁶ The most typical cases for the involvement of receivers include those in which a party is seeking to enforce spousal¹⁷ or child support18 orders or to preserve, manage, or safeguard community property pending a property division order.

The appointment can be prejudgment pending a final order or postjudgment to enforce a final order or judgment. Cases in which the appointment of a receiver are most effective include those in which the community owns a closely held family business, such as a restaurant, bar, or retail store. These businesses have assets, such as cash receipts, that can be hidden, diverted, or dissipated by one spouse. Also, the spouses may give countermanding instructions to employees concerning management of the business.

Often the heated disputes over community assets and their management can be brought under control with the appointment of a receiver to manage and safeguard the assets. Receivers can also be appointed to marshal property when there have been violations or threatened violations of property division orders.¹⁹

Receiverships can also be appointed in regulatory cases. To protect the public, various statutes authorize the court to appoint a general equity receiver. The function of this type of receiver is to take control of the defendant’s assets or business and sometimes, if the defendant is a corporation or partnership, the defendant itself.

One of the more sweeping statutes²⁰ authorizes the attorney general to obtain the appointment of a receiver when the attorney general has a reasonable probability of establishing that a defendant’s real or personal property was acquired by unlawful means and the appointment would facilitate the maintenance, preservation, operation, or recovery of property for the purposes of restitution.

Receivers in these cases not only have the normal powers given receivers, which are explicitly set forth in the statute, such as the right to sue and take possession, manage, and transfer property. They also are given expanded powers that receivers in other types of cases do not have. The more important of these powers is the right to avoid fraudulent transfers²¹ and to set aside certain types of preferences.²² The statute also automatically stays the filing of actions, enforcement of liens, or the issuance of any summons, subpoena, attachment, or writ against the receiver or any property subject to the receivership without prior order of the court.²³

A parallel statute authorizes the appointment of a receiver in actions brought by the California commissioner of corporations when enforcing the state securities law, the personal property broker’s law, and laws regulating health maintenance organizations.²⁴ Similarly, the California commissioner of real estate can seek the appointment of a receiver when the commissioner believes a person has violated or is about to violate an order, license, decision, or requirement—and the funds or property of others in the custody or under the control of the person are jeopardized.²⁵

Equity receivers also are often appointed by federal courts in cases brought by regulatory agencies such as the Securities and Exchange Commission or the Federal Trade Commission. Receivers who are appointed in these cases are not specifically authorized by statute, as they are in state court. Instead, the appointments are based on the equitable powers of the federal district court to fashion appropriate remedies.²⁶

Equity receivers appointed by federal courts usually are charged with locating, marshaling, and safeguarding assets for ultimate distribution to investors or consumers and determining whether the business for which the receiver is appointed can be operated legally and profitably. If not, the receiver generally will obtain court permission to shut the business down and liquidate its assets.

Other nontraditional uses of receivers can be found in the codes and in case law. Receivers have been appointed in partition actions²⁷ and fraudulent transfer actions.²⁸ The Business and Professions Code authorizes the appointment of a receiver in unfair competition cases to prevent the use of any practice that constitutes unfair competition or to help restore money or property acquired by means of unfair competition.²⁹ The code provides the same for unfair or misleading advertising cases.³⁰

The Health and Safety Code authorizes the appointment of a receiver to temporarily operate a long-term healthcare facility³¹ and when the provisions of the Knox Keen Health Care Services Plan Act have been violated.³² Receivers can also be appointed in substandard housing cases to remedy unsafe conditions that pose a danger to the health and safety of residents or the public.³³

Summary
A common perception of receiverships as a remedy is that a remedy is that they are too expensive—and even draconian. However, the use of receivers has evolved in recent years to encompass many more types of cases beyond the ones in which receivers have traditionally played a role. Receivers in criminal cases and regulatory cases not only frequently achieve results that are difficult to realize by alternative methods but in addition do so more quickly and cheaply than other available remedies.

Indeed, there are certain situations in which a receiver is the best or only remedy and should be pursued to protect and advance a client’s interest—whether that involves protecting assets prejudgment or collecting assets postjudgment that would be uncollectible without the receivership.

* Peter A. Davidson is the RN’s contributing “Ask the Receiver” columnist and is managing partner of Moldo Davidson Fraioli Seror & Sestanovich LLP, a Century City law firm. His practice includes both representing receivers and acting as a receiver. Peter is the immediate past chair of the Los Angeles County Bar Association’s Remedies Section.

¹ People v. Stark, 131 Cal. App. 4th 184 (2005).
² Semaan, 42 Cal. 4th 79.
³ The defendants were charged with 24 counts of grand theft and 75 counts of fraudulently drawing checks without sufficient funds. Defendant Yousef Semaan was ultimately sentenced to 14 years in state prison.
⁴ PENAL CODE §186.11(j).
⁵ According to Code of Civil Procedure §708.620, “The court may appoint a receiver to enforce the judgment where the judgment creditor shows that, considering the interests of both the judgment creditor and the judgment debtor, the appointment of the receiver is a reasonable method to obtain a fair and orderly satisfaction of the judgment.”
⁶ This is often a difficult showing to make. One has to wonder what the legislators were thinking. When would it ever be in the judgment debtor’s interests to have a receiver appointed to help collect a judgment that the judgment debtor refused to pay? The concept is so odd that Rutter’s California Practice Guide: Enforcing Judgments and Debts simply leaves this requirement out of its discussion of the statute, focusing instead on the requirement that the appointment is a “reasonable method to obtain the fair and orderly satisfaction of the judgment”. AHART, CALIFORNIA PRACTICE GUIDE: ENFORCING JUDGMENTS & DEBTS ¶6:1458 (2007).
⁷ Indeed, the Legislature Committee Comments to Code of Civil Procedure §708.620 state: “A receiver may be appointed where a writ of execution would not reach certain property and other remedies appear inadequate.”
⁸ Similarly, a franchise granted by a public entity is not subject to execution. CODE CIV. PROC. §699.720. Code of Civil Procedure §708.920, however, provides a procedure for the application of such a franchise to satisfy a judgment—including the appointment of a receiver.
⁹ The order appointing a receiver to sell intellectual property should provide that the intellectual property—specified as a patent, trademark, domain name, or the like—is vested in the receiver, who is authorized and directed to take control of and sell the intellectual property to satisfy the judgment.
¹⁰ Sheridan v. Sheridan, 33 Cal. App. 3d 917 (1972).
¹¹ 29 Id. at 921-22.
¹² 30 CORP. CODE §15522(1).
¹³ See also CODE CIV. PROC. §§708.310, 708.320; §708.310 authorizes the issuance of a charging order, and §708.320 provides that service of a notice of motion for a charging order on the judgment debtor and the other partners of the partnership creates a lien on the judgment debtor’s interest in the partnership.
¹⁴ CODE CIV. PROC. §685.070.
¹⁵ CODE CIV. PROC. §685.040.
¹⁶ FAM. CODE §290; Rosenthal v. Rosenthal, 240 Cal. App. 2d 927 (1966).
¹⁷ Willen v. Willen, 121 Cal. App. 351, 352 (1932).
¹⁸ Quaglino v. Quaglino, 88 Cal. App. 3d 542 (1979).
¹⁹ See generally In re Marriage of Economou, 224 Cal. App. 3d 1466 (1990); Darter v. Magnussen, 172 Cal.App. 2d 714 (1959).
²⁰ GOV’T CODE §12527.
²¹ GOV’T CODE §§12527(4), (5), (6).
²² GOV’T CODE §12527(7).
²³ GOV’T CODE §12527(d)(3).
²⁴ GOV’T CODE §13975.1.
²⁵ BUS. & PROF. CODE §10081.
²⁶ Securities & Exch. Comm’n v. Manor Nursing Ctrs., Inc., 458 F. 2d 1082, 1103 (9th Cir. 1972); Commodity Futures Trading Comm’n v. Co Petro Mktg. Group, Inc., 680 F. 2d 573, 583 (9th Cir. 1982).
²⁷ Mesnager v. Leonis, 140 Cal. 402 (1903).
²⁸ CODE CIV. PROC. §3439.07(a)(3)(B).
²⁹ BUS. & PROF. CODE §17203.
³⁰ BUS. & PROF. CODE §17535.
³¹ HEALTH & SAFETY CODE §§1325-1334. These sections set forth the specific requirements for appointment of a receiver as well as the receiver’s specific powers and duties.
³² HEALTH & SAFETY CODE §1392. A receiver appointed pursuant to this section is vested with all the powers of the officers and directors of the plan.
³³ HEALTH & SAFETY CODE §17980.7. In 2001 Code of Civil Procedure §368.2 was enacted, requiring a receiver of rental housing to notify the court of substandard and/or unsafe conditions as defined in the Health & Safety Code, the cost and time to abate the conditions, and whether the receivership estate has the funds to do so. Health & Safety Code §17980.1 authorizes the appointment of a receiver for buildings that pose a hazard as a result of an earthquake