Resolving Recent Issues Affecting Receivers & Receiverships
By Rense, Kirk*
(Issues arise from time-to-time that affect significant portions of the
receivership community and receivership law. Here is a round-up of a few
that have recently become of interest – Ed.)
At the same time, many financial institutions have been thrust into using receivers and receiverships for the first time to protect their collateral assets as real property values plummet and loan defaults hit record highs.
This combination of new receivers / purported receivership companies and financial institutions inexperienced in receivership procedures has resulted in abuses of receivership law to accommodate business interests of these troubled financial institutions.
RN is advised that members of at least one major real property broker/manage-ment firm have offered in seminars aimed at the financial community to perform receiverships for free provided that the company is retained to market and sell affected properties after non-judicial foreclosures. Further, some financial institutions are demanding complete control over actions of potential receivers as a precondition to nominating them to the court for appointment.
Such maneuverings are illegal, though expedient (and seemingly cost-effective) practices from a business perspective. Not a tiny bit illegal. Not somewhat illegal. Rather, quite blatantly and unqualifiedly illegal.
California Rule of Court 3.1179 provides that a receiver is an agent of the court, is neutral, and holds assets for the court, not for either the plaintiff or the defendant:
Businesses may react: “What spoilsports!” But receivers are quite literally a part of the court, a remote personification of the judge, and may never have two masters (regardless of receivers’ or litigants’ emphasis on enhancing profitability).
Every MBA holder knows game theory demonstrates that those who ignore
the rules of the game are rarely caught, and regularly prevail over those
who follow the rules. Hence the pertinent business question is not what is
right or wrong, but will I be caught breaking the rules, and, if caught,
what are the potential consequences.
If a business is caught, the court’s punitive remedy seems limited to civil sanctions. A quick review of case law does not disclose any instance where an appointing court has attempted to invalidate a security interest upon discovering such an inappropriate receiver-litigant relationship.
The consequences of impropriety may be more severe for the receivers or attorneys involved. Certainly the court may bar such persons from that courtroom in the future, and may report counsel who enter into or are aware of such sub-rosa arrangements to the State Bar for discipline. Names of the transgressors may circulate in the judicial community, making it more difficult to obtain that next appointment, or retention.
The fact that such proscribed arrangements are banned by statute ought
to be sufficient to prevent their occurrence. But it demonstrably is not.
This leaves it to members of the receivership community to monitor and
report such improprieties in order to preserve the general respect with
which receivers and receiverships are held by the judicial community and
Where a custom form of appointing order has been used which does not include this language, must a receiver go back to court and obtain specific authorization to turn over the property? Assume the appointing order contains the standard language that the receiver is to possess / operate the receivership property until further order of the court. Can this instruction be safely ignored where title to the property has changed hands?
At least one treatise, from the Rutter Group, has been mentioned to the RN for the proposition that such turnover by a rents, issues and profits receiver should be automatic without further court order. There has been no response to an RN letter to that organization requesting comment.
The question was generally posed to several long-time receivers. Some took the position that no additional order is necessary, that the property should be turned over promptly upon the completion of the sale (and, presumably, the recording of the trustee’s deed upon foreclosure). Another recalled the issue arising only once, and there the successful deed holder obtained a stipulation to turnover and corresponding court order. A few took the position that a receiver must follow the explicit language of the appointing order and not relinquish the property until the court orders her/him to do so. Those receivers suggest obtaining the required order by stipulation if possible.
In at least one recent instance the foreclosing lender and its counsel
brought pressure to bear on the receiver for immediate turnover even
though the order did not so provide (and contained the standard retention
pending further court order language). The receiver requested that an
order directing turnover be obtained, and ultimately learned that the
propriety of the foreclosure was being challenged by the borrower/debtor.
Would the receiver have incurred personal liability if she/he had turned
over the property without benefit of court order under such a
circumstance? What if the property were lost to fire after turnover
without benefit of court order and the receiver’s insurance policy had
terminated upon relinquishment?
When Must a Receiver Relinquish Bankruptcy Debtors’
Subsection (d) of this same statute provides that “[A]fter notice and hearing” the bankruptcy court may excuse compliance with some of the reporting/turnover requirements “…if the interests of creditors…would be better served by permitting a custodian to continue in possession, custody, or control of such property….”
It was recognized some years ago by members of both the Southern California bankruptcy and receivership communities that the timing issue raised by this statute – what happens between the mandated time of turnover and the eventual hearing on a motion to excuse compliance – should be reconciled. Defendants in state and federal court actions were filing petitions under the Bankruptcy Code to dislodge court-ordered receivers in order to collect a month or two of rents (the plaintiff below’s collateral) before a motion could be brought and the receiver reinstated.
An informal conference between leading receivers and Bankruptcy Court judges some years ago led to much of the language now found in California Judicial Council receiver appointment Form RC-310 (the same language appears in many custom appointment orders as well):
“24. Bankruptcy – Plaintiff’s duty to give notice. If a defendant files a bankruptcy case during the receivership, plaintiff shall give notice of the bankruptcy case to the court, to all parties, and to the receiver by the closing of the next business day after the day on which plaintiff receives notice of the bankruptcy filing.
“25. Bankruptcy Receiver’s duties. If the receiver receives notice that a bankruptcy has been filed and part of the bankruptcy estate includes property that is the subject of this order, the receiver shall have the following duties:
“26. Failure to turn over property. A receiver who fails to turn over the property in accordance with this order shall not be paid for time and expenses after the date the receiver should have turned the property over.”
RN knows of no corresponding rule formally adopted by the Bankruptcy Court Bench, but the general informal agreement seems to have worked well to avoid the abusing of bankruptcy laws by opportunistic debtors.
Long-time Receiver David Pasternak reports that during the last year he has twice been in a bankruptcy court where the judge did not endorse or follow this procedure, and insisted that the receiver had no latitude in complying with the turnover requirements of 11 U.S.C. Section 543. Under such circumstances, a receiver who retains possession of the property could be subjected to Bankruptcy Court sanctions for violating its turnover requirements. Clearly, the Bankruptcy laws predominate over the state court receivership order.
Mr. Pasternak states that he thinks it is important the California Receivers Forum attempt to establish a dialogue with the Bankruptcy Court judges as soon as possible to reestablish this protocol, and the RN agrees in light of the apparent fact that commercial real properties are now starting to come into receiverships, and this may prove to be a much more common dilemma in future months. Moreover, if there is no “grace period” during which the status quo is maintained pending the filing and hearing of the emergency Bankruptcy Court motion excusing the receiver from turnover, disgruntled receivership parties are all the more likely to file bankruptcy petitions in order to dislodge receivers.
In the interim a receiver may wish to discuss in advance with all counsel whether plaintiff’s counsel would seek an order excusing turnover in the event of a bankruptcy filing by the defendant/debtor, and a projected timetable for doing so. The proclivities of area bankruptcy judges on this issue might be researched in advance. If it appears that the issue may arise, secured creditor plaintiff’s counsel may be able to move quickly enough in Bankruptcy Court on an emergency first-day basis to ameliorate the problem, or at least seek an explicit temporary stay of enforcement of 11 U.S.C. Section 543 to allow a motion to be timely brought.
Comments are most welcome. Ed.