Summer 2010 • Issue 37, page 3
The Elephant in the Courtroom: Ethical Issues and Criteria in Selecting Receivers
By Bressi, Jess*
[Mr. Bressi examines prospective judicial criteria for selecting a
receiver, an issue the RN has not treated in the past. I think you will
find his piece well-thought-out and provocative. Ed.]
economic times, state and federal judges are frequently requested to
appoint a receiver to take over a failed or challenged real estate
development project, real property in foreclosure, a corporation having
governance issues, or an organization that allegedly engaged in fraudulent
practices such as fraudulent transfers, securities fraud, or a “Ponzi”
The equitable power of courts to appoint a receiver is an awesome
remedial power often exercised in the beginning of the dispute and before
any adjudication of the merits. Courts appoint receivers with the intent
that they act as the Court’s independent, neutral, court-supervised
fiduciaries authorized to seize and take control of property
notwithstanding a defendant’s constitutionally-protected property
interests. Many millions of dollars of property are often involved and
very substantial amounts of receivers’ and other professionals’ fees are
An Awesome Remedial Power
Notwithstanding the awesomeness of the court’s power and the huge
financial stakes involved, precious little attention has been given to the
receiver selection process and corresponding ethical constraints.
Protecting the court’s integrity requires that even the appearance of
impropriety be avoided. I suggest that much greater care be taken in the
level of disclosures and selection process in order to avoid those abuses
in the selection and appointment of receivers that have recently been
experienced in a number of jurisdictions.1
More specifically, in light of the receiver’s role as a direct extension
of the authority of the appointing court, receivers should be held to
similar ethical standards as other adjuncts to judges, including masters,
arbitrators, referees, and mediators. This article discusses the present
paucity of statutory and rule guidance for California jurists, and
provides practical analysis and a checklist for judges to use when
evaluating whether to approve a receiver nominated by one of the parties
to the litigation (most often, the plaintiff).
Before discussing the substantive law and rules relating to the selection
of a receiver, consider the following hypothetical:
Big Bad Broker (“BBB”)2 has principals who play golf and attend
seminars with representatives of Colossal Ginormous Bank (“CGB”). At
present, BBB’s commercial real estate activity is way down and the income
received by BBB has suffered. Several years ago, BBB opened a property
management division to create a source of counter-cyclical income when
more lucrative brokerage activities are down.
The ever-entrepreneurial principals of BBB had a brilliant idea: they
would offer cut-rate or even free receivership services to CGB in exchange
for CGB nominating officers of BBB to be receivers in lawsuits CGB filed.
In turn, these officers of BBB would, of course, employ BBB to not only
manage the property of the receivership estate, but also to be the
exclusive sales and leasing agents for the projects. BBB, in turn, would
deposit all of the funds of the receivership estates in bank accounts
maintained at CGB. Also, BBB would use its extensive buyer mailing and
email lists to give its customers first shot at all of the pieces of
receivership property it would be managing. The person selected by BBB to
serve as the named receiver also has little or no experience serving as a
Should courts know about this type of quid pro quo arrangement before
approving the selection of a receiver nominated by a plaintiff? Should a
court require disclosure of all business relationships between the
nominated receiver, the receiver’s choices of management and brokerage
companies and other vendors, and the parties to the litigation, before
approving the selection of receiver? The short answer to these questions
The Receiver Is A Court Officer
It should always be kept in mind that a receiver is an officer or
representative of the appointing court, typically directed to take
possession of property that is the subject matter of litigation for the
duration of the litigation.3 The receiver acts as a fiduciary
and often functions as would the owner of property and a representative of
the court that is taking possession of the property.
The receiver holds the property for the benefit of all creditors of the
receivership estate.4 While receivers are often described to be
an “agent” of the appointing court, it is not accurate to describe her or
him as “the Bank’s receiver.”5 In addition to taking possession
of property, receivers often are empowered to sell the property, borrow
money against the property, complete construction of incomplete
developments, and otherwise act and exercise all of the characteristics of
ownership, subject to court oversight and approval.
California Law and Rules Impacting Selection of Receivers
California law provides that unless the parties consent in writing, no
party or an attorney or a party or person interested in an action, or
relative of any judge by consanguinity or affinity within the third
degree, can be appointed a receiver.6 California Rules of
Court, Rule 3.1179 provides:
- Agent of the court. The receiver is the agent of the court and not of
any party, and as such:
Acts for the benefit of all who may have an interest in the
receivership property; and
Holds assets for the court and not for the plaintiff or the defendant.
Prohibited contracts, agreements, arrangements, and understandings.
The party seeking the appointment of the receiver may not, directly or
indirectly, require any contract, agreement, arrangement, or understanding
with any receiver whom it intends to nominate or recommend to the court,
and the receiver may not enter into any such contract, arrangement,
agreement, or understanding concerning:
The role of the receiver with respect to the property following a
trustee’s sale or termination of a receivership, without specific court
How the receiver will administer the receivership or how much the
receiver will charge for services or pay for services to appropriate or
approved third parties hired to provide services;
Who the receiver will hire, or seek approval to hire, to perform
necessary services; or
What capital expenditures will be made on the property.7
In addition to the prohibited types of contracts and agreements described
in Rule 3.1179, Code of Civic Procedure 569 requires receivers to not
deposit funds where they are not fully guaranteed or insured, with a party
to the litigation, i.e. the plaintiff CGB, or with a financial institution
which the receiver owns one percent or more in value of the outstanding
stock, or where the receiver is an officer, director, or employee of the
financial institution, or is related to an owner, officer, employee or
A leading treatise on receivership law states: “It is a rule of general
application that a receiver should be a person wholly impartial and
indifferent toward all parties interested in the fund over which the court
has found it necessary to extend its care and protection. Said the Supreme
Court of Pennsylvania, ‘It goes without saying, who is the officer of the
court and whose actions are under its control, ought to be disinterested,
unbiased and impartial as between the parties; and where any breach of
propriety in any such respect occurs, it is the duty of the court to
remove the receiver and substitute another. But in the exercise of this
power the court must be guided by sound discretion under the circumstances
of the particular case. No definite rule can be framed, but the power of
removal is to be exercised under the broad discretionary jurisdiction of a
court of equity.’” Ralph Ewing Clark, The Law and Practice of Receivers,
Third Edition, Section 112(b), pages 162-163.
Guidance for Judges in Selecting
Receivers in California
There is precious little in California’s Rules of Court or substantive law
directly dealing with ethical or similar standards for the appointment of
receivers for judges. Under Title X, Judicial Administration Rules, Rule
10.611, judges are instructed that “each court should select attorneys,
arbitrators, mediators, referees, masters, receivers, and other persons
appointed by the court on the basis of merit. No court may discriminate in
such selection on the basis of gender, race, ethnicity, disability, sexual
orientation, or age.”
In other contexts, particularly the selection and appointment of
arbitrators and mediators, courts are provided substantially greater
levels of guidance and specific standards of appointment. But only one
canon of the California Code of Judicial Ethics touches on receivers,
Canon 3C(4). It provides that “[a] judge shall not make unnecessary court
appointments. A judge shall exercise the power of appointment impartially
and on the basis of merit. A judge shall avoid nepotism and favoritism. A
judge shall not approve compensation of appointees above the reasonable
value of services rendered.” The Advisory Committee Commentary to Canon
3C(4) states “appointees of a judge include assigned counsel, officials
such as referees, commissioners, special masters, receivers, and
guardians, and personnel such as clerks, secretaries, court reporters,
court interpreters, and bailiffs. Consent by the parties to an appointment
or an award of compensation does not relieve the judge of the obligation
prescribed Canon 3C(4).”
With receivers handling literally billions of dollars of litigants’
assets, Canon 2 of the California Code of Judicial Ethics is also
implicated: “[A] judge shall respect and comply with the law and shall act
at all times in a manner that promotes public confidence in the integrity
and impartiality of the judiciary.” Once again, the Advisory Committee
Commentary to Canon 2 notes that “public confidence in the judiciary is
eroded by irresponsible or improper conduct by judges. A judge must avoid
all impropriety and appearance of impropriety. . . The test for the
appearance of impropriety is whether a person aware of the facts might
reasonably entertain a doubt that the judge would be able to act with
integrity, impartiality, and competence.”
It is not a quantum leap of logic to conclude that appointing conflicted
or unethical receivers with financial ties to vendors or the litigants
would erode public confidence in the judiciary. Yet, there is no
systematic or standardized disclosure mechanism in California to assure
that judges are advised of some of the relationships highlighted in the
Should Judges Impose on Receivers
Ethical Rules Similar To Those Applied to
Mediators and Arbitrators?
When you consider that receivers function as agents of the court and are
held to a fiduciary standard, it is anomalous that California has much
more detailed levels of disclosure and disqualification standards for both
mediators and arbitrators than for receivers.
As to mediators, California Rules of Court, Rules 3.850 through 3.860,
establish “minimum standards of conduct for mediators in court-connected
mediation programs for general civil cases.”8 The rules note
that “for mediation to be effective there must be broad public confidence
in the integrity and fairness of the process.”9
Receivers arguably serve much more powerful roles than mediators, however,
in that receivers are making decisions regarding the disposition of assets
rather than just making recommendations and seeking to facilitate
settlement. Receivers often have possession of millions, if not billions,
of dollars of litigants’ assets subject to constitutional protections of
due process and constitutionally protected property interests. Yet — with
the exception of Rule 3.1179, and Code of Civil Procedure Sections 566 and
569 — California has no analogous rules for receivers regulating the
impartiality, conflicts of interests, disclosure and withdrawal applicable
For example, Rule 3.855 imposes on mediators an affirmative duty to
disclose potential conflicts from the inception of a mediation process
through its completion. It is a continuing obligation.10 This
rule imposes a duty on mediators to disclose to all parties “past,
present, and current expected interests, relationships, and affiliations
of a personal, professional, or financial nature.”11
Just as with mediators and arbitrators, receivers are frequently
repeatedly appointed by the same parties. Surely, if past “affiliations”
are relevant to the selection of a mediator, it is equally or more
relevant to the nomination and selection of a receiver.
California has also enacted ethics standards for arbitrators as Division
VI of the Appendix to the California Rules of Court.12 The
standards adopted by the Judicial Council for Contractual Arbitrators
create both general duties and specific disclosure obligations. Standard 5
imposes a general duty that “an arbitrator must act in a manner that
upholds the integrity and fairness of the arbitration process. He or she
must maintain impartiality toward all participants in the arbitration as
Standard 7 creates a series of subjects that must be disclosed, in
addition to any that are also addressed by statute.13 Standard
7 also imposes an affirmative obligation to disclose various relationships
the arbitrator might have with the lawyers in the arbitration, as well as
the parties, as well as an affirmative obligation to disclose whether the
arbitrator is serving or, within the preceding five years, has served: (a)
as a neutral arbitrator in another arbitration. . ..” The Standard further
states “ if the combined total of the cases disclosed . . . is greater
than five, the arbitrator must provide a summary that states the total
number of cases in which the arbitrator served in each capacity and the
number of cases in which the party to the current arbitration or the party
represented by the lawyer for a party in the current arbitration was the
It does not take much Internet research of court records to confirm that
certain litigants have favored receivers that they routinely nominate to
serve as receiver in cases they initiate. While it is a reasonable
assumption that the reason that these receivers are repeatedly nominated
by the same parties is that they are doing a good job, is there a point
where a litigant’s frequency of nomination of a particular receiver could
cause the public to question the impartiality of the receiver because he
or she is “beholden” to a particular litigant for a large portion of her
or his income?
Can (or should) CGB “always” use the same receiver who in turn always uses
the same agents, brokers, and property managers, regardless of property
type or locale?
Suggested Basic Ethical Rules
To fill this void of ethical guidance for courts and parties to
receiverships, the author searched for potentially analogous and
well-established rules that could be modified and adopted. One such
universe of ethical rules is found when dealing with special masters. The
following collection of proposed ethical rules regarding receivers is
derived from the Basic Ethical Rules for Judicial Adjuncts promulgated by
the Academy of Court-Appointed Masters.15
Rule 1: Dignity and Integrity of the Court
Receivers should observe high standards of conduct so as to preserve the
integrity, dignity, and independence of the
appointing court and judicial system.
Sources: CCUSJ, Canon 1; CCJE, Canon I..
Rule 2: Competence and Diligence
A receiver should accept only assignments: (1) for which the receiver
is suited by education, training, and experience; (2) that the receiver is
able to undertake and complete in a competent, professional, and timely
fashion: and (3) as to which the receiver is physically and mentally able
to meet the reasonable expectations of the parties and the appointing
A receiver must maintain professional competence and diligently
discharge assigned responsibilities in a prompt, fair, nondiscriminatory,
and professional manner.
A receiver must be patient, dignified, respectful, and courteous;
apply an even-handed and unbiased process; and treat all parties with
A receiver must maintain order and decorum in judicial proceedings.
Sources: Fed. R. Civ. P. 53(b)(2); CCUSJ, Canon 3.A(1)-(5): CCJE, Canons
3.B and C: JAMS Guidelines, 11; ABAIAAA Code, Canons 1.13 and IV.
Rule 3: Propriety
A receiver should respect and comply with the law and should at all
times act in a manner that promotes public confidence in the integrity and
impartiality of the receiver and the judiciary.
A receiver should not engage in any activities that would call into
question the propriety of the receiver’s conduct in carrying out the
responsibilities assigned by the appointing court.
A receiver should not allow family, social, or other relationships to
influence official conduct or judgment, nor should a receiver use the
prestige of the office for private gain or to advance or appear to advance
the private interests of others.
A receiver should not hold membership in any organization that
practices invidious discrimination on the basis of race, sex, religion, or
Sources: CCUSJ, Canon 2; CCJE, Canons 2, 3 and 4; ABAIAAA Code, Canon 1.A.
Rule 4: Neutrality/Absence of Conflict or Appearance of Conflict
A receiver should avoid conflicts of interest in the performance of
official duties. A conflict of interest arises when a receiver knows that
he or she (or a close relative) might be so personally or financially
affected by a matter that a reasonable person with knowledge of the
relevant facts would question the receiver’s ability to properly perform
the assigned responsibilities.
Before an appointment, a receiver should disclose to the appointing
court and the parties all matters required by applicable law, any actual
or potential conflict of interest or relationship, or other information of
which the receiver is aware that reasonably could lead a person to
question the receiver‘s impartiality. This duty of disclosure continues
throughout the assignment and requires the prompt disclosure of any
interest or relationship that arises that the party recalls or discovers.
Sources: Fed. R. Civ. P. 53(a)(2) and (b)(3); CCUSJ, Canon 3.C: CCJE,
Canon IF: ABAIAAA Code, Canons I and II: JAMS Guidelines, V.
Rule 5: Disqualification
Federal: A receiver may not have a relationship with the parties,
counsel, action, or appointing court that would require disqualification
of a judge under 28 U.S.C. § 455, unless waived by the parties with the
court’s approval after full disclosure of any potential grounds for
State: A receiver shall comply with the applicable state statutes and
court rules governing disclosures, conflicts of interest, and
Financial interest: A receiver may not own a legal or equitable
interest, however small, in a party, nor have a relationship with a party
such as serving as its director or advisor.
Sources: 28 U.S.C. Section 455: CCUSJ, Canon 3.C; ABAIAAA Code, Canons
1.11 and I; JAMS Guidelines, VII.
Rule 6: Confidentiality
A receiver should avoid making public comment on the merits of a
pending action, except as appropriate in the course of official duties.
A receiver should never disclose confidential information received in
the course of official duties, except as required in the performance of
These restrictions on disclosure continue to apply after the
conclusion of the receiver’s service, unless modified by the appointing
Sources: CCUSJ, Canon 3.A(6); CCJE, Canon 3.D; ABAIAAA Code, Canon VI.13;
JAMS Guidelines, IV.
Rule 7: Compensation/Time-keeping/Gifts and Favors
A receiver’s compensation for official duties shall be determined by
the appointing court.
Reimbursement for expenses incurred in the course of service as a
receiver or for outside activities shall be clearly disclosed and shall he
limited to the actual costs and overhead the receiver reasonably incurs.
A receiver should not solicit or accept anything of greater than de
minimus value from anyone doing business with the receiver or with the
appointing court, or from anyone whose interest may be substantially
affected by the performance of the receiver’s official duties. Upon
completion of an assignment, a receiver may not accept gifts of any kind
until a period of time has elapsed sufficient to negate any appearance of
a conflict of interest.
Sources: Rule 53(h); CCUSJ, Compliance Section (B); CCJL, 4.E; ABAIAAA
Code, Canon VII; JAMS Guidelines, V.G.
The point of applying these rules to receivers is not to punish them, but
to make sure the court and the litigants are fully advised of facts that
could lead to questions regarding the integrity of the receivership and
the impartiality of the receiver.16
Proposed Checklist for Judges
Here is a suggested checklist for judges to employ when evaluating whether
to approve a particular receiver nominated by a party to litigation.
Proposed receivers will have to provide more disclosure than is currently
provided in order for the checklist to be completed.
This checklist is not exhaustive. But completion of the suggested
checklist and the filing of the checklist in the court’s records will
provide any reviewing court a much better record of what the appointing
court had before it when it made the decision to accept or reject a
party’s choice of receiver. It also provides adverse parties with a
checklist of questions to follow up on with receivers being interviewed
for possible nomination.
Receiver Selection Checklist
||Answer - Yes/No Comments
||Does the receiver have any contract,
agreement, arrangements or understanding with any party regarding:
- The receivers role with respect to the property after
foreclosure or the receivership?
- How the receiver will administer the receivership?
- How much the receiver will charge for services?
- How much the receiver will pay for services of third parties?
- Who the receiver will hire?
- What capital expenditures will be made on the receivership
- Does the receiver intend to hire a person to serve the
receivership estate who is connected with the receiver?
||Is the receiver proposing to deposit
funds of the receivership into a bank account?
- Where the deposits are not fully insured?
- Where the financial institution is a party to the action?
- Where the receiver owns stock in the institution or is an
officer, director or employee of the institution?
||How many receiverships has the receiver
been appointed in for the party requesting the appointment over the
last five years?
||Does the receiver have any existing or
previous relationship with any of the parties or attorney involved
in the lawsuit?
||Has the receiver or a relative of the
receiver ever received an offer of employment or been employed by a
||How many similar receiverships has this
||Has the receiver ever been removed as
receiver before the approval of his or her final account and report?
||Has a surety on a bond posted by the
receiver ever paid on a claim?
In light of the “great recession” that has afflicted our country,
receivers are being appointed more frequently and oversee literally
billions of dollars of property owned by parties to litigation. The
existing and suggested ethical standards that courts should insist
receivers comply with before serving as agents of the appointing court
will help ensure that the impartiality and integrity of both the court and
the receiver are preserved and, even, enhanced.
*Jess R. Bressi, Esq. is a partner in the Orange County office of Luce,
Forward, Hamilton & Scripps LLP. Mr. Bressi’s primary areas of expertise
involve financial remedies, bankruptcy, business litigation, and secured
transactions involving real property. He is past president of the Orange
County Bankruptcy Forum and a long-time member of the California Receivers
1 See three article series, “In Las Vegas They’re Playing with
a Stacked Judicial Deck,” Los Angeles Times, Section A, June 8, 9 & 10,
2006, Michael J. Goodman and William C. Rempel, available at
2 The Author doesn’t intend to single out brokers to ridicule.
You could just as easily substitute “Big Bad (former) Developer” or “Big
Bad Property Manager” for Big Bad Broker.
3 See Murray v. Etchepare (1901) 132 Cal. 286, 64 P. 282; Cal
Rules of Court, Rule 3.1179: “The receiver is the agent of the court and
not of any party. . .”
4 Security Pacific National Bank v. Geernaerit, et al. (1988)
199 Cal. App. 3d 1428, 1431, 245 Cal. Rptr. 2d 712,716 [“ In other words,
he acts as a fiduciary on behalf of both parties as a representative and
officer of the court.”]; Shannon v. Superior Court (1990) 217 Cal. App. 3d
986, 992-993, 266 Cal. Rptr.
5 Security Pacific National Bank v. Geernaerit, et al. (1988)
199 Cal. App. 3d at 1431, 245 Cal. Rptr. 2d 712,716.
6 California Code of Civil Procedure, Section 566(a).
7 CRC, Rule 3.1179.
8 Rule 3.850(a).
10 Rule 3.855(b)(2).
12 Code of Civil Procedure, Section 1281.85 provided the Judicial Council
the directive to “adopt ethical standards for all neutral arbitrators
effective July 1, 2002. These standards shall be consistent with the
standards established for arbitrators in the Judicial Arbitration program
and may expand but not limit the disclosure and disqualification
requirements established by this chapter. The standards shall address the
disclosure of interests, relationships, or affiliations that may
constitute conflicts of interest, including prior service as an arbitrator
or other dispute resolution neutral entity, disqualifications, acceptance
of gifts, and establishment of future professional relationships.”
13Ethical Standards for Neutral Arbitrators in Contractual Arbitration,
15 See, Appointing Special Masters and Other Judicial Adjuncts – A
Handbook for Judges and Lawyers, 2009, Academy of Court-Appointed Masters,
16Authority exists in the federal system for judges to impose the Code of
Conduct for Judicial Employees upon masters or other judicial adjuncts.
The Code of Conduct for Judicial Employees provides “[c]ontractors and
other non-employees who serve the Judiciary are not covered by this Code,
but appointing authorities may impose these or similar ethical standards
on such non-employees as appropriate.”