An Introduction to Receiverships
By Pasternak, David & Bronston, Edythe*
Receivers are employed in civil cases when absolutely
needed to control and protect an entity’s assets. All bench officers and
litigants in civil matters employing receivers should have a working
knowledge of this area of law.
California Rule of Court 3.1179 states that, “The receiver is an agent of the court, not of any party to the litigation, and as such: (1) is neutral; (2) acts for the benefit of all who may have an interest in the receivership property; and (3) holds assets for the court, not the plaintiff nor the defendant.”
A receiver may be appointed, in the manner provided in Code of Civil Procedure § 564 et seq., by the court in which an action or proceeding is pending in any case in which the law empowers the court to appoint a receiver. CCP § 564(a). Unlike an injunction, which may be either provisional or permanent, a receivership is only a provisional remedy in an action that seeks some other relief by final judgment.
There is no substantive right to a receiver and no
action for a receiver. Associated Creditors’ Agency v. Wong (1963) 216
Cal.App.2d 61, 66. As the court said long ago in French Bank Case
(1879) 53 Cal. 495, 552: “these subdivisions do not assume to create a
sense of the right of action where none existed before. Their aim is to
provide a more efficacious remedy to the conduct of actions, the right to
bring which already exists, and are elsewhere provided for. . . . . There
is, of course, no such thing as an action brought distinctively for the
mere appointment of a receiver–such an appointment, when made, is
ancillary to or in aid of the action brought. Its purpose is to preserve
the property pending the litigation so that the relief awarded by the
judgment, if any, may be effective. The authority conferred upon the court
to make the appointment necessarily presupposes that an action is pending
before, instituted by someone authorized by law to commence it.”
The most commonly relied upon provisions in § 564 are ones authorizing a receivership, “In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to the creditor's claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds thereof, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured” (CCP § 564(b)(1)); “In an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property is probably insufficient to discharge the deed of trust or mortgage debt” (CCP § 564(b)(2)); and “Where a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights” (CCP § 564(b)(6)).
There are many other specific statutory authorizations throughout the Codes. Examples include: Business & Professions Code §§ 17203 and 17535 (in statutory unfair competition and false advertising cases); Code of Civil Procedure § 564(c) (to enable a secured lender to inspect real property for hazardous substances); Code of Civil Procedure § 708.630(b) (to transfer alcoholic beverage license to satisfy money judgment); Family Code § 290 (family law cases); and Code of Civil Procedure § 712.060 (to enforce judgment for possession or sale of property). Receivers also are appointed in post-judgment proceedings to aid in collection efforts for judgment creditors. (CCP § 564(b)(3).)
Code of Civil Procedure § 564(b)(9) also reemphasizes the court’s equitable power to appoint a receiver by providing that one may be appointed “In all other cases where necessary to preserve the property or rights of any party.” Equity receiverships are often instituted by an action brought by a governmental regulatory agency, with the result that the receiver takes possession of all assets for the benefit of all creditors. This type of receiver can be likened to a bankruptcy trustee.
The appointment of a receiver can be a very effective way to protect assets in many types of disputes, pending the outcome of litigation. Nonetheless, appointment of a receivership is a drastic remedy, wresting control of property from the owner’s hands. Thus, “ordinarily if there is any other remedy, less severe in its results, which will adequately protect the rights of the parties, the court should not take property out of the hands of its owners.” Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp. (1953) 116 Cal.App.2d 869, 873. “California rigidly adheres to the principle that the power to appoint a receiver is a delicate one which is to be exercised sparingly and with caution.” Morand v. Superior Court (1974) 38 Cal.App.3d 347, 351.
The appointment, or the refusal to appoint a
receiver, is within the discretion of the trial court. “The rule is
established that the appointment of receiver rests largely in the
discretion of the trial court and that its action and appointing a
receiver or its refusal of an application for the appointment of such an
officer will not be disturbed in the absence of a showing that the court’s
discretion has been abused.” City and County of San Francisco v. Daley
(1993) 16 Cal.App.4th 734, 744.
The receiver “must be sworn to perform the duties faithfully.” CCP § 567(a). The receiver must give an undertaking to the State of California “in such sum as the court or judge may direct.” CCP § 567(b).
The receiver’s powers are those specified in the applicable statutes and court orders. The primary source of the receiver’s powers are the court’s orders. See Nulaid Farmers Ass’n v. LaTorre (1967) 252 Cal.App.2d 788, 791. Because the appointing order is so significant, it should be carefully drafted so as to anticipate the powers and instructions that the receiver may require. The Judicial Council has promulgated form receivership orders for equity and rents-and-profits receiverships. The forms are not mandatory and many receivers and attorneys prefer to use non-form orders.
Typical provisions in an appointing order include the following: the receiver’s power to employ employees and professionals; the receiver’s power to operate and/or liquidate a business; the receiver’s power to enter into contracts or leases; the receiver’s authority to use a locksmith to enter the receivership premises; the receiver’s authority to bring and defend actions; the receiver’s obligation to investigate, report about, and maintain adequate insurance coverage regarding the receivership estate; a provision regarding payment of the receiver’s fees and costs, as well as the fees and costs of other professionals employed by the receiver; and, a provision that the receiver may sell real or personal property of the estate. CCP § 568.5. Note that a receiver may not employ an attorney without a specific court order authorizing such employment. California Rule of Court 3.1180.
The court’s order further sets forth the compensation due to the receiver and the frequency of reports he or she must submit to the court regarding the entity it is protecting.
A court order is required to terminate a receivership. Upon court approval of the receiver’s final report and account, the receiver is discharged and his or her bond exonerated. California Rule of Court 3.1184. The court’s order terminating the receivership bars subsequent action against the receiver by all parties who received notice, for the receiver’s failure to properly perform duties. Aviation Brake System Ltd. v. Voorhis (1982) 133 Cal.App.3d 230, 234.
The contempt proceeding is initiated by the filing of evidentiary affidavits (or declarations) [Code of Civil Procedure § 1211], together with an application for the issuance of an order to show cause. These documents detail the violations of the court’s orders, and must be personally served on the alleged contemnor. Every separate act of disobedience of a court order is a separate contempt and punishable as such. In re Stafford (1958) 160 Cal.App.2d 110, 113-114.
There are four elements that must be proved to establish a contempt violation: (1) the issuance of a valid court order; (2) the contemnor’s actual knowledge of the order; (3) the contemnor’s ability to comply with the order; and (4) the contemnor’s willful disobedience of the order. See Conn v. Superior Court (1987) 196 Cal.App.3d 774, 784.
A common contempt application in a receivership case involves a defendant who fails to turn over funds to the receiver in compliance with a court order. In order to establish a contempt claim in such a case, the receiver must prove that the defendant had funds to turn over to the receiver. It is not enough to simply prove that the defendant disobeyed the order to turn over funds to the receiver. In re Cassil (1995) 37 Cal.App.4th 1081, 1087-1088.
Unlike civil proceedings such as receivership hearings, a contempt proceeding is quasi-criminal. The alleged contemnors are presumed innocent and all of the elements of contempt alleged against the contemnors must be proved beyond a reasonable doubt rather than by a mere preponderance of the evidence. Bennett v. Superior Court (1946) 73 Cal.App.2d 203, 210. Perhaps most importantly, the alleged contemnor has the right against self-incrimination, and cannot be compelled to testify. In re Witherspoon (1984) 162 Cal.App.3d 1000, 1002. Thus, a receiver (or a party) bringing a contempt action must be able to prove each element to establish the contempt violation without any testimony by the alleged contemnor.
A person guilty of contempt may be fined $1,000 and imprisoned for 5 days for each contempt violation. CCP § 1218(a). Imprisonment for contempt is rare. The fines are paid to the State of California, and not to the receivership estate.
A party to an action who is found in contempt may be ordered to pay to the party initiating the contempt proceeding the reasonable attorneys’ fees and costs incurred by the party in connection with the contempt proceeding. CCP § 1218(a). These fees and costs usually exceed the statutory fines that are available. Judges are usually willing to award these fees and costs if they are requested. They are not available against non-parties.
[Reprinted and/or posted with the permission of
Daily Journal Corp. (2010).]