Summer 2011 • Issue 40, page 18

When funds need to be borrowed to finish a project how, as the receiver, do I get paid?

By Davidson, Peter*

Q: I was appointed receiver for an unfinished housing development. I have convinced the Plaintiff (Bank) to advance funds to pay for guards, insurance and to complete construction, as well as to pay for my and my counsel’s fees, because there are presently no funds in the receivership estate. Plaintiff was only willing to advance funds on the condition that it is given receiver’s certificates for the funds it advances. My counsel filed a motion so that I would have authority to borrow the needed funds and issue the receiver’s certificates. While the court authorized the borrowing and the issuance of the receiver’s certificates, it stated that the borrowed funds could not be used to pay my or my counsel’s fees, indicating that receiver’s certificates can only be used to fund the necessary care and preservation of the property. Is this correct? How do I get paid?

A: The court was apparently relying on one of the leading California cases concerning receiver’s certificates, Title Insurance and Trust Company v. California Development Company, 171 Cal. 227 (1915). There the court approved the issuance of receiver’s certificates, with priority over other indebtedness. The court noted that the general rule (at least at that time, almost 100 years ago) was that the court will not, “as against the objection of a minority of the bondholders, issue receiver’s certificates and make them a prior lien upon the mortgaged property for the purpose of procuring funds to continue the management and operation of the business, the power of the court to incur liabilities being limited strictly to the necessary care and preservation of the property during the receivership. The power to supersede prior liens by certificates issued for the purpose of carrying on the business of the corporation has generally been limited to the case of railroad receiverships. But there can be no question of the right of the court to give priority to certificates issued to enable the receiver to carry out the primary objective of his appointment, viz., the care and preservation of the property”. The Court further noted that the decision to issue receiver’s certificates and give them a priority lien rests with the discretion of the court.

Because the issuance of the receiver’s certificates is discretionary, the court can, if it chooses, limit the use of the funds for what the court deems to be necessary to carry out the primary object of the Receiver’s appointment. One could argue that if construction is taking place the Receiver needs to supervise it and may need to use counsel, if for nothing else, to file the motion to have a receiver’s certificates issued, and this is part of the primary object of his appointment and, therefore, the borrowed funds should be able to be used to pay the receiver and the receiver’s counsel. Indeed, the Nevada Supreme Court in Gordon v. Como Consol Mines Co., 55 Nev. 13 (1933) held: “It is well established that the compensation of receiver and the compensation of his attorney are a part of the cost of a receivership and must be accorded priority of payment over receiver’s certificates.” The court cites a number of cases including a Washington Supreme Court case where the court held: “It is, we think, a universal rule of law that the necessary and proper compensation of a receiver and his attorneys is a part of the cost of the receivership and is entitled to priority, even over receiver’s certificates.” The Nevada Supreme Court also sites Clark on Receivers which states: “Generally speaking, receiver’s certificates are subject, in the first instance, to the payment of court costs, receiver’s fees and his counsel’s fees.” Clark on Receivers, § 471. Unfortunately, Clark sites no authority for this statement. However, see 24 A.L.R. 1174 which states: “The general rule is that compensation of a receiver, being a part of the taxable costs in the proceeding, is entitled to priority over receiver’s certificates” [citing cases]. The court also sites an old California Supreme Court case, McLane v. Plasserville, etc., R.Co., 66 Cal. 606 (1885) for the same proposition that a receiver and his counsel’s fees are a lien upon the receivership estate; however, the McLane case was a railroad case.

In the future, you may be able to convince the Plaintiff to fund the estate by making advances on its Deed of Trust, in which case you would not need to obtain receiver’s certificates. Otherwise, you need to try to convince the court that the cost of the Receiver and his counsel are not only necessary costs for preserving and caring for the property, but that it makes no sense not to allow those fees to be paid out of the funds generated from the sale or issuance of the receiver’s certificates, since it is clear that the Receiver’s and his or her counsel’s fees have a priority over the receiver’s certificates. Absent that, you and your counsel may just have to wait until later in the case to be paid, when some of the assets of the estate are sold, at which time the funds could be used to pay fees and expenses, since they have a priority over the receiver’s certificates. Worse case, you will have to wait until the end of the case, at which time either the funds in the estate can be used to pay your fees or you will have to file a motion to have the Plaintiff pay for your fees, because the Plaintiff sought your appointment.

*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP, a Beverly Hills Law Firm. His practice includes representing Receivers and acting as a Receiver in State and Federal Court.