Fall 2003 • Issue 11, page 4

A Primer on Receivers and Receivership in a Nutshell Part III

By Bronston, Edythe*

Part III: Appointing and Terminating Orders and Topics In Between
(This is the third of a three-part analysis of receivership law and practice. The first installment dealt with the appointment process; the second with the types of receiverships and powers and qualifications of receivers. This installment looks at appointing orders, paying receivership expenses, ethics and related topics.)

Appointment Language: Sweat the Details
The appointing order establishes the parameters of a receiver’s duties and powers. A plaintiff in drafting the order should consider the ultimate goals and any special circumstances. It is recommended that a draft of the order be submitted to both the client and the proposed receiver for comments. All loan documents should be carefully reviewed prior to drafting a complaint and motion for appointment of receiver, especially regarding notice requirements contained therein. Orders should include authorization to: take possession of books and records (both in hands of defendant and third party); collect sums owing or coming due to defendant; enter into contracts and agreements necessary to maintain and preserve property; employ eviction service, without further order: pursue unlawful detainer actions; open bank accounts; pay obligations of the receivership estate; sell real or personal property (if loan documents allow and if circumstances so warrant), subject to confirmation by the court; employ specific agents, employees, and professionals (if warranted); institute and defend actions, upon court approval; operate the business at a loss if appropriate (in such a case, the order should address responsibility for financing); and should address tenant issues.

The Order should also include: a complete description, common and legal, of any real property involved; instructions to the receiver as to retention of excess funds; a provision authorizing the receiver to turn over real property (i) upon foreclosure, to the successful bidder, upon receipt of a copy of a trustee’s deed; (ii) upon notice of cure of default or notice that plaintiff has accepted a deed in lieu of foreclosure; or (iii) upon receipt of a copy of the dismissal of the complaint; a method for determining the receiver’s compensation; and a provision directing the receiver to file a bond as set by the court. Last, one should always check the Local Rules and California Rules of Court.

Financing and Paying Receivership Expenses
CCP §568 addresses receivership financing and expenses. A receiver’s powers include the right to make transfers and do such acts as the court may authorize respecting property in receivership estate. These powers include the right to borrow money and issue receiver’s certificates to carry out the primary object of the receiver’s appointment; i.e., the care and preservation of the property. Title Ins. etc. v. California Dev. Co., 171 Cal. 227, 231 (1917). This requires notice to all entities that might have an interest in the property, including mechanics’ lien claimants and, therefore, the receiver should pull a title report and do a UCC search to ensure proper notice.

A receiver’s certificate is evidence of a receiver’s debt, backed by all assets of the receivership estate and by the court; Gardner v. Grand Beach Co., 48 F.2d 491 (1931); Atlantic Trust Co. v. Chapman, 208 U.S. 360, 28 S.Ct. 406 (1902). Issuance requires court authorization, after notice; it is in the nature of an administrative claim and shares first priority position, pro rata with expenses of the receivership estate, securing the loan with all assets of the receivership estate.

The certificate takes precedence over all existing unsecured debt and is analogous to an administrative claim in bankruptcy.

There is case law that states that a court can actually order that receiver’s certificates take priority as a senior lien on specific property (Title Ins. v. Calif. Dev., supra). Presumably, in such a case, a lender can obtain title insurance to ensure that position, provided that there is evidence of proper notice. In this unlikely case, issuance requires full notice and is very unlikely, if present secured creditors object, unless the court can be convinced that such a “priming” lien is protecting the interests of the senior lienholder or that a health and safety issue exists.

Only the Ethical Need Apply
The receiver is an agent of the Court, not the Plaintiff, and has a strong ethical charge. He or she must maintain the property to the benefit of all who may ultimately be proven to have an interest. The typical ordered goal is to preserve the status quo or maximize return to the estate and not to benefit any party while the action is pending. The receiver may not employ counsel without written, specific application. Where an appointing order or local rule allows for payment of all expenses of the receivership estate upon notice to interested parties, payment can be made to all employed professionals, but final approval of fees is required, after submission by noticed fee application. California Rules of Court, 1900 et seq.

Danger: Intervening Bankruptcy
The Bankruptcy Code at 11 U.S.C. §543 requires turnover of property held by a custodian. Section 543(d) sets forth an exception which authorizes a custodian to remain in possession of property if to do so is in the best interests of creditors. Once a bankruptcy has been filed, a receiver should turn over property to the bankruptcy estate unless the plaintiff tells the receiver that an application for an order shortening time to hear a Section 543(d) motion is being immediately made. The receiver should not expose himself or herself to potential liability to the bankruptcy court. The receiver should confirm in writing to all interested parties that he/she has been requested by the plaintiff to retain possession of the property, as the plaintiff is making an ex parte application for an order shortening time for hearing under Section 543(d). In such a case, the receiver should not wait longer than ten days to turn over the receivership property, if the ex parte application has not been made. After turnover, the receiver should make a motion in Bankruptcy Court for approval and payment of his or her fees under11 U.S.C. §543(c)(2).

Communications between a receiver and his or her counsel are presumed to be confidential. The attorney-client privilege is broad enough to maintain confidentiality even from the appointing judge. Shannon v. Superior Court of Stanislaus County, 217 Cal.App.3d 986, 266 Cal.Rptr. 242 (1990).

Close the Estate Carefully
A court order is required to terminate the receivership, and it is important to check the court rules for any local requirements. The final report and account must be approved and the receiver’s bond exonerated. In the report all of the receiver’s services performed and fees requested must be itemized. Hozz v. Varga, 166 Cal.App.2d 539 (1958). Upon court approval of the receiver’s final report and account, the receiver will be discharged and his or her bond exonerated. The happy effect of this court order is that subsequent action against the receiver by any and all parties who/which received notice of the hearing on the receiver’s final report is barred. Aviation Brake Sys. Ltd. v. Voorhis, 133 Cal.App.3d 330, 183 Cal.Rptr. 766 (1982).

* EDYTHE L. BRONSTON is a founding director and past president of the California Receivers Forum L.A./Orange County Chapter and a founding director of the state organization. She is an attorney practicing in Sherman Oaks, California and also acts as a receiver, court-appointed referee and mediator.