Winter 2003 • Issue 12, page 1

The Importance of Petitioning the Court for Instructions

By Mitchell, Commissioner Bruce*

One of the most valuable tools for a receiver is the petition to the court for instructions. See, Free Gold Mining Company v. Spiers (1901) 135 Cal. 130, 131:

"It is eminently proper for a receiver to apply to the court by which he was appointed for instruction and authority from time to time as he may need it...."

By definition a receiver is in a conflicted situation: the receiver owes fiduciary duties to both sides in a lawsuit, and the parties will often disagree as to the action a receiver should take in a problem situation. A receiver may also lack the funds to immediately solve a problem, but may face liability if he or she doesn't promptly cure the situation.

Asking the court for instructions serves two purposes: first, the receiver does a better job for the litigating parties and for the court which appointed the receiver by setting a hearing when all sides can be heard and all worthy ideas can be considered. Second and equally important, obtaining a court order for a contemplated action protects the receiver from personal liability.

Take, for example, an apartment building that has a roof leak. Should the roof be patched, or should an entirely new roof be put on for considerably more money? The foreclosing lender may want a new roof. The lender will then be foreclosing on an improved property with the cost of the repair added to the borrower's debt. The borrower, on the other hand, may want the simplest and cheapest repair if he or she is gathering money to cure the default, but may be rendered unable to cure the default if the cost of a new roof is added.

Another illustration: a receiver may locate a prospective tenant for a commercial space, but the tenant wants a long-term lease at a low rate and $20,000 in new tenant build-out improvements. The building owner believes that better terms can be obtained, and that the owner will be damaged if he/she/it cures the loan default and is stuck with a bad lease. What choices should the receiver make in these hypothetical situations?

A receiver cannot be held personally liable for damages if the receiver follows a court order. The court has judicial immunity for its rulings, and that protection extends to the court's agent when the agent is following an express order: See Chiesur v. Superior Court (1946) 76 Cal.App.2d 198, 202:

"A receiver is not liable in his individual capacity as a tort-feasor for any act within the scope of his duties as receiver and done under an express order of court which is not in excess of jurisdiction, the liability incurred being chargeable upon the property."

See also, Binney v. San Dimas Lemon Association (1927) 81 Cal.App. 213, 220:

"When a receiver holds a valid appointment containing no directions in excess of the jurisdiction of the court, so long as he acts in pursuance of the orders of the court he cannot ordinarily invade the rights of parties or strangers to the litigation. If he does an injury, he does it by exceeding his authority. In such case the fault is his, and his alone. . . .

But when the court has exceeded its jurisdiction in appointing a receiver, or in directing him to take specific property out of the possession of a stranger, the injury that results is directly due to the action of the court; the wrong is in the order of the court, not in the receiver's transgression of the order. In such case, it seems clear that the appropriate remedy is in some writ or proceeding which operates upon the court, as such, to restrain its judicial action. . . . "

This assumes, of course, that the receiver has fully investigated and then informed the court of the relevant facts, and that the receiver has faithfully carried out the instructions which the court issued.

Thus, if the court ordered only a spot repair on a roof (rather than a new roof), and heavy rains then occur which caused serious water damage to tenants' belongings, only the receivership estate would be liable. Take another example: if a building has serious health and safety violations, but it is physically and financially impossible for the receiver to complete all of the required repairs immediately, and if the receiver obtains court approval of a prioritized work schedule to be completed over time the receiver should not be personally liable for damages if there is a personal injury caused by a condition the receiver has not yet had time to remedy.

Conversely, a receiver can be held personally liable—surcharged—for damage done which could have been avoided by a petition for instructions. See Aviation Brake Systems, Ltd. v. Voorhis II (1982) 133 Cal.App.3d 230, 235 (noting that "upon the receiver's final report and account the receiver in his personal capacity may be surcharged for losses to the receivership estate based upon his misconduct or mismanagement.")

There is one important caveat, however. A receiver may still be found criminally liable for not complying with governmental orders to fix a deficient property, even if the receiver was complying with a work-priority order issued by a civil department of the court. That is because the court, part of the judicial branch of government, cannot interfere with the lawful regulatory functions of the other branches of government, including the executive branch. See Triple A Machine Shop, Inc. v. State of California (1989) 213 Cal.App.3d 131, 144-45:

"The separation of powers doctrine requires judicial restraint in enjoining criminal investigations or prosecutions. . . . The discretionary authority vested in the district attorney to investigate and prosecute criminal conduct is considered too vital to the interest of public order to be subjected to prior restraint by courts except under extraordinary circumstances. [Citations.] The balance between the Executive and Judicial branches would be profoundly upset if the Judiciary assumed superintendence over the law enforcement activities of the Executive branch upon nothing more than a vague fear or suspicion that its officers will be unfaithful to their oaths or unequal to their responsibility. [Citation omitted.]"

The practical effect of this rule is that any enforcement agencies that have cited a building should be included by the receiver in the development of a court-ordered work schedule for repairs.

A receiver should not be embarrassed to seek instructions from the court, and is in fact encouraged to do so. Seeking instructions does not reveal a receiver's lack of expertise, but instead demonstrates the receiver's wisdom and experience. Some of the worst problems in receiverships arise when a receiver is faced with a difficult situation involving high financial stakes but fails to seek court instructions. Receivers who are not themselves lawyers may feel that if they seek court instructions, the court will conclude the receiver does not know his or her business. This is not the case. Sophisticated attorney-receivers realize the importance of seeking and obtaining court instructions.

Petitions for instructions can be brought on the regular statutory notice period, which is 21 days plus added days if service is made by mail. Code of Civil Procedure § 1005[b]. Petitions can also be initiated by ex parte application, which requires that notice of the application be given to the affected parties by 10:00 am the day prior to the ex parte hearing. California Rules of Court § 379[b]. If the ex parte matter is simple or uncontested, the court may resolve the petition at the ex parte hearing. Alternatively, the court may choose to set a fully-noticed hearing with a briefing schedule, and may make interim orders it considers necessary until the hearing can be conducted.

A receiver is entitled to hire an attorney to present his or her petition for instructions. This is a legitimate cost of a receiver's doing business. If there is any question about the need for hiring a lawyer to present a petition, the receiver should prepare a simple pro per application to the court asking for permission to retain counsel, and proposing the name of an attorney and that attorney’s hourly rate. Such a pro per petition can be heard on ex parte notice.

To sum up, petitions for instructions are a "win-win" tool: they result in the best actions being taken for the benefit of the interested parties, and they protect the receiver from potential liability.

*The HONORABLE BRUCE E. MITCHELL joined the Los Angeles County Superior Court in 1990, and currently sits in Central District, Department 59, where he hears real property receivership applications and related suits, in addition to other duties. Commissioner Mitchell’s Professional Profile was featured in the Summer, 2003 issue of Receivership News.