Q: I have been appointed receiver in a case
where the defendant appealed my appointment. If the appeal is successful,
and the receivership is terminated, how do I get paid?
A: As a general rule, fees and costs of a receiver and his or her
professionals are administrative expenses, chargeable against the assets
in the receivership estate. The assets in the estate are liable for those
fees and costs even if the underlying litigation is dismissed or judgment
is rendered for the defendants. Venza v. Venza, 101 Cal. App. 2d
678, 680 (1951). The receivership court has discretion, however, to
determine who is responsible for the receiver’s fees. This is especially
true when the assets in the receivership estate are not sufficient to pay
all fees in full. Baldwin v. Baldwin, 82 Cal. App. 2d 851, 856
(1947) (“Courts generally are vested with large discretion in determining
who shall pay the costs and fees of receiverships. The court may assess
the cost of the receivership against the fund or property in receivership
or against the applicant for the receivership, or it may apportion them
among the parties, depending on the circumstances.”).
A line of cases has developed which provides that
where there was an irregularity in the appointment of the receiver or an
abuse of discretion by the court in appointing the receiver, the party
seeking the appointment of the receiver should be held liable for the
receiver’s fees and costs. See, Lewis v. Hill, 38 Cal. App. 329,
336 (1918) (finding that appointment of receiver was improvident and
erroneously made, and that plaintiff was liable for costs of
receivership); Baldwin v. Baldwin, supra. at 855 (finding that
plaintiff was liable for costs of receiver because receiver was
unnecessary, improvident and wrongful).
These cases, however, do not involve a situation
where the estate was insolvent. The seminal case in California involving
an insolvent estate is Ephraim v. Pacifica Bank, 129 Cal. 589
(1900). In Ephraim, the court pointed out that there are two separate
grounds for holding a party liable for a receiver’s fees -- irregularity
of appointment or insufficiency of funds in the estate. The court stated:
“It is unquestionably the general rule that the costs of the receivership
are primarily a charge upon the fund in his possession, and are to be paid
out of that fund. But it is by no means the rule that a receiver must in
all cases look to that fund for his reimbursement, and has no other remedy
if for any reason that fund is not available…it may sometimes happen that
a direct liability is imposed upon the parties to the action, or some of
them, for remuneration of the receiver. This may result from the
irregularity of the appointment, or the insufficiency of the fund, or out
of the agreement between the parties.” Id. at 592.
In a fairly new federal case, Netsphere, Inc.
v. Baron, 703 F.3d 296 (5th Cir. 2012), the question was how the
receiver was to be paid when neither of the parties had sought the
receiver’s appointment. In the case, the court, on its own motion, had
appointed the receiver, and the appointment was reversed on appeal on the
grounds that it was unjustified and improper.
Baron had formed a joint venture with another
party for the ownership and sale of domain names. Disputes arose,
resulting in seven lawsuits, four mediation attempts and years of
litigation. Ultimately, the parties entered into a settlement. Baron
purportedly breached the settlement, and suit was filed in district court
to enforce it. The district court issued a preliminary injunction to
compel compliance with the settlement, including a $50,000 per day penalty
for a violation. Baron caused one of his entities involved in the
litigation to file chapter 11. During the litigation, Baron kept hiring
and firing his attorneys, and not paying them, going through at least 45
lawyers. A trustee was eventually appointed in the chapter 11. A
settlement was reached providing for a division of the domain names. While
Baron transferred the domain names, as required by the settlement, other
disputes arose. The trustee also expressed concern with the continued
hiring and firing of attorneys who were asserting claims against the
bankruptcy estate. A mediation to resolve the legal fee claims was
commenced, but Baron refused to cooperate. The trustee filed a motion in
the bankruptcy court to appoint a receiver over Baron and his assets
because of his failure to mediate the fee claims and his continued hiring
and firing of attorneys, and also so that the receiver could implement the
settlement. The bankruptcy court issued a report and recommendation to the
district court to appoint a receiver, which the district court did,
finding that Baron had hired and fired his attorneys as a means of
delaying the proceedings and his vexatious litigation tactics increased
costs to all parties, including the bankruptcy estate. Baron appealed to
the Fifth Circuit, which reversed.
The court held that while a receiver can be
appointed in litigation over assets, where the assets are a subject of the
litigation “to preserve and protect the property pending its final
disposition,” a receivership cannot be imposed over property that is not
the subject of the underlying dispute. Id. at 305-306. Here, the
only assets that were subject of the underlying dispute were the domain
names, and Baron had, in fact, transferred them pursuant to the
settlement. It was, therefore, improper to impose a receivership over
Baron and his assets just because he engaged in vexatious litigation
tactics and increased costs to the bankruptcy estate and other parties.
The court then faced the issue of the receivership
fees and expenses. The court acknowledged, citing federal cases similar to
the California cases supra., that when a receivership is proper, the fees
are “a charge upon the property administered” and that when “a
receivership is improper, the party who sought the appointment has at
times been held accountable.” Id. at 311-312. Here, the parties had
not sought the receiver’s appointment. The bankruptcy court recommended,
and the district court then appointed, the receiver. Given that situation,
the court stated: “We discover no controlling rule on assessing costs for
an improperly created receivership other than that equity is the
standard.” Id. at 312. It then held that, “without convincing
evidence that the appointment of a receiver was either collusive,
capricious, venal, or in bad faith, ordinarily the expenses of the
receivership will not be charged ‘other than against the fund administered
by the receiver, even though the [c]ourts are vested with a discretion in
determining who should pay the costs and expenses of a receivership in
unusual circumstances.’” Id. (citations omitted).
While the court acknowledged Baron did not receive
any benefit from the receivership, the court found that charging the
assets in the receivership estate was equitable because the appointment
was the result of Baron’s conduct. However, the court held that because
the receivership was improper, only the cash in the receivership estate
should be used to pay the receivership fees and costs. No further assets
were to be liquidated to pay the fees and costs and, “to the extent the
cash on hand is insufficient to satisfy fully what is determined to be
reasonable charges by the receiver and his attorneys, those charges will
go unpaid.” Id. at 314. The court also felt that because the
receivership was improper “equity may well require the fees to be
discounted meaningfully from what would have been reasonable under a
proper receivership.” Id. at 313. The court returned the matter to
the district court to reconsider the fees already awarded and paid.
*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. |