The Bakery filed a Chapter 11 bankruptcy, which was then dismissed due to the debtor’s failure to file required documents. Shortly thereafter, I swiftly entered the Bakery with security and acquired possession of the operations and the books and records. Unfortunately, at that time I only located approximately $1,000.00 in cash and, even though the Bakery was intact with supplies and a trained staff, it was not paying its bills, including rent, and was not operating profitably. I immediately began to explore potential ways to increase sales of the Bakery, but in order to do so, the infusion of substantial capital and time was required. I also worked as fast as possible to confirm the outstanding liabilities and to develop a workout plan for the Bakery, facing possible eviction from the landlord due to the Bakery’s non-payment of rent and repossession efforts by the equipment lenders. The assets were fully secured, making a sale impossible, and I was unable to negotiate a settlement between Plaintiff and Defendant whereby Plaintiff would agree to accept a lump sum payment, or agree to accept payments to satisfy their Judgment.

It became clear to me that there was nothing I could do in this situation to satisfy Plaintiff’s Judgment, let alone pay myself or my counsel. Therefore, I petitioned the court for instructions and requested to be discharged as receiver. Before the court could hear and consider my petition, the Bakery filed a second bankruptcy case. I immediately turned over possession of the Bakery pursuant to Bankruptcy Code Section 543. However, due to the bankruptcy filing, I was unable to file my final account and report with the Superior Court without obtaining relief from the automatic stay imposed by Bankruptcy Code section 362. My counsel, Byron Z. Moldo of Ervin Cohen & Jessup LLP, was able to obtain a stipulation from the Debtor to modify the automatic stay so that I could file my final account and report with the Superior Court.

The Bakery’s counsel did not appear at the hearing, at which the court approved my final account and report, discharged me as receiver, and ordered Plaintiff to pay my unpaid fees and expenses, plus attorney fees and costs.

Plaintiff’s counsel filed an appeal, raising the following issues:

1. Was I required to forward all revenue derived from the Bakery to Plaintiff, even before payment of operating expenses?

Plaintiff alleged that I had failed to comply with my obligations under the appointing order by not immediately forwarding all revenue derived from the Bakery to Plaintiff. The Plaintiff expected to be paid before the operating expenses of the Bakery such as wages, materials, rent, and other operating costs from the revenue generated by the Bakery.

This might have left me with personal liability for the outstanding administrative expenses that I would have incurred but not paid during my operation of the Bakery. The issue arose from the competing terms of the appointing order. On the one hand, the order provided that I was instructed that my “primary duty” as receiver was “to treat [Plaintiff] as the first creditor to whom payments of any monies shall be made from the business operations.” However, I was also instructed to “incur the expenses necessary” to “manage, control, care for, preserve, and maintain” the Bakery’s business operations, and was specifically empowered to employ labor, purchase supplies and pay day-to-day expenses. I believed and argued that the only reasonable interpretation of the order was that the Plaintiff would be paid out of income from operations after the immediate costs of generating that income were paid. I could not have performed my duties of preserving and maintaining the Bakery if every dollar collected had been forwarded to Plaintiff without satisfying the outstanding administrative expenses. Moreover, in my position as an agent of the court, I could not be expected to exploit current employees and suppliers in order to pay Plaintiff’s Judgment as a first priority. Effectively, this would have permitted Plaintiff to succeed to a higher priority than which Plaintiff was entitled under the law.

The Court of Appeal found that my operations were a reasonable interpretation of and compliance with the court’s order. See 2 Clark, Law of Receivers, supra, § 396(j), p. 684. “Within the limitations set out by the court’s order the receiver must necessarily have discretion and must exercise his best judgment. In such a situation if the receiver obeys the court’s order and keeps within the fair and reasonable implications of the order, he will not be liable for failures.”

2. Was the surcharging of Plaintiff for my fees and expenses an error by the lower court?

The Court of Appeal affirmed the order of the Superior Court that surcharged the Plaintiff for the administrative expenses of the receivership, and made the following observations in its opinion:

Receivers are entitled to compensation for their own services and the services performed by their attorneys. Generally, the costs of a receivership are paid from the property in the receivership estate. However, courts may also impose the receiver costs on a party who sought the appointment of the receiver or ‘apportion them among the parties, depending upon circumstances.’ Courts are vested with broad discretion in determining who is to pay the expenses of a receivership, and the court’s determination must be upheld in the absence of a clear showing of an abuse of discretion. (City of Chula Vista v. Gutierrez (2012) 207 Cal.App.4th 681, 685-686.)

The Court of Appeal concluded that in the absence of any viable alternative for remunerating me who Plaintiff had sought to have appointed, the costs of the receivership should fall on Plaintiff. Not only was Plaintiff the party who requested that I be appointed, but his attorney personally selected me as the receiver and was in close communication with me throughout the post-judgment proceedings.

The Court of Appeal further stated that:

We note that [Plaintiff’s] application for appointment of a receiver -- which was essentially granted without opposition -- did not comply with the requirements of the California Rules of Court governing the appointment of receivers. Rule 3.1175 requires an applicant to show ‘the nature of the emergency and the reasons irreparable injury would be suffered by the applicant during the time necessary for a hearing on notice’ and ‘the nature and approximate size or extent of the business and facts sufficient to show whether the taking of the property by a receiver would stop or seriously interfere with the operation of the business. (Cal. Rules of Court, rule 3.1175 (a)(1) & (4).) [Plaintiff] provided no such information.

As a general proposition the costs of a receivership are primarily a charge upon the property in the receiver’s possession and are to be paid out of said property. However, this is not an invariable rule. In many cases a direct liability is imposed upon the parties to the action, or upon some of them, for the remuneration of the receiver.’” Baldwin v. Baldwin (1947) 82 Cal.App.2d 851, 855, italics omitted, quoting Andrade v. Andrade (1932) 216 Cal. 108, 110.

3. Did I mismanage the Bakery and failed to comply with the Court’s appointing order?

Plaintiff claimed that I was at fault for failing to terminate the Bakery’s operations and sell its assets, or seek an order to cease operating earlier than I did. The Court of Appeal held that I could not have been expected to cease the Bakery’s operations and sell its assets prior to: (1) determining whether the Bakery could be operated to produce sufficient income to pay both its operating expenses and Plaintiff’s judgment; and (2) evaluating its assets for possible sale. The Court of Appeal found that the time spent by me to determine whether the Bakery was viable and evaluating its assets was not excessive.

The Court of Appeal also found the fact that I was unable to generate sufficient income from the Bakery’s operations to pay myself or Plaintiff was not proof of mismanagement. The business expenses simply outweighed the Bakery’s ability to produce sufficient revenue to satisfy all obligations, including the additional costs of a receivership.

4. Were specific items charged by me improper or unreasonable?

The Plaintiff further contended the total amount I charged for my services was unreasonable. Plaintiff specifically claimed that the fees incurred by me to prepare two requests for an order approving and settling my final report and accounting, the attorney fees for my counsel, and the fees for my support staff, were excessive. The Court of Appeal addressed Plaintiff’s allegations and stated that:

The amount of fees awarded to a receiver is ‘in the sound discretion of the trial court and in the absence of a clear showing of an abuse of discretion, a reviewing court is not justified in setting aside an order fixing fees.” Melikian v. Aquila, Ltd. (1998) 63 Cal.App.4th 1364, 1368. “The trial court is ‘in a better position to know the necessity for the services performed by the receiver and his attorney and to assess their reasonable value,’ than is a reviewing court.” Venza v. Venza (1951) 101 Cal.App.2d 678, 680 (quoting Kan v. Tsang (1949) 90 Cal.App.2d 538, 541)).The Court of Appeal found that I presented sufficient information in the form of detailed billing statements for the trial court to determine that the fees and expenses incurred, including the charges for support staff, were reasonable overall. Further, by engaging in litigation over every aspect of the fees charged during the operation of the Bakery, the appellate court determined that Plaintiff and his counsel were responsible in large part for the fact that the fees continued to rise after the Bakery was placed in the hands of the bankruptcy court. In sum, the appellate court found that the trial court did not abuse its discretion in concluding that the fees were reasonable or in refusing to exclude the specific items to which Plaintiff objected.

Lessons to Be Learned
In summary, from a professional standpoint I am pleased that I now have experience in operating a bakery, coffee shop, and wholesale baking distribution center. It is also reassuring that the Court of Appeal in an unpublished decision reaffirmed that if a party requests the remedy of a receivership, the court will support its receiver by holding the requesting party financially responsible for the outstanding fees and expenses. However, one lesson to be learned for parties and their counsel considering the appointment of a receiver is to be careful what you ask for. There are costs involved that someone must pay, and that someone may likely be the party requesting the receiver.

The post script to this story is, however, unfortunate, leading to another lesson to be learned. The likelihood that I will be able to collect the outstanding receiver and attorney fees from the Plaintiff is virtually non-existent. Receivers and attorneys should be cautious in accepting appointments such as post-judgment receivers and to consider requesting payment of a retainer from the judgment creditor.

*Kevin Singer has been a Court Receiver for over 13 years and has served as an Office of the Court in over 200 cases. He works and has offices all throughout the Southwest. He is currently a Board of Director with the Los Angeles/Orange County Chapter of the California Receiver’s Forum and an Associate Publisher for Receivership News.

*Byron Z. Moldo is a partner with the law firm of Ervin Cohen & Jessup LLP, located in Beverly Hills, California. He serves as a receiver in state and federal courts, and as counsel for receivers in both state and federal court.