This is a case study of how a California state
commission institutionalized a rumor and ostensibly proceeded to assert
jurisdiction over a federal court. If only we could figure out how it
happened.
The federal Bankruptcy Code requires a receiver to
turnover assets to the bankruptcy trustee on the date the receiver learns
of the bankruptcy.1 An optional form
order for receivers in the Los Angeles Superior Court contains language
that appears to give receivers a 10 day grace period.2
Does a state form order trump the Bankruptcy Code?
A recent discussion with the Honorable Barry
Russell, United States Bankruptcy Judge, made clear that the United States
Bankruptcy Court for the Central District of California has no idea that
this rule exists as part of a California form order. Nor does that court
believe that such a form order is necessarily solid guidance for receivers
or binding on the Bankruptcy Court.
So one must question how this state ten day safety
rule landed in a form order that state courts approve and upon which
receivers rely. In the late 1990’s, Rule 981.1 of the California Rules of
Court initially went into effect, preempting all local rules and forms. At
the request of the Los Angeles Superior Court, the Judicial Council
authorized a partial, temporary exception to preemption in the
receivership area until January 1, 2002, to allow for the development of
statewide rules and form orders. In October 2001, the Civil and Small
Claims Advisory Committee of the Judicial Council of California issued a
Report proposing new rules and optional form orders for rents, issues and
profits receiverships. Several lawyer members of the California Receivers
Forum had been contacted by the Advisory Committee, which was seeking our
input as they had no experience in this area of the law. This group of
seasoned receivership lawyers, all of whom had bankruptcy experience
(David Ray, David Pasternak, Peter Davidson, Michael Wachtell, Michael
Abney, Richard Weissman, Steven Linkon and myself), was requested to work
with the Council because of our earlier extensive work in assisting the
Los Angeles Superior Court, under the leadership of the Honorable Robert
H. O’Brien, in developing a series of local rules. Those local rules, for
the first time, spelled out the duties and responsibilities of a
court-appointed receiver.3 To my
knowledge, the earliest official reference to the ten day safety rule was
set forth in an order either developed or approved by the Honorable Bruce
Mitchell in Department 59 of the Los Angeles Superior Court in the late
1990’s. This was probably the impetus for the ten day provisions in the
form orders, as the language is almost identical.
Our committee, joined by the judicial officers who
handled receivership matters in the Los Angeles Superior Court, worked
with the Judicial Council for over a year. In 2002, proposed rules were
circulated for comment and ultimately became effective on January 1, 2004.
Although the optional form orders apply only to rents, issues and profits
receiverships, many California judges have required equity receivers to
incorporate the provisions into their orders. The practice appears to have
been accepted and institutionalized.
The committee discussed extensively the impact of
bankruptcy on a receivership estate, and those discussions centered on
protection of the receiver who is required by 11 U.S.C. § 543(b)(1) to
turn over assets to the bankruptcy trustee or the debtor in possession
upon receipt of a notice of bankruptcy. It is well established that a
receiver who remains in custody and control of assets after receiving
notice of a bankruptcy filing may be courting disaster or, at the least,
non-payment of his/her fees and expenses. Since many rents, issues and
profits receivers are not lawyers, and even those who are lawyers often
lack bankruptcy experience, it was felt that the form order should spell
out the receiver’s immediate duties and very limited authority when
notified of a bankruptcy filing. At no time, however, did any of the
experienced bankruptcy/receivership lawyers serving on the committee put
forth the proposition that a ten day holding period was safe. In fact, the
only time ten days was ever mentioned in this context was during the
development of the local rules.....long before the statewide Judicial
Council was involved. At that time, an informal meeting had been held with
the Honorable Lisa Hill Fenning who agreed that we should address the
ambiguity of the timing of the turnover by a custodian pending a party’s
motion for an excuse from turnover under section 543. It may have been the
case that a ten day period was mentioned as “reasonable,” but at no time
was it ever suggested that a state court (or council) could preempt a
federal statute and unilaterally decree that there was a “ten day rule.”
In fact, the 21 federal judges who then sat on the bankruptcy bench each
had their own local rules, known by practitioners as the “local, local
rules,” and woe to the unsuspecting lawyer who failed to follow them.
This case study is a cautionary tale for
receivers. A bankruptcy court will likely have no problem totally ignoring
the ten day safety rule if it determines to enforce the more immediate
language contained in section 543 of the Bankruptcy Code. It behooves a
receiver when faced with these circumstances to immediately make a report
to the federal court following a party’s advice that a § 543(d) motion is
forthcoming.....and to hope for the best. The issue of who authorizes
payment and who pays the receiver’s bills for reporting to both courts and
for the receiver’s interim acts is an entirely separate topic.
1. 11 U.S.C. § 543(b)(1) states: (b) A custodian shall—
(1) deliver to the trustee any property of the debtor held by or
transferred to such custodian, or proceeds, product, offspring, rents, or
profits of such property, that is in such custodian’s possession, custody,
or control on the date that such custodian acquires knowledge of the
commencement of the case.
2. Form Order RC-200, para. 27
and Form Order RC-310, para. 25 (c) each state: “Turn over property if no
motion for relief is filed within 10 days after notice of the bankruptcy.
If the party who obtained the receivership fails to file a motion within
10 court days after his or her receipt of notice of the bankruptcy filing,
the receiver shall immediately turn over the property to the appropriate
entity- either to the trustee in bankruptcy if one has been appointed or,
if not, to the debtor in possession – and otherwise comply with 11 United
States Code section 543.”
3. I am pleased to note that many
if not most of the Los Angeles Superior Court’s Local Rules were
ultimately adopted into the California Rules of Court in 2002.
*Edythe L. Bronston is a Principal with the Law Offices of
Edythe L. Bronston in Sherman Oaks, California. Ms. Bronston is a
court-appointed fiduciary, acting as a Receiver, Provisional Director,
Partition Referee and Grantor Trustee. |