Q: I am a receiver in a case where the court
issued an injunction staying all litigation and creditor action against
the entity and assets in receivership. A secured creditor wants to
foreclose on one of the estate’s assets. Can it do that? What is the
procedure for the creditor to obtain relief from the stay?
A: The first thing to remember is that receiverships are not
bankruptcy cases. Too often, parties to receivership cases analogize to
bankruptcy proceedings. While this is understandable, especially given the
local rules in some courts which provide the receiver is to administer the
estate like bankruptcy estates (See Local Rule 66-8, USDC Central Dist.
Calif.), the rules are not the same and often the differences are
significant. The requirements for relief from a blanket receivership stay
order differ from those to obtain relief from the automatic stay under the
Bankruptcy Code. The most obvious difference is the bankruptcy automatic
stay is statutory (11 U.S.C. § 362), and the grounds for obtaining relief
from the automatic stay are also statutory (11 U.S.C. § 362(d) et. seq.).
A court’s power to issue a receivership stay order “falls within the
court’s inherent power to prevent interference with the administration of
th[e] estate” SEC v. Credit Bancorp., Ltd., 93 F. Supp. 2d 475,477
(S.D.N.Y. 2000).
The grounds for relief under the Bankruptcy Code
depend on the action the creditor wants to take. The rules for obtaining
relief from a receivership stay are different. In SEC v. Universal
Financial, 760 F.2d 1034 (9th Cir. 1985). The Ninth Circuit adopted
three factors to consider in deciding whether to lift a receivership stay:
“(1) whether refusing to lift the stay genuinely preserves the status quo
or whether the moving party will suffer substantial injury if not
permitted to proceed; (2) the time in the course of the receivership at
which the motion for relief from the stay is made; and (3) the merit of
the moving parties underlying claim.” Id. at 1038. The Ninth
Circuit was relying on its prior decision in SEC v. Wencke, 622
F.2d 1363 (9th Cir. 1980). It points out that the traditional preliminary
injunction test would require a receiver to show a probability of success
on the merits and the possibility of irreparable harm to the receivership
if the stay is not continued. The test under Wencke, however,
simply requires the court to balance the interest of the receiver and the
moving party. However, “the interests of the Receiver are very broad and
include not only protection of the receivership res, but also protection
of defrauded investors and considerations of judicial economy.”
Universal Financial, supra. at 1038. It notes that when a motion for
relief from a receivership stay is made early in the case, it will be
harder for a movant to obtain relief from the stay. It cites to the second
Wencke case, SEC v. Wencke, 742 F.2d 1230 (9th Cir. 1984),
and states: “Where the motion for relief from the stay is made soon after
the receiver has assumed control over the estate, the receiver’s need to
organize and understand the entities under his control may weigh more
heavily than the merits of the party’s claim. As the receivership
progresses, however, it may be less plausible for the receiver to contend
that he needs more time to explore the affairs of the entities. The merits
of the moving party’s claim may then loom larger in the balance.” Id.
at 1038-1039. The cases are significant by what they mean by “early in the
case.” When the Ninth Circuit heard the original Wencke case, the
receivership had been pending for two years. It denied relief from stay
and sent the matter back to the district court to reexamine the necessity
for the stay. Upon remand, the district court continued stay in effect and
the movant again appealed. When the Ninth Circuit heard the Wencke
case again, the receivership had been pending for six years. The Ninth
Circuit felt that was long enough and, therefore, lifted the stay. In
Universal Financial the stay had been pending for four years when the
Ninth Circuit ruled, yet it kept the stay in place because it felt, unlike
in the Wencke case, there were still material facts coming to light
through discovery and testimony that might affect the underlying issues in
the case.
Other circuits have adopted the three Wencke factors for determining
whether relief from a receivership stay should be granted. See e.g.,
SEC v. Vescor Capital Corp., 599 F.3d 1189 (10th Cir. 2010);
United States v. Acorn Tech Fund, L.P., 429 F.3d 438 (3d Cir. 2005).
In the Petters’ receivership case, the district court recently
denied a relief from stay motion which would have permitted certain
investors to obtain a default judgment against Petters in other
litigation, so they could use it for pursuing claims against third
parties. Despite the fact that the Petters receivership case was
seven years old, the receiver was still actively marshaling assets and
pursuing litigation and, hence, the court held continuing the stay was
necessary to protect and preserve receivership assets, relying on
Universal Financial. See U.S. v. Petters, 2015 WL 5333806 (D. Minn.
Sept. 14, 2015).
Whether to lift a receivership stay, therefore, is
case specific. It will depend on the timing of when a motion for relief is
filed and the status of the receivership. The decision on whether to grant
relief from a receivership stay will only be overturned if the court of
appeal finds that the trial court abused its discretion. Universal
Financial, supra. at 1038.
*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.
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