Spring 2003 • Issue 9, page 4

Using a Receiver to Resolve Community Association Disputes

By Linkon, Steve*

Using a court appointed receiver to temporarily operate a community association is a creative and cost-effective way to address a chronic repair issue, litigation or governance dispute. A receiver is appointed and supervised by a court and the receiver’s duties are circumscribed by the court’s appointing order. Community or homeowner’s associations sometimes face a problem that (a) cannot be addressed effectively by volunteer homeowners (who typically lack legal or technical expertise), (b) where the volunteer board may have an “agenda” that is in conflict with the best interest of the Association, or (c) where the board itself is conflicted and cannot effectively take action. A receiver can act to address the troubling issue in place of the board.

Why should a volunteer director be placed at risk of losing his or her assets if there is a problem within the association?

Even sophisticated volunteer directors may prefer to have a receiver address certain problems so as to avoid personal liability if their decisions are later (sometimes years later) attacked in a lawsuit. Use of a receiver can insulate these directors from personal liability and the association benefits because the appointing court must approve the receiver’s decisions.

A good example of the value of a receiver arises in the case of construction defect litigation and decisions concerning the scope of repair. Such decisions can involve huge sums of money and have long- term implications for the association. Lawsuits filed years later challenging earlier decisions made by volunteer directors as “grossly negligent” and seeking to hold the directors personally liable for the damages are not uncommon. What volunteer director would choose to serve on a board or make decisions in the face of such potential liability?

If the issue is construction repair, the board must decide the scope of the repairs to be undertaken. Obviously, the board does not want to waste money and perform repairs beyond the scope of what is absolutely needed. Conversely, the board does not wish to spend too little and fail to properly address the defects. No matter what amount the board decides to spend, their decision may be called into question years later if there is new or continuing damage to the property. Homeowners or third parties that suffer damages will naturally look to the individual members of the board that made the subject decisions, claiming that they were grossly negligent in determining an inadequate scope of repair. Such a lawsuit is difficult and expensive for
the association to defend and may result in enormous personal liability for a director if successful.

May a receiver shield volunteer directors from personal liability?

A receiver can make these critical determinations and obtain court approval for such decisions. This insulates the individual board members from personal liability, and protects the association in future litigation by providing evidence that the scope of repair was reasonable under the circum- stances known at the time. The association’s defense to a future lawsuit would be to point out that not only did a disinterested receiver determine the necessary scope of repair, but the appointing court also approved the receiver’s recommendation. This is powerful evidence that the association was not negligent, and the individual directors would be insulated from liability since they did not make the decision.

The receiver is also in a better position to amend CC&R’s and the governing documents of the association. Normally these require either 100% approval of the home- owners or such a high percentage of approval that, as a practical matter, amendments may be impossible. A receiver can simply obtain a court order on notice to the homeowners allowing amendment of the CC&R’s or other governing documents.

Sometimes it is better to use a professional to deal with weighty legal and business problems.

The receiver can also act on behalf of the association in dealing with municipal agencies, or opposing parties in litigation. Often these parties will be more deferential to a receiver, who is operating under court appointment, and then they would be to a board comprised of volunteer homeowners lacking legal or technical sophistication. And managing outside counsel can be a daunting task for a board unfamiliar with the intricacies of association law. This task can be delegated to a Receiver.

There are costs to having a receiver appointed.

The cost of a receiver must be considered. One should be employed only where the scope of the problem justifies the cost. A receiver’s compensation can be limited in many ways — either a fixed hourly rate, a sliding hourly rate or by a flat rate. The receiver’s duties can also be limited by the court’s appointing order to specific tasks or responsibilities.

In short, the receiver is a powerful tool with a myriad of uses to solve a particular problem facing an association.

Statutory basis for appointment.

Several provisions in CCP § 564 may be argued to authorize appointment of a receiver to protect a homeowner’s association in light of the facts described above. CCP §564(b)(6) provides that a receiver may be appointed where a corporation is insolvent, or in imminent danger of insolvency. CCP § 564(b)(9) provides that a receiver can be appointed where such receiver is necessary to preserve the property or rights of any party.

Typically, homeowners’ associations experiencing management problems are insolvent on a balance sheet basis. There are also often facts suggesting that the cur- rent board of directors may not be acting properly to preserve the property of the association.

Alternatively, one may look to the catch-all provision, CCP § 564(a), which provides that a receiver may be appointed in any case in which the court is empowered by law to appoint a receiver. The California Supreme court has held that a court of equity has the power to appoint a receiver of a going corporation upon a showing that there are such dissensions in its governing body as to create a virtual suspension of its business. Golden State Glass Corporation v. Superior Court 13 Cal. 2d 384, 393 (1939). 1

A court of equity also has authority to appoint a receiver to preserve assets of a corporation and prevent irreparable loss or injury, pending suit. Misita v. Distillers Corp., 54 Cal. App. 2d 244, 250. An appellate court will not disturb the trial court’s appointment of a receiver, provided there was no abuse of discretion resulting in a miscarriage of justice. (See Misita, Id, at 249.)

Misita involved a challenge to the validity of an ex parte appointment of a receiver to mange and conserve the assets of a business corporation where there was considerable dissension between stock- holders and a deadlock in the corporate directorate. In upholding the validity of an ex parte appointment, the court stated that the ability to appoint a receiver to preserve the assets of a corporation, and protect the rights of the stockholders is well established in California jurisprudence in situations where internal dissensions deadlock or frustrate the corporation. Dissension, or even honest differences of opinion that make it impossible for the corporation to carry on its business to advantage (or to carry it on at all), are sufficient to invoke the action of a court of equity. Misita, Id. at 251; see, also, Pomeroy’s Equity Jurisprudence, 4th ed.,§§ 1537, 1541, 1543, 1545; Boyle v. Superior Court, 176 Cal. 671 [170 P.1140].

The Golden State trial court appointed a receiver, and request for a writ of prohibition followed. Although the Supreme Court granted the writ, it affirmed that the trial court was authorized to appoint a receiver in such cases where courts of equity had previously done so, including the appointment of a receiver for a going corporation. Here, an uncontroversted showing that the corporation was being conducted in a solvent fashion placed the need for a receiver in doubt. The Supreme Court held that stronger proof was needed to justify a receiver where specific and detailed evidence that the corporation’s business was being successfully conducted is presented in opposition to the appointment of a receiver.

*STEVEN K. LINKON of the Wolf Firm has substantial experience representing receivers and obtaining the appointment of receivers in various matters. He has served as a regulatory receiver for the Securities and Exchange Commission and the Federal Trade Commission.