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.
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