Summer 2006 • Issue 22, page 1

How to be in Two (Or More) Places at Once: Solving the Problems of Multi State Receiverships

By Rense, Kirk*

One of the more complex areas of receivership law – “Issues in Multi-State and Multi-National Receiverships” — was the topic of a recent seminar presented by the Los Angeles / Orange County Chapter of the California Receivers Forum. Some 35 persons attended the program, produced at the new offices of Buchalter Nemer in downtown Los Angeles.

Mike Wachtell, Esq. of Buchalter moderated the noontime program and contributed his expertise on issues that have arisen in cases he has handled. Peter Davidson, Esq. of Moldo Davidson Fraioli Seror & Sestanovich LLP spoke on issues arising in federal multi-state receiverships. Kirk Rense, Esq. addressed law pertinent to state court receiverships where property or business operations of the entity in receivership is/are located in several states. Jose Sanchez, Esq., Trial Attorney with the Los Angeles Office of the United States Securities and Exchange Commission, fielded questions regarding regulatory receiverships spanning more than one state.

Mr. Davidson advised that the situation is more ordered for federal court multi-state receiverships than receiverships ordered by state courts. 28 U.S.C. Section 754 is the federal statute that addresses important aspects of federal multi-state receiverships and governs the receiver’s ability to control property in different federal districts.

This statute requires that copies of the complaint and order of appointment must be filed in each district where property identified to the receivership estate is located within a short time – ten days — of appointment. Failure to do so divests the receiver of his or her jurisdiction and control over the property located therein. A miscellaneous case must be opened to accommodate such a filing, Mr. Davidson advised, and the copies filed must be certified.

28 U.S.C. Section 754:“Receivers of property in different states.”

“A receiver appointed in any civil action or proceeding involving real property, real, personal or mixed, situated in different districts shall, upon giving bond as required by the court, be vested with complete jurisdiction and control of all such property with the right to take possession thereof.

“He shall have capacity to sue in any district without ancillary appointment, and may be sued with respect thereto as provided in section 959 of this title.

“Such receiver shall, within ten days after entry of his order of appointment, file copies of the complaint and such order of appointment in the district for each district in which property is located. The failure to file copies in any district shall divest the receiver of jurisdiction and control over all such property in the district.”

Virtually no reported cases construed this 1948 statute until the 1990’s, Mr. Davidson said. He directed the audience’s attention to SEC v. Vision Communications, 74 F. 3d 287 (D.C. Cir. 1996), which holds that when a receiver fails to file the required pleadings in the foreign jurisdiction within ten days of his date of appointment that failure deprived the district court of jurisdiction over the defendant. The opinion stated, in dicta, that a solution to the problem is for the original appointing court to reappoint the receiver, starting the deadline to file running anew.

Mr. Davidson suggested that the fact that some later cases had picked up this dicta was no guarantee that the suggested re-appointment procedure would be upheld if challenged. “Nothing in the statute talks about reappointment,” he advised, and commented that if Congress wanted to give the receiver more time to comply it could have done so. He cited Lamie v. United States Trustee, 540 U.S. 526, 124 S. Ct. 1023, 1030 (2004) for its holding that where a statute’s language is plain, the sole function of the court, at least where the disposition required by the text is not absurd, is to enforce it according to its terms. Nor is it clear whether the receiver, the plaintiff, or both have authority to seek such reappointment.

The source of federal court supplemental jurisdiction over multi-state receiverships is found at 28 U.S.C. Section 1367, Mr. Davidson said.

Section 1367. Supplemental jurisdiction.

“(a) Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve joinder or intervention of additional parties.”

Mr. Davidson commented that this statute provides for subject matter jurisdiction over cases or disputes related to the receivership, so that such cases can be brought before the receivership court rather than in state court or a different district court. Two cases that have held that this ancillary jurisdiction to the main case gives additional district courts jurisdiction are Haile v. Henderson National Bank, 657 F.2d 816, 822 (6th Cir. 1981) and Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995).

Mr. Davidson advised that once real property is seized by a receiver, 28 U.S.C. Sections 2001, 2002 and 2004 govern its sale, including in foreign jurisdictions. Subsection (a) of that statute provides, in part, that property in the possession of the receiver or receivers appointed by one or more district courts shall be sold at public sale in the district wherein any such receiver was first appointed, at the courthouse of the county, parish, or city situated therein in which the greater part of the property in such district is located, or on the premises or some parcel thereof located in such county, parish, or city, as such court directs, unless the court orders the sale of the property or one or more parcels thereof in one or more ancillary districts.

The procedures for conducting a sale are rather elaborate, he added, and suggested that the appointed receiver consider obtaining a modification of the prescribed sale process from the appointing court.

Mr. Sanchez commented that he has not encountered the problem of recording the appointing pleadings in the various states since typically bank account assets are being sought and banks don’t usually require such multi-state registration when complying with federal turnover orders. The SEC does expect its receivers to be familiar with the procedure and to comply, however. He added that in a couple of SEC cases the original court found that persons in other jurisdictions had sufficiently close association with the defendant entity to allow personal jurisdiction to attach, which would not be defeated by any failure to record appropriate pleadings in the applicable foreign jurisdictions.

Procedures are far less certain for state court receiverships, Mr. Rense said. Whether or not and when it is necessary to obtain the appointment of an ancillary receiver in a jurisdiction foreign to the appointing court are the principle issues.

Several sections of the monumental A Treatise on The Law and Practice of Receivers (Third Edition) by Ralph Ewing Clark, LL.D., published by the W.H. Anderson Company in 1959 deal with the authority of receivers appointed in state and federal district courts over the receivership entity’s property and business assets located in other states and jurisdictions when access to courts of the foreign jurisdiction is sought.

There are many reported decisions on the topic for an interesting reason — receivers used to occupy center stage in corporate insolvencies: in the absence of national bankruptcy provisions for insolvent corporations many states had unique (often contradictory) statutory schemes dealing with the issue. Receivers raiding assets of receivership entities located in other states often prompted legal challenges, resulting in reported decisions.

The leading case holding that the control of a receiver over property of the entity in receivership is confined to the territorial boundaries of the appointing court is Booth v. Clark, 17 (How) (US) 322, 328, 15 Led 164 (1854), which holds that a receiver has no extraterritorial rights of official action. The appointing court had no ability to confer authority to enable him to go into a foreign jurisdiction and take possession of the defendant’s property, the decision states. See, also Ward v. Pacific Mutual Life Insurance Company, 135 Cal. 235 (1901), expressly adopting the U.S. Supreme Court’s reasoning; and the somewhat more recent case, Melvin v. Carl, 118 Cal. App. 249, 4 P.2d 954 (1931), also adopting this language.

But many states do afford a foreign receiver the privilege of appearing in state court to deal with assets as a matter of comity. This was articulated in a California Appellate Court case, Wright v. Phillips, 60 Cal. App. 578 (1923), where a receiver appointed by a Washington State court over an insolvent corporation sought to bring suit in California to avoid a transfer of corporate real property located in California.

“Receivers appointed under a jurisdiction other than that of the state forum may be permitted to sue in a stranger state as a matter of comity only. That this privilege of comity will be extended, wherever the rights of local or domestic creditors are not prejudiced, is now the general rule in the United States [citations omitted]…. Each state, of course, establishes its own policy on the subject.” [emphasis added.]

The American Law Institute sets this out more formally in the Restatement of Torts, Second, in 1971, as follows:

Section 406: When Foreign Principal Receiver May Sue on Claim of Estate

A Foreign principal receiver may maintain an action upon a claim of the estate of which he has been appointed receiver unless there is within the state of the forum a local receiver or unless such suit would prejudice the interests of local creditors.

The desire of courts to protect the creditors of their own states is understandable. This “local creditor” complication to the doctrine of comity was discussed at some length by the California Supreme Court in Ward. V. Pacific Mutual Life Insurance Company, 135 Cal. 235 (1901), where an Illinois receiver and a California resident sought the same funds. The court held:

“All the rights and powers of the plaintiff in the premises, as receiver, are derived from the statute of Illinois, and are confined to the territorial jurisdiction of that state; the statute in question has no force in California. It is true that a receiver appointed under the laws of one state will sometimes be allowed, by comity, to maintain a suit involving property in another state, where there are no claims or interest of the citizens of the latter state to be considered, but not where there are conflicting claims of domestic creditors to the property or fund who are pursuing their remedies under the statutes of the other state.”

Local cases on point also include Clarkson Co., Ltd. v. Rockwell Ontern. Corp., 441 F. Supp. 792 (N.D. Cal. 1977)(a private receiver under Canadian law was permitted to bring suit in California as a matter of comity in view of lack of showing of prejudice to rights of local creditors); and Muth v. Educators Security Inc. Co., 114 CalApp3rd 749, 170 Cal. Rptr. 849 (1981)(where it was held that a domestic creditor has a right to attach real property, and no rule of state comity or of law requires a court of California to set aside that right in deference to a foreign receiver claiming under the laws of another state).

Mr. Rense stated that if legal proceedings must be initiated in a foreign jurisdiction, the receiver should bring suit and request standing as a matter of comity to prosecute the action. So long as the rights of local creditors aren’t prejudiced, there is an excellent chance the local courts will not interfere. In major cases where there is a great deal of property and it is safest to assume that access to local courts will be necessary, taking steps to register the receiver and receivership in the foreign jurisdiction – and perhaps to seek appointment of an ancillary receiver (discussed more fully below) — should be undertaken.

The Nature of the Receivership May Control Whether Application for An Ancillary Receiver Is Necessary.
The situation may be different where the receiver may be said to be a statutory assignee (or so-called “quasi-assignee”) and invested with the rights of the entity over which he has been appointed. This may be the case for a receiver appointed by the state over a domestic insurance company or insolvent state-chartered bank, for example, and when receivers are appointed in exercise of a state’s statutory corporate dissolution scheme. See, 3 ALR 262, “When Receiver Of Corporation Deemed To Be Vested With Title To Assets So As To Entitle Him To Sue In A Foreign Jurisdiction” (1918), with subsequent annotation at 29 ALR 1495.

It has been held that such a receiver can sue in his own name in other jurisdictions as a matter of right. The rationale given in these cases is that a corporation is a creature of legislation, must act through its agents, and the statutorily appointed receiver may properly be said to be its representative in active operations. “If a legislature creating the corporation makes a receiver the successor in title to the corporation’s property, then such title must be recognized in a foreign state or jurisdiction.” Clark on Receivers, Vol. 2, Section 591(o) citing to, inter alia, Clark v. Williard, 292 U.S. 112, 78 L.Ed.1160, 54 S. Ct. 615 (1923).

What of situations where a receiver can accomplish his obligations in a foreign jurisdiction without recourse to the courts? Should he do so, by acting through the receivership entity’s employees located in the foreign jurisdiction, or even more directly? It should be remembered that if his activities are challenged, the receiver runs the risk of having her or his actions set aside by the foreign jurisdiction court. This is particularly true if the receiver’s actions prejudice a local creditor. See, Morlan v. Lucey Mfg. Corp., 7 F2d 494, cert. den. 47 S.Ct. 344 (1925), where it was held that receivers appointed in New York acquired no dominion over assets in California either directly or by instructions to the company’s manager.

Obtaining Appointment of an Ancillary Receiver.
If informal methods to perform receivership duties in a foreign jurisdiction have failed or seem unwise, if comity is not extended by the foreign court, or if title issues preclude a receiver’s sale of property in the foreign jurisdiction, it may be necessary to obtain appointment of an ancillary receiver by a court in the state where the property to be administered is situated or business is operating.

The receiver should first obtain permission from his or her appointing court to seek appointment of an ancillary receiver.

Many states have statutory schemes dealing with the appointment of an ancillary receiver where the primary receiver is a post-judgment receiver, or is charged only with taking possession of and liquidating all the receivership entity’s assets. Typically in these cases a new “bill” or case must first be filed, setting out the case for relief and, in substance, asking that the assets of the defendant be gathered and, after proper liens, charges and expenses are paid, the balance be remitted to the court appointing the primary receiver. See, Conklin v. U.S. Shipbuilding Co., 123 Fed. 913 (1903).1

But where the issue is less clear cut – perhaps where a receiver is appointed to operate a multi-state corporation pending resolution of an ongoing case, it is wise to consult local counsel to determine what procedures (if any) exist in local law to validate the foreign receiver’s existence or to have a local receiver appointed. In such cases, there is always a risk that the foreign court will refuse to appoint a receiver where the primary receiver’s application is challenged.

May the same person be a primary receiver and an ancillary receiver in one or more foreign states? Obviously it is best if the foreign court reappoints the original receiver, precluding conflicts and confusion. Where the company in receivership is a multi-state company, it is particularly desirable that the same person be appointed in both the original and foreign jurisdiction. See, Taylor v. Life Assoc. of America, 3 F. 465, 1880 U.S. App. LEXIS 2557 (C.C.D. Tenn. 1880). In states where there isn’t a statute limiting receivers to state in-residents, it may well be possible to have the out-of-state receiver appointed as ancillary receiver as well. A review of California statutes does not disclose any requirement that a person to be nominated as receiver be a California resident. Other states may have restrictions, however, Mr. Rense added.

If an ancillary receiver is appointed, to whom is such an ancillary receiver accountable: the new appointing court or the original foreign court that appointed the primary receiver? It is clear that the ancillary receiver is under the original jurisdiction of and is responsible solely to the new appointing judge and not to the primary court in a foreign jurisdiction. Reynolds v. Stockton, 140 U.S. 254, 35 Led 464 (1891).

A related question is: from which court will an ancillary take instruction (even if the original receiver is serving in both capacities)? Logic suggests that no conflict between the original appointing order and the ancillary appointing order should arise so long as no creditors of the state of appointment of the ancillary receiver will be prejudiced. But if there is a conflict, home state chauvinism will prevail. Thus it was held in Clark v. Supreme Council of Order of Chosen Friends, 146 Cal. 598, 80 P. 931 (1905) that the rights of a local attaching creditor cannot be prejudiced by the appointment of an ancillary receiver to take charge of local property and turn it over to a foreign receiver.

What if Title to Real Property Is An Issue?
When real property of a receivership entity is located in a foreign state, if the receivership entity voluntarily makes a deed of transfer to the receiver, the receiver becomes the successor in title, and may deal with the property as an assignee/owner. This is also true where a person or entity other than the defendant holds title to such property and voluntarily transfers it to the receiver. Once the receiver acquires title, the receiver may deal with it as any individual with title could.

Whether a foreign receiver may sell receivership estate real property pursuant to court order placing that property into the receivership estate without seeking appointment of an ancillary receiver in the state where the property is located will depend upon the circumstances of the case. If title is held by a corporation in receivership, and the receiver is charged with operating the corporation, it may be that the receiver may sign as an officer of the corporation, Mr. Rense said.

If title is held by an individual, the matter becomes more problematic. A receiver should look to the laws of the particular state where the property is located for his or her answer. There is a very pragmatic test: can a would-be purchaser obtain title insurance on a receiver’s (usually “quitclaim”) deed? Title insurance companies have a legal staff that will be conversant with the laws of the state where the property is located. If no willing title insurance company can be found, an order from the local state court authorizing the sale by an ancillary receiver is probably necessary. And, of course, all liens against the property must be paid or formally avoided.

1 In Conklin v. U.S. Shipbuilding Co. at pages 916-17, the court stated:
“Now comes the question as to the nature of the bill before me. If this were a bill asking me merely to appoint a receiver ad interim, ancillary to an ad interim receiver appointed in New Jersey, I should pay no attention to it. But in my view it is a bill asking me to assist in enforcing a final decree made by the Circuit Court for the District of New Jersey, and asking me to gather together assets, or cause them to be gathered together, so that they can ultimately be accounted for where they should ultimately be accounted for; that is, to the Circuit Court for the District of New Jersey. It is like any bill asking the gathering up of assets by an ancillary proceeding for the purpose of causing them to be remitted to be disposed of by the court having jurisdiction at the place of domicile.