Using Limited Receivers to Accomplish Limited Tasks
By Sampson, Bryan & Scholtemeyer, Seana*
Editor’s note: Tailoring your motion for appointment of a receiver to a particular task may limit expense, focus the receiver’s attention and improve your chance of prevailing at the hearing. Bryan Sampson and Seana Scholtemeyer first discuss the basics of obtaining appointment of a receiver, then explore some of the limited purpose receiverships authorized by statute.
One of the more difficult and critical junctures in a receivership proceeding is the initial appointment of the receiver. Courts are often either unfamiliar with receiverships or are wary of issuing an order to appoint a receiver. The common perceptions associated with receiverships are the potential sizeable expense, the harm to a defendant’s business and the substantial administrative requirements. In fact, it is well settled law that an equity receivership is a drastic remedy that should be used only in extreme or unusual situations. 65 Am. Jur. 2d Receivers ß8; IFS Industries, Inc. v. Stephens, 159 Cal. App. 3d 740 (1984); Hoover v. Galbraith, 7 Cal. 3d 519, 528 (1972).
When applying for appointment of a receiver, it is important to understand that a receiver is an equitable remedy authorized only by statute. Miller v. Oliver, 174 Cal. 407, 410 (1917). The appointment of a receiver rests in the sound discretion of the court. Goes v. Perry, 18 Cal. 2d 373, 381 (1941). The primary purpose of a receiver is simply to preserve property for the parties pending a judgment or disposition of the property. Kreling v. Kreling, 118 Cal. 421, 422 (1897). Furthermore, a receiver is an agent of the court, not an agent of either party. C.R.C. 1903(a); Shannon v. Superior Court, 217 Cal. App. 3d 986, 992 (1990). Therefore, a court will require a good reason to authorize the initial appointment of a receiver, especially on an ex parte basis. Turner v. Sup. Ct. (Cooke), 72 Cal. App. 3d 804, 809 (1977).
If a court is initially reluctant or unwilling to appoint a receiver, consider a lesser remedy. Ask the court to appoint a “limited purpose receiver.” First Interstate Bank of Lea County v. Heritage Square, Ltd., 113 N.M. 763, 766, 833 P. 2d 240, 243 (1992); Ahart, Cal. Prac. Guide: Enforcing Judgments & Debts, ß4:855 (The Rutter Group 2006). This concept has many different names, such as a special receiver, an interim receiver, a pendente lite receiver, a temporary receiver, a limited receiver or a limited purpose receiver. 65 Am. Jur. 2d Receivers ß3. The effect of a limited receiver is to protect the rights of a party while not upsetting the entire business relationships of the other party. Gold v. Gold Realty Co., 114 Cal. App. 4 791, 802 (2004).
The key to successfully obtaining the initial receiver order is to convince the court of the need to appoint a receiver, even if the appointment is only on a limited basis. Once appointed, the court may modify the receiver’s powers as appropriate. Code of Civil Procedure ß568. However, the receiver’s powers are limited to those authorized in the receiver’s order. Morand v. Superior Court, 38 Cal. App. 3d 347 (1974).
Drafting the order appointing a receiver is crucial to define the future course of the receivership. The language of the appointment order must specify the receiver’s powers carefully and precisely. Ahart, Cal. Prac. Guide: Enforcing Judgments & Debts, ß4:900 (The Rutter Group 2006). This will minimize future disputes regarding the receiver’s conduct. For a limited receiver, tailor the appointment order to fit the particular circumstances of the case. Id. Ideally, the appointment order’s instructions will foresee any future problems and eliminate the need to ask the court for further instructions. Id. A self-sufficient receiver order will result in fewer charges to the parties.
From the defense perspective, if the court agrees to appoint a receiver, try to limit the receiver’s duties to minimize the expense and potential harm to the defendant. Morand v. Superior Court, 38 Cal. App. 3d 347 (1974). Also, be aware that a court may sua sponte appoint a receiver for a general or for a limited purpose. Venza v. Venza, 94 Cal. App. 2d 878, 883 (1949).
Courts have authorized limited purpose receivers in a variety of cases. Some examples of cases where courts have appointed limited receiverships follow.
Audit or Discovery Issues. A court may appoint a receiver to review financial records, assets and liabilities of a company, then report the results to the court. Leone Industries v. Associated Packaging, Inc., 795 F. Supp. 117, 121-122 (U.S. Dist. N.J. 1992).
Assignment of Rents. Another type of limited receiver is an assignment-of-rents receiver. Civil Code ß2938(g); Code of Civil Procedure ß564(b)(11),(12).
Corporate Matters. A court may appoint a receiver to handle certain corporate matters if reasonable grounds exist to show that a receiver is necessary to protect the interests of the corporation and its shareholders. Code of Civil Procedure ß564(b)(5),(6); Corp. Code ßß1801(c) & 1803; Merlino v. Fresno Macaroni Mfg. Co., 64 Cal. App. 2d 462, 463 (1944). The appointment may be for a limited purpose, such as selling property of the corporation. 9 Witkin Summ. Cal. Law, Corp. ß217; Merlino v. Fresno Macaroni Mfg. Co., 64 Cal. App. 2d 462, 463 (1944).
Marital Dissolution Proceedings. A court may appoint a limited receiver in a divorce action to locate, hold or liquidate property for the benefit of a party. Cal. Family Code ß290; Rosenthal v. Rosenthal, 240 Cal. App. 2d 927, 933 (1966). Additionally, a receiver may be appointed to effect a sale of community property. Darter v. Magnussen, 172 Cal. App. 2d 714, 720 (1959).
Enforcing a Court Order. If a defendant refuses to obey a court order, such as delivering documents, a court may appoint a receiver to take the records. Aviation Supply Corporation v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8 Cir. 1993). Such an appointment may defuse 5th Amendment issues raised by a defendant. United States v. Doe, 465 U.S. 605, 611612 (1976).
Appointment in Federal Courts. A federal court has the inherent equitable power to appoint a receiver. F.R.C.P. 66; Levin v. Garfinkle, 514 F. Supp. 1160 (U.S.D.C., E.D. Pa. 1981). Notably, this power may vary from state to state under the laws of the state where the federal court resides.
Receivers and Foreign Entities. Generally, a court will not appoint a receiver for a foreign entity. Dropelman v. Illinois Sur. Co., 95 Wash. 476, 164 P. 70 (1917). However, as is the case with most rules, exceptions exist. A receiver may be appointed for a limited purpose when circumstances justify an appointment to preserve property. Citronelle-Mobile Gathering, Inc. v. Watkins, 934 F. 2d 1180 (11 Cir. 1991). The test for appointing a receiver over a foreign corporation is whether there is a substantial possibility of fraudulent conduct, a real danger property will be taken from the court’s reach or an inadequacy of legal remedies due to the foreign entity’s ability to remove assets from the court’s jurisdiction. Select Creations, Inc. v. Paliafito America, Inc., 828 F. Supp. 1301 (E.D. Wis. 1992).
Enforcing a Judgment. Generally, a court may appoint a receiver to enforce a judgment. Select Creations, Inc. v. Paliafito America, Inc., 828 F. Supp. 1301 (E.D. Wis. 1992). Even a limited jurisdiction court may appoint a receiver to enforce its judgment. Cal. Code of Civil Procedure ß86(a)(8). The appointment may be for a limited purpose, such as seizing, marketing and disposing of a judgment debtor’s property. Gold v. Gold Realty Co., 114 Cal. App. 4th 791 (2004). Also, a receiver appointed to enforce a judgment is not necessarily an agent of the court, but is appointed to represent the creditor. Morand v. Superior Court, 38 Cal. App. 3d 347 (1974).
In Connection With Partnership Disputes. A court may appoint a limited receiver to preserve assets in a partnership dispute. Morand v. Superior Court, 38 Cal. App. 3d 347 (1974). The partnership appointment may specify the receiver enforce a court order. Band v. Livonia Associates, 176 Mich. App. 95, 439 N.W. 2d 285 (1989). A limited receiver may be appointed to prevent dissipation of assets. Puma Enterprises Corp. v. Vitale, 566 So. 2d 1343 (Fla. Ct. App. 3d Dist. 1990). A court may appoint a special receiver to hold proceeds pending resolution of a dispute. O&G Carriers, Inc. v. Smith Energy 1986 - A Partnership, 826 S.W. 2d 703 (Tex. App. 1st Dist. 1992). A court may also appoint a receiver simply to obtain an accounting. Moran v. Park, 93 Okla. 201, 220 P. 589 (1923). A court may consider a receiver to dissolve the partnership. McKinley v. Long, 227 Ind. 639, 88 N.E. 2d 382 (1949).
To Preserve an asset. A special receiver may be appointed for control of specific property, such as one parcel of real property, as opposed to a general receiver for control over all property of a party. Cal. Code of Civil Proc. ß564(b)(4); First Interstate Bank of Lea County v. Heritage Square, Ltd., 113 N.M. 763, 766, 833 P. 2d 240, 243 (1992). However, a receivership for real property will not be ordered unless the creditor/vendor can show why recording a lis pendens alone would not protect the property. Barnes v. Morrison, 102 Cal. App. 152, 159 (1929).
To Seize and/or Sell Assets. A court may appoint a limited receiver to hold an asset pending resolution of a dispute. Cal. Code of Civil Procedure ß564(b)(1)&(9). A receiver also may be appointed to sell all or a part of an asset. Cal. Code of Civil Procedure ßß568 & 568.5; Lesser and Son v. Seymour, 35 Cal. 2d 494 (1950). The court has continuous jurisdiction to direct the receiver as to when, where and how to sell an asset. Title Ins. & Trust Co. v. California Dev. Co., 159 Cal. 484, 492 (1911).
Additional types of limited purpose receiverships may be crafted for court
approval by creative parties. Possible examples include executing
documents (similar to an elisor), entering into contracts, issuing
receiver certificates, compromising debts, creating liens on property or
filing and prosecuting a legal action. Nulaid Farmer’s Ass’n v. La Torre,
252 Cal. App. 2d 788, 791-793 (1967).