Receiverships can be a powerful and flexible remedy, and it is often possible to obtain relief through a receivership in situations where relief is not otherwise available. This article will provide a brief overview of receiverships in California Superior Court actions, with an emphasis on understanding common situations for appointment of a receiver.
As a threshold matter, a receiver is appointed by the court and is an agent of the court. See, Cal. Rules of Court 3.1179. As such, the receiver is neutral as between the parties – even though the receiver is usually appointed at the request of one of the parties to the action. A receiver holding assets holds them for the court and not for any of the parties. See, Cal. Rules of Court 3.1179(a)(3).
The Purpose of a Receiver
The primary purpose of most receiverships is to collect, hold, or protect assets at the request of the court during a pending legal action. The receiver is sometimes appointed by a court to take a particular action such as selling real property or collecting money from bank accounts. Receivers are often appointed to operate an on-going business. Typical cases for appointment of a receiver include the following:
- To manage a business during shareholder or partner disputes
- To manage a community property business during a divorce proceeding
- To possess and manage real property and to collect the rental stream from the property
- To sell real property by private sale (using real estate agents) rather than by public auction as would be required through a Sheriff’s sale
- To sell an ongoing business
- To bring real property into compliance with Health and Safety Code requirements
- To enforce court orders
- To collect judgments – especially hard-to-locate or hard-to-seize assets
- To protect a secured lender’s collateral
Receiverships are a common law remedy dating back hundreds of years. In California, grounds for appointment of a receiver are scattered throughout the codes. Code of Civil Procedure section 564 contains a lengthy list of common grounds for appointment of a receiver, but that list is not exhaustive. Statutory grounds for appointment of a receiver are also found in the Family Code (including Family Code section 290), various sections of the Penal Code, various sections of the Health & Safety Code (including section 17980.7), and multiple other places. Code of Civil Procedure section 564(b)(9) contains a catch-all rule allowing appointment of a receiver “in all other cases where necessary to preserve the property or rights of any party.” Case authority also supports the appointment of a receiver. Turner v. Superior Court, 72 Cal.App.3d 804 (1977).
One of the most powerful aspects of receiverships is that a receiver can be appointed prior to entry of judgment in the case. Quite often, the court will appoint a receiver to enforce the status quo prior to entry of a judgment.
A court has the inherent power to appoint a Receiver on its own motion, though that is rare. McCarthy v. Poulson, 173 Cal.App.3d 1212 (1985). As a practical matter, a receiver is usually appointed upon motion by a party. Motions for appointment of a receiver may be done either through ex parte motion or through noticed motion. See, Cal. Rules of Court Rule 3.1175 (ex parte). The moving papers must show the grounds for appointment of a receiver. Miller v. Oliver, 174 Cal. 407 (1917). Receiverships are often described as a “drastic” remedy, so the moving papers should show compelling evidence that a Receiver is necessary to prevent the loss or destruction of property or imminent health issues. It is often sufficient to show that one party is hiding or squandering jointly-owned assets, such as in a divorce proceeding or a business dissolution action, of that a party has disobeyed prior court orders.
In connection with a receivership proceeding, any party may nominate a proposed receiver – even the party opposing the receivership. Cal. Rules of Court 3.1177. California law does not contain any minimum qualification requirements for a receiver. Rather it contains a list of prohibited persons who cannot serve as receiver, such as a party to the action, attorney for a party, or person related to a judge of the court. See, Code of Civil Procedure section 566. Most judges will be looking for a proposed receiver with prior receivership experience and, preferably, prior experience with similar cases. The best practice is to include a declaration from the proposed receiver setting forth that person’s qualifications, fee structure, willingness to serve, and lack of conflicts.
The party seeking appointment of a receiver should prepare a proposed order for the appointment of the receiver. The receivership order is a critical document because it sets forth the powers and duties of the Receiver. A well-crafted receivership order should cover issues that the receiver is expected to encounter. For example, will the receiver need to control access to real property? Hire and fire employees of a business? Freeze bank accounts? Sell assets? Intercept mail? Collect accounts receivable? Hire other professionals such as accountants? Change locks? Enlist the assistance of law enforcement? Should there be injunctive orders prohibiting the parties from interfering with the receiver’s duties? All those subjects and more should be in a receivership order. California’s Judicial Council has created optional orders for the appointment of a receiver (see, for example Form RC-310), but those form orders should be used with caution because they are only appropriate for a limited type of receivership called a “rents and profits” receivership in which the receiver manages income-producing real property. The form orders are not appropriate for operating business receiverships or post-judgment collection receiverships. However, the Judicial Council form orders contain some excellent language applicable to all receiverships that can be incorporated into custom-drafted orders.
Costs of Hiring a Receiver
Receiverships can be expensive, and costs should be analyzed prior to seeking appointment of a receiver. As a general rule, receivers bill on an hourly basis, and they normally charge professional fees similar to fees charged by an attorney. The default rule is that the receiver is paid from the assets being administered in receivership. City of Chula Vista v. Gutierrez, 207 Cal.App.4th 681 (2012). However, if there is a shortage of funds to pay for the receiver’s fees, courts have discretion to order the parties directly to pay the fees of a receiver. In deciding whether to seek the appointment of a receiver, you should analyze the assets of the potential receivership to determine if there are available sources of money to pay for the receiver’s fees, such as bank or investment accounts or a business with a reliable income stream.
It is good practice to reach out to the potential receiver before seeking his or her appointment to verify willingness to serve, costs, and prior experience. Although the Rules of Court prohibit a receiver from making any prior agreements with a party relating to administration of the estate or hiring of particular third-party vendors, it is appropriate for a receiver to discuss general qualifications and willingness to serve. See, California Rule of Court section 3.1179(b).
About the Author. Matthew L. Taylor is an attorney licensed to practice in California. He has been working in receiverships since 1995 and currently serves as both a receiver and partition referee for the Superior Court system throughout the State of California.