QUESTION: My order of appointment states that I have the power to commence litigation. Do I need a separate order from the receivership court if I want to sue someone?
ANSWER: A receiver’s “order of appointment,” along with any applicable statutes, vests the receiver with his or her powers. The order of appointment can provide that a receiver has the power to file suit without the need for a specific court order which provides for the litigation to be filed. That permission can be relied upon. Harting v. Cebrain, 10 Cal. App. 2d. 10, 17 (1935) [“The order appointing the receiver contained broad language authorizing and directing the commencement of such action. Under the circumstances no further order was necessary.”].
However, a more prudent course of action where the proposed litigation is of any consequence is to get specific court approval to bring the proposed litigation. This is the position advocated by Clark on Receivers §582 (b); see also Cal. Code Civ.P. §568 (“The receiver has, under the control of the Court, power to bring and defend actions in his own name…”).
There are a number of practical reasons to obtain specific court authority to bring litigation. Foremost, it advises the court and the parties of the receiver’s proposed action and, once specifically approved by the court, it insolates the receiver from later “Monday morning quarterbacking”. This is especially important today. The financial crisis facing the courts has resulted in the lack of court reporters and, hence, the absence of transcripts of what may have been discussed at any particular hearing. This was the problem faced recently by a receiver in Georgia. See Newton v. Golden Grove Pecan Farm, et. al., 309 Ga. App. 764, 711 S.E. 2d 351 (2011). Newton had been appointed receiver over a number of properties. At a status conference hearing, the court apparently gave some direction about the receivership. However, as the court of appeal pointed out, there was a dispute over what was said at the hearing because it was not transcribed. Months later, the court tried to ascertain what had occurred at the hearing. The attendees had various recollections, some recalling that the court indicated it intended to dissolve the receivership all together and others recalling the court indicated it would modify the receivership by removing certain properties from it. There was no written order following the hearing that dissolved or modified the receivership. Shortly after the status conference the receiver filed several Chapter 11 bankruptcy petitions for various entities under his control that controlled the properties. The receiver did not seek prior approval from the receivership court, but instead relied on authority in her order of appointment. A few months later, one of the parties sought an injunction from the receivership court to prohibit the receiver from disposing of certain of the properties that had originally been part of the receivership. The receiver responded, telling the court of the bankruptcy petitions and that the court could not proceed because of the automatic stay. In response, the receivership court issued an order removing Newton as receiver nunc pro tunc to the original status conference hearing.
A month later, the court held another status conference at which time the court indicated that it felt the receiver had acted contemptuously in light of the “direction” given at the original status conference hearing and summarily held the receiver in contempt for defying the court’s “direction” and wasting receivership estate assets. While the Court of Appeal reversed the contempt finding, it was only because the receivership court could not summarily hold the receiver in contempt because the proposed contemptuous conduct did not occur before the court. Where alleged contemptuous acts are committed outside the court’s presence, summary adjudication is not appropriate. Instead, the party charged must be advised of the charges and given a reasonable opportunity to respond to them with the assistance of counsel.
The case is a stark reminder for receivers that whenever there is a question as to whether the receiver is authorized to take some action or has the power to do so, the receiver should seek instructions from the court and obtain a written order approving the receiver’s proposed action.
An additional practical reason for obtaining court approval from the receivership court before filing litigation is that it provides the receiver with an opportunity to educate the court on the facts and law that underlie the litigation the receiver proposes to bring. This is especially helpful if the litigation is to be before the receivership court. It enables the receiver, without the defendant being present, to explain to the court the receiver’s view of the facts and the law and why the receiver should prevail.