Can a Receiver Be Liable for Acts or Omissions that Occurred in a Case After Discharge?

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QUESTION: The court has approved my final account and report, discharged me as receiver and exonerated my bond in a difficult, litigious case I am glad to have over. An elder receiver I know told me I could still be liable for acts or omissions that occurred in the case even though I have been discharged and my bond exonerated. Is this true?

ANSWER: As the saying goes: “Listen to your elders”. There are situations where you may still have liability for actions taken or not taken during your term as receiver; even personal liability. Although there is a dearth of case law on this subject, the argument goes that when you are appointed receiver you are required to give an “undertaking to the State of California” to the effect that you would “faithfully discharge the duties of receiver in the action and obey the orders of the court therein”. C.C.P. §567. Even after your discharge and the exoneration of your bond, the bond itself remains in full force and effect for any acts or omissions occurring before the release of the bond. C.C.P. §996.150 specifically provides: “If a surety is ordered released from liability on a bond: (a) the bond remains in full force and effect for all liabilities incurred before, and for acts, omissions, or causes existing or which arose before, the release. Legal proceedings may be had therefore in all respects as though there had been no release”. See also, Clark, Law of Receivers, §696(a) [“On discharge of the receiver the surety is still liable for any default he may have made during the administration of his trust, even though this may be afterwards discovered.”] If someone, therefore, sues your sureties on your bond, even after your discharge and after exoneration of the bond, that action can go forward.

How does that affect you? Well, remember when you took out your bond? The bonding company required you to provide it with a financial statement, and in the bond application, if you bothered to read the small print, you agreed to indemnify the bonding company for any liability it may suffer as a result of its posting a bond for you. Therefore, if someone sues on your bond, the bonding company can hold you personally liable if it has to pay.

As indicated, there is not much case authority on this occurring. Indeed, it is unclear what types of claims can be made against your receiver’s bond, as the undertaking provides only that you, as receiver, will faithfully discharge your duties and obey the orders of the court. California case law is unclear on what “faithfully discharges the duties of receiver” means under C.C.P. §567. Does it require actual intent to disobey; negligence; gross negligence; or is it strict liability?

The few reported cases seem to imply that more than negligence is required for liability. State v. Fidelity & Deposit Co. of Maryland, 53 S.W. 2d 1036 (Mo. 1932) [“Mere errors in judgment do not give rise to claims on the bond. To sustain such an action, there must be some element of bad faith, willfulness, malice or corruption shown”.] Of course, it seems clear that if you disobey a court order, your bond and you could be liable even after discharge. Indeed, the few California cases that deal with liability on a receivers bond, when properly analyzed, are really cases where the receiver failed to comply with a court order, resulting in damage to the parties to the litigation.

In Miller v. Fidelity & Deposit Co. of Maryland, 3 Cal. App. 2d 580 (1935) the court had ordered the receiver to pay a specific sum to a party to the action. Unfortunately, the receiver had deposited the money in a bank, which subsequently failed. The receiver, therefore, could not comply with the court’s order. As a result, the party filed an action on the receiver’s bond. The court opinion specifically states that the receiver was not negligent in choosing the bank, which subsequently failed. However, the court held the receiver’s surety liable because the receiver failed to comply with the court’s order to turn over the money to the party the court ordered him to deliver the money to. While there is some discussion in the case about the receiver’s having violated C.C.P. §569 which, at the time, required the receiver to obtain a court order or consent of all parties to invest the receivership funds, the court decided the sureties’ liability on the “inexcusable failure of the receiver to obey the order of court”.

Similarly, in Olson v. Maryland Casualty Co., 6 Cal. App. 2d 421 (1935) the issue again was the receiver’s failure to comply with the court’s order to turn money over to the plaintiffs. The receiver’s inability to do so resulted in the surety being liable. There is only one reported California case holding the receiver’s bond liable in situations other than the receiver’s failure to obey a court order — Stewart v. State of California, 272 Cal. App. 2d 345 (1969).

In that case the receiver, in operating a business, collected sales and other taxes but did not segregate them. The estate became insolvent and the receiver then could not pay over the taxes to the State. The receiver filed his final account and report and the State objected to the receiver’s discharge and the exoneration of his bond, wanting the receiver’s bond surcharged for the taxes owing. The court nonetheless discharged the receiver and exonerated the bond. The State appealed. In reversing, the court of appeal cited to a number of probate cases which held that “a court appointed fiduciary may be surcharged for failure to pay taxes in operating the business of an estate.” It also noted that under federal law a receiver is personally liable to the extent he pays other creditors when there are debts owing the United States. The court, therefore, concluded, the receiver did not faithfully discharge his duties. Interestingly, the State took the position that it was not seeking personal liability against the receiver but was only going after his bond. As indicated above, however, it is likely the receiver would have to repay the bonding company. Further, on remand, the superior court was “directed to surcharge the receiver”.

Holding a receiver liable, indirectly by way of his indemnifying his bonding company, appears to conflict with California case law which holds that a party cannot sue a receiver, after the receiver’s final account and report is approved, if that party had notice of the receiver’s final report and account, because the receiver’s discharge operates as res judicata as to any claims of liability against the receiver. See, Aviation Brake Systems, Ltd. v. Voorhis, 133 Cal. App. 230, 234 (1982). The exception to this rule is where the receiver obtained his discharge by fraud. See, Vitug v. Griffin, 214 Cal. App. 3d 488 (1989) [Receiver failed to disclose claim in her final report and failed to give notice of hearing on final report to claimant]; Taylor v. Easton, 180 Fed. 363 (8th Cir. 1910). [Receiver misappropriated funds and falsified his final account and report].

Topics:  Bonds, Indemnification, Receivership

Published In: Bankruptcy Updates, Business Torts Updates, Civil Procedure Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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