In an Appealed Appointment, How Does a Receiver Get Paid if the Receivership is Terminated?

by Ervin Cohen & Jessup LLP
Contact

QUESTION: I have been appointed receiver in a case where the defendant appealed my appointment. If the appeal is successful, and the receivership is terminated, how do I get paid?

ANSWER: As a general rule, fees and costs of a receiver and his or her professionals are administrative expenses, chargeable against the assets in the receivership estate. The assets in the estate are liable for those fees and costs even if the underlying litigation is dismissed or judgment is rendered for the defendants. Venza v. Venza, 101 Cal. App. 2d 678, 680 (1951). The receivership court has discretion, however, to determine who is responsible for the receiver’s fees. This is especially true when the assets in the receivership estate are not sufficient to pay all fees in full. Baldwin v. Baldwin, 82 Cal. App. 2d 851, 856 (1947) (“Courts generally are vested with large discretion in determining who shall pay the costs and fees of receiverships. The court may assess the cost of the receivership against the fund or property in receivership or against the applicant for the receivership, or it may apportion them among the parties, depending on the circumstances.”).

A line of cases has developed which provides that where there was an irregularity in the appointment of the receiver or an abuse of discretion by the court in appointing the receiver, the party seeking the appointment of the receiver should be held liable for the receiver’s fees and costs. See, Lewis v. Hill, 38 Cal. App. 329, 336 (1918) (finding that appointment of receiver was improvident and erroneously made, and that plaintiff was liable for costs of receivership); Baldwin v. Baldwin, supra. at 855 (finding that plaintiff was liable for costs of receiver because receiver was unnecessary, improvident and wrongful).

These cases, however, do not involve a situation where the estate was insolvent. The seminal case in California involving an insolvent estate is Ephraim v. Pacifica Bank, 129 Cal. 589 (1900). In Ephraim, the court pointed out that there are two separate grounds for holding a party liable for a receiver’s fees — irregularity of appointment or insufficiency of funds in the estate. The court stated: “It is unquestionably the general rule that the costs of the receivership are primarily a charge upon the fund in his possession, and are to be paid out of that fund. But it is by no means the rule that a receiver must in all cases look to that fund for his reimbursement, and has no other remedy if for any reason that fund is not available…it may sometimes happen that a direct liability is imposed upon the parties to the action, or some of them, for remuneration of the receiver. This may result from the irregularity of the appointment, or the insufficiency of the fund, or out of the agreement between the parties.” Id. at 592.

In a fairly new federal case, Netsphere, Inc. v. Baron, 703 F.3d 296 (5th Cir. 2012), the question was how the receiver was to be paid when neither of the parties had sought the receiver’s appointment. In the case, the court, on its own motion, had appointed the receiver, and the appointment was reversed on appeal on the grounds that it was unjustified and improper.

Baron had formed a joint venture with another party for the ownership and sale of domain names. Disputes arose, resulting in seven lawsuits, four mediation attempts and years of litigation. Ultimately, the parties entered into a settlement. Baron purportedly breached the settlement, and suit was filed in district court to enforce it. The district court issued a preliminary injunction to compel compliance with the settlement, including a $50,000 per day penalty for a violation. Baron caused one of his entities involved in the litigation to file chapter 11. During the litigation, Baron kept hiring and firing his attorneys, and not paying them, going through at least 45 lawyers. A trustee was eventually appointed in the chapter 11. A settlement was reached providing for a division of the domain names. While Baron transferred the domain names, as required by the settlement, other disputes arose. The trustee also expressed concern with the continued hiring and firing of attorneys who were asserting claims against the bankruptcy estate. A mediation to resolve the legal fee claims was commenced, but Baron refused to cooperate. The trustee filed a motion in the bankruptcy court to appoint a receiver over Baron and his assets because of his failure to mediate the fee claims and his continued hiring and firing of attorneys, and also so that the receiver could implement the settlement. The bankruptcy court issued a report and recommendation to the district court to appoint a receiver, which the district court did, finding that Baron had hired and fired his attorneys as a means of delaying the proceedings and his vexatious litigation tactics increased costs to all parties, including the bankruptcy estate. Baron appealed to the Fifth Circuit, which reversed.

The court held that while a receiver can be appointed in litigation over assets, where the assets are a subject of the litigation “to preserve and protect the property pending its final disposition,” a receivership cannot be imposed over property that is not the subject of the underlying dispute. Id. at 305-306. Here, the only assets that were subject of the underlying dispute were the domain names, and Baron had, in fact, transferred them pursuant to the settlement. It was, therefore, improper to impose a receivership over Baron and his assets just because he engaged in vexatious litigation tactics and increased costs to the bankruptcy estate and other parties.

The court then faced the issue of the receivership fees and expenses. The court acknowledged, citing federal cases similar to the California cases supra., that when a receivership is proper, the fees are “a charge upon the property administered” and that when “a receivership is improper, the party who sought the appointment has at times been held accountable.” Id. at 311-312. Here, the parties had not sought the receiver’s appointment. The bankruptcy court recommended, and the district court then appointed, the receiver. Given that situation, the court stated: “We discover no controlling rule on assessing costs for an improperly created receivership other than that equity is the standard.” Id. at 312. It then held that, “without convincing evidence that the appointment of a receiver was either collusive, capricious, venal, or in bad faith, ordinarily the expenses of the receivership will not be charged ‘other than against the fund administered by the receiver, even though the [c]ourts are vested with a discretion in determining who should pay the costs and expenses of a receivership in unusual circumstances.’” Id. (citations omitted).

While the court acknowledged Baron did not receive any benefit from the receivership, the court found that charging the assets in the receivership estate was equitable because the appointment was the result of Baron’s conduct. However, the court held that because the receivership was improper, only the cash in the receivership estate should be used to pay the receivership fees and costs. No further assets were to be liquidated to pay the fees and costs and, “to the extent the cash on hand is insufficient to satisfy fully what is determined to be reasonable charges by the receiver and his attorneys, those charges will go unpaid.” Id. at 314. The court also felt that because the receivership was improper “equity may well require the fees to be discounted meaningfully from what would have been reasonable under a proper receivership.” Id. at 313. The court returned the matter to the district court to reconsider the fees already awarded and paid.

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.

© Ervin Cohen & Jessup LLP | Attorney Advertising

Written by:

Ervin Cohen & Jessup LLP
Contact
more
less

Ervin Cohen & Jessup LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!