QUESTION: In an operating receivership with an impaired secured creditor, where there is no possibility of payment to unsecured creditors, is it necessary to notice unsecured creditors on motions?
ANSWER: The answer is “no” if the receivership is in state court; the answer is “maybe” if the receivership is in federal court. In a state court receivership, unlike in a bankruptcy case, notice of motions need only be sent to the parties to the receivership case. Creditors having claims against the entity in receivership or the receivership estate are not parties, and hence are not entitled to notice, unless they formally intervene. See generally, C.C.P. §1004, which refers to service on “parties”. The only reason creditors in bankruptcy cases receive notices is that they are defined as “parties in interest” under the Bankruptcy Code and the Code and/or the Bankruptcy Rules require that they be given notice of certain motions. Additionally, the concept of a request for notice is confined to bankruptcy cases and implemented by Bankruptcy Rule 2002.
As to notice in a federal receivership, whether notice to creditors will be required depends on what federal district the receivership is in. In the Central District of California, Local Rule 66-8 provides that except as otherwise ordered by the Court, a receiver is to administer the estate “as nearly as possible in accordance with the practice in the administration of estates in bankruptcy”. As a corollary of this, Local Rule 66-7 provides that a receiver is to give notice by mail not only to all parties to the action but “to all known creditors of the defendant” for certain specified motions, including petitions to confirm the sale of real and personal property; reports of the receiver; applications for instructions; fee applications; and motions to discharge the receiver. This requirement is often overlooked by federal receivers.
Where there is a significant creditor body in a district court receivership, the receiver should consider filing a motion limiting notice to the parties and those requesting notice. In the Southern District of California, Local Rule 66.1 requires notice to be given to “all interested parties”. Similarly, the Northern District of California requires notice be given to “all interested parties” (Local Rule 66-6). The Eastern District of California does not have any specific notice rules in receiverships other than that the receiver’s reports are to be served on “all parties” (Local Rule 66-232(e)).