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

by Ervin Cohen & Jessup LLP

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.

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