Receivers in Arbitration Proceedings

by Ervin Cohen & Jessup LLP

QUESTION: My client is involved in a partnership dispute. The partnership agreement provides all disputes are to be resolved by binding arbitration. I may want to have a receiver appointed to operate the partnership property pending resolution of the dispute and if we win to fix up and sell the property. How do I do this in an arbitration?

ANSWER: You don’t. This issue was decided a number of years ago in Marsch v. Williams, 23 Cal. App. 4th 238 (1994). There partners had a dispute that was submitted to arbitration and the arbitrator appointed a receiver. The appellate court reversed holding that Code of Civil Procedure §564 vests the power to appoint a receiver in the superior court and that power does not extend to arbitrators, even by agreement. C.C.P.§564(b)(1) provides a receiver can be appointed “by the court in which an action or proceeding is pending, or by a judge thereof”’.

This issue recently came up again in Baron v. First Insurance Exchange, 154 Cal. App. 4th 1184 (2007). There, a dispute initially arose under a joint venture agreement relating to real property that was damaged by fire. The parties’ agreement provided that all disputes were to be resolved by arbitration. The arbitrator reached a decision and pursuant to a stipulation of the parties appointed a receiver to take possession of the property and all insurance proceeds and claims. Two years later, the winning party filed a petition in the superior court to confirm the arbitration award and the appointment of the receiver, which the court granted.

In the intervening period the receiver had worked with the insurance carrier and started restoration work on the property. Disputes developed and the receiver sued. Suit was filed three months prior to the superior court’s confirmation of the arbitrator’s order appointing the receiver.

The receiver’s lawsuit went to trial two years later and the receiver obtained judgment for $96,462.00 in compensatory damages and $1.5 million in punitive damages. The insurance company appealed, arguing the receiver had no standing to sue it because the receiver’s appointment was void because the appointment was made by an arbitrator, citing Marsch v. Williams. The Court of Appeal, however, affirmed.

The receiver argued that Marsch was distinguishable because the attack on the receiver’s appointment there was by a party to the arbitration and not by a third party trying to collaterally attack the order. He also argued his appointment was valid because the superior court confirmed it when it confirmed the arbitrator’s award. The Court, however, did not reach these issues. Instead, it held the challenge to the receiver’s appointment was precluded because of the failure to attack it earlier. In effect, the insurance company was estopped to challenge the receiver’s appointment and standing because it did not seek dismissal of the lawsuit based on the invalidity of the receiver’s appointment. The Court cited a California Supreme Court case Hise v. Superior Court, 21 Cal. 2d 614 (1943) [estoppel to deny validity of appointment, based on failure to make timely objection and affirmative acts recognizing authority of receiver].

The insurance company argued that because the receiver’s appointment was void it could be attacked at any time. The Court held that the order of appointment was not void, just voidable, and hence was valid until successfully challenged. The Court held the order was merely voidable because the superior court had jurisdiction over the parties to the underlying dispute and the subject matter when the order was issued.

The correct way to get a receiver appointed if you are involved in an arbitration is to go to the superior court and ask that it appoint a receiver. Like with most prejudgment remedies, this can be done while the arbitration is proceeding because only the court can grant these remedies (e.g. attachment). If a receiver is to be appointed as part of an arbitrator’s award, it should provide that the superior court is to appoint a receiver and the court can then decide whether it is proper to do so, and do so, as part of the confirmation of the arbitrator’s award.

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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