Q:  A few months ago I was appointed receiver over an operating business.

A party is complaining that I have not filed an inventory of the assets of the business. My order of appointment says nothing about my having to file an inventory. The business has hundreds, if not thousands, of items of property (tools, desks, fork-lifts, supplies, etc.). Do I have to go to the trouble and cost of preparing and filing an inventory and, if so, how detailed must it be? 

A:  Yes. You must prepare and file an inventory. The fact that the order of appointment does not specifically state that an inventory is required is irrelevant. California Rules of Court, rule 3.1181(a) states: “A receiver must, within 30 days after appointment, or within such other time the court may order, file an inventory containing a complete and detailed list of all property which the receiver has taken possession by virtue of the appointment (emphasis added).” Because rule 3.1181(a) uses the term “must,” the obligation is mandatory. Rule 1.5(b)(1)(“Must” is mandatory”). Further, if you subsequently take possession of additional property, you are required to promptly file a supplemental inventory. Cal. Rules of Court, rule 3.1181(b). 

Some attorneys, in drafting appointment orders, try to avoid this requirement by having the court waive the inventory requirement. This is likely ineffective. “The rules have the force of statute to the extent that they are not inconsistent with legislative enactments and constitutional provisions.” In re Richard S., 54 Cal.3d 857, 863 (1991). Just as a court cannot disregard mandatory provisions of a statute, a court generally cannot ignore mandatory provisions of a Rule of Court. Further, although rule 3.1181(a) permits a court to modify the time within which the inventory must be filed this does not mean the Court can waive an inventory altogether. A strict reading of the rule supports this conclusion. If a court had leeway to waive the requirement, rule 3.1118(a) would provide: “A receiver must, unless the court orders otherwise,…” Indeed, the requirement in rule 3.1181(b) – that a receiver promptly file supplemental inventories – further supports the view that a court cannot waive the inventory requirement, because it is a directive to the receiver and makes no mention of a Court’s ability to expand or minimize the requirement. 

The filing of an inventory serves a number of purposes. It not only informs the court of the assets its agent has possession of, it also informs the parties, who may be able to tell the receiver if items he should have are missing (i.e., where is the back-hoe, Picasso, or computer server?). It also protects the receiver from later complaints that property is missing or is not property the receiver should have in his or her possession. 

For example, in Dickie v Flamme Bros., 251 Neb. 910 (Sup. Ct. Neb. 1997), a receiver was appointed in an involuntary corporate dissolution case to marshal and sell the corporation’s assets and wind up its affairs. The receiver sold the corporation’s real property and various other assets and entered into settlements with secured creditors and the parties, all of which were approved by the court. Four years after his appointment, the receiver filed his final report. One of the parties objected to it. The objections were overruled, but the party appealed. Three years later, the Nebraska Supreme Court reversed and remanded, stating that it could not decide the issues on appeal because the receiver had never filed an inventory of the corporation’s property on the date of his appointment, which his order of appointment had required. It directed the lower court to require the receiver to do so within 30 days, without any further compensation to the receiver. Dickie v. Flamme Bros., 246 Neb. 66 (Sup. Ct. Neb. 1994).  

The receiver filed the inventory and an amended final report, which the lower court approved. However, the same party again appealed contending the lower court erred in accepting the inventory because it did not account for all the property owned by the corporation. Three years later, the Nebraska Supreme Court again reversed and remanded. It held that in order for a receiver to comply with his duty of care, he is responsible for taking an inventory of the corporation’s assets and liabilities, which should list all real and personal property of the corporation as of the date of the receiver’s appointment, and identify all mortgages and security interests. Dickie v. Flamme Bros, supra, 251 Neb. at 916. The record showed that various personal property was not accounted for in the inventory, including a combine, certain harvested crops, negotiable commodity certificates, equipment and possible claims against third parties. Further, the inventory listed an entry of “miscellaneous property of junk value,” which the Court held was inadequate because it neglected to list what property the entry included. The court ordered the receiver to file an amended inventory, within 30 days, accounting for all property of the estate. If the receiver failed to provide an adequate explanation for the missing property, the lower court was to surcharge the receiver for any damages the corporation incurred. Id. at 917. Although an extreme example, this result, and the attended cost, possible liability and years of delay, might have been avoided had the receiver filed an inventory at the beginning of the case.  

As to the inventory’s detail, rule 3.1181(a) requires the inventory to be “a complete and detailed list of all property of which the receiver has taken possession…” While a receiver does not have to list every screw and nail on the premises (unless the business manufactures screws and nails), the inventory should be sufficiently detailed so the items can be identified. This will allow the receiver to respond if the receiver is later questioned as to the property’s disposition, or assist the receiver in ensuring that the property is allocated correctly to a specified party, if required. In practice, a receiver should exercise the same care and diligence that an ordinary prudent person would exercise in handling his or her estate under like circumstances. Vitug v. Griffin, 214 Cal app. 3d 488, 496 (1989). 

Q:  I was appointed as the receiver to collect a judgment.

I have not yet filed my final account and report, the court has not approved my final fees, and other creditors of the judgment debtor are demanding that I pay them, because they were not able to be paid from the judgment debtor’s assets taken into receivership. However, the judgment debtor has paid the judgment creditor and is now demanding that the receivership be terminated. Must the court now terminate the receivership? 

A: Not necessarily. The general rule is a receivership should be terminated as soon as the purpose of the receivership has been accomplished. 3, Clark, Treatise on the Law & Practice of Receivers, §691 (3rd ed. 1959) (“Clark”). However, that rule is not absolute and is subject to important exceptions.  

First, the court must ensure that the receivership is terminated in an orderly fashion. As Clark states: the court “must retain jurisdiction of the res long enough to close up the receivership…and see that all receivership claims are properly paid or taken care of or provide for same.” Id. at §695. “The appointing court pledges its good faith that all duly authorized obligations incurred during the receivership shall be paid.” Id. at §637. This includes the receiver’s and his counsel’s fees. The court must also approve the receiver’s final account and report. See, California Rules of Court, rule 3.1184. 

Second, in some instances a court may continue a receivership for the benefit of other creditors, even though the claim of the party that sought the appointment has been satisfied. Consol. Rail Corp. v.  

Fore River Ry. Co., 861 F.2d 322, 327 (1st Cir. 1988). This may occur when assets to pay other creditors have been in the receivership and, hence, beyond the reach of the creditors.  

These exceptions were illustrated in a recent case, WB Music Corp. v. Royce Int’l Broad Corp.__F.4th___ (9th Cir. 2022), 2022 U.S. App. Lexis 24548 (“Royce”). In Royce, the defendant radio stations and their owners were sued for copyright infringement, for playing music without authorization. A jury found the infringement was willful and awarded damages of $330,000. The court added an additional $900,000 in attorney’s fees and costs. After unsuccessful efforts to collect the judgment, plaintiffs moved for a receiver. The court initially delayed the appointment, to give the debtors time to pay the judgment. But, when the debtors admitted the only assets they had sufficient to pay the judgment were their FCC broadcast licenses, the court appointed a receiver to operate the radio stations until he could arrange for a sale of the licenses. 

Soon after the receiver’s appointment, the debtors moved, ex parte, to terminate the receivership because, purportedly, one of the debtors now had enough cash in his account to pay the judgment. The court denied the motion, noting the debtors’ had repeatedly stonewalled and delayed paying the judgment and failed to cooperate with the receiver. Further, the debtors would also have to pay plaintiffs’ post-judgment costs, which had not yet been determined. The debtors subsequently deposited the full amount of the judgment, plus interest, with the court. The court then granted plaintiffs’ post-judgment fees and unpaid sanctions of $384,000, which were added to the judgment.  

The debtors deposited this additional amount with the court and again moved to terminate the receivership and enjoin the sale of the radio station licenses, contending they had now satisfied the judgment.  

Plaintiffs opposed the motion arguing that while the debtors had deposited the funds, they refused to stipulate to their release, and the receivership should not be terminated without ensuring the receiver would be paid. The receiver also opposed the motion arguing that not only were he and his professionals owed hundreds of thousands of dollars, but a number of creditors were also owed significant sums, one of which had already obtained a judgment. 

The court denied the motion to terminate, citing Consolidated Rail, supra., holding that the court could decline to terminate the receiver until the debts of non-party creditors had been paid. “In this way the court can ensure that the receiver will not deplete all of the debtor’s assets on behalf of one creditor, leaving the other creditors without remedy.” Consolidated Rail at 327-28. The court also noted that courts normally do not terminate receiverships until the receiver prepares his or her final accounting and the court ensures the receiver is paid. While the court acknowledged it could terminate the receivership, the facts did not support such action given the court had to appoint a receiver in the first instance and the debtors could not be trusted to pay any amounts the court might award the receiver. The debtors appealed and the Ninth Circuit affirmed, agreeing with the reasoning of the District Court and the First Circuit in Consolidated Rail, supra. 

One argument the debtors made, for the first time on appeal, which the Ninth Circuit refused to address for that reason, was that the receivership was void ab inito because the receiver had never filed his oath and bond as required by C.C.P. §567. This was a major blunder by the receiver and could have been disastrous. As discussed in a prior Ask the Receiver (46, Receivership News,Winter 2013) while there is no reported California case on point, other states with similar statutes hold the failure of a receiver to file his or her oath deprives the receiver of the authority to act and renders the receiver’s activities null and void. See, Laron v. Kaley, 138 Ohio App. 3d 120,122-123 (2000); Zeigler v. Trio Realty Group. LLC, 2011 WL 5119101 (2011).  

*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP a Beverly Hills Law Firm. His practice includes representing Receivers and acting as a Receiver in State and Federal Court.