RN's "Ask the Receiver" Expert Peter Davidson Explores Nontraditional Receivership Uses
By Davidson, Peter*
(This is Part I of a survey of the expanding uses of receivers by California courts that first appeared in March 2008 issue of Los Angeles Lawyer magazine published by the Los Angeles County Bar Association. It is reprinted with the permission of Mr. Davidson. Ed.)
Under the proper circumstances, the appointment of a receiver can lead to desirable results that are otherwise hard to achieve. Even the filing of a motion for a receiver can often spur serious settlement discussions and the resolution of disputes. In recent years, the use of receivers has expanded into ever-increasing areas of the law. Counsel should consider the receivership option when the appropriate situations arise.
Receiverships were created in the chancery courts in England as early as the reign of Queen Elizabeth I to preserve property or a fund at issue in litigation pending the outcome of the action.1 Traditionally, the appointment of a receiver was an equitable procedure that was used when ordinary legal remedies, such as a money judgment, were inadequate. The receiver was not the agent or representative of any party to the litigation but was regarded as an officer of the court, exercising powers for the common benefit of all parties in interest.
As a result of this role, receivers were and still are frequently referred to as the “hand of the court.” They were regarded as the executive officers of the court of chancery much the same way that sheriffs were executive officers of the court of law.2
In California, the powers, functions, and usages of receivers were
codified in the original Field Code in 1872 and remained basically
unchanged until recent years. The demonstrable advantages of appointing an
independent third party as an interim or permanent remedy has triggered an
expansion of the types of cases in which receivers are appointed, despite
the perception of some judges that receivers are “legal luxuries.”3
Traditional receiverships are also available “in all other cases where necessary to preserve the property or rights of any party.”11
The most common type of receiver appointed by the courts in California was not specifically covered by Section 564 until it was amended in 1995.12 This most frequently used receivership is a “rents, issues, and profits” receivership, in which a receiver is appointed by the court to collect rents generated from income-producing property while a secured lender forecloses on the property.
The receiver is appointed as a result of the contract entered into between the borrower and the lender according to the deed of trust executed by the borrower in the lender’s favor. Almost all deeds of trust in California contain this contractual provision in the small print in the deed of trust.13
Section 564 has been amended several times in recent years to add
appropriate circumstances for receiverships to these more traditional
classes of cases in which receivers have been authorized. Nontraditional
bases for using a receiver include allowing a secured lender to obtain the
appointment of a receiver to enter and inspect real property to determine
the existence, location, nature, and magnitude of any hazardous substance
“into, onto, beneath or from the real property security.”14
Two different statutes authorize the appointment of a receiver in criminal cases. Penal Code Section 186.11, sometimes called the Freeze and Seize Law,16 provides for the appointment of a receiver, at the request of a prosecuting agency, when a complaint or indictment charges a person with committing two or more felonies in which a material element is fraud or embezzlement involving a pattern of related felony conduct. This pattern must encompass the taking of more than $100,000 (known as the “aggregated white collar crime enhancement”), and the receivership is necessary to preserve property or assets for the payment of restitution to victims or fines imposed by the section.17
The petition for the appointment of the receiver must allege that the defendant has been charged with two or more qualifying felonies and is subject to the aggregated white collar crime enhancement. It also needs to identify the criminal proceeding as well as the assets and property that will be affected by the order.
According to the statute, unlike state and federal drug asset
forfeiture laws, the assets that will ultimately wind up in the possession
of the receiver do not have to be connected with criminal activity. The
prosecution only needs to show that the defendant controls the assets,
“because a defendant’s obligation to pay restitution is a general
obligation not one limited to the value of assets and property connected
1 This type of appointment is often referred to as pendente
lite—Latin for pending litigation.