Fall 2008 • Issue 30, page 7

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
Code of Civil Procedure Section 564 lists many of the traditional types of cases in which receivers may be appointed. They include those involving:

  • The preservation of a common fund or property in dispute and in danger of injury or dissipation.4
  • The preservation of real property during judicial or nonjudicial foreclosure when it appears the property is in danger of being lost, removed, or materially injured.5
  • The enforcement of a judgment.6
  • The disposition of property according to a judgment or the preservation of property pending appeal.7
  • The windup of a dissolved corporation.8
  • An unlawful detainer action.9
  • A corporation that is insolvent or in danger of insolvency, or the corporation has forfeited its corporate rights.10

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

Criminal Receiverships
Like the appointment of a receiver to enter property to determine whether hazardous substances exist, many other nontraditional uses of a receiver have been codified in recent years or have developed to preserve property or the rights of parties.15 One example is criminal receiverships.

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 with crime.”18

(Part two of this discussion will appear in the Winter 2008 RN.)

*Peter A. Davidson is the RN’s contributing “Ask the Receiver” columnist and is managing partner of Moldo Davidson Fraioli Seror & Sestanovich LLP, a Century City law firm. His practice includes both representing receivers and acting as a receiver. Peter is the immediate past chair of the Los Angeles County Bar Association’s Remedies Section.

1 This type of appointment is often referred to as pendente lite—Latin for pending litigation.
2 Pacific Indem. Co. v. Workmen’s Comp. Appeals Bd., 258 Cal. App. 2d 35 (1968) (“A receiver is a ministerial officer, agent, creature, hand, or arm of, and a temporary occupant and caretaker of the property for the court, and he represents the court appointing him, and he is the medium through which the court acts.”).
3 Elson v. Nyhan, 45 Cal. App. 2d 1, 5 (1941). Courts often consider cost as a factor in deciding whether to appoint a receiver. Morand v. Superior Court, 38 Cal.App. 3d 347, 351 (1974); Hoover v. Galbraith, 7 Cal. 3d 519, 528 (1972). Receivers can, but need not be, attorneys. Some receivers are accountants, bankers, or property managers. While the court appoints the receiver, any party to the litigation can nominate a person to act as the receiver. Receivers generally charge an hourly rate for their services.
4 CODE CIV. PROC. §564(b)(1).
5 CODE CIV. PROC. §564(b)(2).
6 CODE CIV. PROC. §564(b)(3).
7 CODE CIV. PROC. §564(b)(4).
8 CODE CIV. PROC. §564(b)(5).
9 CODE CIV. PROC. §564(b)(7).
10 CODE CIV. PROC. §564(b)(6).
11 CODE CIV. PROC. §564(b)(9). This language was added in 2001 to replace “where receivers have heretofore been appointed by the usages of courts of equity,” because it was considered to be “more readily understandable.” Law Revision Commission cmts. to CODE CIV. PROC. §564.
12 While Code of Civil Procedure §564 was enacted in 1872, it was not until its 1995 amendment that a specific provision was added codifying the longstanding practice that the court could appoint a receiver for specific performance of the assignment-of-rents provision in a deed of trust. The provision also was intended to clarify that a receiver’s appointment could continue after the entry of judgment for specific performance pending a nonjudicial foreclosure on the property.
13 For example, First American Title Insurance Company incorporates into its short-form deed of trust the provisions of a fictitious deed of trust recorded in each California county. Paragraph B5 of the fictitious deed of trust provides in part: Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said property or any part thereof, in his own name sue for or otherwise collect such rents, issues, and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney’s fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine.
14 CODE CIV. PROC. §564(c).
15 The general powers of a receiver are codified in Code of Civil Procedure §568. A receiver has no powers beyond those conferred by statute, by the order appointing him or her, or by orders subsequently made by the court. Morand v. Superior Court, 38 Cal. App. 3d 347, 351 (1974).
16 People v. Green, 125 Cal. App. 4th 360, 363 (2004); People v. Semaan, 42 Cal. 4th 79, 82 (2007).
17 The section “implements the state Constitution’s declaration ‘that all persons who suffer losses as a result of criminal activity shall have the right of restitution from the persons convicted of the crimes for losses they suffer.’ (Cal. Const., Art. I, §28, sub.(b).).…”Semaan, 42 Cal. 4th at 86.
18 Id. at 87.