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The basic principles of receivers
By Elia V. Pirozzi

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The objective of this article and self-study test is to review basic principles regarding receivers. Readers will learn about the nature and types of receivers, the legal authority and procedures for appointment, the powers, obligations and administration of receivers and their termination.

Overview of Remedy

A receiver is an agent and officer appointed by the court to assume control and management of property subject to litigation and to preserve the property pending disposition in accordance with a final judgment. Cal. Rules of Ct, rule 3.1179(a); Steinberg v. Goldstein, 145 Cal. App. 2d 692 (1956). As an agent and "caretaker of the property" for the court, the receiver "represents the court appointing him, and he is the medium through which the court acts." Pacific Indemnity Co. v. Workmen's Comp. Appeals Bd., 258 Cal. App. 2d 35 (1968). A receiver operates for the benefit of all parties with an interest in the property and is subject to the continuous supervision of the court. City of Santa Monica v. Gonzalez, 43 Cal. 4th 905 (2008). The appointment of a receiver can be made only when authorized by statute. See, e.g., CCP Section 564; Marsch v. Williams, 23 Cal. App. 4th 238 (1994). Accordingly, a receiver must be (1) neutral, (2) act for the benefit of those who may have an interest in the receivership property, and (3) hold assets exclusively for the court. Cal. Rules of Ct., rule 3.1179(a).

The authority to appoint a receiver belongs to the court in which an action is pending, provided the case is one in which the court is "empowered by law to appoint a receiver." CCP Section 564(a). Receivership is an ancillary remedy and no independent action for the appointment of a receiver exists. Associated Creditors' Agency v. Wong, 216 Cal. App. 2d 61 (1963). Therefore, the court lacks jurisdiction to appoint a receiver unless the complaint states a cause of action for other relief. Moreover, as an equitable remedy, a receiver is appropriate only when another adequate remedy is unavailable. Rogers v. Smith, 76 Cal. App. 2d 16 (1946) ("[r]eceivership is an extraordinary remedy, to be applied with caution and only in cases of apparent necessity"); Morand v. Superior Court, 38 Cal. App. 3d 347 (1974). Considered a "drastic remedy," courts will carefully evaluate the propriety of appointing a receiver - particularly where the benefit to one party is uncertain and a distinct disadvantage will result to another party. City and County of San Francisco v. Daley, 16 Cal. App. 4th 734 (1993). The court's order appointing a receiver is immediately appealable. CCP Sections 904.1(a)(7), 904.2(h).

Procedure for Appointment

The procedure for the appointment of a receiver is governed by CCP Sections 564-570 and Cal. Rules of Ct., rules 3.1175-3.1184. As discussed below, receivers are appointed by (1) ex parte application, or (2) by noticed motion filed by one of the parties. The court also has the inherent power to appoint a receiver on its own motion when necessary to achieve a judicial objective, provided the parties are afforded notice and an opportunity to respond. McCarthy v. Poulsen, 173 Cal. App. 3d 1212 (1985).

Ex Parte Application

An ex parte application for a receiver requires sufficient notice to the opposing party and the filing of a complaint and declarations supporting the application. The applicant must make the following factual showing by declaration or verified pleading:

(1) The nature of the emergency and reasons why irreparable injury would result during the time necessary for a noticed hearing;

(2) The names, addresses and telephone numbers of persons in actual possession of the property for which the receiver is requested;

(3) The use being made of the property by the persons in possession;

(4) For property consisting of business equipment or stock in trade, whether the taking of the property by the receiver would cease or seriously interfere with business operations; and

(5) If after the exercise of "due diligence" any of the above matters are unascertainable, a statement of the efforts made to obtain the information. Cal. Rules of Ct., rule 3.1175(a).

The applicant must post an undertaking to cover any damages, including attorney fees and costs, suffered by the defendant should the appointment be procured "wrongfully, maliciously, or without sufficient cause." CCP Section 566(b). If appointed, the receiver must also post a separate undertaking to ensure the faithful discharge of her duties and compliance with court orders. CCP Section 567(b). Furthermore, a comprehensive order should be prepared precisely detailing the receiver's powers and duties, a sufficient description of the property and the establishment of the bonds. A hearing on the Order to Show Cause re Confirmation of Appointment of Receiver ("OSC re Confirmation") must be set "on the earliest date that the business of the court will admit," but no later than 15 days from the ex parte appointment or 22 days upon a showing of good cause. Cal. Rules of Ct., rule 3.1176(a).

Noticed Motion

The appointment of a receiver by noticed motion requires the filing and service of standard moving papers (i.e., notice of motion, complaint, declarations, points and authorities and proof of service). They must state facts evincing one of the statutory grounds for a receiver, irreparable injury and the inadequacy of other available and less severe remedies. See Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp., 116 Cal. App. 2d 869 (1953). Although not statutorily mandated on noticed motion, the court has the discretion to require the plaintiff to post an undertaking. However, the receiver is required to post a bond prior to the performance of her duties. CCP Section 567(b). Whether the appointment is accomplished by ex parte application or noticed motion, the applicant must state with specificity the reasons for the proposed amounts of the bonds. Cal. Rules of Ct., rule 3.1178.

Types of Receiverships

The general statutory grounds for the appointment of a receiver include:

(1) Action by a vendor to vacate a fraudulent purchase of property, a creditor with an un-matured claim, or partners or others jointly owning or interested in any property or fund on the application of any party whose right to or interest in the property or fund is "probable," and which is shown to be in danger of being lost, removed or materially injured. CCP Section 564(b)(1).

(2) Action by a secured lender for foreclosure under a deed of trust or mortgage where it appears the secured property is in danger of being lost, removed or materially injured, or to investigate the extent of any release of hazardous substances at the property. CCP Sections 564(b)(2), 564(c).

(3) Enforcement of a judgment. CCP Section 564(b)(3).

(4) Disposition of property after judgment or preservation of property during pendency of appeal. CCP Section 564(b)(4).

(5) Dissolution or insolvency of a corporation. CCP Sections 564(b)(5), 564(b)(6); CCP Section 565.

(6) Unlawful detainer actions. CCP Section 564(b)(7).

(7) Request of the Public Utilities Commission to assume possession of a water or sewer system corporation or to take possession of stored property where a household goods carrier has abandoned property of any shippers under contract with the carrier. CCP Section 564(b)(8).

(8) Request of the Health Planning and Development Office for the assumption of managerial or financial control of a health care provider in default under an insured loan transaction. CCP Section 564(b)(10).

(9) Specific performance by a secured lender of the assignment-of-rents provisions in a deed of trust. CCP Section 564(b)(11).

(10) Action by an assignee under an assignment of leases, rents, issues or profits under CC Section 2938(g). CCP Section 564(b)(12).

(11) All other cases "where necessary to preserve the property or rights of any party." CCP Section 564(b)(9).

Receiverships are also authorized in criminal cases (Pen C Sections 186.11 [fraud or embezzlement] and 186.6 [criminal profiteering activities]), to aid in execution of a judgment, particularly where assets cannot be reached by writ of execution (CCP Section 708.620), to preserve value of attached property (CCP Section 488.700), to preserve real or personal property pending determination of ownership (CCP Section 699.070), enforcement of family law orders (Fam C Section 290), where a general equity receiver is warranted for the purpose of restitution (Govt C Sections 12527, 13975.1), and to remedy substandard building conditions (Health & S C Section 17980.7).

Powers, Obligations and Administration

To comply with bonding requirements, the receiver must be a natural person. See CCP Section 567. Moreover, a party or attorney to an action, or person related to the judge within the third degree, cannot be appointed as a receiver without the parties' written consent. CCP Section 566(a). At the hearing, via noticed motion or OSC re Confirmation, each party may nominate individuals for appointment and must state the reasons for their recommendations. Cal. Rules of Ct., rule 3.1177. The receiver must take an oath to perform her duties faithfully. CCP Section 567(a).

Subject to court authorization, a receiver has the power to (1) bring and defend actions in her own name, (2) take and keep possession of receivership property, (3) receive rents, (4) collect and compromise claims, and (5) transfer property. CCP Section 568.

If the receiver's scope of powers and duties are unclearly defined in the appointment order, the receiver may petition the court for clarification and instructions. In re Executive Life Ins. Co., 32 Cal. App. 4th 344 (1995). To retain legal counsel, the receiver must procure court approval through written application stating the reasons for the attorney, identifying the person and confirming that he is not the attorney, or associated with any attorney, employed by a party to the action. Cal. Rules of Ct., rule 3.1180. The contracts or agreements that a receiver is specifically prohibited from entering into are contained in Cal. Rules of Ct., rule 3.1179(b).

The receiver is obligated to perform only the duties specifically assigned to her. In re Estevez, 165 Cal. App. 4th 1445 (2008). Subject to the notice and procedural requirements of CCP Sections 701.510-701.680, receivers may sell real or personal property in their possession. CCP Section 568.5. However, the finality of the sale requires court confirmation which is contingent on a demonstration that the sale was in the interest of fairness, justice and the rights of the respective parties. CCP Section 568.5; People v. Stark, 131 Cal. App. 4th 184 (2005) (court has "broad authority" to approve receiver's sale). A receiver is further required to pay real property taxes accruing during the receivership. Schreiber v. Ditch Road Investors, 105 Cal. App. 3d 675 (1980). An inventory of all property taken under the appointment must be provided by the receiver within 30 days from appointment or as otherwise ordered by the court. Cal. Rules of Ct., rule 3.1181(a). Additionally, monthly reports must be furnished to the parties comprising financial reports, a narrative of events, and a statement of fees paid from the receivership estate. Cal. Rules of Ct., rule 3.1182(a). The reports are not to be filed with the court unless so ordered. Cal. Rules of Ct., rule 3.1182(b). In the absence of good cause, objections to the receiver's monthly reports and accounting must be specific, made within 10 days of notice, and delivered to the receiver and all parties entitled to service. Cal. Rules of Ct., rule 3.1183(b). A receiver may not be sued by a plaintiff without court permission. Ostrowski v. Miller, 226 Cal. App. 2d 79 (1964).

Termination

The receivership will terminate upon completion of duties or at any time pursuant to court order. Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2007) P 9:774, pp. 9(II)-52-53. The receiver must present by noticed motion or stipulation of all parties: "(1)Â A final account and report; (2)Â A request for the discharge; and (3)Â A request for exoneration of the receiver's surety." Cal. Rules of Ct., rule 3.1184(a). If compensation is requested for the receiver or attorney, the report must state with particularity the services rendered and the amounts of any prior allowances. Cal. Rules of Ct., rule 3.1184(d). These documents must be provided to every person or entity known to the receiver to have a substantial, unsatisfied claim regardless of their status as a party to the action. Cal. Rules of Ct., rule 3.1184(c). When the receiver's final report and account is settled, and all funds disbursed, the court will order the receiver discharged and exonerate the bonds. Weil & Brown, supra, p. 9(II)-53. The discharge order is res judicata barring all claims against the receiver in her official capacity. Vitug v. Griffin, 214 Cal. App. 3d 488 (1989).

Elia V. Pirozzi is a judge on the San Bernardino County Superior Court.

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