Can a Receiver be Sued for Not Paying a Pre-Receiver Creditor?

Question: I am the Receiver for a condo project. A pre-receivership creditor has threatened to sue me because I won’t pay for the services he provided the defendant. I have explained to the creditor that the receivership is not liable for pre-receivership debts of the defendant and that all the assets in the receivership are security for the plaintiff (bank). The creditor has said he does not care, that if I don’t pay him he will sue me and that the court must allow his lawsuit to go forward. Is he correct?

Answer: You did not indicate whether your receivership is in federal or state court. That can make a difference. The creditor seems to understand he cannot sue you without first obtaining court approval. Murray v. Etchepare, 132 Cal. 286,288 (1901) [“it is contrary to established doctrine of courts of equity to permit him to be made a party defendant to litigation, unless by consent of the court appointing him”]; Merryweather v. U.S., 12 F. 2d 407, 408 (9th Cir. 1926); Barton v. Barbour, 104 U.S. 126 (1881). The rule was established to protect receivers and estates from harassment and the expense of possibly unnecessary litigation.

The rule in federal court, and elsewhere, is that a proposed plaintiff seeking leave to sue a receiver must establish a prima facie case against the receiver before leave to sue will be granted. See, Plata v. Schwartzenager, 2008 WL 2558000 (2008 N.D. Cal.) where the court denied leave to sue the receiver [“the Court may refuse MDI’s request for leave to sue if MDI fails to set forth a prima facie case against the receiver or if MDI’s claims are without foundation. In re Kashiwi, 190 B.R. 875, 885 (BAP 9th Cir 1995) (cited with approval in In re Crown Vantage, Inc., 421 F. 3rd 963, 966 (9th Cir. 2005)].

Fifteen years ago in Jun v. Myers, 88 Cal. App. 4th 117 (2001) California deviated from the long established rule and undercut the protection afforded receivers and the beneficiaries of receivership estates. In Jun the court held that upon application of a proposed plaintiff for permission to sue a receiver, the court is required to either permit an independent action or allow the proposed plaintiff to intervene in the receivership action to pursue his or her claims; irrespective of the merits of the proposed claims. Therefore, under Jun, despite the fact that a plaintiff’s claims may be barred by the statute of limitations, the debt has been paid or, as in the facts you pose, the plaintiff improperly seeks payment from the receivership estate for a pre-receivership obligation of the defendant. See Lend Lease Asset Management, L.P. v. Cobra Security, Inc., 912 So. 2d 471, 476 (Miss. 2005) [ “Cobra’s claim for pre-receivership services must be pursued against Aegis, the entity contracting therefore; while the responsibility for payment for Cobra’s post-receivership services was upon the Receiver.”], the proposal plaintiff must be allowed to proceed.

A third option was raised in Jun: that instead of an independent suit or intervention, the creditor could simply pursue his claim as an objection to the receiver’s final account and report and, at that time, assert his claim to some of the funds the receiver was holding. This procedure was rejected because the court indicated: “There is no provision for a non-party to the litigation to receive notice of the final accounting in order to file objections to it.” Jun at 122, fn. 4. The court cited California Rules of Court, Rule 353(d). However, a year after Jun was decided, Rule 353(d) was replaced with Rule 3.1184. Subsection (c) which now provides a receiver is required to give notice of his final account to every person or entity who the receiver knows may have an unsatisfied claim so that person can appear and object to the accounting and assert his or her claim. Therefore, it is no longer necessary, as the Jun court asserted, to allow every proposed lawsuit, merely so a claimant can assert his or her claim to funds in the receivership. Asserting a claim as an objection to a final account is much more efficient than having to pursue or defend separate litigation.

One of the reasons the Jun court believed it was necessary to allow a claimant to either sue a receiver in a separate action or intervene was the court’s belief that to prohibit both could deprive the claimant access to the courts and hence “implicate due process”. Jun at 545.

That concern is however, satisfied by allowing the claimant to object to the final account. Due process is satisfied when a party has notice of a proceeding and an opportunity to be heard. Allen v. Superior Court, 41 Cal. 2d 306, 311 (1953); Conway v. State Bar, 47 Cal. 3d 1107, 1113 (1989) [due process is a flexible concept, the final fundamental requirement of which is the opportunity to be heard].

If the creditor files his motion to sue, suggest to the court that rather than allowing a separate lawsuit, that the creditor be directed to simply assert his claim at the hearing on your final report.

This blog is intended to discuss current trends in receivership law and practice.  It should not be construed as representing advice on specific, individual legal matters, but rather as an overview of the subject discussed. Your questions and comments are always welcome. Please do not hesitate to contact me at pdavidson@ecjlaw.com or (310) 281-6363 to further discuss this blog or to answer any questions.

Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP.  His practice includes all aspects of receivership and bankruptcy law.  He also acts as a receiver, conservator and monitor in state and federal court.