The Proper Procedure for A Receiver Hiring Counsel to be Paid by the Receivership Estate

Q: I am a receiver, but not an attorney. During the receivership some legal matters came up and I used my in-house counsel and an outside attorney to handle the matters. My order of appointment states I can hire attorneys, but does not specifically state who. I have filed my final account and report and the defendant is objecting, stating my attorneys are not entitled to be paid because there was no court order specifically authorizing their employment. Was that necessary?

A: Yes. California Rules of Court, Rule 3.1180 states: “A receiver must not employ an attorney without the approval of the court.” While your order of appointment authorizes you to employ attorneys, it does not name the attorneys you were authorized to employ, and that is important. Rule 3.1180 goes on to specifically provide that a receiver’s application to employ an attorney must be in writing and must state: “(1) the necessity for employment; (2) the name of the attorney whom the receiver proposes to employ; and (3) that the attorney is not the attorney for, associated with, nor employed by an attorney for any party.” Therefore, you can’t get away with using supposed in-house counsel, if you want to get them paid, nor can plaintiff’s or defendant’s counsel perform legal work for you. This rule, regarding specific court approval of a receiver hiring counsel, is not limited to state court receiverships. It applies equally to federal court receiverships.

In a recent case, SEC v. Platinum Management (NY) LLC et. al., 2018 WL 4623012 (E.D.N.Y. 2018), a receiver hired a law firm to represent him. The receiver ended up resigning because of a dispute with the SEC and a replacement receiver was appointed. The prior receiver’s attorneys filed a fee application, which was opposed by the SEC and the new receiver. The court denied all the fees and expenses requested ($459,729.25 in fees and $29,197.86 in expenses). The court held that while the order of appointment authorized the receiver to retain professionals to assist him, like the California Rule of Court, the receiver was required to obtain a specific order authorizing the specific engagement, which was not done. The district court analogized to bankruptcy practice, which forbids allowing compensation to professionals who are not employed by the court. It also explained the underlying reasons for the rule, which are the same as Rule 3.1180. It discourages volunteer services and enables the court to review potentially disqualifying conflicts or relationships. The court also noted that the attorneys were experienced insolvency attorneys and, therefore, should have known an employment order was necessary. Therefore, unless your order of appointment specifically names the attorneys you are authorized to employ, you need to obtain an order approving your employment of the attorneys, whether they are in-house or outside, if you want them to be paid.

Peter A. Davidson is a Senior 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.