When is a receiver appointed over a company?

Partnership disputes can lead to disagreements over who will take control of the company. Learn when and how a receiver may be appointed in such cases.

There are many types of court receivers. Some receivers are appointed on a limited basis over the security for a loan or a particular asset such as cash, receivables, real property, or inventory while other types of court-appointed receivers include the appointment over a company itself. This type of receiver is known as an equity receiver and it could include the appointment of a receiver as a result of a regulatory agency seeking appointment of a receiver or it could also involve a partnership dispute. This pendente lite receivership can be very complex and requires particular experience, knowledge, and training.

There are many common elements regarding the appointment of a receiver over a company. First, the allegations in these types of cases would ordinarily include but not be limited to causes of action for fraud, breach of fiduciary duty, conversion, constructive trust, negligent misrepresentation, accounting negligence, unjust enrichment, nuisance, intentional interference with contractual relations, intentional interference with prospective economic advantage, and conspiracy. It is important for a receiver to have knowledge of all types of these causes of actions.

Courts have authority to appoint receivers in the following pertinent circumstances: where a corporation is insolvent, in imminent danger of insolvency, or has forfeited its rights and in all other cases were necessary to preserve the property/receivership asset or rights of any party. In addition, a court has the power to appoint a receiver for a nonprofit corporation if it has reasonable grounds to believe that unless a receiver of the corporation is appointed, the interests of the corporation or its members will suffer.

The appointment of a receiver is a drastic remedy to be utilized only in exceptional cases. As such, a receiver should not be appointed unless absolutely essential and because no other remedy will serve its purpose. California, among other states, has followed the long-standing tradition to appoint receivers over receivership entities in cases of fraud and misconduct.

An essential element of the appointment of a receiver over a company or partnership is the issue of standing for a person to be able to bring a motion seeking the appointment of a receiver. Such a person must be both a party and have an interest in the receivership estate asset. Without proper standing, plaintiffs will not have standing to seek the appointment of a receiver over a company, partnership, LLC, or corporation.

One issue that a court will analyze is whether or not a preliminary injunction has been issued and whether the defendant has violated the preliminary injunction. Such violation of a preliminary injunction is usually a material factor as to whether a court will determine if it will or will not appoint the receiver, along with whether or not immediate harm, waste or damage is being caused by the actions of the defendant as it relates to the value of the receivership estate asset.

The appointment of a receiver is a remedy that may be utilized for a corporation or a company where it is in imminent danger of insolvency or where necessary to preserve a party’s rights. The defense of unclean hands by a party does not prevent the appointment of a receiver, whose job it is to protect the interests of all parties. The doctrine of unclean hands requires a direct relationship between the misconduct and the claimed injuries such that it would be inequitable to grant the requested relief. It is not enough to prove that the moving party has committed misconduct, there must also be evidence that the “manner of dirtying renders inequitable the assertion of such rights.”

Specifically, in California, CCP section 564(b) provides that the court has the authority to appoint a receiver in any of the following circumstances:

(1) in an action by a vendor to vacate a fraudulent purchase of property, or by a creditor subject to any property or fund of the creditor’s claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or if any party whose right to or interest in the property or funds, or the proceeds thereof, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured;

(2) in an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property value is probably insufficient to discharge the deed of trust or mortgage debts;

(3) after judgment, to carry the judgment into effect;

(4) after judgment, to dispose of the property according to the judgment, or to preserve it during the pendency of an appeal, or pursuant to the Enforcement of Judgments Law Title 9, or after the sale of real property pursuant to a decree of foreclosure, during the redemption period, to collect, expend, and disburse rents as directed by the court or otherwise provided by law;

(5) where a corporation has been dissolved, as provided in Section 565;

(6) where a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights;

(7) in an action of unlawful detainer;

(8) at the request of the Public Utilities Commission;

(9) in all other cases where necessary to preserve the property or rights of any party;

(10) at the request of the Office of Statewide Health Planning and Development;

(11) in an action by a secured lender for specific performance of an assignment of rents provision in a deed of trust, mortgage, or separate assignment document.

The foregoing contains the broad basis upon which a receiver may be appointed and most of these factors are relevant in connection with the appointment of a receiver in connection with a partnership dispute. The receivers at FedReceiver, Inc. have decades of experience in these areas and have decades of knowledge, leadership, and training regarding receivership appointments over companies, corporations, LLCs, and partnerships.