RECEIVERS: THE CONSUMMATE PROBLEM SOLVERS

1. RECEIVERS:THE CONSUMMATE PROBLEM SOLVERS Wayne Klein Lewis B. Freeman & Partners, Inc. December 9, 2008

2. Scenario 1: • Plaintiffs bought ranch property in Millard County, intending to farm the land. After determining the property lacked sufficient water for farming, plaintiffs sued to rescind the contract and recover their down payment. They alleged the seller fraudulently induced the contract by falsely representing there was an adequate supply of water on the property. Seller denied the fraud and sought to declare the down payment forfeited for non-payment of past-due installments. • Query: Who should control this property during the litigation? Why?

3. Scenario 2: • In a divorce, wife was granted custody of the two children and awarded alimony and child support. Proceeds from the sale of the family home were divided between the parties. Husband was ordered to convey to his former wife half his interest in real estate in Sacramento, to hold in trust for the education of the children. Husband refused to make his support payments or convey the property interest, despite receiving $61,000 in proceeds from the sale of business interests. • Query: How can the court ensure payment of the child support and alimony?

4. Scenario 3: • The State Bank of Lehi filed a foreclosure action to recover $161,000 owed by a mink ranch. • Query: What might happen if the rancher is left in control of the mink? • What might happen if the bank seizes the mink and sells them immediately? • What is the best way to preserve the assets and status quo until the rights of the parties are adjudicated?

5. Scenario 4: • After the buyer of a radio station failed to make any payments, the seller brought suit. The court ordered forfeiture of the buyer’s interests in the radio station. After the buyer filed a notice of appeal, the seller asked the trial court for help to preserve the property during the appeal. • Query: Who should operate the radio station during the pendency of an appeal? • Is it too late for the seller to ask the court to appoint a receiver?

6. Scenario 5: • Minority shareholders in a corporation filed suit claiming company officers were causing the corporation to become insolvent. Plaintiffs alleged fraudulent conduct and described suspicious transactions by the officers. • Query: If the officers are engaging in fraud, to the detriment of minority shareholders, how can the shareholder interests be protected from waste during litigation?

7. Scenario 6: • The buyer of a St. George nursery hired the seller to continue managing the nursery. In a dispute over the management of the business, the trial court prohibited the seller from doing anything inconsistent with the new owner’s interests and preventing the manager from incurring further debt on behalf of the nursery. Within two weeks, the manager drew another $15,000 from a line of credit for the nursery. • Query: How can the court assure compliance with its order?

8. Scenario 7: • Two business associates worked together for many years running a title agency. Within a six week period, both died. The families of both argued over continuation of the business. At trial, a jury decided the business was a partnership and determined the ownership share of each. The judge ordered the parties to wind up the partnership, but the parties could not agree. • Query: What is the best way to determine the value of the dissolved partnership and distribute its assets?

9. Scenario 8: • Land underlying a Smith’s grocery store was sold. The buyer became the new lessor to Smith’s. The seller of the property later sought rescission of the transaction and asked Smith’s to pay rents to it during the pendency of the rescission action. Smith’s continued paying rent to its lessor (the buyer). After the seller won its suit and the lessor failed to pay over the rents it had received, the seller sued Smith’s for the rents paid to the buyer during the pendency of the litigation. • Query: Should Smith’s have to pay the rents again? • How could this problem have been avoided?

10. Scenario 9: • Following the sale of a ranch, the seller sought to nullify the transaction, claiming misrepresentation and fraud. The mortgage holder foreclosed on the ranch and buyer bought the property at a sheriff’s sale. Seller then redeemed the property. The court appointed the buyer as receiver to manage the ranch during the litigation. Seller prevailed in his suit and was awarded $1 million in damages (in lieu of rescission). The buyer – as receiver and as the post-litigation owner of the property – asked the court for $10 million expended as receiver to drill 12 water wells, install flood control dams, and construct an irrigation system. • Query: Should the receiver be able to recover the $10 million? • What factor encouraged these expenditures?

11. Common Uses of Receivers: • Problems best suited for receivers include: • Business entity disputes; • Consumer protection; • Domestic relations; • Probate; • Fraudulent property transfers; • Post-judgment enforcement; • Preserving real estate; and • Protecting public welfare and safety.

12. Civil Procedure Rule 66: • This rule identifies four specific and one general justifications to appoint a receiver: • Where property is at risk or needed for judgment; • To effectuate a judgment or preserve property during an appeal; • When a debtor refuses to satisfy a judgment; • If a business entity was dissolved or is insolvent; • All other cases where receivers have been appointed by courts of equity.

13. Additional Code Clarifications: • The Utah Code adds details relating to certain types of equity receiverships: • Business entities; • Fraudulent transfers; • Operation of governmental housing authorities; • Agricultural cooperative associations; and • Independent escrow agents. • Supreme Court Rule 14-603 allows a receiver to take over the law practice of a suspended or disbarred attorney.

14. Statutory Receivers: • The Code authorizes statutory receivers for: • Consumer sales practice violations; • Securities fraud enforcement actions; • Real estate broker trust funds; • Assisted living facilities; • Emergency medical service providers; • Financial institutions; and • Insurance companies. • These can only be sought by the government.

15. Obligations of Receivers: • Receiver must be impartial, disinterested; • Cannot be parties or attorneys to the action; • This can be waived by the parties; • Courts may require receiver to post a bond; • Receiver must take an oath; • If real property is involved, receiver must file notice with county recorder and pay taxes before sale. • Receiver must file tax returns for entity.

16. Powers of Receivers: • Receivers have broad powers – under the direction of the appointing court – to: • File and defend lawsuits; • Seize property; • Collect, pay, and compromise debt; • Invest funds not being used; • Transfer funds and assets; and • Take any other action authorized by the court. • Importance of court notice and approval.

17. Other Fiduciary Relationships: • Fiduciary roles, similar to receivers, include; • Masters (appointed under Rule 53); • Custodians (generally to liquidate businesses); • Liquidators (appointed by banking and insurance regulators); • Assignee for the benefit of creditors (§6-1-1). • Utah Fiduciaries Act (§22-1-1) imposes standards on all fiduciaries: • These include trustees, executors, administrators, guardians, conservators, curators, public officers.

18. Recent Receivership Cases: • There have been four reported state cases involving receivers since 2000: • Chen v. Stewart (Utah 2004); • In Re Olympus Construction (Utah App. 2007); • Irvine v. Anderson (Utah App. 2006); and • Wilcox v. CSX Corp. (Utah 2003). • Receivership cases have some of the most interesting facts you will ever encounter.

19. Contents of Receivership Manual: • Cases where receivers are appropriate; • Initial considerations for the court; • Authority for, purpose of receivership; • Application for appointment of a receiver; • Legal and other qualifications of receiver; • Order appointing receiver; • Duties and responsibilities of receiver; • Bonds;

20. Receiver’s Manual (con’t) • Receivers reports; • Fees and costs; • Claims procedures; • Other state and federal fiduciary roles; • Appendix A: Legal authorities and source materials; • Appendix B: Receivership forms.

21. Questions? • Additional information about the results of the cases described in the scenarios can be found at the end of my written materials. • Extra copies of the Receivership Manual are available.