Legal & Statutory Basis

Legal & Statutory Basis

Federal receivers are usually appointed by the court after a party to a pending lawsuit, or a lawsuit about to be filed, requests that the receiver be appointed. Typically, the receiver is appointed to take control over property that is involved in the underlying litigation, and the party seeking the appointment of the receiver must have an interest in the underlying property (e.g., lien holder, mortgage holder, secured creditor, judgment holder). A receiver’s appointment is ancillary to that underlying litigation.2

The principles discussed in this book are, in the main, equally applicable to receiverships in other types of federal enforcement actions (e.g., criminal proceedings Federal Trade Commission (“F.T.C”), Commodity Futures Trading Commission (“C.F.T.C.”), tax receiverships, Securities Investor Protection Corporation (“S.I.P.C.”), etc.) There are also analogies to the powers and limitations applicable to federal bankruptcy trustees. However, the details of the bankruptcy code may lead to different results than would otherwise flow from the federal common law of equity receiverships. Additionally, there are some major advantages in utilizing a federal receivership rather than a bankruptcy proceeding: see Chapters 5 and 11.

Today, receivers are most commonly appointed in stockholder derivative suits or creditors’ suits, or in enforcement actions brought by the United States Department of Justice (“D.O.J.”), Securities & Exchange Commission (“S.E.C.”), the F.T.C., the C.F.T.C., etc.

The federal appointment of receivers is governed by Federal Rule of Civil Procedure 663 (however, F.R.C.P. 66 does not apply to receivers in bankruptcy). 28 U.S.C. § 1292(a)(2) expressly grants jurisdiction to courts of appeals from: (i) orders appointing a receiver; (ii) orders refusing to wind up a receivership; and (iii) orders refusing to take steps “to accomplish the purposes of winding up a receivership.” This grant of appellate jurisdiction is interpreted narrowly. The Court of Appeals for the Third Circuit has held that § 1292(a)(2) is inapplicable to an order appointing a “guardian ad litem” to pursue a potential claim against a fiduciary, as well as replacing the fiduciary as the party to assert a related claim against a third party where conflicts of interest were possible. In re Pressman-Gutman Co., Inc., 459 F.3d 383, 393-395 (3d Cir. 2006); see also Gov’t of The Virgin Islands v. Lansdale, 307 F. App’x 688, 692 (3d Cir. 2009) (finding that 28 U.S.C. 1292(a)(2) did not provide appellate jurisdiction over a “Determination Order” denying a Receiver’s motion for a determination of exclusive jurisdiction).

The rights, powers, and duties of a federal equity receiver are governed by paragraph (b) of 28 U.S.C. § 959.4 The receiver acts as an officer of the court in which he is appointed.5

The receiver has complete jurisdiction over property located within the jurisdiction in which he is appointed. If the estate has real or personal property in other jurisdictions, the receiver can obtain “complete jurisdiction” over that property by filing a copy of the complaint and the order of appointment within ten days of his appointment in the district court in which the property is located. 28 U.S.C.A. § 754; see infra note 13. If the receiver does not make the necessary filings in a timely fashion, most courts allow the receiver to cure this defect by filing within ten days after entry of an order confirming the original appointment. See Chapter 2.

A series of federal district court decisions have affirmed the United States Supreme Court’s Barton Doctrine, which sets forth the general rule that before a suit can be brought against a receiver, leave of the appointing court must be obtained. See Standifer v. S.E.C., 542 F. Supp. 2d 1312 (N.D. Ga. 2008); Le v. S.E.C., 542 F. Supp. 2d 1318 (N.D. Ga. 2008); Krell v. S.E.C., 1:07-CV-2285-WSD, 2008 WL 513375 (N.D. Ga. Feb. 22, 2008); Ariel Preferred Retail Grp., LLC v. CWCapital Asset Mgmt., 883 F. Supp. 2d 797 (E.D. Mo. 2012); Republic Bank of Chicago v. Lighthouse Mgmt. Grp., Inc., 829 F. Supp. 2d 766 (D. Minn. 2010).

The receivership court sits as a court in equity and is reviewed based on the abuse of discretion standard. The district court has broad powers and wide discretion to determine the relief in an equity receivership. S.E.C. v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 668 (6th Cir. 2001); see also Norwest Bank Wisconsin, N.A. v. Malachi Corp., 245 F. App’x 488 (6th Cir. 2007); Quilling v. Trade Partners, Inc., 572 F.3d 293, 298 (6th Cir. 2009); S.E.C. v. Kaleta, 12-20633, 2013 WL 3030300 (5th Cir. June 19, 2013). Because of this, in addition to the above referenced statutory powers of receivers, there is a substantial amount of federal common law surrounding receiverships and the equitable powers which a receiver holds.

The case law surrounding receiverships clearly and repeatedly demonstrates that the receiver’s powers in operating the estate are extraordinary and virtually only limited by the district court judge’s concept of equity. Some key receivership powers include:

1. In appropriate circumstances a receiver may sell receivership property free of liens of third parties.6
2. The court appointing a receiver may enjoin actions against the receivership estate to assist in the efficient administration of the receivership estate (similar to an automatic stay).7
3. The receiver may sue defendants from all over the country (and in foreign countries) in the court where the receivership action is pending.8
4. A receiver has the power to sue on behalf of entities which participated in the fraud once the entity is no longer under the spell of the “evil zombie” (i.e., the individual who ran the fraud).9
As to indemnification of the receiver, see F.T.C. v. 3R Bancorp, 04 C 7177, 2006 WL 2191317 (N.D. Ill. July 28, 2006); see also New York Life Ins. Co. v. Waxenberg, 807-CV-401-T-27TGW, 2009 WL 632896 (M.D. Fla. Mar. 11, 2009).

2 Zittman v. McGrath, 341 U.S. 446 (1951).

4 28 USCA § 959. Trustees and receivers suable; management; State laws
(a) Trustees, receivers or managers of any property, including debtors in possession, may be sued without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.
(b) Except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.

5 Ledbetter v. Farmers Bank & Trust Co., 142 F.2d 147, 150 (4th Cir. 1944); Terry v. June, 432 F. Supp. 2d 635 (W.D. Va. 2006); Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006).

6 Broadway Trust Co. v. Dill, 17 F.2d 486 (3rd Cir. 1927); Seaboard Nat. Bank v. Rogers Milk Products Co., 21 F.2d 414 (2nd Cir. 1927); People’s Pittsburgh Trust Co. v. Hirsch, 65 F.2d 972 (3rd Cir. 1933).

7 S.E.C. v Wencke, 622 F.2d 1363 (9th Cir. 1980); S.E.C. v. United Fin. Group, Inc., 576 F.2d 217 (9th Cir. 1978);S.E.C. v. Byers, 592 F. Supp. 2d 532 (S.D.N.Y. 2008).

8 28 USC § 754 and 28 USC § 792. See infra Section 2.03.

9 Scholes v. Lehmann, 56 F.3d 750, 755 (7th Cir. 1995); Quilling v. Cristell, CIV.A. 304CV252, 2006 WL 316981, at **5-6 (W.D.N.C. Feb. 9, 2006). ). See also Wing v. Dockstader, 482 F. App’x 361, 362 (10th Cir. 2012); Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 190 (5th Cir. 2013).

3 Rule 66. Receivers Appointed by Federal Courts
An action wherein a receiver has been appointed shall not be dismissed except by order of the court. The practice in the administration of estates by receivers or by other similar officers appointed by the court shall be in accordance with the practice heretofore followed in the courts of the United States or as provided in rules promulgated by the district courts. In all other respects the action in which the appointment of a receiver is sought or which is brought by or against a receiver is governed by these rules.