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How Final is an Order Approving a Receiver's Final Report and Account?
By Edythe L. Bronston

A.       A Receiver's Liability in an Official Capacity.

A receiver's liability for negligence in his or her official capacity in the performance of his or her duties, which results in injury to those occupying the property, is a contingent claim against the receivership estate, any recovery for which is payable out of receivership funds. All creditors, whether their status is contingent or fixed, have a right to be heard concerning distribution and apportionment of receivership funds. Chiesur v. Superior Court, 76 Cal.App. 2d 198, 200-201, 172 P.2d 763 (1946).

In Chiesur v. Superior Court, supra, the court stated that a receiver is liable to those who are not interested in the estate, in his official capacity only, for negligence in the performance of his authorized duties, and recovery is a charge against the receivership estate. In McNulta v. Lockridge, 141 U.S. 327, 12 S.Ct. 11 (1891), cited by the Chiesur court, recovery against the estate for a wrongful death was upheld. The Supreme Court stated "actions against the receiver are in law actions against the receivership, or the funds in the hands of the receiver, and his contracts, misfeasances, negligences and liabilities are official and not personal, and judgments against him as receiver are payable only from the funds in his hands." Clark on Receivers, 2d ed., the seminal work on receivers, quotes from the McNulta opinion and states: "Bold as this decision is, it is the well established law of America." at §392(f).

B.       Effect of Discharge Order.

An order approving a receiver's final report and account is final and appealable. Schreiber v. Ditch Road Investors, 105 Cal.App.3d 675, 677, fn. 1, 164 Cal.Rptr. 633 (1980). A discharge order operates as res judicata as to any claims of liability against the Receiver in his or her official capacity, where a party appears at hearing on the receiver's final report and account, raises objections, and is overruled by the court which in turn approves a receiver's final report and account. Aviation Brake Systems, Ltd. v. Voorhis, 133 Cal.App.3d 230, 234, 183 Cal.Rptr. 766 (1982).

It is clear, however, that a discharge order cannot be res judicata as to one who is not a party to the receivership action and has no notice of those proceedings. Where a person has no knowledge of the receiver's hearing on his final report and account and, therefore, takes no part in those proceedings, res judicata cannot operate to cut off a claim without violating fundamental notions of due process. Vitug v. Griffin, 214 Cal.App.3d 493, 494, 262 Cal.Rptr. 588, 592 (1989). As stated in Miller v. Everest, 212 N.W. 522 (1973): "meritorious claims ought not come to an end before the statute of limitations has barred them by a receiver simply securing his own discharge without notice to the claimants."

C.       Nature of Receiver's Bond.

In Vitug v. Griffin, supra, the court, based upon Chiesur, Miller v. Everest, and Copeland v. Salomon, 436 N.E. 2d. 1284, 1287 (1982), held that an order discharging Griffin as receiver was void as to the plaintiffs who had no notice of the proceedings and whose claim was not accounted for in the receiver's final account, where the receiver was aware of a pending action, (since she had filed an answer in that action). The court (erroneously, I believe) stated that should the plaintiff obtain judgment against the receiver for negligence in the performance of her duty as a receiver, the plaintiff may possibly be entitled to recover from the surety on the performance bond, citing C.C.P. §996.150. That statute reads as follows:

"If a surety is ordered released from liability on a bond:

(a) The bond remains in full force and effect for all liabilities incurred before, and for acts, omissions or causes existing or which arose before, the release. Legal proceedings may be had therefore in all respects as though there had been no release.

(b) The surety is not liable for any act, default, or misconduct of the principal or other breach of the condition of the bond that occurs after, or for any liabilities on the bond that arise after, the release.

(c) The release does not affect the bond as to the remaining sureties, or alter or change their liability in any respect."

There is much controversy over the accuracy of the Vitug Court’s statement as it applies to receivers' bonds, since receivers' bonds are to the State of California, to the effect that the receiver will faithfully discharge his or her duties in the receivership action and obey the orders of the appointing court. In other words, most receivers believe that a receiver's bond is in the nature of a defalcation bond, and is not available to a tort claimant and cannot be considered a performance bond in favor of interested parties. If that position is correct, any judgment arising out of a tort claim would either be uncollectible if against a closed receivership estate, or would have to be against the receiver individually.

D.       A Receiver's Individual Liability.

The California Supreme Court in Tapscott v. Lyon, 103 Cal. 297 (1894), stated that a receiver cannot be held as a tortfeasor for any act within the scope of his duties as receiver, done under the express order of the court.

In Aviation Brake Systems, a receiver's final report and account was approved, after which a suit was filed alleging that the receiver failed to discharge his duties faithfully as receiver, and sought damages from the receiver both personally and on his bond. The court held that the trial court had properly sustained the demurrer on the ground of res judicata, concluding that the matters sought to be litigated "were, could have been, or should have been" litigated at the time the receiver's final report and account was approved, and that the court's order approving the final report and account, which became final, may not be collaterally attacked. The court, citing Macmorris Sales Corp. v. Kozak, 249 Cal.App.2d 998, 58 Cal.Rptr. 92 (1967) and Rochat v. Gee, 137 Cal. 497, 27 P. 670 (1891) stated that those cases demonstrate that it is at the hearing on a receivers' final report and account that he may be surcharged in his personal capacity for losses to the receivership estate based upon his misconduct or mismanagement. The propriety of various expenditures and the adequacy of the inventory could have and should have been raised as objections to the receiver's final report and account. In that case, any alleged misconduct could have been discovered prior to the order approving the receiver's final report and account.

In the recent case of Credit Managers Ass'n v. Kennesaw Life and Acc. Ins., 25 F.3d 743 (9th Cir. 1994), the Ninth Circuit held that under California law a receiver is liable to persons not beneficially interested in his receivership in his official capacity only, citing Chiesur, which in turn adopted the rule established in other jurisdictions "that a receiver is liable to those who are not interested in the estate in his official capacity only, for negligence of the performance of his authorized duties, and that the recovery is a charge upon the estate in receivership." The Ninth Circuit recognized the California exception to this general rule, that a receiver can be held personally liable for his misconduct or mismanagement of the receivership estate, via surcharge for losses to the receivership estate based upon that misconduct or mismanagement, "upon the receiver's final report and account". The Court concluded, based on the foregoing, that the claim by the defendant against the receiver personally must be presented to the state court when the receiver submitted its final report and account and could not be enforced against the receiver by execution. (At p. 751.) As to interested parties, the final order should be res judicata unless those parties had no notice of the proceeding.

E.       Claims of Interested Parties v. Third Party Claims.

Perhaps the confusion in this area is due to the differing characteristics of claims by interested parties, including tenants in possession of real property (who have or should have notice of all proceedings) and third parties who may not have even constructive notice. I believe that a correct statement of the law as to third party claims is that it is only where a receiver knows of an impending lawsuit based on a tort claim against the receiver, and fails to address it, that discharge and an order approving his final report and account should not be res judicata. Otherwise, a receiver would be potentially liable to third party strangers until the expiration of applicable statutes of limitation. Since receivers are not covered by this sort of bond, to hold otherwise would unjustly penalize receivers who are, after all, acting for the Court.

F.       28 U.S.C. §959.

There appears to be a significant difference between federal and California law. 28 U.S. §959 clearly authorizes an action against the receiver without leave of the appointing court, regarding any acts or transactions of the receiver in carrying on business connected with the property, subject to the general equity powers of the appointing court. The annotations to that statute interpret it as intending to permit actions redressing torts committed in furtherance of a bankruptcy debtor's business operations. It is generally recognized, however, that a receivership court has broad equitable powers to prevent interference with the administration of the receivership estate by blanket stay orders as well as injunctions against particular actions, including actions which might otherwise be permissible under statutes subjecting receivers, without prior leave of court, to actions or claims arising out of acts or transactions in carrying on business connected with the receivership property. SEC v. United Financial Group, Inc., 576 F.2d 219 (9th Cir. 1978). Conversely, a California District Court held that where acts complained of were not in response to a directive of the appointing court, and where suit in another court did not affect the administration of a bankrupt estate, or in any situation where a receiver may be held personally liable, an action to enforce the receiver's liability should be permitted without leave of the appointing court. In re Hacker, 217 F.Supp. 393 (D.C. Cal. 1963).

It seems that most of the annotations dealing with this statute address torts which are committed in furtherance of a business and not in administration of a receivership or bankruptcy estate. The Inland Gas Corp. v. Flint, Ky. case, 255 S.W. 2d 1006 (1953), however, states that obtaining leave of the federal court is not a prerequisite to maintaining an action in state court against a federal receiver, based upon an act or omission connected with ordinary operations of a company in receivership, including an action growing out of negligence of agents and servants of the receiver.

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