A Timely Lesson on the Importance of Carefully Drafting Receivership Orders

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A Timely Lesson on the Importance of Carefully Drafting Receivership Orders

A Timely Lesson on the Importance of
Carefully Drafting Receivership Orders

By Jeffrey Messing

February 20, 2015

In a recent case the Arizona Court of Appeals highlighted the importance of carefully drafting any order appointing a Receiver to reflect the reality of who will be receiving the money. In MCA Financial Group Ltd. V. Enterprise Bank & Trust, ___ P.3d ____ 2014 WL 7448897 (Div. 2, 12/30/2014), Enterprise Bank sought to enforce its security on a defaulted loan by, among other things, having a receiver appointed to operate a hotel which was pledged as security for its loan.

Enterprise Bank hired MCA Financial Group to serve as receiver and paid its monthly bills with checks payable to MCA Financial. However, the order itself appointed an individual employee of MCA as the Receiver rather than the Company itself. That individual subsequently changed firms and Enterprise Bank simply filed a “Notice of Receiver’s Change of Firm,” thus confirming its understanding that the individual had been appointed as Receiver, not the Company. Enterprise Bank subsequently sought and obtained an order appointing a new Receiver. The former Receiver then filed a final report summarizing all of his fees, expenses and a narrative description of the duties he had performed during his time as Receiver including the time he was at MCA.

At that point Enterprise Bank objected and asked the Court to order MCA to disgorge some or all of the fees it had previously paid to MCA as excessive. The Trial Court granted that motion and ordered MCA to disgorge over $100,000. MCA appealed, arguing among other things, that the Court had no jurisdiction over it because MCA itself, as opposed to its employee, was not the Receiver and MCA had never been made a party to the suit or served. The Court of Appeals agreed, explaining that because MCA, as opposed to its employee, was not the Receiver, it was not a party to the Receivership action and could not be required to disgorge fees without first being properly named as a party and served with process.

The Court of Appeals distinguished the language used in the original Order appointing the MCA employee from the language used in the Order appointing the Successor Receiver. The latter Order appointed “Resolute Commercial Services, LLC acting by and through its principal [named] is hereby appointed Receiver in this action.” If that language had been used in the Original Order, the Trial Court’s disgorgement Order probably would have been affirmed.

The take away is that the language used in the Order appointing the Receiver should match up with the entity that will be paid for performing the work. If, as is common, the Receiver is an organization it should be named as the Receiver as opposed to the lead individual.