Presented by: California Receivers Forum

1. RECEIVERSHIP 101November 16, 2009 Presented by: California Receivers Forum “Raising the Level of Professionalism of Receivers Throughout California” Stephen J. Donell FedReceiver.com Grant K. Riley, Esq. Riley & Associates CA/NV Peter Csato, Esq. Frandzel Robins Bloom & Csato

2. Receiverships Are A Provisional Remedy • Along with injunctions, writs of attachment and writs of possession, receiverships are designed to protect the rights of one or all of the litigants pending trial. • A receivership is a remedy, not a cause of action. • A receivership results in the appointment of a third party who can assist the litigants and the Court enforce their equitable rights and powers. • The appointment of a receiver is authorized by statute and the Court's equitable powers. See, CCP 564 et seq.

3. The Appointment Of A Receiver Is Appropriate Only In Limited Circumstances • To safeguard real property pending a judicial or non-judicial foreclosure. • To collect rents, issues and profits (“RIP”) generated by income producing property pending a judicial or non-judicial foreclosure. • To safeguard or collect RIPs generated by an operating business pending the exercise of a UCC Article 9 or other security interest in the business or its assets. • To assist in the enforcement of a judgment. • To safeguard the public interest including SEC, FTC or habitability enforcement actions. • To facilitate a corporate or partnership dissolution or the division of assets in a marital dissolution.

4. Who Does The Receiver Work For? What Are A Receiver's Rights And Obligations? • A receiver is a fiduciary who must exercise the highest degree of ethics, responsibility and care. No favoritism. No insider deals. • A receiver must be independent and neutral – he or she cannot favor one side or the other. A receiver is an agent of the Court and is responsible to the Court for the outcome of his or her decisions. • A receiver should listen to the wishes and desires of the litigants but must make business decisions consistent with the order appointing the receiver and subsequent instructions from the Court. • Good faith business decisions exercised by a receiver in his or her capacity as a fiduciary will be sustained and confirmed by the Court. Negligent decisions, acts taken outside the scope of the appointing order or a breach of fiduciary duty can and will subject a receiver to liability.

5. How Do I Become A Receiver? • Receiver's are nominated by the Court or the parties to a pending litigation matter. • With most RIP receiverships involving the judicial or non-judicial foreclosure of an income producing property or other business, the receiver is nominated by the plaintiff. • There are no formal qualifications or licensing requirements applicable to receivers. • There is generally no "approved list" of receivers maintained by the Court. • Receivers should have in-depth property management, business operations, accounting and consulting expertise. • A receivership should not be seen as a means to an end such as identifying distressed properties or brokering REO.

6. How Is A Receiver Appointed By The Court? • Receivers are appointed in the context of an existing civil litigation matter by the Court or by motion. • Excluding RIP receiverships, the appointment of a receiver is seen as a relatively drastic remedy and is generally authorized only after a noticed motion. • The moving party must, by a preponderance of the evidence, demonstrate compliance with the statutory and/or equitable requirements for the appointment of a receiver and demonstrate sufficient good cause to justify the time and expense of a receivership. • The moving party must demonstrate inadequacy of other legal remedies and that, absent the appointment of a receiver, the moving party will suffer irreparable injury. • The party seeking the appointment of a receiver must nominate the receiver and identify the receiver's qualifications and experience. • The moving party and the receiver must each post a bond sufficient to indemnify the opposing party should the Court ultimately determine that the appointment was wrongful or in the event the receiver fails to discharge his or her duties in good faith. A receiver must file an inventory of personal property upon his or her appointment.

7. Receiverships In The Context Of Commercial Real Property Foreclosures • Many Courts allow for the appointment of a receiver on an emergency (ex parte) basis at the request of the foreclosing financial institution so as to preclude the defendant borrower from "cherry picking" the project’s RIPs. • Virtually all deeds of trust contain a provision whereby the lender consents to the appointment of a receiver upon default. Likewise, deeds of trust generally contain an assignment of rents clause whereby the borrower has agreed to absolutely or conditionally assign RIPs to the lender in the event of a default. These provision supports a cause of action for specific performance of the RIP clause authorizing the appointment of a receiver. • The Court will either issue an ex parte order appointing receiver or a temporary restraining order with a subsequent hearing (order to show cause) whereby the opposing party can oppose or seek to modify the Court's initial order. • In most instances, the duties of the receiver are limited to operating and managing the property pending the foreclosure. Relevant issues: appointment of management company, appointment of attorney to prosecute or defend litigation, insurance, security and tax reporting. • Receivers are generally discharged following the foreclosure of the property.

8. Basic Operating Issues • Receivers generally charge based on an hourly rate and engage third party management to operate or manage the business. The receiver's fees must be approved by the Court. A receiver's fees can, with notice, be paid periodically or at the end of the receivership. A receiver may not charge overhead. • Receivers effectively step into the shoes of the owner/operator and, subject to the terms of the appointing order, operate the business in every respect. Receivers may engage employees, administrators and third party vendors to assist in the administration of the receivership estate. • Receivers are allowed to open bank accounts and execute leases for one year or less without prior Court approval. • Receivers are required to serve monthly receivership reports which narrate the conduct and actions of the receiver in administering the receivership estate. • Defendants and others in possession must relinquish possession to the receiver upon demand. The Court's TRO and/or injunction protects the receiver from interference from the litigants or third parties.

9. Special Operating Issues • The recalcitrant defendant who interferes with the administration of the estate is subject to contempt. • Unique problems or issues should always be the subject of a motion or ex parte application which seeks prior approval or instructions from the Court. • Orders which involve the operation of unique properties or businesses require third party expertise. It is the duty of the receiver to engage the appropriate expert with prior Court approval. • The sale of a business or real property poses unique problems requiring prior Court approval, the engagement of a broker, a competitive bidding process, notice to all lien holders and other interested parties, an auction type sale, over bids and a receiver's deed or bill of sale.

10. How Are Receivership's Financed? • Ideally, the expenses of a receivership are paid through the income generated by the receivership. • In RIP receiverships, any shortfall is generally the responsibility of the lender which sought the appointment of a receiver. Any shortfall will be the subject of an interim or final Court order. • In cases where funds must be advanced to the receiver during the course of the receivership, the receiver or moving party must seek Court approval and cause the receiver to issue certificates of indebtedness. • A receiver's certificate is generally funded by the foreclosing lender or a third party lender. • By prior Court order, a receiver's certificate constitutes a super-priority lien in favor of the litigant or third party funding the advance.

11. Termination Of Receivership • A receiver must step down following a foreclosure, cure of default, sale, bankruptcy or other event which eliminates the continued need of a receiver. Bankruptcies pose unique termination problems for both the receiver and counsel. • A receiver must promptly file a final report and accounting which details the history of the receivership, the fees, costs and expenses incurred by the receivership estate, a final accounting of income and expenses and a request that the receiver be discharged. • The receiver's final report and accounting should be filed with the court and served on the litigants and all interested parties. the receiver's final report and accounting is the subject of a notice motion whereby the court approves the conduct of the receiver. • Upon discharge, a receiver should request an order exonerating the receiver from all liability which may result from the operation of the receivership estate.