Judge Theresa Springmann of the Northern District of Indiana issued an opinion on November 5, 2007 in the case FTC v. Think Achievement, 2007 U.S. Dist. LEXIS 82621 (N.D. Ind. 2007) (ThinkAchievementOpinion.pdf). Think Achievement was a negligence case brought against a court-appointed receiver relating to the alleged failure to preserve and protect the assets of the receivership estate. The opinion addresses some of the general rules in Indiana and the Seventh Circuit that apply to receivers. Although the underlying case dealt with Federal Trade Commission Act violations, the opinion relates to secured lenders because of their interest in holding receivers accountable for the protection of the receivership estate.
Why the suit? The receiver failed to procure insurance for a valuable estate asset, specifically a private residence in Carmel, Indiana. The residence was damaged by arson, and there was no insurance coverage for the fire-related losses. The question was whether the receiver should pay for the damage.
More background. The court-appointed receiver was an attorney with no prior experience as a receiver. Interestingly, he also acted as legal counsel for the receiver. (In essence, he provided legal counsel to himself.) The receiver understood he had a responsibility to protect the assets in the receivership estate, including keeping insurance on property. He ultimately dropped the ball, however, despite a seemingly reasonable excuse. (I won’t bore you with the relevant insurance law.)
Legal theories. The case was a negligence action asserting that the receiver breached his duty, owed to the receivership estate, “to exercise reasonable care to protect and preserve the assets of the receivership estate.” Id. at 8. Here are a couple important points cited in the opinion:
• Standard: In carrying out the duties of a receiver, the receiver “must exercise ordinary care and prudence, that is, the same care and diligence that an ordinary prudent person would exercise in handling his or her own estate, or under like circumstances.” Id.
• Help: “If a receiver is uncertain how to preserve property, he should petition the court for instructions.” Id.
In this particular case, the plaintiff argued that the scope of the duty included, specifically, a duty to obtain insurance for the protection of the estate assets and that the receiver breached that duty.
Outcome. The dispute did not center upon whether a duty existed. Indeed, the defendant did not deny that he had a duty of care to the receivership estate requiring him to obtain insurance on insurable assets. Id. Instead, the issue was whether and to what extent he appropriately carried out that duty, and the Court held there was evidence from which a jury could conclude either way. Although Judge Springmann pointed to facts unfavorable to the defendant, in the final analysis she held that the facts concerning whether the receiver breached (violated/failed to comply with) his duty did not “lend of themselves to only a single inference.” Id. at 12. In other words, whether the receiver conformed his conduct to the applicable standard of care was a triable issue of fact that must be reserved for the jury.
The upshot for receivers. There are a handful of points receivers can take away from the Think Achievement opinion. First, a court-appointed receiver may be exposed to liability for damages if it acts unreasonably with regard to its duty to protect the assets of the receivership estate. Second, if the receiver is faced with an issue and is unsure as to what to do, the receiver can and should petition the court for direction. Finally, as suggested by Judge Springmann, it may be prudent to seek the assistance of outside legal counsel.
Neither receivers, nor parties involved in a receivership, want to see unnecessary or avoidable expenses incurred. Hiring lawyers and filing motions with courts can become expensive and can, indirectly, dissipate the assets of the receivership estate. However, reasonable measures need to be undertaken to prevent damage to the property, such as the fire-related losses addressed in the Think Achievement case. Receivers are well advised to consider the retention of legal counsel when confronted with a tricky issue.
Lender applicability. From the perspective of a secured lender, the Think Achievement case is important because it is a reminder that, not only is a receiver’s purpose to protect loan collateral, but an unreasonable failure to do so may expose the receiver to a damages claim. Secured lenders might be able to seek recourse against receivers that negligently cause losses to the receivership estate.