This post will supplement my November 7, 2006 and December 6, 2007 posts related to court-appointed receivers’ potential for exposure to liability. The recent opinion by Judge McKinney in PNC Bank v. OCMC, 2010 U.S. Dist. LEXIS 98368 (S.D. Ind. 2010) (.pdf) dealt with a receiver appointed primarily to liquidate the assets of the defendant corporation. The standards under Indiana law apply with equal vigor to receivers appointed to preserve and protect the subject real estate in mortgage foreclosure cases. Receivers have certain obligations under Indiana law and are not immune from liability.
Attempts to sue receiver. The allegations against the receiver in PNC are not terribly important here. Various parties and creditors sought to file a complaint against the receiver. For a variety of reasons (read the opinion for additional details), Judge McKinney ruled in favor of the receiver and denied the parties’ request for leave to sue the receiver.
Objection to receivership. Parties that do not object to the appointment of a receiver at the time the appointment is made may be estopped from later raising claims of wrongful receivership. “An objection to the appointment of a receiver must be raised at the time such appointment is made.”
Rule summary. Perhaps the most meaningful thing to take away from PNC is the opinion’s outline of assorted Indiana legal principles applicable to receiverships:
- The only claims that may be brought against a receiver are those alleging (a) actions outside the scope of the receiver’s authority or (b) misconduct in the performance of receivership duties. [A] “receiver who acts outside his statutory authority or orders of the appointing court, or who is guilty of negligence or misconduct in the administration of the receivership, is personally liable for any loss resulting therefrom.”
- A court-appointed receiver “may be held liable in negligence when he has breached a duty owed either to creditors or others with whom the receiver is in privity, or held liable for other misconduct in the administration of the receivership.” The duties inherent in a receivership flow from the receiver to the parties to the underlying suit and not to third-parties.
- In PNC, the receivership order limited negligence suits in the case. The order clearly stated that the receiver will not be liable for mere negligence but will be liable for actions taken “as a result of malfeasance, bad faith, gross negligence, or reckless disregard of their duties.” Thus the order of appointment may limit liability.
- A receiver owes fiduciary duties to the creditors that the receivership is set up to protect. “A receiver may not subordinate the interest of one creditor in favor of those of another creditor.” This duty includes protecting the receivership property such that the claims of creditors may be paid out of it.
As previously noted here, and as reiterated by Judge McKinney in PNC, court-appointed receivers have certain duties with which they must comply. But the scope of such responsibility is limited under the law and can be further limited by the order appointing the receiver.
Seemingly, 99% of the time the receiver will be the plaintiff lender’s friend and, as a practical matter, a partner in the foreclosure case. There are instances, however, when a conflict may arise between those two parties, particularly if a receiver causes damage or loss to the receivership estate or otherwise fails to prevent such damage or loss. In such cases, lenders have recourse against the receiver.