“Abuses Of Receiverships”—A Problem From The Late 1800s And Early 1900s

By: Donald L Swanson

Here is an article from more than a century ago: Jacob Trieber, Abuses of Receiverships,”  37 Yale L.J. 275-279 (1909). 

What follows is a summary of that article.

Receivership—A Judicial Remedy

Receivership is a judicial remedy to preserve a fund or property from spoliation, waste or removal pending litigation, so it may, by final decree, be appropriated according to the rights of the parties.

Unless authorized by statute, receivership is a creature of courts of equity, which courts:

• are not bound by the strict rules of the common law; but
• will grant relief when the common law remedies are inadequate.

The appointment of a receiver is not a matter of absolute right, but is within the sound discretion of the court, subject to rules of equity.  A well established rule of equity is to deny relief when:

• the injury caused to the defendant will prove very great; and
• the benefits to the plaintiff will be small in comparison.

Receivership Abuses Despite Rules of Equity

Despite well established equitable principles, receiver appointments are often made upon the most flimsy allegations—and sometimes even without notice to parties directly affected.

–Certain Destruction

For all practical purposes the appointment of a receiver for a commercial business means absolute destruction of the business:

• its credit is destroyed;
• its existence as a going concern is destroyed; and
• its trade and its good will are made valueless.

Based on such realities, a receiver should never be appointed absent nearly conclusive evidence, (i) of great loss to the plaintiff without a receiver, and (ii) that no other means is available to protect plaintiff’s rights.

–Recklessness

The “recklessness” with which receivers are sometimes appointed “has caused such a widespread feeling of uneasiness” among businesses that “the mere threat to apply for a receiver” (especially when the application will be in a court known to easily grant them) will frequently cause the threatened business to submit to any terms demanded, rather than take the receiver appointment risk.

In fact, “it has become an established occupation for unscrupulous parties to buy a few shares of stock in a corporation for no other purpose than that of blackmailing” by threats of a receiver appointment:

• this is particularly true when large transactions are about to be entered into or some mismanagement is discovered—even when there is no danger of insolvency.

–Insider Abuses

One type of great abuse is when the proceedings are solely for the benefit of the defendant.

In many instances receivership proceedings are instituted solely for the purpose of repudiating unsecured claims or depriving stockholders of their interests, for the benefit of a few insiders.

A resort to receiverships has become common, especially when a few dominant stockholders also hold secured indebtedness:

• in such cases a reorganization through receivership occurs upon terms most favorable to those large holders and to the detriment of everyone else; and
• they do so by using their secured indebtedness to purchase defendant’s property at the receiver’s foreclosure sale by credit bidding their liens—and leaving little to nothing for everyone else.

Then, the purchasers sell the same property to a new corporation for bonds and stocks representing from ten to twenty times the purchase price paid at the receiver’s foreclosure sale.

–Receiver Abuses

Abuses include the appointment of a receiver.  It should be expected that courts would select only a disinterested and well-qualified person to be the receiver—someone:

• highly capable of taking charge of valuable property;
• peculiarly qualified for that position; and
• willing to fully devote all time, ability and energy to the discharge of the duties of the office.

But how often is that done? “Rarely,” is the answer. That’s because:

• frequently, the appointed receiver has no knowledge of the business;
• so, the receiver employs a competent manager at a high salary to discharge the duties that the receiver is appointed to perform:
  • in some instances the person employed as manager has no other recommendation than being a friend or relative of the receiver or of the party on whose recommendation the receiver was appointed;
• usually the receiver is someone who stands high in the community with large, personal interests to conserve:
  • such a person does not want to neglect those personal interests and delegates the receivership management duties to clerks and employees whose salaries are charged as expenses of the receivership and paid out of the property that is to be conserved for others; and
• next, the receiver seeks advice of counsel in every step taken:
  • though the receiver gets along very well, in personal endeavors, without such assistance; but
  • since the expense of counsel is borne by the estate, the receiver feels that such a luxury can be afforded.

The result is that expenses of winding up the receivership are from five to ten times as great as sound business management justifies.

To be appointed as receiver of a large concern is considered “the richest plum on the tree.”

Correctable?

While appellate courts have corrected a few of such abuses (notably, in the New York Bank cases in 1908), such corrections are rare.  That’s because appellate courts see the trial judges as more familiar with the services rendered, hence better qualified to determine compensation.

Courts are not solely to blame for these conditions—but too often they blindly follow precedents made by other courts:

• many judges, possessing little practical business experience, fail to realize the great wrong perpetrated under the forms of law and in the name of justice.

Remedies lies primarily with the courts, who can:

• refuse to appoint receivers when it is not absolutely necessary for the protection of the parties;
• exercise the same care in the selection of receivers that they would exercise in the selection of an executor to carry out the provisions of their own will;
• reserve the right to determine when a receiver needs the aid of counsel and appoint counsel with reasonable compensation terms; and
• assure that the compensation of receivers and their counsel is no greater than what would be allowed for like services under employment from individuals.

Perhaps the best manner of regulating such compensation would be by legislation:

• the compensation of executors, administrators, guardians and trustees in bankruptcy is regulated by statute; 
• the similarity of such services with those of a receiver would afford a proper scale for the compensation and justify such legislative action; and
• other remedies may easily be suggested.

Oversight?

“These great abuses . . . justify the American, as well as the State Bar Associations, to give the subject careful consideration and suggest some remedy to relieve the judiciary of this odium.”

Conclusion

Very interesting!

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