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Appointed Receiver Can Prevent Mischief in Divorces

Almost everyone who deals with divorce has a horror story about how a party dissipated the marital estate, destroyed property, or repeatedly violated court orders. There is a solution for that: a court can appoint a receiver. At that point, a party is divested of power over an asset or income, and the receiver can marshal the asset and income for the benefit of the marital estate. While someone has to pay a receiver (who can be expensive), that cost has to be compared to the loss that can be incurred without a receiver.

Michigan has case law and now a court rule (MCR 2.622) governing the appointment of a receiver.

A party may request a receiver, or the court can appoint one on its own initiative. The receiver then has a fiduciary duty to all involved. While you don’t have to have a license to be a receiver, the court rule requires receivers to “have sufficient competence, qualifications, and experience to administer the receivership estate.” A receiver can be appointed after a party requests one and the other party does not object. He/she can be appointed by the court over the objection of both parties. Finally, the parties themselves can just stipulate to the appointment. If the court appoints the receiver on its own, the parties still have a right to object, but there are deadlines for filing objections. These deadlines can be shortened for good cause.

The court rules prevent conflicts of interest by preventing a person or entity from serving as a receiver or assisting the receiver if he/she/it:

(a) is a creditor or a holder of an equity security of the receivership estate:

(b) is or was an investment banker for any outstanding security of the receivership estate;

(c) has been, within three years before the date of the appointment of a receiver, an investment banker for a security of the receivership estate, or an attorney for such an investment banker, in connection with the offer, sale, or issuance of a security of the receivership estate;

(d) is or was, within two years before the date of the appointment of a receiver, a director, an officer, or an employee of the receivership estate or of an investment banker specified in subrule (b) or (c) of this section, unless the court finds the appointment is in the best interest of the receivership estate and that there is no actual conflict of interest by reason of the employment;

(e) has an interest materially adverse to the interest of any class of creditors or equity security holders by reason of any direct or indirect relationship to, connection with, or interest in the receivership estate or an investment banker specified in subrule (b) or (c) of this section, or for any other reason;

(f) has or represents an interest adverse to the receivership estate or stands in any relation to the subject of the action or proceeding that would tend to interfere with the impartial discharge of duties as an officer of the court.

(g) has, at any time within five years before the date of the appointment of a receiver, represented or been employed by the receivership estate or any secured creditor of the receivership estate as an attorney, accountant, appraiser, or in any other professional capacity and the court finds an actual conflict of interest by reason of the representation or employment;

(h) is an “insider” as defined by MCL 566.31(g);

(i) represents or is employed by a creditor of the receivership estate and, on objection of an interested party, the court finds an actual conflict of interest by reason of the representation or employment; or

(j) has a relationship to the action or proceeding that will interfere with the impartial discharge of the receiver's duties.

There is an exception to this rule if a court finds that appointing a receiver will serve the best interest of the estate and if the receiver “does not represent or hold an interest materially adverse to the receivership estate.”

Orders appointing a receiver are subject to several requirements, including without limitation the amount of any bond required; an inventory of the estate; the procedures for compensating the receiver and paying expenses; the receiver reports required; the duties of the receiver; and property that is to be “surrendered to the receiver.”

The receiver has 7 days to accept his/her appointment and then 28 days to notify other parties who have a “recorded interest” in the estate (e.g., holders of a security interest or mortgage). Within 35 days of being appointed, the receiver has to file an inventory of estate property.

The accounting must be meticulous, including an accounting for all receipts, disbursements and distributions of money and property of the receivership estate. If the estate has creditors and money that could be paid to creditors, the receiver can require them to file a “proof of claim” with the court much as they would have to do in a bankruptcy. Any party to the action has a right to request information from the receiver about the estate and its administration, so the process is transparent.

When the matter is concluded, the receiver must file final written report and final accounting of the administration of the receivership estate with the court.

The power of a receiver can be draconian. He/she has “general power to sue for and collect all debts, demands, and rents of the receivership estate, and to compromise or settle claims.” He/she can “liquidate the personal property of the receivership estate into money” and can sell real property.

The receiver may pay the ordinary expenses but cannot distribute the funds to a party without a court order. Further, the receiver can only be discharged on order of the court. A party cannot unilaterally fire the receiver.

The receiver is entitled to reasonable compensation for services rendered to the receivership estate. The court determines the source and method of compensation of the receiver. One party can be ordered to pay 100% of the compensation. All parties, however, have a right to notice of payment and a right to object.

The receiver has to shall file an application to be paid with notice to the parties that the court can order the payment requested if objections are not made timely. If a receiver applies for payment, he/she must disclose a description of the services rendered, time expended, and expenses incurred. He/she must state that amount of compensation and expenses requested and any payment previously made. If the receiver is going to be paid from non-estate assets or income, that must be disclosed as well as any agreement for fee/expense sharing. The court rule explicitly forbids a receiver from sharing or agreeing to share compensation with any person other than a firm member, partner, employer, or regular associate of the person rendering the services except as authorized by order of the court.

The court can require a bond for the receiver. Also, an “interested party or entity” actually has standing to intervene under MCR 2.209 and participate in the action.

Finally, the court rule allows a court to remove a receiver for cause.

(H) Intervention. An interested person or entity may move to intervene. Any motion to intervene shall comply with MCR 2.209.

(I) Removal of Receiver. After notice and hearing, the court may remove any receiver for good cause shown.

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For many years, MCLA 600.2926 provided for the appointment of a receiver by a circuit court judges. That statute, however, was very general and did not address the day-to-day power of the receiver, the fiduciary duty of the receiver, or the compensation of the receiver.

The appointment of a receiver can be used in any circuit court case—but it is a particularly powerful tool in a divorce case. When attempts to restrain transfers, get discovery, or force compliance with court orders has failed, the appointment of a receiver can be a literal god-send.

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