Richard A. Rogan, Esq.415.398.8080

RRogan@JMBM.comJuly 2009

RECEIVERSHIP 101:What you need to know now!

©2009 Jeffer Mangels Butler & Marmaro LLP. All Rights Reserved

The information in this presentation has been prepared by Jeffer, Mangels, Butler & Marmaro LLP (JMBM) for generalinformational purposes only and should not be construed as legal advice on any subject matter, or to answer specific legalproblems you may have.

While we try to ensure the accuracy of the information, we cannot guarantee that all of the information is accurate. Youshould be aware that the law is constantly changing and varies by circumstance. Therefore, information on a given law orlegal issue may not be current or apply to your particular situation. You should not act or refrain from acting upon thisinformation without seeking the advice of professional counsel in your jurisdiction. Viewing and use of any of theinformation on this site does not create an attorney-client relationship between you and JMBM.

Do not send us confidential information related to you or your company until you speak with one of our attorneys and getauthorization to send that information to us. Any information you do send to us through Internet email through this site is notsecure and is done so on a non-confidential basis and does not constitute or create an attorney-client relationship. We acceptclients only after a conflicts resolution process has been cleared, and a written agreement on representation has been agreedto by the prospective client and JMBM.

Unless otherwise noted, JMBM attorneys are admitted to practice only in California. This presentation addresses only the lawof California and may not be applicable in other jurisdictions.

All content included in this presentation, or incorporated by association, such as text, graphics, logos, button icons, andimages, are used with permission or are the property of JMBM, its strategic alliances, clients, or contributors. No portion maybe reproduced in whole or in part without express permission. Any other use, including the reproduction, modification,distribution, transmission, republication, display or performance, of the content on this site is strictly prohibited.

Disclaimer

Q. What is a Receiver?

A. A neutral person who is appointed by a

Court to temporary possession of propertybelonging to one or more litigants.

Q. Does there have to be a lawsuit filed in

order to get a Receiver appointed?

A. Yes

3

The Essentials: FAQ's

Can a defendant ask that a Receiver be appointed?Yes, but it is uncommon

Usual circumstances include:

• Borrower sues a Lender and Lender files a cross-complaint to collect the loan and appoint a Receiver

• One partner sues another partner and secondpartner files a cross-complaint and asks to appoint aReceiver

A.Q.

4

FAQ's continued

5

FAQ's continued

Q. Who can be a Receiver?

A. There are no statutory requirements.

Q. Who cannot be a Receiver?

A. A party, attorney of a party, interested person

or relative of the judge

• To manage theproperty after Iforeclose?

• As to compensation

and how he or she willmanage the property?

NoCRC 3.1179(b)(1)

NoCRC 3.1179(b)(2)-(4)

Can I make a dealwith the proposedReceiver...

Q.

6

FAQ's continued

A.

A.

Q. How does the Court choose who to appoint asReceiver?

A. It is up to the judge, but the parties usually nominate

Q. What types of Receivers are there?A. 1. Rents and profits receivers; 2. Equity receivers

Q. Is the Receiver liable for debts incurred by theBorrower prior to the appointment of the Receiver?

A. No

7

FAQ's continued

• Real estate loans arein default

• To collect rents

• A responsible neutralperson is needed tocare for distressedassets

• To collect assets andliquidate collateral

8

When Would a Lender Consider Moving to Appointa Receiver?

• Inventory shrinkage

• Removal of businessassets

• Payments to tradecreditors instead ofSecured Lender

• Embezzlement

Borrower informs Lender that it will cease operations,but is unable to provide a plan for orderly operation

Typical fact patterns includes:

9

Disposition of Assets:A Failing Business

• Transferring assets to newly formed (secret)entity

• Selling inventory at a loss

• Skimming accounts

• Paying phony accounts payable

10

Disposition of Assets:Fraudulent Transfer of Assets

• Secures control over premises

• Inventories: tangible and intangible assets

• Recovers property

• Begins to collect accounts and rents

11

Disposition of Assets:What Can the Receiver Do?

Q. Can the Receiver sue?

A. Yes

Q. Can the Receiver sell assets outside theordinary course of business?

A. Only with Court approval

Q. Can the Receiver abandon assets that aretoo costly to maintain?

A. Yes

12

Disposition of Assets

Most common Receivership is where there is amonetary default and an income-producing property

• Lender commences judicial foreclosure and asksthe Court to appoint the Receiver to collect rents,and records a Notice of Default under the Deed ofTrust to begin nonjudicial foreclosure

• Lender must choose between foreclosingnonjudicially at a trustee’s sale or obtaining adecree of foreclosure in Court

• Election of remedies not final until auctioncompleted or Court enters judgment

13

Real Estate Foreclosures

• Receiver collects rent for3 months and 20 days –the notice period before asale can take place

• Receiver pays expenses,including his or her feesand counsel’s fees fromrent collected

• Balance paid to Lenderat end of Receivership

A trustee’s saleis an auction.

14

Real Estate Loans:Nonjudicial Foreclosure (Trustee's Sale)

• To recover a substantial deficiency, Lendercan choose to foreclose judicially

• Receiver acts as auctioneer

• Borrower has one year to pay debt andredeem property

• Receiver remains in possession during thisyear

15

Real Estate Loans:Judicial Foreclosure

A Receiver may be appointed if the Borrower:

• Fails to completeconstruction

• Fails to make repairs

• Denies Lender the right toinspect for environmentalhazards

16

Real Estate Loans

Loan in default

• To protect collateral when there are disputesamong principals or owners of a business

• To protect collateral for all creditors when loanis unsecured

Collect or enforce a judgment

• To collect assets, liquidate them and pay toLender when Borrower will not repay evenafter the Lender has obtained a judgmentCCP 564(b)(3)-(4)

17

Equity Receiverships

Preserve property

• To protect collateral where property is indanger of being lost, removed or materiallyinjured

Business insolvency or dissolution

• To protect assets when a business is insolventor going to be dissolved

• Corporation, LLC, partnership or soleproprietorship

18

Equity Receiverships

Borrower needs to borrow more

• To provide knowledgeable businessmanagement to generate funds forrepayment (and any new loan made)

Deadlocked principals

• To provide knowledgeable businessmanagement when principals cannot agreehow to move forward

19

Equity Receiverships

• When?– When the lawsuit is filed

– But can move anytime during the lawsuit

• How?– Ex Parte Motion

• Most common

• Quick

• Give notice before 10 AM of the previous Courtday

– Noticed Motion• 16 Court days + 5 days for mailing!!

20

Procedures for RequestingReceivership Appointments

• Why Ex Parte?

– Defendant is:

• In default

• Collecting rents oraccounts

• Stealing collateral orassets

• Dissipating collateralor assets

– There is or will be anIrreparable Injury or anemergency

CRC 3.1175(a)(1)

• What is needed for Ex Parte

relief? CRC 3.1175-1176

– Plaintiff must post a bond

– Plaintiff must showirreparable injury will occurif Receiver is not put inplace immediately

– Default under Assignment

of Rents CC 2938 (c)

• Second Order confirming no

later than 15 – 22 days

21

Procedures for RequestingReceivership Appointments: Ex Parte Motions

• Single assignment judges unfamiliar with Receivership

• Counter-arguments to Receiver is a drastic remedy– Irreparable injury not needed if default under Assignment of Rents

– Deed of Trust or Security Agreement may include agreement toappointment of a Receiver

– A Receiver Costs Too Much

• Paid out of estate

• Lost rents and profits

• Plaintiff ultimately responsible for expense of Receivership

• Provides management services Defendant should beproviding but is not, such as property management andcompetent business operations CRC 3.1175(a)(4)

• Stops embezzlement or theft

22

Procedures for RequestingReceivership Appointments: Ex Parte Motions

If Ex Parte Motion is Denied• Set hearing to appoint a Receiver

• Ask for Order Shortening Time

CRC 3.1176(a) vs. CRC 3.1300(b)

• Ask for Temporary Restraining Order (TRO) tostop Defendant from looting the Receivershipestate and to keep the status quo pending thehearing on the motion to appoint the Receiver

– Bond required for TRO CCP 529

23

Procedures for RequestingReceivership Appointments

Noticed Motion

• If no irreparable injury, must proceedon a noticed motion

• 16 Court days’ notice if you‘re lucky

24

Procedures for RequestingReceivership Appointments

Order AppointingReceiver

• Source of power

• Judicial CounselformCCP 568

How to SupplementReceiver’s Powers

• Petition Court forinstructions andseek ordersauthorizing specificactions

25

Procedures

Receiver’s Bond

• The Receiver willfaithfully dischargeduties and comply withthe Court

• In addition to ex parte

bond CCP 567(b)

Receiver’s Powers

• Receiver must keepfunds in insuredaccounts, maintainedby licensed securitiesdealers and not in theBank that is a party to

the action. CCP 569

26

Procedures

Sale of Property

• A Receiver may sell property of estate onlyafter order of the CourtCCP 568.5

27

Procedures

• No statutory provisions address turnover ofpossession after reinstatement

• Provide for turnover after reinstatement in OrderAppointing Receiver

• Order Approving Final Accounting shouldinclude explicit instructions as to disposition ofassets in possession of Receiver

28

After Reinstatement

• Receiver should consider solvency of estate atoutset and throughout the assignment

• Seek consensual solution

• Ask Plaintiff to lend money to Receivershipestate and issue Receiver's certificates

• Petition for Instructions or Move for Discharge

29

Administrative Insolvency

Receiver’s Inventory

• Must be filed within 30

days CRC 3.1181

Receiver’s Attorney

• Must obtain Courtpermission before

employing counsel.

CRC 3.1180

Receiver’s Certificates

• Receiver borrows money tosustain operations of illiquidenterprise/property by selling“Receiver’s Certificates”(almost always to securedcreditor).

• Certificates bear interest andhave priority over all debtsexcept administration of theReceivership estate.

30

Procedures

Receiver’s Monthly Reports

• Report to parties and (if requested) non-parties

• Lenders entitled to reports if Borrower’sprincipals caused appointment of Receiver

• Not filed with Court

• Narrative of events, financials, reports, feesCRC 3.1182

31

Procedures

Receiver’s FinalAccount

• Final account andreport must beapproved by the Court

Receiver’s Fees

• Receiver and counselmust seek Courtapproval of fees oninterim and final basis

• Paid out of assets ofReceivership

• Appointing party canbe held liable forpayment if estate isinsolvent

32

Procedures

Borrowers in Chapter 11

• Seeking to keep control of property,Borrowers often file Chapter 11 when aReceiver is appointed.

• Borrowers often fail to comprehend theserious fiduciary responsibilities that Debtors-in-Possession owe to Creditors

33

Procedures:Effect of Bankruptcy - Borrowers

Receiver’s Response

• Makes no further disbursements

• Delivers property to Debtor-in-Possession

• Files accounting in bankruptcy court

• After noticed hearing, Court will allow feesand costs to Receiver

34

Procedures:Effect of Bankruptcy on Receiver

Choice #1: DealWith BankruptcyCourt

• Lender can allowBorrower tobecome Debtor-in-Possession

Choice #2: Move ToAppoint A Chapter11 Trustee

• If there is cause(usually fraud isrequired)

35

Procedures:Effect of Bankruptcy on Lender

Choice # 3: Move ToExcuse ComplianceIn The Best InterestOf Creditors

• Under section 543 (a)and (b) of theBankruptcy Code

• Bankruptcy courtsrarely grant thismotion

Which course of actionis best depends on thecircumstances of eachcase

36

Procedures:Effect of Bankruptcy on Lender

Considerations

Lender Borrower

Borrower is concerned that theReceiver will discover the"skeleton in the closet" thatBorrower has successfully hiddenfrom Lender for years

Lender believes the Borrower hascommitted financial defalcationsand needs a thoroughindependent review of theBorrower's operations andfinancial record keeping

Borrower believes that theappointment of a Receiver willdestroy the Borrower's ability tovoluntarily sell the asset for a profit

Lender does not have theexpertise to work with theBorrower to try to turn around itsoperations

Borrower does not wish to give upcontrol of the asset

Lender lacks confidence in themanagement skills of theBorrower

37

Considerations

Borrower assumes that theReceiver is the Lender's hired gunwho is out to get the Borrower

Receiver brings new "neutral"professionalism to often tensesituation

"Hope springs eternal in the[Borrower's] breast . . . "

Lender will not advance neededfunds to the Borrower, but willadvance them to the Receiverthrough "Receiver's certificates"

Borrower is afraid that theReceiver will damage hisdelicately balanced relationshipswith suppliers

Receiver can maximize cashbecause he/she is not liable forpre-appointment trade obligationsand may not be making regularmortgage payments to Lender

Lender Borrower

38

Borrower fears that the Receiverwill discover the true financialcondition of the business and shutit down

Receiver can provide accuratefinancial and other informationabout the business

Borrower fears that his or herfranchise will be terminatedbecause the Receiver wasappointed

Receiver must deal withfranchisors and other contractualrelationships

Borrower is afraid that the EPA willcome after him

Receiver takes interim control ofan environmentally challengedasset

Lender Borrower

39

Considerations

Borrower may file Chapter 11 tooust the Receiver

Lender wants the Receiver to sellthe business or its assets to payoff the loan

Borrower is concerned about thecost of the Receivership

Lender is concerned about thecost of the Receivership

40

Considerations

Lender Borrower

41

Questions?

Richard A. Rogan, Esq.Jeffer, Mangels, Butler, &Marmaro LLPTwo Embarcadero Center,5th FloorSan Francisco, CA 94111415.398.8080RRogan@JMBM.com