Using Receiverships in California Marital Dissolutions
by Stuart B. Walzer and Peter M. Walzer
When a marriage ends in dissolution, the emotional turmoil can bring out the worst in human behavior. Otherwise honorable spouses may suddenly start concealing assets, fraudulently transferring them, or removing them from the state. In some cases, obtaining a receiver maybe the only practical way to preserve the marital assets until conclusion of the case. Though they view receiverships as drastic remedies to be used only on extreme circumstances, courts will appoint receivers in marital dissolution cases upon a proper showing. When a spouse threatens or takes steps to remove community property from California, the other spouse’s lawyer should seek appointment of a receiver.
Especially in divorce litigation, receiverships are underutilized. The average lawyer is unfamiliar with the remedy and is intimidated by its seeming complexity. Judges and lawyers too often assume that a receiver will cost too much or will waste and ultimately destroy a going business or other asset.
But neither the complexity nor the cost of receiverships is a great as many fear. To be sure, it is expensive to secure appointment of a receiver and for the receiver to marshall the assets. Once that is done, however, the cost of maintaining the receivership is usually substantially less. Upon his appointment, the receiver must locate the assets, learn how they are to be managed, and take the necessary steps to bring them under his dominion and control. Usually the receiver must perform these tasks himself. Once the assets have been marshaled, however, the receiver’s staff can take over their management and maintenance, charging far less than the receiver for their time.
Protection for client
Moreover, cost is far from the only consideration. A domestic relations attorney must protect his client against the other spouse’s concealment or dissipation of community property. In most cases, of course, there is no reason to expect concealment or dissipation of assets, but where there is such a concern, appointment of a receiver may be the only way to protect the client.
If there is a real threat that the other spouse will abscond with the community property, it is far better to move for appointment of a receiver, perhaps even prematurely, than to face a later malpractice action for having left the client unprotected. Juries, exercising hindsight, may impose harsh standards for deciding when a receiver should have been appointed.
In re Marriage of Jones, 109 Cal. App. 3d 28, 167 Cal. Rptr.108 (1980) (ordered depublished Oct. 22, 1980), is a good example of this phenomenon. At the outset of her divorce action, Mrs. Jones told her attorneys that Mr. Jones had threatened to secrete or dissipate community assets. Based on this information, her attorneys immediately sought and obtained a preliminary injunction preventing Mr. Jones from disposing of the community property. The case proceeded apace. After the hearing on the interlocutory judgment, the trial judge rendered his intended decision dividing the property. Before that decision was formalized in the interlocutory judgment, Mr. Jones spirited away most of the community assets in violation of the preliminary injunction. Only thereafter did Mrs. Jones’ attorneys secure a receiver to help collect her share of the community property, a task in which the receiver was only partly successful.
Mrs. Jones sued her former attorneys for malpractice, alleging among other things that they should have secured a receiver earlier. The lawyers settled for $1.8 million of which $600,000 was allocated by the trial judge to damages Mrs. Jones suffered by the attorneys’ failure to secure a receiver earlier. The appellate court agreed that a receiver should have been appointed at the outset of the litigation.
Threats should be heeded
A court will probably not appoint a receiver early in divorce litigation based only on a spouse’s threat to remove assets. This kind of threat is common in marital dissolutions. Judges usually ignore such threats, and they are rarely carried out. Nevertheless, the Jones case raises the question whether, if only as a protective measure, an attorney should always seek a receiver when such a threat is made.
Certainly, if other danger signs are present, a receiver should be appointed. If most of the community assets are cash, cash equivalents or readily marketable, they can easily be spirited away. If the spouse who controls those assets threatens or otherwise indicates he will leave California, the other spouse’s attorney should seek a receiver. A receiver is also indicated if a spouse removes assets in violation of a temporary restraining order or preliminary injunction. If a spouse challenges the court’s jurisdiction and simultaneously removes significant assets from California, a receiver is, again, appropriate.
When facts like these exist, they should be brought to the court’s attention as soon as possible. A receiver will do little good if the assets are already gone before he is appointed. If there are no assets left when it comes time to divide them, the deprived spouse’s attorney surely will face a malpractice action.
Early attempts to secure appointment of a receiver may fail, but later developments in the case may furnish a basis for renewal of the motion. Even if a receiver is not appointed, the early threat that one might be may be sufficient to keep the other spouse on the straight and narrow path.
Ex parte application
If the decision is made to seek appointment of a receiver, it is generally best to ask for one by ex parte application. Such an application is granted only in cases of emergency, but the ex parte application dramatizes the case’s urgency. Such an application gets the attention of the judge who will hear the matter; it allows him to suggest alternative solutions before a full hearing. Once informed of the judge’s thinking, the attorneys can discuss and perhaps negotiate other, less drastic solutions.
The ex parte application should also seek temporary restraining orders against dissipation of community property. If the court refuses to appoint a receiver, it will often grant the lesser relief of a restraining order. In this context, it may be possible to secure a temporary restraining order which does not allow the other spouse the usual freedom to use community assets in the ordinary course of business or for the necessities of life. The court may be willing to issue such a restrictive restraining order for the short time between the ex parte hearing and the plenary hearing on the application for appointment of a receiver.
Carefully drafted order
If a receiver is to be appointed, great care must be taken in drafting the order appointing him. A receiver can only do what the court orders him to do. Moreover, if a person refuses to turn property over to the receiver voluntarily, the only way the receiver can enforce his authority is by seeking an adjudication of contempt for the recalcitrant property-holder’s failure to obey the court’s order. Unless the order is clearly and specifically drawn, it cannot be enforced by contempt.
The proposed order appointing the receiver should be drafted at the same time the motion for appointment is prepared. The proposed order will give the court a better idea of what relief is requested, and preparing it will help focus the showing in support of the motion, If possible, the proposed order should be drafted with the help of the prospective receiver. An experienced receiver will usually provide an example of an order which can be modified to meet the demands of the particular case.
The order must be sufficiently clear and specific to accomplish the intended result. At the same time, the order must give the receiver sufficient latitude to manage the assets. A receiver needs to act swiftly and flexibly; he should not be strait-jacketed by an order that must periodically be modified to allow him to act effectively. If necessary, the order can be written to allow the receiver to use the marshaled assets to pay for enforcing the court’s order. When the order is thus written, the receiver and the attorneys should continually evaluate the case to make sure that the receivership is in the spouses’ best interests.
A receiver is an officer of the court; he takes orders only from the court. The party at whose insistence the receiver was appointed has no prior claim to the receiver’s loyalty. The receiver can and should communicate freely with both sides. But if the receiver is in doubt as to his duties, he should seek clarification from the court, not either attorney. Before moving for appointment of a receiver, an attorney should be sure his client understands that the receiver will be impartial.
The dangers of a receiver’s departing from his proper neutrality were illustrated in In re Marriage of Jones, supra. There the wife’s attorney obtained a limited receiver-ship to enforce an interlocutory judgment of dissolution of marriage. The receiver collected substantial sums that he paid to himself and the wife’s attorney, but not to the wife. As already mentioned, the attorney paid $1.8 million to settle the ensuing malpractice action. Moreover, in an extended dictum, the court of appeal castigated the attorney and receiver, finding that the receiver had acted as the attorney’s agent in collecting his fee instead of acting as the court’s officer implementing the judgment.
Some good examples
Properly used, however, receiverships can prove quite helpful, as several reported decisions show. For example, in Nichols v. Superior Court, 1 Cal. 2d 589 (1934), Mr. Nichols moved to another state, leaving his wife in California. From the safety of his sanctuary in that other state, he disposed of the family home, two candy stores, and the family furniture. Unable to support herself, Mrs. Nichols sued for divorce, seeking a division of the community property, temporary and permanent alimony, attorneys’ fees, and costs. She also sought and secured an order appointing a receiver to take charge of the community property and enjoining others from disposing of that property. The order also directed the receiver to pay Mrs. Nichols alimony, attorneys’ fees, and costs from the assets in his possession.
Though she served the bank and other interested parties with the order, Mrs. Nichols was unable to serve Mr. Nichols personally. Substituted service by publication was permitted.
When Mr. Nichols found out about the order, he sought a writ of mandate, claiming the order was invalid. The California Supreme Court denied the writ, holding the trial court’s appointment of a receiver was proper.
The Nichols case shows how a receiver may be used to preserve the marital property against an absconding spouse. In that case, as in many others, the only was to preserve the community property is to have a receiver take control of the assets until they can be divided by the court.
Quaglino v. Quaglino, 88 Cal. App.3d 542 (1979) illustrates another use of a receivership. Mr. Quaglino was imprisoned for murdering his wife. Through a guardian ad litem, his two minor children sued him for child support, also seeking appointment of a receiver. The trial court did not immediately issue a child support order, instead appointing a receiver to take charge of Mr. Quaglino’s properties until the court had enough information on which to base a specific child support order.
Mr. Quaglino appealed, challenging the trial court’s jurisdiction to appoint a receiver. He argued that the trial court could not appoint a receiver since it had made no child support order. He urged that trial court had improperly used the “receivership as a basis to produce evidence to make the order upon which the appointment of a receiver might ultimately stand.” (88 Cal. App.3d at 545.)
The Court of Appeal disagreed. Civil Code § 4380 and Code of Civil Procedure § 564(7) authorize appointment of a receiver to enforce a family judgment or order. Under these statutes and relevant case law, the court ruled that a receivership is appropriate to preserve assets that might be used to satisfy a future support order. As the Court of Appeal said:
The complaint in the case at bench makes out the case of need by the children and the ability of the father (appellant) to pay support. The trial court did not feel it had enough information upon which to make a specific order of child support; it desired more information about the needs of the children and the income available for support before making such an order. In the interim to prevent dissipation of appelant’s assets that could be used for child support, the trial court acted property in appointing a receiver even though an order for child support had not been entered. (88 Cal. App. 3d at 546).
Since the record showed a great probability that the trial court would soon enter a child support order and that Mr. Quaglino’s property was needed to pay that support, the trial court acted properly in appointing the receiver.
In Venza v. Venza, 94 Cal. App. 2d 878 (1949), a receiver was appointed on the trial court’s own motion to take charge of Mr. Venza’s cannery business in which Mrs. Venza asserted an interest. Mr. Venza appealed and lost. Subsequently, the trial court found that Mrs. Venza had no interest in the cannery, and the receivership was terminated. The trial court ordered that the receiver’s fee be paid from the receivership property; that is, Venza had no interest in it. Mr. Venza again appealed, contending that the trial court had no authority to charge the cost of the receivership against what was now concededly his separate property (Venza v. Venza, 101 Cal. App.2d 678 (1951)).
The Court of Appeal-held that the receivership had been requested in good faith, and since the business had not been harmed, it was proper to charge the receiver’s fee against Mr. Venza’s property.
Receivers as collectors
In each of the foregoing cases, a general receivership was used to marshal assets and preserve them while the case was pending. A limited receiver appointed for a specific purpose may also be helpful. Usually, limited receivers are used as a means of collecting a judgment after all other attempts to collect have failed. Tucker v. Fontes, 70 Cal. App. 2d 768, 775 (1945) described such a receiver’s duties as being
limited to receiving and then paying out, or, more specifically, to demanding and suing for, under the order of the court, and taking into possession and applying in satisfaction of the judgment, money, property, interests of the judgment debtor; and that they do not include active management of property or operation of a business of the judgment debtor, or the administration of his estate on the basis of his insolvency.
Civil Code § 4380 provides for the appointment of a receiver to enforce any family law judgment or order. Code of Civil Procedure § 564(4), providing for receivers, does not limit the appointment of receivers to situations where a writ of execution has been returned unsatisfied. Nevertheless, cases on post-judgment receivership only arise in situations where the moving attorney has already attempted unsuccessfully to enforce the judgment by other means.
Nevertheless, one should not have to exhaust all other methods of collection before turning to a receivership. In Olsan v. Comora, 73 Cal. App. 3d 642 (1977), the court held it proper to appoint a receiver to collect a simple money judgment. The court also ruled that the judgment creditor could obtain a receiver even though he had not first conducted judgment debtor’s examinations under Code of Civil Procedure §§ 714 and 715.
A receiver can effectively implement previously unenforced orders. He can enforce interim orders for support or attorneys fees by taking possession of and disbursing bank accounts standing in the name of the debtor spouse. He can take possession of the originals or copies of books and records, which are difficult to obtain through normal discovery procedures.
The appointment of a receiver exerts great pressure toward the settlement of a case. While the remedy is expensive, it is often far less costly than extended litigation with one or both parties playing a shell game with the marital assets. Once the parties feel the full impact of the receiver they are inclined to resolve their differences.
The receivership is an effective tool of a careful domestic relations attorney. Attorneys should not hesitate to move for a receivership when one is warranted.