How to Lose a Receiver in One Appeal

February 6, 2019

Authored by: Keith Aurzada

The appointment of a receivership is an incredibly useful tool for lawyers. Since it is such a useful tool and due to a recent ruling in Texas, we thought now was as good as any to brush up on our familiarity with receiverships.  (And by the way, check out a prior post by my colleague Brad Purcell on “Fourteen Ways to Appoint a Receiver in the Lone Star State.”)  Although this post focuses on Texas law, the statutes governing most states and federal receiverships have similar requirements.

The general receivership statute in Texas allows for the appointment of a receiver under a number of conditions including[1] an action by a creditor to subject any property or fund to his claim if the creditor has a probable interest in or right to the property or fund and the property is in danger of being lost, removed, or materially injured.  This right is generally limited to secured creditors, and recently, the Texas Courts have been asked to explore the outer limits of the general receivership statute in Texas.

In the recent case of Jay & VMK, Corp. v. Lopez, the trial court granted a receivership because the purchasers claimed an interest in the earnest money that was not returned by the seller of an assisted-living facility when the sale failed to close.[2]  The purchasers requested the appointment of a receiver claiming that they were creditors with a probable interest in property (earnest money), and it was in danger of being lost (spent) because the majority shareholder of the seller had a medical condition that would potentially cause mismanagement – namely bipolar disorder.[3]

Faced with a receivership petition, the majority shareholder of the defendant resigned.  The purchasers then claimed that the resignation was a fraudulent conveyance under the Texas Uniform Fraudulent Transfer Act (“TUFTA”).[4]

While the trial court agreed that a receivership should be appointed, the appellate court disagreed finding that the trial court abused its discretion.[5]  In reaching its decision, the court discussed the general receivership statute in Texas and clarified that in section 64.001, the term “creditor” does not encompass all of a property owner’s creditors.  In fact, the court stated that shortly after the statute was first enacted in 1887, the Supreme Court of Texas construed the provision to clarify that a “creditor” must refer only to a secured creditor.[6]

Despite the statute’s requirement of a secured claim as interpreted by the Texas Supreme Court, the purchasers convinced the trial court to appoint a receiver based upon the alleged strength of a subrogation claim and the TUFTA claim.  Because the purchasers neither alleged nor offered evidence of a security interest in the property, the appellate court reversed the trial court.  The subrogation claim was not found to be the same as a secured claim because equitable subrogation is a right but requires a court order for it to become a security interest.[7]

With respect to the arguments that the majority shareholder’s resignation could be deemed an actual fraudulent conveyance, the court was not convinced.  The court stated that the parties did not explain how the shareholder’s resignation could possible hinder the progress of the case, much less hinder, delay, or defraud any creditor.  As a consequence, the receivership was denied.

While not ground breaking, the Jay & VMK, Corp. case is a nice reminder of how the Texas general receivership statute is designed to work and the circumstances under which a creditor can seek the appointment of a receiver.  Of course, this decision does not impact the other means for appointment of a receiver under Section 64.001, and it remains a potent tool in the litigation toolbox of any lawyer.[8]

 

[1] Tex. Civ. Prac. & Rem. Code Ann. § 64.001(a)(2) (West 2019).

[2] Jay & VMK, Corp. v. Lopez, No. 14-17-00733-CV, 2019 WL 302545  (Tex. App.—Houston [14th Dist.] Jan. 24, 2019, no pet. h.).

[3] The majority shareholder had only recently been diagnosed with the medical condition of bipolar disorder.  The parties petitioning for a receiver took the position that if the shareholder was not mentally healthy enough to attend a deposition, she could not be trusted to run the only asset of value  the defendants owned.  This article takes no position on the ability of those with bipolar disorder to act in a corporate capacity.  However, this issue was not addressed as a function of the shareholder’s resignation, something that may have swayed the appellate court to uphold the appointment of the receiver.

[4] Tex. Bus. & Com. Code Ann. §§ 24.001-013 (West 2019).

[5] For those that deal with receiverships on a regular basis, it is clear that receivership orders are uniformly reviewed only on an abuse of discretion basis given the equitable principals involved. Smith v. Smith, 681 S.W.2d 793, 797 (Tex. App.—Houston [14th Dist.] 1984, no writ).  As a result, a decision overturning the appointment of a receiver should be looked at carefully.

[6] Carter v. Hightower, 15 S.W. 223, 224 (Tex. 1890).  Since this provision was first construed in Carter, courts have uniformly held that a creditor, to be entitled to a receivership, must be a secured creditor and that the receivership is authorized only as to the specific property or funds to which the lien extends.  Parr v. First State Bank of San Diego, 507 S.W.2d 579, 582 (Tex. Civ. App.—San Antonio 1974, no writ); Junkin v. Sterchi Furniture Co., 92 S.W.2d 1098, 1101 (Tex. Civ. App.—San Antonio 1936, no writ).

[7] Richards v. Suckle, 871 S.W.2d 239, 241-42 (Tex. App.—Houston [14th Dist.] 1994, no writ).

[8] The other events that justify the appointment of a receiver include:  an action by a vendor to vacate a fraudulent purchase of property; an action between partners or others jointly owning or interested in any property or fund; an action by a mortgagee for the foreclosure of the mortgage and sale of the mortgaged property; an action involving a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights; or any other case in which a receiver may be appointed under the rules of equity.  Tex. Civ. Prac. & Rem. Code Ann. § 64.001 (West 2019).