The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:
The California Court of Appeal held in a published opinion that a trial court abuses its discretion in appointing a receiver to aid in collection of a money judgment where the record contains no evidence of the judgment debtor frustrating efforts to collect on the judgment. Medipro Medical Staffing, LLC v. Certified Nursing Registry, 2021 WL 388660 (Cal. Ct. App. 2/4/21).
To view the full opinion, click here.
A jury awarded Medipro Medical Staffing, LLC (“Medipro”) $2 million in damages against Certified Nursing Registry, Inc. (“Certified”) and $450,000 against Christina Sy (“Sy”) based on business tort claims, and the court entered judgment. Medipro thereafter served levies on financial institutions and hospitals that had accounts payable owed to Certified and obtained a charging order on Sy’s interest in an LLC owned by her husband. The collection efforts resulted in recovery of approximately $409,372, but collection on the judgment began to dwindle and then stopped. Medipro did not place liens on Certified or Sy’s property. Further, although Medipro unsuccessfully attempted to serve Sy 25 times to conduct a judgment debtor examination, Medipro did not seek to compel Certified or Sy’s attendance at judgment debtor examinations and did not serve interrogatories to aid in the collection of judgment.
Medipro then filed a motion to appoint a receiver, to enforce the charging order and for a preliminary injunction. The motion was contested, with Medipro submitting a declaration of its attorney representing that Certified must be sending out bills under a different entity’s name to circumvent the levies. The representations were based on a hospital employee allegedly stating that Certified had cancelled an invoice and had not sent other invoices. The representations by Medipro’s attorney was also based on information and belief that the LLC subject to the charging order had properties that generated rents but that Sy had not received any payments based on the rents. The opposition to the motion included a declaration by Sy that Certified’s business had significantly diminished based on Medipro’s service of levies. Sy’s husband also submitted a declaration that the LLC was financially struggling and had made no distributions. The court struck the statements by Medipro’s attorney but nonetheless entered an order appointing a receiver and issuing an injunction requiring the judgment debtors to cooperate with the receiver. The Court of Appeal reversed.
The Court of Appeal found that the trial court had the authority to appoint a post-judgment receiver pursuant to Code of Civil Procedure §§ 564(b)(4) and 680.010, et seq. and to enforce the charging order pursuant to Corporations Code § 17705.03(b)(1). In determining whether the trial court properly exercised its authority, the Court of Appeal reviewed the decision for abuse of discretion. See Golden State Glass Corp. v. Superior Court of Los Angeles County, 13 Cal.2d 384, 393 (1939) and City and County of San Francisco v. Daley, 16 Cal. App. 4th 734, 744 (1993).
Noting various enforcement mechanisms for collecting on money judgments, the court stated that appointment of a receiver is not ordinarily used to collect on money judgments. Citing to Jackson v. Jackson, 253 Cal.App.2d 1026, 1040-1041 (1967) and other cases, the court stated that, “[i]nstead, the appointment of a receiver to enforce a money judgment is reserved for ‘exceptional’ circumstances where the judgment creditor’s [sic—the opinion should state “judgment debtor’s”] conduct makes a receiver necessary—and hence ‘proper.’” The court found that “[t]his occurs when the judgment debtor has frustrated the judgment creditor’s collection efforts through obfuscation or through otherwise contumacious conduct that has rendered feckless the panoply of less intrusive mechanisms for enforcing a money judgment.” The court cited cases providing examples that appointment of a receiver is appropriate where there is a conspiracy to defeat collection, where payments are structured to be immune to ordinary collection mechanisms, where testimony at a judgment debtor’s examination is evasive, where title of property is transferred and where profits are concealed.
The Court of Appeal found that there was an abuse of discretion by the trial court in this case “because there was no evidence—let alone substantial evidence” of “obfuscation or other obstreperous conduct to the degree that the other collection mechanisms available under the Enforcement of Judgments Law were ineffective.” The court further stated that “the only evidence in the record on these points came from Certified and Sy, and indicated that the slowdowns were due to factors beyond their control—namely, that Medipro’s collection efforts had severely crippled Certified’s business and reduced the frequency and amount of its accounts receivable, and that the LLC had not turned any profit that would allow for a distribution.”
The court therefore asked “[d]oes a trial court abuse that discretion if it appoints a receiver to aid in the collection of a money judgment where the record contains no evidence that the judgment debtors had obfuscated or frustrated the creditor’s collection efforts and no evidence that less intrusive collection methods were inadequate or ineffective?” The court’s answer to the question is that “[w]e hold it does.”
Courts have the authority to appoint receivers “to carry the judgment into effect” pursuant to Code of Civil Procedure § 564(b)(3) and “to dispose of the property according to the judgment, or to preserve it during the pendency of an appeal, or pursuant to the Enforcement of Judgments Law…” pursuant to § 564(b)(4). A receiver may be appointed to enforce a judgment where “the appointment of a receiver is a reasonable method to obtain the fair and orderly satisfaction of the judgment.” See Code of Civil Procedure § 708.620.
The case law cited by the Court of Appeal has narrowed the grounds upon which a post-judgment receiver may be appointed to collect on a money judgment from the plain text of the statutes. The opinion noted the policy concern that if difficulty in attempts to collect on a money judgment “was sufficient to constitute the ‘necessity’ required to justify the ‘extraordinary’ remedy of the appointment of a receiver to take over a judgment debtor’s business, it is difficult to see how the appointment of receivers would not become a routine part of the collection of judgments—a result at odds with the solid wall of precedent holding to the contrary.” The record reviewed by the Court of Appeal showed little to no evidence in support of appointment of a receiver, mostly consisting of inadmissible evidence or information and belief; to the contrary it contained admissible evidence that showed that the judgment debtors were not attempting to frustrate collection efforts. This case is a good practice pointer that in seeking appointment of a receiver for enforcement of a simple money judgment, sufficient admissible evidence of the judgment debtor frustrating the collection efforts, obfuscation or contumacious conduct must to be shown. While the opinion rejected the appointment of a receiver based on the evidence (or lack of evidence) presented, it did not foreclose the appointment of a receiver, stating in a footnote that if another motion to appoint a receiver is filed, it must be “based on competent evidence that meets the standards set forth” in the opinion. Although not discussed in substance in the opinion, to the extent there is evidence that Sy was actively attempting to evade service regarding the notice or subpoena regarding a judgment debtor examination for which service was attempted 25 times, there may be grounds to support appointment of the receiver. However, the opinion infers that Medipro probably should first file a motion to compel Sy’s attendance at the judgment debtor examination and obtain an order on the motion.
These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Immediate Past Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.