Mashni v. Foster (CA1 4/29/14)

A useful case about the responsibility and liability of receivers.

Builder built a low-income apartment complex but then defaulted on its loan, resulting in litigation. The court appointed a receiver, Mashni, to run the complex. Although recorded covenants required it to be rented to low-income tenants, Mashni rented to regular tenants at market rates. This allegedly threatened Builder’s expected tax benefits but Builder did nothing about it until Mashni moved to wind up the receivership, which happened when Builder eventually filed bankruptcy and the Bankruptcy Court took over. The trial court denied his motion to exonerate his bond on the grounds that he “did not faithfully discharge his duties” and “had a responsibility to protect the rights of all parties to the transaction.”

Mashni took special action, arguing that he was immune. The Court of Appeals accepts jurisdiction and grants relief.

A receiver is a ministerial officer, appointed pursuant to statute and rule, not an agent of any party. The receiver’s duty is to the court and its orders. As to the parties he is neutral – especially since, as here, the party’s interests are ususally adverse (i.e., Builder wanted its tax credits while the other party, the lender’s successor-in-interest, wanted the complex to bring in some money).  As long as the receiver’s actions are within the scope of the order appointing him he shares the judge’s immunity.

The trial court did not find that Mashni acted outside the scope of the order, which said nothing about operating the complex as low-incoming housing. He had the authority to reject contracts, which is what the court says the low-income covenants amounted to.

The court also says that Builder could have moved to amend the appointment order to add the low-income requirement. What does that have to do with immunity? “When a party is aware of a perceived defect in a receiver’s performance of his duties, equity demands that the court be informed and given an opportunity to right the wrong through its supervisory powers. If a party does not afford the court such an opportunity, it is difficult to conceive of a case in which it can later seek damages for the harm that it failed to take measures to prevent.” We’re not sure why judges would suggest that equitable considerations can affect immunity, 

(link to opinion)