August 7, 2020

Existing Law in Arizona.

The existing legal authorities in Arizona for receiverships are sparse and do not provide much guidance to lawyers, receivers, other professionals, lenders and clients.   Although the paucity of law provided flexibility to practitioners in receivership proceedings, the consequence was a lack of certainty for judges and attorneys and a lack of uniformity in application of the law.    That necessarily resulted in a perception of risk for lenders, borrowers and practitioners.

A.R.S. §12-1242 and Rule 66 of the Arizona Rules of Civil Procedure govern the procedure for appointment of receivers and require the applicant to file an application accompanied by a separate affidavit in support of the application.  The standard for appointment is set forth in A.R.S. §12-1241, which provides that the court “may appoint a receiver to protect and preserve property or the rights of parties therein, even if the action includes no other claim for relief.”  Both this rule and statute remain in force and effect.

A plain reading of A.R.S. § 12-1241 requires that a party seeking appointment of a receiver to demonstrate either a need to protect and preserve property or the rights of parties therein.  Gravel Resources of Arizona v. Hills, 217 Ariz. 33, 37, 11, 170 P.3d, 282, 286 (App. 2007) (“The statute simply requires the trial court to determine that the property or the rights of the parties need protection.”); see also Gordon v. Washington, 295 U.S. 30, 39, 55 S. Ct. 584, 79 L.Ed. 1282 (1935) (“[R]eceivership … should be resorted to only on a plain showing of some threatened loss or injury to the property, which the receivership would avoid.”).

In Gravel, the Court of Appeals reviewed the trial court’s appointment of a receiver based on a finding that co-partners in a partnership had “diametrically opposed interests” in the dissolution and winding up of the partnership’s affairs.  Id. at 13.  The Court affirmed the trial court’s determination that “such opposing interests were unmanageable, thereby requiring a receiver to wind down the partnership’s affairs.”  Id. 

Although Arizona courts have not expressed an opinion on the issue, courts within other jurisdictions have appointed receivers in circumstances where there is a risk that the defendant will transfer assets to the detriment of the interests of creditors even where the moving party did not hold a judgment or lien upon the proposed receivership property.  See, e.g., Brown v. Cuba-American Jockey & Auto Club, 2 F.2d 612 (S.D. Fla. 1924) (Simple contract creditor of insolvent corporation may sue for appointment of receiver.); Emmett State Bank v. Emmett Farmers’ Union Co-op. Elevator & Mercantile Co., 116 Kan. 550, 227 P. 257 (1924) (Appointment of a receiver in an action on notes where a verified application therefor alleged that defendant was insolvent and that there was imminent danger of plaintiff’s claim being lost “was proper to preserve the assets of the defendant for the benefit of all the creditors.”); Hurley v. Boston R. Holding Co., 315 Mass. 591, 54 N.E.2d 183 (1944) (A receiver may be appointed for a corporation on petition of a simple contract creditor to prevent waste and loss of property which should be available for payment of debts and which cannot otherwise be satisfactorily conserved.); and In re Mader’s Store for Men, Inc., 77 Wis. 2d 578, 254 N.W.2d 171 (1977) (Appointment of receiver at the instance of a simple contract creditor upheld, recognizing a potential need for immediate action to prevent dissipation of assets of insolvent corporate debtor.)

Furthermore, district courts have broad discretion in appointing a receiver and may consider a host of relevant factors, none of which is dispositive:

[F]ederal courts consider a variety of factors in making this determination, including, for example: (1) “whether [the party] seeking the appointment has a valid claim”; (2) “whether there is fraudulent conduct or the probability of fraudulent conduct,” by the defendant; (3) whether the property is in imminent danger of “being lost, concealed, injured, diminished in value, or squandered”; (4) whether legal remedies are inadequate; (5) whether the harm to plaintiff by denial of the appointment would outweigh injury to the party opposing appointment; (6) “the plaintiff’s probable success in the action and the possibility of irreparable injury to plaintiff’s interest in the property”; and, (7) “whether [the] plaintiff’s interests sought to be protected will in fact be well-served by receivership.”

Canada Life Assur. Co. v. LaPeter, 563 F.3d 837, 845 (9th Cir. 2009) (citing Moore’s Federal Practice, § 66.07[3] (3d ed. 2008); and New York Life Ins. Co., 755 F.Supp. 287, 292 (E.D. Cal. 1991)).

None of these authorities have been abrogated by the new Arizona Receivership Statute, A.R.S. §33-2601, et seq.  This means that A.R.S. §12-1241 & 12-1242, Rule 66 and applicable case law should be consulted by and guide lawyers, other practitioners and parties in future Arizona receivership proceedings even on matters proceedings under the new law.  However, the new statute provides detailed direction for receiverships of entities which own a specific type of asset: commercial real property.

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