by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; RECEIVERS: Receiver is immune from liability for mismanagement except for "bad faith" decisions, even when receiver exercises broad discretion.

Resolution Trust Corp. v. Venus Plaza Assoc., 1998 WL 85292 (Mich.App. 2/27/98).

Court appointed a receiver to manage a shopping center during mortgage default. Under the terms of the court's order, the receiver was to use "best efforts" to manage the property in a "first class manner." The receivership continued for two years, during which the receiver filed monthly reports with the court. Then the receivership was cancelled and the debtor sought leave to sue the receiver for mismanagement.

The debtor alleged that the receiver had not performed his duties as set forth in the court order (general as they were.) The court denied leave to sue the receiver, holding that the receiver was immune from claims except those based upon bad faith.

On appeal, held: Affirmed. The Michigan Court of Appeals agreed that existing Michigan authority, dating from the 1930's required that the receiver's liability be limited to bad faith.

Quoting from an 1898 case, the court emphasized that "a receiver is an officer of the court. . . whatever he does is done under the direction of the court . . . active receivers . . . to be successful, must possess large executive ability, and must be clothed with considerable discretion. He may do such things, in the ordinary course of business, as to him, in good faith, seem necessary to render the business . . . profitable and successful."

Comment 1: Ultimately, the Court of Appeals uses the term "business judgment," and, indeed, it appears to be describing the "business judgment rule" - the same test applied to corporate directors. Arguably, there is a difference between the circumstances of a receivership and a corporate board. The affected parties do not choose the receiver, and their abilities to terminate the receiver are somewhat limited. Consequently, they have fewer weapons to protect themselves from the receiver's malpractice.

Comment 2: Cases dating from 1898 and the 1930's may not reflect current concepts with regard to risk distribution through insurance. If the receiver were required to obtain E&O insurance, funded from revenues of the enterprise under management, why shouldn't this insurance be available in the event of receivership malfeasance? Is it possible that parties affected by a receivership could ask the court to stipulate that such insurance be required and that liability be available for malpractice but limited to the policy amounts? The editor is naive enough about insurance law so as to propose this, but understands just enough to expect that there might be some limitations on the abilities of the parties to limit their claims only to the insurance.

Comment 3: The editor's proposal above would be implemented only with court approval. In general, unless such a proposal were pursued, the editor sees little choice other than to grant a receiver wide discretion to manage the properties in good faith without fear of liability from parties who clearly have interests hostile to the receiver's management and are likely to be critical of many of the receiver's decisions.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org