May 2, 2014

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The Limits to a Receiver's Liability – Mashni v. Foster, No. 1 CA-SA 13-0250 (4-29-2014)

On April 29, 2014, the Arizona Court of Appeals, Division 1, issued a ruling granting relief in favor of a receiver, and thereby strengthening a receiver's security by limiting his responsibilities and liabilities as follows:

In Mashni v. Foster, builder Sunnyslope Housing Limited Partnership ("Sunnyslope") built an apartment complex with the intention of operating it as a low-income housing project for tax purposes allegedly worth millions of dollars. Upon completing construction, Sunnyslope defaulted on one of its loans which had been guaranteed by the federal government. Upon Sunnyslope's default, the federal government satisfied its guaranty obligations and sold the debt to First Southern National Bank (the "Bank"), which moved the Superior Court to appoint Paul Mashni as receiver of the apartment complex.

Sunnyslope did not contest the receivership and in October of 2010, the Superior Court entered an order appointing Mashni as receiver (the "Receivership Order"), to run the complex. Although Mashni was aware of the covenants requiring that the apartments be rented to low-income tenants, Mashni rented to regular tenants at market rates. Sunnyslope was aware that Mashni was not in compliance with the low-income housing covenants, which posed a threat to Sunnyslope's anticipated tax benefits. However, Sunnyslope remained silent and did not object to Mashni's actions until Mashni moved to discharge the receivership, exonerate the receiver's bond, and request payment of various receivership expenses. The Superior Court denied Mashni's motion to exonerate the receiver's 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." Sunnyslope objected on the basis that Mashni had jeopardized its tax benefit eligibility "by failing to operate the apartment complex in compliance with the low-income housing covenants."

Mashni responded by requesting a special action with the Court of Appeals, arguing that he was immune from suit for alleged mismanagement of the receivership. The Court of Appeals accepted jurisdiction and granted Mashni relief, holding, among other things, that "personal liability of a receiver arises . . . from his or her wrongful acts not within the scope of his or her authority as determined by the statutes and orders and directions of the court . . ." (Emphasis added). In addition the Court of Appeals further held that a receiver, which is a ministerial officer, is not an agent of any party but instead, his duty is to the court and its orders. As to the parties he is neutral, and when parties' interests are adverse (i.e., Sunnyslope wanted the benefit of its tax credits derived from low-income apartment rates while the Bank wanted the complex to profit by charging market rates), "it is simply impossible to hold a receiver to a fiduciary duty to advance the private interests of all."

Because the Superior Court did not, in fact, find that Mashni acted outside the scope of the Receivership Order, which omitted any reference regarding the low-incoming housing covenants, the Court of Appeals held that Mashni had the authority to reject contracts under the Receivership Order, which is what the Court of Appeals deemed the low-income covenants to be.

While Mashni v. Foster emphasizes how critical it is for a receiver to understand and act within the scope of the Court's order appointing the receiver, it is noteworthy that this case also places a greater burden upon interested parties to assert any concerns with respect to a receiver's actions or omissions which is also favorable to receivers. Specifically, the Court of Appeals held that "[w]hen 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."

In sum, Mashni v. Foster is a case that confirms that a receiver enjoys judicial immunity, cannot be sued without the appointing Court's permission, and can only be subjected to liability if the receiver's deviates from the order.

Opinions expressed in this Client Alert are those of the author and do not constitute legal advice regarding any specific matter or situation. Legal advice can be given, and an attorney-client relationship can be formed, only on the basis of specific facts discussed between client and attorney pursuant to an engagement to perform legal services.

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