Mashni v. Foster

IN THE

ARIZONA COURT OF APPEALS

DIVISION ONE

PAUL MASHNI, Court-appointed receiver, Petitioner,

v.

THE HONORABLE GEORGE H. FOSTER, Judge of the SUPERIOR

COURT OF THE STATE OF ARIZONA, in and for the County of

MARICOPA, Respondent Judge,

SUNNYSLOPE HOUSING LIMITED PARTNERSHIP, an Arizona limited

partnership; FIRST SOUTHERN NATIONAL BANK, Real Parties in

Interest.

No. 1 CA-SA 13-0250

FILED 4-29-2014

Petition for Special Action from the Superior Court in Maricopa County

No. CV2010-028618

The Honorable George H. Foster, Judge

JURISDICTION ACCEPTED; RELIEF GRANTED

COUNSEL

Quarles & Brady LLP, Phoenix

By John M. O’Neal, Walter J. Ashbrook

Counsel for Petitioner

Lewis Roca Rothgerber LLP, Phoenix

By Susan M. Freeman, Eric Wanner

Counsel for Real Party in Interest Sunnyslope Housing Limited Partnership

Gallagher & Kennedy, P.A., Phoenix

By John R. Clemency, Janel M. Glynn

Counsel for Real Party in Interest First Southern National Bank

OPINION

Presiding Judge Peter B. Swann delivered the opinion of the Court, in

which Judge Maurice Portley and Judge Samuel A. Thumma joined.

S W A N N, Judge:

¶1 This case requires us to examine the limits of the immunity

afforded to court-appointed receivers.

¶2 Receiver Paul Mashni petitions for special action relief from

the superior court’s ruling denying him immunity from suit for alleged

mismanagement of receivership assets. The court’s order permitting the

damage action against Mashni to proceed was not based upon a finding

that he had exceeded his powers under the order of appointment, but

rather on the theory that a receiver can face liability if actions taken

pursuant to the order cause a “material detriment” to any “interested

party.” We accept jurisdiction and grant relief. We hold that a court-

appointed receiver is immune from suit unless the appointing court finds

that the receiver has acted outside the scope of the order of appointment.

We further hold that the court cannot charge a receiver with a fiduciary

duty to maximize economic benefit for adverse parties simultaneously.

Finally, we hold that a party aggrieved by a receiver’s actions must

promptly inform the court and seek its intervention before bringing an

action for damages.

FACTS AND PROCEDURAL HISTORY

¶3 Since 2005, Sunnyslope Housing Limited Partnership

(“Sunnyslope”) has been involved in the construction and operation of an

apartment complex in Phoenix. Sunnyslope financed the construction

with a senior private loan, guaranteed by the federal government and

secured by a deed of trust on the apartment complex, and two junior loans

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Opinion of the Court

from the Arizona Department of Housing and the City of Phoenix,

respectively. Sunnyslope intended to operate the apartment complex as a

low-income-housing project to qualify for the Low Income Housing Tax

Credit (“LIHTC”) program. See I.R.C. § 42. This investment strategy was

purportedly worth several million dollars. Partly to ensure continued

LIHTC eligibility, Sunnyslope and the junior lenders agreed to and

recorded covenants requiring the entire apartment complex to be leased to

low-income households. The covenants were expressly subordinated to

the senior private loan, but “binding upon the Owner’s successors in title

and all subsequent owners and operators.” Under the agreement, the

covenants were to automatically terminate in the event of foreclosure.

¶4 Sunnyslope defaulted on the senior loan after completing

construction. The federal government fulfilled its loan guarantee

obligation and sold the senior debt to First Southern National Bank (“First

Southern”), which shortly thereafter filed a motion to appoint Mashni as

receiver of the apartment complex. Before the hearing on the motion,

Sunnyslope e-mailed First Southern’s counsel to confirm that it “agree[d]

to a stipulated receivership per the proposed order appointing the

receiver.” Sunnyslope did not appear at the appointment hearing, and at

no point sought to amend the appointment order or change the bond

amount.

¶5 The superior court appointed Mashni as receiver in October

2010. The appointment order authorized Mashni to, among other tasks:

“enter into, modify and/or reject contracts affecting any party or the

Property and to exercise rights existing under such contracts, including

but not limited to filing suit thereon, and/or evicting tenants from the

Property”; “market and rent, as [he] believe[d was] in the best interests of

the Receivership Estate”; and “use such measures, legal or equitable, as

[he], in consultation with and with the consent of [First Southern],

deem[ed] appropriate, desirable, [or] necessary . . . to implement and

effectuate the provisions of the Loan Documents [relating to the senior

loan].” The order defined in great detail the property that Mashni took

possession of, but excluded any reference to the low-income-housing

covenants or related tax credits.

¶6 Mashni knew that Sunnyslope had operated the apartment

complex as low-income housing before the receivership appointment, but

he began to lease the apartments at market rates almost immediately after

his appointment. Mashni later testified that he understood the

appointment order authorized him to stop operating the apartment

complex as low-income housing:

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Opinion of the Court

I knew it was low income housing, but I knew it had

also failed as low income housing so one of the stipulations

that we made to even be considered to be the receiver was

we had to have the ability to run it as a market rate

property. . . . [I d]idn’t have an agreement with anybody

except for the fact that when I was asked to be the Receiver I

made sure that the receivership order allowed me to run it

as a market property.

¶7 Sunnyslope initially learned of Mashni’s noncompliance

with the low-income-housing covenants when he filed his first

receivership report in December 2010, approximately two months after his

uncontested appointment. Days after receiving the report, Sunnyslope

contacted Mashni’s counsel to confirm whether Mashni was disregarding

the covenants. His counsel replied that “[a]ll new leases [were] being

completed at market rates on conventional leases.”

¶8 Mashni had scheduled a foreclosure sale of the apartment

complex for February 1, 2011, but it never took place because Sunnyslope

sought Chapter 11 bankruptcy reorganization the day before. Sunnyslope

commenced the bankruptcy to prevent the foreclosure, which would have

automatically terminated the covenants meant to preserve LIHTC

eligibility. Mashni remained in possession of the apartment complex

while the bankruptcy case was pending, and in May 2011 the bankruptcy

court ruled that Mashni had to comply with the low-income-housing

covenants. The following month Mashni relinquished possession to

Sunnyslope’s designee and began winding up the receivership estate.

¶9 At the end of 2011, the bankruptcy court vacated the

automatic stay to permit Mashni to move for discharge of the receivership.

The bankruptcy court ordered Mashni to obtain from the superior court

“such other determinations as may be necessary to wind up the

receivership, including, without limitation, findings of fact confirming

whether [he] acted at all times during the Receivership Action in

accordance with, and within the scope of, the Receivership Order.” It

further ordered that “[a]ny claims the Debtor may assert against the

Receiver . . . shall be raised by the Debtor in connection with the Wind-Up

Proceedings in the Superior Court.”

¶10 Accordingly, Mashni moved the superior court to discharge

the receivership, exonerate the receiver’s bond, and approve payment of

various receivership expenses. Sunnyslope objected, primarily on

grounds that Mashni had jeopardized its LIHTC eligibility by failing to

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operate the apartment complex in compliance with the low-income-

housing covenants. Sunnyslope further alleged that Mashni had

improperly settled an insurance claim, and that he had improperly used

receivership funds to pay for the preparation of the foreclosure sale.

Before the matter proceeded to oral argument, Sunnyslope also filed a

third-party complaint against Mashni raising similar allegations.

¶11 The superior court eventually dismissed Sunnyslope’s third-

party complaint, reasoning that

[t]he order appointing the Receiver in this case is very broad.

Nothing requires him to maintain any of the tax credits. It is

argued that the Receiver elected not to continue seeking

such credits in an effort to rent the units in the complex as a

means to make it viable. The complex, it is alleged, had

fallen into disrepair and resources were needed to operate it

properly. The Defendant has not submitted any facts or

submitted any authority that compels the Receiver to

continue with the Section 8 program in the event the

Receiver decides that in his business judgment that program

need not be continued. . . . [Moreover,] the Defendant failed

at any time to come in seeking any form of protection or

relief until the Receiver sought to be released and his bond

exonerated. Suffice it to say that the Court is not persuaded

that the Receiver has any personal liability and that any

liability extends beyond the amount of the bond.

¶12 The court then found that Sunnyslope was entitled to a

hearing on Mashni’s motion to exonerate the receiver’s bond and allowed

limited discovery. At the bond-exoneration hearing, Mashni argued that

the court’s earlier ruling confirmed his immunity from suit. The court

responded:

[Y]ou read this order too broadly. This Court never ruled

that as a matter of law it finds that the Receiver has

immunity. That is not in this order. . . . [W]hether or not the

Receiver is going to be immune is a question of fact for the

Court to decide in consideration of the facts. And we never

had any evidence taken as to what happened.

....

The purpose of [this] hearing . . . is to find out

whether the Receiver complied with the order appointing

him, whether the Receiver properly discharged those duties

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or not. And if he didn’t, then the matter . . . of his

receivership should not be discharged . . . .

Ultimately, the court found that “sufficient evidence exist[ed] to make a

prima facie case against the Receiver” and denied Mashni’s motion. In

relevant part, the minute entry provides:

While the order appointing the Receiver allows him

to reject certain agreements, he has another responsibility,

which is to protect the rights of . . . all the parties to the

transaction, including the Defendant. Thus, if rejecting a

contract results in a material detriment to the title holder or

any other interested party, then the Receiver may be

culpable. Simply put, just because the order says the

Receiver may reject contracts does not mean he should do

this on whim and caprice, or as in this case, because he had

never operated a project of this type and perhaps did not

know how.

In this case, the Court finds the failure to operate the

property under the affordable housing program and

rejecting the requirements of the various covenants that

attached to the land, compromised the ability of the

Defendant to realize and earn substantial tax credits that

could be worth over millions of dollars. . . . Nothing in this

decision should be taken, however, to establish as a matter

of law a breach of fiduciary duty. Rather, the Court finds

there is sufficient evidence in the record that the Receiver

did not faithfully discharge his duties taking into account

the requirements of the law such that this Court finds he is

not immune. A trier of fact will have to determine causation

and the actual damages, if any, that have been suffered by

the Defendant.

Neither the minute entry nor the hearing transcript contains a finding by

the court that Mashni violated the order of appointment. The court

allowed Sunnyslope to file a new third-party complaint against Mashni,

and this special action followed.

DISCUSSION

¶13 Mashni contends that the superior court abused its

discretion by denying him immunity from suit for alleged

mismanagement of the receivership. We agree.

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¶14 We accept jurisdiction over this special action because when

one is erroneously forced to stand trial, he has lost the benefit of

immunity, even if he is found not liable. Henke v. Superior Court (Kessler),

161 Ariz. 96, 99-100, 775 P.2d 1160, 1163-64 (App. 1989). “Consequently, a

defendant who asserts an immunity has no adequate remedy at law by

direct appeal after trial.” Salt River Valley Water Users’ Ass’n v. Superior

Court (Shoemaker), 178 Ariz. 70, 73, 870 P.2d 1166, 1169 (App. 1993).

¶15 Under Ariz. R. Civ. P. 66 and A.R.S. § 12-1241, a court may

appoint a receiver as an equitable remedy to protect property subject to

pending litigation. The appointing court determines the receiver’s

authority, Sawyer v. Ellis, 37 Ariz. 443, 448, 295 P. 322, 324 (1931), and

allows the receiver to “share[ ] the judge’s judicial immunity” so long as

the receiver acts within the scope of the appointment order, Kohlrautz v.

Oilmen Participation Corp., 441 F.3d 827, 836 (9th Cir. 2006) (quoting Anes v.

Crown P’ship, 932 P.2d 1067, 1071 (Nev. 1997)). Logically, it follows that “a

receiver may be personally liable if he or she acts outside the authority

granted by the court.” Id. (quoting Anes, 932 P.2d at 1071); see also 65 Am.

Jur. 2d Receivers § 295 (2014) (“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 under which he or she acts or omits to act.”).

¶16 This authority provides that a receiver is immune from suit

unless the appointing court specifically finds that the receiver has acted

outside the scope of the appointment order. The superior court in this

case misconceived the nature of immunity by subjecting Mashni to review

of his business judgment. No such review was warranted. Like the court

itself, the receiver’s immunity from suit exists by virtue of the context in

which he acts, not the content of his actions. See Haw. Ventures, LLC v.

Otaka, Inc., 164 P.3d 696, 743-44 (Haw. 2007) (holding that a court-

appointed receiver is entitled to absolute immunity when acting within

the scope of and in accordance with the appointment order, even for

“negligent violations of duties imposed upon her by law”); B.K. v. Cox, 116

S.W.3d 351, 357 (Tex. App. 2003) (“Generally, once an individual is

cloaked with derived judicial immunity because of a particular function

being performed for a court, every action taken with regard to that

function—whether good or bad, honest or dishonest, well-intentioned or

not—is immune from suit.”).

¶17 Whether a receiver has acted within the scope of the

appointment order is a question of fact. See Kohlrautz, 441 F.3d at 830. In

this case, the broadly written appointment order authorized Mashni to

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“reject contracts affecting any party or the Property.” The low-income-

housing covenants involved in this case are contractual obligations. See

Pinetop Lakes Ass’n v. Hatch, 135 Ariz. 196, 198, 659 P.2d 1341, 1343 (App.

1983) (“[A] grantee who accepts a deed containing restrictive covenants

has entered into a contractual relationship.”). It is generally accepted that

“possession does not obligate a receiver to carry out the executory

contracts of the debtor, and subject to the order of the court, he or she may

have a reasonable time after his or her appointment to elect whether to

adopt any such contract or reject it.” 65 Am. Jur. 2d Receivers § 164; see also

D.R. Mertens, Inc. v. State ex rel. Dep’t of Ins., 478 So. 2d 1132, 1134 (Fla.

Dist. Ct. App. 1985) (“[T]he law is clear that there can be no breach,

anticipatory or otherwise, of an executory contract by a receiver unless the

receiver specifically elected to be bound thereby.”); Anes, 932 P.2d at 1069

(“As a general rule, state law allows receivers to reject, within a reasonable

time, outstanding executory contracts of the owner of the estate which is

being administered.”). And a plain reading of Mashni’s appointment

order authorized him to reject the low-income-housing covenants

immediately upon taking possession as receiver of the apartment

complex. Moreover, the appointment order directed Mashni to “market

and rent, as [he] believe[d was] in the best interest of the Receivership

Estate,” and to “use such measures, legal or equitable, as [he] . . . deem[ed]

appropriate, desirable, [or] necessary . . . to implement and effectuate the

provisions of the Loan Documents [relating to the senior loan].” We agree

with the superior court’s statement in its order dismissing the original

third-party complaint that “[n]othing requires him to maintain any of the

tax credits.”

¶18 The superior court never found that Mashni had acted

outside the scope of the appointment order before it stripped him of

immunity. Instead, the court based its decision on a finding that Mashni

had a “responsibility . . . to protect the rights of . . . all the parties to the

transaction, including [Sunnyslope].” But this “responsibility” was

altogether absent from the appointment order, and we can find no logical

basis upon which a receiver can be held to such a duty.

¶19 A receiver is a ministerial officer of the court who acts under

the appointing court’s authority, and not to promote the interest of any

specific party. Sawyer, 37 Ariz. at 448, 295 P. at 324 ; Midway Lumber, Inc. v.

Redman, 4 Ariz. App. 471, 472, 421 P.2d 904, 905 (1967).

Generally speaking, [the receiver] is not an agent of any of

the parties, but is merely a ministerial officer of the court.

He stands in an indifferent attitude, not representing either

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the owners of the insolvent estate or the creditors, but really

representing the court and acting under its direction, for the

benefit of all the parties in interest. The parties to the

litigation have not the least authority over him, nor have

they the right to determine what liability he may or may not

incur; his authority is derived solely from the act of the court

appointing him, and he is the subject of its order only.

Sawyer, 37 Ariz. at 448, 295 P. at 324. Put differently, a receiver’s duty is

fidelity to the court and its orders -- it is not a classic fiduciary duty to any

party. Like the court itself, the receiver is a neutral whose actions may

redound to the benefit of some and the detriment of others. When parties’

interests are adverse, it is simply impossible to hold a receiver to a

fiduciary duty to advance the private interests of all. A receiver may

therefore be liable to interested parties for harm caused by deviation from

the order of appointment, but cannot be liable for actions taken pursuant

to the order that benefit some more than others.

¶20 We further observe that despite ample opportunity to do so,

Sunnyslope never sought to amend the order of appointment to compel

Mashni’s compliance with the low-income-housing covenants. In the

words of the superior court, “[Sunnyslope] failed at any time to come in

seeking any form of protection or relief until the Receiver sought to be

released and his bond exonerated.” 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. See Irwin

v. Pac. Am. Life Ins. Co., 10 Ariz. App. 196, 201, 457 P.2d 736, 741 (1969)

(“Equity aids the vigilant, not those who slumber on their rights.”). Our

holding in this regard is guided by the general rule that a receiver cannot

be sued without permission of the appointing court. Barnette v. Wells

Fargo Nev. Nat’l Bank, 270 U.S. 438, 441 (1926). It is likewise consistent

with the notion that the appointing court “is in the best position to clarify

the scope of its own order and to entertain suggestions that the order be

modified to meet changing circumstances.” S.E.C. v. Lincoln Thrift Ass’n,

557 F.2d 1274, 1280 (9th Cir. 1977).

CONCLUSION

¶21 We vacate the superior court’s ruling denying Mashni

immunity from suit and remand this case for further proceedings

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consistent with this opinion. In the exercise of our discretion, we decline

to address the remaining issues raised in Mashni’s petition for special

action.

¶22 Both parties request attorney’s fees and costs, citing ARCAP

21 and Rule 4(g) of Arizona Rules of Procedure for Special Actions.

However, neither ARCAP 21 nor Rule 4(g) provides a substantive basis

for a fee award. See Ezell v. Quon, 224 Ariz. 532, 539, ¶ 31, 233 P.3d 645,

652 (App. 2010); State v. Shipman, 208 Ariz. 474, 476, ¶ 7, 94 P.3d 1169, 1171

(App. 2004). Mashni also cites the appointment order, which grants him

authority to hire counsel “necessary to assist [him] in the discharge of [his]

duties.” But the order also requires Mashni to obtain court approval for

receiver’s fees and administrative expenses. In the exercise of our

discretion, we therefore deny both parties’ requests for attorney’s fees in

this special action.

:MJT

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