Receiverships Arbitrations
| Publication year | 2022 |
| Pages | 18 |
THE CIVIL LITIGATOR
JACK TANNER
This article discusses how and why receiverships and arbitrations are used in litigation and considers the potential benefits and obstacles to merging the two proceedings.
An old brainteaser from childhood asks: “What happens when an unstoppable force meets an immovable object?” Te playground response was “an explosion,” but the correct answer was that the question is flawed. If an unstoppable force exists, then by definition an object it meets cannot be immovable (and vice versa).
In the law, arbitration tends to be an unstoppable force. Courts are supposed to affirm arbitration awards, even if known to be contrary to law, absent a scant handful of statutory exceptions. Receiverships appear to be the immovable objects—only the court that appointed a receiver can instruct it what to do; other courts must not interfere. So, the new question is: Can receiverships and arbitrations effectively meet and coexist in the same matter?
Receiverships and arbitrations are fundamentally different proceedings, each having good reasons for its respective attributes. Trying to merge the two would be difficult (and perhaps impossible). If it can be done successfully, the combined result could provide a powerful and useful remedy. However, if and how it can be done remain open questions under Colorado law.
This article considers several issues that might arise when a situation calls for a receivership or an arbitration, or perhaps both. It is primarily intended for creative litigators who seek elegant and unusual solutions to problems that may not ft in the usual “round hole” of plaintiff versus defendant litigation.
A Brief History of Receiverships
First, a note on terminology: The term “receiver” is used in many ways. Numerous statutes create and give various powers and duties to quasi-judicial officers called “receivers.” This article is not about them. Rather, it is about true equity receiverships—where a court of equity takes certain assets under its supervision and appoints a receiver to preserve the assets on behalf of the court, generally until the assets can be sold or the underlying litigation is resolved. “Preservation” can include not only operation, but also expansion. Appointing a receiver is inherently within the powers of a court that sits in equity.[1]
In essence, when a court appoints a receiver, it creates an estate (which can be specific assets, an entire company, or almost anything else). Those assets become a res that is in custodialegis (“in the custody of the law”). Te res is under the exclusive control of the receiver, as supervised by the appointing court. As part of the appointment, the entire world is effectively enjoined from interfering with the receiver or the res except via proper motions fled in the appointing court.
Receiverships are court-created remedies. Te first receiverships began in England in the late 1600s.[2] At that time, creditors’ rights law allowed creditors to hold a ship in port if a debt was attached to the ship or its owner. But a ship in port did nobody any good, so the English Chancery created a “receiver.” A receiver was a court officer who would board the ship as it left port, “receive” (and thus control) the money the ship earned in commerce, pay the receiver and the ship’s crew, and then turn the excess funds back to the court to pay down the debt. Tat way, the creditor was protected, the debt could be repaid, and commerce could continue (which was good for both the economy and the Crown, since it taxed the commerce).
Over time, receivers began to be appointed over other res beyond ships—notably entire companies or certain assets that had been pledged as collateral.
Modern Receivership Practice
Today, receiverships are not limited to ships, and the res can be a company, pledged assets, a trust, a marital estate, or many other things. Most commercial deeds of trust provide for appointment of a receiver (often ex parte) in the event of default. Te flexibility of the provisional remedy of a receivership is limited only by the creativity of the counsel and judge involved. Almost any asset can be put into a receivership, allowing the court to supervise the res while it sorts out the underlying dispute.
Receivership courts routinely resolve disputes affecting the res on summary procedures that would otherwise require plenary attention of a court.[3] In a receivership, a claimant with a claim against the res has a right to notice and an opportunity to be heard, but not a right to all the procedures set out in the Federal Judicial Center’s 800-page Manual for Complex Litigation.[4] A large receivership may resolve thousands of disputed claims in summary fashion. Tis greatly reduces the burden on the court system as a whole, but likely increases it for the specific receivership court. One responsibility that comes from all this power is that receiverships must have substantial transparency to satisfy the constitutional requirement of due process.
An equity receivership is necessarily an interim remedy.[5] Because a receiver is a neutral officer of its appointing court, there must be an ongoing court proceeding for a receiver to exist. Once the case is over, a receiver is necessarily discharged.[6]
A Brief History of Arbitrations
In complete contrast to the judicially created remedy of receiverships, arbitrations were not created by courts and indeed cannot be created by courts. An arbitration’s sole purpose is to resolve a dispute outside the court system.
Originally, arbitrations were used by nations to negotiate disputes where neither nation had complete jurisdiction.
In the last century, arbitrations began to be used in commercial disputes. In 1921, the Colorado legislature passed an act recognizing the validity of arbitrations. Tis law has been amended several times and is now codified as the Colorado Uniform Arbitration Act (the Act).[7] Generally, arbitration is a contractually created process, and only parties to the arbitration contract can be compelled to arbitrate.[8]
Modern Arbitration Practice
Currently under the Act, parties can agree to any form of arbitration rules. The largest arbitration organization in the United States is the American Arbitration Association (AAA), and its Commercial Rules provide that an agreement to arbitrate is “not incompatible” with a court entering interim remedies.[9] While this certainly invites injunctions to preserve the status quo pending arbitration, it could also be interpreted to allow receiverships.
Significantly, many parties seek arbitration because they desire confidentiality. Arbitrations are generally conducted completely confidentially, and only the final award is presented to a court for affirmance (if even that is necessary). In most cases, the court must affirm an arbitration award even if it is contrary to law.[10] Te handful of exceptions to this rule generally turn on arbitrator bias.[11]
There is, however, a lesser-used aspect of the Act—under Section 208 of the Act,[12] courts have the authority to enforce an arbitrator’s provisional order. In theory, this could include the provisional remedy of appointment of receiver.
The Interaction of Arbitration and Receivership Law
Not much law exists on the interaction of receiverships and arbitrations (perhaps because they are so fundamentally different). One of the few Colorado cases that...
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