Opinion
No. C2-97-1997.
Filed May 19, 1998.
Appeal from the District Court, Ramsey County, File No. C3978002.
David J. Schoenecker, (for respondent).
Alan Weinblatt, Kathleen A. Gaylord, Weinblatt Associates, (for appellant).
Considered and decided by Crippen, Presiding Judge, Lansing, Judge, and Peterson, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1996).
UNPUBLISHED OPINION
Appellant argues that the district court abused its discretion in (1) appointing a receiver pendente lite to manage and operate a business partnership jointly owned by appellant and respondent's conservatee and (2) failing to require respondent, as applicant for a receiver, to post an indemnity bond. We affirm in part, reverse in part, and remand.
FACTS
Appellant David Beaudet and Mary Lou Whirley jointly own a real estate partnership. The partnership assets include 30 residential real estate rental properties, two vacant lots in St. Paul, and an undetermined number of time-share units in Cancun, Mexico. Beaudet and Mary Lou Whirley also were involved in a personal relationship that ended in May 1997. After the personal relationship ended, Beaudet assumed sole responsibility for managing the real estate partnership.
Respondent Bradley Whirley was appointed conservator of his mother, Mary Lou Whirley, in July 1997. Respondent alleges that in performing his conservatorship duties, he discovered financial discrepancies and missing information in the partnership records that showed a pattern of deceit and an intent by Beaudet to deprive Mary Lou Whirley of her interest in the partnership income and profits. Respondent began this action against Beaudet, alleging claims of breach of contract, breach of fiduciary duty, unjust enrichment, and fraud. Respondent also sought an accounting, dissolution of the partnership, and partition of jointly-owned real estate.
On September 3, 1997, respondent filed a motion to appoint a receiver to manage the partnership and also requested a temporary restraining order. That same day, the district court denied the request for a temporary restraining order. In denying the request for a temporary restraining order, the district court found that respondent had failed to establish irreparable harm and that his likelihood of prevailing on the merits was questionable.
On September 19, 1997, the district court conducted a hearing on the motion to appoint a receiver. By order and amended order, the district court granted the motion to appoint a receiver and appointed Sternfels and Company to manage and operate the partnership.
After the district court appointed Sternfels Company receiver, Beaudet submitted a letter to the court requesting a hearing on the amount and conditions of a receiver's bond and an applicant's bond. The district court found that Beaudet had a full and fair opportunity during the September 19, 1997, hearing and during an October 3, 1997, teleconference to discuss the amount and conditions of a receiver's bond. The court denied Beaudet's request for a hearing. The court did not require respondent, as the applicant for a receiver, to post an indemnity bond, but did require Sternfels Company to provide a bond in the amount of the rents receivable each month, $37,655.
This appeal is from the order and amended order appointing the receiver and from the order setting the amount and conditions of the receiver's bond.
DECISION
I.
"The appointment of a receiver pendente lite is an equitable remedy, to be granted or denied in the exercise of a court's discretion." Brown v. Muetzel , 358 N.W.2d 725, 728 (Minn.App. 1984). On appeal from an order appointing a receiver, the evidence must be viewed in the light most favorable to the prevailing party. Bliss v. Griswold , 222 Minn. 494, 502-03, 25 N.W.2d 302, 307-08 (1946). But a court must act "with great caution in granting an application for a receiver to take possession of property pendente lite." Straus v. Straus , 254 Minn. 234, 240, 94 N.W.2d 679, 683 (1959). An application "will not be granted in a doubtful case." Id.
An applicant for a receiver must prove by clear and convincing evidence that summary relief is necessary or that there is imminent danger of loss and no adequate remedy at law. Id. , 94 N.W.2d at 683-84. Relying on Brown , Beaudet argues that to prove imminent danger of loss and no adequate remedy at law, the applicant must show that (1) the person in possession of the property is insolvent, (2) the person in possession is committing waste, and (3) the value of the property is inadequate to secure the debt. 358 N.W.2d at 728 (citing Mutual Benefit Life Ins. Co. v. Frantz Klodt Son, Inc. , 306 Minn. 244, 246, 237 N.W.2d 350, 352 (1975)). Respondent did not present evidence of insolvency or waste.
Respondent argues, however, that Minnesota courts have not applied the Mutual Benefit elements in all receivership cases. In Bliss , 222 Minn. at 502-03, 25 N.W.2d at 307-08, the supreme court upheld the appointment of a receiver to operate a partnership when evidence of specific instances of fraud, deceit, and misappropriation of partnership assets established that the plaintiff, one of the partners, was in imminent danger of serious loss and injury. The opinion does not indicate that the defendant was insolvent or that waste had been committed. See also Schmid v. Ballard , 175 Minn. 138, 142-43, 220 N.W. 423, 424-25 (1928) (affirming appointment of receiver upon application by minority shareholders who presented evidence that corporate officers had committed fraud but did not make showing of insolvency); Minnesota Hotel Co., Inc. v. Rosa Dev. Co. , 495 N.W.2d 888, 892 (Minn.App. 1993) ( Mutual Benefit elements not applicable when parties contractually agreed otherwise).
Here, as in Bliss , there is evidence that Beaudet committed fraud, deceit, and misappropriation of partnership assets. Specifically, respondent presented evidence that Beaudet (1) provided him with incomplete and altered financial information; (2) failed to account fully for partnership income; (3) falsified records regarding the occupancy of rental properties and the amount of rent paid to the partnership; (4) wrongfully diverted money from partnership accounts; (5) improperly placed time-share reservation contracts solely in his name to enable him to receive the money from the contracts without disclosing it to Mary Lou Whirley; and (6) engaged in dishonest business practices, including accepting application fees for units that had already been rented, falsely using an employee's name on invoices, and overcharging tenants for utilities and damage to rental units.
There is also evidence that the partnership receives about $37,655 per month in rent payments. Because rent payments received each month could be diverted from partnership accounts, as allegedly occurred with partnership income in the past, respondent proved that there is imminent danger of loss.
Beaudet argues that respondent has an adequate remedy at law for any losses of partnership income or profits because the value of real estate owned by the partnership is sufficient to cover any damages that could be awarded in this lawsuit. Beaudet states that the value of the real estate is between $1 and $2 million and that presumably he and Mary Lou Whirley are each entitled to 50% of the value. Using the lower estimate, $500,000 would be available for damages.
There is evidence that Beaudet failed to account for about $175,000 in income received by the partnership from January through June 1997, the partnership's bank account for the residential rental properties contained $47,000 less than the amount the partnership held in tenant security deposits, and Beaudet transferred $55,000 from the partnership account for the time-share properties to his personal account. There is also evidence that Beaudet overcharged tenants for rent, utilities, and other services, but the evidence does not indicate the value of these services.
Because the evidence indicates that the total value of the damages that have allegedly already occurred is less than $300,000 and the value of Beaudet's interest in the partnership is at least $500,000, respondent has an adequate remedy at law for income losses that may already have occurred. However, because the partnership receives about $37,655 per month in rental payments, which could be diverted from partnership accounts, each month's rent payments create the possibility of additional losses. If additional losses occur for several months, it is possible that total losses will exceed the value of the real estate owned by the partnership, and respondent will not have an adequate remedy at law. We, therefore, conclude that the evidence demonstrates that there is imminent danger of loss for which there would be no adequate remedy at law. Under Bliss , the district court did not abuse its discretion in appointing a receiver.
Beaudet argues that under Bliss , as an alternative to a full receivership, the court must provide for a limited receivership upon the posting of a bond. In Bliss , the court appointed a receiver "with the usual powers" over all of the partnership assets and property. 222 Minn. at 500, 25 N.W.2d at 306. The court's order contained an alternative provision that the receivership would be limited only to the books and records of the partnership and the taking of an inventory if defendants would furnish a bond conditioned to pay all amounts that might be found to be due plaintiff upon the accounting sought in the principal action. The bond was to be furnished within 24 hours after service of the alternative order.
The amount of the bond was $250,000. Id.
The defendants furnished the bond and the receivership affirmed by the supreme court was the alternative, limited receivership. It is unclear whether the Bliss court would have affirmed the receivership if the district court had not allowed the limited receivership alternative. Given the fact that the law disfavors receiverships, Bliss can be construed as requiring a limited receivership alternative when it would adequately protect plaintiff's interests. Cf. Asleson v. Allison , 188 Minn. 496, 499-500, 247 N.W. 579, 580 (1933) (appointing "a receiver is a very drastic proceeding, `usually absorbing the greater part of the estate'"; it "is `harsh, severe, drastic, heroic, and costly'"); Albrecht v. Diamon , 125 Minn. 283, 286, 146 N.W. 1101, 1102 (1914) (receiver cannot be appointed in a partnership dissolution action unless necessary to protect the property or the interests of the parties).
In granting the motion to appoint a receiver, the district court explained:
[respondent] has proved by clear and convincing evidence that Mary Lou Whirley has an apparent right to the property in question, which is in * * * Beaudet's possession, and the property, or its rent and profits, are in danger of loss or material impairment. Specifically, there are rents receivable for the partnership of approximately $37,655.00 per month and security deposits totaling approximately $50,000, which Beaudet has retained and not fully accounted for.
Although this explanation refers to the property being in danger of loss or material impairment, it also indicates that the specific danger of loss is limited to a loss of rent and security deposit income. The evidence does not indicate that there is any danger of losing any of the real estate owned by the partnership. Only four of the properties are encumbered by mortgages and there is no evidence of a threat of foreclosure. In addition, respondent has filed a notice of lis pendens against the real estate.
We conclude that a general receivership is not necessary to protect the property or the interests of the parties and that, as in Bliss , a limited receivership is sufficient. The district court exceeded its discretion by ordering a receivership pendent lite that removed Beaudet completely from the management of the partnership when allegations of Beaudet's wrongdoing were limited to conduct involving the receipt of income, the payment of expenses, and accounting for transactions. A receiver appointed to receive partnership income, pay partnership expenses, and account for all income and expenses could protect the property and interests of the parties without imposing on the partnership the expense of a general receiver appointed to manage all aspects of the partnership business. We reverse the order appointing a general receiver and remand to permit the district court to appoint a limited receiver, to determine the amount of any receiver's bond, and to determine whether Beaudet should post a bond.
Respondent argues that in a partnership dissolution action, a receiver can be appointed to wind up partnership affairs upon a showing of (1) the existence of the partnership and (2) the facts necessary to vest the court with jurisdiction over the controversy. See Norton v. Sperry , 113 Minn. 447, 129 N.W. 843 (1911) (affirming appointment of receiver to wind up partnership affairs). But see Albrecht , 125 Minn. at 286, 146 N.W. at 1102 (receiver cannot be appointed in a partnership dissolution action unless necessary to protect partnership party or the interests of the parties). Here, unlike Norton , the district court did not direct the receiver to take steps toward winding up the partnership.
Respondent also contends that the appointment of the receiver can be affirmed because Beaudet consented to the appointment in his answer and his amended answer. See Minnesota Hotel , 495 N.W.2d at 892 (statutory requirements for receiver need not be met when parties contractually agree otherwise); Federal Home Loan Mortgage Corp. v. Nazar , 100 B.R. 555, 559 (D.Kan. 1989) (agreement to appoint a receiver was enforceable). But Beaudet only consented to the appointment of a receiver "for the limited purpose of receiving, accounting for and depositing rents collected by * * * Beaudet and verifying the expenditure of funds for business purposes."
Beaudet also argues that the appointment of a receiver was not justified because the district court found that respondent's likelihood of prevailing on the merits was questionable. That finding was in the district court's order denying respondent's motion for a temporary injunction, which was issued the same day respondent filed the motion to appoint a receiver. In the later order granting the motion to appoint a receiver, the district court found that there is clear and convincing evidence that Beaudet has retained and not fully accounted for partnership income. This later finding indicates that after reviewing all of the materials submitted in support of the motion to appoint a receiver and hearing the arguments of counsel, the district court concluded that respondent was likely to prevail on the merits.
Beaudet also objects to the lack of an evidentiary hearing. But case law indicates that motions to appoint a receiver are properly decided without an evidentiary hearing. See, e.g. , Straus , 254 Minn. at 234-38, 94 N.W.2d at 680-82 (discussing allegations in complaint and affidavit evidence); Bliss , 222 Minn. at 496-98, 25 N.W.2d at 304-05 (receiver appointed based on allegations of verified complaint and affidavits).
II.
Beaudet argues that the district court abused its discretion in failing to require respondent, as applicant for a receiver, to post a bond to indemnify Beaudet against damages he will suffer from the wrongful seizure of his property.
There is a distinction between a bond posted by a receiver, which preserves the property the receiver handles and assures distribution according to the court's order, and a bond filed by the person seeking the receivership, which is required to indemnify parties against a wrongful appointment of a receiver.
Minnesota Hotel , 495 N.W.2d at 893. An applicant's bond "is usually conditioned to pay damages if it is finally determined that the appointment was obtained wrongfully, maliciously, or without sufficient cause, or if it is finally determined that the appointment ought not to have been made."
Griggs, Cooper Co. v. Lauer's, Inc. , 264 Minn. 338, 344, 119 N.W.2d 850, 854 (1962) (quoting 1 Clark, Receivers § 79.1 (3d ed.)).
"The court in appointing a receiver must be satisfied that there is a probability that the plaintiff will prevail on the final determination of the case. All this means that the equities of the case indicate that justice will be done by taking the property out of the hands of the defendant and placing it in the hands of the court. It, therefore, follows that under the usages and rules of equity in ordinary cases the plaintiff is not required to give a bond."
Id. at 343, 119 N.W.2d at 854 (quoting 1 Clark, Receivers § 79.1).
Although respondent may not prevail on the final determination of this case, and it may ultimately be shown that a receiver should not have been appointed, the record before us supports a determination that there is a probability that respondent will prevail on the final determination of the case. Beaudet has not demonstrated that this is an extraordinary case requiring an applicant's bond. The district court did not abuse its discretion by not requiring respondent to file an applicant's bond.