Court of Appeals Opinion Reminds Us that Receivers in Michigan Can Have Broad and Far Reaching Authority

Courts appoint receivers to preserve and protect assets in dispute between parties. Courts can appoint a receiver upon a motion by a party, upon a stipulation by all parties, or sua sponte. Once a receiver is appointed, all assets subject to the receiver’s control become part of the receivership estate and the receiver then acts only for the benefit of the receivership estate and its creditors. Recently, the Court of Appeals concluded that a receiver over a company had standing to pursue lawsuits on behalf of the company against its former directors and officers (“Officers”).  See Gregory G. Coppola v. Steve Manning, Michael Gross, Albert Kim, Noah Walley, Jeffrey Bocan and Eric Forster, No. 323994 (Mich App Nov 17, 2015) (“Coppola”).

In Coppola, the Receiver examined the company’s records and concluded that the Officers “grossly mismanaged” the company. The Receiver sued the Officers alleging, among other things, that the Officers breached their statutory fiduciary duties owed to the company.

On summary disposition, the Officers argued that the Receiver lacked standing to sue them because the Receiver was not a shareholder, and that the lawsuit was really a “shareholder derivative action.” The trial court agreed, finding the Receiver failed to support his allegations that directors and officers could be sued for breach of fiduciary duties other than by shareholders.

The Receiver appealed, claiming that the trial court “fundamentally misunderstood his role as receiver.” The Receiver argued that a receiver is authorized to pursue any and all of the company’s claims on behalf of the receivership estate.

The appellate court agreed. It explained that Receivers act as an independent arm of the court, for the benefit of the receivership estate as a whole – not for any one party. A Receiver’s authority to act is derived from statute, court rules and the order appointing the receiver. In addition, a receiver stands in the shoes of the entity in receivership, and can pursue claims that the entity in receivership could pursue.

The Court then explained that breach of fiduciary duty claims may be brought by “a corporation suing for breach of a duty to the corporation,” and that a corporation may file suit against officers and directors for breach of their fiduciary duties.  The Court concluded, based on statutes, court rules and the receiver order, that the Receiver had authority to sue the Officers and enforce claims for breach of fiduciary duties to the company.

Importantly, the Court’s opinion reminds us that a Receiver in Michigan has broad and far-reaching authority. Receivers serve as independent and transparent arms of the court, and to preserve and protect assets for the benefit of the receivership estate. While receivers are generally authorized by law, that authority can be significantly expanded in the order appointing the receiver. Care should be taken when faced with the prospect of the appointment of a receiver. If you are faced with a receiver issue, Schafer and Weiner has significant experience and invites your inquiries.