Mashni v. Foster – 4/29/2014

May 20, 2014

Arizona Court of Appeals Division One Holds That a Court- Appointed Receiver Is Immune From Suit Unless the Receiver Has Acted Outside the Scope of the Order of Appointment and That A Court Cannot Charge a Receiver With a Fiduciary Duty to Simultaneously Maximize Economic Benefits to Adverse Parties.

In 2005, Sunnyslope Housing Limited Partnership (“Sunnyslope”) began development of a low income apartment complex in Phoenix.  Sunnyslope financed the construction with a senior loan guaranteed by the federal government and secured by a deed of trust.  Sunnyslope planned to operate the apartments as low income housing to qualify for the Low Income Housing Tax Credit (“LIHTC”) program.  Accordingly, Sunnyslope recorded covenants requiring that the apartments be leased to low-income households. The covenants were subordinated to the senior private loan, but binding on subsequent owners and operators of the apartments.  Sunnyslope defaulted on the senior loan after construction was finished.  The federal government sold the senior debt to First Southern National Bank, which soon moved that the superior court appoint Paul Mashni as receiver of the apartment complex. The Superior Court’s 2010 order appointing Mashni as receiver empowered him to “enter into, modify and/or reject contracts affecting any party or the Property.”  It did not make any reference to the low-income-housing covenants or related tax credits. Mashni understood the order as authorizing him to cease operating the apartments as low-income housing, and he began renting apartments at market rates. Sunnyslope filed for bankruptcy under Chapter 11, and the bankruptcy court ordered Mashni to comply with the low-income housing covenants.  In response, Mashni relinquished possession to Sunnyslope’s designee.  After the bankruptcy automatic stay was lifted, Mashni moved the superior court to discharge the receivership, exonerate the receiver’s bond, and approve payment of receivership expenses. Sunnyslope objected, arguing that Mashni had jeopardized the apartments’ LIHTC eligibility.  The court denied Mashni’s motion to exonerate the receiver’s bond, stating that “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 . . . .”  The court then allowed Sunnyslope to file a third-party complaint against Mashni personally.  Mashni filed a special action challenging the superior court’s decisions.

The Arizona Court of Appeals accepted jurisdiction “because when one is erroneously forced to stand trial, he has lost the benefit of immunity.”  The court granted relief in favor of Mashni.  Pointing out that the superior court had never found that Mashni had actually violated the order of appointment, the court held “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,” and that in this case a plain reading of the appointment order authorized Mashni to reject the low-income housing covenants.  The court of appeals criticized the trial court for reviewing Mashni’s business judgment, rather than limiting only itself to determining whether he had violated the court’s appointment order.  The court also held that courts “cannot charge a receiver with a fiduciary duty to maximize economic benefit for adverse parties simultaneously” because 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.”  A receiver therefore does not have a fiduciary duty to any party, but only a duty of “fidelity to the court and its orders.”  A receiver thus may be liable to interested parties when he deviates from the court’s appointment order, but “cannot be liable for actions taken pursuant to the order that benefit some more than others.”  The court also noted that Sunnyslope had more than enough opportunities to seek an amendment to the appointment order that would compel Mashni’s compliance with the low-income housing covenants, but that it failed to do so.  The court held “that a party aggrieved by a receiver’s actions must promptly inform the court and seek its intervention before bringing an action for damages.  The court thus vacated the superior court’s ruling denying Mashni’s immunity from suit and remanded the case to the superior court.

Judge Swann authored the opinion.  Judges Portley and Thumma concurred.