A Court Appointed Receiver                   back to articles
Can Help Run a Community Association
by Steven Linkon, Esq.
WRIGHT, FINLAY & ZAK, LLP

Using a court appointed receiver to temporarily operate a community association can be a creative and cost effective way to address a chronic repair issue, litigation or governance dispute. A receiver is appointed and supervised by a court and the receiver's duties are limited by the court's appointing order. Sometimes, an association faces a problem that cannot be addressed effectively by volunteer homeowners lacking legal or technical expertise, or the volunteers may have an "agenda" that conflicts with the best interest of the Association, or the board itself is conflicted and cannot effectively take action. A receiver can act to address the issue instead of the board.

Why Should a Volunteer Director be at Risk of losing their Assets if there is a Problem within the Association?

Even sophisticated volunteer directors may prefer to have a receiver address certain problems so as to avoid personal liability to those directors if their decisions are later, sometimes years later, attacked in a subsequent lawsuit. A receiver can insulate these directors from personal liability and the association benefits because a court must approve the receiver's decisions.

A good example of the value of a receiver arises in the case of construction defect litigation and the decisions concerning the scope of repair. Such decisions can involve huge sums and have long term implications for the association. Lawsuits filed years later may challenge the earlier decisions made by volunteer directors and claim that these actions were grossly negligent and that the directors should be held personally liable for the damages flowing from the decision. What volunteer director would choose to serve or make decisions when they could be sued years later based decisions made in good faith?

In the case of construction repair, the board needs to decide on the scope of the repairs to be undertaken. Obviously, the board does not want to waste money and perform repairs beyond the scope of what is absolutely needed. Conversely, the board does not wish to spend too little and fail to properly address the defects. No matter how much or little this board decides to spend, their decision could be called into question years later if there is later damage to the property. Then, homeowners or other third parties that suffer damages will naturally look to the individual members of the board that made the subject decisions and claim that they were grossly negligent in deciding the scope of repair in that they did not go far enough to address the known problems. This lawsuit would be difficult and expensive for the association to defend and may result in enormous personal liability for a director if they are found to have been grossly negligent.

Let the Receiver Shield Volunteer Directors from Personal Liability.

A receiver can make these critical decisions and obtain court approval for such decisions, and this would insulate the individual board members from any personal liability, and protect the association in future litigation by providing evidence that the scope of repair was reasonable under the circumstances known at the time. The association's defense to a future lawsuit would be to point out that not only did a disinterested receiver determine the scope of repair, but the appointing court also approved the receiver's recommendation. This is powerful evidence that the association was not negligent, and the individual directors would be insulated from liability.

The receiver is also in a better position to amend CC&R's and the governing documents of the association because normally these require either 100% approval of the homeowners or such a high percentage of approval that as a practical matter amendments may be impossible. A receiver can simply obtain a court order on notice to the homeowners, to amend CC&R's or other governing documents.

Sometimes it is better to use a professional to deal with weighty legal and business problems.

The receiver can also act on behalf of the association in dealing with municipal agencies, or opposing parties in litigation. Often these parties will be more deferential to a receiver, who is operating under court appointment, and then they might otherwise be in dealing with volunteer homeowners lacking in legal or technical sophistication. And managing outside counsel can be a daunting task for a board unfamiliar with the intricacies of association law and this task can be delegated to a Receiver.

But there are costs to having a receiver appointed.

The cost of a receiver needs to be considered and one should only be employed where the scope of the problem justifies the cost. The receiver's compensation can be limited in many ways either by a fixed or sliding hourly rate or by a flat rate. The receiver's duties can also be limited by the court's appointing order to specific tasks or responsibilities. Think of the receiver as a powerful tool that has a myriad of uses to solve a particular problem facing an association.

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