Picture this: a husband and wife have begun divorce proceedings. They co-own a business with a significant amount of equipment, inventory, and real property assets.  Both the husband and wife are actively involved in the business—but the method of running the business is the largest source of acrimony that led to the desire for a divorce.  Neither party can agree on many day-to-day business decisions, and the divorce proceedings are only exacerbating the problem. As any family law attorney can attest, divorce proceedings frequently show the extremes of litigation behavior. Either party is susceptible to emotion driving the litigation decisions, which frequently leads to aggressive and demanding behavior from both sides, with not a lot of room for negotiation and compromise between the parties.

The magistrate judge, on the other hand, must maintain the balance of equities between the parties—even when emotions and stakes in the proceeding are high. The magistrate judge frequently is performing the same act a high-wire artist (a “funambulist”) performs, maintaining balance between the two sides while proceeding through the case. Just as a funambulist frequently will use a long pole with weighted ends to help maintain balance on the wire, the magistrate judge can use an outside receiver to maintain balance between the two parties in the divorce proceeding. A receiver is a common method used in business disputes in creditor/debtor relationships that have soured. However, Idaho courts may also appoint receivers in other cases, including marriage and divorce proceedings. The appointment of a receiver can help to preserve the value of the assets the parties are intent on splitting in the divorce proceeding.

What Is a Receiver and How Do They Get Appointed?

           Trial judges, including magistrate judges, in the exercise of their discretion, may appoint receivers in any case where appointment is allowed by law.[i] Normally, receivers are appointed after a litigation party (including third-parties to the litigation) request the court appoint a receiver. The requesting party first identifies the potential qualified receiver, then proposes the receiver be appointed through a motion made in the proceeding citing the relevant legal authority for appointment of the receiver. The motion may be on an emergency basis, through normal notice, or stipulated by all parties. As an equitable remedy, a receiver is appointed when the trial court determines the statutory requirements are met, and the appointment of the receiver is fair and warranted under the circumstances.

A receiver is often referred to as a representative of the court.[ii] Frequently, receivers are appointed in order to conserve, preserve, protect, and administer property.[iii] A properly-appointed receiver in an Idaho divorce proceeding can use their legal and business knowledge to continue to operate, liquidate or sell a business. Idaho statutes prohibit a party, attorney or other person interested in a proceeding from acting as a receiver.[iv] Generally, the parties should nominate and the court should appoint someone with sufficient competence, qualifications, and experience to administer the receivership estate. Idaho’s receivership statute is minimal in nature, so drafting and preparing the order appointing the receiver is something the involved parties and the Court should spend time crafting well. The authority and power given to the receiver will largely stem from the terms of the receivership order.

           A receiver is generally appointed at the request of an involved party. In some cases, courts have used their own inherent authority to appoint a receiver, even without a specific request from a party.[v] Once the request for a receiver is made, the court will generally hold a hearing and allow the other party to be heard. In divorce proceedings, both parties should recognize the need for an independent third-party to be involved in preserving the business operation, and the parties are frequently better served negotiating the terms of the receiver order, rather than opposing the receivership itself.

However, if one party objects to the receiver being appointed, it remains up to the magistrate judge’s discretion. Because it’s a discretionary decision, any appeal of the appointment is governed by the deferential abuse of discretion standard.[vi] Knowing that the appointment of a receiver is up to the discretion of the trial judge, what are some scenarios when a receiver could or should be appointed in a divorce proceeding?

Scenario 1: Both Spouses Participate in Company Management

Our first scenario was addressed above—both spouses are active in the management of an existing company. The company has multiple assets and many employees. The spouses are now giving conflicting instructions to workers and employee morale is now low as employees are effectively forced to “pick sides,” hoping that their side prevails in the divorce proceeding. The company vendors are now going unpaid since the spouses won’t agree on which should be paid, and the spouses’ acrimony has made the banking relationships unstable.

           These company management decisions are difficult, if not impossible, to resolve in the divorce proceeding. This is especially true where the company is a wholly owned entity, because the entity itself is not a party to the divorce proceeding. Without some quick action to stabilize the company, which may have significant value at the time the divorce proceeding begins, the company may rapidly lose value. A competent receiver could be appointed to manage the company while the spouses work out their property division in the divorce proceeding.

The receiver could report to the divorce proceeding, on at least a monthly basis, the company financials, so the court (and spouses) are aware of the continuing viability and value of the company. Further, if the divorce proceeding ultimately results in an agreed or ordered sale of the company, the receiver could be empowered to conduct the marketing and close the sale. In this instance, a third-party handles the sale, rather than one or the other spouse (who inevitably will not be trusted by the other spouse to handle the sale.  Appointment of the receiver in this scenario preserves the value of the company while the spouses work out their property split.

Scenario 2: Single-Spouse Business Operator

In this scenario, the couple co-owns a magazine publishing business. The business owns substantial printing equipment assets and has multiple customer and advertising accounts. Only one spouse is actively involved in the business. The spouse that does not actively participate is unaware of the company finances and suspects the working spouse may be hiding income or other assets on the company financials. (For instance, by “employing” a friend who performs no duties for the company and is paid in cash, which ultimately gets returned to the working spouse off the books.) The working spouse fights a property division and child support order, arguing that she has insufficient value and income to support the order.

           Here, the receiver could be appointed with limited power to examine all company books and interview any company employees or other representatives. The receiver can be authorized to speak with other professionals employed by the company (such as accountants, payroll companies or attorneys) and receive information directly from them.  In the event the receiver discovers malfeasance or reason to believe the working spouse is not being truthful to the court or other spouse, the receiver can report back to the court and recommend further action be taken (including expanding the scope of the receivership to include management and/or sale of the company). 

Scenario 3: Refinancing Existing Business Loans

Idaho is an agricultural state.  In this scenario, spouses co-own a ranching operation. The ranch consists of hundreds of acres of land used for raising crops, as well as a large cattle operation. There are several existing bank loans, including some long-term loans secured by the land, as well as short-term operating lines used for seasonal growing of crops and payments for cattle feed. While the divorce is pending, the annual renewal of the operating line becomes necessary. However, one spouse disputes the amount of the required loan and refuses to agree to any additional borrowing or pledging of assets. Without the operating line, the business could easily fail.

           In this scenario, the court likely does not understand the intricacies or need for the funds in question, without several long days of competing testimony. In any case, the court will likely make a decision that adversely affects either one or both parties. Here, a receiver could be appointed for the limited purpose of reviewing the business finances and need for the recommended financing. The receiver could then report and recommend to the court what funds are necessary and what the parties should be ordered to do.  Alternatively, the receiver can be empowered to sign loan documents and pledge property as they see necessary. The presence of the independent receiver gives the court and parties assurance that the borrowing and pledge of property are actually necessary to preserve the value of the business operation.

Scenario Four: A Real-Estate Business

Husband and wife co-own an S-Corp which owns multiple parcels of real property in several different states. The real property each has significant value, with some properties securing loans, and some properties owned free and clear of encumbrances. All of the properties are income-producing. In the divorce proceeding, the spouses are each awarded 50 percent of the value of the properties, with the husband ordered to liquidate the properties and/or provide the value to the wife withing 18 months of the divorce decree. Years later, many of the properties remain unsold and un-refinanced, and no accounting of the property income has ever been provided to the wife.

           This exact scenario occurred in an Idaho case involving Utah property. In that case, over 10 years after the decree was entered, the property had still not been sold. The magistrate judge appointed a receiver to liquidate the property and make distributions to the parties. The receiver was also authorized to investigate and provide an accounting of the rent income from the various properties.[vii] 

The Idaho Supreme Court confirmed the abuse of discretion standard for appointment of receivers and also discussed the “extra-territorial” application of the receiver statute to property outside the state of Idaho. Recognizing that the Idaho courts do not have jurisdiction over the actual property outside the state of Idaho, the Idaho state courts do have jurisdiction over the actual parties to the proceeding and can therefore order those parties to liquidate the property and appoint a receiver to liquidate the property.[viii] 

Conclusion

           As these examples show, creative counsel and the court can use the appointment of a receiver to fairly preserve value for parties navigating a divorce proceeding. The examples don’t end here and are likely limited only by the imagination of counsel and the court. Idaho’s current receiver statute provides the flexibility to address a myriad of situations in a carefully drafted receivership order.[ix] Divorce parties and courts can take advantage of this flexibility to preserve the value of the assets they are dividing.

Matt Christensen is the Managing Partner of Ampleo Turnaround & Restructuring LLC. Matt practiced law for 20 years prior to joining Ampleo, and frequently serves as a receiver, trustee and financial advisor for a myriad of companies.

[i] Idaho Rule of Civil Procedure 73; Idaho Rule of Family Law Procedure 1007.

[ii] Shannon v. Superior Court, 217 Cal. App. 3d 986, 992 (1990); Umpqua Bank v. Shasta Apartments, LLC, 194 Wash. App. 685 (Div. 2, 2016).

[iii] 65 Am. Jur. 2d, RECEIVERS § 27 at 676; see Idaho Code § 8-601.

[iv] See Idaho Code § 8-603.

[v] See, e.g., Jones v. State of Idaho, 85 Idaho 135 (1962).

[vi] See, e.g., Smith v. Smith, 167 Idaho 568, 584 (2020).

[vii] See Smith v. Smith, 167 Idaho 568, 577 (2020).

[viii] See Id. At 577.  In a different case, the Idaho Supreme Court dealt with the opposite scenario – an out-of-state divorce proceeding where a receiver had already been appointed, and an Idaho magistrate judge’s appointment of an ancillary Idaho receiver to market and liquidate real property located in the state of Idaho. See Wechsler v. Wechsler, 162 Idaho 900 (2017). 

[ix] Of interest, the Uniform Law Commission has recently promulgated a Uniform Commercial Real Estate Receivership Act (UCRERA). Adopted in 16 states so far, this act deals with any real property used for a commercial purpose. Provisions of this act could be beneficial to the last scenario above.