Butterwick v. Fitzpatrick

Filed 2/15/08 Butterwick v. Fitzpatrick CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from an order of the Superior Court of San Diego County, Joan M. Lewis, Judge. Affirmed.

Thomas Lennon, a court-appointed receiver, appeals from an order awarding him compensation for his services. The court appointed Lennon to serve as a receiver in an action to dissolve two business entities. After the receivership was completed, the court ordered one of the entities to pay $122,500 for the receiver's services, and ordered the other entity to pay $10,027.50 for the services. The court also ordered the entities to pay approximately $62,000 for the receiver's attorney fees.

On appeal, Lennon contends: (1) the court erred in refusing to order one of the entities to pay all of his fees and attorney fees even though the fees related solely to work for the other business entity; and (2) the court erred in refusing to order the individual parties to pay for the receiver fees and attorney fees. We find no abuse of discretion, and affirm.

FACTUAL BACKGROUND

Four dermatologists were owners of a medical practice called Dermatology Associates: Dr. Kimberly Butterwick, Dr. Richard Fitzpatrick, Dr. Yardy Tse, and Dr. Mitchell Goldman. After disagreements among the parties, Dr. Butterwick and Dr. Goldman left the practice at the end of 2002. Under their employment and stock agreements, Dr. Butterwick and Dr. Goldman claimed entitlement to fees collected for their services performed before they left Dermatology Associates. The remaining physicians, Dr. Fitzpatrick and Dr. Tse, refused to pay the amounts claimed by the departing doctors.

The four doctors (through their personal corporations) were also partners in a partnership (FRG Leasing Company (FRG)) that owned medical equipment and leased the equipment to Dermatology Associates. FRG continued operating despite the departure of the two doctors from Dermatology Associates.

In January 2004, an arbitrator awarded Dr. Goldman approximately $271,000 against Dermatology Associates for unpaid termination benefits and income.

In August 2004, Dr. Fitzpatrick took a medical leave from Dermatology Associates. Dr. Tse continued to manage and operate Dermatology Associates using FRG's equipment.

In December 2004, Dr. Butterwick filed an action against Dermatology Associates, FRG, Dr. Fitzpatrick, Dr. Tse, Dr. Goldman (as a nominal defendant), and each of the physicians' personal corporations. As against Dermatology Associates, Dr. Butterwick sought her unpaid benefits and income based on work she performed before she left the medical practice. Dr. Butterwick also sought dissolution of the FRG partnership, and requested the appointment of a receiver for FRG. Dr. Butterwick additionally claimed to be a shareholder of Dermatology Associates, and requested dissolution of the entity and that a receiver be appointed.

Dr. Tse then filed a cross-complaint seeking dissolution of Dermatology Associates and FRG, and seeking the appointment of a receiver to wind up the affairs of both entities. Dr. Tse alleged that Dermatology Associates discontinued its operations on March 20, 2005, and that all officers and directors of Dermatology Associates had resigned.

In specific response to Dr. Tse's motion for a receiver, the parties entered into a stipulation for an order appointing Lennon as a receiver (the Receiver) for Dermatology Associates and FRG. The court entered the stipulation as an order in May 2005. The order gave the Receiver broad powers to: (1) take possession and control of all assets and accounts of Dermatology Associates and FRG; (2) wind up and dissolve Dermatology Associates and FRG; (3) provide for the maintenance of Dermatology Associates' patient medical records and for the delivery of the records to the patients; and (4) settle all claims between Dermatology Associates and FRG. The order stated that "[t]he Receiver shall be compensated at his usual rate of $300 per hour, and the Receiver's fees and administrative expenses shall be assessed against the assets and/or accounts of Dermatology Associates and FRG."

In August 2005, the Receiver filed his initial receiver's report, which concerned only the "Receivership of Dermatology Associates." In the report, the Receiver described the various tasks necessary to wind up the affairs of Dermatology Associates. The Receiver estimated his total fees would be $50,000. The Receiver also noted that some of the parties were disputing Dr. Tse's actions in taking $197,000 from Dermatology Associates shortly before Dr. Tse ceased the Dermatology Associates operations. The court thereafter granted the Receiver's request for the appointment of counsel to assist him in various tasks.

In response to the Receiver's initial report, counsel for Dr. Fitzpatrick wrote a letter to the Receiver emphasizing the importance of not mingling the assets of Dermatology Associates and FRG. Specifically, the letter stated: "In your report, you fail to distinguish the assets and liabilities of [Dermatology Associates] from those of FRG. I ask that you ensure a proper and separate accounting for the two entities, and submit that separate accountings are required to meet your obligations under the receivership order. I also suggest that you ensure separate bank accounts are maintained for each of the receivership entities so as to avoid commingling the assets of the respective receivership estates."

The Receiver did not respond to this letter. But he continued to perform various tasks pertaining to both entities during the next several months. Most of this time was spent working on the disposition of Dermatology Associates' patient medical records.

Then, on December 12, 2005, the Receiver filed a Second Receiver's Report for each entity under the receivership. In the report pertaining to Dermatology Associates, the Receiver stated he had engaged in various activities, including: (1) seizing control of the medical records and responding to requests for medical records by patients; (2) collecting accounts receivable; (3) closing the Dermatology Associates offices; and (4) disposing of personal property left in the medical offices. The Receiver claimed $51,773.20 in fees relating to Dermatology Associates for work performed from May 2005 through August 2005; and claimed attorney fees of $22,266.06 reflecting his counsel's services from September 2005 through November 2005. The Receiver did not identify his fees reflecting his work from August 2005 through December 2005.

On the Receiver's December 12, 2005 report pertaining to FRG, the Receiver stated his work consisted primarily of retaining an auction firm to inventory and sell the company's assets, and that the auction had generated $281,434.95. The Receiver said a final accounting for FRG would be provided following an additional auction. The Receiver did not identify any of his fees incurred for FRG-related work.

Three weeks later, on January 6, 2006, the Receiver's counsel sent the parties a schedule of assets and liabilities with respect to each entity. On the schedules, the Receiver reallocated his previously identified Dermatology Associates related fees from Dermatology Associates to FRG. The FRG balance sheet thus showed it owed all of the Receiver fees for the Receiver's work pertaining solely to Dermatology Associates.

In response, Dr. Butterwick's counsel wrote a letter to the Receiver, stating: "I have not been able to figure out the professional fees that you have listed as being charged against FRG. Looking over the exhibits, it appears that the bulk of the professional fees were incurred with respect to Dermatology Associates, not FRG. Because those are two separate entities with different issues, I do not believe that it is appropriate to lump the [Dermatology Associates] and FRG professional fees on the FRG side of the ledger."

The Receiver provided no response to this letter, and did not express any disagreement with the assertion that Dermatology Associates related costs must be allocated as Dermatology Associates liabilities.

Shortly thereafter, the Receiver filed a motion seeking the court's approval to file for bankruptcy on behalf of Dermatology Associates because the entity's liabilities far exceeded its assets. The Receiver alternatively asked the court to terminate the receivership as to Dermatology Associates because the Receiver did not have the funds to pay ongoing expenses and manage the patient records. In this filing, the Receiver did not raise the issue of his compensation or ask for instructions as to whether he should continue to provide services to Dermatology Associates despite its financial status. The court later approved the bankruptcy filing.

During the next several months, the four physician parties attempted to reach a settlement on their claims against each other. During these settlement negotiations, Dr. Goldman's counsel wrote to the Receiver's counsel, stating "As you may know, we are in the process of settling the FRG issues.  . . . [] 1. [Dr. Butterwick's counsel] previously inquired about the amount of legal and receiver fees allocated to FRG as opposed to [Dermatology Associates]. Have you responded? If not, will you be able to do so in the future? [] 2. What additional fees and costs do you expect will be allocated to FRG beyond what is on the last financial report you distributed? This would include at least you, Mr. Lennon, and the cost of preparing the final tax return." Several days later, Dr. Goldman's counsel again wrote the Receiver's counsel and reiterated that it "is extremely important to our pending settlement that we get this information at your earliest convenience."

Neither the Receiver nor his counsel responded to these questions, or provided any update on the Receiver's continuing fees and costs. The Receiver's counsel instead stated that they were busy attempting to obtain information from the accountant on the final tax return. Several weeks later, the physician parties settled their claims regarding FRG. Under the settlement, the parties retained their rights to assert any claims against Dermatology Associates in bankruptcy court.

In May 2006, the Receiver filed two Final Account and Report documents (one with respect to each entity), which included his request for compensation for his services and his attorney's services. In these reports, the Receiver informed the court for the first time that he believed he was entitled to collect all of his Dermatology Associates related fees and costs from FRG. The Receiver also claimed substantially more fees and costs than he had claimed in December 2005. Whereas in December 2005 he had claimed $51,773.20 for receiver fees and costs pertaining to Dermatology Associates, the Receiver now claimed approximately $130,000. Whereas in December 2005 the Receiver had claimed approximately $22,226.06 for attorney fees, he now claimed $53,781. The Receiver said he had previously paid himself $51,773.20 for his fees and expenses and $24,766.06 to his counsel representing compensation for legal fees. The Receiver took most of this reimbursement from FRG assets.

In the Final Reports, the Receiver requested the court to approve these prior reimbursements, and also to approve a payment from FRG for the balance of his Dermatology Associates fees and costs ($96,166.42 for Receiver services plus $29,015.25 for attorney fees). The Receiver argued that FRG was responsible for these expenses because both entities were part of the single receivership estate. The Receiver alternatively requested the court to order the individual parties to pay for his fees, asserting it was unlikely he would receive his full compensation from Dermatology Associates in the bankruptcy proceeding.

The physician parties objected to the Receiver's compensation claims, arguing that: (1) the fees and costs were excessive; (2) the fees and costs must be properly allocated between Dermatology Associates and FRG; and (3) it was improper to hold the parties individually responsible for the fees, particularly because only two of the parties were owners of Dermatology Associates when the Receiver was appointed.

After substantial briefing, two hearings, and two tentative rulings, the court ruled in favor of the physician parties on the fee allocation issue. The court first found the May 2005 order appointing the Receiver created two separate receivership estates and therefore the fees must be allocated to the entity for which the services were performed. The court explained that this "interpretation . . . is supported by the evidence in this case, including that the Receiver's accountings demonstrated a distinction between time incurred for [Dermatology Associates] and time incurred for FRG . . . and that the Receiver has confirmed in his declaration that his responsibilities differed depending on whether he was dealing with issues concerning Dermatology Associates or FRG. [T]o the extent the Receiver had any question in this regard it was incumbent on the Receiver to clarify." The court also rejected the Receiver's argument that the individual parties should pay the Receiver's costs.

In reaching its conclusions, the court stated that it recognized "the Receiver performed valuable services for both the Court and the parties, spending a considerable amount of time trying to conclude the business affairs of [Dermatology Associates] and FRG. The Court has struggled with the issues presented by this motion and the equities involved. However, after due consideration, the Court has concluded the equities weigh in favor of apportionment and, further, that the Court must award only those fees that it believes are reasonable."

After examining the billing records, the court found the reasonable amount: (1) for the Receiver's services for Dermatology Associates was $122,500; (2) for the Receiver's services for FRG was $10,027.50; (3) of Receiver attorney fees for Dermatology Associates was $39,000; and (4) of Receiver attorney fees for FRG was $23,000. Taking into account the prior reimbursements, the court thus ordered: (1) the Receiver to recover $117,500 from Dermatology Associates; (2) FRG to recover $36,745.50 in reimbursement from the Receiver; (3) the Receiver's counsel to recover $36,500 from Dermatology Associates; (4) the Receiver's counsel to recover $733.94 from FRG.

The Receiver appeals from this order.

DISCUSSION

I. Generally Applicable Legal Principles

A receiver is an agent and officer of the court, and is under the control and supervision of the court. (Code Civ. Proc.,  568; Cal. Rules of Court, rule 3.1179.) The receiver is also a fiduciary who must act for the benefit of all parties interested in the property. (Shannon v. Superior Court (1990) 217 Cal.App.3d 986, 992.)

Receivers are entitled to compensation for their own services and the services performed by their attorneys. (Venza v. Venza (1951) 101 Cal.App.2d 678, 680.) Generally, the costs of a receivership are paid from the property in the receivership estate. (See Andrade v. Andrade (1932) 216 Cal. 108, 110; McCarthy v. Poulsen (1985) 173 Cal.App.3d 1212, 1219-1220, fn. 3.) However, courts may also impose the receiver costs on a party who sought the appointment of the receiver and/or on a party who benefitted from the receivership. (Baldwin v. Baldwin (1947) 82 Cal.App.2d 851, 856.) Courts are vested with broad discretion in determining who is to pay the expenses of a receivership, and the court's determination must be upheld in the absence of a clear showing of an abuse of discretion. (Ibid.; see Melikian v. Aquila, Ltd. (1998) 63 Cal.App.4th 1364, 1368; People v. Riverside University (1973) 35 Cal.App.3d 572, 587.)

II. The Court Did Not Err in Finding Two Receivership Estates

The Receiver first contends the court erred in rejecting his request that his fees for services related to Dermatology Associates be paid from FRG assets.

The trial court made an express finding that the May 2005 stipulated order appointing the Receiver created two separate receivership estates and therefore the Receiver was entitled to recover his fees associated with Dermatology Associates only from the assets of this entity, and not from FRG. In challenging this finding, the Receiver acknowledges that his compensation rights derive from the May 2005 order, but argues that the court's finding of two separate receivership estates is not supported by the language of the order.

We review this contention under the deferential abuse of discretion standard. The Receiver argues that we should apply a de novo review because the May 2005 order was based on the parties' stipulation and therefore is akin to a written contract. However, the trial court's role in the receivership proceedings was not to interpret a private contract entered into by the parties before litigation began. Instead, the court was charged with construing a stipulation that was specifically approved by the court and entered as an order of the court. Moreover it concerned the appointment of an officer of the court who works directly under the court's supervision. (See Free Gold Mining Co. v. Spiers (1901) 135 Cal.130 ["[t]he receiver is but the hand of the court, to aid it in preserving and managing the property involved in the suit"]; Security Pacific National Bank v. Geernaert (1988) 199 Cal.App.3d 1425, 1431-1432.) Under these circumstances, the trial court had broad discretion to determine the meaning intended by the parties and the court as to the manner in which the Receiver would be compensated. (See Talman v. Talman (1964) 229 Cal.App.2d 39, 43.) A reviewing court will not "second-guess the trial court's interpretation of its own orders" unless the court's interpretation is unsupported by the record. (Montenegro v. Diaz (2001) 26 Cal.4th 249, 259.)

Applying this review standard, the court's finding that the May 2005 order created two receivership estates was supported by the record. The order pertains to two separate entities, and does not contain any express or implied terms providing that the assets of these entities can or should be merged or that the liabilities should be consolidated. It was undisputed that Dermatology Associates and FRG were not under the same ownership. Only two of the physicians remained as owners of Dermatology Associates; the other two doctors were its creditors. Moreover, there was no evidence that the Receiver's work for Dermatology Associates specifically benefited FRG, or all the individual owners of FRG.

The Receiver argues the language of the order was ambiguous because it did not directly address the allocation issue and therefore it should be construed against each of the physician parties who stipulated to the appointment of the Receiver. However, the court had a reasonable basis to conclude that to the extent there was any ambiguity, the Receiver had the affirmative obligation to seek clarification from the court. "If the receiver's powers are in doubt, the receiver should petition the court for instructions." (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2007) 9:762.)

Moreover, in attempting to determine the meaning of the order, the court properly looked to the subsequent conduct of the Receiver and the parties. (See Montenegro v. Diaz, supra, 26 Cal.4th at p. 259.) From the beginning of his appointment, the Receiver recognized the distinction between the two entities, issuing separate and independent reports, and maintaining a separate breakdown of services and costs with respect to each entity. It was not until shortly before the Receiver sought permission to file for bankruptcy that he first attempted to reallocate the Dermatology Associates related costs to FRG. The physician parties objected to the reallocation, and the Receiver took no action to suggest the reallocation was appropriate or to otherwise clarify the issue. The parties thereafter continued to assert the separateness of the entities and objected to a reallocation of the costs. The conduct of the Receiver and the actions of the parties throughout the proceedings reflected that they understood the separate nature of the two entities and that there were two receivership estates.

The Receiver's reliance on SEC v. Churchill Securities, Inc. (1998) 223 B.R. 415 is misplaced. The court in that case did not address the issue of the proper allocation of receiver fees and costs among multiple entities under a receivership. Moreover, unlike here, the entities under the receiver's authority did not maintain their corporate separateness, a fact that made it "virtually impossible" to distinguish among the entities' assets, liabilities, income, expenses and other financial details. (Id. at p. 417.)

III. The Court's Refusal to Impose Costs on One or More Parties

The Receiver alternatively contends the court erred in refusing his request to impose personal liability on the parties for receiver fees and costs related to Dermatology Associates.

A court may require one or more parties to pay for receiver fees where the property subject to the receivership is inadequate to compensate the receiver and/or where other equitable circumstances support imposing fees on a party. (Stanton v. Pratt (1941) 18 Cal.2d 599, 603; Baldwin v. Baldwin, supra, 82 Cal.App.2d at p. 856.) In considering the appropriate source for the compensation, a relevant factor is whether the party to be charged obtained a benefit from the receiver's services. (See Stanton, supra, 18 Cal.2d at p. 603.) Additionally, courts may consider the extent to which the receiver met its fiduciary duties to act on behalf of all parties, accurately account for all funds, and provide timely reports regarding the claimed service and requested compensation. (See Shannon v. Superior Court, supra, 217 Cal.App.3d at p. 993; see also Rosenfeld, Meyer & Susman v. Cohen (1987) 191 Cal.App.3d 1035, 1051.) The receiver may be surcharged for the failure to abide by these duties. (Shannon v. Superior Court, supra, at p. 993.)

Applying these principles, we conclude the court did not abuse its discretion in determining the parties should not personally bear the costs of the receiver fees.

With respect to Dr. Goldman and Dr. Butterwick, the court found that these parties should not be held personally liable for the expenses because they had no standing to request a Receiver be appointed for Dermatology Associates. This finding was supported by the record. Neither of these parties was an owner of Dermatology Associates nor did they have any control over Dermatology Associates' management at the time the Receiver was appointed in 2005.^[1] Both doctors had left the dermatology practice in 2002, and Dr. Tse continued to operate the practice through March 2005. The fact that the two doctors stipulated to the May 2005 order does not mean their agreement was a necessary or proper predicate to the Receiver's appointment. Further, although the two doctors may have received indirect benefits from an organized dissolution of Dermatology Associates based on their status as creditors of the medical practice, the Receiver does not cite to any authority requiring a court to impose the costs of a receiver on a creditor because of such indirect benefits.

With respect to Dr. Tse and Dr. Fitzgerald, they remained the legal owners of Dermatology Associates and therefore received a direct benefit from the Receiver's services. However, the court declined to impose personal liability on these parties because the Receiver: "(1) delayed in providing accountings which would have alerted the parties to the situation; and/or (2) was aware of the financial situation of [Dermatology Associates] and failed to approach the parties or the Court concerning direction."

On our review of the entire record, we cannot say this ruling constituted an abuse of discretion. There is substantial evidence in the record to support the court's conclusion that the Receiver did not act in an appropriate manner when he continued to provide services to Dermatology Associates despite knowing the entity had insufficient assets to pay his fees. The Receiver was on notice at least by December 2005 that Dermatology Associates had little or no remaining assets. Yet the Receiver continued to perform substantial work on behalf of the entity, without bringing the issue of his fees to the court's attention. When he apparently realized in late December 2005 that Dermatology Associates may not have sufficient assets to cover his fees, the Receiver unilaterally reallocated those costs to FRG, without explaining this action to the court or the parties. The parties expressly objected to this reallocation, but the Receiver ignored these objections and continued to perform substantial services for Dermatology Associates.

The Receiver's role as a fiduciary required full disclosure of his intentions regarding his services and his fees. In December 2005, the Receiver informed the parties that his Dermatology Associates fees totaled $51,773.20, but five months later when he filed his final account he claimed more than $130,000 in fees. The Receiver incurred these additional fees after the parties had repeatedly asked the Receiver to update the amount and nature of his fees and costs. Although the Receiver now contends that he acted in good faith, the court had a reasonable basis to conclude that the Receiver's conduct did not fully meet the high standards expected of a fiduciary under the circumstances. The Receiver could have easily protected himself and the parties by discontinuing his services until he had been given direction by the court.

The Receiver contends the parties' numerous disputes created the need for his services and unnecessarily added to his bill. This contention does not help the Receiver on the issue of the proper source of his compensation. The court essentially agreed with the Receiver that many of his services were necessary and benefited the owners of Dermatology Associates. However, the court found that under the circumstances it was equitable for the Receiver to look to bankruptcy court, rather than to the individual assets of these parties, to collect these fees. This finding did not constitute an abuse of discretion.

For similar reasons we find unavailing the Receiver's argument that the court erred in finding that his failure to file monthly reports justifies nonpayment of his services rendered. The court did not make this finding. The court did not state or suggest that it was refusing to order the parties to pay for the fees related to Dermatology Associates because the Receiver did not file monthly reports. Instead, the court made clear its primary concern was the Receiver's failure to seek instructions to clarify its role and compensation rights in light of Dermatology Associates' financial condition, and the Receiver's failure to inform the parties of the relevant facts after seeking approval to file for bankruptcy. Although the Receiver argues that the parties themselves had the duty to inquire to prevent any unnecessary fees, the court decided that, on balance, the Receiver had the primary responsibility for seeking clarification from the court. This conclusion is reasonable.

It was the trial court's role to weigh and balance the various interests involved to reach an equitable result on the proper source of the compensation for the Receiver and his attorney. On appeal, the Receiver is essentially asking us to reweigh these interests to reach a different conclusion. This is not the role of an appellate court. We are required to affirm the court's conclusion unless it was arbitrary or capricious. On our review of the entire record, we find the court properly evaluated all the relevant factors and reached a reasonable conclusion. Thus, we must affirm.

DISPOSITION

Order affirmed. Respondents are entitled to costs on appeal.

HALLER, Acting P. J.

WE CONCUR:

McDONALD, J.

McINTYRE, J.

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^[1] Although Dr. Butterwick alleged in her complaint that she remained a shareholder in Dermatology Associates, she later disavowed this claim and the claim was disputed by Dr. Tse and undermined by evidence in the record.