No. 91-587 

TN THE SUPREME COURT OF THE STATE OF MONTANA 

1994 

JOHN H. CROWLEY, 

plaintiff and Respondent, 

-vVALLEY WEST WATER COMPANY, a Montana 

corporation, R MONTANA, INC., a 

Montana corporation, and MISSOULA 7 3 194 

WATER WORKS LIMITED PARTNERSHIP, a 

Montana limited partnership. 

Defendants and Appellants. 

APPEAL FROM: District Court of the Fourth Judicial District, 

In and for the County of Missoula, 

The Honorable John S. Henson, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

George C. DeVoe, Missoula, Montana 

For Respondent: 

Christopher B. Swartley, Datsopoulos, MacDonald & 

Lind, Missoula, Montana 

Submitted on Briefs: August 4, 1994 

Decided: October 13, 1994 

Filed: 
Justice Fred J. Weber delivered the Opinion of the Court. 

Defendants appeal the Order of the District Court of the 

Fourth Judicial District, Missoula County, appointing a receiver to 

administer their assets during the pendency of this litigation. In 

addition to the request for appointment of a receiver, plaintiff 

has also asserted claims of fraudulent conveyances and alleged a 

constructive trust; these claims are not before this Court at this 

time. We affirm. 

The sole question in this appeal is whether the District Court 

erred in appointing a receiver to handle assets of defendants. 

Plaintiff John H. Crowley (Crowley) and Valley West Water 

Company (Valley West) negotiated a written contract signed July 1, 

1981, agreeing to transfer Crowley's shares of stock in Valley West 

back to the corporation for $75,000. Crowley was president of 

Valley West and owned 25 percent of total shares prior to the sale. 

The only other shareholder was Charles Isaly (Isaly), secretary of 

the corporation. 

The contract between the parties provided that $20,000 would 

be paid to Crowley by January 4, 1982, and that the $55,000 

remaining balance would be amortized over ten years and paid in 

quarterly installments at 12 percent interest on the declining 

balance. The contract also provided for additional security, 

including the requirement that an escrow account be established for 

payments to Valley West, so that Crowley would receive his payments 

under the contract before the balances could be paid to Valley 

West. The contract also provided that Crowley's rights to receive 

2 
quarterly payments would be protected if Valley West transferred 

its interest in the water system operating rights to another 

entity. Further, it had provisions relating to default by Valley 

West by which Crowley could foreclose on Valley West pursuant to 

foreclosure provisions fortrust indentures, to apply as though the 

security provided by Valley West was real property subject to a 

trust indenture. 

Valley West's major asset was the water system operating 

rights it owned under an agreement with the City of is sou la. When 

Valley West and Crowley contracted to sell Crowleyls stock back to 

Valley West in 1981, Crowley knew that Valley West intended to try 

to sell its operating rights. Valley West sold the operating 

rights on November 18, 1982 to R Montana, Inc. The same day, R 

Montana, Inc. sold the operating rights to Missoula Water Works 

Limited Partnership (Missoula Water Works). Concurrently, Missoula 

Water Works executed an agreement with Valley West to "lease back" 

the operating rights to Valley West. Although Montana law requires 

that any sale of assets of a public utility be approved by the 

Montana Public Service Commission, the Commission did not approve 

any sale of Valley West's assets between 1981 and 1991 and does not 

recognize either of these sales as valid. 

For approximately eight years, quarterly payments under the 

contract between Crowley and Valley West were made as agreed 

through the escrow account. Starting in September 1989, Valley 

West stopped making these payments. Pursuant to the contract's 

default provisions, Crowley gave thirty days notice of default to 
Valley West on April 9, 1990, and instituted the breach of contract 

action against Valley West on June 19, 1990. Crowley later amended 

the complaint to include claims for fraudulent conveyance and 

constructive trust. After Valley West notified its customers that 

effective June 1, 1991, Missoula Water Works would assume revenue 

collection responsibilities for customer water charges, Crowley 

amended his complaint again to add Missoula Water Works as a 

defendant. 

Isaly is president and sole shareholder of Valley West and the 

only general partner of Missoula Water Works. An addendum to the 

1982 lease agreement between Missoula Water Works and Valley West, 

which was signed by Isaly for both entities, states they had 

just and substantial cause to believe that in the near 

future there will be attempts by creditors of Lessee to 

attach or in some way interfere with the flow of customer 

payments to Lessee for water services. 

This addendum, dated June 4, 1991, allowed Missoula Water Works to 

collect income for water services that previously was paid directly 

to Valley West. Isaly subsequently stated in a letter to Ron Woods 

of the Public Service Commission dated June 17, 1991, that 

the reason for this change [in payee to Missoula Water 

Works] is so that the Internal Revenue Service cannot 

interrupt the cash flow stream from the water system 

customers pursuant to a tax lien that they have filed 

against Valley West Water Company. 

On June 6, 1991, partial summary judgment in this action was 

granted by the District Court in favor of Crowley, giving him a 

money judgment in the amount of $32,818.31 for contract damages and 

attorney's fees of $6,000.00, the total of $38,818.31 to accrue 

interest at 12 percent. 
Although Valley West was involuntarily dissolved by the 

Secretary of State as of February 28, 1985, it has continued to 

operate in a corporate capacity by holding itself out as a 

corporation and doing business under its former name. In fact, 

Valley West requested approval from the Public Service Commission 

and was granted a rate increase under that name in 1990. According 

to Ron Woods of the Public Service Commission, the assets of Valley 

West, including the rights under the Agreement with the City of 

Missoula, still remain with Valley West, and would so remain unless 

and until a transfer request was submitted and approved by that 

entity. Nonetheless, Missoula Water Works collected the accounts 

for Valley West for water services beginning in June 1991. 

In addition, Valley West and Missoula Water Works both use the 

same telephone numbers and addresses in Missoula and in Phoenix, 

Arizona, which is also Isaly's mailing address. The District Court 

determined that the intermingling of names, addresses and telephone 

numbers and the status of Isaly as general partner and president 

indicated that Isaly's actions on behalf of the entities in 

question constitute an effort to avoid legitimate creditors' claims 

and that Isaly seemed to control all of the entities, including R 

Montana, Inc. Further, the court determined that the transactions 

were undertaken with little or no attention to the requirements of 

Montana law in regulating corporations, particularly private 

utility companies, or to the legitimate interest of creditors, 

including the IRS and the plaintiff. Payments have gone to Isaly 

at the same address in Phoenix both before and after the name 
change. 

Because Valley West's major asset, the water system operating 

rights, had been transferred to Missoula Water Works and then 

leased back to Valley West, Crowley was unable to collect the money 

due him from Valley West. On September 5, 1991, Crowley moved the 

District Court to appoint a receiver to administer assets of Valley 

West, Missoula Water Works and R Montana, Inc. The court 

determined that immediate action needed to be taken to prevent 

irreparable damage to Crowley by virtue of the transfers of assets 

between entities. The District Court granted Crowley's motion on 

October 22, 1991, stating: 

For the Court to allow the continuance of the transfer 

during the litigation would produce great and irreparable 

injury to Plaintiff Crowley, due to the lack of other 

assets and the dissolved status of Defendant Valley West 

Water Company. Furthermore, it appears that during the 

course of the litigation, Defendant Valley West Water 

Company, through Mr. Isaly, is undertaking transfers in 

violation of the rights of a judgment lien creditor, 

respecting the subject of this action which would tend to 

render Plaintiff Crowley's Judgment ineffectual if 

concluded; such conduct consists in the removal or 

disposition of Valley West Water Company's property from 

the State of Montana with the stated purpose of avoiding 

legitimate creditor's [sic] claims. Pecuniary 

compensation would not afford adequate relief to the 

Plaintiff under the circumstances. 

This appeal concerns pnly the appointment of a receiver in this 

action. Valley West filed an application to stay the order 

appointing a receiver on October 30, 1991, which was subsequently 

denied by the District Court. 

Defendants Missoula Water Works and Valley West have filed 

petitions for bankruptcy in the United States Bankruptcy Court for 

the District of Arizona. Valley West filed a Chapter 7 bankruptcy 
petition on January 17, 1992, and Missoula Water Works, as debtor 

and debtor in possession, initiated a Chapter 11 bankruptcy 

reorganization in ~pril 1993. Crowley moved for and was granted 

temporary lifting of the stay in the Valley West Chapter 7 

proceeding pending resolution of the Montana District Court action 

on April 5, 1993. Missoula Water Works initiated its Chapter 11 

proceeding later the same month. After more than two years of 

proceedings in state court including the removal of both bankruptcy 

stays in the Arizona Bankruptcy Court, Missoula Water Works removed 

this case to federal district court. On March 7, 1994, Judge 

Love11 remanded the case to state court and this appeal followed. 

~id the District Court err in a~~ointinq a receiver to handle 

the assets of defendants? 

Valley West contends that the District Court erred in 

appointing a receiver because Crowley failed to show that his claim 

of fraudulent conveyances is probable of succeeding at trial or 

that Valley West has any interest in the operating rights under the 

agreement with the City of Missoula. According to Valley West, 

because the propriety of the receivership hinges upon the validity 

of Crowley's claim for fraudulent conveyances, Crowley must show 

that he will prevail on that claim. Therefore, Valley West 

contends that the court should not have appointed the receiver nor 

ordered that the receiver set aside the 1982 sales. Although they 

are not in agreement about the probability of success concerning 

the claim for fraudulent conveyances, both Valley West and Crowley 

agree that there is a genuine issue of material fact here 
concerning the statute of limitations for fraud. The issue 

involves the application of the "discovery doctrine" to the facts 

of this case. 

An order appointing a receiver is immediately reviewable by 

this Court pursuant to Rule 1 (b) (2) , M.R.App. P. However, any other 

findings and conclusions reached by the District Court in this case 

are not reviewable at this time. Thus our review is limited in 

scope to only such evidence as was relied on by the District Court 

to reach the conclusion that a receiver be appointed. Our standard 

of review for discretionary trial court rulings is abuse of 

discretion. Steer Inc. v. Department of Revenue (1991), 245 Mont. 

District courts in Montana have statutory authorityto appoint 

receivers. Section 27-20-102, MCA, governs the appointment of a 

receiver and provides in pertinent part: 

27-20-102. When and by whom receiver appointed. A 

receiver may be appointed by the court in which an action 

is pending or by the judge thereof: 

(1) in an action . . . by a creditor to subject any 

property or fund to his claim . . . on the application of 

the plaintiff or of any party whose right to or interest 

in the property or fund or the proceeds thereof is 

probable, and where it is shown that the property or fund 

is in danger of being lost, removed, or materially 

injured 

(3 

effect; 

) after judgment, to carry the judgment into . . . 

Section 27-20-102, MCA, remains virtually unchanged since it was 

originally enacted and provides for specific instances where a 

receiver may be appointed. It also continues the common law of 

8 
courts of equity in instances where receivers had been appointed 

prior to February 1, 1864. See 5 27-20-102 (5), MCA. For those 

instances where the petition to appoint a receiver is based upon 

statute, as here, § 27-20-102(1), MCA, explains what must be shown 

by the petitioner. The plaintiff must have a probable right to or 

interest in the property or fund or proceeds thereof and the 

property or fund must be in danger of being lost, removed, or 

materially injured. 

prior Montana cases concerning receivership emphasize that the 

power to appoint a receiver is to be exercised sparingly and not as 

a matter of course. Further, a strong showing must be made and 

even then, that power is to be exercised with conservation and 

caution. See, e.q., Little v. Little (1951), 125 Mont. 278, 234 

P.2d 832. A receiver is appointed in a matter pending litigation 

to preserve and manage property prior to a decision on the merits 

of the litigation. 

A receiver cannot be appointed in an action merely for the 

purpose of collecting a judgment debt. Little, 234 P.2d at 835. 

Thus, if Crowley was merely a judgment creditor as argued by Valley 

West, he could not use the remedy of receivership to protect his 

interests. In this case, the matter is not that of a simple 

judgment debt, but it is a judgment debt for which a lien attached 

to the actual property which is the substance of the alleged 

fraudulent transfer. Crowley's allegation of fraud concerning the 

multiple transfers of that asset remains to be litigated. 

The District Court determined that Crowley had demonstrated 
sufficient evidence to establish a prima facie case for fraud and 

further ruled that there are genuine issues of material fact as to 

whether the two-year limitation for an action alleging fraud had 

been tolled by the '!discovery doctrine.I1 These issues cannot be 

reviewed by this Court until a final judgment is reached on their 

merits. Until that issue is resolved, without a receivership, 

customer payments would continue to be made to Missoula Water Works 

at the address in Arizona which is also the address for Charles 

Isaly, the alleged perpetrator of the fraud. 

This Court has held that a receivership is justified where 

there is a fraudulent appropriation of partnership funds, together 

with the probability of insolvency and the danger that money in 

which plaintiffs have an interest will ultimately be lost to them. 

The purpose of the receivership in such a case is to prevent the 

partner at fault from dissipating the property and thereby 

defeating the objective of the ancillary suit. Stoner v. Hannan 

(1942), 113 Mont. 210, 223, 127 P.2d 233, 236-37. It is a general 

rule that, aside from statutory provisions, in order to obtain the 

appointment of a receiver, the plaintiff lrmust show that the 

possession of the property by defendant was obtained by fraud, or 

that the property itself, or the income arising from it, is in 

danger of loss from neglect, waste, misconduct, or insolvency," 

particularly where the defendants control the property under a 

claim of right. 75 C.J.S. ~eceivers 5 18 (1952). This Court has 

followed the general rule holding that a receiver will not be 

appointed if there is another way to protect the property in 
question or otherwise achieve the desired outcome. see State ex 

rel. Larry C. Iverson, Tnc. v. ~istrict Court (19651, 146 Mont. 

362, 371, 406 P.2d 828, 833. 

~pplying 5 27-20-102, MCA, together with the general rule as 

previously applied to other Montana cases on receivership, to the 

record before us, we conclude that the District Court properly 

appointed a receiver in this case. The record discloses that both 

Valley West and Missoula Water Works have filed bankruptcy 

petitions in Arizona and the United States Bankruptcy Court for the 

District of Arizona has lifted the stays in those proceedings for 

the purpose of allowing the resolution of this litigation to 

proceed. The filing of those petitions infers representations of 

insolvency by Isaly on behalf of both Missoula Water Works and 

Valley West. Payments from some 225 water customers totalling 

approximately $7,000 per month were directed, pursuant to a letter 

by Isaly in June of 1991, to be paid to Missoula Water Works in 

Arizona rather than to Valley West, and the income stream is thus 

being diverted out of Montana. Is,alyls letter was written within 

days of the judgment in the District Court in favor of Crowley 

against Valley West. 

In addition, Valley West and Missoula Water Works have delayed 

the resolution of this case by filing bankruptcy petitions and by 

removing the case to federal district court in Montana. Crowley 

has already been injured by the necessity of responding to these 

actions on the part of defendants and is in danger of further 

injury if a receiver is not appoirted to administer the assets of 
these entities until such time as the District Court reaches its 

decision on the merits. Contrary to the position taken by Valley 

West, it is not necessary that plaintiff show that he is 

absolutely, conclusively, or incontrovertibly entitled to the 

relief he has asked for: it is sufficient that he appears to have 

reasonable expectations of succeeding, that there is a showing of 

a reasonable probability of ultimate success, or that his right to 

a judgment is probable. This is particularly so when the plaintiff 

has a lien on or interest in the fund in the hands of the 

defendant. 75 C.J.S. Receivers 5 11 (1952). 

Crowley's interest in Valley West's assets is not in 

controversy here. However, the major asset of Valley West was 

transferred to R Montana, Inc. and then to Missoula Water Works and 

then leased-back to Valley West all in the same day in 1982. 

Although Crowley knew that Valley West was going to attempt a sale 

of assets, his testimony indicates he had no reason to participate 

in or to question the actual sales that subsequently occurred. He 

continued to receive payments through the escrow agent and 

testified to his belief that his security interest in Valley West's 

assets was intact. Valley West continued to collect accounts 

receivable until the time Crowley was granted a judgment against 

Valley West in June of 1991 when Isaly directed that payments be 

made from that time onward to Missoula Water Works instead of to 

Valley West, but continued to operate in the same manner in all 

other respects. 

An affidavit signed by Isaly indicates that the limited 
partnership was established as an attempt to create a tax advantage 

pursuant to a tax loophole which was later extinguished under the 

1986 Tax Reform Act. Isaly did not obtain approval for any of the 

transfers from the Public Service Commission. He did, however, 

write to the Commission in 1991 to explain the change in payee for 

customer accounts to Missoula Water Works as an attempt to evade an 

IRS lien on Valley West's cash flow. He also added an addendum to 

the lease agreement between Missoula Water Works and Valley West to 

change the terms of the lease to reflect the change in payee, 

explaining the purpose as one of avoiding execution on assets by 

judgment creditors. Crowley is the only demonstrated judgment 

creditor, according to the record. This demonstrates that the 

major asset, the water system operating rights, is in danger of 

loss, removal or material injury. 

Valley West also contends that, to be "probable," Crowley must 

show that his claims are not time-barred. The District Court's 

decision states there are genuine issues of material fact regarding 

tolling of the statute of limitations. This threshold issue also 

remains to be decided and no more probable showing can be made at 

this point than a demonstration of facts--already made here--that 

defeat a motion for summary judgment on the issue. We conclude the 

facts relied on by the District Court, which are in the record at 

this point, are sufficient without further proof to support the 

court's appointment of a receiver for the reasons stated by the 

District Court and restated in this opinion. 

We hold the District Court did not abuse its discretion by 
appointing a receiver in this case. 

Affirmed. 
October 13. 1994 

CERTIFICATE OF SERVICE 

I hereby certify that the following certified order was sent by United States mail, prepaid; to the 

following named: 

George Curtis DeVoe 

Attorney at Law 

310 N. Higgins 

Missoula, MT 59802 

Christopher B. Swartley 

Datsopoulos, MacDonald & Lind 

201 W. Main, Ste. 201 

Missoula, MT 59802 

ED SMITH 

CLERK OF THE SUPREME COURT 

BY: 

Deputy