Source: https://www.nybusinessdivorce.com/2010/05/articles/receivership/statute-constrains-commissions-for-courtappointed-receivers-in-corporate-dissolution-proceedings/
Timestamp: 2019-01-20 05:42:18
Document Index: 153376252

Matched Legal Cases: ['§ 8004', '§ 1217', '§ 1217', '§ 1217', '§ 1217', '§ 1217', '§ 1217', '§ 1217', '§ 1217']

Statute Constrains Commissions for Court-Appointed Receivers in Corporate Dissolution Proceedings | New York Business Divorce
Home » Statute Constrains Commissions for Court-Appointed Receivers in Corporate Dissolution Proceedings
Statute Constrains Commissions for Court-Appointed Receivers in Corporate Dissolution Proceedings
By Peter Mahler on May 24, 2010
A decision this month by the Albany-based Appellate Division, Third Department, in Matter of Eklund Farm Machinery, Inc., 2010 NY Slip Op 04097 (3d Dept May 13, 2010), spotlights anew the inadequate statutory compensation scheme governing court-appointed receivers in corporate dissolution proceedings.
Section 1113 of the Business Corporation Law (BCL) authorizes the court to appoint a receiver at any stage of a dissolution proceeding. When appointed prior to an order of dissolution, the receiver’s role is to preserve corporate assets and to rescue the business from a controlling shareholder’s mismanagement or from the paralysis of deadlock between two 50% owners. If the court orders dissolution, the receiver is charged with winding up the business, liquidating its assets, discharging its liabilities, and distributing the remainder to the shareholders.
BCL Article 12 lays out a comprehensive scheme governing the powers and duties of corporation receivers. Section 1217 specifies the receiver’s entitlement to commissions for his or her services using a sliding scale of percentages of “the sums received and disbursed.” The scale is 5% on the first $20,000; 2.5% on the next $80,000; and 1% on the remainder. Note how stingy the rate is compared to the straight 5% commission authorized by § 8004(a) of the Civil Practice Law and Rules (CPLR) which applies to receivers appointed under CPLR Article 64 including, for example, receivers appointed in mortgage foreclosure proceedings.
The Eklund case involved a protracted corporate dissolution of a family-owned business for which the trial court appointed a receiver. In 2007, the trial court’s order granting dissolution was affirmed on appeal. The dissolution proceeding then settled, making a sale of the corporation’s assets unnecessary. The receiver had made two prior, interim applications for commissions which were awarded without opposition, in which his commissions were calculated by applying § 1217’s percentage scale twice, to both the sums received and again to those disbursed by the receiver.
Following settlement the receiver submitted a final application for commissions based upon transactions that occurred after his prior applications, using the same calculation method. This time the parties objected, arguing that the receiver used an incorrect calculation method and seeking to recalculate and modify the prior, interim commission awards. The trial court refused to modify the prior awards based on the parties’ failure to object timely, but it agreed that the final commissions must be computed by applying the statutory percentages only once to the sums that passed through the receiver’s hands since the interim awards.
On the receiver’s appeal to the Appellate Division, Third Department, the court confronted the issue whether § 1217’s reference to commissions on “sums received and disbursed” (emphasis added) permits an aggregate award of commissions on sums received plus commissions on sums disbursed, or requires the court to apply the percentage only once to the sums that pass through the receiver’s hands. The court agreed with the trial court’s single-calculation interpretation, commenting as follows:
Although we have not previously considered this specific question of whether Business Corporation Law § 1217(a) authorizes awards of commissions calculated upon both the “sums received and disbursed,” we note the interpretations given by other courts to the similar language in CPLR 8004 (see Eastrich Multiple Inv. Fund v Citiwide Dev. Assoc., 218 AD2d 43, 44 [1996]; Coronet Capital Co. v Spodek, 202 AD2d 20, 26-27 [1994]; People v Abbott Manor Nursing Home, 112 AD2d 40, 41 [1985]), and we read the statute here as contemplating that the commission paid to a receiver will be the statutory percentage of the amount that has been both collected and disbursed. That is, “a commission is due upon the total amount which passes through the receiver’s hands” (Matter of Jakubowicz v A.C. Green Elec. Contrs., Inc., 25 AD3d 146, 150 [2005] [internal quotation marks and citation omitted]). Accordingly, we conclude that Supreme Court did not err in . . . granting commissions based upon the total amount that passed through the receiver’s hands.
The decision does not describe the receiver’s services, the hours he devoted, or the amounts collected and disbursed, so it’s hard to know whether or to what extent the receiver’s award — before or after it’s halving by the court — constitutes reasonable compensation. What is known is that, had the case not settled, and had the receiver gone forward with liquidation, the sums upon which his commissions would have been computed would have included substantial proceeds from the sale of assets. Considering that the receiver’s temporary stewardship of the corporation likely contributed to its preservation and to the ultimate settlement that permitted the parties to avoid liquidation, it certainly can be argued that the receiver effectively was penalized financially for doing a good job.
This point was driven home even more forcefully in the Jakubowicz case cited in the above-quoted passage. Jakubowicz also involved a protracted dissolution proceeding which was settled shortly before the judicial sale of the corporation’s properties including realty valued between $12 million and $20 million. The court-appointed receiver, who was an attorney, devoted 300 hours over an 11-month period including conducting the mediation that resulted in the settlement. The amount received and disbursed by him totaled about $380,000 which, applying § 1217’s percentages, resulted in commissions less than $5,800, or about $19 per hour.
The receiver unsuccessfully asked the trial court to award him an additional $150,000 based on 1% of the value of the corporation’s real properties which he valued at $15 million. On the receiver’s subsequent appeal, the Manhattan appeals court reluctantly agreed with the lower court, stating that § 1217 is subject to “strict construction,” that the statute does not authorize commissions on the value of property owned but not sold by the corporation, and that the payment of commissions in excess of the statutory rate is “contrary to its plain meaning.” The court’s opinion commends the receiver’s successful mediation efforts and notes that § 1217 discourages a receiver from assisting with settlement by tying commissions solely to sums received and disbursed. In the court’s own words:
Although we are required to give literal application to the provisions of Business Corporation Law § 1217, we cannot detract from the value of the services rendered by the receiver, which were applauded by Supreme Court and acknowledged, albeit reluctantly, by the parties. The statutory reimbursement scheme contemplates the actual dissolution of the corporation and the distribution of corporate assets by the receiver; it does not address the situation where dissolution is avoided. In this case, the receiver was able to extract a negotiated settlement and so preserve, more effectively than by means of a judicial sale, the value of the corporate assets for the share owners. This outcome is favorable both to the parties and to the court. As a matter of policy, settlement is favored as a means of facilitating the resolution of disputes and preserving judicial resources (see Mitchell v New York Hosp., 61 NY2d 208, 214 [1984]; Matter of Hofmann, 287 AD2d 119 [2001]). These salutary purposes will not be promoted by a compensation provision that dissuades a receiver from attempting to settle a dispute between share owners in order to preserve his entitlement to an adequate commission for the services he has rendered.
In sum, the remedy lies not with the courts but with the Legislature. We strongly urge that consideration be given to amending Business Corporation Law § 1217 to afford a court discretion to fix a receiver’s commission based upon the value of the services rendered in those cases where, as here, dissolution and the consequent disposition of corporate property are not effectuated (particularly as the result of a negotiated settlement), subject to limitation by reference to a percentage of the total assets administered.
I know first hand the importance of finding an experienced, qualified receiver to take charge of a dysfunctional business in the throes of dissolution litigation. I also know that most of these cases — at least the ones involving businesses with going concern value — eventually result in a buyout settlement which, as in Eklund and Jakubowicz, can substantially reduce the prospects for receiver compensation. This undoubtedly deters many qualified attorneys and other professionals from taking on receivership assignments. It is unfortunate that the Jakubowicz court’s plea for legislative amendment seems to have fallen on deaf ears in our state capitol.
Tags: Eklund, Jakubowicz, Third Department