Opinion ID: 2630997
Heading Depth: 4
Heading Rank: 2

Heading: Otaka's other pre-receivership debts

Text: Hawaii Ventures contends that Receiver Park paid and discharged certain pre-receivership obligations without any indication that the payments for services and/or expenses were beneficial to the Estate. Specifically, Hawaii Ventures identifies, as examples, payments for the following: travel agents including an Otaka officer ($9,492), vendors of food and beverages ($48,438), maintenance services ($13,782), supplies ($23,271), advertising ($32,906), equipment ($1,105), public relations services ($462), cleaning supplies ($2,420), miscellaneous ($2,460), uniforms ($456), unsecured lease payments ($4,075), office supplies ($1,312), travel/entertainment by Otaka officers ($7,110), sundry ($3,247), and obligations under Otaka equipment leases ($48,862). These categories represent a total of $199,398. (Citations to the record omitted.) The above payments for services and/or expenses challenged by Hawaii Ventures were the exact amounts that the Special Master deemed justified. The Special Master expressly indicated that, [w]here the non-payment of a pre-receivership liability threatens the [Estate], or the corresponding goods and/or services creating the liability directly benefitted the Hotel during the [r]eceivership period, the Receiver may be justified in satisfying that liability. In finding these payments justified for the most part, the Special Master provided the following explanations for each category of payments, which are quoted verbatim from his report: (1) Travel agent commissions of $9,492 ( Justified ) Travel agents were vital to preserving and maintaining the existing guest revenues of the Hotel. Payment of the outstanding commissions was necessary to assure that agents would continue to refer their clients to the Hotel during the [r]eceivership period. (2) Food & Beverages of $60,304 ( $48,438 Justified and $11,866 Estate Receivable ) The Receiver's position is that the Estate rightfully paid the $60,304 in food and beverage costs since the items purchased were used during the [r]eceivership period. The food and beverage inventory on hand [on] August 24, 2000 . . . amount[ed to] $48,438 [and] appears to be a justifiable payment by the Estate[;] the remaining $11,866 should be treated as a receivable of the Estate. (3) Maintenance of $37,290 ( $13,782 Justified and $23,508 Estate Receivable ) The amount of $13,782 were for parts and supplies acquired in August and used to maintain and repair Hotel furniture, fixtures and equipments, or subsequently reimbursed to the Hotel. The remaining $23,508 was attributable to maintenance service contracts, which were replaceable if these service providers required the Receiver to assume the pre-receivership liability along with the contracts. Accordingly, the $23,508 maintenance service contract payments should be classified as a receivable of the Estate. (4) Supplies of $23,271 ( Justified ) These purchases consist of bulk operating supplies such as copy paper, pens, rubbish liners, napkins, toilet tissue, Kleenex, shower caps[,] and toiletries that were purchased in August 2000 and subsequently used by [the] Estate. (5) Advertising of $32,906 ( Justified ) These costs were for print and advertising material, including services that were used [for] or benefitted the Hotel after the Receiver took possession. (6) Equipment of $1,105 ( Justified ) The[se] payments were for the purchase of kitchenware supplies and shower curtains in August for use in the operations of the Estate. (7) Public relations of $462 ( Justified ) The payment was for public relations services for the Hotel. (8) Cleaning supplies of $2,420 ( Justified ) The[se] payments were for the purchase of cleaning supplies in August 2000, which were used by the Estate. . . . . (10) Miscellaneous of $2,460 ( Justified ) These payments were for miscellaneous supplies and services benefitting the Estate, including rent of offsite records storage space. (11) Uniforms of $456 ( Justified ) Uniforms purchased were available for use during the [r]eceivership period, and the payments therefore benefitted the [E]state. . . . . (14) Lease of $10,367 ( $4,075 Justified and $6,292 Estate Receivable ) The [payment] of $4,075 of the pre-receivership liability . . . had no impact on the Estate since it was a one time payment to HWB[,] which account was in the Receiver's possession (essentially an intra-account transfer). The remaining $6,292 should be reclassified as an Estate receivable since these payments were made in connection with the Hotel's telephone system, fax machine[,] and copier equipment leases for which the Receiver had the authority to assume and pay obligations arising during the [r]eceivership, but [did not have the authority to] pay the related pre-receivership payable unless she was able to demonstrate that the non-payment would have threatened the Estate. . . . . (16) Office supplies of $1,312 ( Justified ) Office supplies were in inventory and used in part by the Hotel after the Receiver took possession. (17) Travel/Entertainment of $12,738 ( $7,110 Justified and $5,628 Estate Receivable ) The payments amounting to $7,110 were for travel and entertainment expense reimbursements to the Hotel marketing and sales executives, which provided future benefits to the Hotel. The remaining payments amounting to $5,628 should be treated as an Estate receivable since they were for services rendered by an entertainer prior to the [r]eceivership and other unidentified expenditures . . . . (19) Sundry of $3,247 ( Justified ) The purchases related to Hotel logo items (polo shirts, golf caps) that were either sold or given to Hotel guests after the Receiver was appointed, and therefore[,] benefitted the Estate during the [r]eceivership period. . . . . (28) Obligations Under Capital Lease of $48,862 ( Justified ) The $48,862 consists of a $44,760 telephone system lease contract and $4,102 trash compactor lease contract, which were assumed by the Estate. The assumption of these contracts and payments of lease contract obligations during the [r]eceivership period were appropriate since the telephone system and trash compactor were used by the Estate and essential to the operation of the Hotel. (Emphases in original.) Hawaii Ventures, nonetheless, asserts that the circuit court's approval of these payments for pre-receivership obligations should be reversed[.] Although a receiver need not have prior court approval for every single detail of receivership, a receiver has some duty  given [her] very limited powers  to apply to the court for advice and directions. 65 Am.Jur.2d Receivers § 131 at 748 (footnotes omitted); see, e.g., Interlake Co. v. Von Hake, 697 P.2d 238, 240 (Utah 1985) (The receiver has only very limited powers and should apply to the court for advice and directions. If [she] acts without court authority, [she] assumes the risk of liability for costs and expenses incurred. (Citations omitted.)). Where [her] judgment is likely to be questioned by creditors, prudence will dictate recourse to the court for a decree authorizing particular action which will afford protection against later claim that the action was disadvantageous to the estate or beyond [her] authority. However, it is not to be expected that a receiver authorized to operate a business will apply to the court for specific approval of [her] decision on every business problem which comes before [her]. Fauci v. Mulready, 337 Mass. 532, 150 N.E.2d 286, 290 (1958). In matters of management and manner of disposition of the estate, a receiver exercises a large discretion, which [she] . . . must do, as the court cannot attend to details of administration. The court will act, and the receiver will exercise [her] discretion, at all times to best subserve the estate and those concerned in its due administration. Coy, 198 F. at 280. Moreover, where a receiver is appointed to perform a specific function such as preserving value by running a hotel business, as in this case, she must have freedom of action to do those acts most beneficial to [the] estate which are authorized by the court. Within such sphere[, she] may affirm or reject the rights and obligations of the interest [she] is caretaking[.] Riker v. Browne, 204 N.Y.S.2d 60, 62 (N.Y.Sup.Ct.1960) (citations omitted). Consistent with the foregoing, the appointment order explicitly granted Receiver Park the authority and discretion to, inter alia, (1) pay for such expenses as are necessary or appropriate for the care, preservation and maintenance of the Estate[;] (2) with a priority to be determined in the Receiver's sole discretion, pay any expenses (including for example, rent, utilities, taxes, payroll and debts to vendors) which arise during the period of the [r]eceivership; and (3) assume and perform under any contract relating to the [m]ortgaged [p]roperty. Aside from these expressed powers, the appointment order conferred a broad residual power on Receiver Park to take such other actions as is reasonable to effectuate the[] powers and duties defined in the appointment order. Accordingly, it was well within Receiver Park's discretion, pursuant to the express terms of the appointment order, to pay the necessary business expenses of the Hotel (although they may have been incurred earlier) from the revenues of the Hotel. See Hancock-Nelson Mercantile Co. v. Weisman, 340 N.W.2d 866, 869 (Minn.Ct.App.1983) (A receiver's powers are defined by the orders of the court and include authority as may reasonably or necessarily be implied for such orders. (Citation omitted.)). However, Hawaii Ventures contends that there [was] no evidence of any evaluation of the necessity and the costs before payment, no substantive explanations from the Receiver, and no evidence that the Receiver's conclusions were credible. According to Hawaii Ventures, [n]othing in the record shows that the Receiver or the Special Master considered whether any expenditure on Otaka['s] liabilities was necessary to keep the Hotel open, i.e., necessary to preserve the Estate. There is no evidence that the Receiver or her advisers even recognized that any limitation on their payments existed, and there is no evidence that they consulted with the Lender, or sought direction from the court. We disagree. In the Receiver's final report, in her response to the objections to her report, and in her response to the Special Master's report, Receiver Park pointed to the discretionary provisions contained in the appointment order as the guiding authority for her to pay certain expenses as she did. Attached to the final report were (1) a balance sheet as of the closing date including backup reconciliations and schedules ( e.g., bank reconciliations, inventory counts, fixed asset details, account receivable listings, accounts payable listings, and accrued vacation schedule), (2) a statement of income from August 24, 2000 to closing date, and (3) a post-closing cash balance report, listing the cash balances as of closing and details of the post-closing payments made on outstanding liabilities. Also, in her reply to objections to the final report, Receiver Park addressed each of Hawaii Ventures' concerns and enclosed numerous documents to further support her final report. Moreover, as discussed infra, the Special Master's report provided additional documentation of Receiver Park's payments. The Receiver's payment of the above challenged amounts for services and/or expenses was clearly consistent with her duty to preserve and maintain the Estate; it kept the Hotel operating and resulted in her delivery of a multi-million dollar profit to Hawaii Ventures. Inasmuch as Hawaii Ventures has failed to demonstrate that the circuit court abused its discretion in approving payment of Otaka's other pre-receivership debts, we hold it did not. [16]