Opinion ID: 2630997
Heading Depth: 3
Heading Rank: 2

Heading: Pre-Receivership Obligations

Text: Hawaii Ventures argues that: The circuit court erred in retroactively blessing the use of Estate's assets to pay Otaka['s] debts. The Receiver could not properly use the collateral to pay Otaka['s] liabilities unless there is a finding, based on an adequate record, of necessity for the preservation of the Estate. . . . . . . [T]he Receiver was required to respect [the] Lender's first lien rights in the collateral and could not choose to pay other and junior creditors. . . . Here, the circuit court erroneously approved a wide variety of payments and erroneously permitted distributions to junior creditors prior to any determination of priority. (Citations omitted.) Hawaii Ventures also asserts that: The Special Master appears to have concluded that in excess of $1.3 million of Estate assets were expended to discharge liabilities of the borrower that arose prereceivership. These were in some cases payments for goods, services and labor provided to Otaka for Hotel operations prior to appointment of the Receiver. Other payments were compensation or expense account reimbursement of Otaka executives, tax withholding obligations of Otaka, entertainment bills run up at other Otaka properties, and long overdue vendor bills and contracts entered into by Otaka. These are expenses incurred by Otaka and owed by Otaka. Nothing in the record shows that the expenditures were necessary to keep the Hotel open, i.e., necessary to preserve the Estate. None were claimed by the creditors in the foreclosure proceeding to give rise to interests senior to [the] Lender. . . . There is no basis for using proceeds of collateral or revenues collected by the Receiver during the receivership period to pay these old bills. (Citations omitted.) Hawaii Ventures identifies several specific payments that it believes should not have been paid by Receiver Park from the Estate's funds, which, for purposes of discussion, are categorized as (1) pre-receivership employees' wages and benefits and (2) Otaka's other pre-receivership debts. Keeping in mind the general principles of receivership and the parameters of the appointment order previously discussed, we examine Hawaii Ventures' arguments regarding the aforementioned specific payments made by the Receiver.
Focusing solely on pre-receivership wages, vacation pay or employment taxes paid during the receivership period, Hawaii Ventures specifically argues that: The circuit court erroneously and retroactively approved payment of Otaka debts to Otaka employees for services rendered to Otaka prior to the receivership of approximately $156,220 in wages, $60,122 in payroll taxes withholding, and $99,486 in vacation benefits[, totaling $316,188.00]. . . . There is no record to support that payment for, or use of, benefits such as vacation accrued during the pre-receivership period was a reasonable or necessary expense during the [r]eceivership period[.] (Emphases added.) The contested payments represent (1) wages earned the week immediately preceding the circuit court's appointment of the receiver and (2) vacation benefits taken during the receivership that were drawn in part from unused vacation credits accrued pre-receivership. In response, Receiver Park maintains that the appointment order gave [her] the authority, power, and discretion to pay wages and other obligations that may have had their inception before her appointment, but which arose during the receivership. To prohibit her from maintaining the Hotel's work force, by funding essential perquisites of employment, would contradict her ultimate duty to care for, preserve, and maintain the property. (Emphasis added.) ILWU similarly argues that, [b]ecause the circuit court's order appointing the Receiver gave her the necessary authority, the Receiver acted properly in paying the disputed employee benefits from [the Estate's] assets. ILWU also contends that the payments were appropriately approved by the circuit court as administrative expenses chargeable to the Estate because, inter alia, [t]he Receiver paid wages and vacation in question knowing that continued labor throughout the receivership period was essential to protecting the operation of the [H]otel and making it profitable. Generally, the costs and expenses of a receivership incurred in preserving its assets are administrative expenses, chargeable to the assets of the receivership. Miller v. Leadership Hous. Sys., Inc., 57 Haw. 321, 327, 555 P.2d 864, 869 (1976) (citations omitted) (emphasis added). This court, however, has warned against construing the word preserve too literally. Id. at 328, 555 P.2d at 869. In Miller, this court held that expenses for improvements to a property in receivership may be paid from the receivership assets if they are necessary to preserve the property in the hands of the receiver. Id. at 327-28, 555 P.2d at 869 (citations omitted). The Miller court explained that improvements to the property in the receiver's hands can result in the property being figuratively `preserved' in its intended final condition and a greater sum realized for distribution to creditors, general and special, than if the receiver were forced to leave it in its incomplete less salable condition. Id. at 328-29, 555 P.2d at 869-70 (internal quotation marks and citation omitted). With respect to the specific pre-receivership payments at issue here, other courts have recognized that it may be proper for receivers to pay wages and vacation benefits earned by employees prior to the imposition of a receivership. For example, in United States v. Wisconsin Valley Trust Co., 233 F.Supp. 73 (W.D.Wis.1964), the United States sued Receiver Wisconsin Valley Trust Company in federal court, arguing that the receiver should not have paid pre-receivership wages and vacation in a previous state court corporation receivership and that such sums should have instead been paid towards federal taxes. Id. at 74. The federal court, in dismissing the United States' lawsuit, held, inter alia, that the payments were necessary and explained: Here is a Receiver that was confronted with the duty of running a business [ i.e., a trucking company ] and the record shows that he was dealing with some 250 to 300 employees belonging to approximately 12 or 15 [l]abor [o]rganizations. It was his duty to keep the business running and he could not do so unless he had truck drivers and maintenance men. This [c]ourt takes notice of the facts of business life in that these employees would not continue working had they not been paid the wages due them. Id. at 79. The court further explained that the business could not have been sold so lucratively had it not been for the receiver's decisions that kept it operational. Id. Accordingly, the court held that these payments[, i.e., wages and vacation pay,] to the employees had to be made to preserve the business. It is the [c]ourt's opinion that the Receiver would have been derelict in his duty had he not pursued the course he had for the purpose of preserving the assets which eventually were sold as a going business. Id. at 81 (emphases added). In reaching its conclusion, the court recognized, one, that [w]ages earned prior to the appointment of a receiver have likewise been held to be a first charge upon net earnings during the receivership, upon grounds which would entitle them to a preference out of the corpus, namely, that there has been, prior to the receivership, a diversion of the current earnings out of which such wages should have been paid, or that payment was necessary in order to retain the services of employees needed by the receiver, or that the mortgagees have received a benefit from the continuance of the business as a going concern for which they are bound in equity to pay[,] id. at 80 (format altered) (some internal quotation marks, citations, and ellipses omitted), and, two, that [i]t cannot be affirmed that no items which accrued before the appointment of a receiver can be allowed in any case. Many circumstances may exist which may make it necessary and indispensable to the business . . . and the preservation of the property, for the receiver to pay pre-existing debts of certain classes, out of the earnings of the receivership, or even the corpus of the property . . . . Yet the discretion to do so should be exercised with very great care. Id. (emphasis added) (format altered) (quoting Miltenberger v. Logansport, C. & S.W.R. Co., 106 U.S. 286, 311, 1 S.Ct. 140, 27 L.Ed. 117 (1882)). [13] Here, the appointment order expressly authorized the Receiver to use [her] best efforts to manage, protect, care for, preserve, and maintain the Estate, to pay for such expenses as are necessary or appropriate for the care, preservation and maintenance of the Estate, and to undertake to expend revenues for maintenance or enhancement of the ability of the [m]ortgaged [p]roperty to operate, including marketing and refurbishing expenditures. The circuit court also granted the Receiver the broad authority to take such other actions as is reasonable to effectuate [her enumerated] powers and duties. These provisions empowered Receiver Park to pay any expenses, including payroll, that were appropriate to maintain or enhance the value of the Hotel during the receivership. In fact, the appointment order specifically permitted Receiver Park to pay expenses that were incurred or arose during the receivership and that were necessary and appropriate for the preservation of the Estate. Receiver Park's decisions to pay to the Hotel employees wages earned the week before her appointment and allow the employees to use vacation benefits earned prior to her receivership were clearly necessary [and] appropriate for the care, preservation and maintenance of the Estate. Had she not done so, the Hotel may not have been an asset, but a liability. Receiver Park took over the Hotel with $406,000.00 in the operating account; by the time of the foreclosure sale, she had increased the Hotel's cash-on-hand over tenfold to $4,300,000.00 as of June 30, 2001. Nevertheless, it would not be unreasonable to expect that the Receiver's refusal to pay the pre-receivership wages and benefits could have resulted in a loss of employees or a refusal to work. Moreover, the ILWU could have called for a strike, set up picket lines, and filed charges of unfair labor practices. From her perspective as the manager of an ongoing business and the discretionary authority granted to her in the appointment order, Receiver Park's decision to pay employee expenses to prevent any potential breakdown in the Hotel's labor relations that might have impaired the property's value was reasonable. See Coy v. Title Guarantee & Trust Co., 198 F. 275, 280 (D.Or.1912) (a receiver exercises, in matters of management and manner of disposition of the estate, a large discretion, which he . . . must do, as the court cannot attend to details of administration.). As demonstrated in her final report, Receiver Park commended the efforts of the management team and the workforce in maintaining an average monthly occupancy rate of 72.19% for the period from September 2000 through June 30, 2001, which rate represent[ed] an improvement from the 69.95% average from the previous year (September 1999 through June 2000), and is very much in line with other comparable Waikiki hotels[.] Receiver Park also indicated that, [o]ut of a work force of 270 employees (which included bargaining and non-bargaining, full-time, part-time and on call employees), from August 24, 2000 to June 30, 2001, only 28 resigned (with 11 of them resigning in June 2001). [14] Accordingly, we hold that the circuit court did not abuse its discretion in approving Receiver Park's payment of employees' wages and benefits earned pre-receivership when such payment was clearly appropriate to maintain and enhance the value of the Estate. [15]
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]