Appointing a Receiver in the Family Court Setting

Appointing a Receiver in the Family Court Setting

We address unique solutions to common divorce case problems.

March 01, 2016

Courts and judges often appoint receivers in business settings to liquidate or manage assets ranging from commercial buildings to trade assets. They also may appoint receivers in any cases before them where the facts and circumstances support such appointments — including dissolution of marriage proceedings.

Circuit court judges, in the exercise of their equitable powers, may appoint receivers in any case where appointment is allowed by law.1 The Michigan Supreme Court has recognized that a trial court may appoint a receiver even in the absence of statutory authority by virtue of the trial court’s inherent equitable powers.2 In contrast, the California courts have held that the appointment is a remedy authorized only by statute.3 In other words, a circuit court may use its equitable power on a case-by-case basis to determine whether to appoint a receiver. Often, the facts and circumstances surrounding a divorce proceeding indicate that the appointment of a receiver is not only within the discretion of the court but also absolutely necessary.

A receiver is often referred to as an arm of the court.4 The primary purpose for the appointment of a receiver is to preserve “property and to dispose of it under the order of the court.”5 Among the justifications for the appointment of a receiver is the need to conserve, preserve, protect, and administer property.6 A receiver is a useful tool in divorce proceedings, especially when the receiver is an operating receiver: an attorney or other professional who takes a hands-on approach to his or her appointment and uses all of his or her legal and business knowledge and experience to navigate the myriad issues that need to be addressed. In fact, under revised Michigan Court Rule 2.622, the court is required to appoint someone who has “sufficient competence, qualifications, and experience to administer the receivership estate” at issue.7 Beyond the requirements set forth in the court rules, the court must decide whether to appoint a proactive receiver or a reactive receiver. The following scenarios illustrate how an operator may take a proactive role when appointed to act in divorce proceedings.

Scenario 1: Co-Owned and Co-Operated Family Business

A husband and wife own and operate a successful automotive parts business, with many employees, a warehouse, millions of dollars in inventory, and a substantial line of credit. The couple’s feuding at home inevitably spills over into the workplace and the business suffers and loses money. The husband and wife often give conflicting instructions to workers and employee morale is low because workers fear that being seen as “taking sides” with one of the owners could cost them their jobs. The company has not paid its vendors recently because the spouses cannot agree on who is to be paid and in what order. Finally, due to several technical defaults, the bank is on the brink of calling in the company’s line of credit.

Such issues in family-owned and -operated businesses commonly arise during divorce and are not readily resolved through legal remedies or the filing of endless motions to show cause. Unless someone does something quickly, the business might fall apart — a lose-lose situation for the divorcing couple.

A highly experienced operating receiver assists the parties in stemming the losses and calming the situation — especially with the workers and lenders — and allows the parties’ counsel to move forward with, and concentrate on, the case’s legal aspects. Because of the personal dysfunction that permeates this couple’s business, the operating receiver investigates and addresses a number of issues upon appointment, including 1) the existence of and/or the purchase of liability, property, casualty, and workers’ compensation insurance, 2) the adequacy of the policies’ coverage limits, 3) the status of all taxes, including employment tax and sales tax, and 4) the status of contracts, work orders, vendor obligations, bank loans, and payroll.

How does the operating receiver conduct such an investigation? Ordinarily, the receiver meets with the parties at their place of business (either together or separately, with or without counsel, based on their preference and counsel approval), interviews the management team, reviews current financials, and performs a general walkthrough. Once the receiver and the parties have established a rapport through these steps, the receiver assembles a team of key management personnel to discuss current and past business issues, which accomplishes two goals: 1) it provides the receiver current, honest intelligence —– both good and bad — concerning the business and its operations, and 2) it provides employees a psychological boost, reasonably assuring them that they can do their jobs without fear of reprisal from either party for appearing to be taking sides.

After assembling the team of key management personnel, the receiver addresses any outstanding issues that plague the business and permeate the divorce case; assists with regulatory or government investigations; takes inventory to assist the evaluators; makes decisions concerning liquidating or abandoning obsolete inventory; controls waste and accounts for and secures potentially valuable scrap material; and reopens the doors to improve sales and show the community that the business remains viable. In addition, the receiver meets with loan officers from the lender to present a plan for going forward and to try to avoid foreclosure or other collection activities.

Armed with all the pertinent information about the business, and with a game plan in place, the receiver reports to the parties and their counsel, ensuring that everyone is on the same page and operating with the same working knowledge concerning the business and its status. As this knowledge grows and changes, both parties must be updated frequently so they have the most recent information available to navigate the various proceedings surrounding their divorce. The receiver does not operate in a vacuum or do these activities alone; he or she works with the parties, their counsel, and key management personnel to keep the business afloat and as healthy as possible while the marriage is being dissolved.

Sometimes one of the spouses refuses to cooperate with this approach. In such instances, a proactive receiver may give the uncooperative party a paid leave from the business. While this party should be kept informed of what transpires within the business, he or she typically would not be allowed in the place of business or to be directly involved in day-to-day operations. This arrangement generally continues until the parties reach a property settlement or the court orders otherwise.

Scenario 2: Family-Owned Business Where Only One Spouse Participates in Its Operation

Sometimes one of the spouses does not participate in the operation of the family business, but he or she still needs to have current financial information concerning the business to determine what, if anything, he or she is entitled to in the division of assets. If valuable and necessary information is stored on company computers, the nonparticipating spouse might be denied access to this information. Sometimes attempts to mirror or copy the hard drive are thwarted. Perhaps the nonparticipating spouse has filed motions seeking to compel discovery and impose sanctions, but the information is still not available. Counsel for the shut-out spouse refuses to attend mediation or facilitation without access to this information first, so the case grinds to a halt.

Under these circumstances, the court may appoint a receiver to assist in preserving and gathering the information and documentation necessary to move forward with the divorce proceeding, to work with experts to coordinate the vital material information needed, and to cut through red tape. The receiver’s job begins with a meeting with the accountants, advisors, or business valuators to create a discovery plan. The receiver works with the company’s IT or accounting personnel (or, in some cases, the receiver’s own experts or a combination of the two) to have the items produced, usually in conjunction with a well-crafted confidentiality agreement. Often, the physical presence of the receiver, who is armed with the full authority granted by the court, inspires action and allows for the smooth transfer of the necessary financial information to the parties’ counsel.

Scenario 3: Support Obligations

A recalcitrant party is unwilling to pay child or spousal support. Sometimes the funds available to meet support obligations are locked in an IRA, 401(k) or other retirement vehicle and therefore are not readily available. Similarly, in the case of a highly paid executive, some of his or her compensation and/or wealth lies in an employee stock ownership plan or other stock options. Often, these types of assets compose the bulk of the marital property at issue, and just as often, they are located out of state. In more complicated cases, tax liens have been filed against the taxpayer, making collection of funds even more difficult.

The court may appoint a receiver to control and manage the distributions from these types of funds. With a properly drafted order, the receiver can cut through much of the red tape associated with making withdrawals from or liquidating these types of assets.8 In such cases, the court appoints the receiver over the personal estate of the nonpaying party. The receiver may complete and submit all the necessary paperwork on behalf of the nonpaying party. If tax liens are filed, the receiver may address and/or negotiate a settlement with the IRS, and the remaining funds may be allocated to the receiver for distribution in accordance with the court’s direction.

In other instances, one spouse seeks to modify previously entered support orders. For example, perhaps financial circumstances have changed, with either the receiving party earning less or the paying party presumed to be earning more. One of the parties fails to fully comply with discovery requests. In one such case, a receiver was appointed over a divorced, self-employed handyman who was paid primarily in cash. His ex-wife believed her ex-husband’s income reporting was inaccurate, so she sought child support modification. The receiver subpoenaed bank records, tax returns, business contracts, and similar documentary evidence and, thereafter, employed a forensic accountant to determine the validity of the ex-wife’s concerns regarding underreported income.

Scenario 4: Cash Businesses and the Disappearing Dollar

One of the more difficult scenarios a receiver faces in a divorce proceeding involves closely held businesses that operate mainly in the world of cash: retail stores, repair shops, self-employed contractors, restaurants, bars, and hair salons. The proceeding is even more complicated when only one of the two spouses works in and controls the business.

One such case is Shouneyia v. Shouneyia, 291 Mich. App. 318 (2011). In Shouneyia, the trial court awarded the plaintiff property and attorney fees as part of the divorce judgment entered,9 but the defendant claimed not to have the funds or resources necessary to satisfy the award.10 The plaintiff moved for the appointment of a receiver over the defendant’s assets, including a closely held business, a market the defendant operated with his brother. The trial court appointed a receiver over the business even though the business was not a party to the litigation. Subsequent to that appointment as receiver, and prior to an appeal the defendant filed, the receiver viewed firsthand the business’s operations. The Court of Appeals noted the pertinent facts appeared undisputed.11 Among the facts the Court of Appeals cited in its determination that the trial court had not abused its discretion in appointing a receiver over the corporation was the defendant’s business practice of “multiple daily acts of zeroing out cash registers” (essentially deleting receipts).12 Because the defendant claimed a lack of funds and assets prevented him from paying the plaintiff the sums previously awarded to her, it was imperative that the market’s operations be made more visible and traceable than is typically common with cash-oriented businesses.

Closely held companies that transact business mostly in cash pose unique challenges: 1) finding trustworthy operators, if necessary, to replace those currently in control who are suspected of hiding assets, 2) inventorying licensed products, such as beer, wine, liquor, cigarettes, and lottery tickets, 3) preventing improper business practices (e.g., check-cashing services without proper licensing), and 4) preventing operators from “zeroing out” registers at the end of the day or from taking other steps to disguise the true cash flow of the business. In the search for a trustworthy new operator, the receiver might first turn to other family members familiar with the business. If no such family member exists, the receiver looks for professional recommendations. Ultimately, the receiver’s physical presence in the business usually persuades the operator to cooperate or, if nothing else, to agree to settle the case for fear of seeing the business shut down and its assets liquidated.

Scenario 5: Refinancing Existing Loans Required

A term loan is due in the middle of a divorce proceeding, and the operating spouse either wants to refinance the loan or needs to borrow additional funds. The other spouse, however, refuses to release the business asset from an existing status quo injunction in order to obtain new or additional financing. The judge, not knowing the business, is challenged to make a decision that could negatively impact one or both of the parties. An appointed operating receiver investigates the business, reviews and analyzes the business’s financial needs, gives the court a recommendation as to the business’s need for funds, and makes certain that the loan proceeds, if approved and authorized, are allocated to the business’s needs.

In other instances, refinancing the business assets might be required to provide a spouse sufficient liquidity in order to effectuate the settlement. Again, an appointed receiver gives the nonoperating spouse the assurance that attempts to refinance are genuine and represent a legitimate business purpose, and that the proceeds — or a sufficient amount of the proceeds — will be used for their intended purpose: to pay the nonoperating spouse for his or her fair share of the underlying business.

Scenario 6: As the Marriage Goes, So Does the Business

Sometimes a failed marriage leads to the demise of the family-owned business. In this scenario, the receiver takes the necessary steps to either 1) sell the business as a going concern, or 2) liquidate the business assets for the benefit of the business’s creditors, and then distributes the net sale proceeds to the parties in accordance with the terms of the final judgment of divorce (or an amicably reached property settlement). Selling the business as a going concern requires the receiver to investigate the company’s financial status, current contracts and pending projects, obtain a business valuation, and hire a broker.

Winding down the business requires the operating receiver’s experience and expertise in 1) hiring experts to value the company assets, 2) hiring an auction company or broker to liquidate tangible company assets and inventory, 3) hiring a broker to list, market, and sell company real estate, 4) retaining an accountant and advisors for tax planning and reporting, and 5) carefully reviewing company records to determine outstanding liabilities and the identities of creditors for notice compliance. The receiver also investigates the status of federal, state, and local taxes and ensures the business is in compliance with them all.

By reporting routinely to the parties, their counsel, and the court, the receiver provides transparency in the winding down of the marital business. Also, counsel presents the receiver’s major actions to the court for approval, giving the parties the opportunity to object to the proposed sale of assets. The receiver collects all sale proceeds, satisfies the allowed creditor claims, accounts to the parties and, following settlement, distributes the net proceeds in the manner prescribed by the divorce judgment. Importantly, the receiver’s actions enable the parties to go their separate ways, knowing that the business has been wound down in accordance with the law, in a professional, thorough way, and that years from now they will not encounter unresolved “surprises” from the business they once owned together.

Scenario 7: Multi-Jurisdiction Matters

Sometimes the appointment of a receiver necessarily requires addressing matters in other jurisdictions. Because of the complexity of such matters, a receiver may act in part as a business consultant. In one case, the liquidation of a large construction company included the hiring of an international auction company to conduct an international auction of heavy equipment. The construction company also had a corporate plane. Rather than selling the plane at auction, the receiver hired a broker to list it. A South American company bought the plane. By taking a proactive, hands-on approach to the sale of this asset, the receiver ensured that the plane sold for much more than it would have at auction. Given the size of the company and its business endeavors in other states, the receiver also addressed insurance, tax, creditor, and union issues in multiple jurisdictions, including the hiring of appropriate counsel and professionals when needed.

Multi-jurisdiction issues can also arise when an operating receiver oversees an ongoing business that is not being liquidated. In one such case, a receiver addressed a company’s ongoing concerns with pricing and delivery timeliness of suppliers in Asia involving more than 100,000 SKUs. Simultaneously, the company’s owner was going through divorce proceedings. By assisting the owner and streamlining negotiations with suppliers, the receiver improved the company’s economics and helped the business maintain the status quo until the resolution of pending divorce issues.

Scenario 8: Receiver as Facilitator as a Last Resort

The receiver is in a unique position: He or she learns the ins and outs of the family-owned business, as well as the family dynamics, in order to facilitate a settlement. Of course, the court order cannot mandate that the receiver act as facilitator, but often the parties and their counsel voluntarily approach the receiver for his or her help in negotiating a settlement of remaining issues.

This is usually a last resort because previous facilitation or mediation has failed. Generally, the parties make this request for facilitation at the end of the appointment, when only one or two issues separate the parties from fully resolving their case. If the receiver and the parties have established a comfortable working relationship, the receiver’s goodwill in acting as facilitator often goes a long way in bridging whatever distance remains between the parties, making the parties far more willing to negotiate an end to the litigation.


Counsel and the family court should always consider the appointment of a receiver as a useful tool in navigating divorce proceedings. Under the right circumstances, a receiver greatly reduces the number of motions filed and the amount of litigation involved in a case.

As an arm of the court, the receiver is an impartial buffer between the parties. The receiver’s presence alleviates much of the mistrust between the parties. By doing his or her job effectively – and communicating with the parties, their counsel, and the court throughout the process – the receiver makes the dissolution of a marriage less contentious, less expensive, and less emotionally draining, thereby benefiting all parties involved.

Guest Author:

Henry M. Nirenberg, J.D., LL.M

  1. MCL § 600.2926; Miller v. Oliver, 174 Cal. 407, 410 (1917); Sims v. Stegall, 197 S.W.2d 514 (Tex. App. –Texarkana M1946, no writ).
  2. Michigan Minerals Inc. v. Williams, 306 Mich. 515 (1943).
  3. Miller v. Oliver, 174 Cal. 407, 410 (1917).
  4. Westgate v. Westgate, 294 Mich. 88, 91 (1940); Shannon v. Superior Court, 217 Cal. App. 3d 986, 992 (1990); First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339, 343 (Tex. 1976).
  5. Cohen v. Cohen, 125 Mich. App. 206, 214 (1983); Kreling v. Kreling, 118 Cal. 421, 422 (1897).
  6. 65 Am. Jur. 2d, RECEIVERS § 27 at 676.
  7. MCR 2.622(B).
  8. MCL 552.27(c).
  9. 291 Mich. App. at 319.
  10. Id. at 320-321.
  11. Id. at 326.
  12. Id. at 327.