Mashni v. Foster

• Decision Date: 29 April 2014
• Docket Number: No. 1 CA–SA 13–0250.,1 CA–SA 13–0250.
• Citation: 323 P.3d 1173,234 Ariz. 522,685 Ariz. Adv. Rep. 42
• Parties: Paul MASHNI, Court-appointed receiver, Petitioner, v. The Honorable George H. FOSTER, Judge of the Superior Court of the State of Arizona, in and for the COUNTY OF MARICOPA, Respondent Judge, Sunnyslope Housing Limited Partnership, an Arizona limited partnership; First Southern National Bank, Real Parties in Interest.
• Court: Arizona Court of Appeals

234 Ariz. 522
323 P.3d 1173
685 Ariz. Adv. Rep. 42

Paul MASHNI, Court-appointed receiver, Petitioner,
v.
The Honorable George H. FOSTER, Judge of the Superior Court of the State of Arizona, in and for the COUNTY OF MARICOPA, Respondent Judge,
Sunnyslope Housing Limited Partnership, an Arizona limited partnership; First Southern National Bank, Real Parties in Interest.

No. 1 CA–SA 13–0250.

Court of Appeals of Arizona,
Division 1.

April 29, 2014.

[323 P.3d 1175]

Quarles & Brady LLP By John M. O'Neal, Walter J. Ashbrook, Phoenix, Counsel for Petitioner.

Lewis Roca Rothgerber LLP By Susan M. Freeman, Eric Wanner, Phoenix, Counsel for Real Party in Interest Sunnyslope Housing Limited Partnership.

Gallagher & Kennedy, P.A. By John R. Clemency, Janel M. Glynn, Phoenix, Counsel for Real Party in Interest First Southern National Bank.

Presiding Judge PETER B. SWANN delivered the opinion of the Court, in which Judge MAURICE PORTLEY and Judge SAMUEL A. THUMMA joined.

OPINION
SWANN, Judge.

¶ 1 This case requires us to examine the limits of the immunity afforded to court-appointed receivers.

¶ 2 Receiver Paul Mashni petitions for special action relief from the superior court's ruling denying him immunity from suit for alleged mismanagement of receivership assets. The court's order permitting the damage action against Mashni to proceed was not based upon a finding that he had exceeded his powers under the order of appointment, but rather on the theory that a receiver can face liability if actions taken pursuant to the order cause a “material detriment” to any “interested party.” We accept jurisdiction and grant relief. We hold that a court-appointed receiver is immune from suit unless the appointing court finds that the receiver has acted outside the scope of the order of appointment. We further hold that the court cannot charge a receiver with a fiduciary duty to maximize economic benefit for adverse parties simultaneously. Finally, we hold that a party aggrieved by a receiver's actions must promptly inform the court and seek its intervention before bringing an action for damages.

FACTS AND PROCEDURAL HISTORY

¶ 3 Since 2005, Sunnyslope Housing Limited Partnership (“Sunnyslope”) has been involved in the construction and operation of an apartment complex in Phoenix. Sunnyslope financed the construction with a senior private loan, guaranteed by the federal government and secured by a deed of trust on the apartment complex, and two junior loans from the Arizona Department of Housing and the City of Phoenix, respectively. Sunnyslope intended to operate the apartment complex as a low-income-housing project to qualify for the Low Income Housing Tax Credit (“LIHTC”) program. SeeI.R.C. § 42. This investment strategy was purportedly worth several million dollars. Partly to ensure continued LIHTC eligibility, Sunnyslope and the junior lenders agreed to and recorded covenants requiring the entire apartment complex to be leased to low-income households. The covenants were expressly subordinated to the senior private loan, but “binding upon the Owner's successors in title and all subsequent owners and operators.” Under the agreement, the covenants were to automatically terminate in the event of foreclosure.

¶ 4 Sunnyslope defaulted on the senior loan after completing construction. The federal government fulfilled its loan guarantee obligation and sold the senior debt to First Southern National Bank (“First Southern”), which shortly thereafter filed a motion to appoint Mashni as receiver of the apartment complex. Before the hearing on the motion, Sunnyslope e-mailed First Southern's counsel to confirm that it “agree[d] to a stipulated receivership per the proposed order appointing the receiver.” Sunnyslope did not appear at the appointment hearing, and at no point sought to amend the appointment order or change the bond amount.

¶ 5 The superior court appointed Mashni as receiver in October 2010. The appointment order authorized Mashni to, among other tasks: “enter into, modify and/or reject contracts affecting any party or the Property and to exercise rights existing under such contracts, including but not limited to filing suit thereon, and/or evicting tenants from the Property”; “market and rent, as [he] believe[d was] in the best interests of the Receivership Estate”; and “use such measures, legal or equitable, as [he], in consultation with and with the consent of [First Southern], deem[ed] appropriate, desirable, [or]

[323 P.3d 1176]

necessary ... to implement and effectuate the provisions of the Loan Documents [relating to the senior loan].” The order defined in great detail the property that Mashni took possession of, but excluded any reference to the low-income-housing covenants or related tax credits.

¶ 6 Mashni knew that Sunnyslope had operated the apartment complex as low-income housing before the receivership appointment, but he began to lease the apartments at market rates almost immediately after his appointment. Mashni later testified that he understood the appointment order authorized him to stop operating the apartment complex as low-income housing:

I knew it was low income housing, but I knew it had also failed as low income housing so one of the stipulations that we made to even be considered to be the receiver was we had to have the ability to run it as a market rate property.... [I d]idn't have an agreement with anybody except for the fact that when I was asked to be the Receiver I made sure that the receivership order allowed me to run it as a market property.

¶ 7 Sunnyslope initially learned of Mashni's noncompliance with the low-income-housing covenants when he filed his first receivership report in December 2010, approximately two months after his uncontested appointment. Days after receiving the report, Sunnyslope contacted Mashni's counsel to confirm whether Mashni was disregarding the covenants. His counsel replied that “[a]ll new leases [were] being completed at market rates on conventional leases.”

¶ 8 Mashni had scheduled a foreclosure sale of the apartment complex for February 1, 2011, but it never took place because Sunnyslope sought Chapter 11 bankruptcy reorganization the day before. Sunnyslope commenced the bankruptcy to prevent the foreclosure, which would have automatically terminated the covenants meant to preserve LIHTC eligibility. Mashni remained in possession of the apartment complex while the bankruptcy case was pending, and in May 2011 the bankruptcy court ruled that Mashni had to comply with the low-income-housing covenants. The following month Mashni relinquished possession to Sunnyslope's designee and began winding up the receivership estate.

¶ 9 At the end of 2011, the bankruptcy court vacated the automatic stay to permit Mashni to move for discharge of the receivership. The bankruptcy court ordered Mashni to obtain from the superior court “such other determinations as may be necessary to wind up the receivership, including, without limitation, findings of fact confirming whether [he] acted at all times during the Receivership Action in accordance with, and within the scope of, the Receivership Order.” It further ordered that “[a]ny claims the Debtor may assert against the Receiver ... shall be raised by the Debtor in connection with the Wind–Up Proceedings in the Superior Court.”

¶ 10 Accordingly, Mashni moved the superior court to discharge the receivership, exonerate the receiver's bond, and approve payment of various receivership expenses. Sunnyslope objected, primarily on grounds that Mashni had jeopardized its LIHTC eligibility by failing to operate the apartment complex in compliance with the low-income-housing covenants. Sunnyslope further alleged...