All too frequently owners of closely held businesses find themselves at loggerheads regarding management, compensation or use of company resources. When those owners are forced to resort to litigation, the very existence of the business may be threatened, either as a result of the inability to reach agreement on management or because of the oppressive behavior of the owners who have wrested effective control from those with whom they have a dispute. This article is intended to briefly explore the power of the courts to appoint receivers during the pendency of the litigation so as to preserve the business for all of the owners.
What Is a Receiver? A receiver is an officer of the court appointed on behalf of the parties to take possession and hold property for the benefit of the party ultimately entitled to the property.2 Generally, the power to appoint a receiver is most usually called into action either to prevent fraud, save the subject of the litigation from material injury, or rescue it from threatened destruction. A receiver is usually defined to be an indifferent person between the parties, appointed by the court on behalf of all parties, and not of the complainant or one defendant only, to protect the property at issue.3
The appointment of a receiver is a branch of equity jurisdiction not dependent generally on any statute and rests largely in the discretion of the appointing court.4 It has its origin in the English Court of Chancery at an early date, and it was incidental to, and in aid of, the jurisdiction of equity to enable it to accomplish, as far as practicable, complete justice among the parties before it, the object being to secure and preserve the property or thing in controversy for the benefit of all concerned pending the litigation, so that it might be subjected to such order or decree as the court might make or render.5
The purpose of a limited receivership and the giving of bond in connection therewith are to insure the protection and preservation of the corporate assets, pending a judicial determination as of the merits of the controversy.
The remedy is a drastic one and is not properly employed even for the purpose of preservation, except in cases of urgent necessity, where there is a present danger to the interests of the stockholders, consisting of a serious suspension of the corporate business and a threatened depreciation in the value of its assets. It is nevertheless an inherent part of the general equity power of the court, where the ultimate relief requested in complaint is within the scope of jurisdiction.6
The standards by which the court’s appointment of receiver must be measured are exceptionally stringent. A court of equity has the power to appoint a receiver of a corporation only when conditions of dissension, dispute, fraud, or mismanagement exist, which make it impossible for the business to continue or to preserve its assets.7 It is well recognized that the appointment of a receiver is an extraordinary and drastic remedy to be exercised with great caution.8
The appointment of a receiver pendente lite is appropriate only in cases of urgent necessity where there is a present danger to the interests of the investors, consisting of a serious suspension of the business and an imminent danger of dissipation of corporate assets.9
The Business Corporations Act and Limited Liability Company Act. Rigid standards must be applied even where the appointment of a receiver is temporary and for the limited purpose of preserving property and continuing the business until the dispute between the parties can be resolved.10 The appointment of a receiver pendente lite is warranted only where there is no adequate remedy or means of securing the desired results.11 The Illinois Business Corporations Act of 198312 (BCA) and the Illinois Limited Liability Company Act13 (LLC Act) have provisions for the protection of minority owners who can prove oppressive behavior on the part of their co-owners. While the BCA expressly grants courts authority to appoint receivers, the LLC Act does not.14 The Code of Civil Procedure contains a provision regarding the appointment of receivers at section 2-415.15
Pursuant to Section 12.56(a) of the BCA, grounds for relief include deadlock which causes or threatens irreparable injury to the corporation,16 oppression of minority shareholders,17 and misapplication or waste of corporate assets.18
The appointment of a receiver is also warranted when the directors are so managing or disposing of the corporate business or assets in their own interest that such assets will probably be lost or destroyed before a decree can be rendered; internal dissensions are deadlocking the corporation so as to frustrate or threaten its purposes and objectives; a failure or refusal of directors to meet and transact business is jeopardizing the interest of the stockholders; or other conditions of dissension, dispute, fraud, or mismanagement exist, which make it impossible for the corporation to carry on its business or preserve its assets until a settlement is reached.19
The Limited Liability Company Act provides for the disassociation of members involuntarily in circumstances where that member has engaged in wrongful conduct which materially adversely affects the business,20 “willfully or persistently” breaches the operating agreement or duties to the company,21 or engages in conduct which makes it impracticable for the company to carry on business with that member.22 In such situations, the receiver is not appointed to close up the affairs of the corporation or effect its dissolution, but to preserve its property and continue its function until the dispute is adjudicated.23 Courts have held that actual24 and effective25 receivership can occur during the pendency of litigation involving limited liability companies under Illinois law.
Appointment of a Receiver Pursuant to the Code of Civil Procedure. The Code of Civil Procedure sets out the requisites for appointment of a receiver. The statute provides that a party seeking a receiver “shall” be required to post a bond in favor of the party against whom the receivership is sought.26 However, it goes on to provide that the court can waive that requirement “for good cause shown” after notice and a full hearing.27 In those circumstances the party seeking the appointment of a receiver must establish a reasonable probability that he or she will ultimately prevail in the case.28 Although a receiver may be appointed without notice in emergency circumstances,29 once a sworn denial has been filed a full evidentiary hearing is required on both the necessity of a receiver and the amount of any bond which may be posted.30 As an alternative, the court has authority to deny the appointment of a receiver and allow the party which is then in possession of the property to retain that possession upon the respondent posting a bond.31
1. The author wishes to acknowledge the contribution of the Honorable Terence Sheen whose complete, yet concise, recitation of his ruling in a recent case was the inspiration for this article.
2. Witters v. Hicks, 338 Ill.App. 3d 751 (5th Dist. 2003).
3. Compton v. Paul K. Harding Realty Co., 6 Ill.App.3d 488, 498 (5th Dist. 1972).
4. Poulakidas v. Charalidis, 68 Ill.App.3d 610, 613-614 (1st Dist. 1979); Steinwart v. Susman, 94 Ill.App.2d.
471, 476 (2d Dist. 1968).
5. Chicago Title & Trust Co. v. Mack, 347 Ill. 480, 483 (1932).
6. Duval v. Severson, 15 Ill.App. 3d 634, 642-43 (1st Dist. 1973).
7. Duval, supra.
8. Bagdonas v. Liberty Land & Invest. Co., 309 Ill. 103 (1923); Steinwart v. Susman, 94 Ill App.2d 471, 476 (2d Dist. 1968).
9. Firebaugh v. McGovern, 404 Ill. 143 (1949).
11. Fox v. Fox Valley Trotting Club, 349 Ill.App. 132, 137 (1st Dist. 1953); Steinwart v. Susman, 94 Ill.App.2d 471, 476 (2d Dist. 1968).
12. See generally 805 ILCS 5/12.56 and 5/12.60.
13. See generally 805 ILCS 180/35-1, 35-60 and 35-65.
14. See 805 ILCS 5/12.56(b)(6) and 5/12.60(h).
15. 735 ILCS 5/2-415.
16. 805 ILCS 5/12.56(a)(1).
17. 805 ILCS 5/12.56(a)(3).
18. 805 ILCS 5/12.56(a)(4).
19. Witters v. Hicks, 338 Ill.App. 3d 751, 756 (5th Dist 2002).
20. 805 ILCS 180/35-45(6)(A).
21. 805 ILCS 180/35-45(6)(B).
22. 805 ILCS 35-45(6)(C).
23. Poulakidas v. Charalidis, 68 Ill.App.3d 610 (1st Dist. 1979).
24. In re Teknek, LLC, 343 B.R. 850 (N.D. Ill. 2006) (bankruptcy trustee sought receivership of Illinois LLC alleged to have acquired assets of debtor LLC during pendency of adversary proceeding; court held Illinois law allows the same).
25. Tully v. McLean, 409 Ill.App.3d 659 (1st Dist. 2012) (plaintiff sought disassociation and appointment receiver).
26. 735 ILCS 5/2-415(a).
27. Id.; Simpson v. Adkins, 311 Ill.App.543, 550 (4th Dist. 1941).
28. Simpson, 311 Ill.App. at 552.
29. Simpson, 311 Ill.App. at 550.
30. Fox v Fox Valley Trotting Club, Inc., 349 Ill.App 132 (3d Dist. 1953).
31. 735 ILCS 5/2-415(b).
John Pcolinski, Jr., is a partner in the Wheaton law firm of Guerard, Kalina & Butkus. He graduated from North Central College magna cum laude in 1983 and The University of Illinois College of Law in 1986. He is licensed in Illinois and Arizona. John’s practice is concentrated in commercial litigation, especially chancery litigation.