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FEDERAL HOME LOAN MORTG. CORP. v. SPARK TARRYTOWN

February 5, 1993

FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff,
v.
SPARK TARRYTOWN, INC., PEOPLE OF THE STATE OF NEW YORK, THE TOWN OF MOUNT PLEASANT, VILLAGE OF NORTH TARRYTOWN, and JOHN DOE NOS. 1 TO 20, Defendants. VILLAGE OF NORTH TARRYTOWN, Third Party Plaintiff, v. LARRY RUSH, Third Party Defendant.



The opinion of the court was delivered by: VINCENT L. BRODERICK

MEMORANDUM

 VINCENT L. BRODERICK, U.S.D.J.

 I

 On September 29, 1992, I granted the proposed order of plaintiff Federal Home Loan Mortgage Corporation ("FHLMC") for ex parte appointment of a receiver because of exceptional circumstances justifying proceeding without notice. This memorandum is designed to explain the reasons for my granting the relief requested. The FHLMC's application in this case meets the stringent requirements which are prerequisites to granting ex parte motions for receiverships.

 II

 In Connecticut v. Doehr, 111 S. Ct. 2105, 115 L. Ed. 2d 1 (1991), the United State Supreme Court made it clear that property interests cannot be taken without pre-deprivation notice unless such notice is impractical, e.g., because the party involved cannot be found, because of a bona fide emergency situation, or because prior notice would be likely to result in disappearance of critical evidence or property. See In re Vuitton et fils, SA, 606 F.2d 1 (2d Cir. 1979); Marion Mortgage Co. v. Edmunds, 64 F.2d 248, 251 (5th Cir. 1933).

 Thus, contractual, regulatory, or statutory authority for a receivership, whether on notice or on an ex parte basis, while necessary to such a grant, is not sufficient. The appointment of a receiver in the first instance is to be considered "'an extraordinary remedy' . . . that . . . should be employed cautiously and granted only when clearly necessary to protect plaintiff's interests in the property," such as harm to the property's marketability, see, e.g., Citibank, N.A. v. Nyland (CF8), LTD, 839 F.2d 93, 97 (2d Cir. 1988) (quoting Chambers v. Blickle Ford Sales, 313 F.2d 252, 260 [2d Cir. 1963]).

 A receivership is a drastic remedy dispossessing former owners of assets, imposing substantial additional costs. In some instances appointment of a receiver may risk disruption of the affairs of nonparties such as tenants in a building or other trading partners. Such trading partners may find that formerly routine matters now require approval of persons who are unfamiliar with the circumstances and may be reluctant to act promptly without time-consuming review.

 III

 Where such relief is sought ex parte, it is particularly important that adequate factual support be provided to indicate that dispensing with notice is warranted. United States v. Ianniello, 824 F.2d 203, 207 (2d Cir. 1987). As with any equitable remedy, the equities must be balanced in favor, not only of the relief itself, but of its timing.

 Lack of notice deprives the owner, or lessee of property, of the opportunity to object to appointment of a receiver or to propose an alternative way of dealing with the situation giving rise to the application.

 A court cannot assume that no valid objections are possible, merely because an applicant produces a signed agreement permitting ex parte appointment of a receiver in the event of a default described in affidavits accompanying the application. Unmentioned circumstances such as payment, subsequent agreements, fraud, setoff, existence of other adequate security, unconscionability, breach of warranty, and similar matters may be relevant.

 An emergency may also have been foreseeable, so that the need for ex parte relief is traceable to prior inaction by the applicant for the receivership, constituting laches barring ex parte appointment of a receiver.

 IV

 This application for ex parte appointment of a receiver shows in reasonable detail, in addition to contractual, regulatory or statutory authorization for such relief and a default triggering such authority, existence of a genuine emergency requiring such action. In addition, the showing in the affidavit and other papers submitted by the FHLMC here involves inability to locate or reach responsible persons at a time when funds due for rent or for necessary repairs to property are likely to disappear.

 Absent such circumstances, in many but not all instances, an order to show cause with an expedited return date may be adequate where responsible parties can be located.

 If ex parte relief is requested, careful review of the exact terms of an order authorizing a receivership is important. The approved order in the present case and its accompanying letter with respect to service, which are attached as Exhibit A, reflect the notice and other due process protections of property rights that are essential where judicial waiver of a pre-deprivation hearing is sought.

 Among the aspects of such ex parte orders requiring specific scrutiny are the following: *fn1"

 1. Imposition of obligations enforceable by contempt or otherwise on parties not shown by the papers submitted to have engaged in any wrongdoing, extending beyond mere recognition of the receiver as custodian of the property involved.

 2. Establishment of a low threshold for routine expenditure approval by a plaintiff or by the court in the event of a disagreement, thus risking unnecessary delay, expense, and consumption of resources.

 3. Failure to permit uninterrupted routine provision of services to nonparties and action necessary in the ordinary course of business of supervision of the property.

 4. Requirement for production of large amounts of documents in the possession of parties not shown to have engaged in any wrongdoing without pursuing ordinary discovery or subpoena proceedings under the Federal Rules of Civil Procedure.

 5. Requests for identical relief as against all defendants, rather than relief pertaining ...


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