51382 Gratiot Avenue Holdings, LLC v. Chesterfield Development Company, LLC

Filing 68

ORDER granting in part and denying in part 38 Plaintiff's Motion to Disgorge Retainer Deposited with Defendant's Counsel. Signed by District Judge Robert H. Cleland. (LWag)

UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

51382 GRATIOT AVENUE HOLDINGS,
LLC,
Plaintiff/Counter-Defendant,
v.

Case No. 2:11-cv-12047

CHESTERFIELD DEVELOPMENT
COMPANY, LLC and JOHN DAMICO,
Defendants/Counter-Plaintiffs,
v.
MORGAN STANLEY CAPITAL, INC.,
Third-Party Defendant.
/
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF’S “MOTION TO
DISGORGE RETAINER DEPOSITED WITH DEFENDANT’S COUNSEL”
Before the court is Plaintiff’s “Motion to Disgorge Retainer Deposited with
Defendant’s Counsel.” The court has reviewed the motion and determined that a
hearing on the matter is unnecessary. See E.D. Mich. LR 7.1(e)(2). For the following
reasons, the court will grant in part and deny in part Plaintiff’s motion.
I. BACKGROUND
On April 13, 2005, Defendant Chesterfield Development Co. (“Chesterfield”)
obtained a $17,000,000 loan from Plaintiff’s predecessor-in-interest, Third-Party
Defendant Morgan Stanley Capital, Inc. (“Morgan Stanley”). (Consolidated Findings of
Fact ¶ 2.) To secure the loan, Chesterfield mortgaged its commercial property at the
corner of Gratiot Avenue and 23 Mile Road in Chesterfield Township, Michigan (the

“Real Property”). The mortgage included “a present, absolute assignment” of the leases
and rents for the Real Property to Morgan Stanley. (Am. Compl. Ex. C, § 2.1; see also
id. Ex. B, § 1.2.) Chesterfield defaulted on the loan in December 2009. (Consolidated
Findings of Fact ¶¶ 10-12, 15.) On April 9, 2010, Plaintiff sent Chesterfield a notice of
default demanding payment in full of the amount due on the loan and revoking
Chesterfield’s license to collect rents and other income from the operation of the Real
Property. (Id. ¶ 17.) Chesterfield did not pay the amount due and continued to collect
rents. (Id. ¶¶ 13-14.)
In June 2010, A&P, a tenant at the Real Property, defaulted on its lease. On
August 10, 2010, Chesterfield paid an initial retainer of $35,000 to the law firm of
Maddin, Hauser, Wartell, Roth & Heller, P.C. (“Maddin Hauser”) to bring suit against
A&P and recover the amount owed under the lease. (Defs.’ Resp. Mot. Disgorge 7.)
The ensuing litigation proved more contentious than initially envisioned, and, at Maddin
Hauser’s request, Chesterfield paid an additional retainer of $50,000 on December 17,
2010. (Id. at 8.) Eventually, A&P filed for bankruptcy, and Maddin Hauser continued to
pursue the claim in bankruptcy court.
Plaintiff recorded a Statutory Notice of Default on January 4, 2011.
(Consolidated Findings of Fact ¶ 18.) On April 1, 2011, Plaintiff foreclosed its mortgage,
and the Real Property was sold to Plaintiff at public auction. (Id. ¶¶ 19-21.) Plaintiff
then filed this suit against Defendants to recover the $12,240,108.64 deficiency on the
loan following the foreclosure sale. (Id. ¶ 25.)
On May 10, 2011, the same day Plaintiff initiated this action, it also filed a motion
asking the court to appoint a receiver to manage the Real Property during the six-month
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statutory redemption period in which Chesterfield remained in possession. The court
did so by a stipulated order (the “Receivership Order”) entered on June 10, 2011 (the
“Effective Date”). The Receivership Order provides that, as of the Effective Date, the
“Receiver is authorized and directed to take immediate possession and full control of
the Receivership Property,” which includes “[a]ll Income.” (6/10/11 Order ¶¶ 1.2-1.3.)
The Receivership Order defines “Income” as, in relevant part,
all cash, cash on hand, checks, cash equivalents, credit card receipts,
demand deposit accounts, bank accounts, cash management or other
financial accounts, bank or other deposits, and all other cash collateral . . .
derived with respect to the Real Property or business operations at the Real
Property, regardless of whether earned before or after entry of this
Order[,] . . . [including] all Income that was not . . . used for ordinary and
necessary business expense, regardless of whether the Income was
received on or after the filing of the Statutory Notice of Default.
(Id. ¶ 1.6.) Under the Receivership Order, the “Receiver shall take possession of and
receive from all depositories, banks, brokerages, and otherwise (collectively, “Financial
Institutions”), any money on deposit in all such Financial Institutions relating to or arising
from the operation of the Receivership Property.” (Id. ¶ 1.4.) Further, the Receivership
Order enjoined “[Chesterfield], all property managers, and all those acting in concert or
cooperation with them who receive notice of this Order, and all those having claims
against the Receivership Property who receive notice of this Order” from “demand[ing],
collect[ing], receiv[ing], discount[ing], or in any other way divert[ing] or us[ing] any of the
Income.” (Id. ¶ 13.4.)
Plaintiff filed the instant “Motion to Disgorge Retainer Deposited with Defendant’s
Counsel” on July 11, 2011, requesting that the court order Maddin Hauser to turn over
to the Receiver the entire $85,000 deposited by Chesterfield in August and December
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of 2010. In their response, Defendants indicated that, as of the date Plaintiff filed the
motion to disgorge, only $44,470.13 of the initial retainer was still held on account for
Chesterfield. (Defs.’ Resp. Mot. Disgorge 9.) Of the remainder, $26,542.12 had been
applied to legal fees incurred in the A&P litigation while $13,987.75 had been applied to
legal fees incurred in defending the present suit. (Id. at 15 n.10.) In a telephone
conference held on September 9, 2011, the parties informed the court that they had
resolved this dispute except for the $13,987.75 in legal fees applied to this case.
II. STANDARD
Federal Rule of Civil Procedure 66 provides that “[t]hese rules govern an action
in which the appointment of a receiver is sought . . . . But the practice in administering
an estate by a receiver . . . must accord with the historical practice in federal courts or
with a local rule.” Fed. R. Civ. P. 66.1 “‘[A] district court’s power to supervise an equity
1

Rule 66’s pronouncement that “the practice in administering an estate by a
receiver . . . must accord with the historical practice in federal courts or with a local rule”
has prompted a divergence in opinion as to whether federal or state law governs a
district court’s administration of a receivership. Compare Can. Life Assurance Co. v.
LaPeter, 563 F.3d 837, 842 (9th Cir. 2009) (“Not only does Rule 66 require application
of the federal rules in an action where the appointment of a receiver is sought, it
specifically indicates a normative standard for uniform administration of receiverships in
accordance ‘with the historical practice of federal courts.’” (quoting Fed. R. Civ. P. 66)),
and 12 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2983
(2d ed. 1987) (noting that “the receiver’s title to and possession of receivership
property” and “his powers and discretion with regard to the management and disposition
of the property” are matters “governed by federal law in accordance with the practice
‘heretofore followed in the courts of the United States or as provided in rules
promulgated by the district courts’” (quoting Fed. R. Civ. P. 66)), with Resolution Trust
Corp. v. Fountain Circle Assocs. Ltd. P’ship, 799 F. Supp. 48, 50 (N.D. Ohio 1992)
(relying on the Advisory Committee’s Note to Rule 66 in concluding that “Congress has
specifically provided that a Federal Equity Receiver, once appointed, is to manage and
operate the property according to the laws of the state where the property is located”),
and Emil R. Berg, Annotation, Law Governing Appointment of Receiver in Federal
Diversity Action, 44 A.L.R. Fed. 2d 241 (2010) (“[O]nce the receiver has been
4

receivership and to determine the appropriate action to be taken in the administration of
the receivership is extremely broad.’” SEC v. Capital Consultants, LLC, 397 F.3d 733,
738 (9th Cir. 2005) (alteration in original) (quoting SEC v. Hardy, 803 F.2d 1034, 1037
(9th Cir. 1986)); see also Quilling v. Trade Partners, Inc., 572 F.3d 293, 298 (6th Cir.
2009) (“In a receivership proceeding, the district court has ‘broad powers and wide
discretion’ in crafting relief.” (quoting SEC v. Basic Energy & Affiliated Res., Inc., 273
F.3d 657, 668 (6th Cir. 2001))).
III. DISCUSSION
The parties now agree that the unapplied portion of the retainer qualifies as
“Receivership Property” under the Receivership Order, while the funds applied to the
A&P litigation were “used for ordinary and necessary business expense” and were not
“Receivership Property.” (6/10/11 Order ¶¶ 1.2, 1.6; see also Pl.’s Reply Mot. Disgorge
i-ii.) As a result and at the parties’ request, the court will limit its analysis to the
Receiver’s right to possess the $13,987.75 applied to this litigation as of the filing of
Plaintiff’s motion.
In accordance with the parties’ agreement, any portion of the retainer that
remained unapplied on the Effective Date of the Receivership Order constituted “cash,”
“cash equivalent[],” a “financial account[],” a “bank or other deposit[],” or “cash
collateral” within the Receivership Order’s definition of “Income.” (6/10/11 Order ¶ 1.6.)
Thus, the unapplied portion of the retainer was “Receivership Property” and, as of the

appointed, state law governs the ‘actual administration of the receivership estate itself.’”
(quoting Fed. R. Civ. P. 66, Advisory Comm. Note)). Because both federal and
Michigan authorities support the court’s determination of the Receiver’s right to possess
the portion of the retainer in dispute, it is unnecessary to determine which law controls.
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Effective Date, the Receiver was “authorized and directed to take immediate possession
and full control” of it. (Id. at ¶¶ 1.2-1.3.) See Gaskill v. Gordon, No. 88 C 3404, 1988
WL 102077 (N.D. Ill. Sept. 28, 1988) (determining that legal retainer held by defendants’
law firm was defendants’ property subject to turn over to receiver “authorized to acquire
most of the property belonging to entities owned by the defendants”). Further, the funds
held by Maddin Hauser on account for Chesterfield fell within the Receiver’s power to
“take possession of and receive from all depositories, banks, brokerages, and otherwise
(collectively, “Financial Institutions”), any money on deposit in all such Financial
Institutions relating to or arising from the operation of the Receivership Property.”
(6/10/11 Order ¶ 1.4.) Maddin Hauser should not have applied funds from the retainer
after the Effective Date, and doing so violated the Receivership Order’s mandate that
“[Chesterfield], all property managers, and all those acting in concert or cooperation with
them who receive notice of this Order, and all those having claims against the
Receivership Property who receive notice of this Order” refrain from “demand[ing],
collect[ing], receiv[ing], discount[ing], or in any other way divert[ing] or us[ing] any of the
Income.” (Id. ¶ 13.4.)
Therefore, Maddin Hauser must turn over to the Receiver any portion of the
$13,987.75 that was applied to the defense of this suit after June 10, 2011. Defendants
attempt to refute this conclusion by asserting that legal fees incurred in this action are
“ordinary and necessary business expense[s]” outside the Receivership Order’s
definition of “Income.” (See id. ¶ 1.6.) This argument is unavailing.2 “Income” as
2

So, too, is Defendants’ summary assertion that Plaintiff cannot bring this motion
because it “is not the receiver, and has no right to exercise the receiver’s authority
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defined in the Receivership Order includes only “income derived with respect to the
Real Property or business operations at the Real Property.” (Id.) Similarly, the
definition’s limitation to “Income that was not . . . used for ordinary and necessary
business expense” must be restricted to “ordinary and necessary business expense” of
the Real Property or its business operations. (Id.) Defendants’ indebtedness to Plaintiff
under the loan agreement does not concern the operation or management of the Real
Property, so Defendants cannot finance their defense of this litigation with Income from
the Real Property. Cf. In re Willowood E. Apartments of Indianapolis II, Ltd., 114 B.R.
138, 145 (Bankr. S.D. Ohio 1990) (holding that debtor was not entitled to use net rents
from foreclosed property to pay legal expenses of filing and prosecuting bankruptcy suit,
as such expenses are not “ordinary operating expenses” exempt from debtor’s
assignment of rents to mortgagee).3
On the other hand, Plaintiff has shown no basis for disgorging fees already paid
out of the retainer before the Receivership Order came into effect. It is settled law that

under the Receiver Order.” (Defs.’ Resp. Mot. Disgorge 16.) “[A] primary purpose of
equity receiverships is to promote orderly and efficient administration of the estate by
the district court for the benefit of creditors. . . . Reasonable adminstrative [sic]
procedures, crafted to deal with the complex circumstances of each case, will be
upheld.” Hardy, 803 F.2d at 1038.
3

Defendants are correct that bankruptcy cases are not strictly controlling in the
context of equity receiverships, insofar as such decisions are based on provisions of the
Bankruptcy Code. Johnson v. Studholme, 619 F. Supp. 1347, 1348-49 (D. Colo. 1985).
The court nevertheless finds Willowood instructive, as the operative holding involves the
court’s interpretation of a mortgage and assignment agreement with language similar to
the Receivership Order. See 114 B.R. at 143 (“[O]nly the portion of the Rents
remaining after payment of operating costs and other expenses related to the Property
would be applied to the Debtor’s obligation under the Promissory Note as secured by
the Mortgage and Assignment.”).
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a receiver’s right to possession dates from the time of his appointment. See, e.g., Davis
v. Cox, 356 F.3d 76, 93 (1st Cir. 2004) (construing Maine law); Wells v. Cermak (In re
Ackermann), 82 F.2d 971, 972 (6th Cir. 1936); Saginaw Cnty. Sav. Bank v. Duffield, 122
N.W. 186, 188-89 (Mich. 1909). Any fees that had been paid out of the retainer to
Maddin Hauser prior to the Effective Date were no longer “cash,” “cash equivalents,”
“financial accounts,” “bank or other deposits,” or “cash collateral” attributable to the Real
Property. (6/10/11 Order ¶ 1.6.) Rather, those fees had become the property of
Maddin Hauser. Plaintiff provides no authority, and the court sees no basis, to depart
from the general rule that funds disbursed before the court entered the Receivership
Order are not “Receivership Property.” See Gaskill, 1988 WL 102077, at *1.
Plaintiff also claims that the $13,987.75 in fees should be disgorged from Maddin
Hauser because Chesterfield funded the retainer out of rents it collected in violation of
loan agreement’s assignment of rents. That is, Plaintiff argues that, as of Chesterfield’s
default on the loan in December 2009, Chesterfield’s “revocable license” to collect rents
from lessees of the Real Property expired, and all rents collected after that date belong
to Plaintiff and should not have been used for purposes other than operating and
managing the Real Property. (See Am. Compl. Ex. C, § 2.1; see also id. Ex. B, § 1.2.)
However, even assuming that a violation of the assignment of rents by Chesterfield
would justify disgorging fees paid to Maddin Hauser, the assignment did not become
valid under Michigan law until Plaintiff recorded the Statutory Notice of Default on
January 4, 2011. See Mich. Comp. Laws §§ 554.231-.232; In re Mount Pleasant Ltd.
P’ship, 144 B.R. 727, 732-33 (Bankr. W.D. Mich. 1992). Because Chesterfield paid the
retainer to Maddin Hauser in August and December of 2010, that payment could only
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have included rents collected before the assignment became effective. Therefore,
neither the assignment of rents nor the Receivership Order provide grounds to disgorge
any portion of the $13,987.75 fee applied prior to June 10, 2011.
IV. CONCLUSION
For the reasons stated above, IT IS ORDERED that Plaintiff’s “Motion to
Disgorge Retainer Deposited with Defendant’s Counsel” [Dkt. # 38] is GRANTED IN
PART and DENIED IN PART. It is GRANTED with respect to Plaintiff’s request that
Maddin Hauser turn over to the Receiver any portion of the $13,987.75 in legal fees for
the defense of this suit that was applied from Chesterfield’s retainer after entry of the
Receivership Order on June 10, 2011. It is DENIED with respect to Plaintiff’s request
that Maddin Hauser turn over any funds applied from Chesterfield’s retainer prior to that
date.
IT IS FURTHER ORDERED that, by October 21, 2011, Defendants shall provide
an accounting of the dates on which legal fees for the defense of this suit were applied
from Chesterfield’s retainer and shall turn over to the Receiver any such fees paid after
June 10, 2011.
s/Robert H. Cleland
ROBERT H. CLELAND
UNITED STATES DISTRICT JUDGE
Dated: October 5, 2011
I hereby certify that a copy of the foregoing document was mailed to counsel of record
on this date, October 5, 2011, by electronic and/or ordinary mail.

s/Lisa Wagner
Case Manager and Deputy Clerk
[phone]
S:\Cleland\JUDGE'S DESK\C2 ORDERS\11-12047.51382GRATIOTAVEHOLDINGS.MotDisgorgeRetainer.set.wpd

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