Do State-Requested Receivers Violate the Takings Clause?

Blog Post | 112 KY. L. J. ONLINE | February 13, 2024

Do State-Requested Receivers Violate the Takings Clause?

By: Preston Huennekens, Staff Editor, Vol. 112 

Imagine that you are in the business of commercial real estate. You own a number of office buildings that you lease to businesses. This is normally profitable, but declining property values, the rise of remote work, and economic uncertainty have cut into your profits.[1] Worse, imagine now that a state regulator brings a consumer protection lawsuit against one of your largest tenants.[2]  The state regulator hauls your tenant in front of a judge. The lawyers for the state make a motion for court to place the tenant’s business in a receivership,[3] arguing that the appointment of a receiver is the only way to protect the tenant’s assets which could later be used to pay consumer damages and state penalties. Alternatively, the court could — on its own motion — appoint a receiver if the “facts justify the appointment and to preserve and protect property in litigation.”[4]

A receiver is a “disinterested person appointed by a court... for the protection or collection of property that is the subject of diverse claims.”[5] From the perspective of the landlord, a tenant entering receivership may be some cause for concern.[6] But as long as the rent payments continue, then the underlying business relationship between the landlord and the tenant-in-receivership has not changed.[7]

But what if the receiver — appointed at the behest of the government’s attorneys — stops paying rent to the landlord?[8]

This unique situation raises an interesting constitutional question: could this be a government taking, in violation of the Fifth Amendment?[9]

The drafters designed the Takings Clause to “bar [the] Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”[10] In simpler terms, the Takings Clause prevents the government from taking personal property from individuals without giving them some compensation for it. Scholars agree that under the Takings Clause, “compensation must apply to cases in which the government engages in the outright confiscation of property . . . It also includes situations in which the government permanently deprives a private owner of possession of the asset or gives the asset . . . to someone else.”[11]

This is the crux of our hypothetical landlord’s argument: the government, through the use of a court-appointed receiver, engaged in a taking of the rental property. The argument hinges on the fact that the government’s lawyers motioned for the appointment of a receiver, which the court granted. The receiver’s refusal to pay rent leaves the landlord in a situation where the government’s lawyers, through a chain of causation, deprived the landlord of the benefit of their asset. The landlord thus looks to the government to cover the rental payments.[12]

This gray area involving the intersection between receivers and the Takings Clause has received some attention from the legal community. One author characterized public nuisance receiverships[13] as a form of government taking, especially when “the government is the party petitioning for this court-ordered invasion of private property.”[14] Wells Fargo — the third largest bank in the United States[15] — once argued that the extinguishment of the bank’s security interest in favor of a receivership’s lower-priority claim violated the Takings Clause.[16]

But do these claims have any merit? Most likely, no. An explanation of the unique functions of a receiver and the specific elements of a Takings Clause violation show that a receiver does not meet the legal definition of a government taking.  

A receiver is not a government actor even though their power flows from the court.[17] A receiver is a completely neutral party who steps into the shoes of the entity and acts as the entity.[18] In our example, the receiver is under the control of the state regulator’s lawyers. Indeed, the receiver owes fiduciary duties to all parties – not just the state government.[19]

The receiver has only one goal – the protection of the entity’s property and assets throughout the duration of the case.[20] This is particularly true in a case “involving fraud [and] the possible dissipation of assets.”[21]

What about the Takings Clause claims? The Supreme Court has held that “a property owner has actionable Fifth Amendment takings claim when the government takes his property without paying for it.”[22] Here, our hypothetical landlord would argue that the government’s successful motion to appoint a receiver led to a de facto taking, defined as “interference with the use or value or marketability of land... depriving the owner of reasonable use and thereby triggering the obligation to pay just compensation.”[23] Legal takings must conform to a public use.[24] The landlord might suggest that the public use here is the state’s interest in preserving the tenants business in order to fund any potential damages. 

But the receiver is not seizing the landlord’s property for some public use such as development. In fact, the receiver has not seized the property at all – the landlord is free to pursue existing breach of contract remedies against the receiver as the legal party in control of the non-paying tenant.

Most courts would probably conclude that the court-appointed receiver’s failure to pay rent to the landlord does not constitute a taking. The receiver is not acting at the direction of the state, but as an actor owing fiduciary duties to both sides of the lawsuit.[25] Receivers are not state actors but instead are “[persons] wholly impartial and indifferent toward all parties interested in the [property.]”[26] Because the receiver’s actions — failing to pay rent — does not advance a government interest in any way.

 While the exact scenario presented in the hypothetical has not appeared in any reported cases, the existing case law does not indicate that any court would hold that the appointment of a receiver in response to a state entity’s motion constitutes a taking under the Fifth Amendment. 

[1] See Jack Caporal, Commercial Real Estate Investing Statistics for 2023, The Motley Fool (Jun. 12, 2023), https://www.fool.com/research/commercial-real-estate-investing-statistics/.

[2] See, e.g., Office of Consumer Protection, Attorney General of Kentucky (last visited Jan. 13, 2024), https://www.ag.ky.gov/about/Office-Divisions/OCP/Pages/default.aspx (In Kentucky, “the Office of Consumer Protection enforces the Act by bringing lawsuits in the public interest to obtain civil penalties and consumer redress, including restitution and injunctive relief aimed at changing bad business practices.”).

[3] See Cynthia Hegarty, State Court Receivership 101: How to Get a Receiver Appointed, Daily Distressed Asset Central, (May 24, 2023), https://www.dailydac.com/receivership-101-how-to-get-a-receiver-appointed/.

[4] Montemayor v. Ortiz, 208 S.W.3d 627, 646 (Tex. App. 2006).

[5] Receiver, Black’s Law Dictionary (11th ed. 2019).

[6] See Lorraine Dindi, When a Rental Property is in Receivership, Legislate (Nov. 9, 2021), https://www.legislate.tech/post/when-a-rental-property-is-in-receivership-part-1 (explaining that receivership normally occurs because the tenant has defaulted on a loan or otherwise run out of money).

[7] See Id. (“A receiver in rent essentially takes the position of landlord as far as the tenant is concerned: rent is paid to them, they are the first point of call if anything goes wrong unless they’ve hired a property manager, they will carry out essential repairs etc. When the fixed term of the tenancy ends, the receiver and the tenant will decide what happens next.”).

[8] See, e.g., Peter A. Davidson, Can a Receiver be Sued for Not Paying a Pre-Receiver Creditor, Ervin Cohen & Jessup LLP (June 7, 2017), https://www.ecjlaw.com/ecj-blog/can-a-receiver-be-sued-for-not (discussing scenarios where receivers stopped honoring pre-receiver debts).

[9] U.S. Const. amend. V (The Takings Clause reads “... nor shall private property be taken for public use, without just compensation.”).

[10] Armstrong v. United States, 364 U.S. 40, 49 (1960).

[11] Richard A. Epstein and Eduardo M. Peñalver, The Fifth Amendment Takings Clause, National Constitution Center (last visited Jan. 13, 2023), https://constitutioncenter.org/the-constitution/articles/amendment-v/clauses/634.

[12] See Branch v. United States, 69 F.3d 1571, 1575–76 (Fed. Cir. 1995) (“If a particular governmental action is deemed a taking, it means that the government may engage in the action but must pay for it.”).

[13] See Anna Kennedy, Takings in Disguise: The Inequity of Public Nuisance Receiverships in America’s Rust Belt, 30 Wash. & Lee J. Civ. Rts. & Soc. Just. 239, 255–56 (2023) (defining public nuisance receiverships where states create statutes permitting private actors to petition courts for the creation of receivers to abate the nuisance properties).

[14] Kennedy, supra note 12, at 276.

[15] See Ruth Sarreal, 20 Largest Bank in the U.S., NerdWallet (Jun. 15, 2023), https://www.nerdwallet.com/article/banking/largest-banks-in-the-us.

[16] See SEC v. Nadel, 2016 U.S. Dist. LEXIS 12240, *9–10 (M.D. Fla. 2016) (“Wells Fargo argues, first, that the state property rights of a secured creditor trump a federal equitable receivership in that a secured creditor need not file a proof of claim in the receivership to maintain its priority interest, and any extinguishment of Wells Fargo's security interests would violate the Fifth Amendment as an unconstitutional taking.”).

[17] United States v. Beszborn, 21 F.3d 62, 68 (5th Cir. 1994) (describing a receiver as a “private, non-governmental entity”); Rich v. Cantilo & Bennett, L.L.P., 492 S.W.3d 755, 760–61 (Tex. App. 2016) (“a receiver is an officer of the court, the medium through which the court acts”).

[18] See O'Melveny & Myers v. F.D.I.C., 512 U.S. 79, 86 (1994) (discussing that the FDIC receiver “steps into the shoes” of the failed savings & loan at issue in this particular case.).

[19] City of Chicago v. Jewellery Tower, LLC, 197 N.E.3d 1206, 1216 (Ill. App. Ct. 2021).

[20] Matter of McGaughey, 24 F.3d 904, 907 (7th Cir. 1994).

[21] Id.

[22] Knick v. Twp. of Scott, Pa., 139 S. Ct. 2162, 2167 (2019).

[23] De Facto Taking, Black’s Law Dictionary (11th ed. 2019).

[24] Nottke v. Norfolk S. Ry. Co., 264 F. Supp. 3d 859, 865 (N.D. Ohio 2017).

[25] See supra note 19.

[26] Young v. Fidelity & Columbia Trust Co., 79 S.W.2d 944, 948 (Ky. 1935).