Federal Court Can’t Usually Order a Receivership When No Other Relief Is Sought But May Do So Ancillary to Arbitration If Contract Permits — Can Court Issue Injunction Pending Arbitration If Not Contractually Provided? Circuit Split

Wells Fargo Bank, N.A. v. Star Texas Gasoline & Oil Dist., Inc., 2015 U.S. Dist. LEXIS 10673 (S.D. Tex. Jan. 29, 2015):

Plaintiff Wells Fargo Bank, N.A. ("Wells Fargo") commenced this action by filing its Emergency Application for Appointment of Receiver (the "emergency application") on November 17, 2014. . . . It asserted that Defendant Star Texas Oil & Gasoline Distributors, Inc. ("Star Texas") has defaulted on loan agreements with a then-current outstanding balance of approximately $7 million. Id. ¶¶ 1, 16. Wells Fargo further pleads that these loans, as subsequently modified, were secured by two agreements dated December 14, 2012, granting Wells Fargo "a security interest in and to all accounts, contract rights, promissory notes, chattel paper, instruments, deposit accounts, equipment, tools, machinery, furniture, other goods and payment and general intangibles, all inventory, goods held for sale or lease, or to be furnished under a contract, raw materials, component parts, work in process, and other materials used or consumed in Borrower's business, together with all rights to payment [*2]  of any kind arising out of the sale, lease, collection, exchange or other disposition of any of the property," Id. ¶ 8, and three deeds of trust against Star Texas's real property in Nueces, Gregg, and Midland Counties, Texas. Id. ¶ 10. According to Wells Fargo, Star Texas lacks an adequate source of funding. See id. ¶ 13. As a result, Wells Fargo contends that this Court should appoint a receiver in accordance with the loan agreements and deeds of trust to protect the value of its collateral because "[a]n orderly winding down of [Star Texas]'s business affairs will maximize the value of its business assets for the benefit of all its creditors." Id.

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The Court entered an order expediting consideration of Wells Fargo's motion for discovery on December 16, 2014. Dkt. No. 20. In that order, the Court also advised the parties that it was considering dismissing this action under Federal Rule of Civil Procedure 12(b)(6). Id. at 2 (citing Carroll v. Fort James Corp. 470 F.3d 1171, 1177 (5th Cir. 2006) (other citations omitted). The order stated as follows:

In its emergency application to appoint a receiver, Plaintiff states that "[t]his is a receivership action ancillary to an anticipated arbitration proceeding arising out of Borrower's breach of the terms and conditions of its Loan Documents with Wells Fargo." Dkt. No. 1 ¶ 1. The prayer for relief section of the application requests "the following ancillary relief" and then lists the appointment of a receiver and "such other and further relief, both general and special, at and law in equity, to which Plaintiff is justly entitled under Federal Rule of Civil Procedure 66 and federal common law governing receiverships." Id. at 16. Further, [*4]  a review of this document reveals no facial claim for breach of contract or for coercive relief related to the anticipated arbitration other than the request to appoint a receiver.

Id. The Court invoked the general rule that "[t]here is no occasion for a court of equity to appoint a receiver of property of which it is asked to make no further disposition." Id. at 1 (quoting Tucker v. Baker, 214 F.2d 627, 632 (5th Cir. 1954)). The Court provided the parties with an opportunity to be heard on this matter. Id. at 3. Consequently, in addition to Wells Fargo's motion for discovery, the Court has before it the parties' memoranda on the Rule 12(b)(6) issue raised by the Court. Dkt. Nos. 23, 24. Wells Fargo also has advised the Court that, on December 17, 2014, it filed a statement of claim with the American Arbitration Association commencing an arbitration proceeding stemming from the claimed breach of loan agreements asserted in this lawsuit. See Dkt. No. 23 Ex. A.

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III. Analysis

Wells Fargo's emergency application begins by declaring that "[t]his is a receivership action ancillary to an anticipated arbitration proceeding arising out of Borrower's breach of the terms and conditions of its Loan Documents." Dkt. No. 1 ¶ 1. In its December [*6]  15, 2014, order, this Court observed that Wells Fargo facially pleaded no breach-of-contract claim or other claim for relief apart from its request to appoint a receiver. See Dkt. No. 1 at 1, 16 (requesting only appointment of receiver in prayer for relief). Wells Fargo apparently concedes that this Court correctly reads its emergency application as asserting no primary claim other than the then-anticipated arbitration proceeding. See Dkt. No. 24 at 1. It argues instead that this Court can appoint a receiver ancillary to the pending arbitration proceeding based on the following language from a credit agreement executed by Star Texas on December 14, 2010:

"The arbitration requirement does not limit the right of any party to . . . (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder . . . ."***

The Supreme Court has stated that "[a] receivership is only [*7]  a means to reach some legitimate end sought through the exercise of the power of a court of equity. It is not an end in itself." Kelleam v. Md. Cas. Co., 312 U.S. 377, 381 (1941) (quoting Gordon v. Washington, 295 U.S. 30, 37 (1935)). Consequently, "a federal court of equity should not appoint a receiver where the appointment is not a remedy auxiliary to some primary relief which is sought and which equity may appropriately grant." Id. (citations omitted); See also Santibanez v. Wier McMahon & Co., 105 F.3d 234, 241 (5th Cir.1997) (quoting 12 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 2983 (1973)) (explaining that "receivership may be an appropriate remedy for a judgment creditor[, inter alia,] . . . who otherwise is attempting to have the debtor's property preserved from dissipation until his claim can be satisfied."); Tucker v. Baker, 214 F.2d 627, 632 (5th Cir. 1954) (quoting Gordon v. Washington, 295 U.S. at 55 (1935)) ("There is no occasion for a court of equity to appoint a receiver of property of which it is asked to make no further disposition."); Kinnebrew v. La. Ice Co. 89 F. Supp. 809, 810-11 (W.D. La. 1950) (citations omitted) ( "[i]t has been uniformly held that a receiver will not be appointed where in primary relief, such as the adjudication of some substantial right or interest in property, is sought . . . .").

In RGI, Inc. v. Tucker Associates., Inc. 858 F.2d 227, 229 (5th Cir. 1988), the Fifth Circuit acknowledged a split among the Circuits on the question of whether preliminary injunctive relief is available in an action involving [*8]  an agreement to arbitrate under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. See 858 F.2d at 229 (contrasting as exemplary of split Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286, 1291 (8th Cir. 1984) and Teradyne v. Mostek Corp., 797 F.2d 43, 43 (1st Cir. 1986)). The RGI court did not take a side in this split. Id. Instead, it resolved the case based on a split-bridging "consensus . . . [that] a preliminary injunction [may issue] where the parties had contemplated its use beforehand." Id. (citing Hovey, 726 F.2d at 1291); See also Janvey v. Alguire, 647 F.3d 585, 592 (5th Cir. 2011) (stating that RGI court "did not enter the fray" of the split). The district court in RGI entered a preliminary injunction preserving the status quo of the contracting relationship and ordered the case to arbitration in accordance with the FAA. See id. at 228. The Fifth Circuit affirmed because the parties' written agreement included a "bargained-for provision clearly contemplat[ing] that the [*9]  status quo is to continue pending arbitration." Id. (quoting language of agreement). That is, the RGI court held that "[w]here an arbitration agreement contemplates the use of a preliminary injunction to maintain the status quo, the district court has the power to issue a preliminary injunction for that purpose." Weeks Marine, Inc. v. BAE Sys. Se. Shipyards Alabama, LLC, No. 14-905, 2014 WL 2533408, at *2 (E.D. La. June 4, 2014) (citing RGI, 828 F.2d at 230).

Like the plaintiff in RGI, Wells Fargo alleges in its emergency application that the credit agreements at issue include a bargained-for provision contemplating a court-ordered receivership pending arbitration. The RGI Court reasoned that enforcing a bargained—for agreement to preserve the status quo pending arbitration did not risk injecting the district court into the merits of the issues to be arbitrated-the concern articulated by the Hovey court and others holding that coercive relief is not generally available pending arbitration—because the district court did not need to "involve itself in balancing the various factors to determine whether a preliminary injunction should be issued" when enforcing such a provision. 858 F.2d at 229 (citing Miss. Power & Light v. United Gas Pipeline, 760 F.2d 618, 621 (5th Cir. 1985)). In the case at hand, Wells Fargo alleges that Star Texas "has consented to the appointment of a receiver, before and during the pendency [*10]  of an arbitration proceeding, in the event of a default under the terms and conditions of the Loan Documents, and has agreed that Wells Fargo shall be entitled to such appointment as a matter of strict right." Dkt. No. 1 ¶ 1.

Determining whether the credit agreements strictly entitle Wells Fargo to appointment of a receiver pending arbitration injects this Court no further into the merits of the underlying loan dispute than did deciding whether to enforce the bargained-for provision in RGI. See Digital Generation, Inc. v. Boring, 869 F. Supp. 2d 761, 773-74 (N.D. Tex. 2012) (considering motion for preliminary injunction and distinguishing RGI because "[t]he language in the parties' agreement expressly states that DG may seek injunctive relief from a court of competent jurisdiction or the arbitrator"); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Chapman, No. 98-1615, 1998 WL 792501, at *1 (N.D. Tex. Nov. 3, 1998) (applying RGI to hold that parties contemplated injunctive relief where agreement stated that defendant "consent[ed] to the issuance of a temporary restraining order or a preliminary or permanent injunction"); Morrison Home Center v. Hilti, Inc., No. 98-1660, 1998 WL 397894 (E.D. La July 15, 1998) (holding preliminary injunction could be entered under GI where agreement included clause stating that "pending arbitration, either party may seek injunctive relief in a court of competent jurisdiction."). Consequently, Wells Fargo states a claim which, when [*11]  viewed in the light most favorable to it and assuming all well-pleaded factual allegations to be true, can be granted. See RGI, Inc., 858 F.2d at 229. This Court intimates no view on whether a receivership is available in the absence of an alleged bargained-for provision like that enforced in RGI.

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