Posted on November 23, 2023

Receivership And Divorce In Illinois

In the movie “The Dark Knight” Batman’s loyal butler, Alfred, remarks that The Joker is inscrutable “because some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned, or negotiated with. Some men just want to watch the world burn.”

Well, imagine if you are married to a person like that…and they have control of your marital assets!

Your spouse may allow rental properties and businesses to fall apart during the course of the divorce. The control of said assets may require some level of expertise beyond a judge merely issuing you temporary control of those assets. In such a scenario, a court can appoint a receiver to manage marital assets until those assets’ final disposition is determined.

What Is A Receiver In An Illinois Divorce?

“A receiver is an indifferent person between the parties appointed by the court to collect and receive the rents, issues, and profits of land, or the produce ot personal estate, or other things which it does not seem reasonable to the court that either party should do; or where a party is incompetent to do so, as In the case of an infant” Black’s Law Dictionary (11th ed. 2019)

This “indifferent person” usually has to have some level of expertise regarding the assets. Otherwise, the assets could just be left alone to preserve their value. For real estate, this means property managers. For businesses, this probably means a quasi-competitor at best. For this reason (among others which will be described later), receivership is rare.

The appointment of a receiver can only happen to prevent the waste of the marital property by the spouse who currently controls that property.

The circuit court may appoint a receiver “based on its equity jurisdiction, to secure and preserve property for the benefit of all concerned, so that the property might be subjected to such an order as the court might render…The power to appoint a receiver is most usually called into action either to prevent fraud, save the subject of litigation from material injury, or rescue it from threatened destruction. ” City of Chicago v. Jewellery Tower, LLC, 2021 IL App (1st) 201352, ¶ 47 (citations and quotations omitted)

Two spouses disagreeing as to how the property will be managed is not sufficient to appoint a receiver.

“We hold that mere disagreement is insufficient to permit the appointment of a receiver… the appointment of a receiver is warranted only when there is no other adequate remedy or means of securing the desired result.” Leib v. Toulin, Inc., 113 Ill. App. 3d 707, 720 (Ill. App. Ct. 1983)” Leib v. Toulin, Inc., 113 Ill. App. 3d 707, 718 (Ill. App. Ct. 1983)

There can be a legitimate “bad guy” who is acting unreasonable while controlling those assets but those actions must be proven to be so extreme that it’s will make the business impossible to continue.

“Even if it were shown that [a party’s] acts constituted misconduct, however, neither misconduct nor dissension alone can justify the appointment of a receiver. It must be shown that the dissension or misconduct made it impossible for the business to continue to preserve its assets or created a danger that the property be placed beyond the jurisdiction of the court.” Prassas v. Nicholas W. Prassas Co., 102 Ill. App. 3d 319, 321 (Ill. App. Ct. 1981) (citations and quotations omitted).

Divorce courts should not appoint receivers without making serious findings about what will happen if a receiver is NOT appointed.

“[T]he standards by which the court’s appointment of a 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. It is well recognized that the appointment of a receiver is an extraordinary and drastic remedy to be exercised with great caution. The appointment of a receiver 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 the corporate assets. 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, these rigid standards must be applied.” Poulakidas v. Charalidis, 68 Ill. App. 3d 610, 614 (Ill. App. Ct. 1979)(citations and quotations omitted)

While these requirements are “stringent” they are not too specific. In fact, there is no “receivership” statute in Illinois.

“[T]he power to appoint a receiver is part of the court’s inherent equity jurisdiction and is “not dependent upon any statute.” In re Marriage of Padilla, 2022 IL App (1st) 200815 (citations and quotations omitted)

The trial court can do whatever it wants unless the party objecting to the receivership objects with specificity.

“[W]here it is contended that the procedure of the trial court is in error, the failure to object to such procedure in the trial court precludes its review.” Hargrove v. Gerill Corp., 124 Ill. App. 3d 924, 929 (Ill. App. Ct. 1984)

A procedural objection had better be on the record…or it will never be considered in a higher court. When “there is no transcript of the hearing…, there is no basis for holding that the trial court abused discretion.” Foutch v. O’BRYANT, 459 NE 2d 958 – Ill: Supreme Court 1984

Finally, this receiver will get paid, presumably from the proceeds of the building or business which will be a net loss to the marital estate.

Most Receiverships Are For Corporations

Most properties that aren’t being lived in by the owners and virtually all businesses are corporations.

These corporations are independent entities that must be served individually before they can be put into any kind of receivership.

“A corporation is a legal entity that exists separate and distinct from its shareholders and officers, even if the corporation consists of only one or two shareholders.” Pro Sapiens LLC v. Indeck Power Equipment Co., 2019 IL App (1st) 182019, ¶ 62.

Corporations which are proposed to be put into receivership must be made parties to the divorce. Illinois divorce courts can include almost anyone in a divorce. “The court may join additional parties necessary and proper for the exercise of its authority under this Act.” 750 ILCS 5/403(d)

“The general equitable rule is that all persons possessing a substantial legal or beneficial interest in the matter being litigated and who will be affected by the decree must be made parties.” St. Clair County Housing Authority v. Southwestern Bell Telephone Co., 387 Ill. 180, 185 (1944).

“The failure to join a necessary party is an issue that may be raised at any time, either by the parties or the trial court or appellate court sua sponte and an order entered without jurisdiction over a necessary party will be void. Certain Underwriters at Lloyd’s London v. Burlington Ins. Co., 2015 IL App (1st) 141408, ¶ 15.

“It is indeed difficult to imagine a more necessary party in an action for corporate dissolution [or the prevention thereof]  than the affected corporation itself.” Glickauf v. Moss, 320 NE 2d 132 – Ill: Appellate Court, 1st Dist. 1974

Once the corporation that is to be put into receivership is served, that corporation must be represented by an attorney, NOT the owner of the corporation.

It is well settled in Illinois that “a corporation must be represented by counsel in legal proceedings.” Downtown Disposal Services, Inc. v. City of Chicago, 2012 IL 112040, ¶ 22.

Once a lawyer is representing the corporation, hopefully, that lawyer can remind the destructive owner-spouse that they have a fiduciary duty to their spouse.

“A fiduciary relation exists in all cases in which a confidential relationship has been acquired. The origin of the confidence is immaterial. It may be moral, social, domestic, or purely personal.” Pfaff v. Petrie, 396 Ill. 44 – 1947

Of course, if the owner-spouse believed they had a fiduciary duty to their spouse, they probably would not be subject to a receivership action.

Alternatives To Receivership In An Illinois Divorce

Receiverships are extreme. They directly revoke control of a property from its rightful (for now) owners.

There are a lot of alternatives to receiverships available to an Illinois divorce court.

While a divorce is pending, an Illinois divorce court has enormous powers including the power to order “other appropriate temporary relief including ordering the discretion of the court, ordering the purchase or sale of assets and requiring that a party or parties borrow funds in the appropriate circumstances.” 750 ILCS 501(a)(3)

This can allow for the sale of the property or business in lieu of an appointment of  a receiver. But what kind of price will you get for a property or business that is actively being mismanaged? Probably not a good one.

An asset that can lose value can be put into a trust for the purposes of maintaining the divorcing parties’ children.

‘The court if necessary to protect and promote the best interests of the children may set aside a portion of the jointly or separately held estates of the parties in a separate fund or trust for the support, maintenance, education, physical and mental health, and general welfare of any minor, dependent or incompetent child of the parties.’ 750 ILCS 5/503(g)

The question remains who will administer that trust? Usually property and businesses require a special level of expertise to manage…which turns a 503(g) trust into just another kind of receivership.

If there are no children, a court can put assets into a constructive trust upon a showing of a breach of fiduciary duty and some kind of wrongdoing.

“A constructive trust is created when a court declares the party in possession of wrongfully acquired property as the constructive trustee of that property, because it would be inequitable for that party to retain possession of the property…A constructive trust is generally imposed in two situations: first, where actual or constructive fraud is considered as equitable grounds for raising the trust and, second, where there is a fiduciary duty and a subsequent breach of that duty. A constructive trust may also arise when duress, coercion or mistake is present. Some form of wrongdoing is a prerequisite to the imposition of a constructive trust.” Suttles v. Vogel, 126 Ill. 2d 186, 193, 533 N.E.2d 901, 904-05 (1988).

You will notice that this standard is far below the standard of a receivership. The owner-spouse is probably not “wrongfully in possession” of the asset, initially. If the owner-spouse is destroying the asset, is that not possessing the asset wrongfully? In the end, the property needs to be managed by someone, who will that someone be?

Finally, someone destroying a property or business that is marital can be awarded less of the marital estate because of that destruction via a dissipation claim.

“Dissipation is defined as the use of marital property for one spouse’s sole benefit for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown.” In re Marriage of Tietz, 605 NE 2d 670 – Ill: Appellate Court, 4th Dist. 1992

An Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:

the dissipation by each party of the marital property” 750 ILCS 5/503(d)(2)

Destruction of marital property is dissipation. “A spouse may dissipate marital assets even though he or she derives no personal benefit from the dissipation.” In re Marriage of Thomas, 608 NE 2d 585 – Ill: Appellate Court, 3rd Dist. 1993

Expenses associated with an ongoing enterprise have to be distinguished from the active destruction of that enterprise.

“The property taxes and other debts that had accumulated were far less than the money [the owner spouse] kept making. Dissipation contemplates a diminution in the marital estate’s value due to a spouse’s actions. Although a spouse may not necessarily derive a personal benefit from the acts that constitute dissipation, expenditures that form the basis for dissipation should have some detrimental effect upon the marital estate [in order to qualify as dissipation]” In re Marriage of Miller, 796 N.E.2d 135, 141 (Ill. App. Ct. 2003)

If there are not enough marital assets available at the end of the divorce to adequately compensate the spouse who did NOT destroy the property, a dissipation of assets claim will be insufficient to make the other spouse whole…and, therefore, prove to be a poor substitute for a receivership.

The very non-extreme nature of the alternatives to receivership should highlight how receivership is an extreme form of relief. Receivership is for an immediate and necessary situation where none of the alternatives are sufficient.

If receivership is a possibility in your divorce, contact my Chicago, Illinois family law firm to speak with an experienced Illinois divorce attorney.

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Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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