Supplier can intervene in receivership

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An unpaid supplier to a company in receivership must be permitted to intervene in the action, the Wisconsin Court of Appeals held on Sept. 15.

The Urquhart Companies owned and operated three nursing homes in Pierce and Shawano Counties. M&I Bank held first-mortgage liens on the homes, as well as security interests in the business’ personal property. Urquhart defaulted on its obligations to M&I, and the bank foreclosed. Incident to the foreclosure action, the bank successfully petitioned for the appointment of a receiver and the court appointed Michael S. Polsky to act in that capacity.

Ultimately, the parties stipulated to, and the court approved, a sale to a third party.

Reinhart Foodservice, Inc., supplied food to the homes while they were owned and operated by Urquhart, and it continued to supply food to them after the receiver took possession of them. Reinhart received timely payments for its deliveries during the receivership, except for its deliveries made during the final month before the homes were sold.

To obtain payment of its $14,022 claim for its final food deliveries during the receivership, Reinhart requested the circuit court to either: (1) grant it leave to sue the receiver for its final bill; or (2) permit it to intervene in the receivership proceeding to present its claim for payment.

Shawano County Circuit Court Judge Thomas G. Grover denied the request, concluding that, because Reinhart was an “unsecured creditor” and “no assets of the receivership [are] available to unsecured creditors,” Reinhart was not owed a duty by the receiver and did not possess an interest in the property subject to the receivership. Reinhart appealed, and the court of appeals reversed in a decision by Judge David G. Deininger.

Pursuant to sec. 803.09(1), in order to intervene as a matter of right, a movant must demonstrate that: (1) the movant claims an interest “relating to the property or transaction which is the subject of the action”; (2) the disposition of the action may as a practical matter impair or impede the proposed intervenor’s ability to protect that interest; (3) the movant’s interest will not be adequately represented by existing parties to the action; and (4) the motion to intervene was made in a timely fashion. State ex rel. Bilder v. Township of Delavan, 112 Wis. 2d 539, 545, 334 N.W.2d 252 (1983).

The court found that Reinhart had an interest relating to the property, as a supplier during the receivership.

The court reasoned, “We agree with M&I that Reinhart may not intervene in the foreclosure and receivership proceedings to seek payment for any balance remaining unpaid for food delivered to Urquhart prior to the appointment of the receiver. Reinhart seeks to intervene, however, to obtain payment for goods it furnished to the nursing homes after the receiver took possession of the homes and operated them pursuant to the circuit court’s order. In other words, even though Reinhart may also be an unpaid, unsecured creditor of the Urquhart companies, its status as an unpaid supplier of goods to the receiver is what provides Reinhart the basis for claiming ‘an interest relating to the property or transaction which is the subject’ of the receivership proceeding.”

The court also noted that the management services contract that the circuit court approved provided that the receiver was to pay for supplies necessary to operate the nursing homes. Finally, sec. 813.17 imposes a statutory obligation on receivers to pay for items necessary to continue a business.

The court concluded, “Reinhart, as a supplier of goods to the receiver, has an interest in ensuring that the receiver carries out his court-ordered and statutory obligations to pay ‘the current expenses of carrying on’ the nursing home business. See Wis. Stat. sec. 813.17. Because Reinhart claims to have furnished goods necessary to the receiver’s operation of the nursing homes during the receivership, Reinhart must be allowed to present its claim for payment in the receivership proceeding, provided it satisfies the remaining requirements for intervention as a matter of right.”

Turning to the second element, the court held that Reinhart’s ability to protect its interest may be impaired if it is not allowed to intervene.

The court found, “If Reinhart is not permitted to intervene and the receiver is discharged in this action, a subsequent attempt by Reinhart to sue either the receiver or M&I might well be met with claims that the receiver can no longer be sued, or that Reinhart should be precluded from ‘re-litigating’ M&I’s entitlement to all moneys remitted to it by the receiver, an issue that was arguably litigated and determined by the foreclosure judgment, the order approving sale and any subsequently entered order for discharge of the receiver. These potential obstacles to Reinhart’s ability to protect its interest in being paid for goods it supplied to the receiver are simply not present if Reinhart is permitted to intervene in this action.”

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Finally, the court found that Reinhart’s interests are not adequately represented by any existing parties, that it intervened in a timely fashion, and that M&I will not be prejudiced by the intervention.

The court wrote, “When the bank elected to forgo a sheriff’s sale and, instead, to have the operation of the homes continue under the receivership until they could be sold as going concerns, M&I knew or should have known that additional costs would be incurred in keeping the homes in operation. Given the provisions of the order appointing receiver, M&I must also have understood that it might be called upon to advance the sums necessary to cover those costs. We cannot conclude that it is unfair to M&I to allow Reinhart’s claim to be presented and resolved in this proceeding before the receiver is discharged.”

Accordingly, the court reversed the denial of the motion to intervene.

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David Ziemer can be reached by email.