Earlier this year, the Nevada Supreme Court held in U.S. Bank Nat’l Assn. v. Palmilla Dev. Co. that under Nevada law, a “receiver’s sale” of real property securing a loan qualifies as a judicial foreclosure sale, and therefore leaves the door open to a potential deficiency judgment against the borrower.
Would the same result obtain in California?
I’ve been involved in one case where an attempted receiver sale was first approved, and then halted before closing, by the superior court. And I’ve co-authored articles published in the Spring 2012 and Summer 2012 editions of Receivership News, which characterized receiver’s sales as a potential “mirage” for lenders and receivers.
Based on those experiences, I’ve observed a few factors suggesting (to me, at least) that California courts might reach a different conclusion than the Nevada Supreme Court.
It all starts with the deed of trust
In a lawsuit for judicial foreclosure, receivers are typically appointed pursuant to a clause in the deed of trust securing the loan. Deeds of trust usually provide for the assignment of rents and allow the appointment of a receiver to take possession of the property, collect rents, and preserve and maintain the property until a foreclosure sale.
But deeds of trust do not typically empower a receiver to sell the security property.
In one notable California decision, Turner v. Superior Court (1977) 72 Cal.App.3d 804, the court of appeal emphasized that the deed of trust is a contractual agreement between the lender and borrower, and should guide the scope of powers held by any receiver appointed pursuant to the deed of trust’s terms.
In short, if a deed of trust authorizes the appointment of a receiver to collect rents and preserve the property, but nothing extraordinary like sell the property, then a court should hesitate to authorize the receiver to act beyond the terms of the deed of trust (unless the borrower consents).
Not all receiverships are the same
The Turner decision also rejected the proposition that all receivers are the same, and governed by the same set of rules, regardless of the purpose for which they are appointed.
General equity receivers (see CCP §§564 et seq.) can be appointed to essentially act on behalf of a person or entity, including selling the person’s or entity’s property and making other important decisions regarding assets. But courts have described the appointment of a general equity receiver as “harsh,” and the standards for appointment are often difficult to meet. Most real estate secured lenders have no interest in having a receiver appointed to take over the borrower’s person or business entity.
In contrast, having a foreclosure or “rents and profits” receiver appointed is usually fairly simple — after all, the parties to a secured loan have typically agreed to such in the deed of trust as a remedy for default. But such a receiver is, in the Turner court’s words, “limited and special” and usually doesn’t impair the borrower’s ownership interest in the property other than the assignment of rents and the performance of necessary maintenance and repairs.
There is statutory authority generically authorizing a receiver to sell property (see CCP §568.5), but as acknowledged in the Turner decision, that statute has typically been applied to general equity receivers, not rents and profits receivers.
The appointment order (an end-around?)
Given the distinction in receiver-types above, foreclosing lenders may be tempted to try and stretch the boundaries of a receiver’s authority by drafting the receiver appointment order with an expansive scope that goes beyond beyond the limits of the deed of trust.
This end-around sometimes works.
Receiver appointment orders are usually entered quickly at the outset of a lawsuit, and they are immediately appealable under California law. (See CCP §904.1(a)(7).) If the borrower fails to timely object in the trial court, or to timely appeal to the court of appeal, a broad appointment order might stand even if it conflicts with or goes far beyond what the deed of trust allows.
However, even if the appointment order goes unchallenged initially, the trial court retains power to modify the order as it sees fit — and might do so if it becomes convinced that the initial order was the result of lender overreaching.
The borrower’s (and others’) redemption rights
Redemption rights will also factor into any ultimate characterization of receiver’s sales under California foreclosure law.
The owners of security property, and even holders of junior liens, have the right under California law to redeem the property from a deed of trust before a foreclosure sale by paying the amounts due in full. (Civ. Code §§2903-2905.) The borrower may also redeem after a judicial foreclosure sale. (CCP §726(e); CCP §§729.010 et seq.)
California law offers no guidance as to how a completed “receiver’s sale” would impact the borrower’s and junior lienholders’ redemption rights. Would the borrower hold a post-sale right of redemption following a receiver’s sale? Many questions remain unanswered.
Title insurers don’t like unanswered (and perhaps unanswerable) questions. As such, until the law becomes far more clear, a purchaser at any receiver’s sale might not receive marketable or insurable title.
The one form of action rule
California law governing foreclosure has developed over more than a century, and one of its oldest principles is the “one form of action” rule embodied by CCP §726. Under the existing framework, it is generally accepted that a foreclosing lender must elect between two choices: a private trustee’s sale (which offers the benefit of speed and finality, but no chance of a deficiency judgment), or a judicial foreclosure sale (under which a deficiency judgment is permissible, but only by following intricate and detailed procedures including a public auction sale and an evidentiary fair value determination).
A receiver’s sale doesn’t fit neatly into either of those categories. As the Nevada Supreme Court noted in Palmilla, a receiver’s sale can’t be construed as a private trustee’s sale because a receiver is an agent of the court, must report to the court, and usually seeks court approval for major issues. But a receiver’s sale also bears little resemblance to a judicial foreclosure since it lacks the hallmarks of a sale by public auction subject to the statutory right of redemption, followed by an evidentiary hearing geared to ensure fair value.
In Palmilla, the Nevada Supreme Court quickly dismissed the borrower’s argument that without a sale by public auction the receiver’s sale couldn’t be a judicial foreclosure sale, holding that the borrower’s position would “unnecessarily elevate form over substance.”
Unlike Palmilla, a California court might view the public auction format not as a trivial matter of “form,” but rather, as a substantive and deeply ingrained statutory requirement.
The Nevada Supreme Court’s decision in Palmilla holding that receiver’s sales are judicial foreclosure sales has no precedential effect in California, but it is an interesting development that California lenders and borrowers should pay attention to.
Given the common use of receivers in foreclosure litigation, California courts of appeal will likely weigh in on the issue soon. My best guess is that when they do, they will part company with Nevada law and hold that “receiver’s sales” by rents and profits receivers aren’t really foreclosure sales at all.