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Substandard Apartment Building Receiverships — Who Is On The Hook For Attorney Fees?

Under California’s State Housing Law (Health and Safety Code sections 17910-17998.3), if an apartment building owner fails to comply with a notice to repair or abate building standard violations issued by an enforcement agency, the agency may obtain the appointment of a receiver to take control of the property and correct the violations.

An agency that obtains the appointment of a receiver is entitled to recover its attorney fees against the property owner.  But what if the agency only intervenes in an already-filed action where a receiver has already been appointed (e.g., by a lender holding a deed of trust)?

A recent opinion by California’s Fourth Appellate District — Kaura v. Stabilis Fund II, LLC — addresses the issue.

Background

The Kaura Trust owned a 75-unit apartment complex in Indio, California.  In December 2007, the Kauras took out a $4,050,000 loan secured by a deed of trust on the property.  Stabilis Fund II, LLC later became the holder of the deed of trust.

In 2009, the Kauras conveyed the property to an LLC they controlled.  In 2011, the loan fell into default.

In 2013, the Kauras and Stabilis sued each other.  Stabilis filed a motion for the appointment of a receiver pursuant to provisions in the deed of trust, and the court granted the motion.

After the receiver had been appointed pursuant to the motion filed by Stabilis, the City of Indio issued a “Legal Notice and Order to Repair or Abate,” finding that the extremely dangerous building conditions posed a risk to the health and safety of occupants and the public.  The City filed a motion to modify the receivership to require the receiver to correct the safety issues.  The trial court granted the City’s motion.

The City later filed a motion to disqualify the receiver based on the receiver entering into a prohibited agreement with Stabilis and failing to fulfill his duties.  The trial court granted the motion, and appointed a substitute receiver.

Several months later, the City filed a “cost recovery motion” based on the State Housing Law, in which the City sought more than $87,000 in attorney fees to be imposed against the receivership estate, or alternatively, against the Kauras and Stabilis.  The trial court granted the motion against Stabilis, ordering that the fees be paid out of the receivership estate or, if the estate lacked sufficient funds, by Stabilis.

Stabilis appealed, arguing that it was only the lender, not the owner, and that the State Housing Law did not authorize an award of fees against it under the circumstances.

Court of Appeal’s Opinion

The Court of Appeal reversed.

Turning to the language of the relevant statute — Health and Safety Code section 17980.7 — the court held that the right to recover attorney fees arises when an agency obtains the initial appointment of a receiver.

Here, it was Stabilis, the lender, who obtained the appointment of the receiver.  The City only intervened with its request to modify the receivership, and its later request to have a substitute receiver appointed.

The court held that no statute allows for the recovery of attorney fees for an agency that merely intervenes in an existing receivership.  The court further held that a receivership is established upon the appointment of the initial receiver, regardless of whether a different receiver is later substituted in.

The statute, the court held, was designed to encourage the property owner to promptly correct violations outlined in a notice to repair or abate.  In the situation at hand, the owner (the Kauras) had already lost control of the property to the receiver appointed on Stabilis’ motion before the City issued its notice to repair or abate, and therefore the owner no longer had the ability to correct the violations.

The court also held that the statute allows for fee awards only against the owner or the owner’s successor who had knowledge of the violations, and Stabilis was neither.  The Kauras and their LLC remained the owner of the property at all relevant times.  Stabilis, on the other hand, only held an equitable interest arising from its deed of trust lien.  Stabilis had no rights to sell, encumber, or use the property — rights typically held by the owner.  Likewise, the receiver obtained only the right of possession, not ownership.

Lesson

A public agency that obtains the appointment of a receiver to correct safety violations under the State Housing Law is entitled to recover its attorney fees.

But if the agency only intervenes in an action where a receiver has already been appointed (e.g., by a lender holding a deed of trust), then the agency has no right to recover its attorney fees.

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