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Appointment of a Nuisance Abatement Receiver: No “Financially Viable” Plan for Rehabilitation Needed

Under California law, receivers can be appointed for many purposes.

Sometimes a “general equity” receiver is appointed to take control of a business entity and its assets where the decision-makers are deadlocked in conflict.  More commonly, receivers are appointed to protect real property.  Real property receivers can be appointed at the request of (among others) lenders who have a security interest in the property, or public agencies seeking to eliminate “nuisance” conditions.

A recent opinion from California’s Fourth Appellate District — City of Desert Hot Springs v. Valenti (publication order here) — highlights that getting a nuisance abatement receiver appointed and having a reasonable, financially viable plan to accomplish the abatement work are separate issues.

Facts: city attempts to get nuisance abatement receiver appointed to abate problems at a dilapidated hotel

The City of Desert Hot Springs filed a complaint against the owner of a hotel to abate nuisance conditions on the hotel property, which amounted to numerous building and safety code violations.  The City filed a motion asking the court to appoint GS Strategies as the receiver, with Kevin Randolph as its representative.

The City’s motion contended that it satisfied the requirements to have a receiver appointed: it gave the property owner adequate notice of the alleged violations that needed to be repaired but the violations remained uncured, and Randolph was qualified to act as a receiver.  Randolph had served as a court appointed receiver in more than 125 nuisance abatement cases.

The City’s motion also included estimates of the costs to rehabilitate the property and the expected return from a sale of the property after it was rehabilitated.

Trial court: receiver appointment denied because proposed plan was not financially viable

The trial court denied the City’s motion on the grounds that the rehabilitation plan was not “financially viable.”  The court reasoned that the estimated costs of rehabilitating the property, plus the costs associated with the appointment of a receiver, would exceed the eventual sale value.

The trial court concluded: “I just don’t believe that it’s a property that’s capable of being rehabilitated economically.”

The City appealed.

Court of Appeal’s opinion: reversed; viability of plan is not an issue for appointment order

The Court of Appeal reversed the trial court’s order.

The court held that the trial court erred by denying the motion for appointment of a receiver by looking beyond the narrow requirements for appointment as set forth in Health and Safety Code section 17980.7(c), and exceeded its authority by addressing the “financial viability” of the rehabilitation plan.

Under section 17980.7(c), the trial court should consider only two items when deciding whether to appoint a receiver.  First, “the court shall consider whether the owner has been afforded a reasonable opportunity to correct the conditions cited in the notice of violation.”  And second, “[t]he court shall not appoint any person as a receiver unless the person has demonstrated to the court his or her capacity and expertise to develop and supervise a viable financial construction plan for the satisfactory rehabilitation of the building.”

Here, the trial court did not base its order on any problems with the city giving the property owner adequate notice and a reasonable opportunity to repair the building.  Nor was the trial court’s order based on the proposed receiver’s lack of expertise or capacity to develop and supervise a financially viable plan to rehabilitate the property.  Instead, the trial court based its order on the plan itself not being financially viable.

The statute, the Court of Appeal held, requires the trial court to address the proposed receiver’s qualifications and ability to develop a plan, not to judge the merits of components of the plan disclosed in the motion for appointment.

The opinion concluded that the statute:

does not empower the court to determine for itself whether the property may, in fact, be rehabilitated in a financially sound manner or even to define what constitutes financial viability for the property.  Indeed, on its face, the statute leaves open the possibility that a receiver may be appointed before the plan has been developed, meaning that in some cases there will be no financial and construction plan for the court to review at the time of appointment.

The Court of Appeal sent the case back to the trial court with directions for the trial court to rule on the City’s motion under the correct legal standard as set forth in the statute.

Lesson

The appointment of a nuisance abatement receiver does not require proof of the rehabilitation plan’s “financial viability.”  Instead, the statute allows the appointment of a receiver as long as the property owner is afforded proper notice and an opportunity to cure, and the receiver is qualified to develop and supervise a financially viable plan.

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