In the twenty-first century, superheroes are all the rage. Alive and well are never-ending debates about the superiority of DC characters versus Marvel characters, or heroes that are born super, such as Superman, versus those that are made, such as Iron Man. Meanwhile, the superpowers of a judicially appointed receiver have become clearer.
Judicially appointed receivers are agents of the court, and the court has incredibly broad discretion to grant the receiver powers as to real property. Those powers can include “super-priority” liens securing loans (and the receiver’s fees) necessary to remediate nuisance or hazardous conditions on the property. These principles were made clear in a recent case published by California’s First Appellate District, County of Sonoma v. U.S. Bank N.A.
Facts and Trial Court Proceedings
The property was a 47,480-square-foot lot with multiple structures, including barns, motorhomes, trailers, and buildings with existing fire damage. One report described the property as a “makeshift, illegal mobile home park and junkyard.” The property suffered from a long list of hazardous and substandard conditions which had caught the attention of the County of Sonoma, including unpermitted wiring, hazardous decking and stairs, unpermitted kitchens and plumbing, broken windows, and “a massive accumulation of junk and debris throughout the homes and exterior of the property.” From 2008 to 2014, the sheriff’s department and fire department had been called to the property nearly 450 times to respond to various issues.
The property was owned by James Quail and the structures were occupied by various individuals at various times. The property was encumbered by multiple liens, including a $663,000 lien held by U.S. Bank. However, the property was worth considerably less than half of U.S. Bank’s lien alone.
The County sued and the trial court appointed a receiver to oversee abatement efforts after the owner, Mr. Quail, failed to comply with agreements to abate that hazardous conditions himself. Because of the negative equity in the property, the receiver found it impossible to obtain financing to fund the abatement efforts, which were estimated to cost $115,000 (including the receiver’s fees). Eventually the trial court permitted the receiver to obtain funding through a “super-priority lien,” which would take priority over any existing liens on the property, despite objections from U.S. Bank.
After the receiver finished his initial abatement work, he recommended selling the property to a buyer who would commit to finish rehabilitating the property. The Court approved this plan and authorized the receiver to sell the property free and clear, again over objections by U.S. Bank. The property was sold for $315,000. The receiver paid off the super-priority lien, and all remaining proceeds were set aside pending the court’s determination regarding appropriate distribution among the remaining lien holders, including U.S. Bank.
U.S. Bank appealed.
Court of Appeal’s Opinion
The appellate court affirmed the trial court’s grants of power to the receiver.
The appellate court first noted that deference would always be granted to the trial court in authorizing actions by a receiver. In this case, the trial court appointed the receiver under Health and Safety Code section 17980.7 and Code of Civil Procedure section 564. Section 17980.7 authorizes appointment of a receiver when substandard conditions on a property substantially endanger the health and safety of the public, and the property owner has been unable or unwilling to remediate those conditions. Section 564 is even broader and allows the appointment of a receiver in various situations involving real property, including “where necessary to preserve the property or rights of any party.”
After reviewing California law, the appellate court reaffirmed that a receiver has “very broad powers,” including the right to borrow money if the property is not producing independent income (such as rents) to fund the receiver’s work. The court is permitted “to authorize the issuance of a receiver’s certificate with priority over all preexisting liens to fund the preservation and management of property in the receivership estate.”
The appellate court also agreed that the trial court had authority to empower the receiver the sell the property free of encumbrances because the only way to finish rehabilitating the property was by “stripping the property of its existing liens, including the lien held by U.S. Bank,” so that it could be sold to a buyer willing to finish rehabilitating the property.
The most obvious takeaway from the County of Sonoma case is to recognize the broad powers of judicially appointed receivers. However, it’s also important to note how the receiver’s powers impacted the other parties in this case.
First, the owner, Mr. Quail, lost control and eventually his ownership interest in the property, because he was unwilling or unable to address the County’s concerns regarding the hazardous conditions on the property. Although the hazardous conditions were extreme in this case, a property owner should prioritize addressing any concerns raised regarding a property if neglecting the issue could result in a court appointing a receiver.
Second, U.S. Bank also lost its lien priority and was left in a position to fight with other lienholders to obtain pennies on the dollar. U.S. Bank had the opportunity to foreclose on the property before the receivership or perhaps attempt to motivate Mr. Quail to address the hazardous conditions on the property, but it did not. U.S. Bank eventually was forced to take an even greater loss, as did the other lienholders.
A receiver has immense power to accomplish his or her assigned task, even to the detriment of other, previously-established interests in the property.