California real estate and deed of trust disputes | courtroom war stories and lessons learned

Receivers Gone Wild

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Receivership is a provisional remedy within a court’s broad equitable jurisdiction.  The statute most commonly used in obtaining a receivership is Code of Civil Procedure section 564.  But other statutes sometimes apply, such as Health and Safety Code section 17980.7 (addressing receivership over substandard or dilapidated buildings).

As with all litigation tools and remedies, a receivership can present great utility and benefit, but also carries serious risks and potential abuses.  Receiverships sometimes go off the rails.

Here are some considerations:

Not All Receiverships are the Same

Litigants and even courts often mistakenly view all receiverships as one and the same.  But the 1977 opinion Turner v. Superior Court 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.  The most common two types of receiverships are described below.

General Equity Receivers

General equity receivers (see, e.g., Code Civ. Proc. §564(b)(5), (6), and (9)) can be appointed to essentially act on behalf of a business entity, including selling the entity’s property and making other important decisions regarding assets.  Given the great powers that general equity receivers wield, their appointment is governed by very strict standards that are often difficult to meet.

Courts have described the appointment of a general equity receiver as “harsh,” with a limited purpose.  For example:

  • The “appointment of a receiver is a very drastic, harsh, and costly remedy that is to be exercised sparingly and with caution.”  (Medipro Medical Staffing LLC v. Certified Nursing Registry, Inc. (2021) 60 Cal.App.5th 622, 628.)
  • “The purpose of a receivership is the preservation of property which is the subject of litigation pending its disposition according to the judgment entered.”  (Steinberg v. Goldstein (1956) 145 Cal.App.2d 692, 698.)
  • The “function of the receiver is to aid the court in preserving and managing the property involved in a particular lawsuit for the benefit of those to whom it can ultimately be determined to belong.”  (City of Sierra Madre v. SunTrust Mortgage, Inc. (2019) 32 Cal.App.5th 648, 656.)
  • “A receivership is designed to be merely a provisional remedy. It preserves the status quo of property while litigation is pending. The appointment of a receiver in equity is not a substantive right; rather, it is an ancillary remedy which does not affect the ultimate outcome of the action.”  (Southern Cal. Sunbelt Dev., Inc. v. Banyan L.P. (2017) 8 Cal.App.5th 910, 925.)

Foreclosure / Rents and Profits Receivers

In contrast, appointment of a foreclosure or “rents and profits” receiver (see, e.g., Code Civ. Proc. §564(b)(2), (11), and (12)) is usually simple — in most instances, the parties to a loan secured by real estate have agreed in advance in the deed of trust to the appointment of a receiver 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 either its business entity or the property other than the assignment of rents and the performance of necessary maintenance and repairs as typically set forth in the deed of trust.

The Appointment Order is Critical in Defining the Receiver’s Powers

Many California cases confirm that the powers of a receiver are derived from statute and the orders of the court, starting with the Appointment Order.  (See, e.g., Morand v. Superior Court (1974) 38 Cal.App.3d 347, 351.)  As such, the parties should take great care in drafting — and potentially objecting to — the terms of the Appointment Order.

Receiver appointment orders are usually entered quickly at the outset of a lawsuit, and they are immediately appealable under California law. (See Code Civ. Proc. §904.1(a)(7).)  If a party fails to timely object in the trial court, or to timely appeal to the court of appeal, a overbroad appointment order might remain standing.  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 the applying party’s overreach.

The party drafting and proposing an Appointment Order sometimes goes overboard — for example, giving powers to a receiver beyond what California law allows.  One example might be an Order purportedly allowing a deed of trust receiver to sell the real estate security “free and clear of all liens.” There is statutory authority generically authorizing a receiver to sell property (see Code Civ. Proc. §568.5), but as acknowledged in the Turner decision, that statute has typically been applied to general equity receivers, not rents and profits receivers.

A prior Money and Dirt post — Is a “Receiver’s Sale” a Foreclosure Sale? — addressed this issue.  For additional commentary on the proposed Uniform Commercial Real Estate Receivership Act, which would purportedly allow such receiver sales “free and clear,” see prior posts here and here.

Receivers are Supposed to be Neutral

Generally, a receiver is supposed to be a neutral “agent of the court” acting for the benefit of all parties, and should not “pick sides.”  For example, see:

  • Cal. Rules of Ct., Rule 3.1179(a) [“The receiver is the agent of the court and not of any party, and as such: (1) Is neutral; (2) Acts for the benefit of all who may have an interest in the receivership property; and (3) Holds assets for the court and not for the plaintiff or the defendant.”]
  • Sec. Pac. Nat’l Bank v. Geernaert (1988) 199 Cal.App.3d 1425, 1431-1432 [“A receiver is an officer or representative of the court appointed to manage property that is the subject of litigation. The receiver is not an agent of either party to the action. The receiver represents all persons interested in the property. In other words, a receiver acts as a fiduciary on behalf of both parties as a representative and officer of the court.”]
  • Vitug v. Griffin (1989) 214 Cal.App.3d 488, 495 [“a receiver as an officer of the court is held to a strict accountability.”]

Further, a receiver should not be used as a substitute for judicial decision-making on the merits of the case. (See Hosford v. Henry (1951) 107 Cal.App.2d 765, 772 [receivers “possess no judicial powers” and the court cannot “delegate to the receiver the court’s own fact-finding powers”].)

Sometimes receivers — who also serve as mediators, arbitrators, or referees in other cases — go off the rails and need to be reminded of their neutrality mandate and the limited scope of their role.

Receivers are Supposed to Provide Monthly Reports to the Parties

Under California Rules of Court, Rule 3.1182, receivers are obligated to provide monthly reports to the parties (not the court), including a “narrative report of events,” a “financial report,” and a “statement of all fees paid to the receiver, employees, and professionals[.]”

In practice, this Rule is only sometimes complied with, and most parties fail to timely object to non-compliance.