Bay Area Receivership Group handles a few specific types of receiverships, which are explained below:
What happens when a construction project runs out of money and the half finished skyscraper, mall, or hotel sits vacant for years? There are two things that can happen; (1) while everyone waits until the developer finds funds, which is unlikely; or, (2) a more practical solution is that a developer or other party with a recorded interest can seek the appointment of a receiver over the Property pursuant to California Code of Civil Procedure (“CCP”) § 564 et seq. When seeking the appointment parties with an interest in the property must realize receivership is a drastic remedy and it is not a remedy that courts take lightly. (Plata v. Schwarzenegger (N.D.Cal. Oct. 3, 2005, No. C01-1351 TEH) 2005 U.S.Dist.LEXIS 43796 at Page 96.).
However, when a large scale construction project sits vacant and unfinished it blights the community, and a contractor likely has a large unpaid bill which hurts their workers and the local economy. Therefore, the appointment of a receiver to improve a dangerous building is something a court will approve. (City of Crescent City v. Reddy (2017) 9 Cal. App. 5th 458, 468.) Furthermore, a lien creditor can seek the appointment of a receiver. (Schreiber v. Ditch Road Investors (1980) 105 Cal. App. 3d 675, 679.) Moreover, courts have the power to appoint a receiver to ensure fairness is achieved and creditors are paid. (Allied Grape Growers v. Bronco Wine Co. (1988) 203 Cal. App. 3d 432, 453, 454.) Therefore, if blighted property is sitting vacant and numerous contractors have an unpaid bill the court likely would appoint a receiver to ensure creditors are paid, and the vacant property is brought into productive use.
The next question many will ask is how can this stalled large scale construction project be funded? The answer is through a receivership certificates Any competent receiver has access to a large network of lenders that can provide a large influx of cash to support a viable project. Therefore, if a Court appoints a Receiver a Receiver can will have the Court authorize the Receiver to borrow a certain amount in the form of a Receiver’s Certificate, which is recorded against the Property. (See Receivership Certificate Template) This receivership certificate is entitled to what is known as a super-priority lien, which authorizes the Receiver and the receiver’s lender to be paid ahead of any other party for their services. (City of Sierra Madre v. SunTurst Mortgage, Inc. (2019) 32 Cal. App. 5th 648, 660.) This inspires and authorizes the receiver to provide an influx of cash to the struggling project with the knowledge that they will ultimately be compensated for solving the problems with the development project.
Assuming the circumstances are appropriate for the appointment of a Receiver and a Receiver is appointed what happens next? Once the appointment occurs a Receiver must file an oath, bond and inventory with the Court. (California Rules of Court 3.1178 & 3.1181.) Thereafter, the Receiver becomes a fiduciary of all parties with an interest in the Property, and the Receiver is not an agent of any party. (California Rule of Court 3.1179; see also Shannon v. Superior Court (1990) 217 Cal. App. 3d 986, 992.) The Receiver then submits monthly reports and accountings to all parties with a recorded interest who can object to the Receiver’s actions. (California Rule of Court 3.1182 & 3.1183.) In the case of a construction project the Receiver will oversee contractors, developers, obtain permits, and for all intents and purposes step into the shoes of the developer that was unable to complete the project.
Once the construction is completed the Receiver can sell the Property pursuant to CCP 568.5. A receiver is also authorized to sell assets in the receivership estate in whatever manner will be most beneficial to the parties with an interest in the Property, as long as the court authorizes the manner of the sale. (People v. Riverside University (1973) 35 Cal. App. 3d 572, 583.)
Once the Receivership assets are sold the Receiver has to seek confirmation of the sale by the Court pursuant to CCP 568.5. Any party with a recorded interest can object to the proposed sale, but generally speaking Courts are very liberal in approving receivership sales and will confirm the sales unless a good reason not to is presented. (People v. Riverside University (1973) 35 Cal. App. 3d 572, 582.) Once the sale of the Receivership assets is confirmed a Receiver is required to final their Final Report and Accounting pursuant to California Rule of Court 3.1184. Assuming the judge approves the Final Report and Accounting the Receiver the construction project will have been completed, the development will be in the hands of a responsible owner, the Receiver will be discharged, and the case will be dismissed.
Just as the banks collapsed in the 2000’s as a result of the subprime mortgage crisis, companies and corporations can collapse for a variety of reasons. As an example, a lumber mill in Colorado was struggling economically and about to go under, but before it went under a receiver was appointed to preserve the company. In this case, the Receiver was able to negotiate new contracts and keep most of the sawmill employees employed. Eventually the saw mill was sold to a responsible owner. California courts have appointed receivers to wind-down corporations on numerous occasions, and in these situations courts have appointed receivers on their own motion to achieve judicial objectives.
The case of Gold v. Gold involved a family business started by family patriarch Morris Gold who was an extremely successful businessman. Several years later his son and son-in law became involved in the business. In 1992 the patriarch Morris passed away. Thereafter, Morris’s son and Morris’ son-in law began to disagree, and eventually Morris’s son in-law sued Morris’s son for control of the corporation. Years of litigation between the two parties ensued and eventually the court decided it was best to appoint a Receiver to dissolve the corporation. The court then decided it was appropriate for the Receiver to liquidate and sell the corporate assets.
The situations above are just two examples of how a corporation can fall apart and how a receiver can be appointed to fix the problem. As discussed above, receivers are appointed to bring order to a situation that is out of control and receivers are often called upon to do this when companies and corporations fail.
Another way to utilize the receivership remedy is to preserve property that is involved in criminal activity and pay restitution to the victims of the criminal activity. Often if a person is arrested and incarcerated the question becomes what happens to their assets? A recent example of when a receiver was sought is in a criminal case is when Bernie Madoff was incarcerated for his multi-billion dollar ponzi scheme. Although, the ponzi scheme fell apart Mr. Madoff still had substantial assets to be seized and distributed to his victims, which is why the SEC sought the appointment of a receiver.
California has its own statute to appoint a receiver in these situations, which is known as the “freeze and seize law.” In California if a receiver is appointed pursuant to the penal code they have the ability to sell the receivership assets in the same manner as they do in typical civil law receivership cases. Therefore, district attorneys throughout the state can use the freeze and seize laws to appoint a receiver over the assets of criminal defendant, and the receiver can then sell the assets to assist the victims of fraud. The receiver can also be appointed to preserve the assets of the criminal defendant from falling into disrepair. For example, if a criminal defendant owns ten properties and is incarcerated, these properties must still be maintained, in this case a receiver can be appointed to preserve and eventually sell the holdings.
If a property is underwater and/or in a blighted condition with numerous are lienholders hesitant to foreclose? The answer is often receivership. If a property is underwater, but some equity exists a receiver can be appointed to take control of the property and eventually sell the property pursuant to California Code of Civil Procedure (“CCP”) § 568.5. The receivership sale must be confirmed by the court. (CCP 568.5; (People v. Riverside University (1973) 35 Cal. App. 3d 572, 582.) This allows all the lienholders an opportunity to explain their position in court unlike a Trustee’s Sale, which has no judicial oversight.
A court can also authorize a process called lien stripping, which can ensure equity is achieved and clear title is delivered to a responsible buyer. (City of Riverside v. Horspool (2014) 223 Cal. App. 4th 670, 684.) This again provides more protection than a non-judicial foreclosure trustee’s sale, because at the conclusion of the sale a confirmation hearing is held where all recorded interests have an opportunity to be heard and a judicial order has been signed confirming the sale. Of course, the confirmation order can be appealed, but the confirmation order is subject to an abuse of discretion review. Id. at 683. Therefore, the sale order is highly unlikely to reversed on appeal.
Receivership is a great remedy to resolve distressed properties and the remedy allows judicial oversight to ensure a problem asset can be turned into a productive use.
Secured lenders are hesitant to foreclose when environmental problems exist, based on concerns about CEQA, CERCLA, or other environmental issues, because they may be deemed an owner or operator. However, lenders can avoid these concerns by seeking the appointment of a receiver for the distressed property. California Civil Procedure (“CCP”) § 2929.5 & 564(c) authorizes lenders to inspect property to assess the existence and magnitude of hazardous substances and environmental issues.
If there are significant issues at the property, a lender can seek the appointment of a receiver pursuant to CCP § 564(b)(2) and/or 564(b)(9). When seeking the appointment of a receiver a lender must realize receivership is a drastic remedy and it is not a remedy that courts take lightly. (Plata v. Schwarzenegger (N.D.Cal. Oct. 3, 2005, No. C01-1351 TEH) 2005 U.S.Dist.LEXIS 43796 at Page 96.). However, courts have held that dangerous buildings warrant the appointment of a receiver. (City of Crescent City v. Reddy (2017) 9 Cal. App. 5th 458, 468.) Therefore, environmental contamination issues certainly justify the appointment of a receiver. (United States v. Alisal Water Corp (2005) 431 Cal. F. 3d. 643, 648-649.)
Once a receiver is appointed they are cloaked with tremendous power, as well as the same immunity as a judicial officer. (New Alaska Development Corp v. Guetschow (9th Cir. 1989) 869 F.2d 1298, 1303.) This immunity extends to environmental regulations such as CERCLA. (In re Sundance Corp. (Bankr. E.D. Wash. (1993) 149 B.R. 641, 656-657.) The lender is not liable here because it is neither an owner nor operator of the property in the receiver’s charge. and California has routinely held that a financial institution does not owe a duty of care to the borrower it transacts with. (Weimer v. Nationstar Mortgage, LLC (2020) 47 Cal. App. 5th 341, 355.) Therefore, a lender would certainly not owe a duty of care to a party that is judicially immune, such as a receiver.
Assuming the circumstances are appropriate for the appointment of a receiver and the lender successfully appoints a receiver, the receiver must then file an oath, bond and inventory with the court. (California Rules of Court 3.1178 & 3.1181.) Thereafter, the receiver becomes a fiduciary of all parties with an interest in the property, and the receiver is an agent of the court and a neutral party. (California Rule of Court 3.1179; see also Shannon v. Superior Court (1990) 217 Cal. App. 3d 986, 992.) The receiver then submits monthly reports and accountings to all parties with a recorded interest who can object to the receiver’s actions. (California Rule of Court 3.1182 & 3.1183.) In almost all instances, the receiver will be preparing a troubled asset for sale and a receiver is authorized to sell property pursuant to CCP 568.5. A receiver is also authorized to sell assets in the receivership estate in whatever manner will be most beneficial to the parties with an interest in the Property, as long as the court authorizes the manner of the sale. (People v. Riverside University (1973) 35 Cal. App. 3d 572, 583.)
Once the receivership assets are sold the receiver must seek confirmation of the sale by the court pursuant to CCP 568.5. Any party with a recorded interest can object to the proposed sale, but generally speaking courts are very liberal in approving receivership sales and will confirm the sales unless a good reason not to is presented. (People v. Riverside University (1973) 35 Cal. App. 3d 572, 582.) Once the sale of the receivership assets are confirmed a receiver is required to file their Final Report and Accounting pursuant to California Rule of Court 3.1184. Assuming the judge approves the Final Report and Accounting the Receiver the environmental issue will have been solved, the Property will be in the hands of a responsible owner, the Receiver will be discharged, and the case will be dismissed.
As it relates to specific receivership examples, cities and counties in California often use health and safety receiverships to abate nuisance conditions. A few reasons cities and counties might use the health and safety receivership remedy are when a property is abandoned, occupied by a hoarder, the site of criminal activity, or the owner passed away without any heirs. If typical code enforcement efforts by a City or County are unsuccessful then a receiver can be appointed to abate the dangerous conditions. The Receiver then borrows money from lenders with Court approval to abate the nuisance conditions and then decides to do one of the following with the property.
- Sell the property as-is to a responsible owner with conditions
- Demolish the property and sell the vacant lot
- Fully rehabilitate and sell the property
Court-Appointed receivers are used in various ways to bring control to out of control situations. Some of the various reasons a receiver may be appointed include abating nuisance properties, compensating victims of Ponzi schemes, finding ways to wind down corporations, reforming prison medical care, and a number of other reasons.
Receivers can also be used to enforce or effectuate judgements. 1 This can occur in a number of ways. For example, City of Elk Grove “City” had a property that was the site of substantial criminal activity, but the code violations were insufficient for a health and safety receivership. 2 The nuisance property was the site of substantial criminal activity that included numerous drug deals, shootings, and other nefarious activity. 3 To address the nuisance issues at the property the Sacramento County Court declared the property a public nuisance on April 17, 2019. 4 Despite the property being declared a public nuisance none of the occupants left and the criminal activity continued. City then decided appointing a receiver was necessary to enforce the court’s judgment. The court granted the City’s request to appoint Gerard F. Keena II from Bay Area Receivership Group as a receiver over the nuisance property on August 5, 2019. 5 Within a few months of the receiver’s appointment, the occupants were cleared from the Property, the criminal activity was resolved, and the property was sold to a responsible owner, and the entire neighborhood celebrated. 6
Post-judgment receiverships can be used to resolve nuisance properties. Another way post-judgment receivers can be used is by judgment creditors to collect funds from debtors. 7 As creditors know even with a valid judgment collecting debts can be difficult. Judgment creditors can garnish wages, record liens, and send demand letters, but these paths are often ineffective. 8 However, if a post-judgment receiver is appointed the receiver can act as a forensic accountant, take control of the debtor’s assets and even sell them subject to court confirmation. 9 It is worth noting that California court’s have held that receivers can be appointed for the sole purpose of collecting a money judgment. 10
Banks are regularly straddled with substantial amounts of uncollectible debt and hire collection agencies to assist. Collection agencies can be effective, but receivers are hands of the court with great power. 11 Receivers can take control of a debtor’s personal and real property then sell them in a matter they believe is best for the receivership estate. 12 Banks can even appoint post-judgment receiver’s over debtor corporations to ensure that the corporation’s creditors are paid before other business interests. 13 (Crocker National Bank v. O’Donnell (1981) 115 Cal. App. 4th 264, 267-268.)
In summary, receivers can be used to enforce judgments by the powers granted to them by the court. Using these powers a receiver can sell real or personal property or even monitor a corporations to ensure judgment debts are paid. Therefore, banks and other debtors struggle to collect on money judgments should look at how receivership can help resolve uncollected judgment debts
1 Bryan D. Sampson, Esq., Tools for Judgment Creditors: Post-Judgment Receiverships Enhance the Collection Process, Receivership News, (Fall 2003, Issue 11) https://www.receivers.org/recnews/fall03.pdf. (last visited Apr. 2, 2020).
2 Angela Greenwood, Elk Grove Suing Property Owner Over Problem Home, (August 3, 2017), https://sacramento.cbslocal.com/2017/08/03/elk-grove-suing-property-owner-over-problem-home/
3 Cameron MacDonald, Neighborhoods Feud with Landlord Ends, Elk Grove Citizen, (Sept. 20, 2019), http://www.egcitizen.com/news/neighborhood-s-feud-with-landlords-ends/article_61de6fac-dbd2-11e9-bc78-17b81b46112c.html
4 Sacramento County Case #34-2017-00216691.
6 George Warren, Elk Grove Neighborhood Celebrates "Hell House Auction", CBS Sacramento, (Nov. 27, 2019), https://sacramento.cbslocal.com/2019/11/27/elk-grove-neighborhood-celebrates-hell-house-auction/
7 Bryan D. Sampson, Esq., Tools for Judgment Creditors: Post-Judgment Receiverships Enhance the Collection Process, Receivership News, (Fall 2003, Issue 11) https://www.receivers.org/recnews/fall03.pdf. (last visited Apr. 2, 2020).
10 Olsan v. Comora, 73 Cal. App. 3d 642, 646 (1977)
11 Takeba v. Superior Court of San Joaquin County (1919) 43 Cal. App. 469, 473-474.
12 City of Riverside v. Horspool (1973) 35 Cal. App.3d 572, 583
13 Crocker National Bank v. O’Donnell (1981) 115 Cal. App. 4th 264 267-268.)
The intersection of trusts, wills and other estate documents and receiverships is a common occurrence. For example, a common reason that health and safety receiverships occur is that an owner passes away without any known heirs, or intestate. In situations where an owner passes away without any known heirs or intestate the property becomes abandoned and overrun, which makes the appointment of a health and safety receiver necessary.
Another common occurrence is that a trustee can become irresponsible, incapacitated, or engage in illegal activity. In such situations a trustee can be removed and a receiver appointed to take over the trust. This can be critical as often a trust may be in possession of numerous properties and with an irresponsible trustee in charge of the properties dire consequences could result.