Courts that oversee receivers generally have broad discretion to direct and approve actions proposed by a receiver. But does this authority extend to a receiver not only granting a super-priority lien before existing liens, but also selling the property free and clear of all lien? In Sonoma County v. Quail, 56 Cal.App.5th 657 (Ct. App. 2020), the California Court of Appeal answered this question in the affirmative.
Quail involved a land of 47,480 square feet with two houses, a few garages, several outbuildings and many trailers surrounded by a real dump. Although many of these structures were uninhabitable, unsanitary and dangerous, several families resided on the land. Although Sonoma County (the “County”) ordered the owner to remediate the property on several occasions, he failed and refused to do so. After several years of these relentless violations, the county finally sought and obtained the appointment of a receiver on the real estate.
To secure the funds needed to repair the property, the receiver applied to the court for permission to borrow the money by issuing a certificate of receivership secured by a super-priority lien—that is to say, a lien before all other liens — against the real estate. Although the trial court initially refused to prime the existing privileges, when the receiver could not find anyone to lend the money (since the land lacked fairness), the trial court relented and approved a super-priority privilege. despite the objection of the primary secured lender (the “Lender”).
After the receiver returned the property to a marketable condition, the receiver applied to the trial court for permission to sell the property free and clear of all existing liens. The receiver argued that since the property was not worth enough to fully repay even the primary secured lender, no one would buy the property and complete the renovations unless it was sold free and clean. The trial court accepted and approved the sale despite the lender’s objection.
On appeal, the secured creditor primarily argued that California’s receivership law did not specifically authorize the priming and termination of liens. The Court of Appeals disagreed based on its reading of California’s leading receivership law, Cal. Civ. Proc. Code § 568, which provides the following:
The receiver has, under the control of the court, the power to bring and defend actions in his own name, as receiver; take and retain possession of property, collect rents, collect debts, compound and impair debts, make transfers, and generally perform deeds relating to property which the Court may authorize.
The Court of Appeal concluded that the last clause of the law, which authorized a receiver “generally to do such property related acts as the Court may authorize”, Provided the trial court with sufficient authority to not only approve a super-priority lien, but also to authorize the receiver to sell the real estate free and clear of any lien.
As a fallback argument, the lender asserted that while the trial court was authorized to initiate and strip liens, it certainly did not have the power to affect its lien since it was not a formal party. At the trial. Again, the Court of Appeal disagreed. She found that the lender “had acquiesced in the receivership proceedings” by participating in the matter. In other words, by simply comparing and opposing, it allowed the trial court to assign, move and ultimately strip the lien from the lender.
Quail provides an interesting example of the potentially broad discretion available to a trial court to direct the actions of a receiver. While the model of facts presented in this case is a bit extreme, it can serve as a stark reminder that a receiver can significantly affect property rights. even if the property rights belong to a third party. In this case, if the primary secured lender had better understood the broad powers of a receivership court, it might have been able to act differently to protect its lien. As it stands, however, the lien is waived and the primary secured lender will only get back a portion of the proceeds of the sale as a result of the sale.
For more information on receivership law, see our Receivership Law Handbook: https://www.swlaw.com/services/receivership-law-handbook.