Fall 2008 • Issue 30, page 1

California Supreme Court Strengthens Authority of Courts and Receivers in Health and Safety Code Proceedings.

By Pasternak, David*

The California Supreme Court ringingly reaffirmed the broad discretion that appointing courts have in directing their receivers’ administrations and established that “rehabilitation” of substandard properties in Health and Safety Code receiverships may reasonably include demolition when repair is uneconomic, in its May 19, 2008 decision in City of Santa Monica v. Guillermo Gonzalez, 43 Cal. 4th 905 (2008 Cal. LEXIS 5445), 2008.

The opinion, in the first Health and Safety Code receivership case addressed by the California Supreme Court, also held that the plaintiff city’s substantial compliance with statutory requirements was adequate under the circumstances of the case, in its unanimous decision written by Justice Marvin Baxter. The defendant’s lengthy history of ignoring municipal demands to rectify non-conforming uses and structural inadequacies of the subject property underlay the trial court’s ruling, upheld at the appellate and Supreme Court levels.

The facts were not in dispute. Guillermo Gonzalez owns a two-story single-family house on Ocean Park Boulevard in Santa Monica. Without proper permits, he converted the attached garage into a separate dwelling unit, lives with his family on the first floor of the house, and rents bunk beds on the second floor to various tenants.

The city pursued a variety of criminal and civil court actions against Gonzalez since 1989, alleging violations of its building, fire, mechanical, plumbing and electrical codes. In 1991, the city enforced a civil default judgment by demolishing a portion of the structure. In 1998, Gonzalez was jailed for 180 days following his criminal conviction and subsequent failure to timely correct various code violations.

In 2001, the city filed a second criminal action against Gonzalez. After Gonzalez again was convicted of various criminal counts arising from a number of code violations, and Gonzalez again failed to correct the code violations, the city inspected the property in May 2002 and shortly thereafter served Gonzalez with a “Notice and Order to Comply.” That notice listed the code violations, stated that there would be a re-inspection the following month, and that the city “will take actions to make the necessary corrections”. Gonzalez again failed to correct the various violations.

The follow up inspection did not occur until two years later – in June of 2004. After finding no corrections, the city initiated a probation violation action against Gonzalez.

In December 2004, the city filed a petition for appointment of a receiver alleging various Health & Safety Code violations. Gonzalez was personally served with the petition a few days before it was filed.

The trial court heard the city’s motion for appointment of a receiver in January 2005, almost one month after it was personally served on Gonzales. At that hearing, Los Angeles Superior Court Judge Lisa Hart Cole appointed a receiver. Shortly thereafter, the receiver filed a motion to obtain funding and to use that funding in part to demolish the structure, reporting (through supporting evidence) that it would be cheaper to demolish the structure than to rehabilitate it and that the empty lot would have greater value than a rehabilitated structure. Over Gonzalez’ objection that his home should be rehabilitated rather than leveled, the trial court issued the orders requested by the receiver.

The Court of Appeal affirmed the trial court, with Justice Robert Mallano dissenting on the ground that the trial court and receiver should have been compelled to follow Gonzalez’ desire to preserve his home.

The California Supreme Court opinion considered two issues: (1) whether notice of the receivership remedy given to Gonzalez complied with due process requirements, and (2) whether the trial court and receiver were obligated to rehabilitate the property rather than demolish it because Gonzalez wanted to preserve his home.

The Supreme Court determined that Health & Safety Code §§17980.6 and 17980.7 do not require a notice to repair to inform a property owner that receivership is a potential consequence of failure to correct or abate the specified violations:

“Generally due process requires that ‘the government provide notice and an opportunity to be heard before it deprives a person of property.’ [citations omitted.] But Jones, supra, 547 U.S. 220 [Jones v. Flowers, 547 U.S. 220 (2006)] cannot be read as compelling the government to provide advance notice of all possible civil remedies that might be pursued in the event of noncompliance with a legal obligation.”

Santa Monica v. Gonzalez at 927

The Supreme Court also held that while the city’s May 2002 Notice failed to fully comply with the Health & Safety Code statutory scheme because it was not posted or mailed to the property’s tenants, the technical violations were not prejudicial because Gonzalez had adequate personal notice of his obligation to correct the various specified violations.

The Supreme Court also affirmed the trial court order authorizing the receiver to demolish Gonzalez’ home, determining that appellate courts must be highly deferential to trial court decisions authorizing demolition of substandard structures that pose a substantial healthy and safety risk. Evidence showed that demolition of the property for a bid amount of $54,000 would result in raw land worth approximately $509,000 (projected equity of $455,000), while rehabilitation of the property at a cost estimated at between $145,000 (the receiver’s preliminary estimate) and $350,000 (the city’s estimate) would result in property worth approximately $450,000 (projected equity of between $305,000 and $100,000). The trial court’s approval of demolition did not constitute an abuse of discretion, the Supreme Court held.

Nor was the property owner’s preference for rehabilitation entitled to special weight. While this preference was a legitimate factor to consider, the Court held that “this factor did not mandate judicial disapproval of the demolition alternative, especially in view of the economic information presented.”

Santa Monica v. Gonzalez at 924

The opinion is important for receivers for a number of reasons. First, it is a strong Supreme Court endorsement of the Health & Safety Code receivership remedy for substandard housing. Second, it includes many general citable statements about the role of receivers as neutral court agents. Third, it demonstrates that it is extremely difficult for any appellant to overturn a trial court directive to its receiver on appeal because of the stern standard of review for such orders.

From the perspective of trial courts and receivers, the Supreme Court has issued a wonderful opinion. However, and unfortunately for Mr. Gonzalez (but not for receivers), this case illustrates the well-known adage (only insofar as Gonzalez’ frame of reference is concerned) that bad cases make bad law. With his long history of both criminal and civil litigation arising from many longstanding and serious code violations, and a lengthy jail term, Gonzalez was far from a poster child for sympathetic property owners. As such, he has served the noble role of strengthening California receivership laws for our trial courts and receivers.

Following the issuance of the Supreme Court decision, Santa Monica Deputy City Attorney Adam Radinsky, who argued the case in the Supreme Court, stated:

“We are glad that the court preserved the flexibility of this important remedy for cities and for tenants. Apartment owners need to know that they must correct code violations within a reasonable time. Receivership is drastic medicine, but we won’t hesitate to use it in proper cases to protect the well-being of the community.”

* David J. Pasternak is a founding Co-Chair of the Los Angeles/Orange County branch of the California Receivers Forum, a member of the Century City law firm Pasternak, Pasternak & Patton, A Law Corporation, and the court-appointed Receiver in the Gonzalez case.