Fall 2010 • Issue 38, page 1

Real Property Receiver's Sales: When the Sale Order is Not Enough

By Blackler, Mia*

California Code of Civil Procedure Section 568.5 is often cited as unrestricted authority when a rents, issues and profits receiver1 seeks court confirmation of a sale of real property in receivership, usually at the request of the plaintiff / secured creditor. Section 568.5 provides that, subject to court approval, a receiver may sell real or personal property in the receiver’s possession. It is not a carte blanche endorsement for receiver’s sales, however, as the statute does not address when it is proper for a receiver to attempt to sell such property, or when a court should approve such proposed sale.

This section also contemplates that the receivership property will be sold by way of a public auction pursuant to Code of Civil Procedure Section 701.510 et seq. These rules are rather formalistic and time-consuming, however, and courts regularly approve a sale that varies from the requirements of these statutory provisions. That a receiver may deviate from these public execution requirements is supported by People v. Riverside University, 35 Cal.App.3d 572, 582-583 (1973) and Cal-American Income Property Fund VII v. Brown Development Corp., 138 Cal.App.3d 268, 274-75 (1982).

When the parties to a foreclosure suit stipulate to a sale of receivership real property, courts have freely expanded receivers’ authority to encompass sales, provided that the receiver’s appointment order contains language to permit a sale. The situation becomes more clouded in the face of opposition, however. Accordingly, when there is opposition to a receiver’s sale, it is important that the receiver and secured creditor consider the effect of the objection(s), and how these objections can affect the viability of the sale even if it is authorized by the court through a sale order.

Objections by Junior Lienholders
A mechanic’s lien claimant or junior secured creditor may formally object to the proposed receiver’s sale on the grounds that the only way to remove their liens (in the absence of a voluntarily release) is for the mechanic’s liens to be bonded around, or for the senior lienholder to complete a foreclosure proceeding, or that the liens be discharged in a borrower/debtor’s bankruptcy proceeding.

The junior lienholders are objecting to the proposed lien stripping based on a perceived lack of due process in the absence of express statutory authority for lien stripping through receiver’s sales. They may further argue that these junior lienholders were granted certain property rights by contract and by California law, which rights have value even if their only efficacy is as a roadblock to a quick sale as a substitute for the senior lienholder’s foreclosure. Practically speaking, however, the junior lienholders are looking for a way to obtain payment on their liens that would otherwise be unavailable in a bankruptcy or foreclosure context.

In contrast, those in favor of lien stripping through a receiver’s sale (senior secured creditors) argue in favor of free alienability of real property trumping the legislative scheme requiring a senior secured creditor to complete its foreclosure on its lien in order to free property from other liens later in time and right, and in favor of preserving the value of the real property collateral which would otherwise deteriorate during the delay caused by a foreclosure or bankruptcy proceeding. This debate on lien stripping is as yet unresolved.

The closest analogous case is in bankruptcy court concerning Bankruptcy Code Section 363(f), making Bankruptcy Court the only court with a statutory scheme that specifically allows sales free and clear of liens in certain, controlled circumstances. See, Clear Channel Outdoor, Inc. v. Knupfer, 391 Bank. Rptr. 25 (9th Cir. BAP 2007) and its progeny. Also of note is that Washington State has recently enacted a statute that expressly authorizes state courts to cause properties to be sold free and clear of liens. (RCW Title 7 “Special Proceedings and Actions” Sec. 7.60.260 “Receiver’s disposition of property – Sales free and clear.”)

Objections by a Borrower/Debtor
Sometimes a receiver’s sale is preferable to preserve the real property collateral’s value, which situation regularly arises today with failed real estate developments where construction has stopped, partially completed residential units dot the landscape, and completed houses or condominiums stand vacant and unprotected.2 Secured lenders often seek to have receivers complete and sell units (or the entire project), to preserve the value of these “perishable” properties, and a court may find that there is a contractual right to do so under the security agreements which typically give lenders the authority to “protect” their collateral.

The receiver’s sale is preferable to these secured creditors which generally believe that having the court through its receiver sell the property deflects potential construction defect liability from the lender, which does not fit the definition of “seller” under California law in such circumstance.

But when the defendant borrower objects to the proposed receiver’s sale, the court is forced to decide if it has equitable authority to co-opt the defendant/owner’s property rights and allow its receiver to do such a build-out to “preserve the deteriorating property” (as the argument goes) and then to sell units over the defendant/owner’s objection. The court’s alternative is to have its receiver fence and guard the property until the underlying lawsuit is resolved. If that should happen and the collateral deteriorates, the most cost-effective course of action may be to raze the project and sell the raw land.

Third Parties’ Impact on the Sale
But even if the court authorizes and approves the receiver’s sale over the objections of a lienholder or borrower, title insurance companies may refuse to insure the proposed buyer of the receivership real property in the face of the objections to the sale. Title insurance companies do not want to be dragged into litigation should the objector appeal the court’s order to approve the receiver’s sale.

Consequently, title insurance companies may withhold issuing the insurance policy to the buyer until the 90-day appeal period has run. In essence, the objection has effectively held up the receiver’s sale until the appeal period has run or an agreement is reached through which the objections are withdrawn to alleviate the title insurance company’s concern about an appeal of the sale order.

The delay caused by the objections can result in the sale not closing for the 90-day appeal window, and may have the undesired effect of (1) the sale falls apart altogether where time is of the essence to the buyer or parties, (2) the collateral is damaged if there are weather-related issues that must be dealt with immediately to be handled by the proposed buyer and the receivership does not have the funds to effect the repairs, (3) the accrual of increased taxes/penalties/interest, and (4) increased costs for the receivership continuing while the sale is pending for another 3 months.

By further example, a receiver’s sale may be disrupted by a taxing authority. It is one thing for the receiver and the parties to be aware of delinquent property taxes owing on the receivership property which would have to be paid from the sale proceeds; it’s another when a taxing authority seeks to obtain through the receivership several years’ worth of unpaid partnership taxes owing from the borrower/owner. It becomes more problematic where the borrower/owner is a single purpose entity.

The author is aware of at least one instance where a court ordered that all delinquent partnership taxes of a single purpose entity be paid from the proceeds of a receiver’s sale, even though some of the tax years preceded the receiver’s appointment.

1 A receiver appointed by the court upon the petition of a secured creditor to take possession of, operate and sequester rents from a building pledged as collateral for a loan. See California Code of Civil Procedure section 564(a)(2), which specifically authorizes such appointment where there is a lien under a deed of trust, it appears the property is in danger of being “lost, removed, or materially injured,” or the contractual obligations are not being performed and the value of the property is probably insufficient to discharge the debt. There is nothing in this statute that authorizes a receiver’s sale of receivership property prior to the secured lender foreclosing and taking title to the real or personal property collateral.

2 The primary purpose of an equitable receivership is to preserve property pending resolution of disputes between litigants, i.e. appointment is authorized “[i]n all other cases where necessary to preserve the property or rights of any party.” C.C.P. §564(b)(9).

* Mia S. Blackler, Esq. is a shareholder in Buchalter Nemer, P.C.’s San Francisco Office. She focuses her practice on commercial, real property and financial institutions litigation in state and federal court, and has special expertise in enforcing creditors’ rights, including seeking prejudgment remedies and receiverships.