California Court Finds Protections Afforded by California Foreclosure Laws Preclude Sale of Property by Rents, Issues and Profits Receivers By Rense, Kirk* [Our last issue featured a brief note about an
Arizona case where a receiver was granted authority by the court to sell
and convey legal title to receivership real property without prior
foreclosure by the secured plaintiff and without borrower’s consent. A
California court has reached a different conclusion, as follows. Ed.] In brief summary, the issue was framed within conflicting motions to confirm the receiver’s sale or to deny the sale and modify parts of an existing order (made earlier in the case by a different judge) that allowed such a sale to take place. Chief argument by the objecting party against the sale was that California had enacted a careful statutory scheme governing foreclosures — how a lender might gain title to its collateral while ensuring due process to the defaulted borrower and safeguarding of the interests of other affected parties and entities (holders of other security interests in the property, mechanic’s lienors, and the like). To allow the court’s receiver to act as a surrogate for the lender to circumvent those due process considerations and statutory protections involved in the foreclosure process would do violence to this careful statutory structure, to benefit the lender, it was argued. Bank counsel seeking to confirm the receiver’s sale argued that receivers appointed under many different statutes may sell property – to liquidate corporate property in a corporate dissolution action, as an example. The court’s inherent equitable power could certainly be applied to allow a receiver’s sale in the context of a rents, issues and profits receivership, it was argued. Many additional arguments were made by counsel for both parties during the hearing on the motion, but these assertions were core to the positions espoused. The hearing transcript discloses that the court found that the protections inherent in the statutory scheme governing judicial (and non-judicial) foreclosures by secured parties are paramount. Judge Kirwan stated:
The order in question also purported to allow the receiver’s sale to be “free and clear of liens.” Such a provision, if allowed, strips valid liens held by other persons and entities from the property to simplify the sale. This provision has formerly been allowed chiefly in bankruptcy courts, where there are many statutory qualifications that must be met before it can be used. This provision has recently come under close scrutiny even in bankruptcy courts in the Ninth Circuit (see extended discussion in the Summer, 2010 Issue 37 of the Receivership News commencing at page 24). A recent California Court of Appeal decision dealt with another attempt to use a receiver’s sale to bypass a protective statutory scheme — in this case a controlled judgment levy on a judgment debtor’s residence. In Wells Fargo Financial Leasing, Inc. v. D&M Cabinets et al. (Victoria Wolfe-Davis, Third party Claimant and Appellant), 177 Cal. App. 4th 59 (2009) the court below had appointed a receiver to sell the judgment debtor’s residence without requiring compliance with requirements of California Code of Civil Procedure 704.740 “General Requirements for Sale of Dwelling.” The Third Appellate District Court disagreed with this approach, holding that:
The appellate court cited to People v. Riverside University (1973) 35 Cal.App.3d 572, 583 (1973) in discussing the power of the court to regulate sales by receivers, as follows:
Wells Fargo v. D&M Cabinets, 177 Cal.App. 4th at 70. In both the Wells Fargo case and the Wachovia case the plaintiff attempted to use sale by a court’s receiver to bypass California protective statutory schemes benefitting the defendants – in the former the protections afforded a homeowner, in the latter the protections afforded a property owner (and others) by foreclosure statutes. In at least these two cases, the California Legislature’s intent was found to be paramount. Ed. |