Summer 2011 • Issue 40, page 1

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.]

A significant new ruling in the ongoing dispute about whether court officers – in this case receivers – appointed by the court to preserve secured lenders’ collateral assets pending resolution of a foreclosure action — may instead sell those assets at the behest of lenders so lenders may avoid having to foreclose on and take title to their collateral (and assume attendant liabilities) was made by Santa Clara County Superior Court Judge Peter H. Kirwan on June 6, 2011 in a dispute entitled Wachovia Bank, National Association v. Downtown Sunnyvale Residential, LLC (Case No. 1-09-CV-153447).

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:

“I think that at the end of the day there are inherent statutory protections to the foreclosing process, whether it’s by trustee sale, nonjudicial foreclosure or by judicial foreclosure. I think those protections are afforded in various code sections that counsel has alluded to in their briefs. Those are really there for a reason. In other words, to provide protection to everyone.

“….[A]t the end of the day, some of the protections afforded by statute, whether it’s a judicial foreclosure, which is really what the lawsuit was filed for, or even a nonjudicial foreclosure, just are not addressed or referenced in [the prior order].”

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:

“Section 704.740 unambiguously states that a dwelling subject to a homestead exemption ‘may not be sold under this division [Enforcement of Money Judgments] to enforce a money judgment except pursuant to a court order for sale obtained under this article [Homestead Exemption].” The statute thus clearly and unambiguously makes a section 704.740 order a requirement for sale of a dwelling subject to a homestead exemption, without differentiation between a sale by a sheriff and a sale by a receiver.”
Wells Fargo v. D&M Cabinets, 177 Cal.App. 4th at 72.

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:

“A receiver…is an agent of the court and the property in his hands is really under the control and continuous supervision of the court…Consequently, unless regulated by statute, the court has full power to order the receiver to dispose of property in such a manner as the court may deem to be in the best interest of the parties concerned…. (Riverside, supra, 35 Cal.App.3d at pp. 583-584, italics added.)”

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.