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The Ten Commandments of a Rents and Profits Receiver By Mosier, Robert & Bronston, Edythe* According to ancient scripture, Moses went to Mt. Sinai in about 1,300 BC and returned with the Ten Commandments (the “Original Ten”). These set forth a fundamental set of laws that have survived about three thousand years and provide the basis for many of today’s world religions. What would Moses say to a Receiver? It seems that many of the Original Ten would apply to a Receiver (thou shalt not kill for example); however, these may not be totally on point for California Receivership law. Therefore, the authors of this article have undertaken the daunting task to develop the Ten Commandments of a Rents and Profits Receiver (“Receivership Commandments”). By way of disclosure, the authors cannot claim that these are divinely inspired. Code, ethics and conduct (the focus of the Original Ten) do, however, form the foundation for the Receivership Commandments extolled below. Despite allegedly being carved in stone, it is notable that not every person (whether or not claiming to be religious) follows each of the Original Ten. Likewise, it is suspected that not every Rents and Profits Receiver will adhere to all of these suggested Receivership Commandments. While following these Receivership Commandments may not be a sure-fire ticket to Heaven, Receivers who ignore them may experience discomfort more closely associated with the antithesis of Heaven. Why go there? Therefore, as with the Original Ten, following the Receivership Commandments is not a bad idea and may lead to a better (more harmonious) life for the devoted Receiver. With this background, this article will present each Receiver Commandment, discuss its basis in theory or the law and then, if applicable, discuss the alternatives to the Commandment – something not offered in the Original Ten.
Thou shalt not enter into a management or lease/sale broker agreement with a lender or plaintiff pre-foreclosure. The Receiver is a fiduciary, having a duty of neutrality to both the plaintiff and defendant (lender and borrower in a foreclosure action, in real estate parlance) plus a duty to work in the best interest of all who ultimately have an interest in property of the Receivership Estate. The Receiver is an arm of the Court and holds the Estate assets in custodia legis (for the Court) while the parties are litigating. The Judge is the final arbiter and has complete discretion to determine issues and advise his or her Receiver. For a Receiver to negotiate and be promised a lucrative consulting assignment by the plaintiff as soon as the case concludes would be a conflict of interest of the highest proportion. This is the first and most fundamental Receivership Commandment on which all of the laws are based. Thou shalt not
agree to a fee arrangement (written or oral) with a foreclosing
plaintiff or lender. Only the Court can set a Receiver’s
compensation and approve payment of same. To this end, the California
Rules of Court were amended in 2002. Specifically on point is Rule
3.1179 (b) that states the following: An effective paragraph to add to a prospective Receiver’s declaration
regarding his or her prospective appointment is the following: “I am not
a party, an attorney of a party, or a person interested in the captioned
matter. I have not made an agreement, contract, or arrangement with the
moving party regarding my role as Receiver; how I administer the estate
or hire professionals. I am not related to any Judge of this Court by
consanguinity or affinity within the third degree. Except to inform the
moving party of my billing rates and experience, I have made no
agreement, contract, arrangement or understanding with the moving party
regarding what I will charge as Receiver.” Note that this language also
covers Receiver Commandment One above.
Thou shalt not undertake capital improvements of a Receivership
property without Court permission and after notice to all parties. The
credo of a Receiver is to preserve and protect; it is not to undertake
significant capital expenditures to improve a facility in a
Receivership to make it more marketable after the foreclosure. Paragraph
14 (c) of Form Order RC-310 specifically states that “the receiver shall
not make any capital improvements to the property without prior court
approval”.
Thou shalt not operate without insurance adequate to cover the value
of Receivership assets unless the Court specifically authorizes it. As
an arm of the Court, the Court has complete control of the Receivership.
Appointing orders, the Receivers’ bible, frequently recite that a
Receiver has 30 days to confirm that adequate insurance is in place, and
any losses during the “free look” period will not be a loss of the
Receivership estate. Form orders, however, do not. Paragraph 17 of
RC-310 states that the receiver shall “upon taking possession of the
property” determine whether there is sufficient insurance coverage” and,
if there is not, “shall seek instructions from the court on whether to
obtain insurance and how it is to be paid for.” Once a Receiver
determines that there is no or inadequate insurance protecting the
property of the estate, the Receiver should not continue his or her
administration without immediately seeking such instructions. To remain
in place without the benefit of insurance coverage is a risk that has
disastrous potential. (see Receiver Commandment 10 below).
Thou shalt not borrow money without specific Court permission.
When a
property is placed in Receivership, it is held in custodia legis. A
Receiver may not improve or detract from the status quo by, for example,
borrowing funds, without the permission of the appointing Judge, upon
regular notice to all interested parties. Without such notice, a
Receiver runs the risk of having the new loan subordinated to existing
secured obligations, an effect which could expose the Receiver to
ultimate liability. New lenders should insist on a Receiver’s
Certificate, secured by assets of the Estate, following a Court Order.
Thou shalt not administer a Receivership estate at a net cash loss
unless specifically approved by the Court. A Receiver is not empowered
to operate a property or a building at a loss. Immediately upon
determining that there is no net cash flow, the Receiver must petition
the Court for instructions. The Court will then either (a) dismiss the
Receiver or (b) approve adequate funding from an outside source. Woe
unto the Receiver who returns to Court after operating a business in the
red for several months to divulge to the appointing Judge that the
Receivership Estate has incurred a large and incurable deficit. This is
not a ticket to heaven. This is a very tricky set of circumstances, as
it usually takes more than 30 days for a Receiver to determine that
these circumstances exist. It cannot be emphasized enough that the
Receiver must move quickly to apprise the Court of the situation.
Thou shalt not sell property in rents and profits Receiverships
unless all interested parties (owners and lien holders of record)
stipulate to the sale
and the Court empowers the Receiver to do so. Receiverships are
provisional remedies. A Rents and Profits Receiver is an interim
solution in an action for specific performance of an assignment of rents
provision
in a deed of trust or mortgage or separate assignment document. The
purpose is to allow a secured lender to marshal its cash collateral
during the non-judicial foreclosure process under the power of sale in a
deed of trust or mortgage until such foreclosure has been completed. CCP
§ 564(b)(11). The spirit of the code section is that the lender will
foreclose and then dispose of the building. Under the California Code of
Civil Procedure, the Court does not have authority to order the sale of
a property in a rents and profits Receivership.
Thou shalt not seek authority to sell a property free and clear of
recorded or inchoate liens unless the sale will produce sufficient
equity to pay all such liens in full. The California Superior Courts
simply do not have the authority to sell free and clear of liens. Only
Congress through the Bankruptcy Code has given a bankruptcy Judge the
authority to sell free and clear of liens through a sale conducted
pursuant to 11 U.S.C. § 363. There is a possible exception if a pending
sale would garner proceeds sufficient to pay off all liens, with the
liens attaching to the proceeds. In such a case, junior liens would
retain their priority in distribution of the proceeds, rather than being
extinguished by a senior lien holder’s foreclosure sale. Some “cutting
edge” title insurance companies are apparently insuring title based on
State-Court ordered sales. It could be an interesting mess if a
California Court of Appeal reverses a State Court Judge’s order on the
basis that the lower Court had no jurisdiction to confirm such a sale.
In such a case, who would be left holding the bag? The Receiver? The
title company? What are the rights of a subordinate lien holder? Selling
free and clear of liens is without legal foundation. If the California
State legislature passed amended state legislation granting same, then
such a concept would at least be sanctioned by state law and then only
subject to being overturned at the Supreme Court level (if either the
California or U.S. Supreme Court opted to do so). Who wants to be the
first Receiver to find out?
Thou shalt not operate outside the authorized scope of the powers set
out in the Court’s appointing order. The appointing order is the Judge’s
directive to the Receiver outlining precisely how the Receiver should
operate a case. It is not a suggestion; it becomes an edict. The beauty
of a Receivership order is that it can be tailored or sculpted to fit
most any situation (unlike the order appointing a trustee in Bankruptcy
that comes with a Code-mandated set of requirements). The scope of a
Receiver’s duties and responsibilities can be amended, expanded or
contracted by the appointing Court upon a petition for instructions,
which can also be filed by a party affected by the receivership. Until
this happens, a wise Receiver will follow this Receivership Commandment
and the letter of the appointing order.
Thou shalt not consent to have Plaintiff’s counsel prepare the
Receiver’s pleadings including the Final Account and Report. As noted
throughout these commandments, the Receiver is a neutral and is not
represented by Plaintiff’s counsel. It is inappropriate for counsel for
either of the parties to prepare pleadings for the Receiver as neither
can represent the Receiver. If the Receiver is unable to complete a
document, then the Receiver should seek permission to retain counsel to
assist in the administration or wrap up of the Receivership estate.
*Robert P. Mosier
is a Southern California trustee and receiver and
principal of Mosier & Company, Inc., a firm that has specialized in
managing and turning around troubled companies for more than 25 years.
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