Summer 2012 • Issue 44, page 7

Receiver Denied Recovery of Compensation Directly From Foreclosing Lender Under Health & Safety Code Section 17980.7

By Rubin, Stacy H.*

The California Courts of Appeal, Fourth Appellate District (the “Fourth District Court”), recently held that a receiver was not entitled to compensation where he failed to record a lien on the real property on which a certain uninhabitable building was located.

In 2006, the borrower obtained a loan from World Savings Bank,1 which was secured by a first priority deed of trust on a four-unit residential building in Chula Vista, California (the “Property”). The borrower defaulted on the loan and, thereafter, a notice of default was recorded in February 2008 by Wachovia. Subsequently, the City of Chula Vista (“Chula Vista”) discovered numerous violations of the condition of the Property and sent notice to the borrower, but to no avail, as the borrower was incarcerated.

Shortly thereafter, Chula Vista filed a petition seeking to have a receiver appointed under California Health & Safety Code § 17980.7 (hereinafter, “Health and Safety Code”) due to multiple violations concerning the Property. In December 2008, the lower court ordered the appointment of a receiver to immediately inspect and secure the Property and relocate the tenants who lived there. The order appointing the receiver specified it was not applicable to Wachovia.

After the receiver relocated the tenants, the receiver requested a receivership certificate superior to Wachovia’s deed of trust. In response, the lower court authorized the receiver to file a secondary lien against the Property for the receiver’s compensation. However, the lien was apparently never recorded by the receiver.

Thereafter, Wachovia acquired the Property through a trustee’s sale and, thereafter, sold the Property to a third party purchaser.
Nearly two years after he was appointed, the receiver filed his final account and report initially requesting a receiver’s certificate lien for approximately $41,545.72 against the Property. After discovering that Wachovia had sold the Property to a third party, the receiver modified his original request and sought reimbursement directly from Wachovia in the reduced amount of $37,541.72. The lower court denied the receiver’s request and determined that it would be appropriate to only charge Wachovia for the receiver’s expenses during the time in which Wachovia owned the Property – roughly four months. Those expenses totaled $408.33.

On appeal, the receiver argued that Wachovia was unjustly enriched by the receiver’s work and thus, should be directly responsible for the receiver’s total expenses. However, the Fourth District Court determined that Wachovia should not bear the costs of the receiver’s expenses, primarily because Chula Vista initiated the proceedings, not Wachovia. The Fourth District Court also took into account that Wachovia only owned the Property for approximately four months out of the two-year long receivership. Based on the record, the Fourth District Court did not find a monetary benefit that the receivership conferred directly on Wachovia.2

The Fourth District Court went on to discuss Health and Safety Code. Section 17980.7(c) specifically authorizes a court to appoint a receiver over a substandard property if the property owner has failed to comply with a notice or order to repair issued by a local agency. The Health and Safety Code permits a receiver to borrow funds to pay for relocation benefits and necessary repairs cited in the violation notice, and with court approval, secure that debt by recording a lien on the subject property for the amount owed. Health and Safety Code § 17980.7(c)(4)(G). Essentially, the receiver borrows funds by issuing “receiver’s certificates.” Once approved by the court, the certificates act to secure repayment of the funds and, when recorded, become liens on the subject property.

The Fourth District Court analyzed § 17980.7 and its legislative history and concluded that the statute does not in and of itself impose direct liability on a foreclosing lender for a receiver’s expenses; rather recovery should be through a lien on the subject property. The Fourth District Court explicitly emphasized that the lower court granted the receiver the right to a lien on the Property – but it was not perfected.

The moral is clear: Dot your i’s and cross your t’s or compensation may not follow. You should not take the fees or the solvency of a receivership estate for granted.

1 World Savings Bank ultimately became Wachovia Mortgage (“Wachovia”).
2The Fourth District Court specifically chose not to address whether the receiver could have recovered his fees and costs from Chula Vista instead of Wachovia.

*Stacy H. Rubin is an associate attorney with Mulvaney Barry Beatty Linn & Mayers LLP in San Diego. Ms. Rubin handles various commercial litigation and creditor’s rights matters, specializing in representing banks and financial institutions in receivership matters, including appointment of receivers. She has presented seminars in areas of debt collection, creditor's rights, and identity theft. Ms. Rubin has published articles featured in the San Diego Daily Transcript and the California Real Property Journal, and has been an Adjunct Professor for the Paralegal Program at the University of San Diego.