Spring 2003 • Issue 9, page 1

A Primer on Receivers and Receivership in a Nutshell

By Bronston, Edythe*

Part I: Overview of the Appointment Process
(This is the first of a three-part analysis of receivership law and practice)

A receiver is an agent of the court, acting for the court, holding assets in custodia legis, generally to preserve the status quo, but sometimes to maximize benefit to the estate, depending on the type of receivership. The receiver is neutral, represents neither party, and is a fiduciary to all persons or entities
who or which are ultimately shown to have interest in the property or fund which comprises the receivership estate, or the proceeds of same. The receiver obtains the right to possession of the property, but not title. Receiverships are an ancillary remedy and are created only where authorized by statute or equity. The statutory bases run through the California Codes. Both the California Rules of Court and the Local Court Rules should always be consulted. Historically, imposition of a receiver has been considered a harsh, expensive remedy. It is easier today to obtain a rents, issues and profits receiver, but the court always has discretion and will balance the equities.

An order granting appointment of a receiver is appealable under CCP §904.1(a)(7). An order denying appointment is non-appealable. An order refusing to
vacate a prior appointment is ordinarily nonappealable. City and County of San Francisco v. Shers, 38 Cal.App. 4th 1831 (1995)]. An order discharging a receiver is appealable when it has the effect of being a final judgment. Hibernia S&L Soc. v. Ellins Estate Co., Cal. 216 Cal. 280, 281-282 (1932). An order appointing a receiver in aid of execution may be appealable as to the particular receiver.

There are many advantages to having a receiver appointed, not the least of which is that the lender is insulated from being deemed a mortgagee in possession. This protects a lender from the increased exposure of application of a prudent business standard and responsibility for losses caused by the lender’s negligence. In addition, the receiver will make certain that the property is insured and maintained and, in the case of a non-rents receivership, that the business is appropriately operated. In addition, a receivership order can specify that senior liens are to be kept current and real property taxes paid. Further, the lender will be kept informed as to the status of the property or business.

Conversely, a receivership is an additional layer of expense for which the lender may ultimately be held liable, should the receivership estate be insolvent. Ephraim v. Pacific Bank, 129 Cal. 589, 592 (1900). In addition, should anything out of the ordinary arise, a receiver will undoubtedly petition his or her appointing court for instructions, which can lead to delay and extra expense. Note that Civil Code §2938, effective 1997, deals with perfection of a lender’s rights to rents, issues and profits of real property, and also addresses in Subsections (c) and (d) the rights of a lender/assignee of rents to collect and receive rents, issues and profits which have accrued but remain unpaid and uncollected on the date on which an enforcement step is taken. Those enforcement steps include appointment of a receiver, obtaining possession of the rents, issues or profits, delivery of a written demand to one or more tenants, and delivery of a written demand to the assignor/borrower. The statute, which applies to contracts entered into on or after January 1, 1997, also provides that any of the enforcement actions taken by a lender/assignee do not have the effect of making that assignee a mortgagee in pos- session unless the assignee obtains actual possession of the real property. Civil Code § 2938 (e)(1). Further, rents collected under this statute may be received and applied by the lender/assignee with- out the risk of a CCP §726 violation.

Be aware, however, that although "perfection" protects the security interest against an intervening third party, an additional enforcement step is mandated to allow the creditor to begin collecting the assigned rents. Federal National Mortgage Assn. V. Bugna, 57 Cal.App. 4th 5291 (1997). Under Civil Code §2938 (g) once a lender has availed itself of these enforcement rights, the borrower/assignor can demand that the rents be used for the reasonable costs of protecting and preserving the property. Lenders will probably want a receiver to oversee this process . . . there is statutory authority for appointment of such a receiver pursuant to CCP §564(b)(11).

*Edythe L. Bronston is a Founding Director and Past President of the California Receivers Forum L.A./Orange County and a Founding Director of the State organization. She is an attorney in Sherman Oaks, California and also acts as a receiver, court-appointed referee, and mediator.