Ruling muddies the waters for H&S receivership cost recovery

A recent California appellate decision has injected some doubt into the ability of municipalities to recover their attorney fees and costs after successful appointment of a receiver pursuant to Health and Safety Code Section 17980.7.

In County of Sonoma v. U.S. Bank N.A. as Trustee, 2020 DJDAR 10908 (Oct. 8, 2020), the county filed a petition to appoint a receiver to rehabilitate a nuisance property pursuant to Section 17980.7. The petition also requested authorization for the receiver to finance the necessary repairs and cleanup with a loan of $30,000, secured by a lien with priority over all other previously recorded liens on the property -- i.e., a "super-priority lien." The petition further requested that all of the receiver's and county's fees and expenses be granted super-priority status, to be paid from the proceeds from the sale of the property. At the hearing on the receiver's appointment and financing, the court granted the county's request to appoint a receiver over the property and further authorized the receiver to borrow money to fund the requested $30,000 receiver's certificate. However, the court declined the county's initial request to issue the receiver's certificate with super-priority.

After the receiver tried unsuccessfully to fund the certificate without super-priority, it filed another motion to fund a larger receiver's certificate and again requested that it be secured by a super-priority lien. After several hearings on the matter, the court granted the receiver's motion authorizing it to obtain a receiver's certificate in the amount of $115,000, secured by a super-priority lien, to finance the necessary rehabilitation of the property. U.S. Bank appealed from the order.

After the receiver performed some initial cleanup of the property, it filed a motion to strip the property of all liens and encumbrances and sell the property to a third party that had agreed to complete the necessary repairs. The court granted the motion and authorized the receiver "to pay the outstanding receivership fees and costs, including the County's demand for fees and costs" from the sale proceeds, per the terms of the court's appointment order. The county filed a second appeal of the sale order and both appeals were consolidated before the California Court of Appeal.

The Court of Appeal confirmed the trial court's decision to issue a super-priority receiver's lien for the receiver's fees and costs and to strip the liens from the property to facilitate sale. However, the appellate court would did not agree with the trial's court's decision to give the county's attorney fees and cost recovery the same super-priority as the receivership's fees and costs. "A receiver is an officer of the appointing court," the court noted. And, even though "the County set in motion the appointment of the receiver, it does not occupy the same role as the receiver." The court also opined that nothing in Section 17980.7 assists the county's claim for super priority, noting that Section 17980.7 authorizes the appointed receiver to borrow funds and "secure that debt and any moneys owed to the receiver for services performed." As such, the court concluded that the trial court erred in equating the county's enforcement costs with those of the receiver.

The Sonoma court's ruling does not appear to have disturbed a municipality's ability to claim priority for its fees and costs pursuant to the court's equitable authority to grant the same. The court noted that the trial court's error was granting the county's fees to be paid on a super-priority basis "without consideration of the competing claims of the other lien-holders." It further stated that the county was "free to raise any argument it sees fit before the trial court on remand with respect to its entitlement to a share of the remainder of the sale."

Prior precedent has firmly established that, even where explicit statutory authority is lacking, a court has broad equitable powers to make rulings in a receivership action. For example, in Hozz v. Varga, 166 Cal. App. 2d. 539, 543-44 (1958), the court held that the fees and costs of a party who obtained the receiver's appointment are entitled to the same priority as receivership expenses. And, in a more recent case, City of Santa Monica v. Gonzalez, 24 Cal. 4th 905 (2008), it was confirmed that courts are vested with broad powers to authorize receivers to take action not authorized by statute if justified by the totality of the relevant circumstances.

As such, municipalities may still have a path to priority recovery for their attorney fees and costs based on equitable considerations -- and they would seem to have some good arguments to make in that regard. Cities and counties spend considerable resources in securing rehabilitation of nuisance properties through the appointment of receivers, which puts a strain on their often thin code enforcement budgets. If the municipalities cannot recover the fees and costs because of a lack of priority, it may chill their willingness to use the receivership remedy in the first place. This cannot be what the California Legislature envisioned when it codified the receivership remedy in the Health and Safety Code. Eliminating the severe nuisance conditions on properties increases their value, providing lien holders with more secure and valuable collateral for their encumbrances. It would be inequitable for municipalities to spend their resources to perform this service for the lienholders, while at the same time forcing them to recoup their costs after those lien holders interests. 