Receiverships are a viable remedy to community eyesores

Almost every city or county has major nuisance properties that burden police, fire and code enforcement. These properties result in numerous calls for emergency services, riddle neighborhoods with crime and decrease a community’s trust in public officials. More importantly, they can result in horrible tragedies, such as the 2016 Oakland Ghost Ship fire that led to the fiery deaths of 36 trapped occupants. Nuisance properties burden communities and cause tragedies, but they do not need to be ignored by public officials or even concerned neighbors significantly impacted by the blight. There is a legal solution known as receivership.

Receivership is a legal remedy that dates to 13th century England and is utilized by state and federal courts throughout the United States. The Los Angeles Court system even has judges that exclusively hear writs and receivership matters. However, despite receivership being one of the oldest remedies in the legal system, most lawyers have little if any familiarity with it or realize how useful the receivership remedy can be.

With that introduction what exactly is a receivership? A receivership is an equitable remedy that results in a state or federal court taking control of assets and/or property and then appointing a court neutral receiver to take control of the asset and/or property. In California, specific rules of court for receivers are outlined at California Rule of Court 3.1175-3.1184 and for federal cases Federal Rule of Civil Procedure 66 provides guidance on receivership. Three practical examples of receivership include Bernie Madoff’s Ponzi scheme being put into receivership by the SEC, the FDIC being named the receiver of the former Washington Mutual Bank and transferring all its assets and liabilities to JP Morgan Chase Bank, as well as the California Supreme Court allowing the City of Santa Monica to appoint a receiver and granting him permission to demolish a nuisance property. (City of Santa Monica v. Gonzalez (2008) 43 Cal. 4th 905.)

As for utilizing the receivership remedy to abate nuisance properties, California has come up with a brilliant statutory scheme at California Health and Safety Code sections 17980.6 and 17980.7, informally known as health and safety receiverships. Health and safety receiverships allow enforcement agencies, typically city attorney or county counsel offices, to petition the court to appoint a receiver over nuisance properties. To appoint a receiver over a nuisance property the petitioning party must prove three elements: (1) the property must substantially endanger public health and safety, (2) the owner must have been given a reasonable time to abate the nuisance, and (3) the receiver must be qualified to serve as a receiver. (City of Desert Springs v. Valenti (2019) 43 Cal. App. 5th 788, 793-794.)

As for practically appointing a receiver, the actual appointment is not an evidentiary hearing. Instead whether a receiver is appointed is decided as a noticed motion. (City of Crescent City v. Reddy (2017) 9 Cal. App. 5th 458, 464-465.) If a receiver is appointed, he or she cannot be paid by any party to the litigation as a receiver must remain neutral and act in the best interest of all parties. (California Rule of Court 3.1179, see also Shannon v. Superior Court (1990) 217 Cal. App. 3d 986, 992). However, the party that seeks the appointment of a receiver is entitled to recover its attorney fees. (California Health and Safety Code 17980.7(c)(11) & (d)(1) see also City and County of San Francisco v. Jen (2005) 135 Cal. App. 4th 305, 311.) Furthermore, even if a city does not actually appoint a receiver it can use the threat of receivership litigation as a catalyst to make the owner abate the nuisance through voluntary compliance, and attorney fees may be awarded. (City of Norco v. Mugar (2020) 59 Cal. App. 5th 786, 800-801.)

When and why are health and safety receiverships necessary? Major nuisance properties arise for a variety of reasons, but five of the most common are:

(1) Deceased property owners without heirs, or heirs that are unable or unwilling to care for the property. Occasionally, the heir of the owner is the source of the blight. If this occurs, it is usually due to the relative of the deceased owner having substance abuse issues. The heir will never initiate probate leaving the deceased owner on title, but the property will turn into a drug house, which they cannot be held responsible for as their deceased parents are on the title and they are not the legal owner. However, this matter can be resolved through receivership.

(2) Zombie foreclosure properties: this is when a bank initiates a foreclosure but does not follow through with it, resulting in the owner vacating the property believing the bank is responsible. However, the bank claims the owner is responsible and technically the bank is right, but the property remains in a state of limbo without anyone responsible for it.

(3) Owners with hoarding issues or other mental health conditions.

(4) Owners who file bankruptcy and abandon their property believing their creditors will take it. Receiverships under the Health and Safety Code supersede the automatic stay of bankruptcy under the state police power. See 11 U.S.C. Section 362(b) (4); City of Riverside v. Horspool, 223 Cal. App. 4th 670, 676 (2014).

(5) Slumlords or properties with substantial criminal activity where the owner is unable or unwilling to resolve the nuisance.

Now that the scenarios for when a health and safety receiver have been explained how does a receiver resolve issues at a nuisance property? The answer is that for all intents and purposes the receiver becomes the owner of the property. Therefore, the receiver can remove anyone occupying the property, borrow money against the property, and hire contractors to clear debris and repair the property. Thereafter, the receiver can sell the property to a responsible owner pursuant to California Code of Civil Procedure 568.5. During the pendency of the receivership the receiver must file monthly reports to update the court regarding the process of the rehabilitation. (California Rule of Court 3.1182.)

One of the most common questions asked regarding receivership is how does the receiver obtain payment and what happens to the proceeds from the receivership sale. The answer involves issuing receiver certificates, which becomes a super-priority lien and requires receivers to use the court process to strip liens from the property. The general rule is that funds from the sale of real property are required to be distributed according to the principle of first in time first in right. (Bear Creek Master Assn. v. Southern California Investors Inc. (2018) 28 Cal. App. 5th 809, 817.) However, receivership liens are granted super-priority status over existing liens. (City of Sierra Madre v. Suntrust (2019) 32 Cal. App. 5th 648, 661; see also County of Sonoma v. Quail (2020) 56 Cal. App. 5th 657, 672-673.) The ability to place super-priority liens on properties allows receivers to strip liens off the property to offer clear title to a prospective buyer. The receiver is then paid for their time and expenses to abate the nuisance property. The equitable principles of receivership allow the receiver to be paid ahead of the recorded interests that allowed the property to fall into a state of disrepair. Once the receiver fees are paid, the petitioning city or county is then paid their attorney fees and enforcement costs. Thereafter, the principles of first in time first in right apply as they normally would, and the remaining funds are distributed to the recorded interests. However, the absence of a responsible owner and recorded interests to distribute the remaining proceeds to is not uncommon. In these situations, the receiver submits remaining funds to the California Unclaimed Property Fund. If the owner and recorded interests can be found, the receiver distributes the remaining funds from the sale of the property to those parties.

As far as closing the case after the property is sold, the receivership case does not close until they are discharged by a court order. For the receiver to obtain judicial approval to be discharged, a Final Report and Accounting pursuant to California Rule of Court 3.1184 must be filed. The Final Report must either be a noticed motion or stipulated to and it will confirm the receiver’s fees, which any party can object to. Once the receiver is discharged the court can retain jurisdiction over the property for up to 18 months to ensure the property does not fall into disrepair pursuant to California Health and Safety Code 17980.7(c)(10).

Health and safety receiverships are an excellent tool for major nuisance properties. Every city and county have properties in their jurisdictions that cause major headaches and appear to have no solutions. However, local leaders do not need to look further than Health and Safety receiverships to abate the significant blight major nuisance properties create.