A Fresh Look at The Possible Use of Court Appointed Receivers in Residential Property Foreclosures in California

Written By: Eric D. Dean 

While the consideration of the use of the threat of the appointment or the actual appointment of a Court appointed receiver has been generally accepted in commercial loans as a vehicle to accomplish such objectives as insulating the lender and servicer from liability, protecting the collateral and facilitating the conclusion of a work-out, residential lenders and servicers and their counsel have almost universally dismissed court appointed receivers as overly expensive, cumbersome and unnecessary in the context of residential default services.  However, based on the current environment, this article suggests that it may behoove the Residential Servicing Industry to establish systems that result in the establishment of viable programs for the use of court appointed receiver to accomplish both economic and risk avoidance objectives.

WHAT IS A RECEIVER   A receiver is a person appointed by a Court take possession, manage and preserve property. The receiver may, if authorized by the court order, market and sell the property even though the foreclosure was not completed.  The receiver functions as the owner and is the representative of the Court not the lender or servicer. The receiver is, however, mandated to protect the loan collateral including both the real property and any rents collected from the real property. While the receiver does not technically take instructions from the lender and servicer, he or she is typically nominated by the lender or servicer who sought the appointment of the receiver and by the nature of his or her duties the receiver both protects the interests of the lender and servicer and insulates them from risks and liabilities that might otherwise arise were the lender or servicer to complete a foreclosure, collect rents from tenants or otherwise exercise direct control of the real property collateral.

Who May Act As A Receiver  In California any person who is demonstrated to be qualified may act as a receiver. There is no licensing requirement nor statutory mandate as to who may act as a receiver. In the author’s experience,  while receivers may be entirely independent, the author is finding a trend towards the appointment of receivers who are affiliated with property management companies and/or large real estate brokerage firms.   Assuming that no objection is lodged by the property owner or a creditor, in accordance with the Court’s orders, the receiver oversees and administers the receivership while the affiliated management company manages the property day to day and the affiliated brokerage firm markets and sells the property.  In the authors view lenders and servicers are already retaining the servicers of outside property management and property preservation firms and REO brokers and it would appear neither overly costly nor administratively burdensome to have individuals within these companies appointed as receivers pre-foreclosure on some agreed fee basis that would not result in significant expense beyond the current fee arrangements.

When May A Receiver Be Appointed A Receiver may only be appointed if authorized by statute.  There are a number of statutes in California that permit the appointment of a receiver. In the context of lenders and servicers two of the key statutes are California Code of Civil Procedure Sec. 564 (b) (2)[i]which permits the appointment of a receiver where the loan collateral is in danger of being lost, removed or materially injured or is of insufficient value to satisfy the loan and Civil Code Sec 2938(c) [ii] which permits the appointment of the receiver to protect against the loss of rents where there has been an assignment of rents granted the lender.

WHERE MAY THE APPOINTMENT OF A RECEIVER PROVE PRUDENT

1. TENANT OCCUPIED PROPERTY.   Under Federal law adopted on May 20, 2009, a lender or servicer that forecloses on residential property that is occupied by a Tenant must honor the lease unless certain statutory exceptions apply.  Under this legislation, unless statutory exceptions exist, the foreclosing lender and servicer may not evict the tenant until the expiration of the lease term or 90 days, whichever is later. Compounding the issue, local jurisdictions may have rent control or other ordinances that complicate the eviction process.  Many lenders and servicers do not want to take ownership of tenant occupied property and then be held responsible as a “landlord”.   Under California law the status as a “landlord” subjects the owner of property to statutory and common law duties and potential strict damage claims related to the property condition and property maintenance to tenants, adjoining property owners and governmental agencies.  Further, a borrower who is collecting rents may also desire to stall the foreclosure so that rents can continue to be collected for an extended period.  A lender or servicer who exercises control over the real property collateral pre-foreclosure may be deemed to be a “mortgagee in possession” and have similar duties and responsibilities to tenants, adjoining property owners and governmental agencies.  The entry of a receivership order also adversely impacts the borrower’s rights as to rents should the borrower file a bankruptcy.  If the real property collateral is tenant occupied , rather than immediately complete a foreclosure in a tenant occupied property, lenders and servicers may desire to appoint a receiver early on in the foreclosure process to manage and control the property during the term of the lease thereby cutting off the borrower’s motivation to contest the foreclosure.   If the property is leased, the lender and servicer may choose to continue the receiver in place for the life of the lease rather than assume the duties and responsibilities of a landlord.   The receiver can oversee the preservation of the collateral, require enforcement of the lease and, if an appropriate court order is entered, market and sell the property without the lender or servicer ever going into title.  While the receiver is in most instances selected by the lender or servicer, since the receiver is not deemed to be an agent of the lender or servicer, the lender does not bear responsibilities and risks of becoming a mortgage in possession or a landlord during the term of the receivership.
2. THE IMPAIRED PROPERTY.  The author has represented lenders and servicers who foreclose on a property only to thereafter find that the property is being used to manufacture drugs, has hazardous waste stored on the property or is otherwise impaired.  Once the servicer and receiver complete the foreclosure they are responsible for the condition of the property and subject to liability claims and possible criminal prosecution for maintaining these adverse conditions even though the lender and servicer did not participate in or acquiesce to the creation of these conditions.  If such issues are determined to exist, the lender and servicer may desire appointment of a receiver to remediate these conditions before foreclosure and avoid the attendant risks. The receiver as an agent of the court has certain immunities and protections afforded to him or her that the lender and servicer and the agents of the lender and servicer would not otherwise have available.
3. THE ABANDONED PROPERTY.  Multiple jurisdictions have adopted laws imposing duties on lenders to report, register  and respond to conditions on abandoned properties in which they hold a collateral interest .  Under many of these laws stiff fines and even seizure of the property may result from the failure of the lender and servicer to comply  with these mandates.  The author recommends that lenders and servicers perhaps in conjunction with governmental agencies consider the utilization of receivers to intercede in these matters pre-foreclosure to manage, rehabilitate and market the properties to third party buyer.

CONCLUSION The potential use of receivers in residential default services as a method to limit and avoid risks, create an opportunity for a proactive response to difficult issues and to exercise control without direct lender and servicer involvement has for the most part been universally dismissed by lenders,  servicers and lenders counsel.  However, based on the current challenges to the industry and the likelihood that this environment will continue for the foreseeable future, the author recommends that there be a broader and focused discussion is required in the industry as to how cost effective receivership programs might be established to facilitate efficiencies and avoid undesired and otherwise unavoidable risks.