Uniform Law Act Part 2

Transcription

1 Uniform Law Act Part 2 LOYOLA VII MARCH 3, 2017 Hon. Bruce E. Mitchell (Comm. Ret.) ADR Services Inc Benjamin R. King Loeb & Loeb LLP Richard Weissman Richard Weissman Inc

2 TABLE OF CONTENTS Page# Receiver Summary 3 ULC Act Including Judicial and Attorney Perspective 4-28 Article: Why Rents and Profits Receivers May Sell Property and Courts May Authorize Real Property Sales Free and Clear of Liens: A Rejoinder to the "Ten Commandments" Article: Receiver's Sales Mirage and Major Hazard for Both Lenders and Receivers -Part Article: Receiver's Sales Mirage and Major Hazard for Both Lenders and Receivers Part Speaker Biographies 36

3 RICHARD WEISSMAN, INC. A Professional Corporation Receiver 6303 Owensmouth Avenue, 15 th Floor Tel: (310) Cell: (818) rweissman@rwreceiver.com RECEIVERS A receiver is a neutral fiduciary appointed by the court, both state and federal, to take control and possession of businesses, real properties and other assets involved in contentious litigation for the purposes of preserving and maintaining the assets pending the conclusion of the litigation or proceedings at issue. The Court may appoint a receiver during either or both prejudgment and post-judgment proceedings. The nature of the litigation may be Civil, Probate, Real Estate, Class Action and Regulatory. The receiver is not an agent or representative of any party. He/she is an officer of the court exercising the Court granted powers for the common benefit of all the parties in interest. The judicial decisions often refer to the role of the receiver as the Aagent@ or Ahands and eyes@ of the court. The receiver is charged with carrying out the goals of the court through its orders affecting the assets under its control. The specific functions and powers of a receiver are set forth in the appointing and subsequent orders. Appointment of a receiver is not a cause of action; it is a provisional remedy under the general equity powers of the court, although California has numerous statutes expressly providing for the appointment of a receiver in a variety of litigation circumstances. The general roles of a receiver are (1) to hold, preserve, manage and operate businesses, real properties and other forms of income producing and non-income assets, and/or (2) to cause the sale of the parties' assets to realize cash. The receiver controls the assets in such manner as the judge would do were he or she not confined to the courthouse addressing other matters. 1 3

4 UNIFORM COMMERCIAL REAL ESTATE RECEIVERSHIP ACT (ADOPTED 2015) California statutory guidance on receiverships is quite limited, codified primarily in Code of Civil Procedure and California Rules of Court, Rules Several parts of the Uniform Act are worth considering for adoption in California, including: Section 6 (Appointment); Section 7 (Identity of Receiver); Section 11 (Collection of Receivership Property); Section 12 (Powers and Duties); Section 13 (Duties of Owner); Section 19 (Interim Reports); Section 22 (Removal of Receiver); Section 23 (Final Report and Discharge); and Section 25 (Effect of Enforcement By Mortgagee). However, in my view, several sections of the Uniform Act are not appropriate for use in California, in whole or in part, for the reasons stated below. SECTION 3. NOTICE AND OPPORTUNITY FOR HEARING. Subsection (b)(1) allows a receivership to be appointed without prior notice if the circumstances require. There is rarely, if ever, justification in a real property context to appoint a receiver without at least 24 hours ex parte notice. (CRC, Rule (b)) Unlike personal property, the real property will not be hidden or carried away. If there is an immediate threat to life, the police or fire department should be called. The appointment of a receiver is a major event, imposing financial, legal, and practical burdens on the owner. Appointment without notice is an unwarranted infringement of the defendant owner s right to due process. A judge who does not hear receivership cases on a regular basis could, seeing this option listed in the statute, believe that appointment without notice is a routine practice. Subsection (b)(3) allows appointment of a receiver after notice and without a hearing if no interested party requests a hearing. The defendant should not have the burden of requesting a hearing. Forgoing a hearing is also not good judicial practice. In California, if a receiver is appointed ex parte, then a confirmation hearing will be set. By the time of the confirmation hearing the receiver will have been in possession of the property and can report any problems to the court. The hearing is a good opportunity for the court to remind the receiver of the importance of coming to court for instructions, and to emphasize that the receiver is the court s agent and reports ultimately to the court. In general, I agree with Commissioner Mitchell that the current language in Section 3(b) runs the risk of subtly encouraging more no-notice appointments than are warranted given the often drastic nature of the receivership remedy. However, though rare, I do believe some provision for a potential no-notice appointment is appropriate, because when that is needed it is usually quite imperative. For example, it may be needed when a commercial lender learns that a commercial property is being used to conduct fraudulent or highly dangerous activities, or where there is a 4 1

5 default under a secured loan and there are express threats (or some other reliable evidentiary basis) that the property owner/borrower may seek to redirect significant income from the property away from the lender/landlord s reach (i.e., by spooking tenants). Nonetheless, to less experienced judges, a broad standard such as if circumstances require without any limitation to exceptional or extraordinary circumstances gives the impression that the remedy is more readily available than it should be. This is particularly true given: (1) the related language in Section 6(c) of the Act which makes it only optional for a court to require posting of a bond from the appointing party for damages arising from a no-notice appointment; and (2) the lack of any requirement for a confirmation hearing to be held subsequent to the no-notice appointment (as Comm. Mitchell points out above). Again, given the extreme nature of a no-notice appointment, a bond in the appropriate amount should be required from the appointing party and a subsequent confirmation hearing should almost always be required. At a confirmation hearing, a court will almost always validate the receiver s appointment, but in those rare cases where an appointing party doesn t tell the whole truth to obtain a no-notice appointment (and indeed may not even share the full facts with the receiver), the non-appointing party should have an opportunity to be heard soon after the appointment (without the procedural burden of bringing a removal motion). SECTION 4. SCOPE; EXCLUSIONS. For clarity, this Act applies to virtually all rental properties, including one to four dwelling units and single family residences, unless the tenant is affiliated with the owner. Subsection (b)(4). Subsection (b)(4) attempts to walk a fine line in limiting the act to commercial rather than residential properties. It appears, however, that in some cases, courts may need to thread the needle between true commercial uses and incidental commercial uses in cases where properties improved by one to four dwelling units are used for commercial purposes. What if the person occupying the property telecommutes on a daily basis for a living is that incidental? What if someone operates a small mail-order business out of their home. Commercial or incidental? Receiver Perspective, Richard Weissman (a) (b) Except as otherwise provided in subsection (b) or (c), this [Act] applies to a receivership for an interest in real property and any personal property related to or used in operating the real property. This [act] does not apply to a receivership for an interest in real property improved by one to four dwelling units unless: (1) the interest is used for agricultural, commercial, industrial, or mineral-extraction purposes, other than incidental uses by an owner occupying the property as the owner s primary residence; 2 5

6 NOTE: It will be a question of fact for the court what constitutes incidental uses of a dwelling. Executing against real property which in fact is used as a principal dwelling has a separate detailed statutory scheme of execution to be able to sell real it. However, if the dwelling is used as a long term rental income asset or, as more recently, for short term rentals, such as Airbnb, the dwelling may arguably be (impliedly converted to) a business use and constitute a commercial property. (c) This [act] does not apply to a receivership authorized by law of this state other than this [act] in which the receiver is a governmental unit or an individual acting in an official capacity on behalf of the unit (except to the extent provided by the other law]. NOTE: (i) Example: The Insurance Commissioner acting as receiver to take over an under-reserved or insolvent insurance company. (ii) Example: A District or City Attorney nominating an individual receiver pursuant to Business and Professions Code, 17200, 17235, etc. to take control of a business involved in unfair business practices (violations of the Parcel Map Act, Subdivision Map Act; fraud, etc.) SECTION 5. POWER OF COURT. Section 5 provides that the court which appointed the receiver has exclusive jurisdiction to determine any controversy related to the receivership or receivership property. The Comment states that this section is intended to give statewide jurisdiction to the orders of a receivership court in one county. Court apparently refers to a county s court as a whole, not just the courtroom of the appointing judge. Having the appointing judge determine all controversies is not appropriate in some cases. The judge may preside in a limited-purpose writs department, for example. A claim for personal injuries, such as slip and fall, may need to be heard in a jury trial courtroom. In California, if a third party seeks to sue the receiver the appointing court must decide whether to allow the claimant to intervene in the underlying action or give permission to file an independent suit in whatever jurisdiction is appropriate. Jun vs. Myers (2001) 88 Cal. App. 4 th 117, 125, quoting De Forest v. Coffey (1908) 154 Cal. 444: When the court cannot afford the same relief in intervention as a claimant would be entitled to in an independent action, or where by virtue of some statutory or constitutional provision a particular kind of action must be brought in some jurisdiction other than where the original special proceeding is pending, the court will undoubtedly grant leave to bring it, and it would be an abuse of discretion not to do so. See also the comments to Section

7 Similar to Comm. Mitchell s comment, based upon the current language, it is difficult to delineate what the boundaries would be for a limited purpose judge who appoints a receiver. If the action is for judicial foreclosure and specific performance of an assignment of rents clause (as is common), would the limited purpose judge effectively become the judge for all purposes since almost everything that happens in such a case would be properly characterized as a controversy related to... receivership property? Receiver Perspective, Richard Weissman The Court that appoints a receiver under this [act] has exclusive jurisdiction to direct the receiver and determine any controversy related to the receivership or receivership property. NOTE: In respect to receivers, this section may resolve the perennial problem of the first secured lender to obtain a receiver is then contested by the senior lender/lienholder, who files a separate, subsequent action seeking (ex parte) appointment of its own superseding receiver to displace the first appointed receiver. Most California courts obtaining first in rem jurisdiction do not permit the supplanting of the first appointed receiver. However, it has occurred. This section would clarify the original subject matter jurisdiction issue. A second filing lienholder is better positioned to merely intervene in the first action to preserve its rights. SECTION 6. APPOINTMENT OF RECEIVER. Subsection (c) again refers to appointment a receiver without any prior notice, which is not a good practice. Section 6(a)(1)(B) permits appointment of a prejudgment receiver, among other things, where the real property at issue has been or is about to be the subject of a voidable transaction. From a litigation perspective, it is interesting as to what evidentiary showing would be required to satisfy a court in a prejudgment context that a property is about to be the subject of a voidable transaction. Also, is it premature in an action brought to redress a voidable transaction to have the ultimate issue decided up front in the context of a receivership appointment? What would the standard of proof be and what evidence would suffice? In the prejudgment attachment context, a finding of probable validity of the claim supporting attachment is required, but other provisions of the attachment law limit that remedy to generally straightforward circumstances (i.e., contract claim with readily ascertainable amount). Proving that a transaction is voidable can be far more complex and difficult to establish absent significant discovery. Further, is this section subject to any exception for a BFP, or would a receiver have the ability to reclaim property in a prejudgment context from a BFP? From the perspective of a litigator bringing an appointment motion, I am pleased that Section 6(b)(2) would permit the appointment of a receiver solely upon the grounds that a 7 4

8 mortgagor agreed in a signed record to appointment of a receiver upon default. It always seemed wrong to me that, under California s current statutes such as CCP Section 564, I need to assert some additional ground for appointment of a receiver when I have a black and white document signed by a borrower agreeing to appointment of receiver upon a default. If the borrower doesn t want a receiver, the borrower can just not default, correct? Ok, that sounds harsh, but I am comfortable with this black and white treatment here as the issue is only a threshold right to appointment. Both CCP Section 564 and Section 6(a) address when a court may appoint a receiver. Even when the threshold right to appointment is found, the court still must take the next step and conclude that the factual circumstances warrant a receivership. As I stated above, a bond from the appointing party should probably be required in connection with most if not all appointments especially if made without notice and/or a confirmation hearing. The language of Section 6(c) suggests that such a bond should only be required in an exceptional case. Finally, I like the provision for appointment of a receiver during the redemption period, which would codify a similar provision in CCP Section 564(b)(4). Receiver Perspective, Richard Weissman (a) The court may appoint a receiver: (1) before judgment, to protect a party that demonstrates an apparent right, title or interest in real property that is the subject of the action, if the property or its revenueproducing potential: (A) is being subjected to or is in danger of waste, loss, dissipation, or impairment. NOTE: (same as CCP 564)[typical application for receiver if breach of deed of trust terms or property is subject to foregoing adverse conditions]; Santacroce Bros. v. Edgewater Santa Clara, Inc. 242 Cal.App.2 584, 586 (1966); (B) has been or is about to be the subject of a voidable transaction (2) after judgment: NOTE: This subsection is more related to an equity receivership than a foreclosure receivership. Subsection (A) would be helpful in other receivership contexts as part of Section 564, et seq. NOTE: Subsection (B) also is more within an equity receivership than a commercial foreclosure receivership. Again, it would be helpful to codify this scenario within the Section 564 statutory scheme. (A) to carry the judgment into effect; or 5 8

9 (B) to preserve nonexempt real property pending appeal or when execution has been returned unsatisfied and the owner refuses to apply the property in satisfaction of the judgment; (3)..on equitable grounds; [or] (4) during the time allowed for redemption, to preserve real property sold in an execution or foreclosure sale and secure its rents to the person entitled to the rents NOTE: After Judgment: see CCP 564(b)(3). Section (a) (4): CCP 564(b)(4): to collect the rents and manage the property following the judicial sale until expiration of the redemption period. This subsection could be reorganized within Section 6(b) below. (b) In connection with the foreclosure or other enforcement of a mortgage, [a mortgagee is entitled to appointment of][the court may appoint] a receiver for the mortgaged property if: (1) protect property waste, loss, transfer, dissipation, or impairment; (2) mortgagor agreed to appointment of receiver on default; (3) owner agree after default to receiver; (4) property not sufficient to satisfy the secured obligation; (5) mortgagor fails to turn over to the mortgagee proceeds or rents the mortgagee was entitled to collect; or (6) the holder of a subordinate lien obtains appointment of a receiver for the property. NOTE: (1) through (4) are effectively within CCP 564(b). Subpart (6) See Note to Section 5, above. California has a hybrid process of judicial foreclosure (CCP 726, et seq.), and non-judicial foreclosure to protect a lender s rights (Civ. Code 2924 et seq.); the former process may include appointment of a receiver as a provisional remedy (not a separate cause of action) to collect rents because the borrower agreed to the appointment as a matter of contract in the deed of trust pending the interlocutory judgment finding a default of the obligation and an order for the sale of the property (CCP 726; 564). (Santacroce and Turner above.) There is no basis for the appointment of a receiver in the course of a non-judicial foreclosure because there is no action filed (Civil Code 2924, et seq.) However, a complaint to enforce the contractual agreement for appointment of receiver may be separately filed to effect the collection of rents pending a non-judicial foreclosure proceeding. (CCP 564(b)), (Turner v. Superior Court 72 Cal.App.3d 804 (1977); Santacroce Bros. v. Edgewater Santa Clara, Inc. 242 Cal.App.2 584, 586 (1966); 9 6

10 (c) Court conditions appointment on [applicant's] ex parte bond for payment of damages, reasonable attorney s fees, etc., if the court later concludes the receiver s ex parte appointment was not justified. NOTE: An Ex Parte Applicant s bond is currently required: CCP 566; the bond is subject to discharge and exoneration upon confirmation of the appointment of the receiver. If the receiver is found to be improperly sought, the Applicant's bond is subject to surcharge for actual damages by reason of appointment of the receiver. SECTION 7. DISQUALIFICATION FROM APPOINTMENT OF RECEIVER; DISCLOSURE OF INTEREST. There is good material in Section 7 that could be used to expand Code of Civil Procedure 566(a). Receivership motions in California typically are supported by a receiver declaration stating basic facts of disinterestedness in connection with the matter, which is appropriate. Section 7 attempts to define disinterestedness, and certainly provides touches on some important aspects of disinterestedness. However, capturing such a concept in a tangible way like this is a tall task. Section 7(b)(4) provides that a receiver may not be sufficiently independent due to an existing debtor-creditor relationship with a party. Peter Davidson comments that this is too broad because, for example, if the receiver has a BofA credit card or home loan with BofA, he could not be appointed at the behest of BofA in the case. On the one hand, Mr. Davidson s concern may be alleviated by subsection 7(c)(2) which makes an exception for debts that are not in default and incurred for personal, family, or household income purposes. However, I believe his comment remains valid because one does not have to think very hard to think of examples that this provision would not address such as a receiver that may engage in real estate investment as a side trade or profession (and obtain real property loans in connection with the same). There is no reason why this example would threaten the receiver s neutrality especially if there is no default. SECTION 8. RECEIVER S BOND; ALTERNATIVE SECURITY. Subsection (c) allows the court to act before the receiver posts their bond. This is not good practice. The bond is to protect all parties to the action. Most receivers have bonding companies that they routinely work with and they can quickly post a bond. Subsection (d) requires that all claims against a receiver s bond must be made not later than one year after the receiver is discharged. This is a good idea, it brings finality. 10 7

11 CCP Section 567 currently requires that a receiver post a bond in an amount directed by the court before entering duties. Section 8(c) of the Act gives a court flexibility to permit the receiver to act before a bond is posted. I suppose, in an extreme emergency or where a court has ordered an unusually large bond, that flexibility may be needed. But, even if a court authorized a receiver to act before posting of a bond, I would probably advise a receiver client to have the bond in place before acting. I have never had a case where the short time required to post a bond interfered with a receiver s performance of duties. I agree with the comments of Richard Weissman concerning the tail period for claims against the receiver s bond/security. This is a matter that should really be wrapped up as part of the receiver s discharge and final accounting. Receivers should be encouraged to provide as broad of notice as possible in that closing process. Receiver Perspective, Richard Weissman Subsection (c): The Court may authorize a receiver to act before the receiver posts the bond or alternative security required by this section; NOTE: While many orders state the order is effective upon entry, the receiver must post his bond and file his oath before undertaking his/her duties. These are jurisdictional conditions to the exercise of the receiver s powers. Subsection (d): A Claim against the receiver s bond or alternative security must be made not later than [one] year after the date the receiver is discharged. NOTE: California is one (1) year from date of discharge. (CCP ) Enforcement by individual(s) for whose benefit the bond was given: CCP From a receiver s perspective, it would be more appropriate for a requirement that claims against the receiver personally and the receiver s bond must be made at the time of hearing on the receiver s final report and account and request for exoneration of bond and discharge from her/his duties. If there is a basis for the receiver s surcharge (personal), those claims should be presented to the receivership court by the known claimants with notice of the hearing. (CRC, Rule ) This process is potentially in conflict with the process discussed in the unpublished case noted hereinbelow. Nonetheless, the bond claim is promptly resolved and no one has to wait for the other shoe to drop relating to a latent claim. This process would not be applicable to claims known to the receiver and not duly reported to the court and/or not noticed to the creditor to enable the creditor to file its claim. The receiver may become personally liable for a fraud on the court for failing to report the claim and liable to the creditor after termination of the receivership and discharge. (Vitug v. Griffin, 214 Cal. App.3d 488 (1989) 11 8

12 SECTION 9. STATUS OF RECEIVER AS LIEN CREDITOR. No position on this section. I am in full agreement with the comments of Richard Weissman it does seem unwarranted to require a receiver to record the appointment order in order to secure his place in line. Provision for an equitable lien in the appointment order should be sufficient. Receiver Perspective, Richard Weissman On appointment of a receiver, the receiver has the status of a lien creditor under: (1) [U.C.C. Article 9] as to receivership property that is personal property or fixtures; and (2) [the recording statute of this state] as to receivership property that is real property. NOTE: The general rule is the receivership is subject to all existing liens, priorities, charges and encumbrances. 1 Clark on Receivers 269, p. 413 (3 rd Ed. 1959) The Act addresses the status of the receiver s lien for fees based on the receiver perfecting his lien by recording the order of appointment. Recording is an unnecessary burden to the receiver. It may be worthwhile to record the order as soon as practicable through your friendly escrow officer or title company account executive to assure Notice of the priority of lien, but it should not be deemed a condition to the receiver's priority. For a receiver s lien, see Commercial Code 9102(52)(E) and 9317(a)(2) regarding the timing of perfection of the receiver s lien. As a matter of current practice, the creation of the lien should be stated in the order of appointment and its effectiveness and priority should be stated as arising upon entry of the order. This should provide an equitable lien in priority to all subsequently recorded liens. In practice, if the senior lien is the procuring party of the receiver, then the receiver s fees and expenses arguably have priority over the procuring lienholder and all existing and subsequent junior lienholders. SECTION 10. SECURITY AGREEMENT COVERING AFTER-ACQUIRED PROPERTY. No position on this section. I am not aware of any existing provision of California law that this provision would change. 9 12

13 SECTION 11. COLLECTION AND TURNOVER OF RECEIVERSHIP PROPERTY. No position on this section. Section 11 codifies a number of concepts typically provided for in often lengthy receiver appointment orders. Nevertheless, I agree with Richard Weissman that this section is a bit too empowering for certain third parties that may be reluctant to turn over receivership property. Except in the case of subsection (c), where immediate turnover of property could jeopardize a security interest claimed by the party holding the property, immediate turnover should be required pending resolution of a third party claim to the property. Section 11(a) begins with the statement [u]nless the court orders otherwise but it seems like it would be the receiver s obligation to seek that order. This may be an appropriate section to provide a right of the third party to assert a right of setoff or recoupment via an ex parte application made to the appointing court. Receiver Perspective, Richard Weissman Subsection (a) - Unless the court orders otherwise, on demand by a receiver: (1) a person that owes a debt. NOTE: This language should be framed to require turnover to the receiver and for the property to be held by the receiver pending a timely filing of the claimant s third party claim or the claimant files an action litigating the setoff or recoupment. CCP , This language creates confusion whether a third party debtor can retain the property, and implies the receiver must affirmatively obtain an order establishing there is no setoff or what the amount may be if there is a valid claim. The Subsection s establishment of the setoff right requires the receiver to initiate a turnover proceeding to litigate the offset claims. The third party debtor should be required to first turnover the property upon demand, and then the debtor can file a third party claim and establish its setoff claim. (2) Subject to subsection (c), a person that has possession, custody, or control of receivership property shall turn the property over to the receiver. NOTE: This type of language is often in the initiating receiver order. It would be helpful to have it codified. (b) A person that has notice of the appointment of a receiver and owes a debt that is receivership property may not satisfy the debt by payment to the owner. NOTE: This situation occurs all too often. A receiver makes demand for payment and admonishes the third party debtor of double liability if payment is made to the 13 10

14 owner. The receiver s admonition is ignored and the owner gets the money. Codification of this liability would provide constructive notice and guidance to the debtor prior to payment to the owner. The receiver and the court presumably would avoid the litigation expense to have to sue the third party to recover a second payment. A statute would put some teeth in the receiver s demand for the substantial amount of rent or CAM charges or other property related obligations that would be otherwise payable to the owner. It would also provide a foundation for the court assessing the third party for the fees and expenses incurred by the receiver and his counsel to recover the money paid to the owner. (c) (d) If a creditor has possession.. Unless a bona fide dispute exists about a receiver s right to possession, custody, or control of receivership property, the court may sanction as civil contempt a person s failure to turn the property over when required by this section. NOTE: Subpart (d) might be stated inversely to provide for the civil contempt language first, and then unless a bona fide dispute is established by the claimant upon a hearing pursuant to motion by the citee. California effectively follows the latter procedure. The burden of proof of the alleged dispute shifts to the person refusing to turn over the property. However, a contempt citation should be in the alternative in a receiver s order to show cause for turnover of the property. The holder of the property would have to respond with a prima facie showing that there is a legitimate dispute to the Receiver s right to possession, custody or control of the property. Otherwise, the court should enter a turnover order. A refusal to turn over the property would then provide the court with ample factual grounds for holding the third party in civil contempt. SECTION 12. POWERS AND DUTIES OF RECEIVER. Overall, there are several good provisions in Section 12 that California might want to consider. However, Subsection (a)(6) should be clarified to state that a deposition must be taken through legal counsel for the receiver, after legal counsel has been approved by the court. Subsection (b)(3): See comments to Section 16 on whether a receiver should be allowed to use or transfer receivership property other than in the ordinary course of business. Subsection (b)(4): See comments to Section 17 on whether a receiver should be allowed to reject unfavorable executory contracts entered into by the owner, including certain tenant leases. This provision provides fairly broad powers to a real estate receiver, organized by whether or not specific court approval is required. In certain circumstances, each of these powers may be warranted, but a receiver with all these powers would be essentially a superhero receiver. And that is not always good for everyone concerned including the receiver! Receivers are often 14 11

15 subject to appointing parties that do not understand the limitations of a receiver s authority or abilities, making demands on the receiver to take certain actions that may push the limits of a receiver s powers (and neutrality!). While court approval is required for the more potent powers articulated in Section 12(b), there are no standards here to guide a court in making determinations of the appropriateness of some of these powers (including making real property improvements or transferring receivership property other than in the ordinary course of business). There is no way for a court not experienced with receiverships to know how exceptional that relief should be. There is one oddity that I believe should be ironed out: Section 12(a)(7) suggests that a receiver may engage a professional without court approval, because it falls in the listing of powers the receiver is afforded without specific court approval. However, Section 12(a)(7) incorporates Section 15, and Section 15(a) expressly requires court approval for the engagement of professionals. Thus, it would be appropriate to move the engagement of professionals down to the Section 12(b) listing. Most appointment orders require the extra step of the receiver seeking court approval to hire professionals (although, in cases where receiver s counsel will obviously be needed, that showing may sometimes be made as part of the receiver s initial appointment). SECTION 13. DUTIES OF OWNER. Overall, there are several good provisions in Section 13 that California might want to consider. Subsection (c)(1): Requiring a non-compliant owner to pay the receiver s damages and attorney fees has a surface appeal. However, the receiver and his/her counsel must not be placed in the position of having to collect those expenses after the final accounting is approved. Unpaid damages and attorney s fees should instead be added to the owner s overall debt and cost to cure, and the lender can choose whether to go by judicial or non-judicial foreclosure. 98% of mortgage foreclosure cases are resolved by non-judicial foreclosure, with no deficiency judgment to recover the receiver s expenses. Section 13 is similar to Section 11 dealing with turnover of receivership property, except that it focuses more narrowly on the owner(s) of receivership property. This section has some attractive provisions that lawyers often include in receivership orders and courts typically approve notwithstanding that they are in essence highly disfavored mandatory injunctive provisions against third parties! For example, an owner is required to cooperate with the receiver (note there is no limitation to reasonable cooperation and there probably should be), to preserve and turn over receivership property, identify records and make them available to the receiver, and (after a subpoena) appear for an examination under oath. Interestingly, while a California receiver would generally be free under current law to issue a subpoena in connection with an action he/she was appointed in, Section 13(a)(4) requires an owner (who may or may not be a party) in an examination to furnish information concerning his/her/its financial condition at least as it relates to receivership property or the receivership. This seems like a recipe for trouble and is a bit heavy handed. True, upon appointment a receiver usually wants 15 12

16 to see the financial statements pertaining directly to receivership property and understand what the assets and liabilities are pertaining to that property. But there is some danger here that a court would interpret this provision too broadly and allow a receiver to potentially be misused by a party to strategically obtain financial discovery that might otherwise not be permitted. SECTION 14. STAY; INJUNCTION. Section 14 is problematic to the extent it applies to third parties, rather than only to the defendant. The fact that one party/plaintiff has obtained a receivership does not give that creditor automatic priority over the rights of all other creditors, including those holding a prior judgment lien on the property. A better approach would require the receiver to go to court for instructions if another creditor asserts an interest in receivership property. I generally applaud the effort to codify injunctive provisions that are often included in a receivership order and adoption of the Act may be the only way lawyers can get their receivership appointment parties under 20 pages! Nevertheless, I agree with the comments of Comm. Mitchell and Mr. Weissman to the effect that the stay provided for here may be overbroad in prohibiting, for example, a senior lienholder from taking actions to enforce that senior lien against property of the receivership. SECTION 15. ENGAGEMENT AND COMPENSATION OF PROFESSIONAL. Subsection (b): The receiver should not act as their own attorney, it creates a conflict of interest and makes the receiver/attorney the lawyer for both parties. It is also preferable that the receiver not act as the accountant (other than performing management responsibilities), auctioneer, or broker to avoid conflicts of interest. In line with the comments of Comm. Mitchell and Mr. Weissman above, it is generally not appropriate or advisable for a party s counsel to also serve as counsel for the receiver. There are exceptional cases, of course, where perhaps the borrower has abandoned the property and is nowhere to be found, and the dual-role operates mostly to reduce the costs of the receivership for basic assistance to the receiver. Section 15(b) does not run afoul of these concepts it simply takes automatic disqualification for potential dual-roles off the table which would leave it to the court to determine in its discretion whether there are any potential conflicts. However, my concern would be that Section 15(b) gives the impression to the court that potential conflicts of interest are less of a problem than they actually are and that dual appointments should be the norm. To the contrary, they should be the rare exception

17 Receiver Perspective, Richard Weissman NOTE: See CRC Rule SECTION 16. USE OR TRANSFER OF RECEIVERSHIP PROPERTY NOT IN THE ORDINARY COURSE OF BUSINESS. A pre-foreclosure / pre-judgment sale of the real property by the receiver, without the consent of the owner, may intrude on the legal and contractual rights of the owner. California foreclosure law provides detailed procedural steps, timelines, and safeguards that a lender must follow. Under both statutory law and the terms of the parties contracts, the owner is provided certain rights to cure that might be compromised by a pre-judgment sale. A pre-foreclosure sale was not bargained for by the owner. Except in certain cases, there is no compelling need to sell the property before foreclosure. Real estate is usually not a wasting asset unless there is a health and safety issue. 98% of mortgage foreclosure cases conclude by non-judicial foreclosure, and those cases often last in the court system no more than 6-8 months after being filed. Exceptions are the Health & Safety Code receivership cases where a receiver is appointed to remedy urgent health issues, or to abate gang, drugs, or prostitution activity. These cases are frequently initiated by governmental enforcement task forces. In these cases, a receiver typically needs to borrow funds from a third-party lender, on a super-priority lien receiver s certificate, because the existing lienholder will not advance the money on this troubled property. The property then needs to be sold to re-pay the hard-money lender as soon as the remedial work is completed. Attorney Perspective, Benjamin King The authority of a receiver to sell real property free and clear of liens and encumbrances in California remains a hotly contested issue. The commentary to the Act recognizes this and posits that this debate should be ended in favor of aligning state-court receiverships with federal receiverships and allowing such sales. There are many variables such as whether the receiver is acting in a pre-judgment or post-judgment context, whether the owner/borrower consents to the sale, whether other lienholders are present and objecting, etc. Indeed, the first line of the commentary to the Act recognizes this in stating that the ability of a receiver to sell real property outside the ordinary course of business has historically depended on the circumstances of the receivership. I suspect the level of controversy in this area is the best evidence that a one-size-fits-all approach may not be warranted. In permitting receiver sales of real property outside the ordinary course of business, the Act would end some controversy but perhaps open up a can of worms in many other areas. In the prejudgment context, consistent with the thoughts of Comm. Mitchell, above, my own personal feeling is that California law has worked too hard to develop the comprehensive foreclosure schemes reflected in CCP 726 and Civil Code Section 2924, among other provisions, to permit such a convenient end-around here. There are enough ways for a lender to force a sale 17 14

18 of real property without adding receivers sales to that mix. It seems strange to me that a receiver, while focusing on preserving property, would have the added obligation (and expense) in something other than a rare case of marketing and promoting the property for sale. Among other things, third parties could utilize such marketing efforts for nothing more than satisfying their own due diligence for an upcoming non-judicial foreclosure sale. My view is different in a post-judgment context, where a receiver should have more freedom (with appropriate protections) to take over and sell commercial real property of a judgment debtor in cases where other efforts to recover on the judgment have failed. I recognize room for reform in California as the broad dictate of CCP Section (permitting a receiver sale of real property upon confirmation of the court) leaves far more unanswered than answered. But any scheme in this area must recognize the different circumstances and interests which might encourage or discourage a receiver sale of real property, and allow sufficient discretion for a court to allow or not allow a sale based upon those differing circumstances/interests. Receiver Perspective, Richard Weissman (a) In this section, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. NOTE: good faith is a defined term but is not referred to anywhere else in Section 12. (b) With court approval, a receiver may use receivership property other than in the ordinary course of business. NOTE: It is unclear what this provision means. Subsection (c) below is the operative element of (b). (c) With court approval, a receiver may transfer property other than in the ordinary course of business by sale, lease, license, exchange, or other disposition. Unless the agreement of sale provides otherwise, a sale under this section is free and clear of a lien of the person that obtained appointment of the receiver, any subordinate lien, and any right of redemption but is subject to a senior lien. NOTE: Receiver s Sales, transfers This is the operative section enabling a sale or other disposition of the property by a receiver outside of California s statutory foreclosure scheme-ccp 726, nullifying a borrower s right of redemption. It also codifies a transfer free of liens, which is not available in California. (Coppola v. Superior Court 211 Cal.App.3d 848 (1989)) One issue is the sale process involves a security interest in the property via a deed of trust with the secured party as the beneficiary. Subsection (c) changes the foreclosure of the lien ( 726) (in rem action) to an action by the lender to effect a sale as though the bank had an ownership interest in the property (equity receiver)

19 See Section 25 re effect of a sale not affecting the lender s potential right to a deficiency judgment. This clause may or may not involve the receiver as a rents and profits receiver. Or, it turns a rents and profits receiver ( 564) into an equity receiver outside the judicial foreclosure scheme. 726 allows for a concurrent rents and profits receiver pending a judicial foreclosure and expiration of the right of redemption. The second part of Subsection (c) would provide clarity in a variety of circumstances whether equity sales, short sales, or other situations. The Commentary discusses distress sales and the lesser sales price likely obtained by a foreclosure sale. It is suggested a receiver s sale, which would be a private vs. public sale, should garner more money. While the commentary may be correct in practice, it may not be a sufficient reason to support a receiver s private sale. If the lender waives deficiency as part of this process, then the sale would be by stipulation under 726 and, by stipulation, could proceed by private sale. A modification of 726, et seq., to allow a private sale option to garner a higher sales price may be worthwhile to remove the distressed sale stigma. The second issue is the reference to Unless the agreement of sale provides otherwise It is not clear what an agreement of sale is and between whom. Rents and Profits Receivers are a product of contract; contractual agreements between lender/borrower show the purpose for which the receiver was appointed. Turner v. Superior Court, 72 Cal.App.3d 804, 812 (1977) (Absent consent from the borrower, the court "exceeds its jurisdiction" by purportedly authorizing a rents and profits receiver to exercise control over "property which is not hypothecated in the deed of trust"). A court authorizing the rents receiver to sell the property is effectively asking the court to specifically enforce something for which the contract does not provide. There is a distinction between in rem property (rents and profits) receiverships (identifying the property) and a receivership "over the person" (in personam) is a general equity receivership. Turner, at page 813, 817-the court twice rejected the proposition a "receiver is a receiver regardless of the purpose for which he was originally appointed." A rents receiver is pursuant to contract and not a draconian, harsh or extraordinary remedy. However, the use of a receiver to sell real property is a much harsher and extraordinary remedy. A rents receiver is more limited in scope, to preserve the property and collect and preserve rents. Turner, "Limited and special receiver. Rents are for the mortgagee but the debtor retains the property. (See City & County of San Francisco v. Daley 16 Cal.App.4th. 4th 734, 745 (1993) 19 16

20 A deed of trust does not provide for sale of security by a receiver. The lender must rely on statutes or case law for the receiver to act as a general equity receiver and to sell the security. A rents receiver acts solely for the "identified property." A sale on behalf of the borrower is acting on behalf of that person as owner and would be the subject of sale only pursuant to consent. A foundational concept of mortgage law is the borrower's right or "equity of redemption. A mortgage or deed of trust creates a security interest, not an ownership interest to the lender. Right of redemption is his inferior right in priority to the deed of trust. Civil Code ; O'Neil v. Gen. Security Corp., 4 Cal.App. 4th 587, (1992). An "equity of redemption" can be cut off only by a valid non-judicial foreclosure sale. CCP 726 provides for a right of redemption; Redemption right: CCP Sanctions against lenders who violate 726: Security Pacific national Bank v. Wozab, 51 Cal 3rd 991 (1990); Walker v. Community Bank 10 Cal 3rd 729 (1974); Pacific Valley Bank v. Schwenke 189 Cal. App. 3rd 134 (1987); Aplanalp v. Forte 225 Cal.App.3d 3rd 609 (1990); Shin v. Superior Court 26 Cal.App.4 th 542 (1994); O Neil v. General Security Corp. (1992) 4 Cal.App.4 th 587; In re Pajaro Dunes Rental Agency, Inc., 142 B.R. 383 (Bankr. N.D. Cal. 1992) (d) A lien on receivership property which is extinguished by a transfer under subsection (c) attaches to the proceeds of the transfer with the same validity, perfection, and priority the lien had on the property immediately before the transfer, even if the proceeds are not sufficient to satisfy all obligations secured by the lien. NOTE: Subsection (d) is a desirable addition, particularly in a short sale situation. (e) A transfer under subsection (c) may occur by means other than a public auction sale. NOTE: See comments to Subsection (c), above. SECTION 17. EXECUTORY CONTRACT. Section 17 would allow a receiver to reject, with court approval, executory contracts entered into by the owner, including tenant leases that were entered into after the mortgage was created. An owner cannot terminate binding leases and evict tenants, a real estate receiver should not do so either. The real property receiver is a caretaker who stands in the shoes of the owner, and who owes fiduciary duties to both parties

21 The Comment to Section 17 quotes a legal treatise for authority that a receiver can breach leases, and that the aggrieved third party can then sue the receivership estate for damages. This is not a good practice and it should not be encouraged by statutory permission. Breaching contracts creates damage claims, resulting in legal fees and delay. The receivership estate cannot be closed until all claims against it are resolved. Breach of contract lawsuits could delay resolution of the case. The Comment notes that the owner remains liable to the aggrieved third party for a receiver s breach of contract. The owner would then need to hire a lawyer and undergo the stress of litigation. Tenants would be displaced from their homes or businesses. All to generate somewhat more interim cash flow (assuming the units are quickly re-rented) pending a short process to nonjudicial foreclosure. Respectfully, this is not good public policy. This provision might have greater applicability in a general equity receivership over a large commercial property. I am in full agreement with the comments of Comm. Mitchell, above. Generally, a receiver takes receivership property as he/she finds it, and should not obtain a position superior to that a displaced owner/borrower may have had. Receiver Perspective, Richard Weissman NOTE: H. D. Roosen Company v. Pacific Radio Publishing Company, 123 Cal.App. 525, 534 (1932) ( The mere fact of possession does not, however, obligate the receiver to carry out executory contracts of the debtor ); Irving Trust Co. v. Desmore, 66 F.2d 21, 23 (9th Cir. 1933). Generally, no rejection of executory contracts arises in Rents Receivers or in non-judicial foreclosures. A foreclosure terminates leases and agreements junior to the foreclosed lien. A foreclosure or Rents Receiver generally would not be terminating contracts prior to completion of the foreclosure process. However, if there is a contract which the property's rents cannot support, a termination based on the insolvency of the receivership would be appropriate upon court order. Any claimed damages would be against the estate and would be payable only from excess sales proceeds, if any. SECTION 18. DEFENSES AND IMMUNITIES OF RECEIVER. Subsection (b) requires that a third party must obtain court permission to sue a court s receiver. The Comment states that a potential litigant need only show a prima facie case, not a substantial likelihood of prevailing. In California, a third-party claimant must apply to the appointing court for permission to sue a receiver, but only so the court can decide if it is administratively preferable to have the claimant intervene in the underlying case, or allow the claimant to file an independent action. The court cannot deny leave to sue a receiver based upon a summary evaluation of the merits

22 The trial court had discretion to determine whether or not to require Jun to assert his claim against the receiver in the action or in a separate lawsuit. It did not have discretion to deny both the motion to sue and the motion to intervene by summarily determining that Jun s claim lacked merit. Jun vs. Myers (2001) 88 Cal. App. 4 th 117, 125. The court must allow the claimant to file an independent case if the claimant could receive greater relief in another venue: When the court cannot afford the same relief in intervention as a claimant would be entitled to in an independent action, or where by virtue of some statutory or constitutional provision a particular kind of action must be brought in some jurisdiction other than where the original special proceeding is pending, the court will undoubtedly grant leave to bring it, and it would be an abuse of discretion not to do so. Jun at pg. 125, quoting De Forest v. Coffey (1908) 154 cal. 444: Filing an objection to the receiver s final account is not a substitute for a right to sue: Furthermore, even if a third party could resort to the uncertain procedure of filing an objection to the final accounting by the receiver, it is an inadequate substitute for the right to bring suit. As stated in De Forrest, [i]n determining the right of the petitioner under the intervention, the court proceeds under the same rules and grants him the same relief as if he were the plaintiff in an independent suit, and the same right of appeal is preserved to him. Jun at pg Section 18 does well in codifying a safe zone for a receiver s exercise of business judgment for matters within the scope of the receivership. I agree with Comm. Mitchell that, having taken the step also to codify the requirement of court approval in order to sue a receiver, it would be helpful to clarify a standard for what the court must determine in vetting such a request. Receiver Perspective, Richard Weissman (a) A receiver is entitled to all defenses and immunities provided by law of this state other than this [act] for an act or omission within the scope of the receiver s appointment. NOTE. I agree with Commissioner Mitchell and Ben King that clarifying standards would be helpful. (b) A receiver may be sued personally for an act or omission in administering receivership property only with approval of the court that appointed the receiver. NOTE: Notwithstanding Jun, a receiver should not be personally sued outside or independent of the receivership court s supervision. Receivers have quasi-judicial immunity for actions brought against them in their personal capacity, unless their activities exceeded the scope of their orders of appointment

23 A suit against the receiver in his official capacity first requires court permission from the court which appointed the receiver. (McCarthy v. Poulsen, 173 Cal. App.3rd 1212,1219 (1985); Ostrowski v. Miller, 226 Cal. App.2d 79,83 (1964); Vitug v. Griffin, 214 Cal. App.3 rd 488, 493 (1989); Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881) the Barton Doctrine )) A party who seeks to sue the receiver should be required do so as part of the party's objections to the receiver s interim report and accounting, if any, or upon the final report and account, if no early accountings were filed, as part of a surcharge motion. The receivership is an equitable process and should be the only basis for suing the receiver. Given the fluidity of case law regarding what permissions are required to sue outside of the receivership, the issue should be addressed by a statutory change to preclude an independent action outside of the receivership proceedings. Exceptions: where the receiver knowingly fails to disclose an action or claim against the estate as of the hearing of the final report, or failing to give notice of the final report and termination of the receivership to a known third party having a substantial, unsatisfied claim. (CRC, Rule ) (Vitug v. Griffin, supra.) SECTION 19. INTERIM REPORT OF RECEIVER. There is good material in this section that California might want to consider. Different cases warrant different levels of reporting by a receiver. Section 19 does a nice job of recognizing that and avoiding a temptation toward over-reporting. In my experience, receivership orders (drafted with an eye toward encouraging granting of an appointment) often call for overreporting (i.e., quarterly and sometimes monthly reports). This leads to unnecessary added expense in the receivership and, in many cases, a lot of cutting and pasting. Even with Section 19 in place, there should be a mechanism that encourages the appointing judge to actively consider what kind of reporting he/she would want or need. While receiver reporting often is helpful to the parties, the bottom line is the receiver is an arm of the court and it is the judge s needs that are paramount here. Receiver Perspective, Richard Weissman NOTE: Builders Bank v. Carbon Beach Partners, LLC 2016 WL (Cal. Ct of Appeal, Feb. 18, 2016: held that parties have right to object and must do so to interim reports and accountings pursuant to CRC, Rule (b). It held parties do not have a right to object at the hearing on the final report and account relating to prior monthly reports served on the parties under terms of CRC, Rule (b). Also, Rule provides no basis for either discovery or evidentiary hearing regarding the receiver s final report or the 23 20

24 receiver s fees or his counsel's. Unfortunately it is unpublished. Nonetheless, the court s comments may be practically argued against objections to the final report and discovery demands for fees and other issues, provided there are no objections and/or are unspecific to the interim reports served monthly or upon noticed motion. SECTION 20. NOTICE OF APPOINTMENT; CLAIM AGAINST RECEIVERSHIP; DISTRIBUTION TO CREDITORS. The Comment to Section 20 states that its provisions can be flexibly applied to either a general equity receivership or to a custodial real property receivership. But the scope of the Act is limited to real property receiverships. Many subparts in Section 20 are not appropriate for foreclosure cases. These are not receiverships over the owner, they are single-asset, limited-purpose receiverships of short duration. Under Subsection (a) receivers are required to give notice to all of the owner s creditors, not just those concerned with the property, unless the court orders otherwise. Subsection (b) requires the receiver to gather claims of creditors holding claims against the owner which arose before appointment of the receiver, unless the court orders otherwise. In California, a receiver is generally not responsible for pre-receivership debts. Those creditors must proceed directly against the owner. This section should not be adopted in California. It will cause confusion and needless receiver s expenses in routine foreclosure cases. As a lawyer often representing lenders and receivers, I generally encourage as much notice as possible in nearly all aspects of a receivership, within reason. Broad notice prevents many potential problems down the road. However, I agree with the comments above to the effect that notice of appointment to all creditors of the owner is too broad of a scope. Not only could this encompass creditors who have no conceivable interest in receivership property, but it puts a high burden on a receiver who may not necessarily inherit the most helpful records to determine who the owner s creditors are. I also agree that the establishment of a claims process such as this is not a good fit for routine foreclosure cases. Perhaps Section 20 could be improved by limiting it to equity appointments where a claims distribution process is likely to be needed. There are certainly cases where an orderly claims process would be warranted. Receiver Perspective, Richard Weissman NOTE: Notice need only be given to the vendors relating to operations of the property, not all of owner s creditors, as commented above. There is no reason for a claims procedure relating either to a rents receiver or foreclosure sale receiver. The current process of the 24 21

25 receiver giving notice only to creditors who have substantially unfulfilled claims is functional and appropriately limited. CRC, Rule SECTION 21. FEES AND EXPENSES. Subsection (b) allows the court to order that the costs of the receivership be paid either by the party who requested the receivership or the party whose conduct justified the appointment of the receiver. Ordering the defendant to pay the receiver s expenses could be problematic. The receiver needs and deserves to have any operating shortfall paid promptly when the receivership concludes. That usually means payment by the lender, typically within 30 days after the final order. The receiver should not be required to collect their fees and expenses from the defendant. I understand the comment of Comm. Mitchell, above, and the counter-argument is that the permissive language allows the court freedom to order the costs of receivership be paid by either or both of the appointing party or the party whose conduct justified the appointment. Nothing prohibits the court from awarding all costs to be paid by the appointing party (often the lender) as usual, but I like the flexibility of a court being able to order a defendant to pay receivership costs if the defendant engages in extreme conduct (i.e., waste) that gives rise to the need for appointment. This should, of course, be an exceptional situation where sharper teeth are needed. SECTION 22. REMOVAL OF RECEIVER; REPLACEMENT; ON TERMINATION OF RECEIVERSHIP. There is good material in this section that California might want to consider. Section 22 strikes a chord with me, as I once litigated a federal receivership case where the opposing party made attacking the partiality and professionalism of the receiver a central litigation strategy. A removal motion was made, and removal was ultimately denied, but the battle was very expensive and disruptive of the receiver s activities. Thus, not to nitpick, but I would change the standard of cause (which the Act deliberately leaves undefined) to good cause, and perhaps set some big-picture criteria that would give the impression (as it should be) that removal of a receiver should be an unusual moment. SECTION 23. FINAL REPORT ON THE RECEIVER; DISCHARGE

26 There is good material in this section that California might want to consider. Again, this provision desirably codifies requirements often stated in a typical appointment order. Receiver Perspective, Richard Weissman NOTE: The Comment to this Section 23 states the receivers is discharged from his duties as receiver but does not result in a discharge of liability for his/her acts during the receivership and for which the receiver would not be entitled to immunity under Section 18. The court s discharge should be final as to all actions taken during the receivership and duly reported through interim reports and the final report. The premise of Section 23 should be codified but the discharge should be final and should fully discharge the receiver s liability for actions taken and reported. CRC, Rule provides: By noticed motion or stipulation of all the parties, the receiver must present a final account and report; a request for discharge, and request for exoneration of bond. Notice must be given to every person or entity known to the receiver to have a substantial, unsatisfied claim that will be affected by the order or stipulation, whether or not the person or entity is a party to the action or has appeared in it. Rule (c). The court s approval of the reported conduct and account of the receiver will be res judicata. See Aviation Brake Systems v. Voorhis 133 Cal. App.3d 230, 232 (1982); Smith v. Hill 237 Cal. App.2d 374, 388 (1965); Kirk v. Kirk 243 Cal. App.2d 580, 582 (1966). In California bonds are subject to claims for personal liability of the receiver for one (1) year after a final order of the receiver s discharge. (CCP ) Liability of a surety does not commence until there is a final order discharging the principal and surety from the action. (CCP ), See previous discussion in Sections 8 and 20. A discharge would not be applicable to creditors who have substantial, unsatisfied claims against the receivership about which the receiver is actually knowledgeable but as to whom the receiver fails to give notice of the final report and hearing to be able to present the creditor s claim(s) and fails to inform the court of the existence of the claim(s). This type of creditor would have an independent action against the receiver for the claim and nondisclosure thereof to the court after discharge. (Vitug v. Griffin 214 Cal.App.3d 488 (1989)) SECTION 24. RECEIVERSHIP IN ANOTHER STATE; ANCILLARY PROCEEDING. No position on this section

27 I am always a big fan of making ancillary actions easier to initiate where necessary. A provision like this would particularly benefit from a high adoption rate of the Act, whether in the current form or otherwise. SECTION 25. EFFECT OF ENFORCEMENT BY MORTGAGEE. No position on this section. This provision seems consistent with existing California law, with the appropriate options selected. SECTION 26. UNIFORMITY OF APPLICATION AND CONSTRUCTION. No position on this section. No position on this section. SECTION 27. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. No position on this section. No position on this section. SECTION 28. TRANSITION No position on this section

28 No position on this section. SECTION 29. REPEALS; CONFORMING AMENDMENTS. No comments. SECTION 30. EFFECTIVE DATE. No comments

29 1 of 2 1/28/ :55 PM Winter 2012 Issue 42, page 8 Why Rents and Profits Receivers May Sell Property and Courts May Authorize Real Property Sales Free and Clear of Liens: A Rejoinder to the "Ten Commandments" By Pasternak, David, Alsbrook, Blake & Wald, David* The Fall 2011 issue of Receivership News included an arcle entled The Ten Commandments of a Rents and Profits Receiver. While that arcle provided some excellent insights, Commandments Seven and Eight advised receivers and the courts direcng them to refrain from acons that these authors believe are, in fact, legally permissible under California and federal law. Before addressing the asserons made in the Ten Commandments arcle, however, it is crical to understand the lens through which the California Courts of Appeal review Superior Court orders confirming receiver s acons. In 2008, the California Supreme Court concluded that the Superior Courts must be given considerable deference... even where the court confirms extraordinary acon by the receiver, such as a sale of real property. City of Santa Monica v. Gonzalez, 43 Cal. 4th 905, 931 (2008) (emphasis added). Receivers and judges should be confident, therefore, that reasonable determinaons made based on the individual circumstances of each case will not be overturned lightly. Courts May Authorize the Sale of Property in Rents and Profits Receivership The first queson to be addressed is whether courts have the power, in rents and profits receiverships, to authorize a receiver s sale of property absent spulaon from all interested pares. In Cal-American Income Property Fund VII v. Brown Development Corp., 138 Cal.App.3d 268 (1982), the California Court of Appeal considered a dispute arising out of the sale and leaseback of a shopping center where the trial court confirmed a receiver's sale of the property over buyer objecon. The appointment order there authorized the receiver to, among other things, receive rents and, importantly, do such acts respecng the property as the court might authorize or the pares, by spulaon, could agree upon without prejudice to any further order. Id. at 278. The buyer argued that, because the appointment order only established a rents and profits receivership, the lower court had exceeded its jurisdicon by confirming a property sale not expressly contemplated under the terms of that order. The Cal-American court disagreed. To begin with, the Cal-American court observed that a receiver s powers derive from statute, the appointment order, and the court s subsequent orders. Id. at 273. Based on that hierarchy, the court first looked to the statutory authority provided under the Code of Civil Procedure, and noted that Secon allows receivers to sell real and personal property subject to court confirmaon. Id. at 274. Next, the court rejected the buyer s argument that no express terms in the appointment order addressed the sale of property. The court explained that, although the appointment order did not consider such a sale, it did not preclude one either. Because the appointment order provided the pares with the flexibility to address changed circumstances by applying to the court for further orders and modificaons, the Cal-American court reasoned that [t]he court thus correctly decided the receiver had the power to sell subject to its confirmaon. Id. In sum, Cal-American supplies receivers with ample authority to sell property in rents and profits receiverships. As the Ninth Circuit aptly put it while applying California state law Cal-American did decide that issue and held that, in an appropriate case, a rents, issues and profits receiver can be authorized to sell the security. Resoluı on Trust Corp. v. Bayside Developers, 43 F.3d 1230, 1244 (9th Cir. 1994) (emphasis added). Cal-American is parcularly important for receivers to keep in mind given the unnecessary clamor of late over a Superior Court Judge s ruling in Wachovia Bank, N.A. v. Downtown Sunnyvale Residenı al, LLC, No CV , disallowing the sale of property over a borrower s objecon. First, because Downtown Sunnyvale was merely a Superior Court ruling, it is not binding on any other court. See Auto Equity Sales, Inc. v. Superior Court of Santa Clara County, 57 Cal.2d 450, 455 (1962). Second, the Downtown Sunnyvale court failed enrely to consider the statutory authority to sell receivership property provided under California Code of Civil Procedure secon As Cal-American made clear, Secon 568.5, when combined with an appropriate appointment order, provides the authority for a rents and profits receiver to sell property. Third, and finally, the queson we address today is not whether trial courts are willing to authorize the sale of property by rents and profits receivers trial courts have done so on many occasions with and without spulaon, and over objecon but rather whether a reviewing court might overturn that confirmaon as being in excess of the lower court s jurisdicon. In light of Cal-American and, as set forth above, the California Supreme Court s recent holding in Gonzalez that a Superior Court s confirmaon of extraordinary acons by a receiver is to be given considerable deference, such a reversal is unlikely. Courts May Authorize Receivership Sales of Real Property Free and Clear of Liens On the issue of sales free and clear of liens, there are three issues that should be analyzed: (1) whether the California Superior Courts have authority to sell a property free and clear of liens; (2) whether the power of federal district judges to confirm the sale of property free and clear of liens emanates from the Bankruptcy Code; and (3) whether only cu ng edge tle insurance companies insure tle based on sales authorized by state courts. 29

30 2 of 2 1/28/ :55 PM First, while no California case has expressly considered the queson whether a state court may confirm a receiver s sale of real property free and clear of liens, federal case law makes clear that courts of equity as all receivership courts are have enjoyed such power for more than a century. See, e.g., First Naı onal Bank of Cleveland v. Shedd, 121 U.S. 74 (1887); Van Huffel v. Harkelrode, 284 U.S. 225, (1931). Second, the power to sell free and clear of liens does not emanate from the Bankruptcy Code, but rather is one of those powers tradionally held by courts of equity: We think it clear that the power was granted by implicaon. Like power had long been exercised by federal courts si ng in equity when ordering sales by receives or on foreclosure. Id. That this power is inherent in courts of equity is parcularly important for present purposes because, while federal courts are bound by the strictures of the Bankruptcy Code, California state courts of equity are not so tethered. It is therefore enrely reasonable to conclude that the Superior Courts enjoy those powers tradionally held by courts of equity, including the power to sell free and clear of liens. Third, these authors experience has shown and a number of colleagues have confirmed that reputable tle companies are comfortable insuring tle to properes sold by order of a California court. And righ ully so: as noted above, the California Supreme Court s decision in Gonzalez mandates that Superior Court orders confirming receivership sales of real property are to be reviewed with considerable deference. *David J. Pasternak, Esq. is a founding co-chair of the Los Angeles/Orange County chapter of the California Receivers Forum, and a member of the Century City law Firm Pasternak, Pasternak & Paı on, a Law Corporaı on. *Blake C. Alsbrook is an associate at Pasternak, Pasternak & Paı on, a Law Corporaı on. Blake is a graduate of University of California, Santa Barbara and University of Michigan Law School. *David Wald is President of Wald Realty Advisors and has completed assignments for more than 200 clients, including more than 65 lenders, with a focus on complex projects. 30

31 Spring 2012 Issue 43, page 4 Receiver's Sales Mirage and Major Hazard for Both Lenders and Receivers By Hansen, Charles & Brodehl, Kevin * Introduc 䧉 on The no 䧉 on of a receiver's sale conducted by a rents and profits receiver appointed pursuant to a California trust deed may seem an invi 䧉 ng alterna 䧉 ve to trustees sales and judicial foreclosure auc 䧉 on sales. And since a receiver s sale may involve at least some of the trappings of a non distress sale, such a sale may seem an oasis that will provide shelter against the harshness of foreclosure auc 䧉 ons and mandatory lender elec 䧉 ons of remedies between judicial foreclosure and trustee s sale. But the seemingly lush en 䧉 cements of a receiver s sale are a mirage. And those beguiled into heading for that mirage put themselves and their clients at tremendous risk. The first part of this two part ar 䧉 cle will explore case law and statutory authori 䧉 es to develop the case why receiver s sales are improper under California law, and why case and statutory authori 䧉 es concerning sales by general equity receivers have no applicability in California mortgage and trust deed li 䧉 ga 䧉 on and receiverships. In the second part of the ar 䧉 cle to be published in the next issue we will detail more fully the hazards and poten 䧉 al consequences of receiver s sales, a 땵 empted or completed. Receiver's Sales Are Unlawful And Fraught With Risk For A Variety Of Contractual, Conceptual, And Statutory Reasons The reasons why receiver's sales are both unlawful and dangerous are legion. The best star 䧉 ng point to evaluate most commercial li 䧉 ga 䧉 on remedies is in the language of the applicable contract. A review of the language of customary commercial and proprietary forms of deed of trust used in California (and of the occasional mortgage) will establish that the security document creates an assignment of rents as security (o 瓬 en couched as an absolute assignment) and o 瓬 en contains provisions for the appointment of a receiver to take possession of the security, to collect the rents, and to preserve the property against waste pending foreclosure. What is conspicuous by its absence from such "rents and profits" clauses is language providing for the receiver s sale of the security or for the imposi 䧉 on of a receivership over the person of the borrower. Since secured lenders typically seek appointment of a receiver by way of request for specific performance of the provisions of the deed of trust, the absence of language about a receiver selling the security is a cri 䧉 cal omission. See Turner v. Superior Court, 72 Cal. App. 3d 804, 812 (1977) (the contractual agreements between lender and borrower show the purpose for which the receiver was appointed; in the absence of consent from the borrower the court exceeds its jurisdic 䧉 on by purportedly authorizing a rents and profits receiver to exercise control over property which is not hypothecated in the deed of trust ). In asking the court to authorize a receiver sale, the lender is typically asking the court to specifically enforce something for which the contract does not provide. The dis 䧉 nc 䧉 on between a receivership over iden 䧉 fied property, on the one hand, and a receivership over the person of a corpora 䧉 on or other legal en 䧉 ty, on the other hand, is a cri 䧉 cal one. The former is a rents and profits receivership, and the la 땵 er is usually referred to as a "general equity" receivership. The dis 䧉 nc 䧉 on between rents and profits receiverships and general equity receiverships is far from a merely seman 䧉 c or minor one Rather, the dis 䧉 nc 䧉 on describes fundamental conceptual and legal differences between an arrangement for dealing with the preserva 䧉 on of iden 䧉 fied property, on the one hand, and an arrangement for handling and resolving the business affairs of a legal person. See Turner, supra, 72 Cal. App. 3d at 813, 817 (twice rejec 䧉 ng proposi 䧉 on that a receiver is a receiver regardless of the purpose for which he was originally appointed ). Given the profound difference in the nature and the objec 䧉 ves of the two types of receivership, it should come as no surprise that the role and powers of the two types of receiver are markedly different. When borrowers resist imposi 䧉 on of a receivership based on a defaulted deed of trust by ci 䧉 ng receivership cases trea 䧉 ng the remedy of receivership as harsh and extraordinary, lenders frequently emphasize and take advantage of the dis 䧉 nc 䧉 on between the concepts of a rents and profits receivership and a general equity receivership. Lenders and their a 땵 orneys argue correctly that the appointment of a rents and profits receiver following a trust deed default should be more or less rou 䧉 ne when the trust deed or other loan documents contain a valid "rents assignment" provision, and that cases se 鋢 ng exac 䧉 ng standards for the appointment of a general equity receivership are inapposite to the appointment of a rents and profits receiver under a defaulted trust deed. Lenders will commonly argue again correctly that case law holding that the appointment of a receiver is a harsh and extraordinary remedy to be applied sparingly (see e.g., City & County of San Francisco v. Daley, 16 Cal. App. 4th 734, 745 (1993)) is inapplicable to a rents and profits receiver both because the borrower has already agreed to the appointment in the loan documents and because the purpose of a rentsand profits receiver is a limited one focusing on the preserva 䧉 on of the property and the collec 䧉 on and preserva 䧉 on of rents. See e.g., Turner supra, 72 Cal. App. 3d at (a rents and profits receiver is limited and special; the rents and profits emana 䧉 ng from the property are impounded for the benefit of the mortgagee, but the debtor retains its other property). 31

32 Having obtained the appointment of a receiver, however, many lenders and their a 땵 orneys quickly change their tunes and assert that the rents and profits receivership is not limited and that the receiver can do anything a general equity receiver can do. This common reversal of posi 䧉 on argument on the nature of a rents and profits receivership is a revealing one. Since the trust deed rarely, if ever, contains language authorizing the receiver to actually sell the security, the lender must rely on statutes and case law that apply to the power of receiver for an en 䧉 ty or corpora 䧉 on to sell that corpora 䧉 on's assets. But this argument disproves itself. A general equity receiver (or, for that ma 땵 er, a state law trustee, a bankruptcy trustee, or an a 땵 orney in fact) can some 䧉 mes sell a corpora 䧉 on's or other person s property, real or personal, based on the power and authority to act on behalf the person that is the owner of the property and thus has the right to sell it on a consensual basis. But property cannot sell itself. A receiver that is ac 䧉 ng only as a rents and profits receiver for iden 䧉 fied property rather than as a receiver for the person of a corpora 䧉 on or legal person can no more sell the property than the property can sell itself. The centerpiece and founda 䧉 onal concept of mortgage law is the borrower s right or "equity" of redemp 䧉 on. That right of redemp 䧉 on is what makes a mortgage or a deed of trust a security interest instead of an ownership interest. The right of redemp 䧉 on from a mortgage or deed of trust is actually held, in California, both by the owner of property and by those holding a lien or other interest in the property inferior in priority to the deed of trust in ques 䧉 on. Cal. Civ. Code ; O Neil v. General Security Corp., 4 Cal. App. 4th 587, (1992). It is precisely this equity of redemp 䧉 on that is cut off or foreclosed by a valid foreclosure sale. Historically and seman 䧉 cally, that is how foreclosure came to be called foreclosure. Nowhere in California law does there exist a provision that allows a receiver to cut off the equity of redemp 䧉 on, which is the defining feature of a mortgage or deed of trust. And nowhere in California law can one find any right analogous to Bankruptcy Code 363 permi 鋢 ng the sale of property free and clear of liens or encumbrances or the transfer of the lien to the proceeds of that sale. Coppola v. Superior Court, 211 Cal. App. 3d 848 (1989). Thus, even if a rents and profits receiver s sale could somehow overcome the absence of authorizing language in the deed of trust, there is no basis in California law to suggest that such a sale would cut off or foreclose junior interests any more than a voluntary deed or a deed in lieu by the borrower. A general equity receiver who controls the affairs of a legal person or corpora 䧉 on can properly be empowered to sell that person's assets much as can a trustee or a probate representa 䧉 ve. That sale by the general equity receiver is, at least in legal theory, a consensual sale by the personal representa 䧉 ve of the person who has a right to sell the property. But a rents and profits receiver is not a personal representa 䧉 ve of the borrower at all, and is merely an agent of the court charged with preserving and protec 䧉 ng the real property security pending the outcome of a judicial or nonjudicial foreclosure. A court that has appointed a rents and profits receiver has no basis in the customary language of the deed of trust that authorized the appointment and created the interest in rents and profits, or in either statutory law or in equity principles, to authorize the receiver to cut off or foreclose out the equity of redemp 䧉 on enjoyed not only by the owner and borrower but also by all of those junior interests whose rights of redemp 䧉 on would be likewise terminated and wiped out by a foreclosure. The purchaser from a rents and profits receiver purportedly authorized to sell the property will, at best, acquire unmarketable and likely uninsurable 䧉 tle, and may well look to both the lender and perhaps the receiver as seller for the resul 䧉 ng loss and breach of both the contractual and the deed based covenants of marketable 䧉 tle. Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767 (1991). Anyone sugges 䧉 ng that California Code of Civil Procedure 564 et seq. provide an answer to these fundamental problems should consider the following ques 䧉 ons: Is a rents and profits receiver's sale a foreclosure sale? If the answer is no, how then does such a sale cut off the fundamental equity of redemp 䧉 on enjoyed by the owner and the holders of junior interests? If the answer is yes, then does the sale trigger the deficiency bar of California Code of Civil Procedure 580d? And, does a rents and profits receiver s sale trigger a post sale right of redemp 䧉 on under California Code of Civil Procedure et seq? Where in the law do the advocates of receiver s sales suggest we look to find the answers to these ques 䧉 ons? Whatever answers to these ques 䧉 ons may be offered, how do we know the answers are correct when there is no basis suppor 䧉 ng the answers in either statutory language or the case law? Addi 䧉 onally, why would the California legislature and California courts have spent a century and more refining, balancing, and reconciling the procedures of judicial foreclosure and trustee s sale as an integrated system by virtue of which the lender must make an elec 䧉 on of remedies between these two well mapped remedial choices, but then allow a secured creditor to opt out of the elec 䧉 on and check neither of the above in order to pursue a procedure as to which no guidance is available and as to which no checks and balances have been created as concerns 䧉 tles, procedures, deficiencies, or post sale redemp 䧉 on rights? See Vlahovich v. Cruz, 213 Cal. App. 3d 317, (1989). If secured lenders could use receiver s sales as a means of op 䧉 ng out of the mandated elec 䧉 on of remedies between trustee s sales and judicial foreclosure and the consequences of that elec 䧉 on, they would have been doing so conspicuously for the past century. Yet, there is no evidence in the case law that they have been doing so. That is a sure sign of a mirage. While California Code of Civil Procedure generically allows for property sales by a receiver, that statute must be treated consistently with (and not as eviscera 䧉 ng) the recognized narrow role and purpose of a rents and profits receiver and the language of the deed of trust pursuant to which he is appointed. No California case has applied to jus 䧉 fy a sale of property by a rents and profits, as opposed to a general equity, receiver. In Turner, supra, the court observed that cases applying do not involve rents and profits receivers and are dis 䧉 nguishable on that ground, and noted the powerful arguments against applying to rents and profits receivers (including the limited scope of contractual authoriza 䧉 on, the equity of redemp 䧉 on, and 726), before ul 䧉 mately concluding that it need not decide the issue. Turner, supra, 72 Cal. App. 3d at A case cited by some receiver sale proponents, Cal American Income Property Fund VII v. Brown Development Corp., 138 Cal. App. 3d 268 (1982), expressly acknowledged the limited powers of a rents and profits receiver, but noted that the specific language of the trial court s appointment order suggested bases and powers beyond a typical rents and profits receivership. Id. at The court, therefore, assumed that the right of sale existed under the facts before it, and focused instead on whether the receiver had established an immediate necessity for the sale, finding in the nega 䧉 ve. Id. at No subsequent California decision has relied on Cal American to support a sale of property by a rents and profits receiver. Perhaps the lender or receiver will respond and say that a "receiver's sale" is not a foreclosure sale at all but a sui generis form of equitable remedy. If that is the response, the ques 䧉 on then presented is whether, or how, the receiver sale cuts off or forecloses the rights of redemp 䧉 on enjoyed by both the owner and all juniors. The issue comes full circle and begs the fundamental ques 䧉 on of what a receiver sells and what a buyer acquires in a receiver s sale. Part 2 will conclude this ar 䧉 cle in the next RN issue. *Charles Hansen is a partner at Wendel, Rosen, Black & Dean in Oakland whose core pracce is devoted to lending, mortgages, trust deeds, escrows, tle insurance, real estate developments, guaranes, and secured transacons ligaon. Since 1985, he has also taught advanced real estate courses to law and MBA students at UC Berkeley's Boalt Hall. 32

33 *Kevin Brodehl is a partner at Wendel, Rosen, Black & Dean in Oakland specializing in secured transacons ligaon, as well as other ligaon involving real estate, business, and intellectual property. 33

34 1 of 2 1/31/2017 2:02 PM Summer 2012 Issue 44, page 6 Part II: Receiver's Sales - Mirage and Major Hazard for Both Lenders and Receivers By Hansen, Charles & Brodehl, Kevin* In the second half of this arcle, we address in greater detail the posion that a receiver s sale flies in the face of California Code of Civil Procedure a key provision of California mortgage law for over a century and a half. Secon 726 says, in pernent part, that there can be but one form of acon for the recovery of any debt or the enforcement of any right secured by mortgage upon real property and that acon shall be in accordance with Title 10, Chapter 1 of the Civil Code. Advocates of receiver s sales would gra onto this clear statutory language the codicil: well, except for this other form of judicial sale the mortgage statutes and the secured transacons case law forgot to menon. Receiver s Sales: Violaı ons of Code of Civil Procedure 726 and the Consequences for the Secured Lender Those pursuing receiver s sales as a form of ersatz foreclosure rarely offer to explain to the court just how, in the face of the clear and unambiguous language of 726, they can use a judicial process and a civil acon (as that term is defined in Code of Civil Procedure 22) to effect a foreclosure-like sale of real property security on a defaulted mortgage or trust deed by a means other than judicial foreclosure as performed pursuant to California s elaborate foreclosure and execuon sale statutes. A century and more of case law is absolutely to the contrary. Those at the back of the caravan being led toward the receiver s sale mirage should pay careful aenon to this century plus of case and statutory law and ask whether or not it can be reconciled with the idea of foreclosure-like sales by rents and profits receivers. It has been the clear and unambiguous law of California since 1872 (and actually before then prior to adopon of the Field Code) that there can be only one acon and one form of acon for the foreclosure of California real property. This rule is embodied in California Code of Civil Procedure 726 (which originally contained "one acon" wording that was amended during the Great Depression to read "one form of acon"). Those who have lled the mortgage vineyards for years know that 726 is not only firmly established law, but that violaons of 726 can result in extremely harsh sancons imposed against creditors who violate the statute. See e.g., Security Pacific Naı onal Bank v. Wozab, 51 Cal.3d 991 (1990); Walker v. Community Bank, 10 Cal.3d 729 (1974); Pacific Valley Bank v. Schwenke, 189 Cal. App. 3d 134 (1987); Aplanalp v. Forte, 225 Cal.App.3d 609 (1990); Shin v. Superior Court, 26 Cal. App. 4th 542 (1994); O Neil v. General Security Corp. (1992) 4 Cal. App. 4th 587; In re Pajaro Dunes Rental Agency, Inc., 142 B.R. 383 (Bankr. N.D. Cal. 1992). What may be less well known is that the concept of a real property sale by a rents and profits receiver was held in 1991 to violate 726. In Great American First Savings Bank v. Bayside Developers, originally published at 232 Cal. App. 3d 1546, the court observed that rents and profits referred to the income derived from the property, but not to the property itself or to its proceeds on sale, and held that the rents and profits receiver s sale of townhomes on the property was beyond the authority of the receiver, and beyond the power of the court to authorize. Id. at Further, the bank s applicaon of the proceeds from the sale to the secured debt violated 726. Id. at While a peon for rehearing was pending before the Court of Appeal in Bayside, the case was removed to federal court under the removal at any me provisions of the Financial Instuons Reform, Recovery, and Enforcement Act (FIRREA), and as a result the Bayside decision was ordered de-published by the California Supreme Court in 1992 (1992 Cal.LEXIS 1265), and can no longer be cited as precedent. Nevertheless, the reasoning in Bayside has been discussed extensively in California mortgage law treases, and that reasoning is a now well-entrenched among praconers. Moreover, the federal courts that took over the case paid lip service to the security first aspect of 726, but inexplicably and improperly ignored the express one form of acon language of that statute. See Resoluı on Trust Corp. v. Bayside Developers, 817 F. Supp. 822 (N.D. Cal. 1993); Resoluı on Trust Corp. v. Bayside Developers, 43 F.3d 1230 (9th Cir. 1994). Under California Code of Civil Procedure 564(d) and recently amended California Civil Code Secon 2938(e)(2)-(3), the mere appointment and convenonal funconing of a rents and profits receiver is not a violaon of 726, but rather a legimate interlocutory measure to collect and preserve rents and the security pending foreclosure. But the noon that a rents and profits receiver could be authorized to sell the security as an alternave to judicial foreclosure or trustee s sale can be found nowhere in the statutory scheme. If the Legislature intended to repeal the me-honored one form of acon provisions of 726 and provide a new type of foreclosure, one would think that it might have said so. Two salient features of 726 sancon cases are: first, that the conduct triggering the sancon need not be intrinsically improper; and, second, the fact that a court has blessed or even assisted in the conduct does not insulate the creditor from the resulng sancon. See e.g., Walker, supra, 10 Cal.3d 729; O Neil, supra, 4 Cal. App. 4th 587; Aplanalp, supra, 225 Cal. App. 3d 609; Shin, supra, 26 Cal. App. 4th 542; Pajaro Dunes, supra, 142 B.R A er the California Supreme Court's decision in Wozab, it is clear that the sancon incurred under 726 may include not only loss of the security but if the lender has been cauı oned against the conduct and goes forward despite the warning loss of the debt as well. Wozab, supra, 51 Cal.3d at Thus, borrowers and juniors who are facing a receiver's sale and who are not able to persuade the lender to desist (or the court to withdraw an ostensible grant of authority) should consider a Wozab warning leer challenging the propriety of the "receiver's sale" and cauoning the secured lender of the dramacally negave consequences under the sancon aspect of 726 if the sale goes forward. Negaı ve Consequences for the Receiver Receivers and aorneys whose pracce focuses on represenng receivers may respond that a 726 sancon is the lender s problem and of no concern to them. However, it is clear that the receiver, as a neutral agent and appointee of the court, must be fair and even-handed to all interested pares, 34

35 2 of 2 1/31/2017 2:02 PM including the lender, borrower, and junior lienholders. See, e.g., Cal. Rules of Ct., Rule (a); Sec. Pac. Nat l Bank v. Geernaert, 199 Cal. App. 3d 1425, (1988). This fact alone should give the receiver pause and induce a reluctance to fail to honor the mortgagor s and junior secured creditors express rights under 726 and the other foreclosure statutes. Receivers and their counsel need to make an independent and self-protecve analysis of any lender request that they sell the security. The receiver, a er all, is expected to be a neutral agent of the court. A claim by a rents and profits receiver that pursuit of such a sale was the lender s idea and that the receiver was merely implemenng a remedy selected by the lender could quite plausibly be viewed as an admission of a lack of independence. And a receiver's sale later found to be ultra vires might subject the receiver and the receiver's bond to potenal liability both to the borrower and to the purchaser. Aer all, such a sale, if found to be contrary to law, would have resulted in an unauthorized sale of someone else s property. Further, and as discussed above, the receiver is purporng to sell property to a buyer who reasonably expects to receive good tle in a valid and authorized transacon, and who can be expected to be very unhappy and in a ligious mood when the tle resulng from the sale turns out to be quesonable, unmarketable, and uninsurable. Serious quesons are also presented by a receiver s sale with regard to potenal prejudice to and exoneraon of guarantors of the secured debt. While full development of this issue is beyond the scope of this arcle, it is absolutely clear that guarantors have rights of reimbursement and subrogaon to the secured lender s posion when they make good on their guaranes. See Cal. Civ. Code A secured lender s elecon of remedies can prejudice those rights, and such prejudice has caused secured lenders no end of grief under cases like Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968). While Gradsky waivers are permied under Civil Code 2856, the validity of the waiver turns on the language and wording of the waiver. Few, if any, Gradsky or 2856 waivers in exisng guaranes contain language contemplang receiver s sales, or waiving the potenally prejudicial consequences of those sales for the guarantor. Thus, the risk of compromising or exonerang guarantors and their guaranes needs to be added to the litany of problems that may result from receiver s sales. Lenders and their a orneys know - or at least should know - that their every move in foreclosing on a defaulted loan will be scrunized closely by the borrower, guarantors, and their a orneys. There are, in short, some highly-movated and very serious people just waing out in the open desert for the caravan to head for the receiver s sale mirage. Lenders, receivers, and their aorneys who insist on pursuing receiver s sales because of the real or perceived benefits of such sales - such as avoiding the addion or more REO to a bank s inventory and directly channeling foreclosed property to preferred third party buyers should pay heed to those who may well be waing for them out there in the desert with less than friendly intent. If lenders and receivers listen closely, they will realize that well-informed borrowers and their a orneys might be whispering come on, come on, lovely shade and sweet water is waing for you just here at the mirage er, oasis. *Charles Hansen is a partner at Wendel, Rosen, Black & Dean in Oakland whose core pracı ce is devoted to lending, mortgages, trust deeds, escrows, ı tle insurance, real estate developments, guaranı es, and secured transacı ons liı gaı on. Since 1985, he has also taught advanced real estate courses to law and MBA students at UC Berkeley's Boalt Hall. *Kevin Brodehl is a partner at Wendel, Rosen, Black & Dean in Oakland specializing in secured transacı ons liı gaı on, as well as other liı gaı on involving real estate, business, and intellectual property. 35

36 HON. BRUCE E. MITCHELL (Ret.) Overview. Hon. Bruce E. Mitchell served as a Commissioner on the Los Angeles Superior Court for 26 years, retiring in During Comm. Mitchell s tenure on the bench he presided over receivership cases, provisional remedies, commercial litigation, class actions, and eminent domain. Commr. Mitchell now serves as a mediator, arbitrator, neutral case evaluator, and special master with ADR Services in Los Angeles. bmitchell@adrservices.org. Rent-Issues-And-Profits Receiverships. Comm. Mitchell presided over hundreds of rents-issues-and-profits receivership cases over a period of 10 years. These included: (1) multi-family apartment buildings where the mortgage was being foreclosed; (2) cases brought by a public agency or the tenants under the Health & Safety Code to abate violations; (3) commercial shopping centers and office buildings; and (4) rental of luxury single family homes. Comm. Mitchell is thoroughly knowledgeable about the legal, procedural, and practical aspects of these receiverships. Equity Receiverships. Comm. Mitchell has appointed and supervised equity receiverships in a number of cases, including: placing a receiver over a corporation involved in a Ponzi scheme; appointing receivers to operate insolvent cemeteries; and numerous receivers to complete, and then to market, abandoned construction projects of apartments and condominiums. Education. Stanford University School of Law, J.D University of Southern California, B.A., 1973; Pepperdine University, Straus Institute of Dispute Resolution, Mediating the Litigated Case (Six-Day Training) Advanced Arbitration Academy (5 Days), USC- JAMS Arbitration Institute, Teaching Presentations. Comm. Mitchell has participated in teaching programs for the following groups: California Receivers Forum, Remedies Section of the Los Angeles County Bar Association, Judges of the Los Angeles Superior Court, California Judges Association, Association of Business Trial Lawyers, and The Rutter Group. 36

37 BENJAMIN KING Partner Los Angeles T: F: Download V-Card BIOGRAPHY Benjamin King is a commercial litigator and creditors rights attorney who has particular expertise in protecting creditors interests through the use of prejudgment remedies such as attachment, receiverships, and injunctive remedies. Mr. King has represented national financial institutions, a number of California lenders, and receivers in, among other matters, actions involving the exercise of loan remedies, workouts of troubled loans, and actions for foreclosure upon loan collateral. Mr. King has litigated matters on behalf of creditors in both pre-bankruptcy and bankruptcy contexts, including lender liability actions, real-estate loan disputes, contract disputes, judicial foreclosures, receivership actions, fraudulent conveyance matters, adversary proceedings (including preference actions), non-dischargeability actions, and a variety of business tort disputes. In addition to his representation of lenders, other creditors and receivers, Mr. King has represented firm clients in a variety of litigation matters including, among other things, class actions, unfair trade practices disputes, FTC actions, Lanham Act claims, copyright disputes, and publicity rights lawsuits. Mr. King has developed particular expertise assisting firm clients in ensuring that their websites are accessible to disabled persons in compliance with the requirements of the Americans with Disabilities Act. Mr. King's pro bono efforts include work for Children's Rights, a national organization that utilizes class action lawsuits and other methods to affect positive change for abused and neglected children and to bring much needed reform to state foster care systems. EDUCATION University of Southern California, Gould School of Law, J.D., 1999 Staff Member, Executive Senior Editor, Southern California Law Review James Holbrook Award for Excellence in Service to the Law Review (1998) University of Southern California, B.A., 1991, magna cum laude BAR ADMISSIONS California, 1999 COURT ADMISSIONS U.S. District Court for the Central District of California, 2000 U.S. District Court for the Eastern District of California, 2000 EXPERIENCE Obtained ex parte Prejudgment Writ of Attachment in Matter Relating to Breach of Contract, Fraud Obtained ex parte prejudgment writ of attachment on behalf of firm client in excess of $17 million in a contested matter based upon allegations of breach of contract and fraud. Obtained ex parte Appointment of Receiver in Connection With $180 Million Loan Default Obtained ex parte appointment of a receiver in Contra Costa County over real property in connection with defaulted loan in excess of $180 million Prejudgment Writs of Attachment Obtain writs of attachment and take other prejudgment enforcement actions in connection with the enforcement of credit facilities and guarantees. Represented FTC-Appointed Receiver in Complex Fraud Case U.S. District Court for the Northern District of California, 2000 U.S. District Court for the Southern District of California, 2000 California State Courts, 1999 CAPABILITIES Bankruptcy, Restructuring and Creditors' Rights Consumer Action and Regulatory Defense 37