Can a Receiver Prime and Strip Liens Against Real Property?

Courts overseeing receivers generally enjoy broad discretion in directing and approving a receiver’s proposed actions.  But does that authority extend to a receiver not only granting a super-priority lien ahead of existing liens, but also selling the real property free and clear of all liens?  In County of Sonoma v. Quail, 56 Cal.App.5th 657 (Ct. App. 2020), the California Court of Appeals answered that question in the affirmative.

Quail involved a 47,480 square-foot lot with two houses, a few garages, several outbuildings, and numerous trailers surrounded by a veritable junk yard.  Despite many of these structures being uninhabitable, unsanitary, and dangerous, multiple families resided on the lot.  Although Sonoma County (the “County”) ordered the owner to remediate the property several times, he failed and refused to do so.  After several years of these violations going unabated, the County ultimately sought and obtained the appointment of a receiver over the real property.

To obtain funds necessary to repair the property, the receiver asked the court for permission to borrow money through the issuance of a receivership certificate to be secured by a super-priority lien—i.e., a lien ahead of all other liens—against the real property.  Although the trial court initially declined to prime existing liens, when the receiver could find no one to lend money (since the land lacked equity), the trial court relented and approved a super-priority lien despite the senior secured lender’s objection (the “lender”).

After the receiver remediated the property to a condition where it was marketable, the receiver asked the trial court for permission to sell the property free and clear of all existing liens.  The receiver argued that since the property was not worth enough to pay off even the senior secured lender in full, no one would buy the property and complete the renovations unless it was sold free and clear.  The trial court agreed and approved the sale over the lender’s objection.

On appeal, the secured creditor primarily argued that California’s receivership statute did not specifically authorize the priming and stripping of liens.  The Court of Appeals disagreed based on its reading of California’s main receivership statute, Cal. Civ. Proc. Code § 568, which provides as follows:

The receiver has, under the control of the Court, power to bring and defend actions in his own name, as receiver; to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the Court may authorize. 

The Court of Appeals concluded that the last clause of the statute, that authorized a receiver “generally to do such acts respecting the property as the Court may authorize,” provided sufficient authority for the trial court to not only approve a super-priority lien, but also to authorize the receiver to sell the real property free and clear of liens.

As a fallback argument, the lender claimed that even if the trial court was authorized to prime and strip liens, it certainly lacked authority to affect its lien since it was not a formal party to the lawsuit.  Again, the Court of Appeals disagreed.  It concluded that the lender “acquiesced in the receivership proceedings” by participating in the case.  In other words, by merely appearing and objecting, that authorized the trial court to affect, displace, and ultimately strip the lender’s lien.

Quail provides an interesting example of the potentially wide discretion that a trial court has in directing a receiver’s actions.  Although the fact-pattern presented in this case is a little extreme, it may serve as a stark reminder that a receiver may significantly affect property rights even if the property rights belong to a non-party.  Here, had the senior secured lender better understood the broad powers of a receivership court, it may have been able to act differently to protect its lien.  As it stands, however, the lien is stripped and the senior secured lender will only recover a portion of the sale proceeds as a result of the sale.

For more information about receivership law, check out our Receivership Law Handbook:  https://www.swlaw.com/services/receivership-law-handbook.