California Court Decision Threatens to End Receiver’s Sales of Real Property

In these times of declining property values, lenders are often faced with the prospect of taking back property that will prove to be difficult to manage as ORE. One time-honored means of administering these properties is to move for the appointment of a receiver and ask the Court to authorize the receiver to sell the property and disburse the proceeds in the appropriate priority.

Receiver’s sales are useful in any number of circumstances. One of the best examples was in the liquidation of a failed farm implement dealership. The bank held a deed of trust on the real property, but property was chock full of equipment, tools, old engine blocks and decades of what looked a lot like junk. The bank received very high bids from salvage companies to haul it all away. Instead, the receiver held an auction and sold off all of the personal property. Result: instead of paying $100 to haul off an old engine block, a buyer at the auction paid $100 for the privilege of hauling it off! When the dust settled at the end of the auction, the yard was reasonably clean, most of the personal property had been removed by auction buyers, there was sufficient cash available to cover the cost of the auction and the receivership, as well as some left over for other expenses.

Meanwhile, the receiver had listed the property for sale. Once the property was cleaned up, buyers appeared and the property was soon liquidated for enough to repay the secured lender with some left over.

We’ve also used receiver’s sales to sell property where there were documentation issues, such as where one lender held a deed of trust on the real property and another held a personal property security interest in the essential personal property. (Yes, a real lesson in underwriting!!) The receiver, as the neutral representative of the Court, was able to sort out which lender was entitled to what sums and get the property sold as a package to a buyer.

Now comes a decision that threatens to end receiver’s sales. My partner, Joe Demko, who has handled countless receivership matters over the years, files this comment on a very troubling decision.

California Court Decision Threatens to End Receiver’s Sales of Real Property

by Joseph Demko

Not too long ago, a case venued in the Superior Court of California, County of Santa Clara, entitled Wachovia Bank, N.A. v. Downtown Sunnyvale Residential LLC teed up the issue of whether, over the objection of a borrower, a rents issues and profits receiver could sell the real property on which the secured lender held a senior deed of trust. The Court refused to allow the sale to go forward, reasoning that an order authorizing the receiver to sell allows the lender to circumvent the statutory protections of the foreclosure process. In contrast to that argument, the lender asserted that receivers appointed under many California statutes are entitled to liquidate property, such as, for example, in a corporate dissolution action. The Court felt the prior order setting forth the sale procedures did not afford all of the protections to the borrower afforded by the California statutory foreclosure scheme and therefore refused to approve the sale by the receiver.

It is less than clear, however, whether the court took into consideration the California Code of Civil Procedure Section 568.5 which provides that a receiver may, pursuant to an order of court, sell real or personal property in the receiver’s possession upon giving notice and in the manner set forth under the enforcement of judgments law, beginning with the California Code of Civil Procedure section 701.510. That section deals with execution sales of real property post-judgment. It would seem, however, that the Code of Civil Procedure Sections 701.510 dealing with the post-judgment sale affords as much in the way of protections as do the California statutes dealing with non-judicial and judicial foreclosure sales.

The moral, however, is that even where an order of court appointing a receiver contains a provision allowing the receiver to sell real property, it is not a fait accompli if the lender, over objections of others, seeks to have the receiver sell that property.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Joseph N. Demko
is a partner and member of the JMBM Special Assets Team. Joe is an experienced trial lawyer who specializes in representing banks, lenders and financial institutions in complex commercial litigation involving creditors’ rights, lender liability, claims of fraud and real property secured transactions. Joe’s recent trials and arbitrations have involved loan enforcement and fraudulent transfer claims as well as lender defense against claims for fraud, successor liability, breach of fiduciary duties, elder abuse and imposition of constructive and/or resulting trust on real property. In addition, Joe has extensive experience in representing lenders and special servicers in real property secured transactions and in cases involving California Commercial Code Articles 4, 9 and 10. For more information, please contact Joe at (415) 984-9676 or JDemko@JMBM.com.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

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