Can municipalities seek appointment of a receiver on properties owned or soon-to-be-owned by a foreclosing bank?  With foreclosures at record highs, the receivership remedy may serve to address cities and counties’ need to ensure that their housing stock is not obliterated by the damage that an empty, foreclosed-upon property can incur.  A receivership under California Health and Safety Code section 17980.7 is placed upon the property itself, and endures through ownership change.  Thus, a foreclosure or shift in ownership could not alter or impact the remedial work of a receivership.

What Does the Law Say?

                California Health and Safety Code §17980.7 allows for a court to appoint a receiver on a property that has serious and significant health and safety violations.  This is done upon the petition of a city or county (contact us with any questions about this process).  §17980.7(f) states that “[t}he term ‘owner,’ for the purposes of this section, shall include the owner. . . and any successor in interest who had actual or constructive knowledge of the notice, order, or prosecution.” 

This encompassing definition of “owner” is made possible because in a receivership, courts are utilizing their “in rem” (or over the property, specifically) jurisdiction.  Instead of basing their jurisdiction on the owner, courts have jurisdiction because of where the property is located.  Because the enforcement action is on the property and not the owner, the owner cannot transfer the property just to duck enforcement (much like a person facing criminal charges attempting to change their name).

                 In one case that specifically addresses this issue, the court found that the costs of a receivership were to be based on who created the need for the receivership in the first place, and not who owned the property at the precise moment when the work was done.  Ephraim v. Pac. Bank (1900) 129 Cal. 589, 591.  In that case, a bank got a receiver appointed, and the court ruled that because the receiver was appointed to protect the property and the bank’s interest in it, that the bank could be held liable.  Id. at 594.  It cited similar cases complicated by foreclosure sales and shifting owners/lenders - the key was who the receiver was appointed for, and who retained the benefit from the receiver’s work.  Ibid. 

                This is a part of courts’ broader discretion in overseeing receiverships and assigning their costs.  Generally, receivers recover their costs and fees from the property they were appointed over.  Baldwin v. Baldwin (1947) 82 Cal.App.2d 851, 855-56.  If the property itself is not worth enough to cover the receivership costs, the court can assign the costs as it sees fit.  Id., Ephraim, 129 Cal. at 592.   So the concept of “owner” as described in §17980.7(f) is also informed by the century-long case law of discretion afforded to courts in overseeing the work of receivers.

So Are Banks “Owners” Under H&S §17980.7?

                Cities and counties can seek to appoint receivers on bank-owned properties, or properties that banks are currently foreclosing on under the power of §17980.7.  The definition of “owner” makes it clear that legislators intended to enforce a receivership even if the ownership situation was in flux, so long as the new owner had notice of the proceeding.  So when a bank forecloses, they take ownership subject to the receivership, as the foreclosure does not end the action.  Thus, if a responsible bank wishes to rehabilitate the property and put it back into the housing market, they must show the receiver their plan to do so and get approval.

                A bank’s entrance into the case can go any number of ways.  They should be named from the beginning to prevent problems with title insurance on the receivership certificates (or you can give notice through a lis pendens).  Once they take full possession, then super-priority is not as necessary because the bank owns the property without encumbrance.  But once they do, they are a “successor in interest” and are thus owners under §17980.7(c).

                The common situation in health and safety receiverships is that an owner is being foreclosed upon and neglects all care for the property.  The same neglect that causes the dangers at the property often put the property in financial jeopardy.  So once a receiver is appointed, if a bank takes legal ownership through a foreclosure sale, the costs of the receivership remain on the property along with the receivership action.  A receivership, as an “in rem” remedy, stays on the property and is not changed by the foreclosure.

This “CRG FYI” is not meant to provide legal advice and should not be relied on in any legal matter.  CRG is not providing legal advice and does not create any of the duties and obligations inherent in the attorney-client relationship with this email.  This email is meant to begin a dialogue and to increase awareness of the receivership remedy in the code enforcement and municipal law fields.