Legal commentators often discuss receiverships as the solution to the most decrepit and dangerous properties because the property pays its own cost of rehabilitation, even when there is no equity left. This is only possible because courts are authorized to grant super-priority status to receivership liens, which enables the rehabilitation of nuisance properties. And while this status often scares off lenders and title insurance firms, California Receivership Group has years of experience in establishing and paying off these liens.^[1]

Often times, a receiver is appointed on a property that does not have any equity that could be tapped to remedy the health and safety violations. In these cases, a super-priority receiver’s certificate is mandatory, as it pays for the rehabilitation that otherwise would never take place. Like the limited case law, commentators are uniform in their agreement that courts have full discretion in granting super-priority.^{^[2]} While there are protections for the bondholders, and the general rule is that the “receiver takes control of property subject to the interests therein which existed before his appointment,” ultimately “there can be no question of the right of the court to give priority to certificates issued to enable the receiver to carry out the primary object of his appointment, viz., the care and preservation of the property.”^[3]

The seminal case on this matter was Title Ins. & Trust Co. v. California Dev. Co., 171 Cal. 227, 231 (1915), in which a receiver was appointed over a company that had just inundated the Imperial Valley with Colorado River water by diverting it for nearly two years. In this case, the receiver’s certificates (allowances from the court for the receiver to place a lien on the property for his costs and fees), were granted super-priority, as the court realized that it was the only way to ensure that a receiver would accept the appointment and could operate the company to restore the Colorado to its original course.^[4] The super-priority power was affirmed and expanded in the 1980 Schriebner v. Ditch Rd. Investors case,^{^[5]} where the appellate court agreed that the receiver’s fees and costs could take priority, even if the receiver did not actually provide any measurable benefit to the secured interests.^{^[6]}

Using Title Ins. and the resulting cases, it is clear that whether or not a judge will grant super-priority status depends heavily on three factors. The first, and most important factor is whether the creditors had an opportunity to object to and oppose the appointment of the receiver.^[1] Next, is whether the receiver was appointed to protect the value of the property.^[2] A third factor in setting priority is whether the property in receivership operates for the public good.^[3] All these factors, while alone not dispositive, contribute to the court’s analysis.

On health and safety receiverships, super-priority liens will have to be determined on a case-by-case basis. Because these properties are often underwater, or very close to it, super-priority is often a necessity. Also, while super-priority is extreme, it is necessary when it is shown that the property is a danger and is bad enough for the government to seek appointment of a receiver. In the three tests set above, super-priority for health and safety receivership certificates is proper because it has to be expressly done in the order approving the certificate, so the creditors have a chance to challenge it; the receiver was appointed to preserve the property – otherwise the city would just order it bulldozed; and the public purpose is clearly to prevent the harm of a dangerous and sub-par building.^[4]

So overall, judges have the option to grant super-priority and are justified in granting it for most health and safety receiverships. When a property has more debt than value, it is the only option. Just like in Title Ins., super-priority is the only way to attract a receiver and a lender to do the actual work. So for many local governments and prosecutors, moving for super-priority is the only way to remedy some of their worst problems.

^[1] If you would like a longer legal discussion of the issue, please email aadams@calreceivers.com.^[2] Miller & Starr, California Real Estate, § 33:12 (3d ed.), Rutter Group-Cal. Prac. Guide Enf. J. & Debt Ch. 4-C and 55 Cal. Jur. 3d Receivers § 67.^[3] Title Ins. & Trust Co. v. California Dev. Co., 171 Cal. 227, 231 (1915). Schreiber v. Ditch Rd. Investors, 105 Cal. App. 3d 675, 679, (Cal. Ct. App. 1980).^[4] This follows from earlier cases in which receivers’ powers and super-priority liens were outlined. McLane v. Placerville & S.V.R. Co., 66 Cal. 606, 629 (1885); Illinois Trust & Sav. Bank v. Pac. Ry. Co., 99 Cal. 407, 409 (1893).^[5] Schreiber 105 Cal. App. 3d at 679.^[6] Id. at 680.

^[1] Id.^[2] Hozz v. Varga, 166 Cal. App. 2d 539, 544 (Cal. Ct. App. 1958).^[3] Title Ins. 171 Cal. at 231.^[4] The danger of a substandard building is not just to residents, but to the public at large. City & County of San Francisco v. Jen, 135 Cal. App. 4th 305, 310-11 (Cal. Ct. App. 2005).