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 article entitled The Ten Commandments of a Rents and Profits Receiver. While that article provided some excellent insights, Commandments Seven and Eight advised receivers – and the courts directing them – to refrain from actions that these authors believe are, in fact, legally permissible under California and federal law.

Before addressing the assertions made in the Ten Commandments article, however, it is critical to understand the lens through which the California Courts of Appeal review Superior Court orders confirming receiver’s actions. In 2008, the California Supreme Court concluded that the Superior Courts must be given “considerable deference . . . even where the court confirms extraordinary action 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 determinations 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 question to be addressed is whether courts have the power, in rents and profits receiverships, to authorize a receiver’s sale of property absent stipulation from all interested parties. 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 objection. The appointment order there authorized the receiver to, among other things, receive rents and, importantly, “do such acts respecting the property as the court might authorize or the parties, by stipulation, 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 jurisdiction 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 Section 568.5 allows receivers to sell real and personal property subject to court confirmation. 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 parties with the flexibility to address changed circumstances by applying to the court for further orders and modifications, the Cal-American court reasoned that “[t]he court thus correctly decided the receiver had the power to sell subject to its confirmation.” 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.” Resolution Trust Corp. v. Bayside Developers, 43 F.3d 1230, 1244 (9th Cir. 1994) (emphasis added).

Cal-American is particularly 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 Residential, LLC, No. 1-109-CV-153447, disallowing the sale of property over a borrower’s objection. 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 entirely to consider the statutory authority to sell receivership property provided under California Code of Civil Procedure section 568.5. As Cal-American made clear, Section 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 question 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 stipulation, and over objection – but rather whether a reviewing court might overturn that confirmation as being in excess of the lower court’s jurisdiction. In light of Cal-American and, as set forth above, the California Supreme Court’s recent holding in Gonzalez that a Superior Court’s confirmation of extraordinary actions 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 “cutting edge” title insurance companies insure title based on sales authorized by state courts.

First, while no California case has expressly considered the question 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 National Bank of Cleveland v. Shedd, 121 U.S. 74 (1887); Van Huffel v. Harkelrode, 284 U.S. 225, 227-228 (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 traditionally held by courts of equity: “We think it clear that the power was granted by implication. Like power had long been exercised by federal courts sitting in equity when ordering sales by receives or on foreclosure.” Id. That this power is inherent in courts of equity is particularly 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 entirely reasonable to conclude that the Superior Courts enjoy those powers traditionally 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 title companies are comfortable insuring title to properties sold by order of a California court. And rightfully 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 & Patton, a Law Corporation.

*Blake C. Alsbrook is an associate at Pasternak, Pasternak & Patton, a Law Corporation. 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.