Fall 2012 • Issue 45, page 19

One Action Rule Question

By Davidson, Peter*

Q: I just read “Receiver’s Sales – Mirage and Major Hazard for Both Lenders and Receivers” in the last issue of Receivership News. The authors contend that a receiver’s sale of real property might violate C.C.P. § 726 (the “One Action Rule”) and lead to dire consequences for the lender involved. How can that be? A sale by the receiver is not a sale by the lender. A receiver’s sale is not an “action.” I thought “Ask the Receiver” has stated that the appointment of a receiver does not violate the “one action rule.” What gives?

A: You have hit the nail on the head. As everyone who reads Receivership News knows, a receiver is not the lender’s agent. He or she is the court’s agent. City of Santa Monica v. Gonzalez, 43 Cal.4th 905, 930 (2008) (“It has long been recognized that a receiver is an agent and officer of the appointing court.”). Property in receivership is in the court’s custody. Id. If the court authorizes its receiver to sell property, it is a sale by the court, acting through its agent. It is not a sale by the lender. It is hard to fathom, therefore, how a sale by the court, through its receiver, can be a violation of California Code of Civil Procedure § 726 and violate the One Action Rule.

You are correct that “Ask the Receiver” has stated that the appointment of a receiver does not violate the One Action Rule.” Receivership News, p.16 (Winter, 2012). C.C.P. § 564(d) specifically provides it does not, stating: “Any action by a secured lender to appoint a receiver pursuant to this section shall not constitute an action within the meaning of subdivision (a) of section 726.” The authors contend, however, that the depublished state court decision in Great American First Savings Bank vs. Bayside Developers, originally published at 232 Cal.App.3rd 1546 (“Bayside”), which was later effectively reversed when the case was removed to federal court (Resolution Trust vs. Bayside Developers, 817 F. Supp. 822 (N.D. Cal. 1993), aff’d, 43 F.3rd 1230 (9th Cir. 1994)), supports their conclusion. The critical issue in Bayside, however, was not the receiver’s sale, but the receiver’s turnover of the proceeds to the lender prior to the completion of the lender’s foreclosure.

Bayside’s obligation was secured by a deed of trust on a townhome project. When Bayside defaulted, Great American filed an action for specific performance of the rents, issues, and profits clause of the deed of trust and sought the appointment of a receiver. A receiver was appointed to collect the rent, issues, and profits and to preserve and maintain the property. The court authorized the receiver to close pending escrows and pay senior obligations as they became due. The receiver sold nine finished townhomes, obtaining permission in advance from the court in each case. The escrow instructions related to the sale of the townhomes included paying Great American a certain amount to reduce the debt owed to it and release the various lots from Great American’s blanket deed of trust. As each sale closed, Great American was paid. At the conclusion of the case, Bayside filed objections to the receiver’s final account and report, contending that Great American and the receiver violated the One Action Rule. The State Court of Appeal ruled that the receiver’s turnover of the proceeds from sales to the lender, prior to the lender having foreclosed on the property, violated the One Action Rule. However, the court cited no cases and only relied on commentators who had warned of this possible problem. When the case was removed to federal court, the district court found that the trial court had the authority to approve the sales of the property because the receiver had authority “to take possession of the property to conserve and manage it.” The district court also held that applying the proceeds to Great American’s debt did not violate the One Action Rule. The Ninth Circuit, in affirming, held that Bayside’s argument that the bank “caused” the sale of the townhomes and, therefore, violated the One Action Rule, was wrong. “[A]though the Bank initiated the appointment of the receiver, upon its appointment, the receiver was not subject to the direction of the Bank. Rather, the receiver was an agent of the court and the property was ‘under the control and continuous supervision of the court.’ Accordingly, it was the order of appointment and subsequent order of the trial court, not the Bank, that directed the receiver’s actions.” Id. at 1242 fn. 8. The Ninth Circuit also noted the sale proceeds were part of the bank’s collateral and, therefore, the “security-first” portion of C.C.P. § 726 also was not violated. It finally held that because the receiver was, among other things, authorized to conserve, manage and protect the property, that “necessarily encompassed the power to sell”. Id. at 1243.

The Ninth Court’s holding in Bayside is consistent with the California Supreme Court recent ruling in City of Santa Monica v. Gonzalez, supra., where the Court cited C.C.P. § 568.5 as authority to allow a receiver to sell property and noted that “court rulings on receivership matters are afforded considerable deference on review…Such deference is the rule, even where the court confirms extraordinary action by the receiver, such as a sale of real property.” Id. 1045-46. In that case, the court held that because a court could authorize the receiver to sell property, it could authorize its receiver to destroy the substandard unsafe property involved.

In the almost 20 years since Bayside, no cases have held that a receiver’s sale of receivership property violates the One Action Rule. To avoid the Bayside problem, however, if one thinks it is a concern, the lender or the receiver should do what “Ask the Receiver” has always advocated, as have various other commentators, and that is not distribute sale proceeds to the lender prior to the completion of the lender’s foreclosure sale. If all the property securing the lender’s loan is sold that means the lender needs to complete its judicial foreclosure.

Further, as you point out, a court – approved sale by receiver is not an “action” and, hence, cannot violate the One Action Rule. An action is defined in C.C.P. § 22 as: “An ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense.” The appointment of a receiver or a receiver’s sale is a remedy. As Witkin points out, a “Remedy is Not Action.” 4, B. Witkin, Summary of California Law, Security Transactions in Real Property, § 128 (10th Ed. 2005). Because of this, Witkin points out that the sale under a power of sale, the appointment of a receiver, the exercise of the right to inspect for hazardous substances and the enforcement of an assignment of rents clause, “is not an action under C.C.P. § 726(a).” Id.

*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP a Beverly Hills Law Firm. His practice includes representing Receivers and acting as a Receiver in State and Federal Court.