Published receivership cases are few and far between. As members of the
Receivers Forum know all too well, it is common for legal briefs
concerning receivership issues to rely almost entirely on century-old case
law. For that matter, the leading treatise in the field – Clark on
Receivers – was published in 1959, last updated in 1992, and relies for
the most part on cases decided in the late 19th and early 20th century, in
addition to relics of the English Chancery Courts.
It was noteworthy, therefore, when in February the California Court of
Appeal delivered a powerful published Opinion in City of Sierra Madre
v. SunTrust Mortgage, Inc. (2019) 32 Cal.App.5th 648, 651–652,
review denied (May 22, 2019) (“Sierra Madre”), reaffirming the ability
of receivership courts to authorize the issuance of super-priority
receiver’s certificates. The Opinion handed down by the Court of Appeal
provides much-needed guidance to receivers and lenders alike, and
underscores the broad discretion California law provides to receivership
courts to take drastic actions when necessary based on the facts and
circumstances in the cases before them. This case is probably the most
important receivership decision since the California Supreme Court handed
down City of Santa Monica v. Gonzalez (2008) 43 Cal.4th 905
more than a decade ago.
When my law partner David Pasternak was first appointed as receiver
over a small residential property in sleepy Sierra Madre, it seemed at
first to be a run-of-the-mill receivership. Fix a property in violation of
the Municipal and Health and Safety Codes: simple, right? Wrong. What soon
became apparent was that both the homeowners and secured lender on the
property had no intention of cooperating with the Court, the City, or the
After the receiver’s appointment, my office immediately investigated
the property and learned, to our amazement, that the homeowners had
personally excavated a massive, unpermitted pit beneath their home in
hopes of opening a wine bar. For all we know, underground hooch might
still be freely flowing to this day if not for the sudden collapse of a
neighboring alleyway due to the unsanctioned dig, alerting the City to
danger. Years later, after a lengthy jury trial victory by Bill Litvak on
behalf of the City, the Receiver was finally given the greenlight to move
forward shoring up the pit. But who was going to pay for the extensive
To begin with, it is important to note that Litvak – counsel for the
City of Sierra Madre – made two important legal choices at the outset of
the case that provided the bedrock for the Court of Appeal's eventual
decision: First, Litvak sought the Receiver’s appointment under both the
California Health and Safety Code and the general receivership provisions
found in California Code of Civil Procedure §564. More about that later.
Second, Litvak not only brought suit against the homeowners, but also
named the secured lender, SunTrust Mortgage, Inc.
In order to obtain funding for the work, the Receiver first reached out
to the secured lender, believing that SunTrust might have an interest in
protecting its security. The bank immediately refused, preferring not to
be involved in the matter outside of taking first cut at any eventual sale
proceeds (assuming the house didn't collapse in the meantime). With no
other options available, the Receiver reached out to South County Bank –
one of the few lenders willing to fund receivership remediation work – and
SCB agreed to fund a loan on the condition that the Receiver provide a
first priority lien against the property. At that point, the receivership
court gave SunTrust two options: fund the work or accept second position.
SunTrust again refused to fund the work, and the Court authorized the
Receiver to issue a receiver’s certificate giving SCB first priority.
SunTrust appealed, arguing that the California Health and Safety Code does
not allow such an issuance of a priority certificate.
In affirming the ruling below, the Court of Appeal focused on the fact
that the Receiver had been appointed pursuant to CCP §564, not just the
Health and Safety Code. Writing for the Court, Justice Lavin explained
that Title Ins. & Trust Co. v. California Development Co. (1915)
171 Cal. 227 – decided more than a century prior – established the ability
of receivership courts to authorize the issuance of priority certificates,
and that decision is still good law and applies to all receivers appointed
pursuant to the general receivership law found in CCP §564 et seq. As a
result, Justice Lavin determined it was unnecessary “to engage in a
lengthy statutory analysis of Health and Safety Code §17980.7.” (Id.
at p. 659.) While Justice Lavin did not engage in a lengthy
analysis, he did point out that "Health and Safety Code section 17980.7,
subdivision (c)(4)(H), specifically gives a receiver appointed under that
section the powers of a receiver appointed under Code of Civil Procedure
section 564." (Id.) By extension, therefore, a Health and Safety
Code receiver should be able to issue priority certificates.
As Justice Lavin put it, "Courts have substantial discretion to
authorize a receiver to borrow money to fund the preservation and
management of property in the receivership estate, particularly where, as
here, the estate does not produce income. In that circumstance, the
receiver may ask the court to authorize the issuance of a receiver's
certificate to the lender as security for money loaned to the estate.
Typically, such a receivership certificate will have priority over all
other liens—even preexisting liens." (Id. at p. 657.) But the Court
of Appeal advised caution and clarified that the power to issue priority
receiver's certificates is not unfettered: “use of super-priority liens
should be infrequent because the disturbance of preexisting liens may
bring harsh consequences. ‘The authority to disturb existing liens should
be exercised with great caution, and should be carried no further than
actually necessary to attain the desired protection of the res.’” (Id.
Further Implications and Important Dicta
While the Opinion focuses primarily on the general receivership law
interpreting appointments under Section 564, it also goes a long way to
suggest that a receiver appointed solely pursuant to the Health and Safety
Code has the ability to issue priority certificates as well. As noted
above, the Court was careful to point out that the Health and Safety Code,
by its own terms, incorporates all of the powers the general receivership
law ascribes to receivers.
Perhaps more importantly, Justice Lavin distinguished and limited to
its facts City of Chula Vista v. Gutierrez (2012) 207 Cal.App.4th
681, a case that has troubled many Receivership News readers since it was
handed down. In a single dictum offered at the end of the Opinion without
any analysis, the Chula Vista court opined that, if the legislature had
intended to provide priority liens to receivers appointed under the Health
and Safety Code, "it would have done so." (Id. at p. 688.) In
Sierra Madre, the Court of Appeal rejected SunTrust's reliance on this
dictum, determining that Chula Vista was a case solely considering whether
a receiver could prevail on an unjust enrichment theory against a lender
and whether the receiver's services there had provided a benefit to the
lender. Justice Lavin succinctly distinguished Chula Vista: "that issue is
not remotely relevant to the present proceeding." (32 Cal.App.5th at p.
Finally, the Court of Appeal rejected SunTrust's arguments that the
City or the homeowner should have been forced to fund remediation rather
than the lender. As the Court put it, "the fact that the court had a
variety of options to choose from when it authorized the receiver to
obtain funding for the needed remediation is beside the point. SunTrust
cites no authority suggesting—and doesn't even argue—the court abused its
discretion by authorizing a super-priority lien after considering all the
facts and balancing the equities." (Id. at p. 660.) In other words,
it is the receivership court's prerogative, based on the facts and
circumstances before it, to determine how to fund work necessary to
protect receivership estate property.
Why Is Sierra Madre Important?
The California Supreme Court issued Title Ins. & Trust Co. v.
California Development Co. (1915) 171 Cal. 227 more than a century
ago, and no other case has squarely addressed the power of receivership
courts to authorize priority receiver's certificates since. Many litigants
have since attempted to chip away at or distinguish the high court's
decision. The most common refrain is that the decision is "really old." In
rendering its Opinion in Sierra Madre, the Court of Appeal not only
reaffirmed this fundamental receivership power, but also went a long way
to support the argument that receivers appointed solely pursuant to the
Health and Safety Code can issue priority certificates as well. And, when
read together with the California Supreme Court's decision in City of
Santa Monica v. Gonzalez (2008) 43 Cal.4th 905, Sierra Madre
offers a powerful reminder that receivership courts are given
extraordinary latitude to manage the receiverships before them and
authorize sometimes drastic measures by their receivers.
As a final note, while Sierra Madre plainly stands for the
proposition that receivers can issue priority certificates, they would do
well not to abuse that power. After the Court of Appeal issued its
Opinion, SunTrust filed a petition for review before the California
Supreme Court and another lender – Nationstar Mortgage, Inc. – sought to
depublish the opinion. While the California Supreme Court rejected both
requests, leaving Sierra Madre standing, there was one important
takeaway. In its Request for Depublication, Nationstar noted that it "has
recently found itself defending against litigation spearheaded by private
attorneys and receivers who specialize in what they market as 'zero cost'
code enforcement." The author has also heard rumors of receivers and
private attorneys who, in an attempt to win appointment in new Health and
Safety Code receiverships, offer to pay municipalities' attorney's and
administrative fees by issuing receiver's certificates, thereby giving the
cities' fees and costs priority. Based on the Court's Opinion in Sierra
Madre, this is an abuse and should not continue, as the Court of
Appeal pointed out that receiver's certificates are to be used sparingly
and only to fund work necessary to protect the res. Sierra Madre is
an important Opinion for receivers, and an abuse of that power would only
serve to erode the confidence of courts and other stakeholders, and would
justify the fears expressed by both SunTrust and Nationstar in the courts.
*Blake Alsbrook is a partner at Pasternak, Pasternak &
Alsbrook in Los Angeles. Blake acts as a receiver and partition referee
and provides legal services to prominent receivers and other
court-appointed fiduciaries throughout California.