Posted in: BARG Receivership Law Updates

USING RECEIVERSHIPS TO HELP LENDERS AVOID LIABILITY ON DISTRESSED ENVIRONMENTAL ASSETS

Secured lenders are hesitant to foreclose when environmental problems exist, based on concerns about CEQA, CERCLA, or other environmental issues, because they may be deemed an owner or operator.  However, lenders can avoid these concerns by seeking the appointment of a receiver for the distressed property.  California Civil Procedure (“CCP) §  2929.5 & 564(c) authorizes lenders to inspect property to assess the existence and magnitude of hazardous substances and environmental issues.

If there are significant issues at the Property, a lender can seek the appointment of a Receiver pursuant to CCP 564(b)(2) and/or 564(b)(9). When seeking the appointment of a receiver a lender must realize receivership is a drastic remedy and it is not a remedy that Courts take lightly. (Plata v. Schwarzenegger (N.D.Cal. Oct. 3, 2005, No. C01-1351 TEH) 2005 U.S.Dist.LEXIS 43796 at Page 96.). However, Courts have held that dangerous buildings warrant the appointment of a receiver. (City of Crescent City v. Reddy (2017) 9 Cal. App. 5th 458, 468.) Therefore,  environmental contamination issues certainly justify the appointment of a receiver. (United States v. Alisal Water Corp (2005) 431 Cal. F. 3d. 643, 648-649.)

Once a receiver is appointed they are cloaked with tremendous power, as well as the same immunity as a judicial officer. (New Alaska Development Corp v. Guetschow (9th Cir. 1989) 869 F.2d 1298, 1303.) This immunity extends to environmental regulations such as CERCLA. (In re Sundance Corp. (Bankr. E.D. Wash. (1993) 149 B.R. 641, 656-657.) The lender is not liable here because it is neither an owner nor operator of the property in the receiver’s charge and California has routinely held that a financial institution does not owe a duty of care to the borrower it transacts with. (Weimer v. Nationstar Mortgage, LLC (2020) 47 Cal. App. 5th 341, 355.)  Therefore, a lender would certainly not owe a duty of care to a party that a for all intents and purposes a judicially immune receiver it lent to interacts with.

Assuming the circumstances are appropriate for the appointment of a Receiver and the lender successfully appoints a Receiver, the Receiver must then file an oath, bond and inventory with the Court. (California Rules of Court 3.1178 & 3.1181.) Thereafter, the Receiver becomes a fiduciary of all parties with an interest in the Property, and the Receiver is not an agent of any party.  (California Rule of Court 3.1179; see also Shannon v. Superior Court (1990) 217 Cal. App. 3d 986, 992.) The Receiver then submits monthly reports and accountings to all parties with a recorded interest who can object to the Receiver’s actions. (California Rule of Court 3.1182 & 3.1183.) In almost all instances, the Receiver will be preparing a troubled asset for sale and a Receiver is authorized to sell Property pursuant to CCP 568.5. A receiver is also authorized to sell assets in the receivership estate in whatever manner will be most beneficial to the parties with an interest in the Property, as long as the court authorizes the manner of the sale. (People v. Riverside University (1973) 35 Cal. App. 3d 572, 583.)

Once the Receivership assets are sold the Receiver has to seek confirmation of the sale by the Court pursuant to CCP 568.5. Any party with a recorded interest can object to the proposed sale, but generally speaking Courts are very liberal in approving receivership sales and will confirm the sales unless a good reason not to is presented. (People v. Riverside University (1973) 35 Cal. App. 3d 572, 582.) Once the sale of the Receivership assets is confirmed a Receiver is required to final their Final Report and Accounting pursuant to California Rule of Court 3.1184. Assuming the judge approves the Final Report and Accounting the Receiver the environmental issue will have been solved, the Property will be in the hands of a responsible owner, the Receiver will be discharged and the case will be dismissed.