Posted in: Bi-Weekly Receivership Education, Construction Project Receiverships

Using Receiverships to Revitalize Abandoned Construction Projects

What happens when a construction project runs out of money and the half finished skyscraper, mall, or hotel sits vacant for years?  There are two things that can happen; (1)  while everyone waits until the developer finds funds, which is unlikely; or, (2) a more practical solution is that a developer or other party with a recorded interest can seek the appointment of a receiver over the Property pursuant to California Code of Civil Procedure (“CCP”) § 564 et seq. When seeking the appointment parties with an interest in the property 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, when a large scale construction project sits vacant and unfinished it blights the community, and a contractor likely has a large unpaid bill which hurts their workers and the local economy. Therefore, the appointment of a receiver to improve a dangerous building is something a court will approve. (City of Crescent City v. Reddy (2017) 9 Cal. App. 5th 458, 468.) Furthermore, a lien creditor can seek the appointment of a receiver. (Schreiber v. Ditch Road Investors (1980) 105 Cal. App. 3d 675, 679.) Moreover, courts have the power to appoint a receiver to ensure fairness is achieved and creditors are paid. ((Allied Grape Growers v. Bronco Wine Co. (1988) 203 Cal. App. 3d 432, 453, 454.) Therefore, if blighted property is sitting vacant and numerous contractors have an unpaid bill the court likely would appoint a receiver to ensure creditors are paid, and the vacant property is brought into productive use.

The next question many will ask is how can this stalled large scale construction project be funded? The answer is through a receivership certificates Any competent receiver has access to a large network of lenders that can provide a large influx of cash to support a viable project. Therefore, if a Court appoints a Receiver a Receiver can will have the Court authorize the Receiver to borrow a certain amount in the form of a Receiver’s Certificate, which is recorded against the Property. (See Receivership Certificate Template) This receivership certificate is entitled to what is known as a super-priority lien, which authorizes the Receiver and the receiver’s lender to be paid ahead of any other party for their services. (City of Sierra Madre v. SunTurst Mortgage, Inc. (2019) 32 Cal. App. 5th 648, 660.)  This inspires and authorizes the receiver to provide an influx of cash to the struggling project with the knowledge that they will ultimately be compensated for solving the problems with the development project.

Assuming the circumstances are appropriate for the appointment of a Receiver and a Receiver is appointed what happens next? Once the appointment occurs a Receiver must 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 the case of a construction project the Receiver will oversee contractors, developers, obtain permits, and for all intents and purposes step into the shoes of the developer that was unable to complete the project.

Once the construction is completed the Receiver can sell the 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 construction project will have been completed, the development will be in the hands of a responsible owner, the Receiver will be discharged, and the case will be dismissed.