"Who is going to pay for this?" California Court of Appeal Highlights Receiver Compensation Issues

Real property receivers are most commonly appointed at the request of secured creditors who are often charged with the expenses of the receivership. However, secured creditors are not the only parties who may petition for the appointment of a real property receiver. In a recent opinion, City of Chula Vista v. Gutierrez, et al.,the California Court of Appeal reaffirmed the principle that where a receivership benefits a secured creditor in a relatively trivial manner, the secured creditor may not necessarily be responsible for the costs of the receivership where it did not request the receiver's appointment. In doing so, the Court of Appeal highlighted an issue too often taken for granted in the context of real property receiverships: Receivers should determine, at the time of appointment, which party will bear the expenses of a receivership that is not self-financing. While receivers are entitled to compensation, courts have broad discretion in determining which party should bear a receivership's expenses. The Court of Appeal also suggested receivership certificates as a favored mechanism for receiver compensation.

Overview of Receiver Compensation

In real property cases, receivers and their professionals are often paid from the income stream generated by a receivership estate. However, when the receivership estate produces no income or produces income insufficient to compensate a receiver (or when equity requires), the appointing court has broad discretion in determining which party to the litigation should pay the expenses of a receivership. In this context, a court will ordinarily require the party that requested the receiver's appointment to bear these costs.

A receiver generally has two alternatives when seeking payment for services rendered. First, a receiver may request authority to borrow funds in exchange for receivership certificates sufficient to cover the receivership's expenses. These certificates result in a lien against the subject real property, and are typically issued to the party requesting the receiver's appointment. In most cases, a secured lender accepts the certificates and lends the receiver the necessary funds. Where receivership certificates are issued to a party other than a secured lender, they may not have priority over the secured lender's deed of trust, raising the issue of who would agree to fund such certificates. Second, a receiver may submit interim and final applications for compensation, to be paid by the party who requested the receiver's appointment, and which are subject to court approval. Many receivers prefer to issue receivership certificates because they result in a security interest which the appointing court may deem to be a super-priority lien against the receivership property.

Summary of Case

In Chula Vista, the receiver was appointed at the City of Chula Vista's request, pursuant to California Health and Safety Code § 17980.7 ("Section 17980.7"), to assume control over and maintain a four-unit residential building in disrepair. Notably, the order appointing the receiver specifically stated that the order was "not applicable" to the secured lender, Wachovia Mortgage ("Wachovia"). In February 2009, in response to the receiver's request for a receivership certificate that would be superior to Wachovia's deed of trust (and therefore payable prior to Wachovia), the appointing court authorized the receiver to file a secondary lien against the property for his fees and costs. Apparently no such lien was recorded. Instead, almost two years after his appointment and after Wachovia had foreclosed on the property, the receiver filed a final report and requested the issuance of a receiver's certificate lien against the property in the amount of approximately $41,000. The appointing court determined that while it would be appropriate to charge Wachovia for the receiver's fees and costs during the period that Wachovia owned the property (approximately four months), it would be improper to hold Wachovia liable for all of the receivership's fees and costs. The court thus ordered Wachovia to pay the receiver only approximately $408.

The Court of Appeal affirmed, holding that while receivers are entitled to compensation for their services and the services of their professionals, appointing courts are vested with broad discretion in determining which party should pay the actual fees and costs associated with a receivership. The Court held that the appointing court in Chula Vista had not abused that discretion in denying the receiver's request that, in essence, Wachovia pay his fees and costs. Specifically, the Court found that "Wachovia did not seek appointment of the receiver or create the situation that required the receivership; rather it was the City [of Chula Vista] that initiated the proceedings to cure the dilapidated condition of the property … [and] the majority of [the receiver's] work was performed before Wachovia's ownership." On that basis, and because it was unclear from the record what monetary benefit the receiver's services had conferred on Wachovia, the Court determined there was no reason "to make Wachovia responsible for" the receiver's fees and costs. Likewise, the Court held that nothing in Section 17980.7 or its legislative history suggested it could be used to impose direct liability for a receiver's fees and costs on a foreclosing lender who acquired title to a subject property after a receiver's appointment. The receiver's effort to recover his fees and costs from Wachovia was consequently unsuccessful.

Lessons

Chula Vista highlights the importance to receivers of determining, at the time of appointment, which party will bear the expenses of a receivership that is not self-financing. It further emphasizes the value of properly issued receivership certificates and the importance of ensuring that certificates are entitled to super-priority status. In addition, Chula Vista reaffirms the broad discretion appointing courts enjoy in determining which party should pay the expenses of a receivership, and the fact that, more often than not, in circumstances where a receivership property does not generate sufficient income, the party requesting the appointment of a receiver will ordinarily bear this burden.

To his detriment, the receiver in Chula Vista did not identify which party would bear the expenses of the receivership at the time of his appointment. Nor did he record the secondary lien for his fees and costs authorized by the appointing court. Instead, he elected to seek payment from Wachovia, a party which did not request his appointment and – according to the appointing court – merely incidentally benefitted from his services. Receivers who absorb the lessons from Chula Vista, and conduct themselves accordingly, may be maximizing the likelihood of recovering their fees and costs in real property matters.