AFRCT’s Appellate Department won a victory for California lenders in the California Court of Appeal in City of Chula Vista v. Gutierrez (Adams v. Wachovia Mortgage) (2012) 207 Cal.App.4th 681. The Court of Appeal determined that a receiver appointed on a city’s initiative cannot take over a property in the foreclosure process, do nominal work, and then later force a secured lender to pay the receiver’s fees and costs without following the law.
Chula Vista is one of many cities in California making punitive assessments against properties in foreclosure, while using Health & Safety Code receivers to attempt to overcome a foreclosing lender’s deed of trust in order to pay them. (Health & Saf. Code, § 17980.7.)
In the Chula Vista case, a borrower defaulted on a loan inherited by Wachovia Mortgage, FSB, now Wells Fargo Bank, N.A., securing a multi-unit property. The city sought and obtained appointment of a Health & Safety Code receiver over the property, and then demanded that it be paid over one hundred thousand dollars through the receiver for various fees and “enforcement costs.” AFRCT objected, and fought the demand for its client.
The trial court refused the city and receiver’s requests for “super priority” over the lender’s senior, first priority lien. Instead, it granted the receiver a lien with ordinary priority for services and costs incurred in boarding up the property, mowing grass and pulling weeds. The receiver never recorded the lien, but instead waited more than a year until attempting to charge all of the receivership costs directly against the lender following the foreclosure sale.
On appeal, AFRCT presented the legislative history of Health and Safety Code section 17980.7, revealing that in 1990 and 2001 the Legislature twice rejected super priority for Health & Safety Code receiver’s liens. The Court of Appeal held that nothing in the statute suggested that the Legislature intended for a receiver to charge the lender directly for conduct prior to foreclosure, or that super priority was to be given to a receiver’s lien. (207 Cal.App.4th at p. 688.)
Less than 90 days after the Chula Vista decision, the Legislature amended Health & Safety Code section 17980.7. Effective January 1, 2013, the statute provides a court with discretion to consider requiring payment of “unrecovered costs” associated with Health & Safety Code receiverships. (Health & Saf. Code, § 17980.7, subd. (c)(15).) There is still no super priority for receiver’s liens under the amended statute. The effect of the amended statute on lenders remains to be seen.
Congratulations to Fred Hickman, who was lead counsel at the trial level, and Robert Little, who handled the appeal.