Health and Safety Code Receivership Super-Priority Liens Upheld by Court of Appeal
by Samuel Emerson on March 2, 2019
In a published opinion filed on February 26, 2019, the California Court of Appeal for the Second District upheld the use of super-priority liens to fund rehabilitations of residential properties under Health and Safety Code section 17980.7. At issue in City of Sierra Madre v. SunTrust Mortgage, Inc. was whether the trial court abused its discretion when it authorized the receiver to borrow $250,000, secured by a super-priority lien, to fund the remediation of residential property.
In July 1998, Jeffrey M. and Taryn N. Hildred (the “Hildreths”) purchased residential property in the City of Sierra Madre (“City”). The Hildreths began to substantially remodel the property but failed to obtain necessary building permits from the City. The City issued a Stop Work Order. The Hildreths continued their disregard for the local ordinances and regulations of the City, including opening a commercial winery without a conditional use permit, excavating a large underground pit, and constructing a wooden deck that encroached on the public sidewalk. In 2010, City brought a nuisance abatement action under local and state law. While a receiver was appointed to remediate the property, no significant action was taken until the City ultimately prevailed on the nuisance action in 2016 after a bench trial.
Notably, Appellant SunTrust Mortgage, Inc. (“SunTrust”), which held a preexisting lien, did not object to the nuisance action or the appointment of a receivership during the pendency of the trial court proceedings. As part of its judgment, the trial court ordered the receiver to begin remediation of the property. The receiver prepared a remediation report for the trial court, which recommended the borrowing of $250,000 as secured by a super-priority lien. The receiver demonstrated that it was unable to obtain funding without the super-priority lien.
Generally, the law in California regarding lien priority is “first in time, first in right.” There are some exceptions that allow some liens can gain priority despite coming later in time. Super-priority liens that secure remediation loans for receivers appointed under Health and Safety Code section 17980.7 are one example of a lien that can gain top priority despite being established after other liens like preexisting mortgages. In upholding the practice of securing receivership remediation super-priority liens, the Court of Appeal confirmed that trial court has broad discretion to issue orders related to how the remediation is funded. Here, the Court of Appeal specifically found that SunTrust failed to meaningfully participate in the nuisance action brought by the City, failed to enforce its rights under the Deed of Trust to prevent waste, and was not substantially prejudiced by the issuance of a super-priority lien because the preexisting lien was essentially valueless as a result of the nuisance existing at the property.
Before this latest precedent, cities petitioning the courts for super priority for receivership certificates were forced to rely on general receivership law set forth in very old cases or legislative history which suggested that granting super priority was within a court’s discretion. As a published decision of a Court of Appeal without any contrary authority, City of Sierra Madre v. SunTrust Mortgage, Inc. will be a useful case for cities throughout the state looking to utilize Health and Safety Code receiverships to address serious code enforcement issues at residential properties within their jurisdiction.