Property

Making the Case – Using a Receiver to Sell Real Property to Satisfy a Judgment

Introduction The statutory remedy of selling real property under a writ of execution provides a strict but orderly process that a judgment creditor may follow toward satisfaction of the judgment. However, judgment creditors may consider the process to be too complex and the cost prohibitive in light of the nebulous results attendant to the statutory procedure.

This article discusses use of a court appointed receiver to sell real property as an alternative to the statutory execution sale. Using a court appointed receiver to sell real property offers a number of distinct advantages over an execution sale:

There is a greater degree of certainty that the property will sell under an order appointing a receiver-often in the same amount of time (or less) as a creditor’s first run through an execution sale (i.e., about five months);
Once the receiver is appointed, he handles all of the procedures necessary to complete the sale with very little effort needed from the creditor; and
The receiver can sell the property on the open market, through a real estate agent, to realize the highest return possible.
Despite the obvious advantages, appointment of a receiver is considered a “drastic remedy” and many courts will not grant an order to appoint a receiver unless there are extenuating circumstances and “good cause”, such as:

A previous execution sale against the property was unsuccessful;
The net amount expected from an execution sale will not satisfy the judgment in full;
Non-debtor third parties own an interest in the subject property;
The property includes a resident business that is also subject to execution against an interest of the judgment debtor;
The judgment debtor stipulates to appointment of the receiver in order to get the greatest value for the property applied toward the judgment; or
A fraudulent transfer of the property has been made or threatened, or there are other circumstances indicating fraud or dissipation of the asset.
In the most general terms, the moving party should be prepared to show:

That the other less drastic remedies provided by statute are inadequate AND that appointment of the receiver will substantially improve the outcome; OR
That the receiver is necessary to preserve the interests of all concerned, particularly if outside third parties have an interest in the property or there are “badges of fraud” present.
The purpose of this article is to help you “make the case” for appointment of a receiver under your particular circumstances. The tips provided here are designed to help you establish the requisite “good cause” to convince the court that this otherwise “drastic remedy” is necessary and appropriate in your particular judgment enforcement case.

The Realities of Execution Sales California provides a distinct and orderly process to sell real property under a writ of execution. Code of Civil Procedure §§701.510, et. seq. This method has a number of important safeguards for the debtor built in. These include:

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Personal service of notice on the debtor;
An opportunity for the debtor to respond;
Title report or equivalent is obtained and reviewed;
Fair Market Value and homestead exemptions are determined;
Debtor given minimum 120 days from notice to sale; and
Homestead Property must sell for at least 90% of determined Fair Market Value.
Due to the strictures of this process, there are a number of reasons why a judgment creditor might not obtain satisfaction in the end. Consider these common issues:

The execution method requires cash on sale or within 10 days and these days, buyers with cash are looking for a better deal than 10% under fair market value
Buyers are not able to walk through and inspect the property before buying resulting in a lower bid price, especially on questionable properties
A mistake is made in the process, where the process must begin again
The sale lacks the benefit of common open market sales like listings on the Multiple Listing Service, aggressive marketing by a licensed real estate agent, ability for buyers to obtain financing, inspections and repairs, etc.
The sheriff or levying officer has numerous responsibilities and cannot devote any significant amount of time toward insuring completion of the sale or other “special attention”
If you are in a situation where you have gone through an execution sale without success, appointment of a receiver may well provide some satisfaction in your case.

A Real World Case-in-Point: The author was appointed as a receiver in a case to sell a single-family home that was purchased using $40,000.00 in proceeds from a fraudulent transfer. The home was appraised for $241,000.00, which means it could have sold for as little as $216,900.00 at an execution sale ($241,000.00 x 90%). The house actually sold for $259,000.00 in a private open market sale, well over the appraised value. The difference was enough to entirely cover the receiver’s fees and expenses, the real estate agents’ commissions, and some minor repairs to the property so it would pass pest inspection. With the $40,000.00 paid to the creditor, the homeowner was entitled to the remaining proceeds. Including costs, the owner could have lost over $25,000.00 in equity if the house had sold at an execution sale. It was also a winning situation for the creditor, who had cash-in-hand within five months of the property being listed for sale while avoiding the rigors of an execution sale.

Planning and Evaluation

First Step: Call an experienced receiver to discuss your case

As discussed above, nearly every case requiring appointment of a receiver will involve extraordinary circumstances that warrant special attention. An informal discussion with an experienced receiver will:

Confirm whether or not appointment of a receiver is appropriate based on the facts of your specific case
Reveal important points and provisions that must be included in your application and order
Help you plan the timeline for applying for appointment of the receiver, commencement of the receiver’s duties and obtaining the goals of the receivership
Making the Case for Appointment of Receiver So we’ve got it all put together: the circumstances show that the property will be more likely to sell, sooner, and for more money, if we appoint a receiver. The judge will sign the order, right?
Probably not. The court will most likely find that the statutory method for forcing a sale of real property provides an “adequate remedy”. When this is compared with the “drastic remedy” that receivership is considered to be, the moving party must make a showing that the statutory method is “inadequate” or that a “drastic remedy” is warranted and necessary.

Make Your Case Unique The statutory “adequate remedy” is meant to cover, in theory, all situations where real property is to be sold to satisfy a judgment. In reality, arguments can me made under certain circumstances that the statutory method is “inadequate”. It is therefore important to show that your case is unique; unlike all of the other cases where the statutory remedy is supposed to be “adequate”. You’re now at the point where you’ve evaluated the case and determined that some special circumstance applies to warrant appointment of a receiver.

A Previous Execution Sale Against The Property Was Unsuccessful The most obvious way to demonstrate that the statutory remedy is inadequate is to show that it was tried and unsuccessful. If you can make this showing, be sure to fully brief the court on the facts. Show costs expended. Show dates and calculate the delay. If there are other circumstances affecting the viability of the Sheriff’s sale, such as an understaffed Sheriff’s department or previous error, those should be tactfully addressed as well.

The Net Amount From An Execution Sale Will Not Satisfy The Judgment In Full In the previous real world example, the receiver was able to sell the property for $18,000.00 more than the appraised value, and over $40,000.00 more than the minimum execution sale price at 90%. Using the same figure from the previous example ($241,000.00 appraised value), consider the difference if the judgment is for $240,000.00 or more: Through the statutory execution sale at 90%, you may only net around $215,000.00-not enough to satisfy your judgment, the debtor walks with nothing and you have a $25,000.00 remainder due, probably unsecured. Using a receiver, there is a greater chance of selling the property at or above appraised fair market value. The end result is increased satisfaction of the judgment, possibly full satisfaction, and the possibility of the debtor walking with some money.

Non-Debtor Third Parties Own An Interest In The Subject Property

Infrequently, a situation will arise where a judgment debtor owns homestead property jointly with another person who is not liable for the debt. In addition to the debtor’s and creditor’s interests, the court must now be concerned with the interests of an innocent third party. While 90% of fair market value may be legal and acceptable for the sale of the debtor’s property, the third party should not be required to live with such a heavy discount on their property. A receiver can get the best possible price for the property, thus insuring that the third party is fairly compensated for their interest.

The Real Property Includes A Resident Business Subject To Execution

In cases where there is a particularly large judgment against a business located on owned real property, a receiver may be appointed to manage orderly sale of the business and property together as a going concern to maximize value and protect against fraud.

The Judgment Debtor Stipulates To Appointment Of The Receiver

As discussed previously, a receiver is likely to produce a greater net return from the sale of property than through an execution sale. Of course, it may be possible to simply negotiate that the debtor will sell the house and pay the judgment with the proceeds. But stipulated appointment of a receiver may be possible where it can be shown to be of benefit to the debtor.

A Fraudulent Transfer Of The Property Has Been Made Or Threatened Appointment of a receiver in a fraudulent transfer case is expressly provided for under California law. Civil Code §3439.07(a)(3)(B). In practical terms, use of a receiver as a remedy for fraudulently transferred real property is viable in cases where income is generated from the property, maintenance is required or there is danger of waste-situations where the property requires protection. Of course, if the primary goal is to liquidate the property, receivership may be an option based on the points discussed elsewhere in this article. The main goal is safe and successful liquidation of the property for the greatest net return.