The Role of Receivership in Devastating Fire Recovery: Options in the Wake of the Palisades and Eaton Fires BY MARK ADAMS* California Receivership Group (CRG) and I have remediated a number of fire-damaged properties over the last twenty-years. Based on that experience, I propose that the California Receivers Forum is uniquely capable of making a major contribution to rehabilitation efforts after the Palisades and Eaton Fires without spending a dollar.
The Problems We all know and have talked to family, friends, and colleagues who have lost their homes during the recent fires in Southern California. The most heartbreaking part of these conversations is listening to people who are completely unprepared and untrained to try to navigate the dangerous shoals of insurance companies who want to deny or not pay claims; of banks, whose only concern is that the mortgage get paid no matter what; and of contractors, both scrupulous and unscrupulous, just so they can rebuild their homes and return to some semblance of normalcy. As receivers, we deal with insurance companies, banks, and contractors all day, every day. But even after twenty-five years of experience, I find it hard to spot all the land mines that one might face in an effort to do the right thing. Imagine the stress for the thousands of homeowners who have never had to deal with these issues before! Skill and experience are talents that we, as receivers, can provide. But there’s another, unique aspect that only a receiver can bring to property recovery: super priority for the receiver’s certificate. An example will illustrate this point: a young family of my acquaintance (husband, wife, and baby) bought a house in Altadena in September 2023, less than two years ago, for $1 million. They put their life savings into a 25% down payment, with the remaining cost covered by a $750,000 bank loan secured by a first deed of trust on the property. Their house is now gone, and they are living with relatives on the other side of town. After intense negotiations, their insurance company finally paid out $400,000—but the payment was made to the lender, not to them. So, the mortgage lender is still owed $350,000 and is demanding immediate resumption of mortgage payments when the ninety-day moratorium expires.
It’s impossible to imagine this young couple getting bank financing subordinate to the remaining loan balance to rebuild their home (1,500 square feet x $200 per square foot is a $300,000 rebuilding cost). This scenario is a recipe for disaster for this young family and for the entire community. There’s not enough government aid to thwart this result, and certainly charity is not a solution. But the super-priority provided to a receiver’s certificate may be the answer. As receivers, we know that if our appointing judge grants super-priority to a certificate, that certificate becomes, in effect, a new first trust deed on the property. (County of Sonoma v. Quail, 56 Cal.App.5th 657 (2020), A CRG case in which the California Supreme Court denied review; and City of Sierra Madre v. Suntrust Mortgage Inc. 32 Cal.App.5th 648 (2019)) We also know that there are lenders willing to lend on the basis of super-priority who would not otherwise lend. For example, no lender would provide secondary financing behind a $350,000 first trust deed on a parcel in a community as devastated as Altadena or the Pacific Palisades. Super-priority lenders, on the other hand, would look at the parcel, see that before the fire, the house was worth $1 million, figure that a post-fire house would be worth at least 50-60% of what it was before ($500,000-$600,000), and then make a $300,000 super-priority loan (a 50-60% loan-to-value ratio) to complete it. Would the underlying lender complain? Of course. Banks are notoriously short-sighted in these situations. They would ignore the fact that their current asset, a $350,000 loan on a devastated property, is virtually worthless. A smart lender would see that the super-priority loan would actually enhance the value of their asset; that asset (the loan) would then be a lien on a $500,000 or $600,000 house. And if the rebuilt house sold for more, the entire loan could be paid. So, it can be anticipated that underlying lenders will complain. But in the health and safety receivership context, the underlying lender does not ultimately control what happens. A Superior Court judge will have that control in either granting or denying the receivership petition. The court Continued on page 21...
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