Use of receiver may protect lender from environmental liability

Lenders who hold deeds of trust against residential or commercial property are often hesitant to proceed with foreclosure actions against borrowers when the underlying property at issue has been contaminated. One of the many creative uses of the remedy of a receivership appointment involves the use of a receiver to remediate the property prior to foreclosure and/or to have the receiver sell the asset in order to avoid the lender being on the chain of title.

The cleanup of contaminated sites often involves the removal of contaminates on the land, including soil and ground water. The manifests that accompany such removal require signatures of responsible parties, and lenders are generally unwilling to expose themselves to such potential liability. It is incumbent upon receivers to seek court approval to proceed with such remediation. If properly undertaken, a receiver will generally not be subject to any kind of personal liability due to California Rule of Court 3.1179, whereby a receiver enjoys quasi-judicial immunity.

The ultimate goal in an environmental remediation includes a No Further Action Letter from the appropriate governmental agency. When ground water is at issue in the State of California, that agency is the California Regional Water Quality Control Board. Pursuant to California Code Section 1471 and Water Code Section 13307.1, the Regional Water Board can also require deed restrictions on properties in lieu of additional cleanup measures.

Once a No Further Action letter is obtained, a property will become marketable, as the environmental contamination has been removed. The receivership can presumably achieve a higher sales price, and both the borrower and lender will benefit. As long as the lender does not own or operate the subject property, it will not cross the line into being deemed an “owner.” The work undertaken by the receiver will be approved by the court, and liability against the owner/lender will not exist.

This approach is one of many creative ways to utilize the litigation services of receivers in connection with distressed real estate.