What Is Super-Priority Funding in a Health and Safety Receivership?
Health and safety receivers have many tools available to them to aid in the rehabilitation of nuisance properties, but arguably nothing is more important than the availability of super-priority funding. In practical terms, a super-priority lien allows the receiver to obtain new money to address life-safety hazards, stabilize a property, and bring it into compliance—even when that means the new lien will come ahead of an existing deed of trust or other recorded encumbrances. Without this mechanism, receiverships for severely distressed properties would often be stalled or rendered ineffective because traditional lenders or owners are either unwilling or unable to fund the remediation work.
How City of Sierra Madre v. SunTrust Mortgage Reaffirmed Super-Priority Funding
Though super-priority liens have been authorized by courts in California since at least 1915 (Title Ins. & Trust Co. v. California Development Co. (1915) 171 Cal. 227), the 2019 case of City of Sierra Madre v. SunTrust Mortgage Inc. is a landmark development, because it brings this authorization into the 21st century by explicitly reiterating the availability of super-priority funding to receivers. Sierra Madre confirms, in a modern lending and foreclosure environment, that courts may place the public’s interest in abating dangerous conditions ahead of previously recorded security interests, and that lenders who decline to fund necessary rehabilitation may find their priority displaced by receivership financing. For cities, counties, lenders, and owners of distressed properties, this decision provides critical clarity about how health and safety receiverships can be funded in real-world situations.
What Happened in City of Sierra Madre v. SunTrust Mortgage?
The Property Conditions That Led to the Nuisance Action
The facts of Sierra Madre illustrate the need for this remedy. Over a period of about ten years, Jeffrey and Taryn Hildreth performed extensive, unpermitted construction projects at their residential property in the City of Sierra Madre. The property deteriorated into a serious nuisance, with conditions that raised significant health and safety concerns for the occupants and surrounding community. During that same time, the Hildreths refinanced their home loan with SunTrust Mortgage, which then held the first position deed of trust on the property and, under ordinary circumstances, would expect its lien to remain senior to nearly all later encumbrances.
Why the Court Appointed a Health and Safety Receiver
In December of 2010, Sierra Madre filed its nuisance action against the Hildreths after years of unsuccessful code enforcement efforts. When voluntary compliance failed, the City sought the appointment of a health and safety receiver to take possession of the property and implement a rehabilitation plan under court supervision. A receiver was appointed at the City’s request in August of 2012, and the receiver began evaluating the scope of violations, the cost of bringing the property into compliance, and the available funding options.
Why the Receiver Sought a Super-Priority Receivership Certificate
As is typical in these cases, neither the owners nor existing lienholders were willing to pay for the substantial rehabilitation needed to abate the dangerous conditions. To move the case forward and protect the public, the receiver requested authority from the court to borrow funds secured by a receivership certificate with super-priority status. On July 5, 2017, after considering the evidence and the competing interests, the court granted the receiver’s request to borrow $250,000 from a bank in exchange for a receivership certificate with first priority ahead of SunTrust’s lien—provided that SunTrust was first given the opportunity to fund the remediation on the same terms. SunTrust declined to fund the rehabilitation work and, instead, appealed the court’s decision to grant the super-priority certificate.
Can a Receiver Prime an Existing Deed of Trust?
What the Court of Appeal Said About Lien Priority
On appeal, SunTrust presented multiple arguments against the court’s decision to allow a super-priority receivership certificate, including challenges to the court’s authority to reorder lien priorities and concerns about the impact on secured lenders. Each argument was rejected in turn. The Court of Appeal reaffirmed that trial courts have “substantial discretion to authorize a receiver to borrow money to fund the preservation and management of property in the receivership estate,” particularly where public health and safety are at stake. The court further indicated that, as a general rule, a properly authorized receivership certificate will have priority over all other liens, including those that were previously recorded, when necessary to carry out the purpose of the receivership.
Does a Receiver Have to Exhaust Other Funding Options First?
Importantly, the court also addressed the practical funding questions that frequently arise in these cases. It rejected the notion that the receiver or the court must exhaust every possible alternative funding method or demonstrate that the selected lender is the lowest-cost option. The availability of other funding methods or lower-cost options does not preclude a court from authorizing a super-priority lien when the evidence demonstrates that the proposed financing is reasonable, necessary, and in furtherance of the receivership’s objectives. This aspect of the Sierra Madre decision is particularly significant because it acknowledges the realities of the marketplace: lenders willing to extend capital to distressed properties under receivership do so at elevated risk and must be given meaningful security to make that financing feasible.
What Sierra Madre Means for Cities, Lenders, and Property Owners
For municipalities and enforcement agencies, Sierra Madre underscores that health and safety receiverships can be a viable, fully funded remedy even when traditional financing sources are unwilling to participate. For lenders, it clarifies that cooperation with receivers—such as choosing to fund the rehabilitation themselves—may be the best way to protect their collateral position. For property owners, it confirms that, once a health and safety receivership is in place, the court has broad authority to ensure that the property is repaired, even if that requires elevating new liens ahead of existing ones to secure the necessary funding.
Why Experience Matters in Health and Safety Receiverships
Receiver Richardson “Red” Griswold has been appointed by California courts over 300 times across 30 counties in the western region to act as a Health & Safety Code Receiver for substandard and nuisance properties ranging from single-family residences to large multifamily and commercial assets. In many of these matters, successful outcomes depended on securing and deploying super-priority funding to correct extensive code violations, eliminate dangerous conditions, and prepare properties for long-term compliance and, where authorized, sale.
By combining a deep understanding of the legal framework governing super-priority liens with practical experience in property rehabilitation, Griswold Receivers is uniquely positioned to assist courts, public agencies, lenders, and property owners in navigating complex nuisance properties and achieving lasting, code-compliant results. For more information about how super-priority funding can be used in a health and safety receivership, or to discuss a specific property or enforcement matter, please contact us today.
