BILL NUMBER: SB 23 CHAPTERED
BILL TEXT
CHAPTER 8
FILED WITH SECRETARY OF STATE APRIL 15, 1997
APPROVED BY GOVERNOR APRIL 15, 1997
PASSED THE SENATE APRIL 10, 1997
PASSED THE ASSEMBLY APRIL 10, 1997
AMENDED IN SENATE FEBRUARY 12, 1997
INTRODUCED BY Senator Johnson
DECEMBER 2, 1996
An act to amend Section 2938 of the Civil Code, relating to
security interests, and declaring the urgency thereof, to take effect
immediately.
LEGISLATIVE COUNSEL'S DIGEST
SB 23, Johnson. Security interests.
Chapter 49 of the Statutes of 1996, among other things, revised
provisions relating to security interests in leases, rents, issues,
and profits in real property. That statute provides that sections in
effect prior to January 1, 1996, govern contracts entered into and
actions and proceedings initiated prior to January 1, 1997.
This bill would revise that provision to provide that sections in
effect prior to January 1, 1997, govern contracts entered into prior
to January 1, 1997, and actions and proceedings initiated on the
basis of these contracts.
The bill would declare that it is to take effect immediately as an
urgency statute.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 2938 of the Civil Code is amended to read:
2938. (a) A written assignment of an interest in leases, rents,
issues, or profits of real property made in connection with an
obligation secured by real property, irrespective of whether the
assignment is denoted as absolute, absolute conditioned upon default,
additional security for an obligation, or otherwise, shall, upon
execution and delivery by the assignor, be effective to create a
present security interest in existing and future leases, rents,
issues, or profits of that real property. As used in this section,
"leases, rents, issues, and profits of real property" include the
cash proceeds thereof. The term "cash proceeds" means cash, checks,
deposit accounts, and the like.
(b) An assignment of an interest in leases, rents, issues, or
profits of real property may be recorded in the records of the county
recorder in which the underlying real property is located in the
same manner as any other conveyance of an interest in real property,
whether the assignment is in a separate document or part of a
mortgage or deed of trust, and when so duly recorded in accordance
with the methods, procedures, and requirements for recordation of
conveyances of other interests in real property, (1) the assignment
shall be deemed to give constructive notice of the content of the
assignment with the same force and effect as any other duly recorded
conveyance of an interest in real property and (2) the interest
granted by the assignment shall be deemed fully perfected as of the
time of recordation with the same force and effect as any other duly
recorded conveyance of an interest in real property, notwithstanding
any provision of the assignment or any provision of law that would
otherwise preclude or defer enforcement of the rights granted the
assignee under the assignment until the occurrence of a subsequent
event, including, but not limited to, a subsequent default of the
assignor, or the assignee's obtaining possession of the real property
or the appointment of a receiver.
(c) Upon default of the assignor under the obligation secured by
the assignment of leases, rents, issues, and profits, the assignee
shall be entitled to enforce the assignment in accordance with this
section. On and after the date the assignee takes one or more of the
enforcement steps described in this subdivision, the assignee shall
be entitled to collect and receive all rents, issues, and profits
that have accrued but remain unpaid and uncollected by the assignor
or its agent or for the assignor's benefit on that date, and all
rents, issues, and profits that accrue on or after the date. The
assignment shall be enforced by one or more of the following:
(1) The appointment of a receiver.
(2) Obtaining possession of the rents, issues, or profits.
(3) Delivery to any one or more of the tenants of a written demand
for turnover of rents, issues, and profits in the form specified in
subdivision (j), a copy of which demand shall also be delivered to
the assignor; and a copy of which shall be mailed to all other
assignees of record of the leases, rents, issues, and profits of the
real property at the address for notices provided in the assignment
or, if none, to the address to which the recorded assignment was to
be mailed after recording.
(4) Delivery to the assignor of a written demand for the rents,
issues, or profits, a copy of which shall be mailed to all other
assignees of record of the leases, rents, issues, and profits of the
real property at the address for notices provided in the assignment
or, if none, to the address to which the recorded assignment was to
be mailed after recording.
Moneys received by the assignee pursuant to this subdivision, net
of amounts paid pursuant to subdivision (g), if any, shall be applied
by the assignee to the debt or otherwise in accordance with the
assignment or the promissory note, deed of trust, or other instrument
evidencing the obligation; provided, however, that neither the
application nor the failure to so apply the rents, issues, or profits
shall result in a loss of any lien or security interest which the
assignee may have in the underlying real property or any other
collateral, render the obligation unenforceable, constitute a
violation of Section 726 of the Code of Civil Procedure, or otherwise
limit any right available to the assignee with respect to its
security.
(d) If an assignee elects to take the action provided for under
paragraph (3) of subdivision (c), the demand provided for therein
shall be signed under penalty of perjury by the assignee or an
authorized agent of the assignee and shall be effective as against
the tenant when actually received by the tenant at the address for
notices provided under the lease or other contractual agreement under
which the tenant occupies the property or, if no address for notices
is so provided, at the property. Upon receipt of this demand, the
tenant shall be obligated to pay to the assignee all rents, issues,
and profits that are past due and payable on the date of receipt of
the demand, and all rents, issues, and profits coming due under the
lease following the date of receipt of the demand, unless either of
the following occurs:
(1) The tenant has previously received a demand which is valid on
its face from another assignee of the leases, issues, rents, and
profits sent by the other assignee in accordance with this
subdivision and subdivision (c).
(2) The tenant, in good faith and in a manner which is not
inconsistent with the lease, has previously paid, or within 10 days
following receipt of the demand notice pays, the rent to the
assignor.
Payment of rent to an assignee following a demand under an
assignment of leases, rents, issues, and profits shall satisfy the
tenant's obligation to pay the amounts under the lease. If a tenant
pays rent to the assignor after receipt of a demand other than under
the circumstances described in this subdivision, the tenant shall not
be discharged of the obligation to pay rent to the assignee, unless
the tenant occupies the property for residential purposes. The
obligation of a tenant to pay rent pursuant to this subdivision and
subdivision (c) shall continue until receipt by the tenant of a
written notice from a court directing the tenant to pay the rent in a
different manner or receipt by the tenant of a written notice from
the assignee from whom the demand was received canceling the demand,
whichever occurs first. Nothing in this subdivision shall affect the
entitlement to rents, issues, or profits as between assignees as set
forth in subdivision (h).
(e) No enforcement action of the type authorized by subdivision
(c), and no collection, distribution, or application of rents,
issues, or profits by the assignee following an enforcement action of
the type authorized by subdivision (c), shall do any of the
following:
(1) Make the assignee a mortgagee in possession of the property,
except if the assignee obtains actual possession of the real
property, or an agent of the assignor.
(2) Constitute an action, render the obligation unenforceable,
violate Section 726 of the Code of Civil Procedure or, other than
with respect to marshaling requirements, otherwise limit any rights
available to the assignee with respect to its security.
(3) Be deemed to create any bar to a deficiency judgment pursuant
to any provision of law governing or relating to deficiency judgments
following the enforcement of any encumbrance, lien, or security
interest, notwithstanding that the action, collection, distribution,
or application may reduce the indebtedness secured by the assignment
or by any deed of trust or other security instrument.
The application of rents, issues, or profits to the secured
obligation shall satisfy the secured obligation to the extent of
those rents, issues, or profits, and, notwithstanding any provisions
of the assignment or other loan documents to the contrary, shall be
credited against any amounts necessary to cure any monetary default
for purposes of reinstatement under Section 2924c.
(f) If cash proceeds of rents, issues or profits to which the
assignee is entitled following enforcement as set forth in
subdivision (c) are received by the assignor or its agent for
collection or by any other person who has collected such rents,
issues, or profits for the assignor's benefit, or for the benefit of
any subsequent assignee under the circumstances described in
subdivision (h), following the taking by the assignee of either of
the enforcement actions authorized in paragraph (3) or (4) of
subdivision (c), and the assignee has not authorized the assignor's
disposition of the cash proceeds in a writing signed by the assignee,
the rights to the cash proceeds and to the recovery of the cash
proceeds shall be determined by the following:
(1) The assignee shall be entitled to an immediate turnover of the
cash proceeds received by the assignor or its agent for collection
or any other person who has collected the rents, issues, or profits
for the assignor's benefit, or for the benefit of any subsequent
assignee under the circumstances described in subdivision (h), and
the assignor or other described party in possession of such cash
proceeds shall turn over the full amount of cash proceeds to the
assignee, less any amount representing payment of expenses authorized
by the assignee in writing. The assignee shall have a right to
bring an action for recovery of the cash proceeds, and to recover the
cash proceeds, without the necessity of bringing an action to
foreclose any security interest which it may have in the real
property. This action shall not violate Section 726 of the Code of
Civil Procedure or otherwise limit any right available to the
assignee with respect to its security.
(2) As between an assignee with an interest in cash proceeds
perfected in the manner set forth in subdivision (b) and enforced in
accordance with paragraph (3) or (4) of subdivision (c) and any other
person claiming an interest in the cash proceeds, other than the
assignor or its agent for collection or one collecting rents, issues,
and profits for the benefit of the assignor, and subject to
subdivision (h), the assignee shall have a continuously perfected
security interest in the cash proceeds to the extent that the cash
proceeds are identifiable. For purposes hereof, cash proceeds are
identifiable if they are either (A) segregated or (B) if commingled
with other funds of the assignor or its agent or one acting on its
behalf, can be traced using the lowest intermediate balance
principle, unless the assignor or other party claiming an interest in
proceeds shows that some other method of tracing would better serve
the interests of justice and equity under the circumstances of the
case. The provisions of this paragraph are subject to any generally
applicable law with respect to payments made in the operation of the
assignor's business.
(g) (1) If the assignee enforces the assignment under subdivision
(c) by any means other than the appointment of a receiver and
receives rents, issues, or profits pursuant to this enforcement, the
assignor or any other assignee of the affected real property may make
written demand upon the assignee to pay the reasonable costs of
protecting and preserving the property, including payment of taxes
and insurance and compliance with building and housing codes, if any.
(2) On and after the date of receipt of the demand, the assignee
shall pay for the reasonable costs of protecting and preserving the
real property to the extent of any rents, issues, or profits actually
received by the assignee; provided, however, that no such acts by
the assignee shall cause the assignee to become a mortgagee in
possession and the assignee's duties under this subdivision, upon
receipt of a demand from the assignor or any other assignee of the
leases, rents, issues, and profits pursuant to paragraph (1), shall
not be construed to require the assignee to operate or manage the
property, which obligation shall remain that of the assignor.
(3) The obligation of the assignee hereunder shall continue until
the earlier of (A) the date on which the assignee obtains the
appointment of a receiver for the real property pursuant to
application to a court of competent jurisdiction, or (B) the date on
which the assignee ceases to enforce the assignment.
(4) Nothing in this subdivision shall be construed to supersede or
diminish the right of the assignee to the appointment of a receiver.
(h) The lien priorities, rights, and interests among creditors
concerning rents, issues, or profits collected before the enforcement
by the assignee shall be governed by subdivisions (a) and (b).
Without limiting the generality of the foregoing, if an assignee who
has recorded its interest in leases, rents, issues, and profits prior
to the recordation of such interest by a subsequent assignee seeks
to enforce its interest in those rents, issues, or profits in
accordance with this section after any enforcement action has been
taken by a subsequent assignee, the prior assignee shall be entitled
only to the rents, issues, and profits that are accrued and unpaid as
of the date of its enforcement action and unpaid rents, issues, and
profits accruing thereafter. The prior assignee shall have no right
to rents, issues, or profits paid prior to the date of the
enforcement action, whether in the hands of the assignor or any
subsequent assignee. Upon receipt of notice that the prior assignee
has enforced its interest in the rents, issues, and profits, the
subsequent assignee shall immediately send a notice to any tenant to
whom it has given notice under subdivision (c). The notice shall
inform the tenant that the subsequent assignee cancels its demand
that the tenant pay rent to the subsequent assignee.
(i) This section shall apply to contracts entered into on or after
January 1, 1997.
Sections 2938 and 2938.1, as these sections were in effect prior
to January 1, 1997, shall govern contracts entered into prior to
January 1, 1997, and shall govern actions and proceedings initiated
on the basis of these contracts.
(j) "Real property," as used in this section, shall mean real
property or any estate or interest therein.
(k) The demand required by paragraph (3) of subdivision (c) shall
be in the following form:
DEMAND TO PAY RENT TO
PARTY OTHER THAN LANDLORD
(SECTION 2938 OF THE CIVIL CODE)
Tenant: (Name of Tenant)
Property Occupied by Tenant: (Address)
Landlord: (Name of Landlord)
Secured Party: (Name of Secured Party)
Address: (Address for Payment of Rent to Secured Party and for
Further Information):
The secured party named above is the assignee of leases, rents,
issues, and profits under (name of document) dated ______, and
recorded at (recording information) in the official records of
___________ County, California. You may request a copy of such
assignment from the secured party at ____ (address).
THIS NOTICE AFFECTS YOUR LEASE OR RENTAL AGREEMENT RIGHTS AND
OBLIGATIONS. YOU ARE THEREFORE ADVISED TO CONSULT AN ATTORNEY
CONCERNING THOSE RIGHTS AND OBLIGATIONS IF YOU HAVE ANY QUESTIONS
REGARDING YOUR RIGHTS AND OBLIGATIONS UNDER THIS NOTICE.
IN ACCORDANCE WITH SUBDIVISION (C) OF SECTION 2938 OF THE CIVIL
CODE, YOU ARE HEREBY DIRECTED TO PAY TO THE SECURED PARTY, ____
(NAME OF SECURED PARTY) AT ____ (ADDRESS), ALL RENTS UNDER YOUR LEASE
OR OTHER RENTAL AGREEMENT WITH THE LANDLORD OR PREDECESSOR IN
INTEREST OF LANDLORD, FOR THE OCCUPANCY OF THE PROPERTY AT ____
(ADDRESS OF RENTAL PREMISES) WHICH ARE PAST DUE AND PAYABLE ON THE
DATE YOU RECEIVE THIS DEMAND, AND ALL RENTS COMING DUE UNDER THE
LEASE OR OTHER RENTAL AGREEMENT FOLLOWING THE DATE YOU RECEIVE THIS
DEMAND UNLESS YOU HAVE ALREADY PAID THIS RENT TO THE LANDLORD IN GOOD
FAITH AND IN A MANNER NOT INCONSISTENT WITH THE AGREEMENT BETWEEN
YOU AND THE LANDLORD. IN THIS CASE, THIS DEMAND NOTICE SHALL REQUIRE
YOU TO PAY TO THE SECURED PARTY ____, (NAME OF THE SECURED PARTY),
ALL RENTS THAT COME DUE FOLLOWING THE DATE OF THE PAYMENT TO THE
LANDLORD.
IF YOU PAY THE RENT TO THE UNDERSIGNED SECURED PARTY, ____
(NAME OF SECURED PARTY), IN ACCORDANCE WITH THIS NOTICE, YOU DO NOT
HAVE TO PAY THE RENT TO THE LANDLORD. YOU WILL NOT BE SUBJECT TO
DAMAGES OR OBLIGATED TO PAY RENT TO THE SECURED PARTY IF YOU HAVE
PREVIOUSLY RECEIVED A DEMAND OF THIS TYPE FROM A DIFFERENT SECURED
PARTY.
(For other than residential tenants). IF YOU PAY ANY RENT TO
THE LANDLORD THAT BY THE TERMS OF THIS DEMAND YOU ARE REQUIRED TO PAY
TO THE SECURED PARTY, YOU MAY BE SUBJECT TO DAMAGES INCURRED BY THE
SECURED PARTY BY REASON OF YOUR FAILURE TO COMPLY WITH THIS DEMAND,
AND YOU MAY NOT BE DISCHARGED FROM YOUR OBLIGATION TO PAY SUCH RENT
TO THE SECURED PARTY. YOU WILL NOT BE SUBJECT TO SUCH DAMAGES OR
OBLIGATED TO PAY SUCH RENT TO THE SECURED PARTY IF YOU HAVE
PREVIOUSLY RECEIVED A DEMAND OF THIS TYPE FROM A DIFFERENT ASSIGNEE.
Your obligation to pay rent under this demand shall continue
until you receive either (1) a written notice from a court directing
you to pay the rent in a manner provided therein, or (2) a written
notice from the secured party named above canceling this demand.
The undersigned hereby certifies, under penalty of perjury,
that the undersigned is an authorized officer or agent of the secured
party and that the secured party is the assignee, or the current
successor to the assignee, under an assignment of leases, rents,
issues, or profits executed by the landlord, or a predecessor in
interest, that is being enforced pursuant to and in accordance with
Section 2938 of the Civil Code.
Executed at _________, California, this ____ day of _________,
_____.
(Secured Party)
Name: _____________________________
Title: ____________________________
SEC. 2. This act is an urgency statute necessary for the immediate
preservation of the public peace, health, or safety within the
meaning of Article IV of the Constitution and shall go into immediate
effect. The facts constituting the necessity are:
In order to clarify ambiguous language enacted in 1996, it is
necessary for this act to take effect immediately.