Super Priority And The Salton Sea: Financing Health and Safety Receiverships
What do the Salton Sea and Health and Safety Receiverships have in common?
Super-priority lending
This is a story that began 115 years ago, when the mighty Colorado River breached the faulty construction of an irrigation canal from the river into the Imperial Valley. The canal would later become the All American Canal, providing an important source of water to our State. The historic breach was so severe that it changed the course of the Colorado River and millions of gallons of water gushed into the California desert. The flood destroyed everything in its path until it came to an area of land below sea level where it began to pool. It took two years to stop the flood and in that time the water accumulated to form our State's largest lake, the Salton Sea. During that time, the debts of the development company responsible for the canal also mounted and it became insolvent.
A receiver was appointed to take over and ensure that crucial repairs were made to the irrigation canal so that significant flooding of this magnitude would never happen again. Those repairs, as you will learn below, would not have been possible without the Superior Court authorizing (and Supreme Court approving) super-priority receiver's certificates.
The concept of super-priority in California dates back over a century to a case involving our state's largest lake: the Salton Sea
Photo of the Salton Sea from National Geographic
At the turn of the 20th Century, the California Development Company received engineering clearance on the feasibility to cultivate arid, desert land in Imperial County, California. Developers believed that the dry land, which was unproductive due to the absence of adequate moisture, could be cultivated and become highly profitable if properly irrigated. They embarked on an ambitious plan to divert water from the Colorado River into the Imperial Valley, as well as to a tract of land in the Republic of Mexico, via an irrigation canal.
At first, everything went according to plan. The barren land became fertile and farmers could harvest crops on it. News spread quickly, and by the end of 1904, two thousand settlers had migrated to the area and were “farming the desert.” But silt buildup in the irrigation canal led to blockages, which engineers tried to alleviate by making the diversion of river water into the canal more porous.
Nature was not on their side. Heavy rain and snowmelt in 1905 led the Colorado River to swell and flood, it blasted through its banks and pushed through the structures built to divert just a portion of it. Disasters mounted, and ultimately, the entire volume of the Colorado River was being carried through the irrigation canal. It began to pool in an area of land below sea level in Imperial and Riverside Counties known as the Salton Sink.
Photo from USC Digital Library of farming alfalfa in Imperial Valley circa 1900-1910
1906 photo of the flood found in Earth Magazine
The significant amount of damage caused by the flood led to numerous court cases against the development company, which was already indebted to the railroad company. It still operated the structures used to irrigate the land, but it was financially underwater and unable to maintain them. W.H. Holabird, a Civil War veteran of Vermont and former Naval fireman, was appointed as receiver. Under his direction, the development company was returned to solvency and repairs were made to the irrigation canal.
Images from Imperial Irrigation District
14,000 acres of farmland were ruined and efforts to stem the flood only worsened it when they unintentionally spawned what onlookers described as “a raging torrent of huge waterfalls," which were recorded to be up to eighty feet high and 1,000 feet wide.
The flooding seriously impeded the Southern Pacific Railroad, which was the lifeblood of the area at that time. It began to pour hundreds of thousands of dollars into the development company's efforts to stop the flood. In 1907 the breach was finally repaired, and the Colorado River returned back to its natural course. In the two years it took engineers to stop the unprecedented flooding, the pool of water in the Salton Sink grew, forming a giant lake, now known as the Salton Sea.
Image from Imperial Irrigation District from 1905 of flood damage to the railroad found in The Great Flood
Eventually, the canal would be run by the Imperial Irrigation District and it would go on to become the All American Canal, which today supplies roughly 500,000 acres of Imperial Valley farmland with water for irrigation. According to the Imperial Irrigation District, enough lettuce is grown in the Imperial Valley today to serve a salad to one-third of the world's population.
Super-priority is as important today as it was in 1915.
A 1916 California Law Review Article concludes of the receiver that, "In passing, it is only fair to state that under the administration of Mr. W. H. Holabird, of Los Angeles, who has acted as receiver... many old structures have been replaced by new and better ones, and the service given by the system in every way greatly improved, much to the benefit of the Imperial Valley."
Due to the development company being financially overburdened, the receiver requested priority certificates to obtain the funds necessary to do the work. These allowed the receiver to fund the maintenance of the irrigation canal and ensure its future upkeep.
Many other parties had filed claims for damages to their property, presenting a challenge to the receiver's lien. In one of 3 cases relating to the disaster, Title Insurance and Trust Company v. California Development Company (1915) 171 Cal. 227, the California Supreme Court ruled that a Superior Court is well within their discretion to authorize priority receiver’s certificates secured by the real property.
That now 105-year-old precedent is equally applicable and important to our work as California health and safety receivers where we remediate other man-made catastrophes. Many such properties are over-encumbered with large loans from a different era; without super-priority, we could not borrow what is needed to do our work.
Image from Still Unfold
Developers decided to use the new lake as an opportunity to establish a resort area. Tourists flocked to the Salton Sea for vacations, bringing boats and fishing rods. Neighborhoods and schools were built, and people purchased vacation homes there. But, because the irrigation canal transports silt and salts from the Colorado River into the Salton Sea, which has no outlet to the ocean, the salts and minerals are concentrated by evaporation. Over time this has killed off much of the fish, increased pollution, and led to a smell that the US Geological Survey has termed "pervasive". Now, the area, although still beautiful and interesting to visit, is largely abandoned. State and local planning to restore the Salton Sea is ongoing.
Through super-priority, California Receivership Group has funded over $44 million to finance rehabilitation costs on over 235 receivership properties across California with no loss to its lenders.
Stay tuned for our next blog post where we'll go into greater depth on how we finance receiverships. We'll also explain how CRG developed the concept of arranging first-of-its-kind receivership certificate financing.