Articles Posted in foreclosure

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I had previously discussed the case of OC Interiors, where the court determined that a void judgment in the chain of title to real property nullifies all subsequent transfers, including a transfer to a bona fide purchaser. That is a frightening prospect for buyers, and a reason to take a close look at the preliminary title report, and consult a real estate attorney if they are not comfortable with what they find. A default judgment may, in some cases, easily be found to be void. In a more recent decision, some other defendants tried to avoid this result by arguing that the void default judgment had the effect of granting quiet title relief, and thus the subsequent transaction was valid. They were disappointed to find otherwise – the action to cancel and instrument did not have the same impact as an action to quiet title.

Sacramento-real-estate-instrument-cancellation-attorneyIn Deutsche Bank National Trust Company v. Alan Pyle et al. Saluto owned property in Rancho Mirage and obtained a loan. She defaulted and began a firestorm of recording documents to screw up the chain of title to presumably prevent foreclosure and eviction. The long list of recorded documents is set out at the end of this post. (I wonder if she paid someone to muddy things up like this- I have done a quiet title in a similar situation, and the hired perpetrator faced Federal criminal charges). A trustee’s sale was held. Saluto then filed an action against the lender to cancel the trustee’s deed and deed of trust and obtained a default judgment. Eventually, the lender got the judgment set aside, the court finding that she had falsified the proofs of service, and that the judgment was void.

The issues on appeal for the court were: (1) whether defendants were entitled to bona fide purchaser or encumbrancer status, and (2) the impact of the void default judgment in the chain of title.

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Slander of title is a false statement related to real property that causes monetary loss. The goal is the protection of the transferability of title. The claim is based on whether the publisher of false information could reasonable expect the false publication to influence the conduct of a third party, such as a lender or buyer. It may be an unsupported claim of an interest in real property that throws “doubt” on its ownership. However, Sacramento real estate attorneys point out to their clients that the false publication may be privileged, which is a statutory defense to a claim for slander of title.

Sacramento-slander-of-title-lawyerIn Raymond A. Schep v. Capital One, N.A., Schlep borrowed $910,000, secured by a deed of trust on his Beverly Hills home. He missed his mortgage payments and a Notice of Default was recorded. Before the Notice of Trustee’s Sale was recorded, someone recorded a “Substitution of Trustee and Full Reconveyance” (the ‘Wild Deed’). The court’s opinion does not specify who did this, but implies that it was the borrower. Subsequently the Notice of Sale recorded, and the property was foreclosed through a trustee’s sale. The Borrower filed this lawsuit claiming slander of title due to the recording of the Notice of Default, Notice of Sale, and Trustee’s Deed. Apparently his argument was that the Trustee had constructive notice of the Wild Deed and the implied competing claim on title.

Sacramento-privilege-slander-of-title-lawyerThe court found that the plaintiff was wrong, because all the documents underlying his claim were privileged. Civil Code section 2924(d) (1) (set out below) provides that the notices required for a trustee’s sale procedure are privileged communications under section 47 (also set out below).

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When there are multiple liens on real property and the senior lien or deed of trust is foreclosed, the junior liens are wiped out, and the junior lienholders have lost their security for the debt. All they have left is the underlying debt, which they can then seek to collect directly from the debtor. These latter parties are termed “sold-out juniors.” Generally, when a debt is secured by real property, the creditor must seek to be paid from the property first (by foreclosure). If the senior lienholder conducts a trustee sale, and the property does not raise enough cash to pay them off, it’s too bad- they cannot go after the debtor personally. However, if they are a junior, once they lose the security, they may go after the debtor for a monetary judgment. But sometimes Sacramento real estate attorneys are confronted by senior and junior loans that are made by, or acquired by, the same individual lender. If the lender forecloses on the first, does it become a sold-out junior as to the second?

Sacramento-one-form-of-action-lawyerIn Black Sky Capital, LLC v. Michael Cobb, plaintiff Black Sky held both the first and second loans (totaling over $11.7 million dollars) on a property in Rancho Cucamonga. Black Sky foreclosed on the first, holding a trustee’s sale. It then filed suit to recover the balance owed on the 2nd junior note, and this appeal was the result.

Section 580d Applies only to the Deed of Trust Foreclosed, and does not apply to a Junior Lien after a Trustee’s Sale on the first – Regardless of whether it is the same lender

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When a lender holds multiple deeds of trust on the same California Real Estate, they may be forced to make a decision. If the borrower defaults on one of the notes, the lender has all the remedies as to that loan – he can conduct a judicial foreclosure, or hold a nonjudicial trustee’s sale and foreclosed under the power of sale. What concerns the lender and their real estate attorney is, once they foreclose, what happens to the other loan? What can they do to enforce it? If they had foreclosed the first, the second was wiped out. Are they a foreclosed junior lienholder, who can then sue for the debt? In one decision the senior and junior creditors were the same, and the court found that once they foreclosed on the first, they were out of luck on the second.

Sacramento antideficiency attorneyIn Simon v. Superior Court, the bank loaned $1.5 million in exchange for two notes, each secured by separate deeds of trust on the same property in Santa Clara County. The bank foreclosed by trustee’s sale on the senior deed of trust, then sued the borrower on the 2nd note and deed of trust.

the court concluded that, where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust’s power of sale, thereby eliminating the security for its junior deed of trust, section 580d of the Code of Civil Procedure bars recovery of any “deficiency” balance due on the obligation the junior deed of trust secured.

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California real estate financing typically includes a note and deed of trust. In event of default the trustee named in the deed of trust is a third party who would conduct the non-judicial foreclosure process, and hold a trustee sale. This is not a true ‘trustee’ with fiduciary duties but an agent for the parties with statutory duties. When disputes arise regarding foreclosure, Sacramento real estate attorneys often see that the trustee is often named in the lawsuit by the borrower with the other defendants. Given that the trustee relies on instructions of the beneficiary and does not act on its own, the complaint does not allege any specific wrongful act committed by the trustee. As a result, Civil Code section 2924l provides that the trustee may file a “Declaration of Nonmonetary Interest” in the case. The declaration must state that the trustee’s “reasonable belief that it is named as a defendant … solely in its capacity as trustee and not due to its acts or omissions.” Unless another party objects, the trustee then avoids participation in the lawsuit and liability for damages and attorney fees.

woodland  deed of trust attorneyIn Bae v. T.D. Service Company, Bae defaulted on a $5 million dollar property in Glen Ivy. The property was sold at a trustee sale, and the plaintiff sued everyone, including the Trustee. The trustee filed a Declaration of Nonmonetary Interest, and not an answer to the complaint. The Plaintiff’s attorney entered the trustee’s default and obtained a default judgment, all without providing notice to the trustee’s attorney. That’s right, the clerk entered the default, the judge granted the judgment, all without notifying the trustee’s attorney. Unbelievable, but it happened, and the trustee moved to set aside the default and won. More bizarre- the plaintiff appealed.

The court first looked at requirements for setting aside a default. Civil Procedure section 473.5 permits the court to set aside a default or default judgment if the defendant, through no inexcusable fault of his own, [received] no actual notice” of the action, provided that relief is requested not more two years after the entry of the default judgment. But here, the Trustee filed its motion more than two years later.

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In California, generally when a real estate buyer defaults on the loan and loses the property to foreclosure, the lender may not pursue a deficiency judgment against the borrower where the foreclosure sale proceeds are not enough to cover the amount of the debt. Lenders may go after loan guarantors for a deficiency judgment, but only if they are true guarantors. Where the borrower and the guarantor are the same, however, the guaranty is considered an unenforceable sham. I like reading about sham guaranty cases, because the courts actually call them a sham, a word not used often enough in judicial opinions. Sacramento real estate attorneys see the argument applied when either the guarantors are trying to squirm out of liability, or where the bank set up the transaction to avoid the antideficiency laws. In a recent decision out of Napa County, it does not appear that the borrowers intended to set-up the lender for a sham, but were able to make the sham argument that they were the sole owners of the borrower LLC, which was merely a shell and they were its alter ego. The court said no, there was adequate separation between the guarantors and the borrower.

attorney sacramento sham loan guaranty.jpgIN CADC/RAD Venture 2011-1 LLC v Richard Bradley et al. Bradley and Yates were owners of No Boundaries LLC, which owed property in Seattle. They were selling that building and wanted to exchange it for 7 acres in Napa. Bradley entered a contract to buy the Napa land, and No Boundaries submitted a loan application. The loan was approved, with Bradley and Yates being required to sign loan guaranties. At the last minute the buyers decided to change the borrower to the newly created Nohea LLC. The bank was willing to allow the change in borrowers because the defendant guarantors had enough money to justify the loan. The $2.1 million loan closed, and Bradley and Yates signed commercial guaranty agreements in which they waived their rights under the California antideficiency laws. Nohea LLC did not provide the bank with any financial information. Of course, the loan went into default, the bank foreclosed, and brought this lawsuit against Bradley and Yates, the guarantors. Bradley and Yates claimed that the guaranties were unenforceable shams.

A threshold issue in sham guaranty cases is whether the guarantor of a loan is also obligated as a borrower. An example is where a partnership was the borrower, and the partners are guarantors. Under partnership law, general partners are already liable for the debts of the partnership, so the guaranty added nothing. Likewise where a corporation is organized solely to take out a loan, and is not capitalized. Thus the corporation was a mere instrumentality used by the defendants, who were in fact the buyers.

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There are numerous anti-deficiency laws concerning California real estate. An Important one, especially with commercial real estate, is CCP section 726(a). It is broadly described as the “one form of action” rule. This broad rule has two components – a) the “one action rule”, a prohibition of multiple lawsuits to collect a debt secured by real estate; and b) the “security first rule,” which requires the creditor to proceed first against all the real property security (exhausting the security) first through judicial foreclosure before enforcing the underlying debt. 726 provides for a lender to file a judicial foreclosure lawsuit which will allow them to recover a deficiency judgment against the borrower. This statute is subject to many Judge-made requirements and sub-rules, and a careful lender or borrower will want to consult a Sacramento real estate attorney. In a decision from Southern California, the lender got a big surprise when they discovered that because of its mistake, it could not obtain a deficiency judgment.

NOTE: A petition for review was granted by the Supreme Court; this case may not be cited.

Sacramento security first attorney.jpgIn First California Bank v. McDonald, the bank made a $1.5 million dollar loan to a husband and wife. The loan was secured by a deed of trust on property in Wasco. As additional security, the wife signed a deed of trust on her separate property located in Shafter. Eventually, Sally wanted to sell the Shafter property. The Bank agreed to the sale with the understanding that the bank would get the proceeds, and the couple would not be released of liability. The husband did not sign the release agreement.

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In California, most lenders on real estate take back a deed of trust in which they are named the “beneficiary.” If the borrower defaults, the beneficiary may then instruct the trustee to proceed to foreclose. Occasionally there is more than one beneficiary, resulting in multiple cobeneficiaries. They may all have contributed a percentage of the funding, or may have been assigned a fractional interest in the note and deed of trust after-the-fact. If the borrower defaults on their loan, California real estate attorneys will advise their lender clients to instruct the trustee to initiate foreclosure proceedings by execution a declaration of default. But, what happens if the cobeneficiaries do not agree to proceed to foreclose? The law is clear that each cobeneficiary has a right to proceed with the foreclosure; however, trustees are not forced to agree, and are reluctant to do so. Beneficiaries must rely on a statutory agreement ahead of time if they want this protection.

Sacramento cobeneficiary dispute.jpgIn apparently the only California decision to address the issue head on, Perkins v. Chad Development Corp., there were two cobeneficiaries. The borrower had defaulted on loan payments, and had let the property taxes go in to arrears. One cobeneficiary wanted to proceed to a nonjudicial foreclosure, the other did not. The property was foreclosed, and the buyer brought a quiet title action to clear title in his name. A third party intervened, claiming an equitable interest in the property. His argument was that the foreclosure sale was not valid because the Notice of Default and Election to Sell had not been executed by both cobeneficiaries. The court did not agree.

The court first noted that joint beneficiaries have a community of interest in the secured obligation akin to a joint venture or partnership, and any of them should have sufficient agency powers to record the notice of default to protect their mutual interests. As a cobeneficiary, beneficiary Perkins was a tenant in common in the beneficial interest under the note and trust deed. A cotenant has a right to protect the estate from injury or loss without the aid or assistance of other cotenants. As the borrower had defaulted on trust deed and had permitted the taxes to go delinquent, Perkins as a cotenant was entitled to protect the common beneficial interest by foreclosing the security.

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Under California foreclosure law, a trustee’s sale eliminates all interests in the property that are recorded after the deed of trust was recorded. For that reason, holders of interests want to get notice that the property is being foreclosed. Generally, the foreclosing trustee is only required to provide notice of the recording of the notice of default to the parties identified in statutes or specified in the deed of trust. Other persons with lesser interests that are junior to the deed of trust are not automatically entitled to notice. Civil Code section 2924b(a) provides a process for anyone to record a request for notice, which then obligates the trustee to send them a copy of the Notice Of Default. Civil Code 2924b (b), set out in full below, describes who otherwise must be provided notice. The trick is whether you are included in the specified categories. In a recent decision, an easement holder was disappointed to learn that he was not, and the easement was lost. They should have recorded a request for a copy of the notice of default.

Saccramento notice of default attorney.jpgIn George Perez as Trustee v. 222 Sutter St. Partners, there was a foreclosure and the subsequent quiet title action was about whether the foreclosure of 425 Bush Street in San Francisco extinguished easement rights. The easement holder had not received notice from the trustee of the foreclosure.

The easement holders argued that an easement holder is included in section 2924b, subdivision (c)(2)(A), as “[a] successor in interest, as of the recording date of the notice of default, of the estate or interest or any portion thereof of the trustor or mortgagor of the deed of trust or mortgage being foreclosed. It continued that it was a successor to the mortgagor of the deed of trust, who was the owner. But this is impossibility. An easement is an interest, but the mortgagor/owner cannot own an easement across one’s own property. Thus, the easement holder cannot be a successor to that interest.

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A deed in lieu of foreclosure is occasionally used as an alternative to a foreclosure sale. The borrower merely deeds the property back to the lender “in lieu of foreclosure.” The lender does not have to go through the time and expense of a foreclosure, and the borrower/owner gets the process over with more quickly. However, there is some risk for the lender in this situation. Title conveyed by a trustee’s deed after a foreclosure sale relates back in time to the date on which the deed of trust was executed. The trustee’s deed therefore passes the title held by the trustor (the borrower; remember the ‘trustor’ is ‘poor’) as of that earlier time, rather than the title that the trustor held on the date of the foreclosure sale. Liens that attached after the deed of trust was recorded are ‘sold out’ or eliminated. However, a deed in lieu of foreclosure (as opposed to a foreclosure deed) passes title to the transferee subject to all existing liens. Whether concerned about deeds in lieu or lien priority in general, it is best to consult with a Sacramento real estate lawyer. Hopefully, you can avoid the problem recently faced by a lender when the trial judge didn’t follow the law regarding merger. They had to get the court of appeals to set things right.

Sacramento merger attorney.jpgIn Decon Group, Inc. v. Prudential Mortgage Capital Company LLC, the owner of a commercial property had a mortgage with Prudential. They hired Decon to renovate the property, but did not pay the bills, so Decon recorded a mechanic’s lien for $437,000, and filed suit to foreclose the lien. The owner was in default on the loan, so the lender took back a deed in lieu of foreclosure from the owner. The lender then conducted a trustee’s sale, and took title to the property. In the action to foreclose the mechanic’s lien, the judge ruled that, on taking back the deed of lieu, the two interests, as beneficiary under the deed of trust and as grantee under the deed in lieu merged, destroying the senior lien. Thus, the junior mechanic’s lien was not eliminated by the foreclosure. The court ordered that the property be sold at auction. The lender appealed.

The court of appeal reversed the lower court, finding that no merger had occurred. It first noted that, under ordinary circumstances, where the holder of a mortgage acquires the estate of the mortgagor (debtor), the mortgage interest is merged in the fee and the mortgage is extinguished…. But this rule is never applied where there is an intervening lien on the property, and where there is no evidence of an express intention to extinguish the first mortgage and hold subject only to the second.