Articles Posted in real estate loan

Usually, residential lenders do not file judicial foreclosures. Rather, they prefer to hold a trustee’s sale to get the property back. This is a much faster, and streamlined, process which is governed by statute. In holding a trustee’s sale foreclosure however, the lender gives up any rights to a deficiency judgment. The borrower loses the house, but does not owe any money. Often the owner tries to stop the foreclosure by trustee’s sale by filing a lawsuit, alleging defects in the lender’s procedure, and seeking an injunction against proceeding. That is what happened in a recent San Diego case, but the wise lender surprised the borrower with a cross-complaint for judicial foreclosure.

In Arabia v BAC Home Loans Servicing, L.P., Arabia refinanced his home. It was 2005, and he got an astronomical valuation- he took out a $2.8 million first, and a home equity loan of $1 million- probably lots of cash. He quit paying on the first loan in 2007. BAC began trustee sale proceedings. And Arabia sued. BAC filed a cross-complaint for judicial foreclosure. This was smart for the lender; since they were going to be tied up in a lawsuit, they might as well seek judicial foreclosure, with the resulting chance at a deficiency judgment. There was a lot of money at stake -($3.8 million total in the first and second loans. At the foreclosure the lender got the property back for a bid of $1.95 million, presumably the balance on the first). Maybe they felt that the borrower had assets, and a judgment against him could be collected.

The Servicer Can File Judicial Foreclosure

I wrote in March about the loan guaranties and how the guarantor can waive antideficiency protections. A recent decision out of Sacramento concerned a commercial loan where, because of the drop in property value, the lender did not bother to foreclose but went directly to the guarantor, and was successful.

In Gray1 LLC v. Kolokotronis, in 2006 Kolokotronis was the Guarantor of a $17.7 million dollar loan to Sheldon Terrace LLC, a real estate project the Guarantor had set up. By 2008 the value of the real estate had crashed. The loan had a provision providing that if the value of the security was far less than the balance of the loan, it was a default and the lender could call the loan due. That happened here, and neither the borrower or the Guarantor cured the default or paid off the loan. So, the lender sued the Guarantor.

First, the guarantor argued that language in the guaranty describing debt “due or not due” suggests that the instrument was a demand note, not a guaranty. The court said no; in this context the phrase meant nothing more than part of the broad definition of the borrower’s obligations that the guarantor is guaranteeing. A guaranty relates to a future liability of the principal. Civil Code section 2814.

Property buyers in California purchase a title insurance policy as a matter of course. Many do not understand what exactly such insurance does for them, and should consult with an experienced Sacramento real estate attorney. Title insurance does not guaranty the state of title. Instead, it is an agreement to indemnify the buyer / insured for losses incurred as a result of defects in, or encumbrances on, title. One buyer bought seven adjacent parcels in Santa Clara County, with a plan to sell parcel number 7. When the buyer backed out because of the title situation, he sued the title company, but lost.

In Deanza Assoc. v. Chicago Title Insurance, the problem was that the city had recorded a “Notice of Merger” of the seven parcels prior the purchase by the plaintiff. Deanza then went into contract to sell number 7, but the buyer backed out when they discovered the notice of merger.

Deanza filed a claim against their title insurance policy. Chicago Title first denied, claiming that the CLTA policy excluded claims regarding governmental regulation whether or not shown in public records. The title company said oops, you paid for an ALTA policy, we issued a CLTA, so your claim is covered. Then they said oops, the claim is not covered. The Notice of Merger impacts only the value and use of the property, not the validity of your title. Deanza filed suit.

A recent decision concerned a property in a real estate transaction that had two deeds of trust securing two different lenders which were recorded at the exact same time. However, they were indexed at different times, and the earlier indexed lender thought he had priority. Generally, where it is a matter of notice, first to be indexed has priority. The court here thought a different rule applied.

In First Bank Chung, the borrower, pulled a fast one on two lenders (actually three, but the third was not involved in the appeal). He got two different loans at the same time, signing loan documents for each on the same day; the lenders did not know about each other. Maybe the property was worth more then all the loans combined, but also maybe not, & by moving simultaneously on both loans, he got twice the cash he should have.

Both lenders delivered their deeds of trust to the county recorder before 8 a.m. On the same day. The usual procedure for recorders is to allow title companies to deliver documents in batches before 8 am.,and all these documents have an 8 a.m. recording time stamp. They are then separately indexed later. Here, the East West bank’s lien was indexed first, so they thought they had priority. The court said no, they both had equal priority.