Articles Posted in Mortgage

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Quiet title actions establish claims for and against title to California real property. Quiet title has its own rules regarding t when the statute of limitations begins to run – courts look to the underlying theory of relief to determine the applicable period of limitations. Once that is determined, whether a statute of limitations bars an action to quiet title may turn on “whether the plaintiff is in undisturbed possession of the land.” But what exactly disturbs possession of land? A recent decision out of Lafayette CA determined if the posting and recording of a Notice of Trustee’s Sale disturbed the owners’ possession. Wells Fargo was not pleased with the result.

Sacramento-quiet-title-attorney-1In Huang v Wells Fargo Bank, Wells Fargo held two letters of credit (home equity loans) that had been paid off in a refinance. Wells Fargo never issued or recorded any reconveyances of these two deeds of trust. The owner defaulted, and the refinance lender foreclosed. The Huangs purchased the Property from the successor to the foreclosing lender in February 2009. They were issued a policy of title insurance from Fidelity National Title Company (Fidelity). The following month, Wells Fargo recorded a notice of default and election to sell the Property under the power of sale in the First Wells DOT.

On August 24, 2009, Wells Fargo recorded its notice of trustee’s sale. The Huangs received the notice when it was posted on the door of the Property that month. The Huangs contacted their title insurer Fidelity, who informed them that it was going to conduct an investigation and contacted Wells Fargo to resolve the issue. The trustee’s sale did not proceed as scheduled. In the months following, Fidelity sent the Huangs periodic updates to identify new points of contact and to state the investigation was ongoing, but they never received any communication from Fidelity telling them there was a resolution of the dispute with Wells Fargo. Between July 2010 and May 2014, the Huangs heard nothing further and assumed the matter had been resolved. In May 2014, nearly five years after the Huangs gave Fidelity the notice of trustee’s sale, they were told that Wells Fargo claimed it had two deeds of trust secured by the Property and was again threatening to foreclose. The Huangs filed suit against Wells Fargo to quiet title to the Property.

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Notes and Deeds of Trust are often assigned to different parties. The question posed is what happens if the Deed of Trust alone is assigned? A typical assignment of the Deed of Trust alone will purport to assign “all beneficial interest under that certain Deed of Trust dated xyz..” But the long-established law in California is clear: the beneficial interest under a Deed of Trust is held by the party who holds the Note (or is entitled to enforce it), without regard to the assignment of the Deed of Trust.

Sacramento-Deed-of-Trust-LawyerWe start with the U.S. Supreme Court decision in Carpenter v. Longan (83 US 271.) In that great 1872 style of legal writing, it states:

“The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity. That the debt is the principal thing and the mortgage an accessory. Equity puts the principal and accessory upon a footing of equality, and gives to the assignee of the evidence of the debt the same rights in regard to both.”

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It is common in a real estate transaction to have more than one loan providing the purchase money. In the residential situation, it usually involves the first mortgage and a second home equity line of credit (HELOC) for a lesser amount. The HELOC is a usually required if the buyer cannot provide a large enough down payment. The 1st mortgage deed of trust is usually recorded first in order and indexed that way. The lender wants this loan to have priority over the 2nd deed of trust. Multiple deeds of trust are also involved in some commercial transactions. If the first forecloses, the second will be wiped out, losing its security. Real estate attorneys sometimes see the holder of the second rushing to foreclose first so that it is not a “sold out junior.” In a recent decision in Contra Costa County, the deeds of trust were recorded in the opposite order – the HELOC first – and the HELOC foreclosed. The first lender believed it was entitled to the surplus from the trustee’s sale, but the court disagreed.

Sacramento-deed-of-trust-attorney-2In MTC Financial, Inc. v. Nationstar Mortgage, borrower Sparrow obtained a mortgage loan plus a $15,000 HELOC (home equity line of credit) 2nd on his property in Hercules. Both loans were from the same lender. Both deeds of trust were recorded at the same time, but the HELOC was indexed first in the recorder’s records. The mortgage was indexed as the very next document. Sparrow defaulted on the smaller HELOC, and the 2nd was foreclosed, with a surplus remaining of over $73,000. The trial court decided that the senior lienholder was not entitled to any surplus – as it was senior, the foreclosure sale buyer obtained the property subject to the senior loan. The lender appealed, arguing that, because the senior deed of trust was recorded 2nd, it was wiped out in the trustee’s sale.

The court determined that Nationstar, as a senior lienholder, was not entitled to any of the surplus proceeds of the trustee sale.

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When a loan is secured by real property in California, a deed of trust is recorded, acting as a lien on the property. This reduces the equity in the property. If the owner defaults on the loan, the beneficiary (lender) may then conduct a trustee’s sale. But what if the beneficiary does not exist? A scam to hide equity from creditors would be to record a fictitious deed of trust so that a judgment would not attach to the property. If the creditor discovers the scam, they could take legal action to have the deed of trust determined to be void. However, in a recent decision, the owner of the property recorded a false deed of trust shortly after acquiring the property. The creditors did not discover the fraud until years later, after the statute of limitations for Fraudulent Transfer had expired. The scam worked.

Sacramento-fraudulent-transfer-lawyerIn PGA West Residential Association Inc. v. Hulven International Inc., defendant Mork bought a condo in La Quinta for cash. It was valued between $5 & $6 hundred thousand dollars. He then recorded a deed of trust against the property naming Hulven Inc. as the beneficiary. There was no such corporation. The deed of trust purported to secure a Note for $450,000, but Mork never made any payments.

Nine months after it was named as the beneficiary on the deed of trust, Hulven was incorporated in Montana. Just over two years later, Hulven was involuntarily dissolved. At all times, Mork was Hulven’s sole officer, director, and shareholder.

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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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Real Estate investors in California often work through a licensed Broker, who puts together investor’s cash with potential borrowers. Investors prefer these arrangements (hard-money loans) because they can obtain a higher interest rate for their money, fully secured by a deed of trust recorded against real property. These loans are made through a licensed Broker because broker arranged loans are not subject to usury laws. (More details at the end of this article.) Real Estate Attorneys may be tasked with the job of determining if the usury law applies, and if so, whether this particular loan is usurious. If the loan is usurious, the concern for the investor is to be treated as a holder in due course, free from the defense of usury. It was a bad day for some investors in the Bay Area when the court decided that they were not holders in due course, because the unlicensed Broker kept possession of the notes in order to service them.

In Creative Ventures, LLC v. Jim Ward & Associates, Jim Ward was a licensed real estate broker, and his license was placed with a corporation. He retired and the license expired. He came out of retirement, created a new corporation, JWA, and applied to the DRE to renew his license for the old corporation. Apparently he did not realize that he needed a new license for the new corporation.

A real estate developer borrowed $3 million from JWA. It was through four Promissory Notes, two at 8% interest and two at 10% interest. All the notes included a 6% Broker commission. (For usury purposes, the interest rate is added to the commission, so here they were 14% and 16%, over the 10% usury limit.) This would be ok if JWA was licensed, but it was not. A lawsuit followed.

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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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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.

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