Articles Posted in real estate loan

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An all-inclusive deed of trust (“AITD”) is used when the seller will be financing part of the selling price, and the buyer will also take subject to the existing deed of trust. The seller remains on the existing loan (and continues to make the payments) and finances the difference between the existing loan balance and the purchase price. But any transfer normally triggers the “due on sale” or acceleration clause, where the lender may foreclose, calling the entire loan due. Once the deed is recorded, the transfer is public record, and the Lender may catch it. But there is an exception in Federal Law which blocks lender action for a transfer to the spouse or children of the borrower. This becomes important where the original loan has a low interest rate, or the buyer is unable to qualify for a loan.

Due-on-Sale-attorneyAll-inclusive deeds of trust are used when the interest rate on the existing loan is much lower than the current prevailing rate, the rate of the wraparound can be lower than the [prevailing rate, and the seller still earns a spread between the rate he is paying and the rate that the buyer is paying to the seller.

The exception is part of the Garn–St Germain Depository Institutions Act of 1982, that deregulated savings and loan associations and allowed banks to provide adjustable-rate mortgage loans. More importantly for us, it prohibits lenders from exercising the due on sale clause in transfers between parents and children. There are some other exemptions set out at the end of this Blog.

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In California, a third party who acts in reliance on a quiet title judgment retains its property rights even if the judgment is later invalidated as void, as long as the third party qualifies as a bona fide purchaser for value. The third party must do so without knowledge of any defects in the judgment. But “knowledge” is a slippery term. Does it mean actual knowledge, or include “constructive” knowledge? is a legal concept that, in real estate, generally applies when the document must be recorded as prescribed by law. The buyer may not have seen it, but the law treats them as if they had. In a recent decision out of Inglewood, CA, the court decided that they must have neither actual notice or constructive notice. This decision is interesting because the buyer would have had to do some digging (and actually did obtain title insurance) to realize there was a defect.

Quiet-title-judgment-attorneyIn Tsasu LLC v. U.S. Bank Trust, N.A the court had a complicated series of facts.

– Celestine borrowed money from CIT, who assigned the deed of trust to US Bank. It was then assigned to DLJ.

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A junior lienor is a lender who is not in first place on the property – there is a senior lien in front of them. This often occurs when an owner has paid down the senior and takes out an equity loan, or may be the result of a purchase. If the senior forecloses, the junior can pay the senior lien, or buy the property at foreclosure. The junior then stands in the place of the senior. Alternatively, the junior can allow the foreclosure to take place, in which case it becomes a sold-out junior – it has no security for the debt. The junior must pursue the borrower personally to get paid. If the senior’s foreclosure results in a sale with excess proceeds, they may be paid by order of priority. But what happens if the junior lienor holds a lien on less than the entirety of the property? That was the case in a recent decision in which the junior was secured by only 75% of the property. The court found that the junior was only entitled to 75% of the proceeds. The owner of the 25% got the remainder.

Sacramento-junior-lien-AttorneyIn Zieve, Brodnax & Steele, LLP v Dhindsa, a father had 75% interest, and his son the remaining 25% in property in Turlock. The senior lender held a lien against 100% of the property, and the juniors lien was only against the father’s 75% – the son’s interest was not included. The senior foreclosed and got paid, leaving a surplus of $160,000 available. The dispute was whether the 25% owner got any.

The junior lender wanted all the proceeds, so it relied on Civ. Code, § 2924k, subd. (a)(1)–(4), set out in full at end of post.) This provides that First, the costs of foreclosure are paid. Second, the foreclosing creditor’s secured obligations are paid. Third, junior lienors are paid in their order of priority (this is what the trial court relied on). Lastly, any remaining funds are given to the vested owner of record at the time of the foreclosure sale. In this case the trial court awarded the entire surplus to the junior creditor, but it was reversed on appeal.

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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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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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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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Default judgments occasionally occur, and sometimes they may be set-aside or vacated by the court. There are several statutory grounds for a judgment debtor to get a default vacated. But what happens in the default judgment concerns title to real property? If there is a default judgment in the chain of title, potential buyers need to take notice and may need to consult a real estate attorney. There is a possibility that the judgment could be vacated, and the result would affect the buyer’s title. A question arises – is the potential buyer a bona fide purchaser for value, who may rely on the recorded judgment? And what are the limits to vacating the default? Those are questions learned the hard way by a disappointed buyer in a recent decision.

Sacramento-BFP-lawyerIn OC Interior Services, Inc. (OCI) vs. Nationstar Mortgage Inc., OC purchased real property knowing about a recorded default judgment in the chain of title. The default judgment nullified the appellant’s deed of trust. It started when the original owner obtained a $2 million loan on a property in Silverado, California. He filed a lawsuit to cancel the deed of trust and snuck in a default judgment. OCI paid $750,000 for the property, knowing that it was worth $1.5 million. OCI was aware of the issue; it obtained title insurance for $937,500- over $150 thousand more than the purchase price! Before OCI purchased the property it asked its title insurer “‘what happens if this [default judgment] gets appealed?’ And they said, ‘That’s why you have title insurance.’ ”

The original lender got the default judgment vacated and proceeded to foreclose. OCI filed this lawsuit. OCI claimed that it qualified as a bona fide purchaser for value, relying on the recorded default judgment showing that the deed of trust had been wiped out. The court of appeals did not agree.

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Assigning claims and causes of actions regarding real estate to someone does not necessarily give them the right to file a lawsuit for quiet title. A quiet title action seeks a declaration of the parties’ rights to the real estate. A description of the parties’ legal interests in real property is all that can be expected of a judgment in an action to quiet title. Without an interest in the property itself, a party has no standing to ask the court to quiet title in the property or to obtain damages for the cloud on title. An action to cancel a trustee’s deed or other instrument transferring title is no different. Parties in this situation should speak with a Sacramento real estate attorney to make sure that the assignment has them covered because the assignment needs something else – assignment of all the assignor’s interest in the property itself. This was a surprise to several people in a 2012 California decision.

Sacramento-real-estate-attorneyIn Chao Fu, Inc. v. Wen Ching Chen, Chao Fu Inc. (CFI) had a 25% interest in property at 852-860 Villa Street in Mountain View, CA (conveniently located between a brewpub and a beer garden.). CFI’s secretary, Kuo, borrowed money from Chen (Lender) and Chen received a promissory note. Chen got nervous and wanted security. They gave him a deed of trust against the Mountain View property. The CFI principals were out of the country for a long time, and the lender foreclosed, obtaining title to the property.

The lender, in a further attempt to collect on the note, sued Kuo. Kao obtained an assignment from CFI of its claims regarding the dispute with the lender. Important is the language of the assignment:

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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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