Articles Posted in real estate loan

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When the same debt is secured by liens on both real property and personal property, the lender has options as to how they are allowed to enforce their security interest. They can enforce against the real property under real property law, against personal property under the Commercial Code, or both. There are specifics under both areas of law which must be observed, or the lender may lose their security, and a party in this situation may want to consult with a business and real estate attorney. Otherwise, they may run into the problem faced by a lender recently when they failed to adequately describe the personal property in the deed of trust. The Court of Appeals found that the deed of trust did not successfully describe personal property as additional security, and thus any further recourse for the lender would be contrary to the purpose of the antideficiency laws.

mixed collateral attorney sm.jpgIn Thoryk v. San Diego Gas and Electric Company, the owner of an avocado ranch in San Diego County wanted to subdivide it into two-acre homesites. The owner borrowed $1 and ½ million from Highland for this purpose. There was a wildfire which did extensive damage to the property, and the project stopped. Highland foreclosed and obtained title to the property. The owner believed that San Diego Gas and Electric was at fault and sued for damages. Highland joined the suit, claiming that its deed of trust was secured by more than just the property, and extended to any of the owner’s recovery of damages caused to the property; i.e. it was also secured by personal property. Highland argued that it was entitled to a judicially imposed lien under the terms of its deed of trust and related note.

The owner argued that he was protected by the antideficiency laws, which prohibits collecting money from the owner after a trustee’s sale. However, where there are liens established upon both personal and real property in the subject transaction, a foreclosing lienholder using the power of sale may continue to pursue remedies against the former property owner/borrower. The creditor is not seeking a personal judgment for the unpaid balance of a loan, but instead seeks to enforce additional security secondarily liable for the principal loan.

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I have written before about courts calling to account lenders who reneg on loan modifications after the borrower made numerous trial plan payments. Courts have ruled against lenders based on promissory estoppel, offer and acceptance creating a contract, for lack of a signed, written modification; and lack of a modification signed by the lender. Usually, when the property is about to be, or already has been, sold at a trustee’s sale, the borrower consults a Sacramento real estate attorney about such a situation. In a recent decision the lender was disappointed when the court found that the plaintiff properly alleged numerous claims against it.

Sacramento real estate loan attorney 2.jpgIn James Rufini v. CitiMortgage, Inc., the Sonoma homeowner sought a loan modification. In June 2009 CitiMortgage approved the loan modification, and told him he would receive a permanent modification in October after timely making three trial payments. He continued making the trial payments through December, in January the lender told him that his permanent loan modification agreement would be ready in three days. Three months later, since he had not received the written agreement, he rented out the house (and lived with his son) to offset expenses while waiting for the modification. The modification was then denied because the home was not “owner-occupied.” The lender then refused to accept his mortgage payments at the modified level. A notice of trustee’s sale was recorded, and the borrower got a 30-day postponement, while the lender was requesting additional information, like income information. Meanwhile, CitiMortgage transferred the loan to PennyMac. CitiMortgage kept discussing the modification, and the property was foreclosed. The borrower claimed that the lender’s contact said he had known all along the loan had been transferred to PennyMac.

BREACH OF CONTRACT

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I have written in the past about Sham Guaranties – this is a guaranty of a loan where the guarantor has such a close identity with the borrower that they are in effect providing a guaranty of their own loan. Such a sham guaranty is not enforceable. A typical scenario would be with a limited partnership. The general partner is fully liable for the debts of the limited partnership. If all the principals of the general partner sign the guaranty, the question arises of whether anything has been added by the guaranty. This is a sham especially when the lender takes a role in encouraging the formation of the entity, and only investigates the financial wherewithal of the individual guarantors. Business and real estate attorneys for lenders usually pay special attention to make sure they really will have an effective guaranty. In a recent decision. the guarantors were unhappy to learn that they were liable on the guaranty – there was too much separation between themselves and the borrowers, which they did on purpose so that they would not occur direct liability on the loan.

Sacramento real estate loan sham guaranty attorney.jpg In California Bank & Trust v. Lawlor, the bank loaned millions to Heritage Partners, secured by numerous real estate projects. Smith and Lawlor owned and controlled Covenant Management, which owned and controlled Heritage Capital, which was the general partner of the Heritage partnerships. They really tried to isolate themselves from the borrower to avoid personal liability. The lender required Smith and Lawlor to sign continuing guaranties. The borrower went into default, the lender foreclosed, and had a deficiency of $15 million dollars. California Bank and Trust brought this action to collect on the loan guaranties. Smith and Lawlor argued that the guaranties were sham guaranties and therefore they were actually the primary obligors on the loans, not true guarantors. As primary obligors, Smith and Lawlor claimed that they were entitled to the protection of California’s antideficiency statutes. This should prohibit the lender from obtaining a judgment against them for the difference between the value of the security and the outstanding loan balances.

The antideficiency statutes strictly limit the right to recover deficiency judgments for the amount the debt exceeds the value of the security. The antideficiency laws promote several public policy objectives:

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“Equitable subordination” is used to correct equitable wrongs in the priority of liens on real property. If fairness requires, a first lien or deed of trust can be subordinated, or reduced in priority below, a second lien, swapping their positions. (Civ. Code, §§ 2876, 2903, 2904. A lengthy description by the Supreme Court is copied below). When, through fraud or mistake, a party finds that his lien does not have the priority he bargained for, they should consult with a Sacramento real estate attorney to discuss equitable subordination. Such a lawsuit may result in the judge reclassifying the respective liens to make them fair. In a recent decision the court granted equitable subordination on behalf of two deeds of trust where there was both broker fraud (in forging signatures) and escrow negligence in failing to carry out instructions and reconvey a deed of trust.

Sacramento equitable subordination of loan.jpgIn Elbert Branscomb v. JPMorgan Chase Bank N.A., Navjot owned property on Canal Street in San Rafael. He had three loans; 1st, from Washington Mutual Bank; 2nd with MMB; and 3rd, a $500,000 loan from plaintiff Branscomb. All were secured by deeds of trust. However, Banscomb’s 3rd DOT only indicated that I the loan was for $100,000, due to the broker’s negligence. Navjot refinanced with WaMu, and Modified the MMU loan. Conditions of both were that the lenders were to keep their respective first & second positions. When the escrow officer asked Branscomb’s broker for a payoff of the third, he replied that it was zero, and signed a request for reconveyance. (Yikes, it was $500,000! This broker was bad news. He was also found to have forged his client’s signature on a number of documents. He had done this before, but Branscomb continued to work with him. They deserved each other.) Compounding the broker’s error, the escrow officer was negligent in not reconveying the Third deed of trust. When the first & second refinances recorded, Branscomb moved to 1st, and the other two dropped to 2nd & 3rd. This lawsuit for equitable subordination resulted.

Knowledge of the Plaintiff’s Lien Did Not Prevent Subordination

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I recently described a decision that overruled the rule that a borrower may not make a claim for fraud based on the other party misrepresenting what the contract will say (The Pendergrass Rule). In the past borrowers who claimed that their mortgage broker or lender made promises about their loan that were not true. Where these promises are in direct conflict with the terms of the written agreement, the parole evidence rule as described in Pendergrass prohibited allowing evidence of these statements in court. The California Supreme Court decision in Riverisland concluded that evidence of the false promises may be admitted as evidence of fraud. Another decision went a little farther in clarifying the new rule, finding that even sophisticated parties who engaged in extensive negotiations were not subject to the Pendergrass rule, and evidence of fraudulent statements could be admitted.

sacramento real estate contract fraud attorney.jpgIn Julius Castle Restaurant Inc. V. Payne, the parties entered a lease agreement, as well as purchase of the fixtures, of a restaurant in San Francisco. The lease agreement stated:

“Tenant acknowledges that as of the date of this Lease, Tenant has inspected the Premises and all improvements on the Premises and that the Premises and improvements are in good order, repair, and condition… This instrument constitutes the sole agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, and the specified lease term, and correctly sets forth the obligations of Landlord and Tenant. Any agreement or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are void.”

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A Deed of Trust in California can be used to secure contract obligations other payment of money. Usually, the primary obligation secured is the repayment of the loan. There are ancillary duties usually set out in the deed of trust, such as keeping the property in good repair, maintaining insurance, etc. However, in some cases the other obligations may be a primary secured obligation. Enforcement, by judicial foreclosure or nonjudicial trustee’s sale, essentially provides a dollars remedy through a foreclosure sale. Thus, the obligation being secured must be capable of liquidation (i.e. determining a specific monetary value) before enforcement. The contract may include a liquidated damages provision, which specifies how to calculate that monetary value. Whether a liquidated damages clause is enforceable is not always clear, and interested parties may want to consult with a Sacramento real estate and business attorney for clarification. Otherwise, without liquidated damages, determining the amount of damages would likely require a judicial foreclosure, in which monetary damages will be determined.

yolo and sacramento real estate attorney.jpgA dilemma arises when the property owner pays off the loan, but has not yet completed full performance of other obligations secured by the deed of trust. Usually, on paying off the loan, the borrower wants the lender to record a reconveyance of the deed of trust, effectively removing the ‘lien’ from the record. However, courts have found that reconveyance was not required. Such was the case in Dieckmeyer v. Redevelopment Agency of the City of Huntington Beach, where the plaintiff bought a condo through an affordable housing program. The program included restrictions on household incomes, and on future buyers. The deed of trust securing the purchase loan stated that it secured repayment of the note, future advances or obligations of the borrower, and…

“[p]erformance of each and every obligation, covenant, promise or agreement of Trustor contained herein in the Loan Agreement between Beneficiary and Trustor … and in that certain Affordable Housing Agreement [the CC & R’s] currently recorded on the property….”

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The Marketable Record Title Act (MRTA, Civil Code section 882.02+) was enacted so that ‘ancient mortgages’ would not last forever. Prior to the act, lost or forgotten mortgages and deeds of trust would continue to be a cloud on title. The MRTA became law in 1982 to put an outside limit on the number of years that the power of sale in a deed of trust may be executed. The MRTA provides that if the “evidence of indebtedness” recorded with the county recorder contains a reference to the maturity date of the secured debt, the right to foreclose by private trustee’s sale will expire 10 years after maturity. If no date of maturity is provided, the limit is 60 years after recordation of the deed of trust. The trustee’s deed must be recorded before the time is up. The limit to conduct a judicial foreclosure, however, is much different. Civil Code section 2911 provides that a lien is extinguished by the lapse of time within which, under the provisions of the Code of Civil Procedure, an action can be brought upon the principal obligation. Generally, this means four years after maturity or breach of a written note.

marketable title attorney.jpgThe beneficiary can extend the time by recording a “notice of intent to preserve interests” prior to the expiration of the prescribed time period. If this notice is timely recorded, the period is extended until 10 years after the notice is recorded. Civil Code section 880.310(a), 880.020(a)(3). If one has a concern about the limitations of their deed of trust, they should consult a Sacramento and Yolo county real estate attorney.

Prior to a 2006 amendment, the statute required the maturity date be “ascertainable from the record…”. This resulted in an issue which had been raised several times, and courts have had varying opinions about, namely, what happens if a Notice of Default is recorded? One decision found that this triggered the 10 year statute. Another court has said it did not. A third decision, from the Third District Court of Appeal (which includes the greater Sacramento area), found that it did not trigger the 10 year statute. The statute was amended in 2006 to resolve this issue, essentially providing that a Notice of Default does NOT trigger the limit. The discussion which follows concerns the 3rd District decision, and why interpreting the older language to allow the NOD to trigger the limit would be preposterous.

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Code of Civil Procedure §726 is referred to as the “one action rule,” and the “security first rule.” It provides that, where there is a debt secured by real estate, there may only be one form of action to collect the debt, and that remedy is foreclosure. If it is through a lawsuit for judicial foreclosure, with some exceptions the lender may also obtain a deficiency judgment in that same action. If the lender conducts a non-judicial trustee’s sale, it is barred from collecting for the deficiency. On its face the rule is simple, but what if either the borrower, or the real property, is not located in California where section 726 applies? In that case, lenders and borrowers should consult with a Sacramento and El Dorado real state attorney, as there are numerous statutes and court decisions that cover the issues in this area. One such issue is where the lender gets a deficiency judgment after foreclosure of out of state property. Another issue, discussed here, is where the foreclosure is out of state, but the lender wants to sue for the balance in California. In this case, 726 does not apply.

Yolo real estate attorney one action rule.jpgIn Felton v. West ((1894)102 Cal 266), both parties lived I n California. Felton loaned West over $90,000, and West signed a promissory note, which was secured by property West owned in Oregon. West didn’t pay the loan, and there was a foreclosure sale of the Oregon property. The sale price did not cover the debt, so the lender sued the borrower, in California, for the balance, about $44,000.

Defendant argued that section 726 barred the action. As there was a prior action in Oregon to recover for the same debt, section 726 prohibited the California action- after all, there can be only “one form of action…,” and that already occurred in Oregon.

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A Loan Guaranty is a promise by the guarantor to pay the debt of another. In commercial real estate loans they are commonly used to provide additional security to the lender. Such loans are often given to new entities without a financial history, and the lender wants a person (with assets) on the hook for the debt if the entity fails. Last week I discussed a decision where the guarantor excluded a house from liability on the guaranty, but when he sold the home, the cash proceeds could be grabbed by the creditor. This article concerns the scenario in which the guarantor can escape liability, if the it turns out that they signed what courts consider a “sham guaranty.” This could arise due to deliberate action by the lender, insufficient investigation by the lender, or inartfully worded guaranty language. Parties concerned about what exactly their guaranty covers should consult with a Sacramento real estate attorney.

sacramento loan guaranty attorney 1.jpgCivil Code section 2787 provides that a “guarantor is one who promises to answer for the debt, default, or miscarriage of another…” What has become known as a sham guaranty is one where the guarantor is found to be the same as the borrower. The clearest case is where an individual signs a promissory note promising to pay the debt. The lender requires the same individual to sign a guaranty for the same debt, waiving many defenses. For example, there are statutory anti-deficiency protections for real estate borrowers, prohibiting the lender from collecting from the borrower. These protections are not extended to guarantors, and loan guaranties usually have waivers of all these defenses. In the sham guaranty the lender may think that by having the same borrower guaranty the loan allows for a deficiency judgment against the borrower as guarantor. Or, it may be used in hopes that the borrower/guarantor does not understand, and truly expects to be personally liable for the debt.

The sham guaranty defense extends to partnerships. In a general partnership, where each partner is already liable for debts of the partnership, their guaranty of partnership debt would be a sham. For Limited Partnerships, the same could apply to the general partner. River Bank America v. Diller is instructive, in a case where the principals of the corporate general partner signed the guaranty. The Bank wanted the borrower to form a limited partnership to be the borrower. A new entity was formed to be the general partner. The lender always considered the individuals as the primarily obligors, and had them guaranty the loan. The lender did not investigate the financial health of the new entity created to be general partner. The court found that, had the individuals themselves been the general partners, and had they attempted to guarantee the debt, there is no question such guaranty would have been a sham. Instead, the general partner of the primary obligor is a corporation which the individuals fully owned and controlled. However, the court found that this was a distinction without a difference. (The court was influenced also by evidence of the lender’s intent to subvert the antideficiency protection.

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Loan guaranties are contracts in which the guarantor promises to pay the debt if the principal debtor fails to pay. This is not what happens when someone thinks they guaranteed a home mortgage loan for their son or their significant other- they are usually equally liable on the loan. A guaranty more routinely shows up when an entity, such as an LLC or corporation, borrows money or signs a lease. The lender or landlord wants the individuals involved to guaranty the debt. If the guarantor has substantial assets, the lender may allow them to carve out some assets from being available for collection, such as their residence. Loan guarantors should consult with a Sacramento real estate and business attorney to closely review the terms of their guaranty so that they understand what their liability is. In a recent case (which was the first published opinion on the issue in the U.S.), the guarantor excluded a house from liability. He sold the house, and was surprised when the court ruled that, while the house was not attachable to pay the debt, the proceeds of the house (cash from the sale) were not excluded, and could be grabbed by the Lender. That the house was on Lake Como tells you that this was alota cash.

sacramento loan guaranty attorney.jpgIn Series AGI West Linn of Appian Group Investors DE LLC, Series loaned $3.1 million to a limited partnership which was developing a market in Oregon. Robert Eves, the developer, guaranteed the loan. The lender had Eves sign a Loan Guaranty, which provided:

” The following assets are excluded from the Robert J. Eves personal Guaranty: … The personal residence of Robert J. Eves at Via Regina, 27 Moltrasio, Como, Italy and its contents.”

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