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					Roger Bernhardt‘s                                  Real Estate Finance                                                  Page 1 of 235
Golden Gate University                                Spring 2004                                                    October 26, 2011
Chapter I.      Introduction and Overview ..................................................................................... 1
  A)       The Advantages of Being a Secured Lender, p. 3........................................................... 1
     1) The Mortgage – Definitions, p. 3 .................................................................................... 1
     2) Some History - The Equity of Redemption, Foreclosure and Moratoria, p. 4 ................ 1
     3) The Deed of Trust, p. 10 ................................................................................................. 3
     4) The Secured Obligation, p. 16 ........................................................................................ 4
  B)       The Security, p. 19 .......................................................................................................... 5
     1) Real Property vs. Personal Property, p. 19 ..................................................................... 5
     2) Partial Real Estate Interests, p. 20 .................................................................................. 5
     3) Junior and Senior Liens, p. 21 ........................................................................................ 6
  C)       Deficiency Judgment, p. 22 ............................................................................................ 6
     1) Routine Foreclosure under California Law, p. 23........................................................... 6
     2) Nonjudicial Foreclosure, p. 23 ........................................................................................ 6
     3) Judicial Foreclosure, p. 25 .............................................................................................. 7
     4) Federal Foreclosure Procedures, p. 25 ............................................................................ 7
Chapter II.     Part I: The One Action Rule ................................................................................... 8
  A)       The Basic Rules, p. 29 .................................................................................................... 8
     1) Cal. Code Civil Procedure § 744 & 726 ......................................................................... 8
     2) Cases ............................................................................................................................... 9
  B)       Sanctions for Violating the Rule, p. 42 ......................................................................... 13
Chapter III. The Anti-Deficiency Rules ................................................................................... 20
  A)       The Statutes, p. 65 ......................................................................................................... 20
  B)       The Basic Cases, p. 66 .................................................................................................. 21
  C)       Nonqualifying Juniors, p. 91 ......................................................................................... 29
  D)       Rival Rules, p. 98 .......................................................................................................... 31
  E) Getting Around the Rules, p. 103 ..................................................................................... 33
     1) Changing vendors into lenders, p. 103.......................................................................... 33
     2) Unsecured and undersecured notes, p. 105 ................................................................... 34
Chapter IV. Other Debtor Protections ...................................................................................... 36
  A)       Consumer Protection Legislation, p. 111 ...................................................................... 36
     1) Disclosures .................................................................................................................... 36
     2) Yield Spread Premiums, p. 112 .................................................................................... 36
     3) Predatory lending, p. 112 .............................................................................................. 36
  B)       Usury, p. 116 ................................................................................................................. 38
     1) Policy Considerations, p. 116 ....................................................................................... 38
     2) Some Basic Statutes and Regulations, p. 117 ............................................................... 38
     3) Loans Made or Arranged by a Person Licensed as a Real Estate Broker, and Secured
     by Real Property. .................................................................................................................. 40
  C)       Homesteads, p. 127 ....................................................................................................... 43
     1) Homestead exemptions ................................................................................................. 43
     2) Forced sale of a homestead ........................................................................................... 43
     3) Exception for holder of mortgage or deed of trust ........................................................ 44
     4) Distinctions between automatic and declared homesteads ........................................... 44
     5) One residence limitation, .............................................................................................. 44
  D)       Bankruptcy Protection, p. 129 ...................................................................................... 44
     1) 11 USC §362, Automatic Stay ...................................................................................... 45
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Golden Gate University                                 Spring 2004                                                      October 26, 2011
     2) Cases, p. 130 ................................................................................................................. 45
Chapter V.       Part II: Other Security Arrangements - Equitable Mortgages .............................. 50
  A)      Deeds Absolute, p. 145 ................................................................................................. 50
  B)      Leases and Leasebacks, p. 151 ..................................................................................... 52
  C)      Negative Pledges, p. 160 ............................................................................................... 55
     1) Covenants Not to Convey, p. 161 ................................................................................. 55
     2) Holding Agreements, p. 167 ......................................................................................... 57
  D)      Irregular Mortgages, p. 169 .......................................................................................... 58
  E) Vendors‘ Liens, p. 171 ...................................................................................................... 59
Chapter VI. Ground Leases ...................................................................................................... 60
  A)      Purposes of the Ground Lease, p. 175 .......................................................................... 60
  B)      Mortgaging the Ground Lease, p. 176 .......................................................................... 61
     1) Wells Fargo Bank, N.A. v. Bank of America, NT & S.A., 32 Cal. App. 4th 424 (1995),
     p. 177..................................................................................................................................... 61
     2) Glendale Federal Bank v. Hadden, 73 Cal. App. 4th 1150 (1999), p. 181 ................... 63
     3) Vallely Investments, L.P. v. Bancamerica Commercial Corporation, 88 Cal. App. 4th
     816 (2001), p. 184 ................................................................................................................. 64
Chapter VII.         Part III: Lenders‘ Other Strategies – Rents as Security .................................... 66
  A)      In the Absence of a Specific Clause in the Deed of Trust, p. 191 ................................ 66
     1) Case law ........................................................................................................................ 66
     2) Cal. Code Civil Procedure ............................................................................................ 67
     3) Cal.Civ.Code, Rent Skimming Statutes, p. 193 ............................................................ 68
     4) Federal equity skimming statutes,................................................................................. 70
  B)      The Effect of an Assignment of Rents Clause, p. 196 .................................................. 70
     1) Getting a Receiver......................................................................................................... 70
     2) Cal. Code Civil Procedure §564(b)(11) – (12) ............................................................. 70
     3) Fighting off the Bankruptcy Trustee ............................................................................. 70
     4) In re GOCO Realty Fund I, 151 B.R. 241 (Bankruptcy N.D. Cal. 1993), p. 197 ......... 71
     5) Notes, p. 201 ................................................................................................................. 72
Chapter VIII.        Supplemental Sources of Repayment, p. 211 ................................................... 78
  A)      Damages Awards, p. 211 .............................................................................................. 78
Chapter IX. Actions in Waste, Fraud & Negligence ................................................................ 85
  A)      Waste............................................................................................................................. 85
     1) Cornelison v. Kornbluth, 15 Cal.3d 590 (1975), p. 229 ............................................... 85
  B)      Notes ............................................................................................................................. 87
     1) Waste, p. 233................................................................................................................. 87
     2) Successors, p. 233 ......................................................................................................... 87
     3) Security deposits for waste, p. 233 ............................................................................... 87
     4) Federal waste, p. 233 .................................................................................................... 87
     5) Nonrecourse loans and financial waste, p. 236 ............................................................. 88
     6) Liability of third parties: U. S. Financial v. James Sullivan, 37 Cal. App. 3d 5 (1974),
     p. 238..................................................................................................................................... 88
     7) Damage occurring before the mortgage, American Sav. & Loan Asso. v. Leeds, 68
     Cal. 2d 611 (1968), p. 239 .................................................................................................... 89
     8) Fraud, Cal. Code Civil Procedure § 726(f, g, h), p. 241 ............................................... 90
     9) Inadvertent loss of security, p. 241 ............................................................................... 90
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Golden Gate University                               Spring 2004                                                  October 26, 2011
     10)    Toxic Waste, p. 242 .................................................................................................. 90
     11)    Forfeited property, p. 246 ......................................................................................... 91
Chapter X.     Guarantors ............................................................................................................. 92
  A)     True Guaranties, p. 247 ................................................................................................. 92
     1) Rules, p. 247 ................................................................................................................. 92
     2) Cases and Notes ............................................................................................................ 93
  B)     Sham Guaranties (under 580d) ..................................................................................... 97
  C)     Hidden Guaranties, p. 265 ............................................................................................ 99
Chapter XI. Multiple Security ................................................................................................ 100
  A)     Blanket Liens, p. 269 .................................................................................................. 100
     1) Order of Sale, p. 269 ................................................................................................... 100
     2) Releasing Parcels from the Blanket Lien .................................................................... 103
  B)     Fair Value and Anti-Deficiency Protection ................................................................ 105
  C)     Deficiency Judgments ................................................................................................. 107
  D)     Mixed Security, p. 290 ................................................................................................ 108
Chapter XII.      Miscellaneous Lender Strategies .................................................................... 109
  A)     Opinion Letters, p. 305 ............................................................................................... 109
  B)     Arbitration, p. 306 ....................................................................................................... 109
Chapter XIII.     Priorities .......................................................................................................... 113
  A)     Initial Determinants of Priority, p. 317 ....................................................................... 113
     1) Recording Act Priority, p. 317 .................................................................................... 113
     2) Purchase Money Priority, p. 326................................................................................. 116
     3) Priority of Unrecorded Mortgages Against Other Interests ........................................ 118
  B)     The Effect of Foreclosure ........................................................................................... 119
     1) The Effect on Junior and Senior Liens ....................................................................... 119
     2) The Effect on Leases ................................................................................................... 119
     3) The Effect on Other Interests, p. 335 .......................................................................... 119
     4) Merger ......................................................................................................................... 120
  C)     After-Acquired Property, Fixtures and Mezzanines, p. 337 ....................................... 120
     1) Enlarging the Mortgaged Property, p. 337.................................................................. 120
     2) Competing Claimants to Fixtures ............................................................................... 122
     3) Mezzanine Financing, p. 341 ...................................................................................... 124
  D)     Priority Protected by Title Insurance, p. 343 .............................................................. 124
     1) Title insurance described ............................................................................................ 124
     2) Cal Ins Code ................................................................................................................ 124
Chapter XIV.      Chapter 14 Alteration of Priorities .................................................................. 126
  A)     The Effect of Statutes of Limitations, p, 349 .............................................................. 126
     1) Affect on foreclosure .................................................................................................. 127
     2) Extension agreements ................................................................................................. 127
     3) Mortgage (lien theory) ................................................................................................ 127
     4) Deed of Trust (title theory) ......................................................................................... 127
  B)     Waiver and Estoppel, p. 350 ....................................................................................... 127
     1) James v. P.C.S. Ginning Co., 276 Cal. App. 2d (1969), p. 350 .................................. 127
     2) Valley Title Co. v. Parish Egg Basket, Inc., 31 Cal. App. 3d 776 (1973), p. 352 ...... 129
     3) Note, p. 356 ................................................................................................................. 130
  C)     Loan Modifications ..................................................................................................... 130
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Golden Gate University                               Spring 2004                                                  October 26, 2011
     1) Lennar Northeast Partners v. Biuce, 49 Cal. App. 4th 1576 (1966), p. 355 ............... 130
     2) Notes, p. 359 ............................................................................................................... 132
  D)     Equitable Subrogation, p. 360 ..................................................................................... 132
     1) Cal.Civ.Code § 2876 Prior liens ................................................................................. 132
     2) Caito, revisited ............................................................................................................ 132
     3) Non-paying cotenants ................................................................................................. 133
     4) Notes, p. 361 ............................................................................................................... 133
  E) Consent to Lower Priority: Subordination, p. 363 .......................................................... 134
     1) Handy v. Gordon, 65 Cal. 2d 578 (1967), p. 363 ....................................................... 134
     2) Notes, p. 365 ............................................................................................................... 135
     3) Protective Equity Trust #83, Ltd v. ByBee, 2 Cal. App. 4th 139 (1991), p. 367........ 136
     4) Notes, p. 371 ............................................................................................................... 137
  F) Using Subordination, Nondisturbance, and Attornment Agreements, p. 374 ................ 138
     1) Miscione v. Barton Development Company, 52 Cal. App. 4th 1320 (1997), p. 374 . 138
     2) Notes, p. 379 ............................................................................................................... 139
  G)     Future Advances, p. 380 ............................................................................................. 139
     1) Cal.Civ.Code § 2884 ................................................................................................... 139
     2) Notes, p. 381 ............................................................................................................... 140
     3) Turner v. Lytton Savings and Loan Association, 242 Cal. App. 2d 457 (1966), p. 381
         141
     4) Notes, p. 383 ............................................................................................................... 142
  H)     Mechanics Liens, p. 384 ............................................................................................. 143
     2) Notes, p. 385 ............................................................................................................... 143
Chapter XV.     Part V – Events of Default and Enforcement By the Lender: Payment of the
Loan            144
  A)     What is a Timely Payment? ........................................................................................ 144
     1) Right of reinstatement and redemption in default....................................................... 144
     2) Nguyen v. Calhoun, 105 Cal. App. 4th 428 (2003), p. 389 ........................................ 144
  B)     The Effect of Receiving Timely Payment, p. 390 ...................................................... 144
     1) Bartold v. Glendale Federal Bank, 81 Cal. App. 4th 816 (2000) ............................... 144
     2) Cal.Civ.Code § 2941 Request for full reconveyance .................................................. 145
  C)     Impound Accounts, p. 391 .......................................................................................... 145
  D)     Prepayment Clauses, p. 392 ........................................................................................ 145
     1) Perfect tender in time .................................................................................................. 145
     2) Gutzi Associates v. Switzer, 215 Cal. App.3d 1636 (1989), p. 392 ........................... 145
     3) Notes, p. 396 ............................................................................................................... 147
  E) Late Charges, p. 404 ....................................................................................................... 149
     1) As improper liquidated damages ................................................................................ 149
     2) Rigley v. Topa Thrift and Loan Association, 17 Cal. 4th 970 (1998), p. 409 ............ 151
Chapter XVI.    Defaults and Workouts, p. 415 ....................................................................... 153
  A)     Events of Default, p. 415 ............................................................................................ 153
     1) Hauger v. Gates, 42 Cal. 2d 752 (1954), p. 415 ......................................................... 153
     2) Notes, p. 416 ............................................................................................................... 154
     3) Estoppel....................................................................................................................... 156
     4) Notes, p. 424 ............................................................................................................... 158
  B)     Acceleration Clauses, p. 427 ....................................................................................... 159
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Golden Gate University                               Spring 2004                                                  October 26, 2011
     1) Phrasing....................................................................................................................... 159
     2) Notes, p. 428 ............................................................................................................... 159
  C)      Junior Responses to Senior Defaults, p. 429............................................................... 160
     1) Windt v. Covert, 152 Cal. 350 (1907), p. 429 ............................................................ 160
     2) Notes, p. 431 ............................................................................................................... 160
  D)      Alternative to Foreclosure, p. 431............................................................................... 160
     1) Workouts, p. 431 ......................................................................................................... 160
     2) Deeds in lieu of Foreclosure, p. 439 ........................................................................... 163
  E) Attorney‘ Fees ................................................................................................................. 166
Chapter XVII. Chapter XVII. Part VI The Foreclosure Process: Pre-Sale Activity............... 170
  A)      Preliminary Considerations, p. 459 ............................................................................. 170
     1) Choice of Remedy, p. 459........................................................................................... 170
     2) Statutes of Limitation, p. 469 ...................................................................................... 173
     3) Creditor Disagreements, p. 474 .................................................................................. 175
  B)      Residential Debtor Protection Legislation, p. 477 ...................................................... 176
     1) Restrictions on Debt Collectors .................................................................................. 176
     2) Home Equity Sales Contracts and Foreclosure Consultants ....................................... 176
  C)      Judicial Foreclosure: Pre-Sale, p. 479......................................................................... 177
  D)      Nonjudicial Foreclosure: Pre-Sale, p. 488 .................................................................. 180
     1) The Notice of Default (the ―NOD‖), p. 488................................................................ 180
     2) Reinstating the Obligation, p. 488 .............................................................................. 182
     3) Notes, p. 514 ............................................................................................................... 187
Chapter XVIII.      The Sale and After ...................................................................................... 189
  A)      The Foreclosure Sale, p. 515....................................................................................... 189
     1) The Notice of Sale (NOS), p. 515 ............................................................................... 189
     2) Postponement of the Sale, p. 519 ................................................................................ 191
     3) Conduct of the Sale, p. 526 ......................................................................................... 194
     4) Disposition of the Surplus, p. 537 ............................................................................... 198
  B)      The Fair Value Hearing, p. 539 .................................................................................. 198
  C)      Foreclosure Steps and Time Frame (added notes) ...................................................... 200
     1) Within 1 month of recording the Notice of Default .................................................... 200
     2) After 3 Months - Set Sale date -- 2924 & 2924f(b) ................................................... 200
     3) Four weeks before the Sale ......................................................................................... 200
     4) Two weeks before the Sale ......................................................................................... 201
     5) The last week before the Sale ..................................................................................... 201
     6) Sale Date: Sell, Notarize and Record .......................................................................... 201
Chapter XIX.      Chapter 19 Contesting Foreclosure and Redemption ..................................... 201
  A)      Attacks on Foreclosure, p. 545 ................................................................................... 201
     1) Presale Attacks, p. 545 ................................................................................................ 201
     2) Post Sale Attacks......................................................................................................... 204
  B)      Post Sale Redemption, p. 573 ..................................................................................... 213
     1) The Statutory Right of Redemption, p. 573 ................................................................ 213
     2) The Right to Possession During the Redemption Period, p, 588 ................................ 215
Chapter XX.       Part VII – Lender‘s Commitment to Lend, and Borrower‘s Commitment to
Provide Security – Chapter 20 – Lender‘s Commitment to Lend or Pay Liens on the Borrower‘s
Property.         219
Roger Bernhardt‘s                                 Real Estate Finance                                                Page 6 of 235
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  A)      Lender‘s Commitment to Make a Loan, p. 597 .......................................................... 219
  B)      Lender‘s Commitment to Make Additional Loans (Future Advances), p. 605 .......... 221
     1) Introduction ................................................................................................................. 221
  C)      Lender‘s Commitment to Repay Existing Loans (All Inclusive Trust Deed), p. 612 223
Chapter XXI.     Borrower‘s Commitment to Furnish Additional Security, or to have Existing
Security Secure Additional Debts (Dragnet Clauses) ................................................................. 224
  A)      Dragnet clause of Wong v. Beneficial Savings and Loan Association, 56 Cal. App. 3d
  286 (1976), p. 620. .................................................................................................................. 224
  B)      Pre-existing debt of the mortgagor and co-tenants ..................................................... 225
  C)      Applying the security to the debt ................................................................................ 226
Roger Bernhardt‘s                   Real Estate Finance                               Page 1 of 235
Golden Gate University                 Spring 2004                                 October 26, 2011

Chapter I.             Introduction and Overview
Text: Real Estate Finance, Cases and Materials, Fourth Edition, Bernhardt, Dyer, and Rabin,
Carolina Academic Press, 2004
   A) The Advantages of Being a Secured Lender, p. 3
      1)    The Mortgage – Definitions, p. 3
         a) Cal.Civ.Code § 2920 (a)
A mortgage is a contract by which specific property, including an estate for years in real
property, is hypothecated for the performance of an act, without the necessity of a change of
possession.
            b) Restatement Third Property (Mortgage §1.1)
A mortgage is a conveyance or retention of an interest in real property as security for the
performance of an obligation. A mortgage is enforceable whether or not any person is personally
liable for that performance. [See §3 below on the absence of a personal liability requirement.]
            c) Cal.Civ.Code §2948
A mortgage of real property may be made in substantially the following form:
This mortgage, made the ____ day of ________, in the year ____, by A B, of _____, mortgagor,
to C D, of ______; mortgagee, witnesseth: That the mortgagor mortgages to the mortgagee (here
describe the property), as security for the payment to him of _______ dollars, on (or before) the
_____ day of ________, in the year ____, with interest thereon (or as security for the payment of
an obligation, describing it, etc.) A B.
            d) Delivery
A mortgage is invalid unless delivered. Hahn v. Hahn, 123 Cal. App. 2d 97 (1954)
       2)      Some History - The Equity of Redemption, Foreclosure and
               Moratoria, p. 4
            a) Goodenow v. Ewer, 16 Cal. 461 (1860), p. 4
Facts: Downer, a TIC of a theatre, mortgaged his share to Goodenow. Downer defaulted on his
loan. Goodenow acquired judgment on his mortgage, but Downer and his partner sold their
shares to Ewer before Goodenow ‗took possession.‘ Goodenow sued Ewer for possession of
rents but failed to timely proceed and include all parties. The courts ruled that Goodenow had
title, but no rights of possession. Ewer had possession subject to the mortgage, and Goodenow‘s
only recourse was foreclosure on the mortgage.
Court: At common law, a mortgage was regarded as a conveyance of a conditional estate, and
upon breach of its condition, the estate became absolute. But from an early day, Courts of
Equity interfered, and to prevent the hardship consequent, by the strict rules of law, upon a
failure in the performance of the conditions attached to the conveyance, gave to the mortgagor
a right to redeem upon payment, within a reasonable time, of the debt secured. This right was
established from a consideration of the real character of the transaction, as one of security, and
not of purchase, and its purpose was to give effect to the intention of the parties against the terms
of the instrument. And this right is now held to be an inseparable incident to every mortgage, and
cannot be abandoned or waived, even by express stipulation of the parties at the time of its
execution. But with this right in the mortgagor, to redeem from the consequences of his default
which was termed an equity of redemption, as it could be enforced only in a Court of Equity,
there was recognized a corresponding right in the mortgagee to insist upon the redemption
being made within a reasonable period, or a relinquishment of its right, and for that purpose he
could also resort to a Court of Equity. The proceeding for this purpose, on his part, was the suit,
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Golden Gate University                 Spring 2004                                October 26, 2011
as it was termed, for a foreclosure of the mortgage--that is for the extinguishment of the equity of
redemption held by the mortgagor. The decree in the suit usually directed the mortgagor to assert
his right, by payment of the principal sum due, interest and costs, within a designated period, or
be barred of his equity. The decree operated directly upon the property, and its effect was to
restore the same, upon payment, to the mortgagor; or to vest upon failure of payment, an
absolute title in the mortgagee.
           b) Notes, p. 5
               (i)     Redemption - the opportunity to cure default
               (ii)    Strict Foreclosure - loss of the property and equity
               (iii) Sale Foreclosure - loss of the property but debtor receives equity
               (iv) Mortoria - foreclosure barred by natural catastrophe, war, or
                    depression
           c) McMillan v. Richards, 9 Cal. 365 (1858), p. 8
A mortgage is … a mere security for a debt. The owner of the mortgage in this State can in no
case become the owner of the mortgaged premises except by purchase upon sale under judicial
decree consummated by conveyance.
Facts: To secure the payment of a note with interest, Osio mortgaged to Bird the premises in
controversy. Bird assigned the note and mortgage to Jonathan Edwards, and Edwards assigned
them to Thomas G. Cary. Osio then sold the premises to Andrew Randall. Cary foreclosed his
note on Osio and Randall. The court ordered sale of the property with payment to Cary of the
note and interest and equity paid to Osio and Randall. Richards bought the property at a Sheriff‘s
sale. McMillan and others also sued Randall on other notes on the property and sought to enforce
their judgments against the land. The issues became ownership, possession, and redemption.
Court: In England, a mortgage is regarded in law as a conveyance, vesting in the mortgagee,
upon its execution, a conditional estate, which becomes absolute upon breach of its condition,
and of course carrying with it all the rights and incidents belonging to the ownership of property.
Thus, the mortgagee, unless restrained by stipulations in the mortgage, is there entitled to
immediate possession of the land, and may enter peaceably, or bring ejectment; and his right to
possession cannot be defeated, except by payment at the period fixed by the terms of the
mortgage. Payment, subsequent to that period, only gives an equity of redemption, and a re-
conveyance is necessary to vest the title in the mortgagor.
        [In] the United States, a mortgage is … a mere security for a debt, and passes only a
chattel interest; that the debt is the principal, and the land the incident; that the mortgage
constitutes simply a lien or encumbrance, and that the equity of redemption is the real and
beneficial estate in the land which may be sold and conveyed by the mortgagor, in any of the
ordinary modes of assurance, subject only to the lien of the mortgage. This equitable doctrine,
established to prevent the hardships springing by the rules of law from a failure in the strict
performance of the conditions attached to the conveyance, and to give effect to the just intent of
the parties in contracts of this description.
        The owner of the mortgage in this State cannot become the owner of the mortgaged
premises except by purchase upon sale under judicial decree consummated by conveyance. A
foreclosure suit by our law, results only in a legal ascertainment of the amount due, and a decree
directing the sale of the premises, for its satisfaction, the surplus, if any, going to subsequent
incumbrancers or the owner of the premises, and execution following for any deficiency.
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            d) Notes, p. 9
               (i)     Mandatory Foreclosure, Code Civ. Proc. § 744
A mortgage of real property shall not be deemed a conveyance, whatever its terms, so as to
enable the owner of the mortgage to recover possession of the real property without a foreclosure
and sale.
               (ii)    Cal.Civ.Code § 2888
Notwithstanding an agreement to the contrary, a lien, or a contract for a lien, transfers no title to
the property subject to the lien.
               (iii)   Cal.Civ.Code § 2889
All contracts for the forfeiture of property subject to a lien, in satisfaction of the obligation
secured thereby, and all contracts in restraint of the right of redemption from a lien, are void.
               (iv)    Cal.Civ.Code § 2924
Every transfer of an interest in property, other than in trust, made only as a security for the
performance of another act, is to be deemed a mortgage, except when in the case of personal
property it is accompanied by actual change of possession, in which case it is to be deemed a
pledge.
               (v)     Cal.Civ.Code § 2926
A mortgage is a lien upon everything that would pass by a grant of the property.
               (vi)    Cal.Civ.Code § 2927
A mortgage does not entitle the mortgagee to the possession of the property, unless authorized by
the express terms of the mortgage; but after the execution of the mortgage the mortgagor may
agree to such change of possession without a new consideration.
       3)      The Deed of Trust, p. 10
            a) Koch v. Briggs, 14 Cal. 256 (1859)
Promissory note secured with conveyance providing for sale of property at option of creditor
(plaintiff) on default of debtor (defendant). Debtor argued that note was a mortgage requiring
judicial foreclosure and sale. The court found that the note was similar to a mortgage only in that
it involved indebtedness. The right to foreclose and the right of redemption are mutual and
reciprocal. Denial of one is denial of the other, and where one exists, so does the other. The
contract here expressly provides for the trustee to a sell the property in accordance with the trust.
A mortgage (is different because a mortgage) is a contract of conveyance only of security and
invokes equity (a court) to enforce the security.
               (i)     Notes, p. 11
Mortgages and Deeds of Trust differ in that a deed of trust, but not a mortgage, involves a trustee
as an unrelated third party, although the trustee may be a beneficiary. The trustee is the ―common
agent of both parties.‖ A trustee of a deed of trust is not a trustee like one of an express trust. A
trustee of a deed of trust does not control the property, nor is the trustee of a deed of trust bound
to the fiduciary duties of trustee of an express trust.
            b) Bank of Italy v. Bentley, 217 Cal. 644 (1933), p. 12
               (i)     “The one-action rule” requires exhaustion of the security.
Promissory note secured by a deed of trust. The due date of the note was one year after
execution. In February, a few days before the four-year statute of limitations, the plaintiff filed a
notice of breach, and sued the defendant for the amount of the note, plus interest, costs, and
attorney‘s fees. The real property involved was of ―substantial value.‖ The defendant answered
that the action was premature for being secured by the deed of trust and the trial court agreed that
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Golden Gate University                 Spring 2004                                October 26, 2011
the action required exhaustion of the security. In June, the plaintiff sold the property, and
maintained that its cause of action lie before exhausting the security.
The plaintiff argued that law (Code Civ. Proc. 726) did not require exhaustion of other liens
(mortgages, pledges, mechanics‘ and vendors‘ liens, etc.)
The court noted that in other states, title to the property in a mortgage lies in the mortgagee, but
in California, the mortgagee only has a lien (Cal.Civ.Code 2920, 2927). The injustice of allowing
a mortgagee to both foreclose and sue on the mortgage caused California to pass Code Civ. Proc.
§ 726 requiring a mortgagee to resort to the security before pursuing the person of the mortgagor.
A deed of trust is a mortgage with the power of sale with title passing to the trustee.
A mortgagor (the creditor) retains title in a mortgage and the mortgagee has only a lien.
However, deed of trust does not carry the incidents of property ownership, only the right to
convey on default of the debtor in payment of the debt. The legal title conveys only for the
purpose of security, leaving in the trustee or successor, the legal estate in the property (Code Civ.
Proc. 865, 866) and the right of possession subject to the execution of the trust. [Thus the equity
interest remains in the debtor - JRP.]
The estate of the trustee ceases on payment of the debt, leaving whole title in the grantor or the
successors, and leaves nothing in the trustee except bare legal title of record, which they may be
compelled to clear. The security for indebtedness is the important and essential thing in the
whole transaction. The economic function of the two instruments would seem identical, but the
rights and duties of the parties should not depend on the form of security. (This court) has never
held that a personal action may be brought on a secured note without exhausting the security.
            c) Notes, p. 15
               (i)     Zig-zagging
This opinion was on re-hearing. The California Supreme Court had ruled the opposite way
unanimously per curiam just seven months before. 14 P.2d 85 (1932).
               (ii)    Code Civ. Proc. §725a - The legislature passed four months later.
The beneficiary or trustee named in a deed of trust or mortgagee named in a mortgage with
power of sale upon real property or any interest therein to secure a debt or other obligation, or if
there be a successor or successors in interest of such beneficiary, trustee or mortgagee, then such
successor or successors in interest, shall have the right to bring suit to foreclose the same in the
manner and subject to the provisions, rights and remedies relating to the foreclosure of a
mortgage upon such property.
               (iii)   Judicial foreclosure available in a deed of trust
The California Supreme Court held that judicial foreclosure is available in a deed of trust even
though it is not a mortgage. Felton v. LeBreton, 92 Cal. 457 (1891).
       4)      The Secured Obligation, p. 16
Promissory notes and the security instrument are now separate instruments. The security
instrument must have a valid obligation (the loan), and exists only to enforce the obligation.
However, a valid obligation does not require a real obligor, i.e., a personal obligation besides the
property. A mortgage or deed of trust is enforceable whether or not any person is personally
liable for that performance. Restatement Third Property (Mortgage §1.1) 1997
Thus, a loan can be non-course, meaning unsecured, so that the creditor has only the security to
look to for compensation, and the debtor is not personally liable. Most real estate investors
require (1) non-liability for debts over and above their investment and also (2) receipt of the tax
benefits (depreciation) of real estate ownership. Thus, the investors may use a limited
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partnership, but IRC § 704 limits the tax benefits to the general partner facing the liability. To
pass the depreciation benefits to the limited partners, the loan must be non-recourse.
            a) Obligations That Can Be Secured by a Deed of Trust, p. 17
               (i)     Timing
An obligation and the security do not have come into existence at the same time.
A deed of trust may arise to a pre-existing debt.
A deed of trust may arise before the debt exists, as for a developer who grants the deed in
advance of the funding.
               (ii)    The parties
The obligator and the trustor do not have to be the same person. Parents may give a deed of trust
to secure a lender‘s loan to a child. Restatement Third Property (Mortgage §1.3)
               (iii)   The obligation
The obligation does not have to be money, but only something capable of liquidation.
Restatement Third Property (Mortgage §1.4)
            b) Alternative Financing Arrangements, p. 18
Fixed rate mortgages (FRM) were the usual loans after the Depression until inflation struck in
the 1970‘s. FRELP - Flexible real estate loan plans arose, including‖
ARM - Adjustable rate mortgages
AMI- Adjustable rate interest
VRM - Variable rate mortgages
DRVRM - Dual rate variable rate mortgages - different short-term and long-term interest rates
apply to determine the monthly payment.
CPFVRM - Constant payment factor variable rate mortgage
RNN - Renegotiable rate mortgages
Negative amortization - the payment does not repay the accrued interest since the last payment,
so the amount of debt increases from payment to payment.
PLAM - price level adjusted mortgage
BPM - Ballon payment mortgage
GPM - Graduated payment mortgage
PAM - Pledged payment mortgage
   B) The Security, p. 19
      1)   Real Property vs. Personal Property, p. 19
If the security is personal property, then UCC Article 9 probably governs the transaction. See
§9109(c)(11)
            a) Notes secured by mortgage notes
Mortgage law does not govern notes secured by personal property. Bank of California v. Leone,
37 Cal. App. 3d 444 (1974)
            b) Note secured by stock in corporations owning real estate
A pledge of stock is not a real estate mortgage even through the corporation whose stock was
pledged owns only real estate. Union Bank v. Anderson, 232 Cal. App. 3d 941 (1991). Thus,
cooperative ownership shares are under UCC.
       2)      Partial Real Estate Interests, p. 20
Any interest in real estate can secure a mortgage, even a leasehold (Code Civ. Proc. § 726) or a
fractional interest. A joint tenant, or tenant in common can mortgage an interest without consent
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of the other owners. Dieden v. Schmidt, 104 Cal. App. 4th 645 (2002). However, survivorship in
a joint interest trumps a debt interest, so the security expires on death of the debtor.
A mortgage of community property is invalid without the signature of both spouses (excepting to
secure attorney fees in a divorce action), Family Code §1102, although the community property
of the signing spouse is still responsible for the debt. Family Code §910.
       3)      Junior and Senior Liens, p. 21
            a) Senior foreclosure, p. 21
If a senior creditor forecloses and sells, then the proceeds of the sale are first paid to the senior
creditor to the extent of the debt, then any remainder to the second mortgagee (creditor) to the
extent of the debt, then any remainder to the third mortgagee (creditor) to the extent of the debt,
and if any remainder yet is present, then to the debtor (equity). If the sale proceeds are
insufficient to pay all debts, then the lowest junior mortgagee receives partial payment (or none)
in ascending order. The senior mortgagor always receives payment first if the senior mortgagor
forecloses.
            b) Junior foreclosure, p. 21
If a junior creditor forecloses, then the purchaser buys subject to all other debts. The proceeds of
the sale are paid to the foreclosing junior mortgagee, and any excess goes to the debtor. If the
value of the property (less the purchase price) is less than the sum of all other debts, then the
purchaser has overpaid, as the purchaser still owes the entire sum of the senior debts.
            c) Title Theory, p. 21
A deed of trust does not extinguish anyone‘s interest, thus, a grantor may grant as many deeds of
trust as other persons will take, subject that each deed of trust is subsequent in priority to earlier
deeds of trust.
   C) Deficiency Judgment, p. 22
      1)   Routine Foreclosure under California Law, p. 23
Acceleration - the note provides that the lender may require a borrower to pay the balance of the
loan on (1) default (missing a payment on the payment date), usually (2) after expiration of a
grace period.
       2)      Nonjudicial Foreclosure, p. 23
            a) Background – no deficiency judgment
Code Civ. Proc. § 744 allows a lender to perform a nonjudicial sale (1) after default, and (2) the
security agreement includes a ‗power of sale‘ clause. The power of sale clause dates back prior
to 1774.
The sale is called a ―Trustee‘s Sale,‖ or ―Private Sale‖ with the benefit that is nonjudicial,
without even an attorney required, but the sale also extinguishes the debt, so a deficiency
judgment is not available to the lender.
An attorney accepting a note with a power of sale clause is contrary to the Code of Professional
Conduct, §5-101 as an adverse interest of the attorney to the client, for negating the requirement
of a client to have counsel with an independent interest in a nonjudicial proceeding.
An unsecured promissory note gives the attorney only an interest in a judicial proceeding.
            b) Procedure
Note that there are 6 steps to a completed nonjudicial foreclosure under a deed of trust.
               (i)     Notice of Default
The lender records the default, mails notice to all parties, buys a ―trustee‘s sale guaranty.‖
               (ii)    Notice of Sale
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Three months later the lender records and publishes a notice of sale, naming a location (i.e., the
trustee‘s office) for the sale at a time not less than 20 days after first publication.
                (iii)   Reinstatement
California law gives the debtor time up to five days before the sale date to cancel the sale by
curing the default by payment of the overdue installments. Reinstatement is not available during
the last five business days before the sale.
                (iv)    Redemption
During the final five days before the sale, the debtor can avoid the foreclosure sale only by
paying the entire accelerated balance. The debtor‘s opportunity for redemption ends when the
trustee receives the first bid at the foreclosure sale.
                (v)     Sale
A public auction where all bidders bidder except the foreclosing lender must make payment in
cash. In a ―full credit bid,‖ the lender may credit bid up to the amount owed. The sale is complete
on fall of the hammer, at which time the debtor has lost all of the rights named above.
                (vi)    Trustee‟s Deed
At the bidder‘s payment, the trustee delivers a deed to the successful bidder at the foreclosure
sale. The successful then becomes the owner of the property and may bring an action in unlawful
detainer against a recalcitrant trustor (debtor) who fails to quit the property.
        3)      Judicial Foreclosure, p. 25
Note that there are 5 steps to a completed judicial foreclosure (as if under a mortgage.)
                (i)     Complaint and lis pendens
After default, the lender files suit against the debtor, trustee, the owner(s), and all junior lien
holders, records a lis pendens of the action, and mails the lis pendens to all named parties.
                (ii)    Pretrial and trial
Follows usual proceedings of motion for summary judgment, followed by a bench trial. Actions
in equity do not receive jury trials.
                (iii)   Foreclosure Decree (ends reinstatement)
If the lender prevails and receives judgment, the decree sets forth a sale and may permit a
deficiency judgment. Entry of the judgment ends the debtor‘s right of reinstatement.
                (iv)    Sale (ends redemption)
Judicial foreclosure requires the lender to seek a Sheriff‘s sale. The sale is similar to a
nonjudicial foreclosure sale, except that bidders make a deposit at the sale with 10 days to
complete the sale, at which time the debtor has lost the equitable right of redemption, but not the
statutory right of redemption.
                (v)     Statutory Redemption
If the court allowed a deficiency judgment (not available in a nonjudicial sale), the debtor then
still has a Statutory Redemption period to pay off the purchase price within three months.
        4)      Federal Foreclosure Procedures, p. 25
Mortgages insured by the Department of Housing and Urban Development follow federal
requirements that permit both a non-judicial foreclosure and a deficiency judgment, but without
any right of post-sale redemption.
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Chapter II.            Part I: The One Action Rule
   A) The Basic Rules, p. 29
      1)    Cal. Code Civil Procedure § 744 & 726
         a) Cal. Code Civil Procedure § 744
               (i)     Mortgage not a conveyance
A mortgage of real property shall not be deemed a conveyance, whatever its terms, so as to
enable the owner of the mortgage to recover possession of the real property without a foreclosure
and sale.
           b) Cal. Code Civil Procedure § 726 – The One Action Rule
               (i)     Form of action; procedure; action for borrower fraud
(a) There can be but one form of action for the recovery of any debt or the enforcement of any
right secured by mortgage upon real property or an estate for years therein, which action shall be
in accordance with the provisions of this chapter. In the action the court may, by its judgment,
direct the sale of the encumbered real property or estate for years therein (or so much of the real
property or estate for years as may be necessary), and the application of the proceeds of the sale
to the payment of the costs of court, the expenses of levy and sale, and the amount due plaintiff,
including, where the mortgage provides for the payment of attorney's fees, the sum for attorney's
fees as the court shall find reasonable, not exceeding the amount named in the mortgage.
(b) The decree for the foreclosure of a mortgage or deed of trust secured by real property or
estate for years therein shall declare the amount of the indebtedness or right so secured and,
unless judgment for any deficiency there may be between the sale price and the amount due with
costs is waived by the judgment creditor or a deficiency judgment is prohibited by Section 580b,
shall determine the personal liability of any defendant for the payment of the debt secured by the
mortgage or deed of trust and shall name the defendants against whom a deficiency judgment
may be ordered following the proceedings prescribed in this section. In the event of waiver, or if
the prohibition of Section 580b is applicable, the decree shall so declare and there shall be no
judgment for a deficiency. In the event that a deficiency is not waived or prohibited and it is
decreed that any defendant is personally liable for the debt, then upon application of the plaintiff
filed at any time within three months of the date of the foreclosure sale and after a hearing
thereon at which the court shall take evidence and at which hearing either party may present
evidence as to the fair value of the real property or estate for years therein sold as of the date of
sale, the court shall render a money judgment against the defendant or defendants for the
amount by which the amount of the indebtedness with interest and costs of levy and sale and of
action exceeds the fair value of the real property or estate for years therein sold as of the date of
sale. In no event shall the amount of the judgment, exclusive of interest from the date of sale and
of costs exceed the difference between the amount for which the real property or estate for years
therein was sold and the entire amount of the indebtedness secured by the mortgage or deed of
trust. Notice of the hearing shall be served upon all defendants who have appeared in the action
and against whom a deficiency judgment is sought, or upon their attorneys of record, at least 15
days before the date set for the hearing. Upon application of any party made at least 10 days
before the date set for the hearing the court shall, and upon its own motion the court at any time
may, appoint one of the probate referees provided for by law to appraise the real property or
estate for years therein sold as of the time of sale. The probate referee shall file the appraisal with
the clerk and the appraisal is admissible in evidence. The probate referee shall take and subscribe
an oath to be attached to the appraisal that the referee has truly, honestly and impartially
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appraised the real property or estate for years therein to the best of the referee's knowledge and
ability. Any probate referee so appointed may be called and examined as a witness by any party
or by the court itself. The court shall fix the compensation, in an amount as determined by the
court to be reasonable, but the fees shall not exceed similar fees for similar services in the
community where the services are rendered, which may be taxed and allowed in like manner as
other costs.
(e) If a deficiency judgment is waived or prohibited, the real property or estate for years therein
shall be sold as provided in Section 716.020. If a deficiency judgment is not waived or
prohibited, the real property or estate for years therein shall be sold subject to the right of
redemption as provided in Sections 729.010 to 729.090, inclusive.
       2)      Cases
            a) Western Fuel Co. v. S.G. Lewald Co., 90 Cal. 25 (1922), p. 30
               (i)       A note secured by a mortgage may only be enforced by taking „one
                     action‟ as foreclosure on the mortgage. An action on the note alone is
                     not supported by Cal. Code Civil Procedure § 744.
The plaintiff sold coal to the defendant and accepted the debt on a note. The defendant secured
the note by a mortgage. The defendant paid interest but not principal on the note. The plaintiff
then cancelled the note and issued a new note, which the defendant refused to accept. The
plaintiff sued on the note, and the defendant successfully demurred without leave for the plaintiff
to amend.
            b) Barbieri v. Ramelli, 84 Cal. 154 (1890), p. 31
               (i)      A mortgagee cannot bring a personal action and waive first action
                     on its security. There is not exception to the one-action rule even
                     where there is more than one note secure by a mortgage.
Turri bought his home subject to a note and first mortgage to the S&L. Turri then sold his home
to the plaintiff, and took a note and mortgage, but did not retire the note and mortgage to the
S&L. The plaintiff thus took the home subject to both notes and mortgages. The plaintiff sold his
property to the defendant who took subject to a note and mortgage to Turri (and retiring the
second mortgage), plus a note for $700 loaned by the plaintiff to the defendant and also secured
by a mortgage (third on the property). The defendant did not pay and the plaintiff sued on the
note for $700. The defendant sought demurer under Cal. Code Civil Procedure § 726 as the
plaintiff could not sue on his note alone as there were three mortgages on the property. The lower
court ruled for the plaintiff, the defendant appealed.
The Supreme Court agreed with the defendant that foreclosure was the remedy provided by law,
and noted that the exception for a change in value, (then Cal. Code Civil Procedure § 537, now
483.010), did not apply here. Since the value of the property had not changed, the plaintiff had to
accept his security, as he was satisfied with it at the time of sale of execution of the note.
            c) Notes, p. 33
               (i)      New York law
The one-action rule derives from New York Code of Civil Procedure § 1850, to prevent a lender
from harassing a debtor on both the note, in a court of law, and the mortgage, in a court of
equity. The effect of the law was to make sure the first action was on the mortgage, but courts
have construed this to mean the value of the security must be exhausted before action on the note
may be taken following the doctrine on the election of remedies. New York law requires a
judgment to issue on default of the mortgage, and an attempt at collection (execution on the
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judgment) before the remedy of foreclosure may be sought. New York also allows action in
deficiency with the foreclosure.
               (ii)    Deficiency
California does not permit an action on the note before foreclosure, as it would in raise the issue
of creating a deficiency in the security, and affect the rights of other mortgagors. It would also
allow a mortgagee to accept a security and issue a mortgage, then later change his mind that
maybe he should not have taken the security in the first place. Where default occurs and the
mortgagee alleges that the security is valueless to the amount of debt, California requires
foreclosure in order to show by the sale, that indeed, the property is valueless to the amount of
debt. Allowing a personal action on the note is otherwise allowing the mortgagee to substitute his
judgment of value, which is question of fact, not opinion.
               (iii)   Chattels
While Cal. Code Civil Procedure § 726 originally included chattels, Cal. Code Civil Procedure §
9601 now provides for an action of recovery on chattels.
               (iv)    Dual breach
A debtor commits a first act of breach when he defaults on the promissory note. The security
agreement is provides that the debtor will surrender the security when he defaults on the
promissory note. If the debtor then refuses to surrender the security, he has then also breached
the security agreement.
               (v)     Attachment - Cal. Code Civil Procedure § 483.010(b)
An attachment may not be issued on a claim which is secured by any interest in real property
arising from agreement, statute, or other rule of law (including any mortgage or deed of trust of
realty and any statutory, common law, or equitable lien on real property [except a commercial
exception]. However, an attachment may be issued where the claim was originally so secured
but, without any act of the plaintiff or the person to whom the security was given, the security
has become valueless or has decreased in value to less than the amount then owing on the claim,
in which event the amount to be secured by the attachment shall not exceed the lesser of the
amount of the decrease or the difference between the value of the security and the amount then
owing on the claim. [In 1977 the legislature removed the one-action rule as a bar to this rule.]
               (vi)    Actions, p. 36
Cal. Code Civil Procedure § 22 defines an action as a ―proceeding in a court of justice.‖
Montana Code 71-1-222 is more detailed. http://data.opi.state.mt.us/bills/mca/71/1/71-1-222.htm
Proceedings in foreclosure suits.
(1) There is only one action for the recovery of debt or the enforcement of any right secured by a
mortgage upon real estate, and that action must be in accordance with the provisions of this part.
In the action, the court may, by its judgment, direct:
 (a) a sale of the encumbered property or as much of the property as may be necessary;
 (b) the application of the proceeds of the sale, including the payment of property taxes due at the
time of foreclosure; and
 (c) the payment of the costs of the court, the expenses of the sale, and the amount due the
plaintiff.
 (2) If it appears from the sheriff's return that the proceeds are insufficient and a balance still
remains due, judgment can then be docketed for the balance against the defendant or defendants
personally liable for the debt, and it becomes a lien upon the real estate of the judgment debtor,
as in other cases on which execution may be issued.
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 (3) A person holding a conveyance from or under the mortgagor of the property mortgaged or
having a lien on the property, which conveyance or lien does not appear of record in the proper
office at the time of the commencement of the action, does not have to be made a party to the
action. The judgment and the proceedings are as conclusive against the party holding the
unrecorded conveyance or lien as if the holding party had been made a party to the action.
 (4) The one-action limitation in this section does not prohibit an act or proceeding:
 (a) to appoint a receiver for or obtain possession of real or personal property collateral for the
debt or other obligation;
 (b) to enforce a security interest in or the assignment of any rents, issues, profits, or other
income of any real or personal property;
 (c) to enforce a mortgage or other lien on real or personal property collateral located outside this
state that is security for the same debt or other right secured by real property in this state;
 (d) to secure a judgment outside this state on a debt or other right secured by real property in this
state and by real or personal property collateral located outside this state;
 (e) for the exercise of a power of sale conferred pursuant to the provisions of 71-1-223 or a
foreclosure by advertisement and sale pursuant to Title 71, chapter 1, part 3;
 (f) for the exercise of a right or remedy under the Montana Uniform Commercial Code, except
securing a judgment on a secured debt, including a deficiency judgment on a secured debt, in a
court in Montana;
 (g) for the exercise of a right or remedy under the uniform commercial code of another state;
 (h) for claim and delivery of personal property pursuant to the provisions of Title 27, chapter 17;
 (i) for the exercise of a right to set off a deposit or share account, to enforce a pledge in a deposit
or share account pursuant to a written agreement or pledge, or to enforce a financial institution's
statutory lien;
 (j) to draw under a letter of credit;
 (k) for the recovery of damages arising from the commission of a tort or the recovery of any
declaratory or equitable relief;
 (l) to collect a debt or enforce a right or obligation secured by a junior mortgage or other junior
lien on real property if the property has been sold to satisfy, in whole or in part, a debt or other
right or obligation secured by a senior mortgage or other senior lien on the property;
 (m) concerning a mortgage securing a debt or right guaranteed, to enforce an agreement with a
surety or guarantor of the debt or right secured by a mortgage on real estate, if the surety or
guaranty obligation is not secured by the same mortgage;
 (n) relating to a proceeding in bankruptcy, including filing a proof of claim, to seek relief from
an automatic stay and any other action to determine the amount or validity of a debt or right or
obligation secured by a mortgage;
 (o) for filing a claim or to enforce a claim disallowed pursuant to the Montana Uniform Probate
Code;
 (p) that does not include collection of the debt or realization of the collateral securing the debt or
other obligation;
 (q) that is exempted from the provisions of this section by law;
 (r) to recover costs of suit, costs and expenses of sale, attorney fees, and other incidental relief in
connection with any act or proceeding authorized in this subsection (4); or
 (s) for recovery of a debt or for enforcement of a right secured by a mortgage when the
mortgage security in this state has become valueless through no fault of the mortgagee.
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            d) Savings Bank v. Central Market Co., 122 Cal. 28 (1898) p. 37
                (i)     Cal. Code Civil Procedure § 726 is not an absolute bar to a
                     personal action where the mortgagee loses its security (is „sold-out‟)
                     through no fault of its own.
                (ii)    The "one form of action" rule of § 726 does not apply to a sold-out
                     junior lien.
Savings Bank held a junior mortgage. The senior mortgagee foreclosed and gave notice to
Savings Bank, which did not appeal at the foreclosure proceeding of the senior mortgagee. After
sale of the property for the amount of the first mortgage without redemption, the property
became valueless. Savings Bank sued on its note, and appealed after receiving nonsuit.
The Court held that the result of valuelessness to Savings Bank was not of its doing, as the
mortgagor was the person who defaulted on the first mortgage, the law did not require Savings
Bank to also foreclose, and even had Savings Bank attended the foreclosure proceeding, he
would have received nothing from the sale. Cal. Code Civil Procedure § 726 is intended to
prevent multiple suits by a mortgagor by requiring an action on the mortgage. Savings Bank lost
its security through no fault of its own, and the nonsuit left Savings Bank without a remedy
where it could not have otherwise preserved its rights. Reversed.
            e) Notes, p. 38
                (i)     Permissive sell-out
The holder of the second deed of trust learned that the holder of the first deed of trust had
scheduled it lien sale one month after the holder of the second. Thinking it could then pursue a
personal action, the holder of the second deed of trust rescheduled its lien sale for two months
later (one month after the holder of the first deed of trust.) The debtor claimed that by
intentionally rescheduling its lien sale until after the first lien sale, the holder of the second deed
of trust was with fault for losing its security, and was therefore barred from a personal action.
While one appellate judge agreed, the majority disagreed and permitted the holder of the second
deed of trust to pursue a personal action on grounds that (1) public policy allows a business
decision regarding foreclosure, and (2) forcing the junior to foreclose to stave off the senior
would burden the junior with the costs, or worse, (3) leave it to pay for or assume the first lien
position. Bank of America v. Graves, 51 Cal. App. 4th 607 (1996).
                (ii)    Decision estoppel
The junior lender obtained and entered judicial foreclosure, but then held off until after the senior
lender (using the same attorney) completed the sale. The junior lender then obtained a
conversion of the judicial foreclosure into a money judgment. The Court of Appeals reversed the
order and reinstated the judicial foreclosure because the junior lender set a course of remedy for
judicial foreclosure with the facts given to the court at that time, and by delaying, and then
changing its tactic, the junior lender never presented the case for a money judgment in the
original proceeding, and thus side-stepped the law, and the court.
                (iii)   Phantom security
Courts may permit the mortgagee to ignore the security in cases where the security was void, as
where the security lacked a spouse‘s signature, or was not in tangible existence at the time. The
premise is that without property at the start, there is not a lien, so there is not security.
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           f) Salter v. Ulrich, 22 Cal.2d 263 (1943), p. 41
               (i)     While a debtor cannot waive their CCP§ 726/redemption rights
                    before getting a mortgage, the law does not prevent a mortgagor from
                    waiving those rights after getting the mortgage.
               (ii)    A default judgment serves as a waiver of redemption rights.
               (iii) If the debtor successfully raises the security as an affirmative
                    defense, the creditor will be forced to exhaust the security before he
                    may obtain a money judgment against the debtor for any deficiency.
               (iv) The debtor waives the security-first rule if the debtor fails to raise
                    the security as an affirmative defense.
The defendant sold the property to Kassell for a secured promissory note. A couple years later,
Oswald recorded a street improvement bond against the property. Thereafter, the defendant sued
Kassell on the note by withholding from the complaint that the note was secured. The defendant
won judgment in default against Kassell. The defendant then bought the property at a sheriff‘s
sale in partial satisfaction of the judgment. In the time between the execution sale, and recording
of the deed, Oswald sued Kassell and sought foreclosure on the bond. The defendant did not
receive notice of the action. Kassell defaulted and Oswald bought the property on foreclosure
before recording of the defendant‘s deed. Oswald then sold his certificate to the plaintiff, who
received a ‗commissioner‘s deed.‘ The plaintiff then sued the defendant to quiet title, alleging
that the defendant‘s title was void for his failure to follow Cal. Code Civil Procedure § 726. The
trial court ruled that the defendant held title, and the plaintiff held a lien. The plaintiff appealed,
the defendant did not appeal.
The court looked at the waiver provisions and noted that while a debtor cannot waive their
redemption rights before getting a mortgage (Cal. Code Civil Procedure §2953), the law does not
prevent a mortgagor from waiving those rights after getting the mortgage. Since Kassell had not
plead the affirmative defense of mortgage, and the defendant won judgment in default, the
judgment was not void or open to collateral attack. Furthermore, Cal. Code Civil Procedure §
726 protections are for the primary mortgagor, not someone who takes title free of the mortgage,
as did the plaintiff in this case, so he cannot make such an attack.
Consequently, the plaintiff cannot void the defendant‘s title, but the defendant cannot void the
lien of the plaintiff, as he did not appeal the judgment. Affirmed.
   B) Sanctions for Violating the Rule, p. 42
           a) Walker v. Community Bank, 10 Cal.3d 729 (1974), p. 42
               (i)       If the debtor of a single debt secured by both real and personal
                    property does not raise §726 as an affirmative defense, the debtor may
                    still invoke it as a sanction against the creditor on the basis that the
                    latter by not foreclosing on the security in the action brought to
                    enforce the debt, has made an election of remedies and waived the
                    security.
               (ii)      A successor in interest has standing to challenge a lien acquired
                    with the property.
DEI secured promissory notes from Community Bank, using its chattel of trucks, equipment, and
one piece of real property as security. DEI defaulted and Community Bank secured judicial
foreclosure and sale on the chattel and a deficiency judgment. Neither party mentioned the
secured real estate during the proceedings. Before entry of the deficiency judgment, DEI sold the
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real estate to Walker. After the sale, but still before entry of the deficiency judgment,
Community Bank recorded a notice of default and election to sell the property Walker now held
title to. Walker sued to quiet title and obtained a temporary injunction. Walker lost at trial, and
the court lifted the injunction. Walker appealed and argued that by foreclosing on the chattel,
Community Bank elected under new (1963) Cal. Code Civil Procedure § 726 to forego its
security on the real estate (citing Salter).
In 1963, the legislature removed the personal property provisions from Cal. Code Civil
Procedure § 726 to the Commercial Code. Thus, the issue before the court was whether the
legislature intended forfeiture of a real security interest when a creditor of real and personal
security pursues the personal security. The court noted that the Cal. Comm. Code §9501 could be
read as such. ―If the security agreement covers both real and personal property, the secured party
may proceed under this chapter as to the personal property or he may proceed as to both the real
and the personal property in accordance with his rights and remedies in respect of the real
property in which case the provisions of this chapter do not apply.‖ Thus, if the creditor proceeds
as to both real and personal property security, he must do so according to the rights and remedies
accorded real property security and not pursuant to the Commercial Code.
(1) The Bank said that the law allowed the bank to pursue either course, including a real security
foreclosure, and then the personal security foreclosure, so the bank should be able to follow the
reverse course. The court noted that the first course (pursuing the real, then the personal security)
denied the bank a deficiency judgment that it could pursue in the reverse course. Allowing the
reverse course permitted the bank to take a deficiency from a judicial action on the personal
security (as Community bank did here) and apply it to a nonjudicial action on the real security.
(2) The Bank also argued that DEI did not assert the security interest in an affirmative defense
and therefore waived its ability to do so later. The court agreed that DEI waived the security-first
provision by not asserting it, and distinguished this case in that the Bank elected its action
against the secured personal property, and not as a personal money judgment as against a note
secured by real property, to which the affirmative defense rule applies. [Compare Salter above.]
Thus, the waive that arose here was the Bank‘s waiver of its ability to take action on the real
security.
(3) The Bank also argued that Walker lacked standing, as he was not the primary debtor (citing
Salter). The court called the Bank misplaced in that Salter specifically recognizes that the
successor in interest or one who holds even an adverse interest is protected by (or waives) the
sanction aspect just as much as the primary debtor.
In summary, the §§726, 580a and 580d invest the debtor with two protections. First, when the
creditor sues for the recovery of a single debt secured by more than one parcel of real property or
by both real property and personal property, the debtor may compel the creditor to include all of
the security in a single judicial foreclosure action by raising §726 as an affirmative defense.
Second, although he fails to raise such an affirmative defense and thus allows the creditor to
judicially foreclose on part of the security and to obtain a deficiency judgment, the debtor may
nevertheless subsequently invoke the sanction aspect of §726 and challenge the right of the
creditor to thereafter foreclose on the real property security or to sell it under a power of sale, on
the basis that he has waived all right to such security.
N.B. The Bank may still pursue DEI on the deficiency judgment. The Bank cannot pursue
Walker‘s property.
           b) Notes, p. 46
               (i)     Omitted Security
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The last note in Walker (N.B. above) is dictum since DEI was not a party to the proceedings.
While an 1888 case (Bull v. Coe, 77 Cal. 54) noted that a loss of security was also a loss the
deficiency against the security, U.C.B. v Tijerina (25 Cal. App.3d 963, 1972) just two years
before Walker opined that the legislature made the foreclosure/ deficiency process two-steps, not
one, so a loss of foreclosure is not a loss of the deficiency. [However, Tijerina is an appellate
case, Walker, though dictum, is a Supreme Court case.]
               (ii)    Triggering Sanctions - res judicata, or estoppel
When Westamerica sued Kirkpatrick (63 Cal. App. 4th 982, 1998) for contractual breach by not
selling the properties in his trust, Kirkpatrick (who won S/J) then countered with §726 saying
that Westamerica forfeited its (nonrecourse) security by failing to foreclose. Westamerica then
moved (successfully) to amend and judicially foreclose. Kirkpatrick said that the 726 loss-of-
security ‗trigger‘ arises when the action moves far enough along the ‗spectrum.‘ The Bank
responded that the 726 loss-of-security ‗trigger‘ only arises after final judgment. The court noted
that under election of remedies, only the doctrines of res judicata, or estoppel apply. The court
noted that neither estoppel (avoiding substantial injury), nor res judicata (final judgment)
applied. Kirkpatrick only prejudice (injury) so far was attorney‘s fee, and summary judgment is
not final until entered.
           c) Security Pacific National Bank v. Wozab, 51 Cal.3d 991 (1990), p.
              48
               (i)      A debtor can object to an improper setoff and require the bank to
                    return it and proceed first against the security interest.
               (ii)     A bank cannot unilaterally waive its security interest by taking an
                    improper setoff and then proceeding directly on the underlying debt.
               (iii) The debtor retains the right to require the bank to return the
                    improper setoff and proceed against the security interest before the
                    bank attempts to recover on the underlying debt.
               (iv) If the bank refused the debtor's demand and retained the setoff
                    funds, the security-first rule would preclude the bank from foreclosing
                    the security interest or proceeding on the underlying debt.
               (v)      If the bank complied with the debtor's demand to return the funds
                    and to proceed first against the security, the debtor could not then
                    assert that the bank had waived its security interest.
The Wozabs operated a business and had deposit accounts, and unsecured debts to Security
Pacific. The debts reached about $1MM, so Security Pacific requested the Wozabs to place their
home as security for the debts. Thereafter Security Pacific, without filing foreclosure, seized the
deposits as ‗set-off‘ to about $115,000 of the debt. The Wozabs filed for bankruptcy, and advised
Security Pacific that the setoff‘s waived the security under §726 according to B of A v. Daily
(Cal. App. 1984). The bank reconveyed the deed to the Wozabs and filed suit to recover the now
unsecured debt of about $976,000. The Wozabs argued that under Daily, the setoff was both a
waiver of the security and the debt. The court disagreed with the holding of Daily, but granted
S/J to the Wozabs and requested the bank to appeal. The court of appeals affirmed.
The issues before the court were whether (a) the set-off seizures were actions under Cal. Code
Civil Procedure § 22, (b) whether the set-off seizures were improper, (c) whether the bank then
gave up its security interest in the home, and (d) whether the bank waived up the debt as a §726
sanction.
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(1) Since the setoff seizures were not ―an ordinary proceeding in a court of justice,‖ they were
    not actions within the meaning of Cal. Code Civil Procedure § 22.
(2) However, prior decisions have invalidated setoff seizures because they took place without
    the benefit of foreclosure, as occurred to the Wozabs. While Daily considered setoff seizures
    as ‗actions,‘ the Court disagreed with this holding. McKean (Cal. 1897) held that a setoff
    seizure without benefit of foreclosure was improper under §726, and the banking industry
    had not in the 100 intervening years had the law changed. The Court refused to judicially do
    that. The setoff seizure by Security Pacific was improper.
(3) The Wozabs contended that under §726 the improper setoff seizure meant that Security
    Pacific forfeited both its security interest, and the balance of the debt. The Bank said fairness
    meant that it should return the setoff funds seized, plus interest and compensatory damages,
    and regardless of whether is lost its security interest or not, the Bank should retain the right
    to collect the underlying debt. The Court noted that counsel for the Wozabs told Security
    Pacific that the setoff seizure meant that it had forfeited the security interest, and Security
    Pacific reconveyed the property to the Wozabs. The bank's voluntary reconveyance of the
    trust deed to the debtors eliminated as a practical matter the issue of whether the improper
    setoff in this case should be sanctioned with an involuntary loss of the security interest. This
    question was effectively mooted by the reconveyance. [The court went on:] Neither party
    brought up returning the seized funds, nor did Security Pacific return the funds. Thus, the
    seizure was not inadvertent or of negligible duration, which would be suggestive of a less
    objectionable technical violation of §726. A creditor bank that violates § 726(a) by taking an
    improper extrajudicial setoff must be held to have waived the bank's security interest in its
    depositor's real property. (Bank of America v. Daily, 152 Cal.App.3d 767, 772.) The Bank
    contended this as unduly severe and proposed restoration. The Court disagreed said this
    alternative would deprive the depositor of the full measure of protection contemplated under
    section 726(a) by requiring the depositor to take judicial action to recover the deposits, and
    suffer from not having funds for legal assistance [and living expenses.] Furthermore, the
    Bank would under its proposal still have the recourse of foreclosure and deficiency
    judgment. This is multiplicity of actions of recovery of the setoff and defense against the
    creditor would be a burden to the depositor and little incentive to the Bank to comply with
    §726(a).]
(4) The law does not require a draconian sanction that bank's improper setoff requires a
    forfeiture of the underlying debt. Yet the law is clear. ―The classic sanction against the
    creditor who fails to exhaust all his security for the same debt in a single action is harsh, yet
    it follows inescapably from the availability of but one action to the creditor - he waives the
    balance of the security and he waives any claim to the unpaid balance of the debt.‖ Daily
    quoting Hetland, Cal.Real Estate Secured Transactions (Cont.Ed.Bar. 1970) Antideficiency
    Legislation, § 6.18, p. 258. The Bank was Daily was not seeking to recover a debt, so the
    quotation is dictum, and Daily did not decide the setoff seizure issue presented here.
    a. Salter holds that secured creditor suing only on the underlying debt without seeking to
         foreclose the security is precluded by §726(a) from proceeding against the security in a
         subsequent action, and waived his security. The judgment on the debt, is unaffected by
         the creditor's failure to comply with the chronology required by §726. Furthermore, a
         creditor who seeks action on multiple, but not all, security interests cannot seek to apply a
         deficiency judgment to the omitted security interest. Walker.
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    b. The act by Security Pacific was nonjudicial without a judgment or a deficiency. The
       Salter and Walker creditors violated §726 but the courts allowed judgment to both for the
       full amount of debt. [N.B. The parties in Salter had default judgments and Walker was
       not the debtor.] The only sanction was that the creditors lost their preferred position as
       secured creditors (in whole or in part) and were reduced to the status of unsecured
       creditors - a drastic sanction in the marketplace. (Bernhardt, Mortgages and Deeds of
       Trust (Cont.Ed.Bar 1989) 12 Real Prop. L. Rptr. 184, 186.) (7c) By parity of reasoning,
       the bank in this case also must be allowed to seek a judgment for the full balance of the
       debt.
(5) Judgment Reversed.
    a. At the time of the setoff seizure, the parties did not discuss return of the funds, or remedy
       to the security. The Wozabs acquiesced in (indeed, demanded) the bank's decision not to
       foreclose. This is consistent with the rule that a debtor can waive the protection of §726
       by failing to insist that the creditor first proceed against the security. To allow the
       Wozabs now to claim they were deprived of the benefits of the rule would be to
       encourage gamesmanship - demanding reconveyance of the security and then demanding
       that the creditor resort to the security. The two demands are mutually inconsistent.
    b. Allowing the bank to sue on the debt does not violate the two fundamental purposes of
       section 726: (1) preventing a multiplicity of lawsuits against the debtor, and (2) requiring
       exhaustion of the security before a resort to the debtor's unencumbered assets. The
       present action is the only lawsuit against the Wozabs, and they freely chose not to have
       the bank foreclose upon the security interest. Allowing them to evade their debt almost in
       its entirety - would be a gross injustice to the bank and a corresponding windfall to the
       Wozabs.
               (vi)    Concurrence and dissent by JJ. Broussard, Mosk, and Kennard
The "security first" principle is an indispensable element of all of the numerous statutory
provisions that afford a secured debtor protection in a wide range of circumstances: e.g., the
provision that limits the amount of a deficiency judgment a secured creditor may obtain after a
judicial foreclosure (§ 726, subd. (b)), the provision that bars a deficiency judgment in purchase
money transactions (§ 580b), and the provision that precludes a creditor who has elected to
foreclose by private sale from proceeding against any personal assets of the debtor (§ 580d). If a
secured creditor, without violating section 726, could reach nonsecured assets of the debtor
before proceeding against the security, the creditor could circumvent the carefully fashioned
protections of all of these statutory provisions. (See Bernhardt, Cal. Mortgage and Deed of Trust
Practice (Cont.Ed.Bar 1990) § 4.4., pp. 188-189.)
Banks are well aware that when a debt is secured by real property they are required to exhaust
the security before resorting to any nonsecured property of the debtor, including a personal bank
account, and that, under the threat of a potentially harsh sanction, they have successfully
established procedures to comply with this rule. In my view, the majority seriously err in
permitting the "hard" facts of this case to lead it to depart from the usual sanction imposed in
past §726 cases.
           d) Offsetting judgments, p. 57
The buyers sued the sellers for fraud, and the sellers sued the buyers for default. The buyers
enjoined the seller‘s trustee sale, and won a $96,000 judgment. The sellers then moved to offset
the buyers $95,000 arrears and sold the home in a trustee sale for the balance of the mortgage.
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The court of appeals declared the offset an action under Cal. Code Civil Procedure § 22, which
consequently invalidated the trustee sale.
           e) Shin v. Superior Court (RPI: Korea First Bank), 26 Cal. App. 4th
              542 (1994), p. 58
               (i)      Cal. Code Civil Procedure § 726 is triggered when (1) the creditor
                    commences an action (2) on the debt for money (3) after the claim is
                    reduced to judgment (4) where the debtor's unpledged assets have
                    either (a) not been subjected to attachment or (b) where the
                    attachment has been reduced to execution on the final judgment.
               (ii)     A comaker of a promissory note secured by a deed of trust is
                    entitled to the protection of the one-action rule of Code of Civil
                    Procedure §726.
Shin and other persons had a secured loan with Korea First Bank (KFB) in Los Angeles. After
the debtors defaulted, KFB elected to accelerate the note and demanded payment of the full
principal with interest and late charges. KFB commenced a judicial action in the Seoul Civil
District Court, in Korea, and obtained a prejudgment attachment order recorded against real
property in Korea owned by Shin. KFB then filed for judicial foreclosure and a deficiency
judgment in the U.S. Shin opposed the action on grounds that KFB violated §726 and waived its
security by judicially attaching his property in Korea. The trial court granted S/J to KFB and
ruled that the action in Korea did not violate §726.
(1) KFB contends that the Korean action does not violate the "one form of action" rule because it
did not proceed to judgment. According to KFB's expert witness, KFB merely recorded a lien,
which, upon a minimal showing, allows claimants to have their claims to real property recorded
for purposes of giving notice to potential purchasers and lenders, and to preserve KFB's priority
if KFB should obtain a judgment against Dong Suk Shin some time in the future. Although the
declaration of KFB's expert witness assiduously avoids the term "action," it is clear KFB
prosecuted its claim on the debt in a court of justice. It is also clear that KFB was required to
make only a "minimal showing" that Shin was, in fact, indebted to KFB. Whether KFB may
proceed in the pending matter or whether it must follow up with another action to foreclose is of
no consequence because either way KFB invoked the jurisdiction of the Korean court to protect
its claim with an involuntary lien.
(2) KFB's expert witness observed that no person on notice of the lien would likely purchase or
lend against the Korean Property because of KFB's recording of the attachment Lien. Clearly,
KFB obtained through a judicial proceeding an involuntary lien on additional assets of its
borrower in order to increase the collateral over and above the value of the California real
property, which was the security interest originally provided for KFB's loan. KFB has restricted
Shin's use of his unpledged assets, and his ability to protect and defend his interests has been
impaired. KFB's tactics, if allowed, would empower every secured lender to initiate lawsuits for
the sole purpose of sequestering a debtor's unpledged assets to assure payment of a potential
deficiency judgment before there is any showing that a deficiency will occur. KFB initiated the
Korean action before it filed this action for judicial foreclosure, thereby embarking on a process
of freezing petitioners' assets without either demonstrating that a deficiency was likely or
applying first to a California court for relief. Here, KFB has confronted Shin with two pending
lawsuits on the same claim and only in the second one is it resorting to its security. [The court
noted the usual burdens §726 is to prevent and stated the §726 trigger rule above.]
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(3) KFB contends that its Korean prejudgment attachment is consistent with Cal. Code Civil
Procedure § 483.010(b), which authorizes an attachment order on a claim which originally
secured security has become valueless or decreased in value to less than the amount owing on the
claim through no fault of the creditor. However, § 483.010(b) must be invoked, and a hearing
made in a judicial foreclosure action to persuade the court that the security has become valueless
or has declined in value below the amount of the claim.
(4) KFB next argues the Korean Lien is clearly the equivalent of a lis pendens or attachment lien
to merely gives notice to potential purchasers and lenders of KFB's claim and establishes priority
for purposes of preserving a source from which KFB can satisfy a deficiency judgment when and
if one is obtained in the instant action. [While having the law right, KFB did it wrong.] Its
California security interest is recorded, and it must exhaust that security interest before seeking
to encumber any of petitioners' unpledged assets.
(5) KFB also contends that, if its Korean action violates the one action rule, it does so only as to
Shin and not the other petitioners and comakers of the promissory note on which they are jointly
and severally liable. [This contention ignores California law.]
    a. Schwenke and O'Brien signed a promissory note secured by a deed of trust on two
        properties owned by O'Brien. Without Schwenke's knowledge, O'Brien had the bank
        reconvey title to enable him to refinance his properties. The bank later filed [a personal]
        action against Schwenke to recover on the note. Schwenke invoked §726 as an
        affirmative defense as the bank relied on O'Brien's request for the reconveyances. The
        court held that O'Brien could not forfeit Schwenke's right to the benefit of the "one form
        of action" rule. [Pacific Valley Bank v. Schwenke (1987) 189 Cal.App.3d 134]
    b. Two corporations of which the Kelleys were sole shareholders executed a promissory
        note for the debt. The Kelleys secured and guaranteed the debt with a deed of trust on an
        office building. The corporations defaulted and the lender brought an action for judicial
        foreclosure against the corporations and the Kelleys. One of the corporations filed for
        bankruptcy and stayed the foreclosure action. The lender then accepted a stipulated
        judgment against the nonbankrupt corporation and the Kelleys for $1 million, which the
        court held violated the §726 as to the bankrupt corporation.
Thus, although only Shin's property has been subject to the Korean lien, all of the petitioners are
entitled to invoke the sanction aspect of section 726.
           f) Notes, p. 62
               (i)     Cal. Code Civil Procedure § 483.012
The legislature responded to the lenders‘ dilemma by revising the about to sunset code.
―Subject to the restrictions of Sections 580b and 580d, in an action to foreclose a mortgage or
deed of trust on real property or an estate for years therein, pursuit of any remedy provided by
this title shall not constitute an action for the recovery of a debt for purposes of subdivision (a)
of Section 726 or a failure to comply with any other statutory or judicial requirement to proceed
first against security.‖
               (ii)    Draconian Sanctions
The judgment of dissolution of the marriage of Salvatore and Jodi DiSalvo included an
equalizing award of $100,000 in Jodi's favor, evidenced by a $100,000 note and secured by a
trust deed on the spouses' former marital residence. When Salvatore failed to make payments on
the note, Jodi's attorneys attempted to collect it by various methods, including a writ of execution
seeking to levy on Salvatore's assets, an application to compel him to appear at a judgment
debtor's examination, an earnings withholding order seeking to garnish his wages, a levy on his
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bank account and an attempted appointment of a receiver to take possession of the stock in his
insurance agency. All of those efforts resulted in the collection of the grand sum of $83, but
conspicuous by its absence was any effort by Jodi to foreclose under the trust deed.
Salvatore filed a bankruptcy, and Jodi sued to have the $100,000 indebtedness declared
nondischargeable. The Bankruptcy Court (BC) extinguished both the security interest in the real
estate and the $100,000 debt, and awarded Salvatore attorney's fees as the prevailing party. The
judgment was reversed on appeal, and Salvatore sued, claiming that the pre-petition efforts of
Jodi and her lawyers to collect on the $100,000 debt had constituted an abuse of process and
amounted to a tortious violation of Cal. Code Civil Procedure § 726. [Dismissed on procedural
grounds.] In Re DiSalvo, 219 F.3d 1035 (Bk9 2000).
               (iii)   Conflict of Laws
Cal. Code Civil Procedure § 726 is held not to apply to property outside California unless the res
jurisdiction has a similar one-action rule also. [Felton v. West, 102 Cal. 266] Consequently, a
creditor cannot (1) sue the debtor in California on the note without bothering to foreclose first on
the land elsewhere (see Prestige below); or (2) sue the debtor in California for a personal
deficiency after a foreign foreclosure unless a choice of law clause provides otherwise (see
Guardian below). Younker v. Reseda Manor, 255 Cal. App.2d 431 (1967).
[Prestige Limited Partnership Concord v. East Bay Car Wash Partners and
Guardian Saving and Loan v. MD Associates (hyperlinks embedded).
Chapter III.           The Anti-Deficiency Rules
   A) The Statutes, p. 65
        a) Cal. Code Civil Procedure § 580a, Deficiency judgments must be
           filed w/in 3 mo., & up to FMV – sale $
 Whenever a money judgment is sought for the balance due upon an obligation for the payment
of which a deed of trust or mortgage with power of sale upon real property or any interest therein
was given as security, following the exercise of the power of sale in such deed of trust or
mortgage, the plaintiff shall set forth in his or her complaint the entire amount of the
indebtedness which was secured by the deed of trust or mortgage at the time of sale, the amount
for which the real property or interest therein was sold and the fair market value thereof at the
date of sale and the date of that sale. Upon the application of either party made at least 10 days
before the time of trial the court shall, and upon its own motion the court at any time may,
appoint one of the probate referees provided for by law to appraise the property or the interest
therein sold as of the time of sale. The referee shall file his or her appraisal with the clerk and
that appraisal shall be admissible in evidence. The referee shall take and subscribe an oath to be
attached to the appraisal that he or she has truly, honestly and impartially appraised the property
to the best of his or her knowledge and ability. Any referee so appointed may be called and
examined as a witness by any party or by the court itself. The court must fix the compensation of
the referee in an amount as determined by the court to be reasonable, but those fees shall not
exceed similar fees for similar services in the community where the services are rendered, which
may be taxed and allowed in like manner as other costs. Before rendering any judgment the
court shall find the fair market value of the real property, or interest therein sold, at the time of
sale. The court may render judgment for not more than the amount by which the entire amount
of the indebtedness due at the time of sale exceeded the fair market value of the real property or
interest therein sold at the time of sale with interest thereon from the date of the sale; provided,
however, that in no event shall the amount of the judgment, exclusive of interest after the date of
sale, exceed the difference between the amount for which the property was sold and the entire
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amount of the indebtedness secured by the deed of trust or mortgage. Any such action must be
brought within three months of the time of sale under the deed of trust or mortgage. No
judgment shall be rendered in any such action until the real property or interest therein has first
been sold pursuant to the terms of the deed of trust or mortgage, unless the real property or
interest therein has become valueless.
           b) Cal. Code Civil Procedure § 580b, Deficiency judgment forbidden
              after foreclosure on that dwelling of a purchase money loan
  No deficiency judgment shall lie in any event after a sale of real property or an estate for years
therein for failure of the purchaser to complete his or her contract of sale, or under a deed of
trust or mortgage given to the vendor to secure payment of the balance of the purchase price of
that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling
for not more than four families given to a lender to secure repayment of a loan which was in fact
used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the
purchaser. [―that‖ added in 1983?]
  Where both a chattel mortgage and a deed of trust or mortgage have been given to secure
payment of the balance of the combined purchase price of both real and personal property, no
deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would
lie under the deed of trust or mortgage on the real property or estate for years therein.
           c) Cal. Code Civil Procedure § 580d, Deficiency judgment forbidden
              after foreclosure under power of sale
  No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or
mortgage upon real property or an estate for years therein hereafter executed in any case in
which the real property or estate for years therein has been sold by the mortgagee or trustee
under power of sale contained in the mortgage or deed of trust.
  This section does not apply to any deed of trust, mortgage or other lien given to secure the
payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the
Commissioner of Corporations, or which is made by a public utility subject to the Public Utilities
Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code).
           d) Note – difference in terms

   B) The Basic Cases, p. 66
        a) Brown v. Jensen, 41 Cal.2d 193 (1953), p. 66
               (i)      A holder of a junior deed of trust cannot seek a deficiency
                    judgment after foreclosure by any senior deed of trust on the same
                    property without first joining the foreclosure action by the senior deed
                    of trust. Cal. Code Civil Procedure § 580b.
               (ii)     §726 requires a single action for foreclose. §580a requires the
                    trustee to apply the fair market value test to any power of sale on
                    secured real property. §580b prohibits a secured trustee from taking a
                    deficiency judgment on any secured contract of sale for purchase
                    money, whether the trustee resorts to trustee sale under a power of
                    sale or not. §580d prohibits a secured trustee from taking a deficiency
                    judgment in all trust deeds, whether purchase money or otherwise.
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The seller/plaintiff sold real property to the buyer/defendant who secured a first deed of trust
from Glendale Federal Savings & Loan, and a second deed of trust from the seller/ plaintiff.
Hence both trust deeds were purchase money trust deeds. Glendale Federal Savings & Loan later
foreclosed on the buyer/defendant, and bought the property for the outstanding costs of the loan
without any action by the seller/plaintiff to protect her second deed of trust. The seller/plaintiff
then sued the buyer/defendant on the note, alleging that the security was worthless because of
foreclosure sale by Glendale Federal Savings & Loan, and thus not due to her fault. At trial the
plaintiff prevailed under Cal. Code Civil Procedure § 726. The defendant appealed.
REVERSED. On appeal, the defendant pleaded that the plaintiff‘s trust deed was a purchase
money trust deed subject to the bar of deficiency judgment under Cal. Code Civil Procedure §
580b. The plaintiff argued that Cal. Code Civil Procedure § 580b does not apply because the
security had become valueless by reason of the sale under Federal's first trust deed, and there
cannot be a deficiency if there is no security to sell because it presupposes a partial satisfaction
of the debt by a sale which exhausts the security. [As agreed by the dissent here.]
The court noted that section 580a applies the fair market value test of section 726 to sales made
without court assistance under a power of sale contained in a trust deed. Section 580d goes
further and provides that no judgment shall be rendered for any deficiency on a note secured by a
trust deed where the property has been sold under the power of sale (as distinguished from a sale
in a foreclosure action) contained in the trust deed. Section 580b deals specifically with a trust
deed as security for the purchase price, but without an actual sale of the security under the power
of sale in the trust deed [which would be superfluous to §726]. Section 580d covers precisely
that situation in all trust deeds, whether purchase money or otherwise.
The court said that the one taking such a trust deed knows the value of his security and assumes
the risk that it may become inadequate. Especially does he know the risk where he takes, as was
done here, a second trust deed. While the section speaks of a deficiency judgment after sale of
the security that means after an actual sale or a situation where a sale would be an idle act, as
where the security has been exhausted. The deficiency judgment that cannot be obtained is still a
deficiency judgment even though it may consist of the whole debt because a deficiency is
nothing more than the difference between the security and the debt.
Section 580b states there cannot be deficiency judgment where there is a sale under the power of
sale or sale under foreclosure, or no sale because the security has become valueless or is
exhausted. The purpose of the "after sale" reference in the section is that the security be
exhausted and that result follows after a sale under the first trust deed.

           b) Note, p. 69
Antideficiency laws raise interest rates.

           c) Roseleaf Corp. v. Chierighino, 59 Cal.2d 35 (1963), p. 70
               (i)      The limitations of §§726, and 580(a), (b), and (d) do not apply
                    where the property secured is not is the property on which the note
                    issued.
               (ii)     The one-action rule of §726 refers to the mortgage or deed of trust
                    foreclosed by the same decree, and does not apply to a sold-out junior
                    not joined within the same action.
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               (iii) The recovery of a deficiency may not exceed the difference
                    between the amount of the indebtedness and the fair market value of
                    the property at the time of the sale. CCP § 580a.
               (iv) Proceedings for a deficiency by a senior lender must be initiated
                    within three months after either a private sale under a power of sale
                    or a judicial sale. CCP § 580a. The limitation does not bar junior
                    lenders who are not joined in the proceedings.
               (v)      The purpose of CCP § 580b is to discourage overvaluing the
                    security to prevent precarious land promotion schemes and give
                    purchasers a clue as to its true market value.
               (vi) CCP § 580d applies if the property is sold under a power of sale,
                    but not if the property is foreclosed and sold by judicial action, so it
                    does not extend to a junior lienor whose security has been sold out in
                    a senior sale.
               (vii) A junior has fewer rights in that the junior may redeem or obtain a
                    deficiency judgment after a senior judicial sale (CCP § 701), but after
                    a senior private sale, the junior has no right to redeem, but may only
                    obtain a deficiency judgment.
Facts: Roseleaf Corp. sold its hotel to Chierighino, and secured the purchase note with a first
deed of trust on the hotel, and second deeds of trust on three other properties that Chierighino
owned. The holders of the first deeds of trust on three other properties that Chierighino owned
foreclosed and sold the properties under the power of sale, thus rendering Roseleaf‘s security
valueless. Roseleaf then sued Chierighino to recover the full amount unpaid on the three notes
secured by the second trust deeds. The trial court entered judgment for Roseleaf. Defendant
Willy Chierighino appealed, contending that Roseleaf's action is limited by section 580a and
barred by sections 580b and 580d of the Code of Civil Procedure.
Court: Judgment affirmed.
The court noted that the "one form of action" rule of § 726 does not apply to a sold-out junior
lienor, nor does the three-months limitation of § 580a. There is no reason to compel a junior
lienor to go through foreclosure and sale when there is nothing left to sell. Moreover, to
compel a junior lienor to sue for a deficiency within three months of the senior's sale would
unnecessarily compel acceleration of the junior obligation, to the detriment of the debtor.
Furthermore, the court interpreted the fair-value limitations of sections 580a and 726 as also
not applying to a junior lienor whose security has been rendered valueless by a senior sale.
The court explained the language of §726 applies where decree of foreclosure "shall determine
the personal liability of any defendant for the payment of the debt secured by such mortgage or
deed of trust," referring to the mortgage or deed of trust foreclosed by the same decree.
        Fair value provisions are designed to prevent creditors from buying in at their own
sales at deflated prices and realizing double recoveries by holding debtors for large
deficiencies. The position of a junior lienor whose security is lost through a senior sale is
different from that of a selling senior lienor. A selling senior can make certain that the security
brings an amount equal to his claim against the debtor or the fair market value, whichever is less,
simply by bidding in for that amount. He need not invest any additional funds. The junior lienor,
however, is in no better position to protect himself than is the debtor. Either would have to invest
additional funds to redeem or buy in at the sale. Equitable considerations favor placing this
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burden on the debtor, not only because it is his default that provokes the senior sale, but also
because he has the benefit of his bargain with the junior lienor who, unlike the selling senior,
might otherwise end up with nothing.
         Roseleaf would clearly be barred by section 580b from suing on the note secured by the
first trust deed and chattel mortgage on the hotel and its furnishings. That note, however, is not
involved in this case, and the record discloses no default under it. The issue here is whether the
three second trust deeds on land other than that purchased are purchase money trust deeds
because they were "given to secure payment of the balance of the purchase price of real
property."
         Section 580b was apparently drafted in contemplation of the standard purchase money
mortgage transaction, in which the vendor of real property retains an interest in the land sold to
secure payment of part of the purchase price. Variations on the standard are subject to section
580b only if they come within the purpose of that section. The purpose of Section 580b is to
discourage overvaluing the security to prevent precarious land promotion schemes and give
purchasers a clue as to its true market value. There is no indication in the present case that the
hotel was overvalued. The purchaser will not lose the property he purchased yet remain liable for
the purchase price. To apply section 580b here would mean that the Chierighinos would acquire
the hotel at less than the agreed price.
         CCP § 580d applies if the property is sold under a power of sale, but not if the property is
foreclosed and sold by judicial action, so it does not extend to a junior lienor whose security has
been sold out in a senior sale. CCP § 580d was enacted to put judicial enforcement on parity with
private enforcement. This result could be accomplished by giving the debtor a right to redeem
after a sale under the power. The right to redeem, like proscription of a deficiency judgment,
has the effect of making the security satisfy a realistic share of the debt.
         The legislature could have chosen redemption, but by choosing instead to bar a
deficiency judgment after private sale, the Legislature achieved its purpose without denying the
creditor his election of remedies. If the creditor wishes a deficiency judgment, his sale is subject
to statutory redemption rights. If he wishes a sale resulting in non-redeemable title, he must
forego the right to a deficiency judgment. In either case the debtor is protected.
         A junior has fewer rights in that the junior may redeem or obtain a deficiency judgment
after a senior judicial sale (CCP § 701), but after a senior private sale, the junior has no right to
redeem, but may only obtain a deficiency judgment. Reading § 580d as to deny the junior his
single remedy after a senior private sale while leaving him with two alternative remedies after a
senior judicial sale, leaves the junior's right to recover controlled by the whim of the senior, and
there is no reason to extend the language of § 580d to reach that result.
           d) Notes, p.73
               (i)     The Three Month Time Limit
The three-month limit filing for § 580a is not a procedural limitation (which are waivable for
excusable neglect under CCP 473(b), but is an unwaivable statute of limitations. The statute of
limitations under CCP §580a starts on the date of the foreclosure, not the date of recording.
However, renewing a deficiency starts with entry of the deficiency judgment, not the date of the
foreclosure decree. Life Savings v. Wilhelm, 84 Cal. App.4th 174 (2000)
               (ii)    Fair Value - Low bidding & Other States
Cal. Code Civil Procedure § 580a and 726 apply only when a deficiency judgment could result,
as when the bid is less than the balance due under the mortgage. Cal. Code Civil Procedure §
580a and 726(b) require that the fair market value of the property determines the size of a
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deficiency judgment, and not the difference between any actual lower foreclosure sale price and
the mortgage. Consequently, Cal. Code Civil Procedure § 580a and 726(b) do not govern when
the foreclosure sale price equals of exceeds the balance due, even if that bid is far below the
value of the property.
        About half of the states restrict deficiency judgment to the fair market requirements. The
other half, and Cal. Prob. Code § 750 require court confirmation of a sale price, with the sale
denied if the price is below the ‗upset‘ price, such as 2/3rds less than the fair market value.
               (iii)    The Effect of a Trustee Sale
Rettner had a judgment against Shepherd, who transferred his assets (and those of brother) to a
corporation to keep the assets out of Rettner‘s reach. Rettner alleged in a lawsuit that the
conveyances were fraudulent. Shepherd settled the suit by giving a secured deed of trust to
Rettner on the property. Rettner then sold the property under the deed of trust, rather than the
prior judgment, and sued Shepherd for a deficiency judgment. The court ruled that Rettner‘s
trustee sale was as a secured creditor, which invoked 580d, and voided his ability to get a
deficiency judgment. Rettner argued that the note derived from the unsecured money judgment,
and pointed out the clause of the note which said so! Yet the note also named the Shepherd
brothers a ‗jointly and severally liable.‘ The court said Rettner was trying to get a third choice of
collection (security and the note) and rejected the provision as violating the policy behind §580d.
               (iv)     Purchase Money
In 1963 when the Roseleaf decision came out, Cal. Code Civil Procedure § 580b covered the
―purchase price of real property.‖ The 1989 amendment changed the words to the ―purchase
price of that real property.‖
Three weeks after the Roseleaf decision, 59 Cal. 121 held that §580b applies to third-party
lenders as well as sellers.
Other Security
Implied Overvaluation: The seller refused to take the property on a deed of trust because the
building was noncompliant to earthquake standards and was almost certain to fail in a significant
earthquake. The cost of repairs was significant and the seller did not want to be subordinate to a
construction loan, so the buyers offered another building they owned (but which also suffered the
same defect.) McCulloch v. M & C Beauty Colleges, Inc. (1987) 194 Cal.App.3d 1338.
Implied Single Combined Sale: In one contract, with separate closings, the seller sold two
apartment buildings and accepted a subordinate deed of trust on one building to secure the
purchase price of the other building. A senior foreclosure sold-out the deed of trust, so the seller
sued on the note, claiming the ‗other security‘ exception of Roseleaf to §580b. The court rejected
the Roseleaf analogy, pointing out that the Roseleaf properties really were separate properties,
and not simply separate buildings in the same sale. The court pointed to the seller‘s knowledge
of the properties, and the total loss of both buildings to the buyers. The court held this was a
purchase money transaction, despite his stated lack of desire for one in the first place, and
apparent attempt at circumvention.
Other housing: Cal.Civ.Code § 2983.8 and Health & Safety Code §18038.7 prohibit deficiency
judgments on manufactured (mobile & floating) homes, unless there is substantial damage to the
asset and the sale was conditional to seller financing, and thus allow deficiency judgments on
third-party financed sales. The status of family farms is uncertain.
           e) Spangler v. Memel, 7 Cal.3d 603 (1972), p. 77
               (i)      §580b applies to a sold-out junior lienor holding such security for
                     the payment of the balance of the purchase price. The issue is whether
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                    the particular purchase money situation in question fell within the
                    purposes of section 580b.
               (ii)    §580b does not bar a deficiency judgment in a commercial
                    development sale with a subordination clause. In these cases, the
                    burden falls on the commercial developer as the vendor cannot know
                    the value of the property for commercial development, the success of
                    the development lies in the developer, and the sold-out junior lienor
                    cannot possibly raise the astronomical sums needed to buy in at the
                    senior sale and thereby protect his junior security interest.
The Spanglers sold their home to a 4-person partnership, which secured a first deed of trust to
construct and office building, and a junior purchase money deed of trust to the Spanglers in
conjunction with personal guarantees and waivers of the anti-deficiency statutes. The partnership
defaulted on the first deed of trust, and the bank judicially foreclosed, sold the property, and sued
for a deficiency judgment. The Spanglers joined the suit against the partners as individuals on
their person guarantees. The trial court held for the Spanglers.
AFFIRMED. Cal. Civ. Proc. Code § 580b places the risk of inadequate security on the purchase
money mortgagee. A vendor is thus discouraged from overvaluing the security. Precarious land
promotion schemes are discouraged, for the security value of the land gives purchasers a clue as
to its true market value. If inadequacy of the security results, not from overvaluing, but from a
decline in property values during a general or local depression, § 580b prevents the aggravation
of the downturn that would result if defaulting purchasers were burdened with large personal
liability. The statute thus serves as a stabilizing factor in land sales.
The court found that a sale for commercial development is a purchase money transaction, but is
without present value in the sense that the parties are not conveying the property for what is it,
but for what it could be. Consequently, applying §580b is not automatic.
The first clear purpose of the statute is to prevent overvaluation in those situations where "the
security value of the land gives purchasers a clue as to its true market value," by placing the risk
of inadequate security on the purchase money mortgagee. The inability of the purchaser to obtain
the purchase price from a lender using the land as security, should warn the vendor that he is
perhaps overvaluing the land, and that he insists, at his peril, upon his premium price secured by
a second trust deed.
Where however, the agreement of sale contains a subordination clause, as where the vendor is
selling the property for commercial development, the security value of the land at the time of the
agreement gives neither vendor nor purchaser any clue as to its true market value. The market
value of the land depends upon the likelihood of the success of the commercial development;
which depends upon the obtaining of loans to construct it; and securing these loans depends on
the ability of the purchaser to give the lender a senior security interest. In these cases, the success
of the commercial development depends upon the competence, diligence and good faith of the
developing purchaser. It would seem proper, therefore, that the purchaser not the vendor bear the
risk of failure, particularly since in the event of default, the junior lienor vendor will lose both
the land and the purchase price.
Also, in these cases of subordination clauses, the difference between the sold-out junior lienor in
the subordination clause, and the amount of the construction loan is usually extremely large. It is
clear that the typical vendor in this context cannot possibly raise the astronomical sums needed
to buy in at the senior sale and thereby protect his junior security interest. The only possible
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protection available to the vendor other than careful and sometimes fortuitous choice of
purchasers, is to allow a deficiency judgment against the commercial developer.
           f) Notes, p. 80
               (i)     Co-owners
In a final property settlement, the ex-wife transferred the jointly owned apartment and motel to
her ex-husband, and he transferred the jointly owned family home to her, with a note secured by
a second deed of trust on the apartment. After the holder of the first deed of trust foreclosed on
the motel, the ex-wife filed for a deficiency judgment. The ex-husband argued that Cal. Code
Civil Procedure § 580b applied, of if not, then Brown v. Jensen applied.
The court disagreed and held that (1) the note was a property settlement, not a purchase money
mortgage, (2) the note was part of the transfer of both the motel and the apartment, so voiding
the note would give him the apartment for less than the agreed price, (3) in this case, both parties
had equal knowledge of the property and its value, and (4) this was not an ordinary sale in that
the husband and wife were tenants in common to the properties, and each wanted the benefit of
the transaction, her to be free of management and control, and he to have management and
control. Placing the risk of the business venture solely on her would be unfair. Nickerman v.
Ryan, 93 Cal.App.3d 564 (1979).
               (ii)    “Prudent Maximization”
In 1979, Long sought to sell his home and office property for commercial development. As a
residential property, the value was about $150,000. A condominium developer bought the
property with a $134,000 down payment, a note for $118,000, and subordination to a $682,000
construction loan. The note had small monthly payment with balloon payment in 3-years, with
acceleration by a 1/5 payoff as the developer sold each of five condominiums. The seller knew
his risk, even telling his broker that if the project bombed, he was out the carry-back note. After
completion, the developer was unable to sell, the holder of the construction note foreclosed, and
the seller sough to attach two other parcels of land owned by the developer.
The trial court held that Spangler v. Memel did not apply here since Long actively participated in
the project, knew his risk, and had received his value (the down payment and monthly payments
would have exceed $150,000.) The court of appeals, however, reversed, and allowed Long to
attach the properties. Like the Spanglers, the court said that Long was only trying to prudently
maximum the value of his property, and had taken no material risk. His expertise as a financial
broker, and the payment acceleration clause did not show active participation, or a formal waiver
as to his security position.
The developer also argued a lower value was realistic for the property, and that overvaluation
protections of § 580b should apply, the property. The developer also argued that § 580b
economic protections from further property value aggravation should apply. Lastly, the
developer argued that seller accepted risk by accepting the note to obtain his high sale price.
The court said the developer failed to show competent evidence on his first claim, and the
enormity of the construction loan compelled against his overvaluation protection argument.
Third, the history of §580b applied to the depression of the 1930‘s, and to not the economic
period of the early 1980‘s. Lastly, the court noted that the developer‘s high price and risk
argument applied to him also. Long v. Superior Court, 170 Cal.App.3d 499 (1985).
           g) DeBerard Properties v. Lim, 20 Cal.4th 659 (1999), p. 84
The Lims bought a shopping center with a down payment to DeBerard Properties, assumption of
note secured by first deed of trust to a bank, and note secured by a second deed of trust to
DeBerard Properties. Three years, the Lims had trouble making payments and renegotiated the
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notes. The replacement notes halved the interest rate, and the payments, subordinated DeBerard
Properties in favor of the bank, forebear DeBerard Properties from foreclosing, and waived Cal.
Code Civil Procedure § 580b protections for the Lims. The Lims later defaulted, the bank
foreclosed, DeBerard Properties lost its security, and sued on the note.
In a bench trial, the court concluded that section 580b may be waived as a matter of law and
found that the Lims had voluntarily, knowingly, and intelligently waived it. The court awarded
DeBerard $241,075.81 plus costs. The Court of Appeal reversed. It concluded that section 580b's
language precluded its protection from being waived.
The Court noted the purposes of §580, (1) keep the vendor from overvaluing the property, and
(2) a macroeconomic stabilization measure to harm purchasers as a class less than they might
otherwise be during a time of economic decline. The court also noted that Spangler did not apply
in that the Lims bought and operated a shopping center – they did not take out a construction
loan for a commercial development. Thus, this case is not outside the purposeful protections of
Cal. Code Civil Procedure § 580b.
DeBerard Properties argued that by the express act of renegotiation, the Lims reallocated the
risks to their hands [recall that DeBerard was barred from foreclosing], and that the Lims were
sophisticated purchasers and borrowers. The court rejected these arguments as cause to bring the
Lims within Spangler, since the same property secured the note [DeBerard could probably have
still forced a judicial foreclosure] and § 580 does not distinguish between sophisticated and
unsophisticated purchasers.
DeBerard Properties also argued that enforcing "post-default waivers of § 580b would‖ …
―encourage flexibility in negotiating modifications of purchase money secured land sales.‖ The
court noted that this argument was outside its ―persuasive authority to permit a waiver of section
580b,‖ and ―must be addressed to the Legislature.‖ As the law currently stands, "[i]f the purchase
money creditor does not wish to accept the risk that the property will be lost through foreclosure
by another secured creditor, the remedy is to either foreclose himself or destroy the purchase
money nature of the transaction by reconveying the deed or mortgage on the original real estate
in exchange for the substitution of other security."
With respect to a case in which the court of appeals allowed a wavier [Russell v. Roberts (1974)
39 Cal.App.3d 390, 114 Cal.Rptr. 305] after the loan the made (noting that Salter said the
protection applied at the time was loan was made, but left open what could happen afterwards,)
the Court agreed with Palm v. Schilling (1988) 199 Cal.App.3d 63 244 Cal.Rptr. 600, that,
―Ruinous concessions are, if anything, easier to obtain when the debtor is in default.‖ The Court
noted the waiver was counter to the legislature‘s policy behind §580b, and expressly disapproved
of Russell.
           h) Notes, p. 87
               (i)    Variant subordination
Seller who subordinates the purchase money mortgage to a senior loan without defined purpose
is Spangler exception to §580b - the seller protections of the exception and buyer burden are of
greater importance when the seller cannot know, nor control the buyer use of the property, and
the senior loan. Wright v. Johnson, 206 Cal. App.3d 333 (1988) [before DeBernard.]
Seller who agrees to subordination for construction loan to single family home qualifies for the
Spangler exception to §580b - after agreeing to a revised (and higher) subordination loan limit.
Ziegler v. Barnes, 200 Cal.App.3d 224 (1988).
Spangler does not automatically make the presence of a subordination agreement a push button
that defeats the automatic application of §580b. The subordination agreement must make a
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pronounced change in the property use to remove the transaction from the buyer‘s anti-
deficiency protection under §580b. Seller who subordinated to a construction clause barred from
deficiency judgment where $220K of a $1.27 MM was used for ‗purely cosmetic renovation.
Thompson v. Allert, 233 Cal.App.3d 1462 (1991).
Debtor‘s attorney is subject to malpractice for failing to raise §580b as debtor protection even
though the construction loan of subordination clause never issued - so subordination could not
have been exercised by debtor as protection. Crookall v. Davis, et.al., 65 Cal. App.4th 1078
(1998).
Seller may recover deficiency judgment where the buyer never secures the intended construction
loan of subordination. Lawler v. Jacobs, 83 Cal. App.4th 723 (2000).
               (ii)    Waivers in litigation
Seller sold a commercial unit, but the subsequent owner (who must have assumed the loan)
converted it into a single family dwelling. The seller sued for prepayment and won. The court
then asked the seller to elect damages (prepayment), or judicial foreclosure. The debtors did not
object until appeal when it occurred to them that Code Civ. Proc. §. 726 and 580b prohibited
such relief. The court noted that the seller gave up his security interest, and the debtor forfeited
exhaustion relief from personal liability, so the protections of §580b were never invoked.
               (iii)   Variant waivers
The purchase money secured creditor wrongfully attached assets of the debtor‘s guarantor, which
lead the bankruptcy court to rule the lienor lost its security interest. (Wozab.) The debtor then
claimed that debt also was not collectable (Brown.) The Court of Appeals held that Brown only
applies where the junior lienor is sold-out by a senior foreclosure. The Court also noted that the
security had only been attached, and not sold, so the anti-deficiency protections of §580b did not
apply. Prestige Ltd Partnership-Concird v. East Bay Car Wash Partners, 234 F.3d 1108 (2000).
               (iv)    Buying vs building a residence.
The Pruntys borrowed $40K to build a home on a lot they owned. After a landslide later
destroyed the building, the Pruntys sued for declaratory relief that the §580b anti-deficiency
protections applied. Bank of America argued that §580b did not apply since the loan (1) was for
construction, not a purchase of the residence, or (2) the purchase of labor and material rather than
real property. The Court rejected both arguments, saying that the total loss of the building fell
within the downturn aggravation protection purpose of §580b, so the bank assumed the risk as it
had the ability to control its risk by controlling (1) how the debtor used the funds, and (2) the
design and construction proceeded.
   C) Nonqualifying Juniors, p. 91
        a) Citrus State Bank v. McKendrick, 215 Cal. App. 3d 941 (1989)
Citrus State Bank made a secured loan to McKendrick with a deed of trust subordinate to four
seniors, three judgment liens, and a California EDD lien, worth in total, $154,000. The bank‘s
appraisal of the property at the time was $167,000. The holder of the third deed of trust later
recorded default and set a trustee‘s sale. At the time, the total indebtedness was $192,386.38.
Citrus State Bank took high bid for $45,132. The sale extinguished both its deed of trust, and that
of the fourth holder, and Citrus State Bank had the property subject to the senior encumbrances.
The following year, the Bank sold the property for $146,500. Fourteen months after the
foreclosure sale, the bank sued for a deficiency judgment. Mckendrick successfully motioned for
nonsuit by the bank‘s failure to fill suit within three months of the foreclosure sale.
AFFIRMED. On appeal, the bank argued that it was a sold-out junior so the four-year statute of
limitations of Code Civ. Proc. § 337 applied, not the three-months of §726. The Court noted that
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while §580b allowed a sold-out junior lienor to pursue a deficiency judgment under §580a
without limitation of the fair market value, or three month filing requirement, these rules did not
apply to a junior lienor who purchased the secured property at the senior foreclosure. The court
distinguished Roseleaf on this purchase difference, and stated that equity applies the fair value
limitation to prevent a lienor from making an inferior bid and make an excess recovery by
secured creditors. (Bank of Hemet v. U.S., 643 F.2d 661 (Ninth 1981). While Hemet presumed
the three-month limitation applied, the issue in Hemet was whether the fair value ruled applied to
a case of a senior tax lien in a junior‘s buyout (the bank). The court in Hemet held that bank‘s
purchase was dispositive (it meant nothing in that case) and the 580a fair value rule applied so
the bank‘s recovery in the sale was only that portion above the fair market value of the property
at the time of the bank‘s purchase. The Citrus Court noted that no injustice applied to Citrus
since the period between the default filing and foreclosure sale was enough to get a fair market
appraisal for the bank to decide what action to take (wait and try to recover as sold-out, or buy
and try to regain from the fair value difference.) Nor is the bank injured in its purchase by
stepping into the shoes of the senior lienor. The junior lienor owns the property and protected by
the difference between the fair market value of the property and the amount of the foreclosure
sale price. This is an unredeemable title the junior lienor may sell, and recover. Thus the three-
month statute of limitations serves to fulfill this equity.
           b) Notes, p. 94
               (i)     Fair value and junior bidding
Hemet noted that the entire amount of the indebtedness the junior lienor bidder must consider at
a senior foreclosure sale is included both the senior, and the junior‘s debt. A deficiency judgment
is permissible only when the combined debts exceed the sale price of the property. This rule
serves to protect against a lienor buying at a depressed property, getting a deficiency judgment
and selling the property at a profit in excess of the debt. Not applying §580a creates the
possibility of excess recovery without government oversight.
The court in Walter E. Heller Western v. Bloxham (1985) 176 Cal.App.3d 266, commented that
applying the fair value rule in Roseleaf would have left the junior in a position of his deficiency
being controlled by someone‘s bid, over which he had no control. A junior‘s decision to
purchase under the fair value rule means the junior can still equitably gain in underbidding by
being a bargain purchaser.
           c) Simon v. Superior Court, 4 Cal. App.4th 63 (1992), p. 95
Simon received a loan from Bank of America secured by two deeds of trust on his residence in
favor of Bank. Neither deed contained a dragnet clause (to bring in past, present, and future debts
in the creditor‘s action.) Simon defaulted on the senior note, Bank non-judicially foreclosed, and
bought the residence at the trustee bid. Bank then sold the property to a third party at a lesser
amount, and sued Simons on the junior note, plus accrued penalties, interest, and attorney fees;
the junior lien having been exhausted by Bank's nonjudicial foreclosure of its senior lien. Simon
unsuccessfully demurred on grounds the three-month statute of limitations of §580a barred the
action.
The Court of Appeals saw the broader issue as whether a foreclosing purchaser of a senior note
may get a deficiency judgment on the junior note under §580d. Bank of America argued it was a
sold-out lienor as in Roseleaf. The Court noted that ―Bank was not a third party sold-out junior
lienholder as was the case in Roseleaf. As the holder of both the first and second liens, Bank was
fully able to protect its secured position. It was not required to protect its junior lien from its own
foreclosure of the senior lien by the investment of additional funds. Its position of dual lienholder
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eliminated any possibility that Bank, after foreclosure and sale of the liened property under its
first lien, might end up with no interest in the secured property, the principal rationale of the
court's decision in Roseleaf. In fact, Bank purchased the Simon residence on foreclosing its first
lien by a credit bid without putting up any additional funds whatsoever. (…) Unlike a true third
party sold-out junior, Bank's right to recover as a junior lienor which is also the purchasing
senior lienor is obviously not controlled by the "whim of the senior.‖ [Allowing this action
would entice creditors to divide its notes on a security, foreclose a default on the senior note,
eliminate the debtor‘s right to redemption, and then sue for deficiency on the junior notes, all
against the purpose of §580d.] ―We conclude that §580d applies to bar Bank's causes of action
for a deficiency judgment. That conclusion moots the question of the application of the three-
month limitation period of section 580a to the filing of Bank's complaint.‖
           d) Note, p. 97
               (i)      Note Merger - Substantive or Procedural
The Kurians had notes from Home Savings secured by first and second deeds of trust. Home
combined the payment schedules into one billing statement and payment. When the Kurians
defaulted, Home foreclosed on the junior note. At the trustee sale, the auctioneer announced that
he believed a senior lien was outstanding. Ostayan thought otherwise, won high bid, and tried to
back out the next day after learning about the note. Ostayan failed in suit on misrepresentation,
and also attempted to void the note on merger under Simons. The court noted that Home simply
foreclosed the junior note with full disclosure to all without seeking a deficiency, so Simons did
not apply.
   D) Rival Rules, p. 98
         a) Carter v. Derwinski, 987 F.2d 611 (Ninth 1992), p. 98
               (i)      Federal preemption applies to state mortgage and deficiency laws.
                     The VA always possesses a right of indemnity against the veteran for
                     the amount of guarantee paid to the lender.
A lender in the VA Home Loan Guarantee program takes the guarantee subrogated to its own
mortgage. The lender may either judicially foreclose, which requires a judicial determination of
the fair market value of the property, and then seek a deficiency judgment for any remaining
amount; or foreclose nonjudicially by selling the property on the open market. Deficiency
judgments are then permitted only the lender sought a fair market value determination within
three months of foreclosure. After that, no further judgments may be collected except for the VA
to collect the amount VA paid from the veteran. The plaintiffs were a class of foreclosed
veterans who brought a class action to enjoin the VA from collecting deficiency judgments
against them following nonjudicial foreclosure where the lender failed to obtain a fair market
valuation within three months. The veterans also sought the return of monies previously
collected in this manner. On cross-motions for summary judgment, the district court entered
judgment for the veterans and held that the VA had forfeited its right to recover from the
veterans.
REVERSED. On appeal, Judge Kozinski noted that in Whitehead and United States v. Shimer,
367 U.S. 374, 6 L. Ed. 2d 908, 81 S. Ct. 1554 (1961), the Court assumed that the VA's right of
indemnity is secondary to its primary right of subrogation. The same year, the Court flatly
rejected this contention: ―The statute affords an independent right of indemnity to the Veterans'
Administration.‖ In United States v. Shimer, 367 U.S. 374, 6 L. Ed. 2d 908, 81 S. Ct. 1554
(1961).
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In the context of federal preemption, Judge Kozinski stated, ―VA is not a private litigant, limited
to the choices provided by state law. It is an arm of the federal government and cannot be
deprived of the benefits of federal law, regardless of any election it may make under state law.
Federal law is mandatory, and neither the State of Idaho through legislation, nor the VA through
its litigation choices, can waive its applicability.‖
           b) Notes, Deficiency judgments in personal property secured
              transactions, p. 99
               (i)       UCC §9-615: Application of Proceeds of Disposition; Liability for
                      Deficiency and Right to Surplus.
(f) [Calculation of surplus or deficiency in disposition to person related to secured party.] The
surplus or deficiency following a disposition is calculated based on the amount of proceeds that
would have been realized in a disposition complying with this part to a transferee other than the
secured party, a person related to the secured party, or a secondary obligor if: (1) the transferee
in the disposition is the secured party, a person related to the secured party, or a secondary
obligor; and (2) the amount of proceeds of the disposition is significantly below the range of
proceeds that a complying disposition to a person other than the secured party, a person related
to the secured party, or a secondary obligor would have brought.
               (ii)      UCC §9-610: Disposition of Collateral After Default.
(a) [Disposition after default.] After default, a secured party may sell, lease, license, or
otherwise dispose of any or all of the collateral in its present condition or following any
commercially reasonable preparation or processing.
(b) [Commercially reasonable disposition.] Every aspect of a disposition of collateral, including
the method, manner, time, place, and other terms, must be commercially reasonable. If
commercially reasonable, a secured party may dispose of collateral by public or private
proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on
any terms.
               (iii)     UCC §9-626: Action in Which Deficiency or Surplus is in Issue.
(a) [Applicable rules if amount of deficiency or surplus in issue.] In an action arising from a
transaction, other than a consumer transaction, in which the amount of a deficiency or surplus is
in issue, the following rules apply:
(3) if a secured party fails to prove that the collection, enforcement, disposition, or acceptance
was conducted in accordance with the provisions of this part relating to collection, enforcement,
disposition, or acceptance, the liability of a debtor or a secondary obligor for a deficiency is
limited to an amount by which the sum of the secured obligation, expenses, and attorney's fees
exceeds the greater of: (A) the proceeds of the collection, enforcement, disposition, or
acceptance; or (B) the amount of proceeds that would have been realized had the noncomplying
secured party proceeded in accordance with the provisions of this part relating to collection,
enforcement, disposition, or acceptance.
(4) For purposes of paragraph (3)(B), the amount of proceeds that would have been realized is
equal to the sum of the secured obligation, expenses, and attorney's fees unless the secured party
proves that the amount is less than that sum.
(5) If a deficiency or surplus is calculated under Section 9-615(f), the debtor or obligor has the
burden of establishing that the amount of proceeds of the disposition is significantly below the
range of prices that a complying disposition to a person other than the secured party, a person
related to the secured party, or a secondary obligor would have brought.
               (iv)      Uniform Land Security Interest Act
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The Uniform Land Security Interest Act proposed to make protected parties of owners,
occupants, or relatives of less than three acres of land, or less than four dwelling units.
               (v)     Federal foreclosures
12 USC §3751 permits the U.S. government to conduct nonjudicial foreclosure sales of 1 to 4
family residences in 21 days, with the rational being the protection of the property from
deterioration, vandalism, and decline of property values. 12 USC §3701 covers larger structures.
               (vi)    Other alternatives
State law on deficiency judgments varies greatly. Nebraska is opposite in law from California.
               (vii)   Choice of law
Whether the land is California may a second consideration when the contract states the law of
another state applies. The California Supreme Court ruled that choice of law provisions are valid
as long as the jurisdiction designated had a substantial relationship to the parties, and its laws
were not in fundamental conflict with those of California.
               (viii) Bankruptcy and deficiency claims, 11 USC §506(a) Determination
                   of secured status
An allowed claim of a creditor secured by a lien on property in which the estate has an interest,
or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the
value of such creditor's interest in the estate's interest in such property, or to the extent of the
amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the
value of such creditor's interest or the amount so subject to setoff is less than the amount of such
allowed claim. Such value shall be determined in light of the purpose of the valuation and of the
proposed disposition or use of such property, and in conjunction with any hearing on such
disposition or use or on a plan affecting such creditor's interest.
               (ix)    Income tax consequences
A mortgagor who loses the property in foreclosure is treated as having sold it to the highest
bidder at the foreclosure sale. Thus the basis and depreciation are important.
   E) Getting Around the Rules, p. 103
      1)    Changing vendors into lenders, p. 103
         a) Kistler v. Vasi, 71 Cal.2d 261 (1969), p. 103
Facts: The plaintiffs acted as real estate brokers for three parties in a property exchange. As the
property values differed, the defendants executed a first deed of trust to one party, and a second
deed of trust to the plaintiff as commission. In effect, defendants borrowed the amount of the
$ 17,500 commission from plaintiffs and used it as part of the purchase price. The holders of the
second deed of trust sued on the note after the holders of the first note foreclosed.
The trial court granted defendants' motion for summary judgment on the ground that that Code
Civ. Proc. § 580b barred any recovery.
REVERSED. ―The amendment to §580a [―on a dwelling for not more than four families‖] limits
the protection given vendees against nonvendor purchase money lenders to vendees of defined
residential property. Since the property in this case is unimproved commercial property, §580b
no longer precludes third-party lenders of purchase money for such property from obtaining a
deficiency judgment.‖ The defendants also argued that the plaintiffs were vendors under §580b
and therefore barred from a deficiency judgment. Defendants point out that the note and deed of
trust plaintiffs accepted was given to discharge Agajanian's and Santa Anita's obligation as
vendors and they conclude that therefore it must be deemed to be a note and deed of trust given
to the vendors. [On this the defendant are again wrong.] The ―amendment expressly
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distinguishes between lenders of purchase money and vendors and contemplates that the parties
to a sale of real property, other than the defined residential property, may freely elect to arrange
for the financing of the purchase price in ways that may wholly or in part limit the vendee's
protection from deficiency judgments.‖
            b) Notes, p. 105
               (i)     580b and Third parties
Most states prohibit purchase money judgments only for seller-backed mortgages, to discourage
such mortgages among amateurs that cause so much misfortune.
               (ii)    Double Avoiding
To avoid the residential seller anti-deficiency rules, the sellers had the buyers secure the note (1)
on a different property, (2) in favor of the broker, who then assigned it to the sellers. The broker
also declared that the ‗note‘ was in satisfaction of his buyer‘s finder‘s fee (rather than being the
seller‘s commission.) Thus, the sellers became ―other‖ security, as well as a ―third-party‖ lender
when the holder of the first deed of trust foreclosed.
       2)      Unsecured and undersecured notes, p. 105
            a) Van Vleck Realty v. Gaunt, 250 Cal. App.2d 81 (1967), p. 105
The Gaunts bought a property from the plaintiffs, Givencos, with a note and first deed of trust to
a bank, a note and second deed of trust to the Givencos, and an unsecured note to Van Vleck
Realty for commission and the Givencos towards the down payment. The Gaunts defaulted first
on the unsecured note, then they secured note to the Givencos. In lieu of foreclosure, the Gaunts
conveyed back the deed to the Givencos. The unsecured note was not part of the settlement. The
trial court found as a fact that the $ 15,000 note was unsecured but concluded that as a matter of
law the note was "a part of the obligation secured" by the second deed of trust, and that recovery
upon it was barred by §580b. Judgment was for defendants, and plaintiffs appeal.
REVERSED. The court noted that the overvaluation protection, and the stabilizing factor
purposes of §580b apply to protect secured transaction where the loss of property exists. An
unsecured note does not have that risk, and the seller is not asserting a vendor‘s lien. [The court
missed the irony that the buyer had already lost the property on the second deed of trust.]
The court also distinguished a case submitted by the buyers where the sellers took two notes, one
on a secured deed of trust, and the other a secured chattel mortgage as ‗duplicate‘ payment for
the purchase price. The court stated that the secured and unsecured notes to Givencos were part
of the purchase price, not as the same consideration.
            b) Loretz v. Cal-Coast Dev. Corp., 249 Cal. App.2d 176 (1967), p.
               107
The buyer executed a note for $25,000 secured by a deed of trust to property stated in the note as
valued at $8,000. At the trustee sale, the plaintiff received $2,500, then instituted a deficiency
proceeding for the ‗unsecured‘ $17,000 portion of the note, and the $5,500 deficiency of the
security. The appeals court held that the security applied to the whole note, not just the value
stated within the note. Cal.Civ.Code § 2912. A deed of trust does not sever a transaction into a
secured, and unsecured portion. Furthermore, §580d prohibits the deficiency judgment on the
‗note,‘ not on the ‗debt,‘ regardless of whether the debt is in part secured, and in part unsecured.
The court also saw that taking the note as the plaintiff saw would be an impermissible waiver of
580d. The plaintiff argued the valuation in the note was to express the secured and unsecured
portions of the debt, and that letting the defendant free of deficiency gave the defendant the
property for less than the bargained price. The court replied that the valuation clause may have
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been suitable in judicial foreclosure, but not under a power of sale, and that the plaintiff had the
option of judicial foreclosure to bypass the legislature and §580d, while preserving both the
rights of the plaintiff and defendant.
           c) Notes, p. 108
               (i)       Freeland v. Greco
Facts: The creditor accepted two notes from the borrower, each for the full amount of the debt.
One note was secured by real property; the other note was secured by the personal property
transferred by the sale.
The legislature did not intend creditors to circumvent §580(d) by allowing creditors to issue both
a secured note, and an unsecured note, each on the full amount of indebtedness, and after selling
the security under the secured note, and then seek a deficiency judgment on the unsecured note.
               (ii)      Fractionalizing the debt – Christopherson v. Allen, 190 Cal. App.
                      2d 848 (1961)
Recovery on an unsecured note for personal property does not constitute a deficiency judgment,
even when other notes for the purchase of the same personal property have real property as
security.
Facts: Christopherson purchased Allen‘s boat with $4500 in cash, secured notes on each of 12
lots owned by Christopherson, and an unsecured note for $5700. Christopherson defaulted, Allen
foreclosed, and then sought a deficiency judgment on the unsecured note. Christopherson argued
that §580b prevented a deficiency judgment on the unsecured note. The trial court ruled for
Allen. Christopherson appealed and lost.
The Court of Appeals held that ―(1) The Legislature has not seen fit to consider unsecured
portions of the purchase price of real property as being within the purview of the section. (2) The
"device" can only exist if the purchaser is willing to adopt that method of purchasing the
property. (3) A seller who takes unsecured notes for the purchase price, is taking his chance as to
whether, if the notes are defaulted, he may be able to collect any judgment he may obtain on the
notes. The buyer, immediately upon purchasing the property, may dispose of it; if he does that,
he may have no assets which could be attached when the notes become due. Hence, as a
"device," the procedure would be a rather dangerous one.‖
               (iii)     Allocating the purchase price
Facts: The borrower bought a veterinary hospital from the lender. The sale separated the value of
supplies and equipment, goodwill, the seller‘s covenant not to compete, consulting services by
the seller to the buyer, and real property. The buyer paid cash for the supplies, equipment and
goodwill; gave the seller a secured for the real property, and an unsecured note for the seller‘s
covenant not to compete, and consulting services. When the buyer defaulted, the sellers sought a
deficiency judgment on the unsecured note. The buyer argued that §580b prevented a deficiency
judgment, and lost. The Court noted that the parties had intent to fractionate the sale, fractionated
the sale in the agreement, and issued separate notes on the fractionated portions. ―When
fractionalization occurs, only the secured part of the transaction is governed by CCP § 580b.‖
Nevin v. Salk, 45 Cal. App. 3d 331 (1975).
               (iv)      Second generation security
Cal. Code Civil Procedure § 726 does not bar a creditor from foreclosing on a note secured by
the borrower to a deed of trust held by the borrower on another security. Guyselman v. Ramsey,
179 Cal. App. 2d 802 (1960).
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Chapter IV.            Other Debtor Protections
   A) Consumer Protection Legislation, p. 111
      1)    Disclosures
         a) Cal.Civ.Code § 2943
Any owner or junior creditor may obtain a statement from a beneficiary of a deed of trust
regarding the original nature and current condition of the loan.
            b) Cal.Civ.Code § 2954.2
A purchase money mortgagor of a 1 to 4 family residence must provide the mortgagee an annual
statement of transactions.
            c) Cal.Civ.Code § 2956-67
Any arranger of credit in the purchase of a 1 to 4 family residence must disclose all significant
financial data about the note and deed of trust which creates the extension of credit and of any
senior financing to both the vendor and the purchaser.
            d) Truth in Lending, 15 USC 1601, Regulation Z, 12 CFR 226
A credit lender must disclose the finance charge, APR, late payment fee, and prepayment fee.
[Does not include real estate loans.]
            e) Real Estate Settlement Procedures Act (RESPA) 12 USC 2601,
Lenders must provide borrowers with an advance Good Faith Estimate of Settlement Costs
before closing. See 24 CFR 3500, Regulation X
       2)      Yield Spread Premiums, p. 112
            a) Defined
Commissions paid by lenders to lenders from the loan proceeds where the borrower cannot pay
the broker‘s fee upfront.
            b) RESPA
§8(a) – no kickbacks (good law)
§8(c) – fees permitted (loophole)
       3)      Predatory lending, p. 112
            a) Statutory background
Depository Institutions Regulation and Monetary Control Act (DIDMCA)
State usury laws on home loans are preempted.
Consumer interest is nondeductible.
Home loan interest is deductible.
Securitized loans - bundled loan packages sold to investors.
Subprime lenders – lenders to persons who cannot obtain credit in the prime market.
            b) Forms of predatory lending
               (i)     Loan flipping
A lender forces a borrower to refinance a loan repeatedly over a short period of time.
               (ii)    Packing
Packing is the charging of unjustified fees in excess of the lender‘s costs, life insurance,
disability insurance, credit insurance, and inclusion of other unrelated debt such as credit card,
utility, or other bills.
               (iii)   Equity stripping
A lender makes a loan based on the amount of equity rather than the borrower‘s ability to repay
the loan, also known as asset-based lending.
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               (iv)     Fraud – asset flipping
An investor buys a home, makes some repairs (perhaps surface, shoddy, excessively expensive,
or unnecessary), and conspires with the lender and appraiser to sell the home at an inflated
appraisal value, using a falsified loan application. The buyer, usually a first-time homebuyer
cannot afford to refinance the home and loses it in foreclosure.
               (v)      Contract fraud
Exorbitantly high interest rates, mandatory arbitration clauses, prepayment penalties, balloon
payments, negative amortization, and subprime loans.
           c) Statutory protections, p. 115
               (i)       Home Ownership and Equity Protection Act (HOEPA), 15 USC
                      1601 (1994)
Disclosure requirements and prohibitions on contract fraud (above) for loans above 8% of
comparable Treasury securities.
               (ii)     Covered loans, Cal. Finance Code § 4970 (2001)
(b)(1) "Covered loan" means a consumer loan in which the original principal balance of the loan
does not exceed two hundred fifty thousand dollars ($250,000) in the case of a mortgage or deed
of trust, and where one of the following conditions are met: (A) For a mortgage or deed of trust,
the annual percentage rate at consummation of the transaction will exceed by more than eight
percentage points the yield on Treasury securities having comparable periods of maturity on the
15th day of the month immediately preceding the month in which the application for the
extension of credit is received by the creditor. (B) The total points and fees payable by the
consumer at or before closing for a mortgage or deed of trust will exceed 6 percent of the total
loan amount.
               (iii)    Suitability requirements, Cal. Finance Code § 4973 (2001)
f)(1) A person who originates covered loans shall not make or arrange a covered loan unless at
the time the loan is consummated, the person reasonably believes the consumer, or consumers,
when considered collectively in the case of multiple consumers, will be able to make the
scheduled payments to repay the obligation based upon a consideration of their current and
expected income, current obligations, employment status, and other financial resources, other
than the consumer's equity in the dwelling that secures repayment of the loan. In the case of a
covered loan that is structured to increase to a specific designated rate, stated as a number or
formula, at a specific predetermined date not exceeding 37 months from the date of application,
this evaluation shall be based upon the fully indexed rate of the loan calculated at the time of
application.
The consumer shall be presumed to be able to make the scheduled payments to repay the
obligation if, at the time the loan is consummated, the consumer's total monthly debts, including
amounts owed under the loan, do not exceed 55 percent of the consumer's monthly gross income,
as verified by the credit application, the consumer's financial statement, a credit report, financial
information provided to the person originating the loan by or on behalf of the consumer, or any
other reasonable means.
(2) No presumption of inability to make the scheduled payments to repay the obligation shall
arise solely from the fact that at the time the loan is consummated, the consumer's total monthly
debts, including amounts owed under the loan, exceed 55 percent of the consumer's monthly
gross income.
(3) In the case of a stated income loan, the reasonable belief requirement in paragraph (1) shall
apply, however, for stated income loans that belief may be based on the income stated by the
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consumer, and other information in the possession of the person originating the loan after the
solicitation of all information that the person customarily solicits in connection with loans of this
type. A person shall not knowingly or willfully originate a covered loan as a stated income loan
with the intent, or effect, of evading the provisions of this subdivision.
               (iv)    Preemption of state predatory lending laws
http://www.occ.treas.gov/combat.htm
    On January 7, 2004, the OCC issued a final rule that contains a strong standard to ensure that
predatory lending does not gain a foothold in the national banking system. The OCC took this
step as a preventive measure, even though there is scant evidence of predatory practices among
national banks.
    The new standard is part of a rule that clarifies the extent to which state laws apply to
national banks. The OCC also issued on the same day a rule intended to clarify issues involving
the OCC's exclusive visitorial powers over national banks. As the sole regulator of national
banks, the OCC is in a unique position to take action on behalf of national bank customers, no
matter what state they happen to live in. While instances of abuses are isolated, the OCC has
taken quick and decisive action in each case. Overall, the OCC has required payment of
hundreds of millions of dollars in restitution to national bank customers injured by abusive
practices.
    The OCC issued a number of documents explaining the rulemakings on national bank
preemption and the OCC's visitorial powers, including:
        Statement from the Comptroller
        Press Release
        Final Rule: Preemption, http://www.occ.treas.gov/2004-3bPreemptionrule.pdf
        Final Rule: Visitorial Powers
        Q&As on the Preemption Rulemaking
        Q&As on the Visitorial Powers Rule
On February 21, 2003, the OCC issued guidance to help banks avoid predatory lending practices.
A second piece of guidance dealt with loans banks buy from third parties.
On October 7, 2003, The federal Interagency Task Force on Fair Lending published a brochure
on predatory lending, alerting consumers to potential borrowing pitfalls. A shopping checklist is
included with the brochure to assist with comparison shopping for interest rates, payments, term
of the loan, points and fees and other costs of the loan.
   B) Usury, p. 116
      1)   Policy Considerations, p. 116
Supply and demand: the balance of loan availability to consumer protections.
       2)      Some Basic Statutes and Regulations, p. 117
            a) Code of Federal Regulations
TITLE 12--BANKS AND BANKING
CHAPTER V--OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY
PART 590--PREEMPTION OF STATE USURY LAWS
               (i)     12 CFR §590.2, Definitions
For the purposes of this part, the following definitions apply:
(a) Loans mean any loans, mortgages, credit sales, or advances.
(b) Federally-related loans include any loan:
(1) Made by any lender whose deposits or accounts are insured by any agency of the Federal
government;
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(2) Made by any lender regulated by any agency of the Federal government;
(3) Made by any lender approved by the Secretary of Housing and Urban Development for
participation in any mortgage insurance program under the National Housing Act;
(4) Made in whole or in part by the Secretary of Housing and Urban Development; insured,
guaranteed, supplemented, or assisted in any way by the Secretary or any officer or agency of the
Federal government, or made under or in connection with a housing or urban development
program administered by the Secretary, or a housing or related program administered by any
other such officer or agency;
(5) Eligible for purchase by the Federal National Mortgage Association, the Government
National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or made by
any financial institution from which the loan could be purchased by the Federal Home Loan
Mortgage Corporation; or
(6) Made in whole or in part by any entity which:
(i) Regularly extends, or arranges for the extension of, credit payable by agreement in more than
four installments or for which the payment of a finance charge is or may be required; and
(ii) Makes or invests in residential real property loans, including loans secured by first liens on
residential manufactured homes that aggregate more than $1,000,000 per year; except that the
latter requirement shall not apply to such an entity selling residential manufactured homes and
providing financing for such sales through loans or credit sales secured by first liens on
residential manufactured homes, if the entity has an arrangement to sell such loans or credit sales
in whole or in part, or where such loans or credit sales are sold in whole or in part, to a lender or
other institution otherwise included in this section.
               (ii)      12 CFR §590.3, Operation
(a) The provisions of the constitution or law of any state expressly limiting the rate or amount of
interest, discount points, finance charges, or other charges which may be charged, taken,
received, or reserved shall not apply to any Federally-related loan: (1) Made after March 31,
1980; and (2) Secured by a first lien on: (i) Residential real property;
           b) State of California
               (i)       Constitution of the State of California, Article XV – Usury, §1
                      Interest Rates
The State interest rate is 7%, but parties may contract for rates up to 10% for loans for personal,
family, or household purposes.
These requirements do not apply to building and loan associations, credit unions, pawnbrokers,
or loans made or arranged by California licensed real estate brokers and secured by real property
liens.
               (ii)      Cal.Civ.Code § 1916.1
A loan or forbearance is made or arranged by a person licensed as a real estate broker when the
broker acts for compensation or in expectation of compensation for soliciting, negotiating, or
arranging the loan for another. The term 'made or arranged' includes any loan made by a person
licensed as a real estate broker as a principal or as an agent for others, and whether or not the
person is acting within the course and scope of such license.
           c) Notes and Questions, p. 119
               (i)       Federal exemption
12 CFR §§590.2, 590.3 exempt most first liens on residential property from usury laws. The law
does not exempt commercial property, so commercial borrowers are protected, but residential
borrowers are not.
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               (ii)      Exempt lenders
The main persons bound by usury laws are private individuals and entities not licensed as
lenders. Licensed lenders, which are the bulk of the business, are exempt from usury laws.
               (iii)     Real estate brokers
Why is Cal.Civ.Code § 1916.1 necessary if Article XV – Usury, §1 Interest Rates of the
Constitution of the State of California, exempts real estate brokers? (See below).
       3)      Loans Made or Arranged by a Person Licensed as a Real
               Estate Broker, and Secured by Real Property.
            a) Del Mar v. Caspe, 222 Cal. App. 3d 1316 (1990)
               (i)        Making the loan means lending your own money.
               (ii)       Arranging the loan means acts essential to preparation, execution,
                      and completion of the loan documents and transaction, such as title
                      searches, document reviews, consultation and advisement, calculation
                      of principal and interest, preparation of loan documents, discussion of
                      documents and terms with lender and borrower, and securing
                      execution of documents.
Facts: Mohus made several loans to Del Mar. Caspe, an attorney and real estate broker, prepared
promissory notes for Mohus to secure repayment of the debts owed Mohus by Del Mar. The
notes had a 15% interest rate. Mohus made more loans to Del Mar, and the parties renegotiated
note after note for new loans. The parties re-negotiated one note to 13%. When Mohus died,
Caspe demanded payment of the loans, plus the interest. Del mar paid under protest, and sued
Caspe, in his capacity as executor for the estate of Ole Mohus, on allegations of usury for the
three promissory notes she repaid. Del Mar sued Caspe, alleging that the loans violated the state
10% constitutional cap. The trial court named 17 reasons (see below) as to why it found that
Caspe ‗made or arranged‘ the loans. Del Mar lost at trial.
AFFIRMED IN PART, REVERSED IN PART.
Del Mar appealed on grounds that the trial court erred in concluding that because the three notes
were "made or arranged" by a licensed real estate broker and/or licensed attorney, they were
exempt from the constitutional prohibition against usury. (Cal. Const., art. XV.) Proposition 2
exempted from the interest rate ceiling "any loans made or arranged by any person licensed as a
real estate broker by the State of California and secured in whole or in part by liens on real
property.
Cal.Civ.Code § 1916.1 defines a loan or forbearance arranged by a person licensed as a real
estate broker as when the broker acts for compensation or in expectation of compensation for
soliciting, negotiating, or arranging the loan for another. The term 'made or arranged' includes
any loan made by a person licensed as a real estate broker as a principal or as an agent for
others, and whether or not the person is acting within the course and scope of such license.
               (iii)     “Made the Loans”
The appeals court found a loan is "made" by a licensed real estate broker within the meaning of
article XV and section 1916.1 "when the broker acts as a principal in the transaction by lending
his own money," and that there was no dispute that Caspe was not a principal in the loans made
to Del Mar because he did not lend his own money. The issue then was whether Caspe
‗arranged‘ the loans as licensed real estate broker.
               (iv)      “Arranged the loans”
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The court looked at the background of Cal.Civ.Code § 1916.1, and found that the legislature
exempted loans arranged by real estate brokers to alleviate the funding shortage for housing in
California, while still have a fraud control mechanism of broker‘s licensing requirements over
the people involved. The court interpreted this as a broad exemption of broker duties, even if the
broker is not acting in a licensed capacity as when the broker is lending his or her own money
because §1916.1 adds the exemption applied where the broker, ―acts for compensation or in
expectation of compensation for soliciting, negotiating, or arranging the loan for another.‖ The
court found common and ordinary meaning of the word "arrange" includes: "to put in correct,
convenient, or desired order"; to put in order beforehand: make preparations for"; to effect
[usually] by consulting: come to an agreement or understanding about: settle."
               (v)      Essential to preparation, execution, and completion of the loan
                     documents and transaction
Consequently, the court concluded that the services Caspe performed for compensation (title
searches, document reviews, consultation and advisement, calculation of principal and interest,
preparation of loan documents, discussion of documents and terms with lender and borrower,
securing execution of documents) reasonably fall within the common understanding of the [222
Cal.App.3d 1329] term "arrange" and "arranging a loan." His services were not nominal or
ostensibly pretextual. Nor is there evidence that Caspe merely lent his license to Mohus to avoid
the 10 percent interest limitation. Rather, Caspe was essential to preparation, execution, and
completion of the loan documents and transaction.
               (vi)     Licensed real estate broker
The court found that Caspe was not a licensed real estate broker at the time he arranged one of
the loans. Consequently, even though he was a licensed attorney, his status was statutorily
insufficient. While the trial court accepted his licensure as a ‗class of authorized persons,‖ the
court reversed the trial court holding on that loan, and concluded the 10% rate applied. As Caspe
was a licensed real estate broker at the times of the other loans, the court upheld those rates.
               (vii)    Trial Court Reasoning
The trial court‘s 17 reasons were: "(1) Caspe conducted an informal title search by obtaining
recorded encumbrances against the Plaintiff's property. [] (2) Caspe reviewed the recorded
encumbrances and prior notes and deeds of trust executed by Plaintiff to determine their effect
on subject transaction. [] (3) Caspe consulted with the lender, Ole Mohus, and advised the
lender, Ole Mohus, of his rights and obligations as well as the potential problem areas of the
subject transaction. [] 4. Caspe reviewed the advance clauses contained in the deeds of trust and
discussed the effect of the advance clauses with the lender, Ole Mohus, and cautioned the lender,
Ole Mohus, about the legal consequences of making advances without a prior signed promissory
note. [] 5. Caspe reviewed the checks and other documents evidencing advances made by the
lender, Ole Mohus, to the borrower, Plaintiff. [] 6. Caspe calculated the principal amount of the
prior loan and the principal amount of future advances. [] 7. Caspe calculated interest on the
prior principal amount and calculated interest on future advances. [] 8. Caspe calculated the
amount of the new note by totalling the prior principal plus interest on principal plus the amount
of the new advances plus interest on the new advances. [] 9. Caspe prepared three promissory
notes and two deeds of trust. Caspe secured the January, 1986 note by the January, 1982 deed of
trust. [] 10. Caspe discussed the terms of the new notes and deeds of trust with the lender, Ole
Mohus, and advised lender how calculation was made. [] 11. Caspe discussed terms of new notes
and deeds of trust with borrower (Plaintiff) and advised borrower how principal and interest on
notes was calculated. [] 12. Caspe obtained borrower's signature on new notes and deeds of trust.
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[] 13. Caspe notarized deeds of trust. [] 14. Caspe caused deeds of trust to be recorded. [] 15.
Caspe negotiated interest on January, 1986 loan with borrower and lender. [] 16. Caspe
calculated and collected payoff of January, 1986 note (i.e., calculated amount of principal and
interest due for payoff of January, 1986 note and made demand on escrow holder). [] 17. Caspe
charged a fee for his services in making and arranging the loans."
           b) Notes and Questions, p. 125
               (i)     Justification for the exemption
―Proposition 2 established an additional class exempt from interest rate limitations for persons
licensed as real estate brokers by the State of California on the basis that real estate brokers are
qualified by the state on the basis of education, experience, and examination, and that the
licenses of real estate brokers can be revoked or suspended if real estate brokers perform acts
involving dishonesty, fraud, or deceit with intent to substantially benefit themselves or others, or
to substantially injure others.‖ Del Mar 222 Cal.App.3d at 1326.
               (ii)    Broker as lender
When a broker lends his or her own money, the usury cap does not apply.
               (iii)   Exempt loans from non-exempt lenders
Time price doctrine - A seller of real or personal property may charge different prices for cash
and credit sales, even if the difference in price would suggest an interest rate taken back that
violates the usury cap.
Late payment charges - The time price doctrine also applies to late payment charges, so that the
late payment charge could be based on an 18% interest rate.
Settlement notes and assignees - The time price doctrine also applies to notes arranged to replace
a cancelled note, even if the debtor is a grantee (assignee) of the original purchaser.
Shared appreciation loans (Cal.Civ.Code § 1917.005) - A shared appreciation loan obligates the
borrower to pay the creditor a share of the appreciation in the real property. Shared appreciation
loans do not apply to residential property of 1 to 4 units.
Certain corporate borrowers (Cal. Corp. Code § 25118) - Loans to corporations are exempt
from the usury cap if the corporation has at least $2 MM in assets, and the debt issued exceeds
$300,000.
               (iv)    Unconscionability
The usury exemption does not permit unconscionable interest rates. The court reduced a 200%
rate to 24%. 2 Cap. App. 4th 76 (1992).
               (v)     Savings clauses
To avoid the harsh interest forfeiture penalties, lenders use ―savings clauses‖ that state (1) the
lender‘s intent is to charge no more than the maximum permissible rate, and (2) excess interest
collected above the maximum interest rate is applied to pay down the principal. Such a clause
has been held valid. In re Dominguez, 995 F.2d 883 (Ninth 1993).
               (vi)    Personal defense
Usury is only a defense to the borrower. Thus, a junior lienor paying off a debtor‘s senior
indebtedness cannot assert the senior loan is usurious.
           c) Penalties for Violating Usury Laws, p. 127
Cal.Civ.Code § 1916-2 provides that an agreement to pay usurious interest shall be null and void,
and no action at law to recover interest in any sum shall be maintained, and the debt cannot be
declared due until the full period of time it was contracted for has elapsed. Thus, the lender can
recover only the entire principal at the end of the contract, but no interest.
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Cal.Civ.Code § 339 allows a two-year statute of limitations for a borrower to recover all usurious
interest paid within the last two years at the end of the contract.
During the contract, a borrower may apply all interest payments of a usurious loan toward the
principal.
Cal.Civ.Code § 1916-3(a) permits treble damages if the borrower brings the action within one
year after payment of the usurious interest.
   C) Homesteads, p. 127
      1)    Homestead exemptions
         a) Automatic homestead, Cal. Code Civil Procedure § 704.710-
            704.850
This is the homeowner‘s principal residence and applies without execution or recording of any
formal document, and is also called an automatic homestead.
              b) Declared homestead, Cal. Code Civil Procedure § 704.910-704.995
A "declared homestead owner" as defined in 704.910(b) must not only be named as such in a
homestead declaration but also must be the owner of an interest in the declared homestead.
However, the declared homestead owner need not reside in the declared homestead if the spouse
of the declared homestead owner resides in the declared homestead. See Sections 704.920 and
704.930(a) (3). If a husband and wife are both owners of an interest in a homestead (as where the
property is community property or where the spouses hold the property in joint tenancy or as
tenants in common), they both may be named as declared homestead owners in the same
homestead declaration. See Section 704.930(a) (1). In addition, a married person who is not the
owner of an interest in the dwelling may execute, acknowledge, and record a homestead
declaration naming the other spouse who is an owner of an interest in the dwelling as the
declared homestead owner (see subdivisions (a) (3) and (b) (2) of Section 704.930), but at least
one of the spouses must reside in the dwelling as his or her principal dwelling (see Section
704.920 and subdivision (a) (3) of Section 740.930). Where unmarried persons hold interests in
the same dwelling in which they both reside, they must record separate homestead declarations if
each desires to have a declared homestead.
         2)      Forced sale of a homestead
              a) Requirements for court order & 90% FMV bid minimum
A sale can take place only pursuant to a court order. Cal. Code Civil Procedure § 704.740
Any bid must equal or exceed 90% of the fair market value of the property. CCP 704.800(b)
              b) Forced sale only for sufficient bids, Cal. Code Civil Procedure §
                 704.800(a)
If no bid is received at a sale of a homestead pursuant to a court order for sale that exceeds the
amount of the homestead exemption plus any additional amount necessary to satisfy all liens and
encumbrances on the property, including but not limited to any attachment or judgment lien, the
homestead shall not be sold and shall be released and is not thereafter subject to a court order for
sale upon subsequent application by the same judgment creditor for a period of one year.
              c) Distribution of sale proceeds, Cal. Code Civil Procedure § 704.850
   (1)   First to the discharge of all liens and encumbrances on the property; then
   (2)   To the judgment debtor in the amount of the exemption; then
   (3)   To the judgment creditor for the amount owed; and
   (4)   Lastly, to the judgment debtor.
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            d) § 704.730. Amount of homestead exemption
(a) The amount of the homestead exemption is one of the following:
(1) Fifty thousand dollars ($50,000), or
(2) Seventy-five thousand dollars ($75,000), if a family member of the judgment debtor resides
in the homestead is at the time of the attempted sale of the homestead, and that family member
owns no interest in the homestead or whose only interest in the homestead is a community
property interest with the judgment debtor.
(3) One hundred fifty thousand dollars ($150,000) if the judgment debtor or spouse of the
judgment debtor who resides in the homestead is at the time of the attempted sale of the
homestead is a person (A) 65 years of age or older, or (B) disabled, or (C) a person 55 years of
age or older with a gross annual income of not more than fifteen thousand dollars ($15,000) or, if
the judgment debtor is married, not more than twenty thousand dollars ($20,000) for the
judgment creditor and spouse.
            e) Example
The property is worth $500,000, there is a deed of trust on the property for $400,000, and that
homestead exemption is $50,000. If a bid for $490,000 is received, the property will be sold, and
$400,000 will be distributed to the holder of the deed of trust, $50,000 to the judgment debtor
and $40,000 to the judgment creditor. In contrast, if a bid of only $450,000 is received, the
property will not be sold, since the judgment creditor would receive nothing. CCP 704.800(a).
       3)      Exception for holder of mortgage or deed of trust
The holder of a mortgage or deed of trust can foreclose on the property unhampered by a
homestead exemption or a declaration of homestead. In other words, a lender secured by a deed
of trust can foreclose on homestead property just it can foreclose on other property. This rule
permits the homeowner freely to borrow against the home. Cal. Code Civil Procedure
§ 703.010(b).
       4)      Distinctions between automatic and declared homesteads
            a) Automatic homestead protection
If a homestead is sold in a forced sale, or is damaged or destroyed or is acquired for public use,
the proceeds of sale or of insurance or other indemnification for damage or destruction of the
homestead or the proceeds received as compensation for a homestead acquired for public use, are
exempt in the amount of the homestead exemption. Cal. Code Civil Procedure § 704.720(b)
            b) Declared homestead protection
An owner of a declared homestead may sell the homestead, and is protected to the statutory
maximum for six months to purchase a new homestead if owner also declares the new
homestead. The exemption does not apply ―if a homestead exemption is applied to other property
of the judgment debtor or the judgment debtor's spouse during that period.‖ CCP § 704.960
       5)      One residence limitation,
If the judgment debtor and spouse of the judgment debtor reside in separate homesteads, only the
homestead of one of the spouses is exempt and only the proceeds of the exempt homestead are
exempt. Cal. Code Civil Procedure § 704.720(c).
   D) Bankruptcy Protection, p. 129
A debtor filing bankruptcy under Chapter 7 will have all of his assets liquidated to pay creditors.
A debtor filing bankruptcy under Chapters 11 or 13 will have an opportunity to reorganize his
financial affairs.
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Chapter 11 applies to commercial entities or individuals with more than $300,000 in unsecured
debt, or more than $900,000 in secured debt. The court usually appoints a trustee to oversee a
Chapter 11 reorganization.
Chapter 13 applies to individual with less than $300,000 in unsecured debt, and less than
$900,000 in secured debt. A debtor in possession is usually permitted to his own reorganization.
       1)      11 USC §362, Automatic Stay
[An automatic stay allows the debtor to preserve his assets, and creditors an opportunity to work
through a plan to address all debts, not just specific debts with greater priority.
            a) (a) Bankruptcy operates as a stay
Except as provided in subsection (b) of this section, a bankruptcy operates as a stay, applicable to
all entities, of--
(1) the commencement or continuation, including the issuance or employment of process, of a
judicial, administrative, or other action or proceeding against the debtor that was or could have
been commenced before the commencement of the case under this title, or to recover a claim
against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained
before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to
exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that
such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case
under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court
concerning the debtor.
            b) (h) Recovery of damages
An individual injured by any willful violation of a stay provided by this section shall recover
actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may
recover punitive damages.
            c) Note - Junior bankruptcies - Mixed opinions
The appellate bankruptcy panel ruled that a bankruptcy filing by a junior lienor automatically
stays a foreclosing senior lienor that would impair the junior lien. In re Bibo, 200 B.R. 348
(B.A.P. Ninth, 1996). However, the full court vacated the panel ruling, but by then, the property
was sold, and the lien paid, without clarification by the court. 139 F.3d 659 (1998).
       2)      Cases, p. 130
            a) In re Kinney, 51 B.R. 840, 13 Collier Bankr.Cas.2d 957,
               Bkrtcy.Cal.,1985, p. 130
               (i)     An attorney may be sanctioned for abusing the bankruptcy
                    process, and ordered to pay damages to the affected creditors.
               (ii)    A showing of bad faith appears where the debtor (1) fails to file
                    any reorganization plan during this period, (2) fails to make any
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                    creditor payments during this period, and (3) files bankruptcy
                    petitions timed successively to stave off foreclosure.
               (iii) The attorney‟s sanction for bad faith is forfeiture of fees, paid to
                    the injured creditor.
The Kinneys sequentially filed 10 bankruptcy petitions to case an automatic stay and prevent
foreclosure by Imperial Bank on their property. While the Kinneys, and their attorney testified
that they had had a constitutional right to bankruptcy, the court found that the Kinneys abused
the process by (1) failing to file any reorganization plan during this period, (2) failing to make
any creditor payments during this period, and (3) filing the bankruptcy petitions timed
successively to stave off foreclosure.
The court ordered (1) the Kinneys and the attorney to pay Imperial Bank $2500, (2) such that the
attorney would forfeit her entire fee, in the amount of up to $2500 to Imperial Bank to cover the
first court order, and (3) any insufficiency or excess of her fee was to reviewed by the court for
further orders.
           b) Note
Unsecured creditors must rely on the bankruptcy trustee to fend off the secured creditors
attempts at foreclosure, and collect enough assets to pay the unsecured debts.
           c) In re Weisman, 5 F.3d 417, 29 Collier Bankr.Cas.2d 1045, Bankr.
              L. Rep. P 75,442, C.A.9 (Cal.), 1993, p. 132
               (i)      An unrecorded quit-claim is effective where possession is publicly
                     evident to support the quit-claim.
Issue: Whether an unrecorded quit-claim bars a subsequent bankruptcy action against the
current and recorded possessor. [Not solely.]
Facts: Weisman had been married to Peters. When they divorced, they changed the ownership
of their former home from community property to tenants in common. Peters lived in the home
and eventually re-financed, paying off Weisman, who signed a quit-claim, that Peters did not
timely record. Peters re-marries, and Weisman re-married. The Weisman‘s eventually filed a
Chapter 7 voluntary bankruptcy. The bankruptcy trustee learned that Weisman was still listed as
owner of Peter‘s home, and filed to sell it to pay the Weisman‘s debts. Peters then filed the quit-
claim, and the Bankruptcy Court held for Peters, so the trustee sued.
Rules: Bankruptcy Code, 11 USC 544(a)(3) allows a trustee to void Bona Fide Purchaser
transfers. Also Cal.Civ.Code §19.
Trial Court: Judgment for the trustee against Peters.
Upper Court: California is a race-notice jurisdiction that requires recording every conveyance to
be valid against a subsequent purchaser of the same property. However, an unrecorded
instrument is valid as between the parties thereto and those who have notice of it. Cal. Civil
Code § 1217. Although 11 U.S.C. section 544(a)(3) creates the legal fiction of a perfect BFP and
explicitly renders the trustee's actual notice of prior grantees irrelevant, constructive or inquiry
notice obtained in accordance with California Civil Code section 19 can defeat a trustee's claim.
A "prudent purchaser" describes someone who is shrewd in the management of practical affairs
and whose conduct is marked by wisdom, judiciousness, or circumspection.
Such a purchaser will be charged with knowledge of 1) the nature of the property; 2) its current
use; 3) the identities of the persons occupying it; 4) the relationship among them; and, 5) the
relationship between those in possession and the person whose purported interest in the property
the purchaser intended to acquire. The BFP is charged with knowledge of information that a
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reasonable inspection of the property would have revealed. If, under the circumstances, the
trustee should have made an inquiry as to whether Weisman had transferred all of her interests in
the Campbell residence to Peters, then §19 charges the trustee with knowledge of the unrecorded
deed that did just that. Such knowledge would prevent the trustee from prevailing in this strong
arm action.
[The laws of adverse possession, inquiry notice, and inconsistent possession are the key issues
here.] The trustee argues that the possession was consistent because, as a cotenant, Peters had the
right to possess the whole of the property. The trustee maintains it was immaterial that Weisman
lived elsewhere and that Neergaard resided on the property. Peters contends possession was
inconsistent with title because of a combination of 1) the change in title from Marc Peters and
Sheila Peters to Marc Peters and Sheila Weisman, a married woman, demonstrating that the
couple had divorced and Sheila had remarried, and 2) the presence of Peters' second wife,
Neergaard, on the property with him. Peters argues that knowledge of these facts would have
caused a prudent purchaser to conduct an inquiry.
Inquiry becomes a duty for a prospective purchaser of property when the visible state of affairs is
inconsistent with the alleged rights of the person who has proposed to sell the property in
question. The trustee here is charged both with knowing that Neergaard resided on the property
with Peters, was married to him, and of Weisman's remarriage because that information is on the
recorded deed to the Campbell residence. The state of affairs at the Campbell residence would
have made a prudent purchaser suspicious that Weisman, divorced and remarried, no longer
actually owned any interest in the home occupied by her former husband and his new wife.
Inquiry would have revealed that Peters, in fact, had full title and that Weisman had no interest to
sell. Reversed.
           d) Notes, p. 135
               (i)     Rights of an unexecuted mortgagee
Chbat and Tleel owned property as tenants in common. Chbat conveyed his interest to Tleel
without receiving full payment or a mortgage to secure the debt. Tleel filed bankruptcy, and the
trustee sold the property. Chabt tried unsuccessfully to assert a constructive trust, but the court
held the trustee was a bona fide purchaser. In re Tleel, 876 F.2d 769 (Ninth 1989)
               (ii)    Rights of an unrecorded mortgagee
See the discussion in In re Tleel, 876 F.2d 769 (Ninth 1989).
               (iii)   Preferences and Fraudulent Transfers
A bankruptcy trustee also has the right to attack preferential transfers and fraudulent
conveyances.
           e) 11 USC 362 (d) Relief from stay, p. 136
On request of a party in interest and after notice and a hearing, the court shall grant relief from
the stay provided under subsection (a) of this section, such as by terminating, annulling,
modifying, or conditioning such stay--
(1) for cause, including the lack of adequate protection of an interest in property of such party in
interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if--
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization; or
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a
creditor whose claim is secured by an interest in such real estate, unless, not later than the date
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that is 90 days after the entry of the order for relief (or such later date as the court may determine
for cause by order entered within that 90-day period)--
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being
confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments to each creditor whose claim is secured by
such real estate (other than a claim secured by a judgment lien or by an unmatured statutory
lien), which payments are in an amount equal to interest at a current fair market rate on the value
of the creditor's interest in the real estate.
           f) Notes, p. 136
               (i)     Relief from the stay
―Cause‖ for relief of the mortgagee includes ―lack of adequate protection.‖ However, these
protections also apply to the creditor for abuse of the bankruptcy process, fraud, and bad faith.
               (ii)    Single asset real estate bankruptcies and special purpose entities
The 1994 Bankruptcy Reform Act, 11 USC §101(51B), added single asset real estate
bankruptcies to protect debtors with under $4 MM in debt and only one asset of over 3
residential units and, and where the asset as real property generates substantially all the debtors
gross income without other business by the debtor on the property. The debtor then has 90 days
to file a plan of reorganization, or the court will life the stay. Businesses operated within the real
property, such as a restaurant, bar and gift shop disqualify the property from protectiopn.
           g) In re Arnold & Baker Farms, 85 F.3d 1415 (9th Cir. 1996), p. 137
Arnold & Baker Farms had three mortgages on its properties. A first deed of trust to the Ladras
from whom Arnold & Baker Farms bought the property, a second deed of trust to the Farmers
Home Administration (FmHA) which financed the payments Arnold & Baker Farms made to the
Ladras, and a third deed of trust to Western Cotton which financed certain crops of Arnold &
Baker Farms. When the Ladras foreclosed on Arnold & Baker Farms, Arnold & Baker Farms,
and the Bakers as individuals, filed bankruptcy. The Bankruptcy Court eventually approved sales
of portions of the land, which paid off the Ladras and extinguished their note. FmHA and
Western Cotton moved up one priority. Some time afterwards, the buyers of the property
defaulted, and the land reverted to Arnold & Baker Farms.
Arnold & Baker filed a repayment plan under §1129(b)(2) of the Bankruptcy Code, the ―cram
down,‖ ‗dirt for debt‘ provision, to pay FmHA in land. Arnold & Baker valued the land at $8300
per acre, FmHA said it was worth $1381 per acre. Thus, the value of the land became the issue
before the Court. The Bankruptcy Court approved the plan, FmHA appealed, the Bankruptcy
Appellate Panel reversed. Arnold and Baker appealed.
AFFIRMED
―To be "fair and equitable" the plan must satisfy, with respect to secured claims, one of the
following three tests: (1) The creditor is to retain the lien securing its claim and is to receive
deferred cash payments with a present value at least equal to the claim; (2) The property securing
the claim is to be sold and the lien is to attach to the proceeds of the sale; the lien on the proceeds
is then to be treated as described in test (1) or (3); (3) The creditor is to realize the indubitable
equivalent of its secured claim.
―The bankruptcy court confirmed the plan on the ground that the plan satisfied the third
requirement. After an evidentiary hearing on the issue of valuation, the court found that the
property was worth $7,300 per acre. It then concluded that the receipt of 566.5 acres at $7,300
per acre would provide for FmHA to realize the indubitable equivalent of its secured claim.
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―Experience has taught us that determining the value of real property at any given time is not an
exact science … made on a case-by-case basis. We conclude that in order for a partial
distribution to constitute the most "indubitable equivalence," the partial distribution must insure
the safety of or prevent jeopardy to the principal. Ee are not convinced that the finding [of the
Bankruptcy Court] regarding the value of the real property provided the indubitable equivalence
of the particular secured claim in question, nor are we convinced that the partial distribution of
566.5 acres to FmHA will insure the safety of or prevent jeopardy to the principal. The large
disparity in the parties' valuation of the same property illustrates the obvious uncertainty in
attempting to forecast the price at which real property will sell at some uncertain future date, in
part as they disagreed on the future use.
―FmHA originally lent funds to Arnold and Baker secured by 1320 acres of land. If Arnold and
Baker defaulted on the terms of the note, FmHA bargained for the right to foreclose on the entire
1320 acres of land in order to satisfy the outstanding obligation. In this situation, the principal is
protected to the extent of the entire 1320 acres held as security. If FmHA subsequently sells the
property for less than the value calculated by the bankruptcy court, FmHA has no recourse to the
remaining collateral to satisfy the deficiency. FmHA is forced to assume the risk of receiving
less on the sale without being able to look to the remaining undistributed collateral for security.
―The amount of collateral deemed to be the indubitable equivalent of FmHA's secured claim
depends entirely on the court's valuation of the collateral. If the court had found that the land was
worth more than $7,300 per acre, FmHA would receive correspondingly less land, and if the
court had found that the land was worth less, FmHA would receive correspondingly more.
We do not hold that the indubitable equivalent standard can never as a matter of law be satisfied
when a creditor receives less than the full amount of the collateral originally bargained for, we
do hold, as did the BAP, that the Arnold and Baker plan does not provide FmHA with the
indubitable equivalent of its secured claim as required by the Bankruptcy Code.
           h) Notes, p. 140
               (i)     Lien stripping
If the property value is less than the amount of debt, the court can strip the lien into a secured
part to the value of the lien, and an allowed unsecured portion for the remainder. Curing an
existing default is not regarded as impairing a claim, even though it does undoes a previous
acceleration of the debt.
               (ii)    Interest during the stay
Unsecured loans do not accrue interest during a bankruptcy stay. (§502(b)), buy secured
creditors are allowed interest to the extent an allowed secured claim is secured by property for
which the value is greater than the amount of the claim. The bankruptcy statute now requires that
interest is a question of state law.
               (iii)   Rents from the debtor‟s property
Chapter 7 discusses who is entitled to rents from mortgaged property in a bankruptcy
proceeding.
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Chapter V.   Part II: Other Security Arrangements -
  Equitable Mortgages
   A) Deeds Absolute, p. 145
        a) Todd v. Todd, 164 Cal. 255 (1912), p. 145
               (i)     A deed is deemed mortgage where the sale was accompanied by
                    option to repurchase for original price plus interest.
               (ii)     Sale of the security by the mortgagor releases the mortgagee.
In June 1895, Mr. Todd borrowed $1600 from Mrs. Todd. Mr. Todd conveyed a lot to Mrs. Todd
as security for the $1600 with an option for him to repurchase the lot at the original sales price,
plus 7% interest. Mr. Griffin acted as Mrs. Todd‘s agent. In March 1898, Mrs. Todd sold the
land to a third party with Mr. Todd‘s consent, and kept the $1000 towards Mr. Todd
indebtedness. Mrs. Todd repeatedly told Mr. Todd not to make payments. The parties disagreed
whether the conveyance was a sale (Mr. Todd said it was not a sale, but a mortgage to Mrs.
Todd). Mr. Todd sued Mrs. Todd for an accounting. The trial court admitted parole evidence of
testimony of M/M Todd, and their agent Griffin, who said the option expired after one year, at
which time the conveyance took effect, and found the conveyance was only a mortgage, so Mrs.
Todd had effectively sold her security from with under herself.
           b) Notes, p. 147
               (i)     The Parole Evidence Rule
It is against policy of law to allow irredeemable mortgages. A security is not permitted to convert
into a sale unless parole evidence is admitted, the policy of law will be evaded. Debtors will
submit to almost any extraction for a loan, and the equity of redemption would elude the court. A
mortgage is a conveyance of conditional estate, which purports to vest the entire estate on breach
of the condition. Pierce v. Robinson, 13 Cal. 116 (1859).
               (ii)    The Impact on Third Parties
Cal.Civ.Code § 2925 Transfer made subject to defeasance may be proved
  The fact that a transfer was made subject to defeasance on a condition, may, for the purpose of
showing such transfer to be a mortgage, be proved (except as against a subsequent purchaser or
encumbrancer for value and without notice), though the fact does not appear by the terms of the
instrument.
Cal.Civ.Code § 2950 Defeasance, to affect grant absolute on its face, must be recorded
  When a grant of real property purports to be an absolute conveyance, but is intended to be
defeasible on the performance of certain conditions, such grant is not defeated or affected as
against any person other than the grantee or his heirs or devisees, or persons having actual notice,
unless an instrument of defeasance, duly executed and acknowledged, shall have been recorded
in the office of the county recorder of the county where the property is situated.
        [Under these sections, had Mr. Todd not consented, the effect of the sale would have
depended on what notice Deakin had.]
               (iii)   Restatement Third of Property, Mortgages. §3.2(b)
The Absolute Deed Intended As Security
(a) Parol evidence is admissible to establish that a deed purporting to be an absolute conveyance
of real estate was intended to serve as security for an obligation, and should therefore be deemed
a mortgage. The obligation may have been created prior to or contemporaneous with the
conveyance and need not be the personal liability of any person.
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(b) Intent that the deed serve as security must be proved by clear and convincing evidence. Such
intent may be inferred from the totality of the circumstances, including the following factors:
(1) statements of the parties;
(2) the presence of a substantial disparity between the value received by the grantor and the fair
market value of the real estate at the time of the conveyance;
(3) the fact that the grantor retained possession of the real estate;
(4) the fact that the grantor continued to pay real estate taxes;
(5) the fact that grantor made post-conveyance improvements to the real estate; and
(6) the nature of the parties and their relationship prior to and after the conveyance.
(c) Where, in addition to the deed referred to in Subsection (a) of this section, a separate writing
exists indicating that the deed was intended to serve as security for an obligation, parol evidence
is admissible to establish that the writings constitute a single security transaction.
           c) Wehle v. Price, 202 Cal. 394 (1927), p. 149
               (i)      An agreement that particular property is security for a debt, or a
                      mortgage or trust deed defectively executed, gives rise to an equitable
                      mortgage even though it does not constitute a legal mortgage.
Facts: Plaintiff had an existing loan of $2600 from the Bank of Italy. He also had a fine of $700
to pay. The plaintiff hired defendant‘s assistance as his attorney. Defendant got a 10-day
extension for the plaintiff, but the plaintiff was unable to secure further funding. The plaintiff
owned property he said was worth $8000 and conveyed it to the defendant for $900 with a
buyback option in 6-months, plus interest, and subject to the $2600 mortgage for to the Bank of
Italy. The plaintiff remained in possession during the time he could repurchase the property. The
plaintiff did not buyback the property within the allotted time. When the defendant refused to
reconvey, the plaintiff sued the defendant. The trial court found for the Defendant in that the
value of the property was only $4500, and that the parties never put the note in writing. The
defendant and his witness testified that the deed was only a repurchase option without mortgage
intent. AFFIRMED
           d) Notes, p. 150
               (i)       Calculating the Option Price - Sales and repurchase agreements
                      must meet California loan requirements if the terms and intent of the
                      agreement show it to be a loan.
Orlando wanted a loan, but Bern would advance the money only if Orlando sold his property
(worth $292,000) to Bern for $178,000, with a repurchase option for $200,000 within 6 months.
Orlando signed the deed, and later repurchased his property according to the option. Orlando
then sued Bern alleging a usurious loan. The App. Court ruled for Orlando reasoning that (1)
Bern would not accept any other deal, (2) the spread between the value, the sale price, and the
repurchase price was quite for the 6-months involved. Bern stated he had made various
calculations regarding loans on the property. The court said these supported the allegation that
the agreement was a loan. Orlando v. Berns, 154 Ca. App.2d 753 (1957)
               (ii)      “Intent” v. “Effect”
The jury held the deed of trust to not be a mortgage. The court called the answer a conclusion of
law (rather than of fact), in that the deed of trust is a security to a debt, and therefore are
mortgages. Regardless of what the parties call a security, the parties cannot avoid the foreclosure
agreement or the debtor‘s right to redeem. Hodgkins v. Wright, 127 Cal. 688 (1900).
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   B) Leases and Leasebacks, p. 151
        a) Earp v. Earp, 231 Cal. App. 3d 1008 (1991), p. 151
               (i)     Where a lease is intended to be a mortgage, the lessee‟s right to
                    accrued profits are limited to the amount of debt, plus interest.
               (ii)     A mortgagee in possession is not entitled to compensation.
               (iii) One indicia of a mortgage is when the sale price is not
                    proportional to the market value of the property.
Facts: The Earps dissolution judgment required Kenneth to pay Doris $723M, plus interest to
divide community property. Doris got a judgment of sale in their mobile home park, so they
negotiated a 5-year lease of the park to Doris for her to stay execution of the sale. The lease
required rent payments to Doris from the park‘s income, with a reserve fund for Doris. Kenneth
could terminate the lease by making the equalizing payments to Doris, and he would receive the
reserve fund. Alternatively, Doris could purchase the park by assuming Kenneth‘s mortgage and
relieving him of his equalizing obligation. Kenneth exercised his option and paid the full
equalizing price. Kenneth asked for the reserve fund, but Doris argued that the funds
accumulated through the end of the prior year were hers. Kenneth sued for the funds and won in
lower court. AFFIRMED.
Court: Ordinarily, Doris be entitled to the prior year proceeds. However, the transfer of the park
between Kenneth and Doris was a mortgage security for Kenneth‘s equaling payments to Doris.
The rule is Cal.Civ.Code § 2924. ―Every transfer of an interest in property … made only as a
security for the performance of another act is … a mortgage.‖ The court cited several reasons to
this finding. (1) Doris‘ answer to the complaint said the lease negotiation resulted from Doris‘
desire for security for Kenneth‘s equaling payments; (2) The sales price, here the amount of the
equalizing payments, was not in proportion to the (net) market value of the park of about
$5 MM. Thus, Doris was a mortgagee in possession. Doris argue that she and Kenneth agreed
that she would be compensated for personally operating the park. The court noted that even by
agreement, a mortgagee in possession is not entitled to compensation, as that would facilitate
usury and oppression. Thus, denial of the funds to her was not a forfeiture.
           b) In re San Francisco Industrial Park, Inc. 307 F. Supp. 271 (N.D.
              Cal. 1969)
               (i)     One indicia of a mortgage or sale is whether the person executing
                    the documents is an experienced real estate investor.
               (ii)    One indicia of a sale is when grantor receives substantially
                    favorable terms in the package to the market value of the property
               (iii) The secret intent of one party alone is insufficient to counter the
                    absence of the word mortgage in the documents.
Facts: SFIP bought 13 acres in San Francisco and needed about $4 MM to develop the property.
John Hancock Mutual Life Insurance Company offered a purchase package to SFIP which
included $1 MM for the purchase, a 50-year lease at an annual price of 6-1/2% of the purchase
price, a 25-year renewal option at 5% of the market value, a re-purchase option from the 25th to
the 50th year of the lease, and $3 MM in construction loans. SFIP accepted the offer, and earned
$200,000 by the sale. SFIP defaulted on the lease a few years. Hancock filed a notice of default,
and SFIP filed for a declaration that the deed was a mortgage. The property was then worth
$2 MM. The referee found the deed to be a sale-leaseback with repurchase option, and not a
mortgage. AFFIRMED.
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Court: SFIP argued that its president sought financing without sale. The court rejected the
argument because the president was an experience real estate investor, who knew that the secret
intent of one party alone is insufficient to counter the absence of the word mortgage in the
documents. The court also noted that SFIP received substantially favorable terms in the package
to the market value of the property, while Hancock might come up short. Such a deal is
indicative of a sale, rather than a mortgage.
           c) Notes, p. 155
               (i)       Disguised usury - Two indicia of a mortgage is a mandatory
                      repurchase requirement, and a personal guarantee of repurchase.
If the true intent of the Fox Group were simply to acquire the master lease by purchase, there
would be no point in requiring Golden State to repurchase the lease at the end of 8-years, nor in
requiring its stockholders to guarantee repurchase. Golden State Lanes v. Fox, 232 Cal. App. 2d
135 (1965).
               (ii)      Tax Treatment
American Realty Trust bought the Palm Beach Towers from Helmsley, and gave him a lease
back, with renewals, and specific term repurchase option. ART paid part cash, and assumed
Helmsley‘s mortgage. ART then took depreciations which the IRS disallowed, as the IRS
considered the transfer of funds merely a loan. The court gave the jury a 10-point instruction to
decide whether the sale was really a loan. The jury held for American Realty Trust. American
Realty Trust v. U.S., 498 F.2d 1194 (4th, 1974), cf., Helvering v. Lazarus, 308 US 252 (1939).
  1. Who had the actual command or control over the property?
  2. What economic results were intended by the parties; and what were those economic
      results?
  3. Whether American Realty Trust paid a price for the property which was equal to its fair
      value? That is, $7 million-- and insofar as this tends that $7 million was not the value of
      the property.
  4. Who was to bear the various expenses on the property including repairs, taxes, insurance,
      maintenance, and whether it was normal for that party to bear them.
  5. Who was to bear the risk of loss in event of destruction of the property?
  6. The length of the lease, and the length of the lease with reference to the useful life of the
      property.
  7. The option to repurchase-- and its terms, including the amount to be paid if the option was
      exercised.
  8. Who would get the benefits of any appreciation that occurred in the value of the property?
  9. Did the payments made by Helmsley resemble rent or did they resemble payments on a
      loan?
  10. For whom, Helmsley or American Realty Trust, was the equity by the amortization of the
      mortgage being built up-- that is, who would get this equity in event of repurchase by
      Helmsley?‖
               (iii)     Lyon v. U.S. - Form over substance
The taxpayer‘s lawyers drafted a $9-million sale leaseback to not look like a mortgage loan. The
IRS disagreed, and assessed a $280 M deficiency. On suit by the taxpayer, the District Court
reversed the IRS, the Court of Appeals (Eighth Cir.) reversed the District Court, and the U.S.
Supreme Court, by 7-2, reversed the Court of Appeals to affirm the District Court. Lyon v. U.S.,
435 US 561 (1978). Countering the IRS substance over form view, the Court opined that the IRS
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should honor the form of the document where the transaction is driven by economic or
regulatory realities, and the parties retain their traditional roles in the transaction.
               (iv)    Title Insurance Coverage
When a sale-leaseback is recharacterized as a mortgage, the lender‘s title changes form a fee
(reversion subject to a lease) to a mortgage lien. As the lender created, or suffered the
encumbrance, title insurance does not cover the costs, and any other coverage is probably
invalid.
               (v)     Treatment in Bankruptcy
A landlord of a commercial bankrupt tenant can force the tenant to affirm (cure the defect) or
reject (abandon) the lease. When PCH sold a hotel, but not the land to Liona Corp., and leased it
back with rent based on the financing necessary, the court ruled the conveyance was a joint
venture, as the conveyance price was not related to the market sale (like a mortgage), and PCH
still held the land, while Liona had the tax benefits of the hotel (like a sale.).
               (vi)    Treatment under Cal. Commercial Code § 1201(36)
(a) "Security interest" means an interest in personal property or fixtures that secures payment or
performance of an obligation. The term also includes any interest of a cosignor and a buyer of
accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject
to Division 9 (commencing with Section 9101). The special property interest of a buyer of goods
on identification of those goods to a contract for sale under Section 2401 is not a "security
interest," but a buyer may also acquire a "security interest" by complying with Division 9
(commencing with Section 9101). Except as otherwise provided in Section 2505, the right of a
seller or lessor of goods under Division 2 (commencing with Section 2101) or Division 10
(commencing with Section 10101) to retain or acquire possession of the goods is not a "security
interest," but a seller or lessor may also acquire a "security interest" by complying with Division
9 (commencing with Section 9101). The retention or reservation of title by a seller of goods
notwithstanding shipment or delivery to the buyer (Section 2401) is limited in effect to a
reservation of a "security interest."
(b) Whether a transaction creates a lease or security interest is determined by the facts of each
case. However, a transaction creates a security interest if the consideration the lessee is to pay
the lessor for the right to possession and use of the goods is an obligation for the term of the
lease not subject to termination by the lessee, and any of the following conditions applies: (i)
The original term of the lease is equal to or greater than the remaining economic life of the
goods. (ii) The lessee is bound to renew the lease for the remaining economic life of the goods
or is bound to become the owner of the goods. (iii) The lessee has an option to renew the lease
for the remaining economic life of the goods for no additional consideration or nominal
additional consideration on compliance with the lease agreement. (iv) The lessee has an
option to become the owner of the goods for no additional consideration or nominal additional
consideration on compliance with the lease agreement.
(c) A transaction does not create a security interest merely because it provides one or more of
the following: (i) That the present value of the consideration the lessee is obligated to pay the
lessor for the right to possession and use of the goods is substantially equal to or greater than the
fair market value of the goods at the time the lease is entered into. (ii) That the lessee assumes
the risk of loss of the goods, or agrees to pay the taxes, insurance, filing, recording, or
registration fees, or service or maintenance costs with respect to the goods. (iii) That the lessee
has an option to renew the lease or to become the owner of the goods. (iv) That the lessee has an
option to renew the lease for a fixed rent that is equal to or greater than the reasonably
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predictable fair market rent for the use of the goods for the term of the renewal at the time the
option is to be performed. (v) That the lessee has an option to become the owner of the goods for
a fixed price that is equal to or greater than the reasonably predictable fair market value of the
goods at the time the option is to be performed. (vi) In the case of a motor vehicle, as defined in
Section 415 of the Vehicle Code, or a trailer, as defined in Section 630 of that code, that is not to
be used primarily for personal, family, or household purposes, that the amount of rental
payments may be increased or decreased by reference to the amount realized by the lessor upon
sale or disposition of the vehicle or trailer. Nothing in this subparagraph affects the application or
administration of the Sales and Use Tax Law (Part 1 (commencing with Section 6001), Division
2, Revenue and Taxation Code).‖
               (vii)   Distinguishing leases from disguised sales
Isn‘t a sale a conveyance where the transferee accepts both the upside, and downside of
ownership (the hope of appreciation balanced by the risk of depreciation)?
               (viii) “Synthetic leases.”
Financial Accounting Standard No. 3 – A nominal lease is not a lease if (1) the lease
automatically conveys ownership to the tenant at the end of the lease; (2) a repurchase option is
at a bargain price; (3) the term is over 74% of the estimated economic life of the building; or (4)
the present value of future leases is more than 89% of the fair market value of the building.
Capital (non-operating) leases must be treated as debt, and depreciation taken on the assets.
A synthetic lease is on that serves as a lease (expense) under accounting rules, but as a mortgage
for tax purposes.
               (ix)    Usury
Many transactions are treated as sales to avoid usury laws.
   C) Negative Pledges, p. 160
That a mortgage is unwise or unfeasible does not bar lending. The hurdle means other methods
to secure funding are required.
       1)      Covenants Not to Convey, p. 161
            a) Coast Bank v. Minderhout, 61 Cal. 2d 311, (1964)
               (i)     An agreement that particular property is security for a debt also
                    gives rise to an equitable mortgage on which the creditor may
                    foreclose even though it does not constitute a legal mortgage.
               (ii)    If a mortgage or trust deed is defectively executed, an equitable
                    mortgage will be recognized.
Facts: Bank made promissory loans to the Enrights, in return for the Enrights‘ pledge not to
convey certain real property they owned until they made repayment. On default, the bank could
accelerate the loan. The bank recorded the instruments. Without the bank‘s knowledge, the
Enrights later conveyed the property to Minderhout, who knew of the encumbrance. The bank
accelerated the loan, and being unable to collect form the Enrights‘ sough to foreclosure its
equitable mortgage.
Court: The court noted that an executory agreement in writing, where the party intends a
particular property, as security for a debt creates an equitable lien. Thus a promise for a secured
mortgage is an equitable mortgage. Minderhout said the parties knew how to, and would have
executed a secured mortgage if they wanted one, and created an unsecured debt instead (citing
out of jurisdiction cases.) The court noted the language of the note ―restrict[ed] the rights of the
Enrights in dealing with their property for plaintiff's benefit. It describes itself as "For use with
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Property Improvement Loan," it specifically sets forth the property it covers, and it authorizes
plaintiff to record it. These provisions afford some indication that the parties intended to create a
security interest.‖ AFFIRMED
           b) Notes, p. 164
               (i)     How much to pay?
Minderhout knew about the encumbrance, but we don‘t know how much he paid. Would
Minderhout have a defense as a BFP?
               (ii)    What kind of default?
What if the Enrights had defaulted in payment rather than breached the covenant.
           c) Tahoe National Bank v. Phillips, 4 Cal. 3d 11 (1971), p. 162
               (i)      An assignment is not an equitable mortgage.
               (ii)     Intent to make the property a security for the indebtedness does not
                    need to show on the face of the instrument, as long as the instrument
                    is reasonably susceptible of interpretation as a mortgage.
               (iii) One indicia of a mortgage or sale is when the person creating the
                    documents is an experienced financier.
Facts: Phillips and three co-ventures were doing real estate development near Lake Tahoe. At
one point they quickly needed $34,000, and asked the Bank for a loan. The parties had already
overdrawn their account, and the Bank refused. Phillips offered her house a collateral. The Bank
gave her a commercial form titled, ―Assignment Of Rents And Agreement Not To Sell Or
Encumber Real Property,‖ which Phillips signed. Phillips later filed for a homestead exemption,
and the Bank sued. At trial, the Bank argued the form was a mortgage as they intended it as one
by use of the words, ‗as security for a loan‘. Phillips said she did believe it to be a mortgage, or
she would not have signed it (the Bank also said Phillips offered an FHA statement as proof of
her home‘s value.) The trial court held the form created an equitable mortgage. REVERSED.
Court: The court noted the Bank‘s argument fails for ambiguity by persons who are familiar with
such forms. The court distinguished home drafted documents requiring rescue. The Bank made
the form, selected the form, and had it executed. For this, the form it made, selected, and
executed binds the Bank. The court also noted the Bank‘s testimony was impermissible extrinsic
evidence.
        The language of the form did not call the loan a mortgage in any sense. There are no
words of lien, mortgage, or foreclosure. The Bank argued that use of the word ‗security‘ might
signify a right of foreclosure. (Coast Bank.) The court noted that none of the six provisions does
anything more than make a promise for the debtor to not encumber the property.
        The Bank also argued that the term ‗security,‘ the assignment describing real property,
and permitting recording, made the assignment ambiguous, so the Bank‘s testimony was
permissible. The court said that even if the language was ambiguous, it was the Bank‘s doing,
the Bank was in the superior negotiation position, and thus the ambiguity must be interpreted
against the Bank. The court said the contract was one of adhesion, with ambiguity in favor of the
borrower, and assignment is not an equitable mortgage. The court distinguished Coast Bank in
that that debtor promised to not convey, and breached the promise, which left the Bank without a
remedy. The lien was all left to the Bank. Here, the defendant performed all terms of the
assignment, and the property is still available over the amount of the homestead to satisfy the
bank‘s judgment on the note. If the security is inadequate, that was the bank‘s choice.
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             d) Notes on negative covenants, p, 166
                (i)     Drafting Lessons
Covenant Not to Convey
                (ii)    Negative Covenant Does Not Create A Mortgage
Restatement Third Property (Mortgage §3.5)
―In the absence of other evidence of intent to create a mortgage, a promise by a debtor to a
creditor not to encumber or transfer an interest in real estate does not create a mortgage,
equitable lien, or other security interest in that real estate.‖
Negative covenants are not popular with all persons – if the lender wants security, he should take
it in a recognized form.
                (iii)   “Due on … clauses”
A ―Due on … clause‖ permits acceleration of the loan.
        2)      Holding Agreements, p. 167
             a) Kaiser Industries Corp. v. Taylor, 17 Cal. App. 3d 346 (1971), p.
                167
                (i)     An agreement not to convey or encumber real property until all
                     indebtedness has been paid creates an equitable mortgage.
                (ii)    One indicia of a sale is how the parties carry the transaction on
                     their books.
Taylor owed Sondgroth an open book indebtedness. Kaiser bought the assets of Sondgroth,
including the indebtedness. Kaiser asked Taylor for security on the debt. The parties settled on
Taylor‘s part interest in a ranch with a promissory note to Kaiser, and a letter of instruction (a
‗holding agreement‘) to a title company providing that his interest in certain real property could
not be transferred or encumbered without Kaiser‘s consent until the promissory note was paid in
full. Kaiser carried the notation, "holding agreement" on its books under the heading
"Collateral," and also received a letter from Western Title Guaranty Company acknowledging
that they had received the instructions and that they would hold the property pursuant to the
instructions. When Taylor failed to pay the note, Kaiser filed a request for notice of default on
the property, but declined foreclosure, as the property was ‗valueless.‘ Taylor argued that the
holding agreement was an equitable mortgage, requiring Kaiser to foreclose under §726 without
deficiency. The trial court held for Kaiser on the debt, and ruled that the holding agreement was
not an equitable mortgage. Taylor appealed. REVERSED.
Court: This case is opposite of Coast Bank in that the lender is a private creditor as distinguished
from an experienced lending institution. Coast Bank has made it clear that an equitable mortgage
may be created by a document restricting the owner's right to convey or encumber his real
property if that is the intention of the parties. The letter of instructions restricted Taylor‘s right to
transfer or convey the property was an agreement that only the debtor could breach. That the
property was held subject to a holding agreement by which only the title company could pass
title made the letter of instructions to the title company tantamount to a recorded lien as far as the
title company and future grantees were concerned. Thus, The letter of instructions is reasonably
susceptible of interpretation as an equitable mortgage.
        Kaiser would have preferred a deed of trust, but he negotiated a secured note. Their own
books listed the holding agreement as ‗Collateral.‘ The parties intended a secured transaction and
got an equitable mortgage. Thus, Kaiser must follow §726 and foreclose on the security. Kaiser‘s
argument that it could elect a remedy, and sue for an equitable lien to foreclose is unsupported in
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its cited cases where the note was not secured by a mortgage on real property, and at most there
was a promise to execute a mortgage to secure the debt. The election here is by the borrower, not
the creditor. The borrower may raise a one-action defense of §726, or waive it by not raising it.
A mortgagor may not avoid the limitation by exacting a waiver by the borrower. (Civ. Code, §
2953). To allow a creditor to avoid the limitation by a device which gives the creditor the
advantage of legal mortgage would seen to be clearly contrary to the legislative intent expressed
in the above code sections.
           b) Notes, p. 169
               (i)    As a payment trigger
An unsecured promissory note providing for monthly payments with additional payments on
occurrence of a lot sale does not make the note an equitable mortgage. The note did not call for a
release of title by the payee. Jonathan Manor v. Artisan, 247 Cal. App. 2d 651 (1967).
               (ii)   Valid negative pledges
Does Cal.Civ.Code § 2924 (―Every transfer of an interest in property made … as a security … is
… a mortgage‖) prohibit hybrid-lending arrangements? A seller recovered for tortious
interference against the lender who placed in his purchase contract a ‗non-encumbrance clause‘
for as long as the purchase price remained unpaid. First Wyoming Bank v. Mudge, 748 P.2d 713
(1988).
   D) Irregular Mortgages, p. 169
         a) Kogan v. Bergman, 244 Cal. App. 2d 613 (1966)
               (i)      Where a debtor agrees to execute a mortgage to secure the debt
                    (but does not do so), the creditor may stand on the contract and sue
                    for its breach.
               (ii)     A creditor to a promise of security is not required to establish an
                    equitable lien and sue under that section.
               (iii) Delivery of valueless security does not make a note secured.
Facts: Kogan had invested in previous loans that Bergman had brokered, all of which were
secured by real estate. Bergman next asked Kogan for a personal loan, which the promissory
note stated was secured by Bergman‘s real and personal property. Kogan recorded the note, but
Bergman failed to execute the security documents. Bergman had in fact, already encumbered his
property to a Bank and another person. Bergman made some payments, but was slow in making
them, so Kogan talked to a title agent and learned the loan was usurious. However, Bergman
refused to correct the note. When Bergman defaulted on his first mortgage, the Bank named
Kogan as defendant on his recorded note. Bergman lost his house in the proceedings, and when
they were completed, Kogan sued Bergman on the note. The court held for Kogan. Bergman
appealed arguing the note was secured, so Kogan was barred by §726.
Court: AFFIRMED. Although the promissory note was not executed in the form of a mortgage,
containing a description of the real property intended to be mortgaged thereby (Civ. Code, §
2948), even though such description was readily available to the Bergmans, it is clear from the
record that Bergman, from his long experience as a mortgage broker, was qualified to prepare
and execute a legal mortgage, had he intended to do so. There was other evidence in the record to
sustain the inference that Bergman did not intend the note, standing alone, to constitute a legal
mortgage upon any of the property, real or personal, mentioned therein. There is also evidence in
the record to sustain the inference that Kogan, in accepting the note, was under the belief that
Bergman by the terms of the note had only promised to execute and deliver to Kogan instruments
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of security or transfer independent of the note which in and of themselves would constitute
security for the payment of the loan. Under these circumstances the court's finding that the note
was an originally unsecured note is amply supported by the evidence.
         Of the provisions of the promissory note relating to security, under the evidence and the
findings of the court, such provisions constituted a promise to give a mortgage or a trust deed on
particular property as security for a debt, and thus could be specifically enforced by granting an
equitable mortgage. Here the court found upon sufficient evidence that the promissory note sued
upon was an originally unsecured note. As to the eleven trust deeds subsequently delivered by
Bergman to Kogan as security for the payment of the note, eight of them had proved to be
without value and the proceeds of the remaining three had been credited upon the balance due.
This left the Kogans with no alternative but to sue on the note after the default in the payments in
accordance with its terms. Under the evidence and the law the Kogans were not required to bring
a suit in equity to establish an equitable mortgage and then seek to foreclose it, but they were
entitled to bring their action directly upon the promissory note, and such action was not barred
by the provisions of section 726 of the Code of Civil Procedure.
               (iv)      Notes – Defective mortgage instruments, Cal.Civ.Code § 2922
―A mortgage can be created, renewed, or extended, only (1) by writing, where (2) executed with
the formalities required (3) in the case of a (present) grant (4) of real property.‖
        Equitable mortgages apply where (1) the instruments failed to comply with the formal
requirements, or (2) were defective by spelling errors, or a lack of notarization, or (3) described
the wrong real estate, or (4) used the wrong form, but which (a) properly described the premises,
and parties, and (b) was filed in the recorder‘s office (and not the Sec. of State‘s office).
        Where a lender fails to record a deed of trust, a trustee may refuse to execute a sale, and
require the lender to file a judicial foreclosure action.
   E) Vendors’ Liens, p. 171
        a) Codes
               (i)      Cal.Civ.Code § 1214 Prior recording of subsequent conveyances,
                      mortgages, judgments
Every conveyance of real property or an estate for years therein, other than a lease for a term not
exceeding one year, is void as against any subsequent purchaser or mortgagee of the same
property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is
first duly recorded, and as against any judgment affecting the title, unless the conveyance shall
have been duly recorded prior to the record of notice of action.
               (ii)      Cal.Civ.Code § 1215 Conveyance defined
The term "conveyance," as used in Sections 1213 and 1214, embraces every instrument in
writing by which any estate or interest in real property is created, aliened, mortgaged, or
encumbered, or by which the title to any real property may be affected, except wills.
               (iii)     Cal.Civ.Code § 3046 Lien of seller of real property
One who sells real property has a vendor's lien thereon, independent of possession, for so much
of the price as remains unpaid and unsecured otherwise than by the personal obligation of the
buyer.
           b) Brown v. Johnson, 98 Cal. App. 3d 844 (1979), p. 171
               (i)       Statements recorded in a chain of title that are not instruments
                      operative in transferring or creating a right or title do not provide
                      constructive notice to subsequent purchasers.
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               (ii)     Recording a notice of vendor's lien does not provide constructive
                    notice to bona fide purchasers for value.
               (iii) Once parted, a grantor is without the power to repudiate the
                    instrument as a transfer of title. (judicial intervention required.)
Facts: Alice and Jess Browns purchased real property from Witt and Huxley, giving two
promissory notes as payment. By three years later, the Browns had made some interest
payments, and though they were not in default of either principal or interest, Witt recorded a
notice of vendor‘s lien, although Huxley did not sign it. Alice Brown died, and Jess Brown
conveyed the property to the Johnsons, who gave a deed of trust to Jess and Thomas Brown. The
Browns sold the deed and debt to the Turners. The Johnsons then sold the property to the Bucks
and Brooks, who gave the Johnsons a deed of trust. Witt‘s conservator sued for foreclosure on
the note to Witt and Huxley. The trial court held that recording the vendor‘s lien was
constructive notice to the Johnsons and subsequent parties, thus they were not BFP for value
without notice, and foreclosure was appropriate to satisfy the vendor‘s lien.
Court: REVERSED. Miller and Star (now ―Miller and Starr California Real Estate Third Edition
5 Cal. Real Est. § 11:6 (3d ed.)‖] lists 75 (now 116) instruments that may be recorded. Vendors‘
liens is not on the list. Cal.Civ.Code §§ 1214, and 1215 lists instruments that give constructive
notice. However, statements recorded in a chain of title that are not instruments operative in
transferring or creating a right or title do not provide constructive notice to subsequent
purchasers. Thus, a grantor‘s recording of a statement that a previously recorded deed was
intended as a mortgage does not convey constructive notice to subsequent purchasers.
         The court distinguished a case of a grantor rescinding a grant by recording her notice of
rescission. In that case, the grantor rescinded the grant for inducing conveyance by fraud and she
served the grantee. She did not only record the notice. Cal.Civ.Code § 3046 provides that a
vendor of real property has an equitable lien on the property until the property is paid for.
However, the lien is personal to the vendor so it is not assignable, an the right to resort to the lien
must be established by decree of the court. When Witt recorded her vendor‘s lien, she already
statutorily had one, but it was not enforceable, or constructive notice, nor would recording the
notice make it enforceable or constructive notice. As plaintiff stipulated that the defendants did
not have actual notice, the defendants are bona fide purchasers for value without notice.
           c) Notes, p. 173
               (i)     Recording something
One author suggested recording a memorandum of the purchase agreement (as an alternative to
recording the deed of trust) for a subordinated vendor loan.
               (ii)    Staying within the chain of title
In Brown, Witt recorded her notice of vendor‘s lien after granting the deed. In another case, the
court held that once the grantor parted with her title, she was without the power to repudiate the
instrument as a transfer of title, so subsequent purchasers from her grantee were not bound to
search the records for such a declaration. Rowley v. Davis, 34 Cal. App. 184 (1917).
               (iii)   Installment land contracts
Where a sale of land contract provides for the grantor to hold title until the purchase price is paid
off, does the seller have a vendor‘s lien? [See Chapter 24.]
Chapter VI.            Ground Leases
   A) Purposes of the Ground Lease, p. 175
               (i)     Cal.Civ.Code § 717
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No lease or grant of land for agricultural or horticultural purposes for a longer period than 51
years, in which shall be reserved any rent or service of any kind, shall be valid.
               (ii)    Cal.Civ.Code § 718
No lease or grant of any town or city lot, which reserves any rent or service of any kind, and
which provides for a leasing or granting period in excess of 99 years, shall be valid. The
property owned by, or that held by, or under the management and control of, any municipality, or
any department or board thereof, may be leased for a period not to exceed 55 years.
               (iii)   Cal.Civ.Code § 719
Notwithstanding the 55-year limitation imposed by Section 718, property owned by, or held by,
or under the management and control of, any city, or any department or board thereof, may be
leased for a period which exceeds 55 years but does not exceed 99 years, if (a) the lease is
periodically reviews, (b) the lease is authorized by ordinance, (c) the city holds public hearings,
and (d) the lease is awarded to the highest bidder.
               (iv) Cal. Rev. & Tax Code §61(c)(1) Ownership presumption by long
                   term lease
A lease of 35 years or more is presumed a change in ownership for tax purposes.
               (v)     Ground lease
A ground lease is a lease for the land alone where the lessee acts like an owner to erect
improvement, pay expenses, including real estate taxes, insurance, maintenance, repairs, and
may give the lessee the power to mortgage the leasehold estate.
               (vi)    Net lease (a.k.a. triple net lease)
The lessee pays all taxes and expenses, and pays a rent to the lessor, who does not have any
payment obligations for the property.
               (vii)   Ground lease rational
A purchase requires perhaps a 25% down payment of the purchase price, while a ground lease
requires only a security of few months rent. While the developer may lose the improvements
added to the property, the ground lessor has the reduced capital advantage.
   B) Mortgaging the Ground Lease, p. 176
To ensure the lender security of the leasehold, the lender may arrange a mortgage of the owner‘s
fee, so that the fee is subordinated to the leasehold mortgage, or correctly, the fee is subjected to
the leasehold mortgage. The ground lease may incorrectly be called a, ―subordinated ground
lease,‖ but the ground lease to subject to the leasehold mortgage regardless of whether the fee is
subject as well.
       1)      Wells Fargo Bank, N.A. v. Bank of America, NT & S.A., 32
               Cal. App. 4th 424 (1995), p. 177
            a) Rules
               (i)     31 USC 5118
(a) In this section - (1) ''gold clause'' means a provision in or related to an obligation alleging to
give the obligee a right to require payment in - (A) gold;
(d)(1) In this subsection, ''obligation'' means any obligation (except United States currency)
payable in United States money. (2) An obligation issued containing a gold clause or governed
by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency
that is legal tender at the time of payment. This paragraph does not apply to an obligation issued
after October 27, 1977.
               (ii)    Cal.Civ.Code § 1530
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Novation is the substitution of a new obligation for an existing one.
               (iii)   Cal.Civ.Code § 1531
Novation is made: (1) By the substitution of a new obligation between the same parties, with
intent to extinguish the old obligation; (2) By the substitution of a new debtor in place of the old
one, with intent to release the latter; or, (3) By the substitution of a new creditor in place of the
old one, with intent to transfer the rights of the latter to the former.
               (iv)    Cal.Civ.Code § 1532
Novation is made by contract, and is subject to all the rules concerning contracts in general.
               (v)     1 Witkin §906
A novation thus amounts to a new contract which supplants the original agreement and
"completely extinguishes the original obligation.
               (vi)    1 Witkin §907
Where novation is in the form of a substitution of a new debtor for an old one, the release of the
old debtor is sufficient to constitute the requisite consideration for the new debtor's promise.
           b) Case Points
               (i)     Transfer of a lease may serve as novation which makes the new
                    party subject to the prior terms of the lease.
               (ii)    An assignment is an “obligation issued” as of that date.
Facts: In 1929, several families granted a 95-year lease to First National Bank of Beverly Hills,
at the rate of $2000 per month, or according to the ‗gold clause,‘ $2000 in gold coin, or the
―dollar for dollar‖ equivalent of the weight of $2000 in gold (about 57 troy oz. at the government
fix of $35 per troy oz.) During the Great Depression, Congress invalidated gold clauses, and
banned private ownership of gold. In 1977, Congress reauthorized existing gold clauses, and
private ownership of gold. At that time, Triangle Co., was the successor lessee, and paying
$2000 per month. As Triangle Co. had assumed its assignment prior to the change in law, the
change did not affect it. Also at that time, Bank of America was the subtenant, and paying
$27,000 per month rent to Triangle. In 1981, Bank of America assumed as lessee with a
$4.225 MM payment to Triangle. Both firms knew about the gold clause in the original lease,
and Bank of American got advice that the clause was again valid, although counsel though the
probability was unlikely of the clause ever being invoked. Triangle refused Bank of America‘s
request for indemnification on the clause, and the parties executed the agreement.
In 1986, one of the successor lessors learned of a then pending gold clause case, in which
transfer of the lease served as novation which makes the new party subject to the prior terms.
Congress had revived the gold clause in 1977, and Bank of America had become a transfer lessee
in 1981, so the thought was that the gold clause applied to Bank of America. One of the
successor lessors sent Bank of America a letter demanding payment according to the gold clause.
Bank of America instead paid the usual $2000 rent, which lessors endorsed as partial payment
without waiver of lessor rights. The lessors sued Bank of America, but lost when the court held
that the lease transfer was not, ―an obligation issued after October 27, 1977,‖ nor was the
assignment from Triangle a novation. REVERSED.
Court:
The court found that the 1981 agreement between Bank of America and Triangle terminated the
sublease, assented to Bank of America as the new debtor, and released Triangle of its lease
obligation. Thus, the agreement was a novation under Cal.Civ.Code §§ 1530, 1531, and 1532. As
to the term obligation in 15 USC 5118(d)(2), Bank of America argued that, ‗issued,‘ meant
between the original parties to the contract, so the gold clause was unenforceable. The court
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disagreed and held that the novation was an ‗obligation issued after October 27, 1977,‖ so the
gold clause did apply to Bank of America.
             c) Notes, p. 180
                (i)     Inflation Adjustments
Inflation indexing is now as a percentage of market value, where value is well-defined, and with
appraisal as a back-up.
                (ii)    Assignments of ground leases
To allow for successors, a ground lease is usually freely assigned without consent of the ground
lessor.
                (iii)   Subleases
Sublessees usually obtain a non-disturbance agreement from the ground lessor and the leasehold
mortgagor to ensure termination, or foreclosure of the ground lease does not disturb the
performing lessee.
                (iv)    Foresight
The task of the ground lease drafter is to anticipate how unforeseeable changes affect the parties.
                (v)     Novation
The novation in WFB occurred because Traingle, as assignee, was completely released from
liability after the assignment. Where a lease provides that a lessee is only released for ―direct
liability,‖ the lessee is still ―indirectly liable,‖ as a surety, and the assignment is not a novation.
                (vi)    Lessee-mortgagee disputes
WFB v. B. of A. was between the ground lessor, and lessee. The rights of the leasehold
mortgagee are litigated more often.
        2)      Glendale Federal Bank v. Hadden, 73 Cal. App. 4th 1150
                (1999), p. 181
             a) Notes, Ground lease mortgagee’s nightmare, Joshua Stein p. 183
                (i)     Leasehold Mortgages
Tenant may, without Landlord's consent, assign or mortgage this Lease (including any options it
contains) to any leasehold mortgagee(s) (each, a "Leasehold Mortgagee"). A Leasehold
Mortgagee (and anyone whose title derives directly or indirectly from a Leasehold Mortgagee,
including a purchaser at any foreclosure sale held under a Leasehold Mortgage) may, without
Landlord's consent, hold a foreclosure sale, take title to this Lease, and transfer or assign this
Lease, either in its own name or through a nominee.
                (ii)    Priority of Fee Mortgages
Any mortgage on Landlord's fee estate (a "Fee Mortgage") shall be subject and subordinate to
this Lease. Landlord shall not enter into any Fee Mortgage that violates the previous sentence.
Tenant shall not subordinate this Lease to any Fee Mortgage without consent by all Leasehold
Mortgagees.
                (iii)   No Merger
If this Lease and the fee estate in the Premises are ever commonly held, then they shall remain
separate and distinct estates and shall not merge without consent by all Leasehold Mortgagees.
                (iv)    Notice and Opportunity to Cure
If Tenant defaults, then Landlord shall so notify all Leasehold Mortgagees. Each shall have the
right to cure such default. Landlord shall not terminate this Lease for Tenant's default unless and
until Landlord has. given all Leasehold Mortgagees notice of such default and 30 days in which
to cure it. If it cannot reasonably be cured within 30 days, then each Leasehold Mortgagee shall
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have such additional time as it shall reasonably require, so long as it is proceeding with
reasonable diligence. For any default that cannot be cured without possession of the Premises,
Landlord shall allow such additional time as Leasehold Mortgagees shall reasonably require to
prosecute and complete a foreclosure or equivalent proceeding and obtain such possession. If a
Leasehold Mortgagee completes a foreclosure of this Lease, then Landlord shall waive any
noncurable defaults.
               (v)      Copies of Notices
No notice given by Landlord shall be effective against a Leasehold Mortgagee unless Landlord
has given a copy of it to such Leasehold Mortgagee.
               (vi)     New Lease
If this Lease terminates because of Tenant's default or because Tenant rejects it in bankruptcy or
similar proceedings, then Landlord shall upon request enter into a new lease with the most senior
Leasehold Mortgagee on the same terms and with the same priority as this Lease.
               (vii)    Subleases
Tenant may, without Landlord's consent, sublease the Premises. Landlord shall not disturb the
possession, interest, or quiet enjoyment of any subtenant.
               (viii) Condemnation Awards
Tenant's share of any condemnation award shall be no less than the total condemnation award
less the value of Landlord's remainder interest in the Premises, considered as if unimproved and
as if this Lease had not terminated. To the extent that Tenant is entitled to any condemnation
award, it shall be paid to the most senior Leasehold Mortgagee.
               (ix)     Casualty and Partial Condemnation
In the event of a casualty or a partial condemnation, this Lease shall continue. Any insurance
proceeds or condemnation award shall be paid to Leasehold Mortgagee or a trustee it designates,
to be used first to restore. Any remainder shall be disbursed to Leasehold Mortgagee to the
extent required by its loan documents, and thereafter to Tenant.
               (x)      Preservation of Lease
This Lease may not be amended, modified, changed, cancelled, waived, or terminated without
the consent of all Leasehold Mortgagees. Landlord shall not accept a voluntary surrender of the
Lease without consent by all Leasehold Mortgagees. Any such amendment, modification,
change, cancellation, termination, waiver, or surrender shall not bind any Leasehold Mortgagee
or its successors or assigns unless made with such Leasehold Mortgagee's consent.
               (xi)     Options
If this Lease contains any renewal or purchase option and Tenant does not timely exercise it,
then Landlord shall promptly notify each Leasehold Mortgagee. Each Leasehold Mortgagee shall
then have 30 days to exercise the option on Tenant's behalf.
               (xii)    Tenant‟s Rights
Any Leasehold Mortgagee may exercise any or all of Tenant's rights under this Lease.
               (xiii) No Personal Liability
No Leasehold Mortgagee shall have any personal liability under this Lease unless and until it
becomes Tenant under this Lease.
       3)      Vallely Investments, L.P. v. Bancamerica Commercial
               Corporation, 88 Cal. App. 4th 816 (2001), p. 184
               (i)       An express assignment of a leasehold makes the assignee liable as
                     lessee to the lessor.
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               (ii)     Foreclosure on a subtenant (junior interest) by the lessor does not
                    extinguish the lessee‟s (senior interest) liability.
               (iii) A subtenant who expressly assumes the obligations of the prime
                    lease comes into privity of contract with the landlord, who can enforce
                    the assumption agreement as a third party beneficiary.
               (iv) A foreclosure of a leasehold transfers the lease to the purchaser at
                    the foreclosure sale, and terminates all junior leases and liens.
Facts: In 1978, Vallely Investments owned property which it leased commercial development.
After various assignments, Balboa Landing, a limited partnership, was the developing lessee in
1986, when Balboa took a mortgage loan from BA (Bancamerica?) Mortgage to develop the
property. Balboa defaulted in 1988, and BA Mortgage sought foreclosure. Balboa filed
bankruptcy to stay foreclosure. With concern by Balboa for personal liability, and by BA
Mortgage for its mortgage, the firms agreed that BACC, a subsidiary of Bank of America, would
expressly accept assignment of the Ground lease and management for the property. Neither firm
told Vallely of the assignment. BA Mortgage foreclosed and took the lease as high bidder. In
1994, BA Mortgage sold the lease to Edgewater Place. Shortly afterwards, Edgewater Place
defaulted on the lease, and Vallely sued, at which time Vallely learned of assignment to BA
Mortgage. Edgewater filed for bankruptcy, and after neither accepting nor rejecting the lease, the
court order default rejection, and Vallely took possession. Vallely also sued BACC as assignee
for the rent that Edgewater failed to pay, on the basis that BACC as express assignee of Balboa,
was the lessee, and it‘s position survived Edgewater‘s foreclosure.
The trial court entered summary judgment for BA Mortgage, finding that the bank's foreclosure
of its senior deed of trust terminated Balboa‘s junior interest in the lease, and along with it any
obligations defendant had to Vallely. REVERSED.
Court: A lease of real property is a conveyance of both an estate in land (a leasehold with rights
and obligations by privity of estate) and a contract (with rights and obligations by privity of
contract). An assignment terminates a tenant‘s privity of estate with the landlord, but it does not
alone affect privity of contract. If the assignee takes possession of the premises but no more,
privity of estate exists and he is bound by all lease covenants which run with the land. On a
subsequent assignment, privity of estate ends and, with it, all obligation to the landlord.
If the assignee expressly agrees with the assignor to assume the obligations of the lease, the
assumption agreement creates a new privity of contract between landlord and assignee,
enforceable by the landlord as a third party beneficiary, regardless of whether the landlord was a
party to the assumption agreement. The assuming assignee is then required to perform all
covenants of the lease for the remainder of its term, absent a release by the landlord. While we
view this as an assignment, BACC would be liable even as a sublessee.
―Assignment of Leasehold Interests‖
BACC accepted an express assignment, titled, "Assignment of Leasehold Interests." By it,
Balboa transferred to BACC "all of Assignor's right, title and interest as lessee in and to the
Ground Lease ... and all other right, title or interest held by Assignor in and to the Property ... for
and during the full respective unexpired terms of the Ground Lease." As the title indicated, this
reflects an assignment, not a sublease. A sublease is a transfer of only a portion of the tenant's
estate, with the latter retaining a reversionary interest. BACC argued that because the assignment
was subject to a deed of trust and foreclosure, it held a position as a subtenant. The rejected the
argument as BACC held the entire lease, and being subject to a mortgage does not diminish that
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power. BACC also argued that its short term hold on the lease was less than assignment. The
court also rejected that argument as the instrument is operative to assignment, not time.
―Foreclosure‖
BACC also argued Vallely‘s foreclosure on Edgewater extinguished any assignment it had.
However, contract obligations survive foreclosure when they do not impair the foreclosing
mortgagee's rights. Thus, a valid foreclosure terminates all interests in the real estate junior to the
mortgage being foreclosed, but it does not terminate interests senior to the mortgage.
Vallely's interest as lessor (technically a reversion) was senior to the leasehold mortgage.
Vallely‘s foreclosure terminated the privity of estate and privity of contract between BACC and
Balboa, but it did not reach the privity of contract between BACC and Vallely, since Vallely's
right to enforce BACC's assumption agreement, as a third party beneficiary, was an incident of
Vallely‘s reversion. Vallely‘s foreclosure on Edgewater junior interest did not extinguish
BACC‘s senior interest as assignee-lessee.
           b) Notes, p. 187
               (i)     Lease provisions to protect future leasehold mortgagee.
A lessee who would seek financing would not accept an assignment that did not give it power to
mortgage the lease. This is a power limited to leasehold owners, or ‗express assignments.‘
               (ii)    Merger
Balboa offered BACC the deed to the leasehold, which BACC turned down in fear that owning
both the deed, and the mortgage would merge them, and it would lose its senior status to
mechanic‘s liens. BACC thus turned to an affiliate as a third party. This fear was probably
unfounded since merger is a matter of intent.
               (iii)   Assignment v. sublease
The court said BACC would have been liable even if it had been a subtenant. Said the court, ―A
subtenant who expressly assumes the obligations of the prime lease, with the consent of the
landlord, comes into privity of contract with the landlord, and the latter can enforce the
assumption agreement as a third party beneficiary.‖
               (iv)    Foreclosure of leasehold mortgage
A foreclosure of a leasehold transfers the lease to the purchaser at the foreclosure sale, and
terminates all junior leases and liens, but does not terminate the rent obligations of the parties.
Chapter VII.           Part III: Lenders’ Other Strategies – Rents as
  Security
   A) In the Absence of a Specific Clause in the Deed of Trust, p. 191
      1)    Case law
A borrower of a commercial loan is generally required to pledge not only the real property, but
the rents as well. While a mortgage is not a conveyance (Cal.Civ.Code § 744) a lender
(mortgagee) may obtain possession of the property of the borrower (mortgagor) in default, and
until being paid the mortgage, becomes the mortgagee in possession, with the rights, duties and
obligations associated with the rents. (Paraphrased.)
The mortgagee in possession may be held chargeable for rents and profits and where he fails t
use reasonable diligence, guilty of fraud, gross negligence, or willful default.
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       2)      Cal. Code Civil Procedure
            a) §564(a), Appointment of a receiver, p. 192
A receiver may be appointed, in the manner provided in this chapter, by the court in which an
action or proceeding is pending in any case in which the court is empowered by law to appoint a
receiver.
            b) §564(b) Circumstances for appointing a receivers
A receiver may be appointed by the court in which an action or proceeding is pending, or by a
judge thereof, in the following cases:
(1) In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to
subject any property or fund to the creditor's claim, or between partners or others jointly owning
or interested in any property or fund, on the application of the plaintiff, or of any party whose
right to or interest in the property or fund, or the proceeds thereof, is probable, and where it is
shown that the property or fund is in danger of being lost, removed, or materially injured.
(2) In an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of
property upon which there is a lien under a deed of trust or mortgage, where it appears that the
property is in danger of being lost, removed, or materially injured, or that the condition of the
deed of trust or mortgage has not been performed, and that the property is probably insufficient
to discharge the deed of trust or mortgage debt.
(3) After judgment, to carry the judgment into effect.
(4) After judgment, to dispose of the property according to the judgment, or to preserve it during
the pendency of an appeal, or pursuant to the Enforcement of Judgments Law (Title 9
(commencing with Section 680.010)), or after sale of real property pursuant to a decree of
foreclosure, during the redemption period, to collect, expend, and disburse rents as directed by
the court or otherwise provided by law.
(5) Where a corporation has been dissolved, as provided in Section 565.
(6) Where a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its
corporate rights.
(7) In an action of unlawful detainer.
(8) At the request of the Public Utilities Commission pursuant to Section 855 or 5259.5 of the
Public Utilities Code.
(9) In all other cases where necessary to preserve the property or rights of any party.
(10) At the request of the Office of Statewide Health Planning and Development, or the Attorney
General, pursuant to Section 129173 of the Health and Safety Code.
            c) Secured lender
A receiver may be appointed, in the manner provided in this chapter, including, but not limited
to, Section 566, by the superior court in an action brought by a secured lender to enforce the
rights provided in Section 2929.5 of the Civil Code, to enable the secured lender to enter and
inspect the real property security for the purpose of determining the existence, location, nature,
and magnitude of any past or present release or threatened release of any hazardous substance
into, onto, beneath, or from the real property security. The secured lender shall not abuse the
right of entry and inspection or use it to harass the borrower or tenant of the property. Except in
case of an emergency, when the borrower or tenant of the property has abandoned the premises,
or if it is impracticable to do so, the secured lender shall give the borrower or tenant of the
property reasonable notice of the secured lender's intent to enter and shall enter only during the
borrower's or tenant's normal business hours. Twenty-four hours' notice shall be presumed to be
reasonable notice in the absence of evidence to the contrary.
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            d) Appointment is not an action
(d) Any action by a secured lender to appoint a receiver pursuant to this section shall not
constitute an action within the meaning of subdivision (a) of Section 726.
            e) Definitions - For purposes of this section:
(1) "Borrower" means the trustor under a deed of trust, or a mortgagor under a mortgage, where
the deed of trust or mortgage encumbers real property security and secures the performance of
the trustor or mortgagor under a loan, extension of credit, guaranty, or other obligation. The term
includes any successor in interest of the trustor or mortgagor to the real property security before
the deed of trust or mortgage has been discharged, reconveyed, or foreclosed upon.
(2) "Hazardous substance" means any of the following:
(A) Any "hazardous substance" as defined in subdivision (h) of Section 25281 of the Health and
Safety Code.
(B) Any "waste" as defined in subdivision (d) of Section 13050 of the Water Code.
(C) Petroleum including crude oil or any fraction thereof, natural gas, natural gas liquids,
liquefied natural gas, or synthetic gas usable for fuel, or any mixture thereof.
(3) "Real property security" means any real property and improvements, other than a separate
interest and any related interest in the common area of a residential common interest
development, as the terms "separate interest," "common area," and "common interest
development" are defined in Section 1351 of the Civil Code, or real property consisting of one
acre or less that contains 1 to 15 dwelling units.
(4) "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping, or disposing into the environment, including continuing
migration, of hazardous substances into, onto, or through soil, surface water, or groundwater.
(5) "Secured lender" means the beneficiary under a deed of trust against the real property
security, or the mortgagee under a mortgage against the real property security, and any successor
in interest of the beneficiary or mortgagee to the deed of trust or mortgage.
       3)      Cal.Civ.Code, Rent Skimming Statutes, p. 193
            a) §890, Definitions
(a)(1) "Rent skimming" means using revenue received from the rental of a parcel of residential
real property at any time during the first year period after acquiring that property without first
applying the revenue or an equivalent amount to the payments due on all mortgages and deeds of
trust encumbering that property.
(2) For purposes of this section, "rent skimming" also means receiving revenue from the rental of
a parcel of residential real property where the person receiving that revenue, without the consent
of the owner or owner's agent, asserted possession or ownership of the residential property,
whether under a false claim of title, by trespass, or any other unauthorized means, rented the
property to another, and collected rents from the other person for the rental of the property. This
paragraph does not apply to any tenant, subtenant, lessee, sublessee, or assignee, nor to any other
hirer having a lawful occupancy interest in the residential dwelling.
(b) "Multiple acts of rent skimming" means knowingly and willfully rent skimming with respect
to each of five or more parcels of residential real property acquired within any two-year period.
 (c) "Person" means any natural person, any form of business organization, its officers and
directors, and any natural person who authorizes rent skimming or who, being in a position of
control, fails to prevent another from rent skimming.
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           b) §891, Civil rights and remedies; invalidity of waiver; applicability
              of statutes
(a) A seller of an interest in residential real property who received a promissory note or other
evidence of indebtedness for all or a portion of its purchase price secured by a lien on the
property may bring an action against any person who has engaged in rent skimming with respect
to that property. A seller who prevails in the action shall recover all actual damages and
reasonable attorney's fees and costs. The court may award any appropriate equitable relief. The
court shall award exemplary damages of not less than three times the actual damages if the
defendant has engaged in multiple acts of rent skimming and may award exemplary damages in
other cases.
(b) A seller of an interest in residential real property who reacquires the interest from a person
who has engaged in rent skimming with respect to that property, or a law enforcement agency,
may request the court for an order declaring that the reacquired interest is not encumbered by any
lien that is or has the effect of a judgment lien against the person who engaged in rent skimming
if the lien is not related to any improvement of the property and does not represent security for
loan proceeds made by a bona fide lien holder without knowledge of facts constituting a
violation of this title. The motion or application shall be made with at least 30 days' advance
written notice to all persons who may be affected by the order, including lienholders, and shall
be granted unless the interests of justice would not be served by such an order.
(c) A mortgagee or beneficiary under a deed of trust encumbering residential real property may
bring an action against a person who has engaged in rent skimming with respect to that property
as one of multiple acts of rent skimming, whether or not the person has become contractually
bound by an obligation secured by the mortgage or deed of trust. The mortgagee or beneficiary
who prevails in the action shall recover actual damages to the extent of the amount of the rent
collected on the encumbered property and attorney's fees and costs. The court also may order any
appropriate equitable relief and may award exemplary damages.
(d) A tenant of residential real property may bring an action against a person who has engaged in
rent skimming with respect to that property for the recovery of actual damages, including any
security, as defined in Section 1950.5, and moving expenses if the property is sold at a
foreclosure sale and the tenant was required to move. A prevailing plaintiff in such an action
shall be awarded reasonable attorney's fees and costs. The court also may award exemplary
damages; it shall award exemplary damages of at least three times the amount of actual damages
if the payments due under any deed of trust or mortgage were two or more months delinquent at
the time the tenant rented the premises or if the defendant has engaged in multiple acts of rent
(e) The rights and remedies provided in this section are in addition to any other rights and
remedies provided by law.
(f) Rent skimming is unlawful, and any waiver of the provisions of this section are void and
unenforceable as contrary to public policy.
(g) Sections 580a, 580b, 580d, and 726 of the Code of Civil Procedure do not apply to any action
brought under this title.
           c) §892(a), Criminal penalties for rent skimming
Any person who engages in multiple acts of rent skimming is subject to criminal prosecution.
Each act of rent skimming comprising the multiple acts of rent skimming shall be separately
alleged. A person found guilty of five acts shall be punished by imprisonment in the state prison
or by imprisonment in the county jail for not more than one year, by a fine of not more than ten
thousand dollars ($10,000), or by both that fine and imprisonment. A person found guilty of
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additional acts shall be separately punished for each additional act by imprisonment in the state
prison or by imprisonment in the county jail for not more than one year, by a fine of not more
than ten thousand dollars ($10,000), or by both that fine and imprisonment.
            d) §893, Affirmative defense; burden of producing evidence, burden
               of proof
(a) It is an affirmative defense for a natural person who is a defendant in a civil action brought
under § 891, or a criminal action brought under § 892, if all of the following occurred:
(1) The defendant used the rental revenue due but not paid to holders of mortgages or deeds of
trust to make payments to any of the following: (A) Health care providers, as defined in
paragraph (2) of subdivision (c) of Section 6146 of the Business and Professions Code, for the
unforeseen and necessary medical treatment of the defendant or his or her spouse, parents, or
children. (B) Licensed contractors or material suppliers to correct the violation of any statute,
ordinance, or regulation relating to the habitability of the premises.
(2) The defendant made the payments within 30 days of receiving the rental revenue.
(3) The defendant had no other source of funds from which to make the payments.
(b) The defendant has the burden of producing evidence of each element of the defense specified
in subdivision (a) in a criminal action under § 892 and the burden of proof of each element of the
defense in a civil action under § 891.
       4)   Federal equity skimming statutes,
         a) 12 USC § 1702-1
         b) 12 USC § 1715z-4b
   B) The Effect of an Assignment of Rents Clause, p. 196
      1)    Getting a Receiver
While Cal. Code Civil Procedure § 564(b)(2) provides for a receiver in a foreclosure action, the
lender must show that the property is ―probably insufficient,‖ to pay the debt. As making this
showing is expensive, almost all commercial mortgages provide for an assignment of rents to the
lender. That language makes the appointment of a receiver easier in light of Cal. Code Civil
Procedure §564(b)(11) – (12).
       2)      Cal. Code Civil Procedure §564(b)(11) – (12)
A receiver may be appointed …
(11) In an action by a secured lender for specific performance of an assignment of rents
provision in a deed of trust, mortgage, or separate assignment document. The appointment may
be continued after entry of a judgment for specific performance if appropriate to protect, operate,
or maintain real property encumbered by a deed of trust or mortgage or to collect rents therefrom
while a pending nonjudicial foreclosure under power of sale in a deed of trust or mortgage is
being completed.
(12) In a case brought by an assignee under an assignment of leases, rents, issues, or profits
pursuant to subdivision (g) of Section 2938 of the Civil Code.
       3)      Fighting off the Bankruptcy Trustee
If the borrower defaults, and declares bankruptcy, both the lender and the bankruptcy trustee
want the rents.
            a) 11 USC § 552(a) Post-petition effect of security interest
Property acquired by the estate or debtor after the commencement of the case is not subject to
any lien resulting from any security agreement entered into by the debtor before the
commencement of the case.
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            b) 11 USC § 552(b)
(1) Except for: proceeds, product, offspring, or profits acquired by the estate after the
commencement of the case to the extent provided by such security agreement and by applicable
non-bankruptcy law.
(2) And: amounts paid as rents of such property or the fees, charges, accounts, or other payments
for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging
properties, then such security interest … to the extent provided in such security agreement.
[Congress added sub§(b)(2) to 11 USC §552 in 1994.]
            c) Explanation
―The purpose of § 552 is to permit a debtor "to gather into the estate as much money as possible
to satisfy the claims of all creditors"; but § 552(b) "balances the Code's interest in freeing the
debtor of pre-petition obligations with a secured creditor's rights to maintain a bargained-for
interest in certain items of collateral. It provides a narrow exception to the general rule of
552(a)." In re Days California Riverside Limited Partnership, 27 F.3d 374, 375 (9th, 1994).
       4)      In re GOCO Realty Fund I, 151 B.R. 241 (Bankruptcy N.D.
               Cal. 1993), p. 197
            a) Definitions of assignments
               (i)     Absolute – collection by the lender
An absolute assignment requires collection of rents by the lender rather than the borrower.
               (ii)    Conditional absolute – lender‟s access only after default
A conditional absolute assignment, sometimes referred to as an absolute assignment conditional
on default, provides the lender with access to rents only after default.
               (iii)   Collateral – a lien on rents requiring actual possession
A collateral assignment for additional security gives the lender a lien on rents in addition to the
lien against the property. However, it requires actual possession by the lender or an appointed
receiver prior to collection of rents.
Facts: GOCO was the successor to a group of limited partnerships with a real estate investment
program financed by American Savings and Loan Association (ASLA). The loan is secured by
deeds of trust and assignments of rents on 32 commercial properties in GOCO's portfolio. New
West purchased ASLA's assets in 1988. The California deeds of trust and assignments of rents
provide: ―Borrower hereby absolutely and unconditionally assigns and transfers to Lender all the
rents and revenues of the Property, including those now due, past due, or to become due by
virtue of any lease or other agreement for the occupancy or use of all or any part of the Property,
regardless of to whom the rents and revenues of the Property are payable. … Lender shall
immediately be entitled to possession of all rents and revenues of the Property . . . as the same
become due and payable‖
GOCO defaulted on the loan and New West recorded notices of default. GOCO then paid
retainers of $500,000 (and more) to (various) attorneys from its general operating account of
rents and other sources. New West filed a complaint against GOCO for sequestration of rents and
judicial foreclosure of all assets securing the loan. Later the same day, GOCO filed Chapter 11.
In suit, New West sought the return of the rents paid as retainers.
Court: Under California law, a trustor may grant as security an assignment of rents from
property that is the collateral for a debt, which may be an absolute assignment, a conditional
absolute assignment, or a collateral assignment for additional security. [Roger Bernhardt,
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California Mortgage and Deed of Trust Practice §§ 5.10-5.11 (2d ed. 1990 & Supp. 1992).] The
assignments given by GOCO to New West are conditional absolute assignments of rents.
            b) Conditional absolute assignments of rents are governed by Cal.
               Civ. Code § 2938 (1991)
(a) A written (absolute) assignment of … rents … secured by real property … shall … constitute
a present transfer of the assignor's (rents) interest … (only on) execution and delivery of the
assignment by the assignor. (b) An assignment of an interest in rents . . . may be recorded, and
(2) the interest granted by the assignment shall be deemed perfected as of the date of recording.
            c) Additional enforcement step required
               (i)        Cal. Civ. Code § 2938 (conditional absolute assignment) requires
                      an act of enforcement by the lender to possess the rents, even though
                      the lender's interest is already perfected.
No California court has interpreted an absolute assignment of rents to be self-executing with
respect to enforcement upon default by the borrower. Thus, a lender's right to possession of rents
arises only upon both the borrower's default and the lender's demand for possession. Although
Cal. Civ. Code § 2938 may obviate the need for a further perfection step, it cannot be read to
obviate the need for a further enforcement step. An additional "enforcement step," beyond
default, is needed before a creditor can collect rents.
               (ii)      If a lender wishes to preserve the right to rents collected before the
                      appointment of a receiver, the lender must make written demand for
                      the rents before seeking a receiver.
       5)      Notes, p. 201
            a) Cal.Civ.Code § 2938.1 (Repealed as undeterminable)
(a) An assignment of the rents, issues, and profits of real property, stating that it is given as
additional security, is perfected by the recordation, in the county in which the real property is
located, of an instrument granting that assignment. Recordation shall perfect that assignment
without the necessity of the beneficiary or mortgagee obtaining possession of the real property,
appointing a receiver, or taking any other action.
            b) Cal.Civ.Code § 2938
               (i)       (a) Assignment of rents
A written assignment of an interest in leases, rents, issues, or profits of real property made in
connection with an obligation secured by real property, irrespective of whether the assignment is
denoted as absolute, absolute conditioned upon default, additional security for an obligation, or
otherwise, shall, upon execution and delivery by the assignor, be effective to create a present
security interest in existing and future leases, rents, issues, or profits of that real property. As
used in this section, "leases, rents, issues, and profits of real property" include the cash proceeds
thereof. The term "cash proceeds" means cash, checks, deposit accounts, and the like.
               (ii)      (b) Recordation
An assignment of an interest in leases, rents, issues, or profits of real property may be recorded
in the records of the county recorder in which the underlying real property is located in the same
manner as any other conveyance of an interest in real property, whether the assignment is in a
separate document or part of a mortgage or deed of trust, and when so duly recorded in
accordance with the methods, procedures, and requirements for recordation of conveyances of
other interests in real property, (1) the assignment shall be deemed to give constructive notice of
the content of the assignment with the same force and effect as any other duly recorded
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conveyance of an interest in real property and (2) the interest granted by the assignment shall be
deemed fully perfected as of the time of recordation with the same force and effect as any other
duly recorded conveyance of an interest in real property, notwithstanding any provision of the
assignment or any provision of law that would otherwise preclude or defer enforcement of the
rights granted the assignee under the assignment until the occurrence of a subsequent event,
including, but not limited to, a subsequent default of the assignor, or the assignee's obtaining
possession of the real property or the appointment of a receiver.
               (iii)   (c) Enforcement
Upon default of the assignor under the obligation secured by the assignment of leases, rents,
issues, and profits, the assignee shall be entitled to enforce the assignment in accordance with
this section. On and after the date the assignee takes one or more of the enforcement steps
described in this subdivision, the assignee shall be entitled to collect and receive all rents, issues,
and profits that have accrued but remain unpaid and uncollected by the assignor or its agent or
for the assignor's benefit on that date, and all rents, issues, and profits that accrue on or after the
date. The assignment shall be enforced by one or more of the following:
(1) The appointment of a receiver.
(2) Obtaining possession of the rents, issues, or profits.
(3) Delivery to any one or more of the tenants of a written demand for turnover of rents, issues,
and profits in the form specified in subdivision (j), a copy of which demand shall also be
delivered to the assignor; and a copy of which shall be mailed to all other assignees of record of
the leases, rents, issues, and profits of the real property at the address for notices provided in the
assignment or, if none, to the address to which the recorded assignment was to be mailed after
recording.
(4) Delivery to the assignor of a written demand for the rents, issues, or profits, a copy of which
shall be mailed to all other assignees of record of the leases, rents, issues, and profits of the real
property at the address for notices provided in the assignment or, if none, to the address to which
the recorded assignment was to be mailed after recording.
Moneys received by the assignee pursuant to this subdivision, net of amounts paid pursuant to
subdivision (g), if any, shall be applied by the assignee to the debt or otherwise in accordance
with the assignment or the promissory note, deed of trust, or other instrument evidencing the
obligation; provided, however, that neither the application nor the failure to so apply the rents,
issues, or profits shall result in a loss of any lien or security interest which the assignee may have
in the underlying real property or any other collateral, render the obligation unenforceable,
constitute a violation of Section 726 of the Code of Civil Procedure, or otherwise limit any right
available to the assignee with respect to its security.
               (iv)    (d) Demand
If an assignee elects to take the action provided for under paragraph (3) of subdivision (c), the
demand provided for therein shall be signed under penalty of perjury by the assignee or an
authorized agent of the assignee and shall be effective as against the tenant when actually
received by the tenant at the address for notices provided under the lease or other contractual
agreement under which the tenant occupies the property or, if no address for notices is so
provided, at the property. Upon receipt of this demand, the tenant shall be obligated to pay to the
assignee all rents, issues, and profits that are past due and payable on the date of receipt of the
demand, and all rents, issues, and profits coming due under the lease following the date of
receipt of the demand, unless either of the following occurs:
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(1) The tenant has previously received a demand that is valid on its face from another assignee of
the leases, issues, rents, and profits sent by the other assignee in accordance with this subdivision
and subdivision (c).
(2) The tenant, in good faith and in a manner that is not inconsistent with the lease, has
previously paid, or within 10 days following receipt of the demand notice pays, the rent to the
assignor.
Payment of rent to an assignee following a demand under an assignment of leases, rents, issues,
and profits shall satisfy the tenant's obligation to pay the amounts under the lease. If a tenant
pays rent to the assignor after receipt of a demand other than under the circumstances described
in this subdivision, the tenant shall not be discharged of the obligation to pay rent to the assignee,
unless the tenant occupies the property for residential purposes. The obligation of a tenant to pay
rent pursuant to this subdivision and subdivision (c) shall continue until receipt by the tenant of a
written notice from a court directing the tenant to pay the rent in a different manner or receipt by
the tenant of a written notice from the assignee from whom the demand was received canceling
the demand, whichever occurs first. Nothing in this subdivision shall affect the entitlement to
rents, issues, or profits as between assignees as set forth in subdivision (h).
               (v)     (e) Limitation of enforcement actions
No enforcement action of the type authorized by subdivision (c), and no collection, distribution,
or application of rents, issues, or profits by the assignee following an enforcement action of the
type authorized by subdivision (c), shall do any of the following:
(1) Make the assignee a mortgagee in possession of the property, except if the assignee obtains
actual possession of the real property, or an agent of the assignor.
(2) Constitute an action, render the obligation unenforceable, violate Section 726 of the Code of
Civil Procedure or, other than with respect to marshaling requirements, otherwise limit any rights
available to the assignee with respect to its security.
(3) Be deemed to create any bar to a deficiency judgment pursuant to any provision of law
governing or relating to deficiency judgments following the enforcement of any encumbrance,
lien, or security interest, notwithstanding that the action, collection, distribution, or application
may reduce the indebtedness secured by the assignment or by any deed of trust or other security
instrument.
The application of rents, issues, or profits to the secured obligation shall satisfy the secured
obligation to the extent of those rents, issues, or profits, and, notwithstanding any provisions of
the assignment or other loan documents to the contrary, shall be credited against any amounts
necessary to cure any monetary default for purposes of reinstatement under § 2924c.
               (vi)    (g) Protection of rents
(g)(1) If the assignee enforces the assignment under subdivision (c) by any means other than the
appointment of a receiver and receives rents, issues, or profits pursuant to this enforcement, the
assignor or any other assignee of the affected real property may make written demand upon the
assignee to pay the reasonable costs of protecting and preserving the property, including payment
of taxes and insurance and compliance with building and housing codes, if any.
(2) On and after the date of receipt of the demand, the assignee shall pay for the reasonable costs
of protecting and preserving the real property to the extent of any rents, issues, or profits actually
received by the assignee; provided, however, that no such acts by the assignee shall cause the
assignee to become a mortgagee in possession and the assignee's duties under this subdivision,
upon receipt of a demand from the assignor or any other assignee of the leases, rents, issues, and
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profits pursuant to paragraph (1), shall not be construed to require the assignee to operate or
manage the property, which obligation shall remain that of the assignor.
(3) The obligation of the assignee hereunder shall continue until the earlier of (A) the date on
which the assignee obtains the appointment of a receiver for the real property pursuant to
application to a court of competent jurisdiction, or (B) the date on which the assignee ceases to
enforce the assignment.
(4) Nothing in this subdivision shall be construed to supersede or diminish the right of the
assignee to the appointment of a receiver.
               (vii)   (i) & (j) Application of section
(i) This section shall apply to contracts entered into on or after January 1, 1997.
Sections 2938 and 2938.1, as these sections were in effect prior to January 1, 1997, shall govern
contracts entered into prior to January 1, 1997, and shall govern actions and proceedings initiated
on the basis of these contracts.
(j) "Real property," as used in this section, shall mean real property or any estate or interest
therein.
               (viii) Cal.Civ.Code § 2938 (k) Demand to Pay Rent to Part Other Than
                   Landlord, p. 204
(k) The demand required by subdivision (c) paragraph (3) shall be in the following form:

             DEMAND TO PAY RENT TO PARTY OTHER THAN LANDLORD

       Tenant: [Name of Tenant]
       Property Occupied by Tenant: [Address]
       Landlord: [Name of Landlord]
       Secured Party: [Name of Secured Party]
       Address: [Address for Payment of Rent to Secured Party and for Further Information]:

The secured party named above is the assignee of leases, rents, issues, and profits under [name of
document] dated __________, and recorded at [recording information] in the official records of
__________ County, California. You may request a copy of such assignment from the secured
party at __________ (address).

This Notice Affects Your Lease Or Rental Agreement Rights And Obligations. You Are
Therefore Advised To Consult An Attorney Concerning Those Rights And Obligations If You
Have Any Questions Regarding Your Rights And Obligations Under This Notice.

In accordance with subdivision (c) of section 2938 of the civil code, you are hereby directed to
pay to the secured party, __________ (name of secured party) at __________ (address), all rents
under your lease or other rental agreement with the landlord or predecessor in interest of
landlord, for the occupancy of the property at __________ (address of rental premises) which are
past due and payable on the date you receive this demand, and all rents coming due under the
lease or other rental agreement following the date you receive this demand unless you have
already paid this rent to the landlord in good faith and in a manner not inconsistent with the
agreement between you and the landlord. In this case, this demand notice shall require you to pay
to the secured party __________, (name of the secured party), all rents that come due following
the date of the payment to the landlord.
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If you pay the rent to the undersigned secured party, __________ (name of secured party), in
accordance with this notice, you do not have to pay the rent to the landlord. You will not be
subject to damages or obligated to pay rent to the secured party if you have previously received a
demand of this type from a different secured party.

[For other than residential tenants]. If you pay any rent to the landlord that by the terms of this
demand you are required to pay to the secured party, you may be subject to damages incurred by
the secured party by reason of your failure to comply with this demand, and you may not be
discharged from your obligation to pay such rent to the secured party. You will not be subject to
such damages or obligated to pay such rent to the secured party if you have previously received a
demand of this type from a different assignee.

Your obligation to pay rent under this demand shall continue until you receive either (1) a
written notice from a court directing you to pay the rent in a manner provided therein, or (2) a
written notice from the secured party named above canceling this demand.

The undersigned hereby certifies, under penalty of perjury, that the undersigned is an authorized
officer or agent of the secured party and that the secured party is the assignee, or the current
successor to the assignee, under an assignment of leases, rents, issues, or profits executed by the
landlord, or a predecessor in interest, that is being enforced pursuant to and in accordance with
Section 2938 of the Civil Code.

Executed at __________, California, this __________ day of __________, __________.

                        [Secured Party]
                        Name: _____________________________
                        Title: ____________________________

               (ix)    (h) Priority between competing assignees, p. 205
(h) The lien priorities, rights, and interests among creditors concerning rents, issues, or profits
collected before the enforcement by the assignee shall be governed by subdivisions (a) and (b).
Without limiting the generality of the foregoing, if an assignee who has recorded its interest in
leases, rents, issues, and profits prior to the recordation of such interest by a subsequent assignee
seeks to enforce its interest in those rents, issues, or profits in accordance with this section after
any enforcement action has been taken by a subsequent assignee, the prior assignee shall be
entitled only to the rents, issues, and profits that are accrued and unpaid as of the date of its
enforcement action and unpaid rents, issues, and profits accruing thereafter. The prior assignee
shall have no right to rents, issues, or profits paid prior to the date of the enforcement action,
whether in the hands of the assignor or any subsequent assignee. Upon receipt of notice that the
prior assignee has enforced its interest in the rents, issues, and profits, the subsequent assignee
shall immediately send a notice to any tenant to whom it has given notice under subdivision (c).
The notice shall inform the tenant that the subsequent assignee cancels its demand that the tenant
pay rent to the subsequent assignee.
[Juniors may either intervene in the senior receivership proceeding or may instead just present
claims to the receiver for the surplus rents.]
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                (x)     (f) Tracing cash proceeds, p. 206
(f) If cash proceeds of rents, issues or profits to which the assignee is entitled following
enforcement as set forth in subdivision (c) are received by the assignor or its agent for collection
or by any other person who has collected such rents, issues, or profits for the assignor's benefit,
or for the benefit of any subsequent assignee under the circumstances described in subdivision
(h), following the taking by the assignee of either of the enforcement actions authorized in
paragraph (3) or (4) of subdivision (c), and the assignee has not authorized the assignor's
disposition of the cash proceeds in a writing signed by the assignee, the rights to the cash
proceeds and to the recovery of the cash proceeds shall be determined by the following:
(1) The assignee shall be entitled to an immediate turnover of the cash proceeds received by
the assignor or its agent for collection or any other person who has collected the rents, issues,
or profits for the assignor's benefit, or for the benefit of any subsequent assignee under the
circumstances described in subdivision (h), and the assignor or other described party in
possession of such cash proceeds shall turn over the full amount of cash proceeds to the assignee,
less any amount representing payment of expenses authorized by the assignee in writing. The
assignee shall have a right to bring an action for recovery of the cash proceeds, and to recover
the cash proceeds, without the necessity of bringing an action to foreclose any security interest
which it may have in the real property. This action shall not violate Section 726 of the Code of
Civil Procedure or otherwise limit any right available to the assignee with respect to its security.
(2) As between an assignee with an interest in cash proceeds perfected in the manner set forth in
subdivision (b) and enforced in accordance with paragraph (3) or (4) of subdivision (c) and any
other person claiming an interest in the cash proceeds, other than the assignor or its agent for
collection or one collecting rents, issues, and profits for the benefit of the assignor, and subject to
subdivision (h), the assignee shall have a continuously perfected security interest in the cash
proceeds to the extent that the cash proceeds are identifiable. For purposes hereof, cash proceeds
are identifiable if they are either (A) segregated or (B) if commingled with other funds of the
assignor or its agent or one acting on its behalf, can be traced using the lowest intermediate
balance principle, unless the assignor or other party claiming an interest in proceeds shows that
some other method of tracing would better serve the interests of justice and equity under the
circumstances of the case. The provisions of this paragraph are subject to any generally
applicable law with respect to payments made in the operation of the assignor's business.
                (xi)    Cash collateral, p. 207
A creditor is known as ―cash collateral‖ in bankruptcy where the creditor has a perfected claim to
rents. ―Under the Bankruptcy Code, a bankruptcy trustee may not "use, sell, or lease cash
collateral" of the debtor without the consent of "each entity that has an interest in such cash
collateral" or an order of the bankruptcy court. 11 U.S.C. § 363(c)(2). "Cash collateral" is
defined as "cash, negotiable instruments, documents of title, securities, deposit accounts, or
other cash equivalents whenever acquired in which the estate and an entity other than the
estate have an interest . . . ." 11 U.S.C. § 363(a).‖ [The beneficiary] asserts a security interest in
Safeguard's self-storage revenues, as cash collateral, pursuant to the deed of trust and 11 U.S.C.
§ 552(b), which provides, in part: If the debtor and an entity entered into a security agreement
before the commencement of the case and if the security interest . . . extends to property of the
debtor . . . and to proceeds [or] . . . rents . . . of such property, then such security interest extends
to such proceeds [or] . . . rents . . . acquired by the estate after the commencement of the case to
the extent provided by such security agreement and by applicable nonbankruptcy law . . . .‖ In
Re Safeguard Self-Storage Trust, 2 F.3d 967, 970 (9th 1993).
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               (xii)    Revenues versus rents, p. 207
The revenues in In Re Safeguard Self-Storage Trust were treated as rents since self-storage
agreements are leases (and not simply licenses.) Income from golf courses, race tracks, nursing
homes, and hotels are not ‗proceeds‘ or ‗profits‘ in the sense of real estate phrasing and were a
problem until Congress added sub§(b)(2) to 11 USC §552 in 1994. Secured creditors in a 1991
BAP case lost their appeal on hotel rents even though it filed both a UCC-1 and a recorded deed
of trust against the debtor‘s hotel.
The 9th Circuit turned that around in 1994 ruling that hotel room income is rents, and protected
to the secured creditor from collection as bankruptcy assets. The Court‘s basis was that this
ruling was the basis of the hotel financing industry, and would reject of the bargain of the parties.
In Re Days California Riverside Limited Partnership, 27 F.3d 374 (9th Cir. 1994). 11 USC
§552(b) came into being 6 months later.
               (xiii) Careless bidding at the foreclosure sale, p. 208
A beneficiary foregoes the rents when the beneficiary had a receiver appointed and then bid the
full amount of indebtedness at the foreclosure sale prior to the receiver‘s accounting.
―When the price paid at a trustee's sale includes all items of indebtedness due to a beneficiary,
there is no deficiency against which the rents collected by a receiver may be applied. Where the
beneficiary receives full payment of the indebtedness, net rent money collected by the receiver
belongs to the trustor.‖ [The surplus belongs to the Trustor unless the juniors claim it.] Eastland
Savings And Loan Association, v. Thornhill & Bruce, Inc., 260 Cal. App. 2d 259 (1968).
Chapter VIII. Supplemental Sources of Repayment, p. 211
   A) Damages Awards, p. 211
        a) Los Angeles Trust and Savings Bank v. Bortenstein, 47 Cal. App.
           421 (1920)
               (i)      A mortgagee may recover funds from a damage award or
                     condemnation to satisfy its security lien for the fraction of the land
                     taken or destroyed.
Facts: Bortenstein owned land and buildings secured by a deed of trust to LATSB. A flood
caused by the city of Los Angeles greatly damaged the properties. Bortenstein sued the city for
his damages and won an award. The Bank then foreclosed on the property. The court ordered
sale of the property with payment of the debt, and if the proceeds were insufficient then a
deficiency judgment was to issue and the city was to pay the Bank instead of Bortenstein.
Bortenstein appealed the order.
Court: AFFIRMED. The court used the analogy of condemnation in that had the city condemned
the property, the city would owe Bortenstein, but as an equitable payment, was apportionable to
the Bank. ―It is a well-recognized rule of equity, based upon the doctrine of equitable conversion,
that when land is taken for public use, the money awarded for such land remains, and is to be
considered, as land in respect to all rights and interests relating thereto. The money in such cases,
is deemed to represent the land, and is applied in equity to discharge the liens upon it, precisely
in accordance with the legal or equitable rights of creditors or encumbrancers in respect to such
land.‖ The funds due Bortenstein from the flood came about from the land by reason of the
damage to the land. The damage to the land was total and reached the freehold. Therefore the
money award must be treated in equity as the land itself to replace the reduced value of the land.
The Bank is trying to recover the value of its secured property that the city, by the flood, took
from its security. The deficiency is to be taken out of the fund.
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            b) Schoolcraft v. Ross, 146 Cal. Rptr. 57, 81 Cal. App. 3d 75 (1978),
               p. 213
                (i)      A lender‟s discretion is limited to apply damages awards to the
                     loan when the property can be rebuilt without an impact on lender's
                     security interest.
                (ii)     Where the value of the property after the take exceeds the amount
                     of the indebtedness secured by the deeds of trust, the trust deed
                     holders' security is not impaired and they are entitled to no part of the
                     condemnation award. (The debt equivalency rule.)
Facts: The Schoolcrafts purchased a home from Ross, giving her a note secured by a deed of
trust. Fire destroyed the house, and Ross refused to release the insurance proceeds for rebuilding,
citing her option under the deed of trust to apply the proceeds to the outstanding debt. Unable to
pay rent on an apartment and pay the mortgage payment, the Schoolcrafts defaulted and Ross
took back the property through foreclosure.
The trial court held the $4,500 damage award belonged to mortgagees, which amounted roughly
to the equity they lost in foreclosure, plus attorney's fees.
Court: AFFIRMED. In every contract there is an implied covenant of good faith and fair dealing;
that is, that neither party will do anything that injures the right of the other to enjoy the benefit of
his bargain. The Schoolcrafts bargained for the use of the loaned funds and Ross received the
right to specific repayment terms secured in her deed of trust. She did not have the unilateral
right to cut off the loaned funds absent a showing that her security was impaired. Although
applying the insurance proceeds to the indebtedness was not contrary to the explicit terms of the
agreement, "The covenant in this case does not mean good faith in the abstract, but, instead,
refers to the purpose of the particular contract." Here, the purpose of the particular contract was
to provide a long-term loan with adequate security in the property. Since the value of the
property was sufficient to secure her interest in the mortgage and note, she had no claim to the
proceeds.
            c) Notes, p. 215
                (i)     A curious case
The Emerys refinanced with World Savings. The deed of trust allowed that, the, ―Lender may, at
its option, enforce these rights in its own name, and may apply any proceeds resulting from this
assignment to any amount that I may owe to Lender.‖ The Emerys found construction defects in
their home, and recovered damages. The Emerys later defaulted and went bankrupt. The trustee
sale was inadequate, so World Savings sued the Emery‘s law firm for the suit proceeds. ―World
Savings argues that it had an immediate possessory interest in the litigation proceeds and that
Kasdan converted those proceeds by disbursing them to the Emerys.‖ As the court said: ―At the
time that Kasdan distributed the settlement proceeds to the Emerys, the Emerys were not in
default. Because the amount ―owed to Lender‖ was therefore zero, Kasdan did not injure World
Savings by disbursing settlement funds directly to the Emerys.‖ The court found the word,
―owed‖ ambiguous, and construed the word against the drafter (World Savings), which followed
California law.
                (ii)    Another view
                (iii)   Legislative intervention, Cal.Civ.Code § 2924.7
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The California Appeals court let the Trustor keep the insurance award without rebuilding
because the value of the remaining security ($2 MM) far exceeded the mortgage balance
($320K). To the extent the security was unimpaired, the sellers had no right to keep the proceeds.
A beneficiary cannot foreclose for failure of the debtor to carry insurance unless the mortgagee
could show that not carrying insurance impaired the security (which is not possible when the
value of the land outstrips the mortgage balance.) Freeman v. Lind, 181 Cal. App.3d 791 (1986).
The legislature responded by passing Cal.Civ.Code § 2924.7 to allow a mortgagee to enforce its
express provisions of a deed of trust or mortgage. ―A mortgagee may accelerate the maturity date
of any loan and foreclose if the trustor fails to pay, ―any taxes, rents, assessments, or insurance
premiums with respect to the property or the loan, or any advances made by the beneficiary …
whether or not impairment of the security interest in the property has resulted.‖ The elimination
of the impairment requirement in CC 2924.7 applies only to insurance awards.
               (iv)    Insurance
Although it is frequently said that the property is insured, this is inaccurate. The policy is not an
insurance of the specific thing without regard to the ownership, but is a special agreement of
indemnity with the person insuring against such loss or damage as he may sustain. Different
persons may have separate insurable interests in the same property, as, for example, a mortgagor
and a mortgagee. [A]bsen[t] of special provisions in the lease there is no obligation on the lessee
to procure insurance for the benefit of his lessor. The rule is the same as between mortgagor and
mortgagee. But if there is an agreement for insurance between parties standing in these
relationships, and the party obligated, in violation of his agreement, procures insurance payable
to himself alone, the other party for whose benefit the agreement was made has an equitable lien
on the proceeds of such insurance. Alexander v. Security-First Nat. Bank, 7 Cal.2d 718, 723
(1936.) Cal. Comm. Code § 9312(b)(4) requires an issuer receive written notice of lender‘s
security interest in a real property insurance policy. Authority is mixed whether a lender get the
proceeds where the borrower gets insurance that the insurer did not require.
               (v)     Timing
Insurance is merely additional security (Redlinger v. Imperial Savings), and fair value does not
apply to additional security (Hatch v. Security First Nat‘l Bank.) Where a default is already
recorded, and the reinstatement period has run, the loan is already accelerated. Thus, the
mortgagee‘s security would be impaired if forced to wait for rebuilding, so the mortgagee has the
right to the insurance funds.
Thus, if Mrs. Ross had foreclosed before the insurance company paid, she could have underbid,
and probably gotten the proceeds.
           d) Dept. of Transportation v. Redwood Baseline, 84 Cal. App. 3d 662
              (1978), p. 217
               (i)      Condemnation Awards constitute substitute security.
               (ii)     A lender has a claim to them even when the deed of trust is entirely
                    silent on that issue.
               (iii) The doctrine of impaired security limits that claim to only what is
                    necessary to restore the lender's previous loan-to-value ratio. (The
                    original ratio rule.)
               (iv) (The debt equivalency rule.)
Facts: Redwood Baseline purchases a property and gave first and second deeds of trust to the
lender and seller respectively. The trust deeds contained the usual provision that any award of
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damages in connection with a condemnation of the property or any part thereof shall be paid to
the trust deed holder who may at his option apply the amount received upon the secured
indebtedness or release it to the owner.
A couple of years later, CalTrans used eminent domain to acquire fee ownership of 6.1 acres of
the larger parcel for flood control purposes. The part taken cuts diagonally across the larger
parcel, effectively dividing it in half. The northern portion of the remainder, consisting of
approximately 22.5 acres, was left landlocked. Redwood Baseline sued.
The trial court found the trust deed notes provided for payment of interest only, and the security
of the trust deed holders impaired by the taking. The court apportioned the condemnation
proceeds between the property owner and the holders of first and second deeds of trust
encumbering the property. The court allocated $8,667.27 to the holder of the second deed of trust
($7,555 referable to the 6.1 acres taken and $1,112.27 for delinquent interest payments) and
$46,804.30 to the holder of the first deed of trust ($16,935 referable to the 6.1 acres taken,
$15,000 referable to severance damages and $14,869.30 on account of delinquent taxes, past due
interest and foreclosure charges.
The owner appealed contending the trial court's determination that the security of the trust deed
holders was impaired was erroneous as a matter of law and that as owner it is entitled to the
entire condemnation award.
Court: AFFIRMED - No error has been demonstrated.
Redwood Baseline first argued that the value of the property after the take exceeded the amount
of the indebtedness secured by the deeds of trust and that, therefore, the trust deed holders'
security was not impaired and they are entitled to no part of the condemnation award. Redwood
Baseline also argued that the value of the remaining property is sufficiently in excess of the
secured indebtedness to provide the trust deed holders the margin of security in excess of the
amount of the debts existing at the time the trust deeds came into being. (The original ratio rule.)
The Trust deed holders argued that the debt equivalency rule is entirely unfair to the lien holder
and is inconsistent with the bargain and reasonable expectations of the parties. They argued that
generally the holder of a deed of trust or mortgage is entitled to a reasonable margin of security
over and above the amount of the secured indebtedness.
               (v)       In the absence of an agreement between the parties to the contrary,
                     a trust deed holder or mortgagee in California is entitled to share in
                     an award resulting from condemnation of part of the property
                     constituting the security only to the extent the security has been
                     impaired by the taking. (Bortenstein, Cal. Code Civil Procedure
                     §1265.225)
The crucial question, however, is what is meant by impairment of the security. Although the
Bortenstein court spoke of "the reduced value of the land," it did not mention much less explain
impairment of security. The significance of the Bortenstein case to resolution of the problem at
hand lies in the fact that the mortgage was being foreclosed prior to disbursement of the damage
award so that the debt would be satisfied and the lien extinguished prior to the owner's receiving
any part of the damage award.
Whether the security transaction is to continue in force, has been, or is to be immediately
terminated is a factor crucial to the propriety of applying the debt equivalency rule. Cornelison v.
Kornbluth. Here, the debtor-creditor relationship and the security transaction are ongoing and
will continue after disbursement of the condemnation award. As we shall explain, application of
the debt equivalency rule in these circumstances would be inequitable and inconsistent with the
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essential bargain and reasonable expectations of the parties. The waste cases usually involve
injury to the land, not its outright appropriation.
In condemnation cases, the essential conflict is that between the owner and lien holder with
respect to a fund of money, presumably not expected or contemplated by either party. The
"injury" results from the conduct of the condemner, and the compensatory fund of money is
furnished by the third person. (Unlike a waste case where there is not a pot of money.). If the
fund of money is turned over in whole or in part to the lien holder for application on the debt, the
owner-debtor in a large sense loses nothing, for not only is his debt reduced to that extent but, in
addition, his total interest expense will be lessened accordingly. Even in the event of a
subsequent default and foreclosure, the owner-debtor is out nothing he would have had had there
been no taking by eminent domain.
Where a deficiency judgment is statutorily prohibited, the lien holder bears the risk of any
inadequacy of the security resulting from its overvaluation at the inception of the transaction or a
decline in value caused by market conditions. However, the lien holder does not expect and
anti-deficiency legislation does not require him to assume the risk of inadequacy in the security
resulting from "bad faith" waste, tortious injury to the property by third persons or a partial
taking of the property by eminent domain. Where a deficiency judgment is legislatively
proscribed, it is all the more important that the integrity of the security be safeguarded.
               (vi) The debt equivalency rule is appropriate only in those situations in
                   which the lien has been or immediately will be foreclosed so that the
                   debtor-creditor relationship and the security transaction are at an end.
The lien holder is fully protected if the value of the property is at least equal to the amount of the
debt and, as in Bortenstein, if the value of the security has not yet been ascertained, a lien or trust
may be imposed on all or part of the award for payment of any ensuing deficiency pending
determination of that fact.
While the original ratio rule recognizes a lien holder‘s right to some margin of security over and
above the amount of the debt and thus strikes a somewhat more equitable balance than the debt
equivalency rule, it does not truly reflect the real bargain of the parties that the lien holder will
have the security of the entire property even if it has increased in value--whatever its value may
be. The original security to debt ratio is largely irrelevant to the expectations of successors in
interest of the original parties.
               (vii) Security is impaired if the partial condemnation leaves the
                   „security to debt‟ ratio less than that existing immediately prior to the
                   taking.
               (viii) A proper apportionment of the condemnation award is to restore
                   the security to debt ratio existing just before the take. (The pretake
                   ratio rule.)
This is the rule, however, now prescribed by statute for use in allocating a condemnation award
resulting from a partial taking as between junior and senior lien holders in certain circumstances.
[(FN15) CCP § 1265.230 (b) reads: "As used in this section, 'impairment of security' means the
security of the lien holder remaining after the taking, if any, is of less value in proportion to the
remaining indebtedness than the value of the security before the taking was in proportion to the
indebtedness secured thereby." Subdivision (a) of the section, however, provides in part: "This
section provides only for allocation of the portion of the award, if any, that will be available for
payment to the junior and senior lien holders and does not provide for determination of the
amount of such portion."]
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We agree the pretake ratio rule will achieve an equitable result in many cases. We think it
probable this rule more nearly accords with the bargain and reasonable expectations of the
parties. Its use invariably results in a division of the award between the owner and lien holder.
However, the pretake ratio rule may not appropriately be applied in all cases either.
               (ix) The pretake ratio rule should not be utilized without modification
                   where the value of the property has increased greatly in excess of the
                   reasonable expectations of the parties at inception or where for some
                   reason the value of the property was already less than the debt before
                   the partial condemnation.
Other tests:
The market value comparison test would determine impairment of the security by comparing the
market value of the secured debt before and after the partial condemnation. The market value of
the secured debt would depend in large part upon factors unrelated to impairment of the security,
such as fluctuations in the prevailing interest rate, the marketability of the particular secured debt
and, in some cases, financial strength and repute of the particular debtor. Utilization of such a
test, therefore, would not likely provide an accurate measure of impairment of the security or
produce a result consistent with the reasonable expectations of the parties.
The conservative lender rule recognizes that the lien holder is entitled to a margin of security in
excess of the amount of the debt. While it might be a highly useful tool in some cases, its
relevancy would be somewhat limited in a case, such as the case at bench, in which the secured
debt was created as the result of a sale rather than a loan by a commercial lender and the lien is
not held by a commercial lender in its capacity as such.
               (x)     Impairment Factors
Whether a lien holder‘s security has been impaired by a partial condemnation, which is normally
a question of fact is to be determined in light of the circumstances of the particular case
considering all of the relevant factors. Without attempting to list all possible relevant factors, we
mention those that occur to us.
       1. Whether the debt and security transaction resulted from a sale or a loan;
       2. Whether or not a deficiency judgment is legally permissible;
       3. The terms for repayment;
       4. The interest rate charged compared with the prevailing interest rate in similar
            transactions;
       5. The original, pretake and posttake security to debt ratios;
       6. The length of time the transaction has been in effect;
       7. The amount of the debtor's equity and the amount actually invested by the debtor in
            the property constituting the security;
       8. The payment record of the debtor prior to the partial condemnation;
       9. The length of time the transaction is to continue in force after the partial
            condemnation;
       10. Whether or not the partial condemnation necessitates repair to or reconstruction of
            the property;
       11. The amount of the annual taxes and assessments against the property;
       12. Whether the debt is currently paid or is in default;
       13. Facts bearing on the likelihood of default by the debtor;
       14. The nature of the security property;
       15. Whether or not the security property is likely to be readily salable; and
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        16. And whether or not it is likely it can be sold at a foreclosure sale for a price
             approximating its fair market value.
In view of the relevant factors we cannot say in the case at bench that the trial court erred in
finding the trust deed holders' security impaired and in apportioning the condemnation award
between owner and the trust deed holders in the manner it did. The record is devoid of evidence
that the 6.1 acres taken were representative of the whole parcel. The record does not establish the
pretake value of the whole property or the post-take value of the remainder, and owner has failed
to meet its burden on appeal of affirmatively proving reversible error. [The court then made its
own calculations of the pretake and post-take security ratios, and found that (1) the security of
the second deed of trust was substantially impaired, (2) that the security of the first trust deed
was also impaired cannot be said to be unsupported by the evidence or erroneous as a matter of
law, and (3) the apportionment made by the court did not even fully restore the lien holders to
their pretake security positions.
           e) Notes, p. 226
               (i)     Other results - Cal.Civ.Proc. § 1265.225, Encumbrances
(a) Where there is a partial taking of property encumbered by a lien, the lien holder may share in
the award only to the extent determined by the court to be necessary to prevent an impairment of
the security, and the lien shall continue upon the part of the property not taken as security for the
unpaid portion of the indebtedness.
  (b) Notwithstanding subdivision (a), the lienholder and the property owner may at any time
after commencement of the proceeding agree that some or all of the award shall be apportioned
to the lienholder on the indebtedness.
               (ii)    Shocking the conscious of the court.
The Miller‘s mortgage included the usual condemnation provision (like Redwood Baseline). The
Miller‘s later sold part of their property in a private sale condemnation and received a joint check
also naming the bank. The bank had a policy of granting partial releases on below market rate
loans only if received at least one-half of the present market value of the security to be released,
or adjusted the loan to current market rates. The Millers sued when the bank refused to endorse
the check unless the Bank received half the check, or the Millers accepted a current loan rate.
The district court held the condemnation provision inapplicable since title passed by private sale
rather than by condemnation. The court also held the bank policy unconscionable. The 9th
Circuit held the clause inapplicable because of the private sale, but the bank policy was just an
―enhanced ability‖ for driving loans. Miller v. Federal Land Bank of Spokane, 587 F.2d 415 (9th
Cir.1978).
               (iii)   The UCC
When more than one security interest attaches to the product or mass, they rank according to the
ratio that the cost of the goods to which each interest originally attached bears to the cost of the
total product or mass. UCC §9-315(a)(2).
A beneficiary of a Trustor sale can claim the buyer‘s deposit when the buyer defaults, even when
the deed of trust refers only to rents, issues, and profits, because these proceeds were
automatically subject to liens on the real estate. Old Stone Bank v. Tycon I Bldg. Ltd.
Partnership, 946 F.2d 271 (4th, 1991).
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Chapter IX.              Actions in Waste, Fraud & Negligence
   A) Waste
      1)  Cornelison v. Kornbluth, 15 Cal.3d 590 (1975), p. 229
               (i)       The measure of damages for waste is the amount of the
                      impairment of the security that is the amount by which the value of
                      the security is less than the outstanding indebtedness and is thereby
                      rendered inadequate.
Facts: Cornelison sold a home to the Chanon, taking back a promissory note secured by a first
deed of trust on the property with covenants that the Chanons would pay the real property taxes
and assessments against the property; that they would care for and maintain the property; and
that if they resold the property, the entire unpaid balance would become immediately due and
payable. The Chanons later sold the home to Kornbluth, who later sold the property to Larkins.
The following year the county health department condemned the house as unfit for human
habitation. The Chanons defaulted on the promissory note. Cornelison forecloses and purchased
the property at the trustee's sale. Cornelison then sued the Chanons and Kornbluth for damages
for breach of contract and waste. Kornbluth denied the allegations, and produced the grant deed
that at the time of the purchase he knew it was encumbered by the deed of trust in favor of
Cornelison as beneficiary, but he never assumed either orally or in writing the indebtedness
secured by the deed of trust.
Kornbluth also produced an affidavit from his attorney that Cornelison purchased the property
back at the trustee sale ―by a full credit bid resulting in the full satisfaction of the remaining
indebtedness secured by the deed of trust‖ and incorporated by reference a copy of the "trustees
deed upon sale," and argued that Cornelison‘s action was precluded by the antideficiency
legislation, and the extinguishment of the security interest through a full credit bid at the trustee's
sale [See Chapter 12.] The trial judge granted summary judgment to Kornbluth. Cornelison
appealed and argued that that an action for waste may be maintained independently of the §§ 580
(b) and (d) antideficiency provisions.
Court: AFFIRMED. The leading case of Van Pelt v. McGraw (1850) 4 N.Y. 110 where the court
held that a holder of a mortgage on lands had an action on the case against the mortgagor for acts
of waste committed by the latter with knowledge that the value of the security would thereby be
injured. Van Pelt clearly set forth the measure of damages: ―This action is not based upon the
assumption that the plaintiff's [mortgagee's] land has been injured, but that his mortgage as a
security has been impaired. His damages would be limited to the amount of injury to the
mortgage, however great the injury to the land might be.‖
               (ii)     “Waste. No person whose interest is subject to the lien of a
                      mortgage may do any act that will substantially impair the
                      mortgagee's security.” Cal.Civ.Code § 2929
This court relied on Van Pelt in Robinson v. Russell (1864) 24 Cal. 467 and declared that the
mortgagee of real property could maintain an action for damages of property that impaired the
mortgage security, and that action for an injunction would lie to restrain the commission of waste
on the premises. This cause of action was codified in 1872 as Civil Code § 2929.
               (iii) Damages in an action for waste are measured by the amount of
                    injury to the security caused by the mortgagor's acts, that is by the
                    substantial harm which impairs the value of the property subject to
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                     the lien so as to render it an inadequate security for the mortgage
                     debt." (Robinson v. Russell).
A deficiency judgment is a personal judgment against the debtor-mortgagor for the difference
between the fair market value of the property held as security and the outstanding indebtedness.
The two judgments against the mortgagor, one for waste and the other for a deficiency, are
closely interrelated. If property values in general are declining, a deficiency judgment and a
judgment for waste would be identical up to the point at which the harm caused by the mortgagor
is equal to or less than the general decline in property values resulting from market conditions.
When waste is committed in a depressed market, a deficiency judgment, although reflecting the
amount of the waste, will of course exceed it if the decline of property values is greater.
However, when waste is committed in a rising market, there will be no deficiency judgment,
unless the property was originally overvalued; in this event, there would be no damages for
waste unless the impairment due to waste exceeded the general increase in property values.
               (iv) §580b bars recovery in actions for waste without “bad faith”
                   following foreclosure sale, but does not apply in "bad faith" waste.
Allowing an action for waste following a foreclosure sale of property securing purchase money
mortgages may frustrate the primary purpose of §580b to prevent the aggravation of the
downturn that would result if defaulting purchasers lost the land and were burdened with
personal liability. Damages for waste would burden the defaulting purchaser with both loss of
land and personal liability and the acts giving rise to that liability would have been caused in
many cases by the economic downturn itself. A purchaser caught in such circumstances may be
compelled in the normal course of events to forego the general maintenance and repair of the
property in order to keep up his payments on the mortgage debt. If he eventually defaults and
loses the property, to hold him subject to additional liability for waste would seem to run counter
to the purpose of §580b and to permit the purchase moneylender to obtain what is in effect a
deficiency judgment. Not all owners of real property subject to a purchase money mortgage
commit waste solely or primarily as a result of the economic pressures of a market depression.
               (v)      Bad faith waste occurs where the acts are reckless, intentional, or
                     a malicious despoiling of property.
In circumstances of waste committed in bad faith, the purchase money lender should not go
remediless since they do not involve the type of risk intended to be borne by him in promoting
the objectives of § 580b alluded to above. The trier of fact [shall] determine on a case by case
basis to what, if any, extent the impairment of the mortgagee's security has been caused by the
general decline of real property values and to what, if any, extent by the bad faith acts of the
mortgagor.
               (vi) Under §580d, recovery for waste against the mortgagor following
                   nonjudicial foreclosure sale is barred by the section's proscription
                   against deficiency judgments when the waste actually results from the
                   depressed condition of the general real estate market but not when the
                   waste is caused by the "bad faith" acts of the mortgagor.
A different analysis must be pursued for an action for waste of § 580d to a non-purchase money
mortgage. The Legislature intended to establish parity between judicial foreclosure and private
foreclosure by denying a deficiency judgment after a private sale. If following a nonjudicial sale
the mortgagee were allowed to obtain a judgment for damages for waste against the mortgagor,
this would essentially destroy the parity between judicial foreclosure and private foreclosure in
all instances where the waste is actually caused by general economic conditions.
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               (vii) A non-assuming successor in interest is not liable after a judicial
                   sale or a nonjudicial one for waste not committed in "bad faith.”
Cornelison argues that neither §580b nor §580d applies to an action for waste against the
Kornbluth because Kornbluth was not the original mortgagor but a successor in interest. A
mortgagee can recover damages in tort for impairment of his security interest by non-possessing
third parties and this action is not limited by the antideficiency legislation protecting the debtor-
mortgagor.
However, §580b protections against a deficiency judgment are extended to the successors in
interest of the original mortgagor or Trustor. We think it illogical to subject successors in interest
who do not assume the indebtedness to a greater liability than those who do assume it by
permitting recovery against the former of damages for waste caused by a market downturn and
not committed in "bad faith." Permitting such recovery would impede the §580b policy of
preventing the aggravation of a depression in land values.
Although the underlying policy of §580d is not so directly compelling and the non-assuming
successor in interest somewhat in the position of a third party, nevertheless, in view of the
interrelation of the two sections and the parity established between them as explained above, we
are convinced that recovery against non-assuming successors in interest for waste caused by a
market downturn and not committed in "bad faith" should not be permitted after a nonjudicial
foreclosure sale.
   B) Notes
      1)   Waste, p. 233
               (i)       Mismanagement
Failure to pay property taxes is ‗waste,‘ but is protected by §580b if the error was in good faith.
Willful mismanagement to cultivate and preserve fruit trees is properly charged bad faith.
Permitting public access by implied dedication might be waste.
               (ii)      Property mortgaged or pledged to farm credit agencies
Farmer prosecuted for selling topsoil from his farm: ―Whoever, with intent to defraud,
knowingly conceals, removes, disposes of, or converts property mortgaged to the Farmers Home
Administration shall be fined or imprisoned not more than five years, or both.‖ 18 USC §658.
       2)      Successors, p. 233
Deeds of trust require a Trustor to keep the property in good condition and repair and not commit
or permit waste of the property. Kornbluth‘s deed of trust apparently lacked that provision.
       3)      Security deposits for waste, p. 233
6 USF L. Rev. 267 (1972) is not carried on either Westlaw or LexisNexus
       4)      Federal waste, p. 233
            a) United States Of America v. Haddon Haciendas Company, 541
               F.2d 777 (9th Cir. 1976)
               (i)        Adoption of the California law on waste actions would remove a
                      powerful incentive for landlords to maintain federal housing projects
                      in decent condition.
Facts: Haddon acquired title to a housing project that had an outstanding note and deed of trust
in favor of the Michigan Public School Employees' Retirement Board insured by the Federal
Housing Administration. Haddon defaulted on the trust deed note by failing to make the monthly
payment. The FHA paid the note, and received assignment of the replacement fund, the trust
deed and the note. The government foreclosed, made a partial bid, and sued Haddon seeking
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damages for waste and for violations of the obligations specified in the regulatory agreement to
maintain the premises and to keep satisfactory financial records. The district court found that
Haddon and the general partners had failed to maintain the premises in good repair, [**4] n1 and
had failed to maintain financial records in reasonable condition. He assigned as damages the
$13,500 expended in restoring the property to "good repair and condition" and the $2,500
expended in reconstructing Haddon's books. Haddon argued on appeal that §§580b and d applied
to bar deficiency absent bad faith waste.
Court: The California anti-deficiency legislation and the no-deficiency clause in the deed of trust
for this federally insured development do not serve identical purposes and thus different
constructions are required. Both the legislation and the no-deficiency clause protect the
mortgagor and thus encourage investment in housing.
The federally insured loans program under the NHA has more far-reaching objectives than
merely protecting mortgagors. Under-maintenance is a common practice for profiteers in the
FHA housing field since artificial profits can be gained during the interim period between the
point at which normal maintenance ceases and the time at which the consequent quality decline
becomes apparent to the market and the Commissioner. A no-deficiency clause in the deed of
trust serves the additional NHA purposes of preserving the housing stock and preventing its
deterioration into slums. The purpose is to deter the exploitive management of federally insured
projects and the resulting substandard and slum-like housing conditions that the NHA was
designed to eliminate. The federal housing program is not furthered by insuring investments in
housing stock declining in standards of decency, safety and sanitation. The Cornelison rule
would bar a post-foreclosure action for damages for failure to keep adequate books and remove
an incentive for landlords to comply with this requirement and hamper detection of exploitation
and fraud.
               (ii)      Where the lender is a private party, acts out of inability to make
                      ends meet financially are not bad faith.
Mills purchased the Beverly Hotel gave the seller Edwards a wrap-around deed of trust for the
balance of the purchase price. Mills paid about $50,000 in sales commissions, a down payment
of $100,000, and three monthly payments of $8,000, for a total investment of some $174,000,
not counting the additional $9,000 Mills claims he spent on maintenance. He received no more
than $84,000 in rents, and probably considerably less. Far from using the hotel as a means of
generating profits at the expense of the security, Mills lost the bulk of his investment. In re Mills,
841 F.2d 902 (9th, 1988).
       5)      Nonrecourse loans and financial waste, p. 236
               (i)       “Milking” of the security is recognized as bad faith waste.
To help stem its losses, the partnership requested a below market interest rate on its adjustable
rate loan. The Bank turned down the request. The managing partner then distributed the
partnership‘s cash reserves to the partners instead of paying its property taxes. Although the loan
was non-recourse, the court awarded a ‗waste‘ judgment to the Bank and recognized that failure
to pay property taxes is financial waste, as the Bank had to pay the taxes to prevent a tax sale.
Nippon Credit Bank v. 1333 North Cal. Boulevard, 86 Cal. App. 4th 486 (2001).
       6)      Liability of third parties: U. S. Financial v. James Sullivan,
               37 Cal. App. 3d 5 (1974), p. 238
               (i)        A mortgagee or beneficiary of a deed of trust has a cause of action
                      for impairment of security against a negligent third party tortfeasor.
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Facts: James Sullivan/Pacific Southwest was the owner, developer and subdivider of a
residential tract of land. Home Federal held 39 notes and first deeds of trust on 39 tract
properties. U.S. Financial held one note and deeds of trust of 38 of the lots. At that time, each lot
was of sufficient value to provide adequate security for the loan made. The developer defaulted
on U.S. Financial, which foreclosed and purchased the lots at trustee‘s sales. A differential
settlement occurred in the filled earth on the lots, causing foundation failure, cracks, and other
damage to the houses constructed on the lots. U.S. Financial refinanced the notes with Home
Federal but Home Federal also defaulted. Instead of foreclosing U.S Financial sued the soil tester
and contractor for negligent work on the tract. The trial court sustained demurrers because the
facts did not show why Home Federal did not obtain a deficiency judgment against U.S.
Financial. A question of appeal was whether U.S Financial was required to foreclose before
suing the soil tester and contractor.
Court: Reversed - Home Federal argued that it chose not to seek foreclosure because:
         1. The value of the security was less than the balance due on the note;
         2. The 1-year redemption period would have exceeded the deficiency judgment;
         3. Carrying the loan would decrease its lendable funds.
Where the beneficiary seeks to recover damages from the trustor, the security is the primary fund
for the discharge of the indebtedness, and the requirement that the security first be exhausted
protects the debtor and prevents a multiplicity of actions. (Code Civ. Proc., § 726). The reason
for the rule disappears when the defendant is a third party tortfeasor. The action is not for the
recovery of the debt secured by the mortgage but for damages for the tortious conduct of the
third party tortfeasor resulting in impairment of the security. The monetary recovery against the
third party tortfeasor takes the place of the reduced value of the land.
If the trust deed beneficiary or mortgagee is required to foreclose against an innocent trustor or
mortgagor, the latter would be led to institute an action against the negligent wrongdoer. Thus,
two actions or proceedings would be required instead of one.
The defendant‘s argue that that if the beneficiary or mortgagee is not first required to foreclose
against the trustor or mortgagor, the negligent wrongdoer may be held liable twice or at least
suffer overlapping damages in separate actions by the beneficiary or mortgagee and the trustor or
mortgagor. The argument is unpersuasive. When a third person tortiously damages the property,
both the mortgagor and mortgagee may sue the third party tortfeasor. Each is entitled to the
damages suffered by him. U. S. Financial properly seeks recovery of its out-of-pocket losses
incurred in performing repairs and corrective work on the property, and Home Federal properly
seeks recovery only for the impairment of its security which may be shown in the case at bench
by comparing the value of the property before injury and after injury as repaired and corrected by
U. S. Financial. If respondents/defendants are seriously concerned about the possibility of double
liability or overlapping damages, we see no reason they cannot protect themselves by moving to
have U. S. Financial and Home Federal joined as necessary parties, each in the respective causes
of action of the other.
               (ii)      Mixed decisions – May a lender sue a borrower for loss of the
                      security when the borrower‟s attorney fails to prepare the proper
                      documents? D. Ill. – No; 7th Cir. – Yes.
       7)      Damage occurring before the mortgage, American Sav. &
               Loan Asso. v. Leeds, 68 Cal. 2d 611 (1968), p. 239
               (i)       Cal. Civ. Proc. Code § 580b prohibits a deficiency judgment when
                      a mortgage or deed of trust secures the payment of purchase money
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                     on real property, but it does not prohibit mortgagees from preventing
                     mortgagors or third parties from physically harming the security or
                     from recovering damages for such harm. Such a recovery is not a
                     deficiency judgment. Since the purchase moneylender is confined to
                     his security, it is all the more important that he be allowed effectively
                     to protect it.
Facts: The mortgagee sued the seller to recover damages alleging they knew that their house and
other improvements were built on improperly filled and compacted soil. The mortgagee sued the
purchaser in the amount of cash that the purchaser received as a settlement in a suit brought by
the purchaser against the vendors for fraud.
The bank argued that the buyer owned it the funds for (1) failing to abide by the ―good condition
and repair‖ clause, and (2) the condemnation clause by way of a constructive trust. The bank
argued that the seller owed it for damaging the security. The trial court granted demurrer.
Court: AFFIRMED. The damage to the property did not result from any act of the purchaser or
others occurring after the sale, but rather by the failure properly to compact the fill before the
house and improvements were constructed. As a result, the property was worth substantially less
at the time of the sale than the mortgagee and the purchaser believed it to be worth. Each was
damaged by the fraud of the vendors: the mortgagee by lending money on the basis of inadequate
security and the purchaser by paying the remainder of the purchase price. Neither the mortgagee
nor the purchaser could properly shift his loss to the other.
Dissent by Justice Mosk: This is not a suit upon a secured debt, but a suit to prevent security
from being impaired.
       8)      Fraud, Cal. Code Civil Procedure § 726(f, g, h), p. 241
               (i)      Protection for loan brokers
(f) A loan broker may sue for damages, and exemplary damages not exceeding 50 % of the
actual damages, against a borrower based on fraud inducing the original lender to make that loan.
(g) Subdivision (f) does not apply to borrower occupied loans secured by single-family, owner-
occupied residential real property and the loan is for less than one hundred fifty thousand dollars.
(h) An action under subdivision (f) for damages shall not constitute a (money) judgment for
deficiency under the Code of Civil Procedure §§ 580a, 580b, or 580d.
[While the § 726(f, g, h) provisions protect loan brokers, lender do not get the same civil
protection, but Cal. Penal Code §532 makes a misdemeanor of making a false mortgage loan
application. 18 USC §1821 allows forfeiture of the property acquired with the funds.]
       9)      Inadvertent loss of security, p. 241
Canceling the reconveyance deed, and restoring the lender‘s lien is usually the simplest remedy
where the lender loses its security by a mistaken reconveyance to the borrower.
While cancellation is not possible when a bona fide seller buys the property, the lender may
recover for unjust enrichment from the seller who knew about the mistake, and got a bigger sales
price for selling free of the encumbrance. First Nationwide Savings v. Perry, 11 Cal. App. 4th
1657, (1992).
       10)     Toxic Waste, p. 242
Under CERCLA, if the government pays to clean a site, it gets a subordinate lien for the costs.
            a) Cal. Code Civil Procedure § 726.5, p. 242
               (i)      Election between waiver of lien or exercise of specified rights and
                     remedies
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(a) A secured lender may elect between the following where the real property security is
environmentally impaired and the borrower's obligations to the secured lender are in default:
(1)(A) Waiver of its lien against (i) any parcel of real property security that is environmentally
impaired or is an affected parcel, and (ii) all or any portion of the fixtures and personal property
attached to the parcels; and
(B) Exercise of (i) the rights and remedies of an unsecured creditor, including reduction of its
claim against the borrower to judgment, and (ii) any other rights and remedies permitted by law.
(2) Exercise of (i) the rights and remedies of a creditor secured by a deed of trust or mortgage
and, if applicable, a lien against fixtures or personal property attached to the real property
security, and (ii) any other rights and remedies permitted by law. [Continues for 4 pages.]
            b) Cal. Code Civil Procedure § 736, p. 244
A secured lender may bring an action for breach of contract against a borrower for breach of
any environmental provision made by the borrower relating to the real property security, for
the recovery of damages, and for the enforcement of the environmental provision, and that action
or failure to foreclose first against collateral shall not constitute an action within the meaning of
subdivision (a) of Section 726, or constitute a money judgment for a deficiency or a deficiency
judgment within the meaning of Section 580a, 580b, or 580d, or subdivision (b) of Section 726.
No injunction for the enforcement of an environmental provision may be issued after (1) the
obligation secured by the real property security has been fully satisfied, or (2) all of the
borrower's rights, title, and interest in and to the real property security has been transferred in a
bona fide transaction to an unaffiliated third party for fair value. [Continues for 3 pages.]
            c) Response costs and CERCLA liability, p. 245
42 USC §9601(20)(E) Exclusion of lenders not participants in management: (ii) Foreclosure.
The term ―owner or operator‖ does not include a person that is a lender that did not participate in
management of a vessel or facility prior to foreclosure, notwithstanding that the person—
(I) forecloses on the vessel or facility; and (II) after foreclosure, sells, re-leases (in the case of a
lease finance transaction), or liquidates the vessel or facility, maintains business activities, winds
up operations, undertakes a response action under section 9607 (d)(1) of this title or under the
direction of an on-scene coordinator appointed under the National Contingency Plan, with
respect to the vessel or facility, or takes any other measure to preserve, protect, or prepare the
vessel or facility prior to sale or disposition, if the person seeks to sell, re-lease (in the case of a
lease finance transaction), or otherwise divest the person of the vessel or facility at the earliest
practicable, commercially reasonable time, on commercially reasonable terms, taking into
account market conditions and legal and regulatory requirements.
        11)     Forfeited property, p. 246
                (i)     Exodus 21:28 - What about the mortgage?
If an ox gores a man or a woman, that they die: then the ox shall be stoned, and its flesh not be
eaten.
                (ii)    Statutory Civil Forfeiture for Penal Violations
Many statutes provide for property forfeiture for violations of law pertaining to controlled
substances, money laundering, racketeering, and financial fraud.
                (iii)   Innocent holder requirements
An innocent mortgagee is only entitled to compensation on proof of no involvement, no
awareness of the wrongful activity, and reasonable acts to prevent the proscribed activity.
                (iv)    Nuisance laws, Cal. Health & Safety Code § 11570: Abatement
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Every building or place used for unlawfully selling, serving, storing, keeping, manufacturing, or
giving away any controlled substance, precursor, or analog is a nuisance which shall be enjoined,
abated, and prevented, and for which damages may be recovered, whether it is a public or private
nuisance.
Chapter X.             Guarantors
   A) True Guaranties, p. 247
      1)    Rules, p. 247
         a) Cal.Civ.Code § 2787
               (i)     The distinction between sureties and guarantors is abolished.
A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of
another, or hypothecates property as security. Guaranties of collection and continuing guaranties
are forms of suretyship obligations, and except in so far as necessary in order to give effect to
provisions specially relating thereto, shall be subject to all provisions of law relating to
suretyships in general.
               (ii)    Letter of credit
A letter of credit is not a form of suretyship obligation. "Letter of credit" means as defined in
paragraph (10) of subdivision (a) of Section 5102 of the Commercial Code regardless of whether
Division 5 (commencing with Section 5101) of the Commercial Code governs the engagement.
           b) Cal.Civ.Code § 2809
The obligation of a surety must be neither larger in amount nor in other respects more
burdensome than that of the principal; and if in its terms it exceeds it, it is reducible in proportion
to the principal obligation.
           c) Cal.Civ.Code § 2819
A surety is exonerated, except so far as he or she may be indemnified by the principal, if by any
act of the creditor, without the consent of the surety the original obligation of the principal is
altered in any respect, or the remedies or rights of the creditor against the principal, in respect
thereto, in any way impaired or suspended. However, nothing in this section shall be construed to
supersede subdivision (b) of Section 2822.
           d) Cal.Civ.Code § 2845
A surety may require the creditor, subject to Section 996.440 of the Code of Civil Procedure, to
proceed against the principal, or to pursue any other remedy in the creditor's power which the
surety cannot pursue, and which would lighten the surety's burden; and if the creditor neglects to
do so, the surety is exonerated to the extent to which the surety is thereby prejudiced.
           e) Cal.Civ.Code § 2847
If a surety satisfies the principal obligation, or any part thereof, whether with or without legal
proceedings, the principal is bound to reimburse what he has disbursed, including necessary
costs and expenses; but the surety has no claim for reimbursement against other persons, though
they may have been benefited by his act, except as prescribed by the next section.
           f) Cal.Civ.Code § 2848
A surety, upon satisfying the obligation of the principal, is entitled to enforce every remedy
which the creditor then has against the principal to the extent of reimbursing what he has
expended, and also to require all his co-sureties to contribute thereto, without regard to the order
of time in which they became such.
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            g) Cal.Civ.Code § 2849
A surety is entitled to the benefit of every security for the performance of the principal obligation
held by the creditor, or by a co-surety at the time of entering into the contract of suretyship, or
acquired by him afterwards, whether the surety was aware of the security or not.
            h) Cal.Civ.Code § 2850
Whenever property of a surety is hypothecated with property of the principal, the surety is
entitled to have the property of the principal first applied to the discharge of the obligation.
       2)      Cases and Notes
            a) Heckes v. Sapp, 229 Cal. App. 2d 549 (1964), p. 248
               (i)      Cal.Civ.Code § 580b protection applies to purchasers, but not to
                    loan guarantors who are not obligees of the loan.
               (ii)     An intermediary surety is not subject to the Cal.Civ.Code § 580b
                    anti-deficiency statutes.
               (iii) Cal.Civ.Code § §580b does not bar an action against the
                    guarantors of a purchase money note secured by a junior deed of trust
                    after the holders of the senior deed of trust nonjudicially foreclose the
                    security.
Facts: Jonathan Manor, Inc. bought 50 lots secured by multiple deeds of trust on the lots, and
guaranteed by respondents (officers of Jonathan Manor, Inc.). Jonathan Manor, Inc. sold 15 lots
and made payments on the note, but defaulted. The senior deed of trust holder non-judicially
foreclosed and sold the remaining lots under the note‘s power of sale. The sold-out junior
creditor (appellant) sued the guarantor (respondent) for payment. Guarantor / respondent argued
successfully that §§ 580b and 2847 barred a deficiency judgment against them. REVERSED.
Court: Neither purpose of §580b to prevent overvaluation, nor aggregation in an economic
downturn applies to a guarantor. The guarantor‘s obligation is not secured by the purchase
property. A guarantor has protection under §580b only if the guarantor is a primary obligor of
the loan (Riddle). The court also rejected the argument that holding the guarantor liable is
indirectly a deficiency judgment of the principal since §2847 allows a guarantor to recover from
the principal. The court said that an intermediary surety is not subject to the anti-deficiency
statutes.
            b) Notes, p. 250
               (i)     Reimbursement for purchase money mortgagors
               (ii)    Non-recourse versus purchase money protection
A surety is not liable for disability of the principal. Cal.Civ.Code § 2810.
A surety is not exonerated by the discharge of his principal by operation of law.
               (iii)   Fair value protection got guarantors
A lender who brings a judicial foreclosure may join the guarantor as a defendant.
            c) Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968), p. 251
               (i)     The one-action rule is inapplicable to a suit by a secured creditor
                    against a guarantor, endorser or other surety.
               (ii)    A guarantor is bound by the one-action rule.
Facts: Bess Gradsky signed a Union Bank promissory note secured by a first deed of trust for a
construction loan. Max Gradsky (no relation to Bess stated) guaranteed the note with a waiver
for the bank‘s right to pursue guarantor payment without the bank‘s action first against Bess, or
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the security. When Bess defaulted, Union Bank foreclosed and executed a Trustee Sale. A
deficiency remained after the sale of $11,565. Union Bank sought the deficiency from Max
Gradsky. The trial court granted Gradsky‘s demurrer. Union Bank appealed. AFFIRMED.
Court: At the time of Bess's default the Bank had three options: (1) It could have brought an
action for judicial foreclosure, joining Max and Bess; (2) it could have sued Max upon his
guarantee for the full amount of the unpaid balance of the principal obligation without
proceeding against either Bess or the security; or (3) it could have realized on the security by
way of a nonjudicial sale.
               (iii) §580d permits deficiency judgments only in those cases in which
                    the creditor allows the debtor the opportunity of exercising his right of
                    redemption.
In the first instance, had the Bank elected the judicial foreclosure remedy, no § 580d problem
would have existed, because the Bank could have obtained a deficiency judgment against Bess,
and she would have had a statutory right of redemption.
               (iv) Section 580d cannot be stretched to shield a guarantor from
                   liability to the Bank on his guarantee before resort to the security.
In the second instance, had the Bank sued Max on the guarantee, § 580d would not have
insulated Max from liability for the unpaid balance of the debt. The action is on the guarantee,
not on the note, not the security, and in absence of either judicial or nonjudicial foreclosure of
the security, a "deficiency" does not exist.
               (v)      A guarantor may waive the principal‟s burden protection of
                     § 2809, and the security requirement protection of § 2845.
In the third instance, Cal.Civ.Code §§ 2809 & 2845 provide that a surety's obligation must not be
more burdensome than that of the principal obligor, and a surety has the right to require the
creditor to exhaust his remedies against the debtor and any security before he pursues the surety
or guarantor. Max specifically waived the benefits of those sections in his guarantee agreement
in the Bank's favor. That waiver effectively foreclosed him from asserting those statutory rights
against the Bank.
               (vi) An obligor cannot waive the anti-deficiency protections of Code
                   Civ. Proc., §§ 580a-580d.
In contrast, the principal obligor cannot waive the provisions of the anti-deficiency legislation
because those provisions are not solely for the debtor's benefit but are also for the protection of
the public. Freeland v. Greco 45 Cal.2d 462, 467 (1955).
               (vii) A guarantor who pays the obligation of another is equitably
                   subrogated to all of the rights and to the security formerly held by the
                   obligee against the principal obligor. (Civ. Code §§ 2848, 2849), and is
                   as subject to the anti-deficiency rule as the creditor.
The guarantor (Max), like the original creditor (Union Bank), has an election whether to pursue
judicial foreclosure, thereby obtaining a deficiency judgment, or a nonjudicial foreclosure,
thereby foregoing a deficiency judgment but cutting off the debtor's (Bess) right of redemption.
The guarantor may obtain by subrogation the right to pursue either judicial or nonjudicial sale of
the security. If the guarantor elects judicial sale, the guarantor can obtain a deficiency judgment
against the debtor. However, the guarantor can stand no better against a debtor than could the
creditor with respect to the rights acquired by subrogation. If the guarantor elects a nonjudicial
remedy, § 580d of the Code of Civil Procedure bars a deficiency judgment against the debtor.
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               (viii) Cal.Civ.Code § 580d bars recovery by a creditor of the unpaid
                   balance on the note from a true guarantor following the creditor's
                   nonjudicial sale of the security.
If the Bank elects nonjudicial sale of the security, the respective positions of the parties are
substantially different from those existing after exercise of the other options. If Max is required
to pay the Bank the unpaid balance of the note, he does not acquire any rights from the Bank by
subrogation, because the Bank no longer has any rights against Bess, and no security remains
after the sale, and Bess has no power of redemption. If Max, the guarantor, can successfully
assert an action in assumpsit against Bess for reimbursement, the obvious result is to permit the
recovery of a "deficiency" judgment against the debtor following a nonjudicial sale of the
security. Because of section 580d neither the Bank nor the guarantor can recover a personal
judgment from the debtor after a nonjudicial sale of the security. The result follows not because
§ 580d prevents recovery of a deficiency judgment against the guarantor, but because the section
prevents a deficiency judgment by the guarantor against the debtor.
               (ix) The creditor‟s exercise of an election of remedies destroys the
                   guarantor's subrogation rights against the principal debtor, and
                   estops the creditor from recovering from a true guarantor.
No liability, direct or indirect, should be imposed upon the debtor following a nonjudicial sale of
the security. To permit a guarantor to recover reimbursement from the debtor would permit
circumvention of the legislative purpose in enacting section 580d.
               (x)       A guarantor may waive his defense to the creditor's action to
                      recover any deficiency after a nonjudicial sale.
Since Max's rights in this respect do not rest on §580d itself, as we have previously pointed out,
he can by express contract or by his subsequent actions either waive or be estopped from raising
his defense to the creditor's action to recover any deficiency after a nonjudicial sale.
           d) Notes, p. 254
               (i)       Purchase money mortgages
Gratsky applies only to construction loans since 580b prohibits deficiency judgments for
purchase money loans on 1-4 residence purchases.
Gratsky might not apply in other non-purchase loans if some for other reason the guarantor has
no recourse against the debtor.
               (ii)      Secured guarantees
Indusco Management v. Roberson: foreclosure on the guarantor releases the guarantor,
A guarantor cashier‘s check does not serve as further security to bar a deficiency judgment
against the guarantor.
A cashed-out guarantor must sue the debtor before the creditor‘s trustee sale recovery his
guarantee.
           e) Mariner’s Savings & Loan Ass’n v. Neil, 22 Cal. App. 3d 232
              (1971), p. 256
Facts: Jesse Neil sought a loan to buy furniture and pay community debts. Her husband Edmund
guaranteed the note and deed of trust on her separate real property that Jesse gave to Mariner‘s
Savings & Loan Ass‘n. Jesse defaulted, and Mariner‘s exercised its power of sale under the trust
deed and took action on Neil‘s guarantee. Edmund argued that he was not a "true guarantor" but
a principal obligor, and shielded by §§ 580a & 580d. He lost, and appealed. AFFIRMED.
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Court: Neil argued that Mariner‘s knew that Neil and his wife made the original loan application,
and that the application was for existing and anticipated community debts, so his guarantee was
nothing but a sham attempt to circumvent the statutes prohibiting deficiency judgments.
Section 580a is a procedural statute for deficiency judgments after a trustee sale, and has to do
solely with actions for recovery of deficiency judgments on the principal obligation and has no
application to an action against a guarantor. A guarantor has protection under §580b only if the
guarantor is a primary obligor of the loan (Riddle).
               (i)       A guarantor may by express contract or act, or by subsequent
                      notice and inaction either waive or be estopped from raising a 580d to
                      the creditor's action to recover a deficiency after a nonjudicial sale.
The contract of guarantee here contains a number of the usual waivers. Specifically it states that
defendant waives "any defense based on §§ 580 and 726 of the Code of Civil Procedure of the
State of California, or either of them. Section 2953 lists statutory rights of which waiver by a
debtor are contrary to public policy. Section 2953 does not list section 580d. About one week
before the trustee sale, Mariner‘s gave Neil an assignment of the promissory note and trust deed
subject to his payment of all sums due under the guarantee. Neil had ample notice of the trustee
sale and the opportunity to preserve all of his rights by acquiring the note and trust deed. Neil did
not accept the assignment, thus by reason of explicit waivers and conduct which implies waiver
Neil cannot claim that Mariner‘s was estopped from securing its judgment. Neil showed a
complete disinterest in any right of subrogation.
           f) Notes, p. 257
               (i)       Other states – guarantor protections also apply
Nevada ruled that the 3-month statute of limitations applies to guarantors. The Ninth Circuit
ruled that Nevada‘s fair value hearing laws applies to guarantors. New York ruled that fair value
hearing laws apply to guarantors of multiple securities.
               (ii)      Proposals for change
One proposal is to allow a guarantor to present fair value evidence to limit liability, but the court
ruled this is a legislative matter, not a judicial one.
               (iii)     Waivers
The Gradsky court ruled Max‘s waiver ineffective, and later courts followed that line, until the
legislature passed Cal.Civ.Code § 2856, providing waivers of Cal.Civ.Code §§ 2787 to 2855,
and Cal. Code Civil Procedure §§ 580(a),(b),(d) and §726, but still denies waivers to loan
guarantees of a 1-4 family purchase money loan security occupied by a debtor to the loan.
Cal.Civ.Code § 2856(e).
               (iv)      Community Property
Community Property is no longer immunized from liability of contracts by either spouse. Cal.
Fam. §910(a). Spousal separate property however is immunized. Cal. Fam. §913.
               (v)       Community Property & Joint Tenancy Mortgages
The share of a non-signing non-spousal joint tenant is not subject to debt of the indebted and
secured joint tenant, and so the security of the joint tenancy vanishes if the indebted and secured
joint tenant dies before the creditor forecloses.
               (vi)      Creditor disclosures
               (vii)     Mortgage guarantee insurance
Credit life insurance is a life insurance to pay debts on the death of the insured. FHA may insure
100%, but it is expensive and cumbersome.
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A private mortgage insurer (PMI is not a ―mortgage insurer‖) may guarantee 30% of the secured
debt, when the security is a first lien on real property. Cal. Ins. §12640.09. If the borrower
defaults, the insurer has the option to either pay the 30%, or pay the entire mortgage and take
over the collateral. Lenders must notify borrowers of their right to cancel the insurance.
Cal.Civ.Code § 2954.6. There are procedural hurdles to cancellation. Cal.Civ.Code § 2954.7,
although 12 USC 4900 et. seq. easies the process for balances of 80% of original home value or
less.
               (viii) Letters of credit, p. 260
A financial institution may serve as guarantor by issuing a line of credit under Article 5 of the
Commercial Code.
               (ix)    Cal. Civ. Proc. § 580.5(b) No implications to letters of credit
With respect to an obligation which is secured by a mortgage or a deed of trust upon real
property or an estate for years, and which is also supported by a letter of credit, neither the
presentment, receipt of payment, or enforcement of a draft or demand for payment under the
letter of credit by the beneficiary of the letter of credit nor the honor or payment of, or the
demand for reimbursement, receipt of reimbursement or enforcement of any contractual,
statutory or other reimbursement obligation relating to, the letter of credit by the issuer of the
letter of credit shall, whether done before or after the judicial or nonjudicial foreclosure of the
mortgage or deed of trust or conveyance in lieu thereof, constitute any of the following.
(1) An action within the meaning of subdivision (a) of § 726, or a failure to comply with any
     other statutory or judicial requirement to proceed first against security.
(2) A money judgment for a deficiency or a deficiency judgment within the meaning of §§ 580a,
     580b, or 580d, or subdivision (b) of § 726, or the functional equivalent of any such judgment.
(3) A violation of §§ 580a, 580b, 580d, or 726.
               (x)     Cal.Civ.Code § 580.7(b) When letters of credit are unenforceable
No letter of credit shall be enforceable by any party in a loan transaction in which all of the
following circumstances exist: (1) The customer is a natural person. (2) The letter of credit is
issued to the beneficiary to avoid a default of the existing loan. (3) The existing loan is secured
by a purchase money deed of trust or purchase money mortgage on real property containing one
to four residential units, at least one of which is owned and occupied, or was intended at the time
the existing loan was made, to be occupied by the customer.
   B) Sham Guaranties (under 580d)
        a) River Bank America v. Diller, 30 Cal. App. 4th 1400 (1955), p. 262
Facts: Sanford and Helen Diller were trustees of DNS Trust, a revocable, family trust that owned
all the stock of Prometheus Development. River Bank made two construction loans ($36 MM &
$2 MM) to Prometheus‘ Hacienda Gardens for a 456-unit apartment complex in Pleasanton (now
called Archstone Hacienda, 5650 Owens Drive at Rosewood Drive) on land owned by
Prometheus Development. The properties were the security for the first and second deeds of trust
respectively, with separate notes for each loan. Sanford insisted on a non-recourse clause in the
notes. As addition security, the Dillers, and Prometheus Development guaranteed 20% ($7.6
MM) of the aggregate construction loan. Hacienda completed the project in late 1988, and
defaulted in 1991 (a victim of the Bush I Gulf War and recession.) By the time of foreclosure,
the debt had escalated to $42.9 MM. The property sold for $30 MM, leaving a $12.9 MM
deficiency. River Bank sued the Dillers, and Prometheus Development for the deficiency. The
Dillers, and Prometheus Development argued that their guarantee was a burden under
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Cal.Civ.Code § 2809, and was an unenforceable sham guaranty, and won summary judgment.
River Bank appealed.
Court:
Issue I: Burdensomeness of the guarantee.
"The obligation of a surety must be neither larger in amount nor in other respects more
burdensome than that of the principal; and if in its terms it exceeds it, it is reducible in proportion
to the principal obligation." Cal.Civ.Code § 2809. The trial court concluded that the obligation
purportedly assumed by the guarantors under their 'guaranties' was 'larger in amount or in other
respects more burdensome than that of the principal and that the Dillers and Prometheus
Development had not waived their §2809 defense. We conclude that the guarantors waived any
defense based on § 2809 and reverse the trial court on this ruling.
Issue II: Sham Guarantee Defense.
The next question is whether the guarantee by the Dillers, and Prometheus Development was a
sham, and therefore unenforceable. During the course of drafting this final set of documentation,
counsel for River Bank insisted that in order to render 'enforceable' the 'guaranty' being given by
Prometheus, a new 'borrower' should be brought into existence. That is, instead of creating a
general partnership consisting of Prometheus and River Bank, as the parties had originally
agreed to do, or even lending money to a 'borrower' entity of which Prometheus was the general
partner, River Bank now required that the 'borrower' be a limited partnership, of which the
general partner was an entity other than Prometheus. Faced with that requirement, Prometheus
suggested that Prom XX be inserted as such new general partner. So far as [Sanford Diller knew]
River Bank never inquired about the financial standing of Prom XX during the loan application
process, or even up to the closing of the 'loan,' ... Rather, River Bank relied upon the extensive
financial statements which it required to be provided reflecting the financial strength of
Prometheus, the DNS Trust, Helen Diller and [Sanford Diller], since it was these persons
(nominally the 'guarantors') to which River Bank at all times actually looked as the 'borrowers.'"
        Had the Dillers themselves been the general partners of Hacienda, and had they attempted
to guarantee Hacienda's debt, there is no question such guaranty would have been a sham.
Instead, the general partner of the primary obligor (Hacienda) is a corporation (Prom XX) the
Dillers fully own and control. In summary adjudication, this is a distinction without a difference.
               (i)      The inquiry is whether the purported debtor is anything other than
                     an instrumentality used by the individuals who guaranteed the
                     debtor's obligation, and whether such instrumentality actually
                     removed the individuals from their status and obligations as debtors.
River Bank subverted the purpose of the antideficiency laws "by making a related entity the
debtor while relegating the principal obligors to the position of guarantors." River Bank never
inquired about the financial standing of (the debtor) Prom XX, Hacienda's nominal general
partner. Instead, River Bank relied upon extensive financial statements reflecting the financial
strength of the guarantors: Prometheus Development, the DNS Trust, Helen Diller and Sanford
Diller, since it was these persons to which River Bank at all times actually looked to as the
"borrowers." Nor is it conclusive, as River Bank contends, that the general partner in this case
was a long-standing corporation that adhered to all formalities. The bank advised or required
them instead to have a corporation take title, and required two corporate officers to execute
personal guaranties. We conclude that the Dillers have raised a triable issue of fact concerning
their "sham guaranty" defense.
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           b) Notes, p. 265
               (i)       Guaranties of one‟s own debt
The effective defense of the guarantor seeking to deny obligation to the debt, is for the guarantor
to admit that the guarantor owes the debt in the role as a debtor!
               (ii)      Guaranty by general partner of general partner of debtor
The guarantee is invalid under 580d when the guarantor is an individual partner of the general
partner in the limited liability partnership.
   C) Hidden Guaranties, p. 265
        a) Mead v. Sanwa Bank California, 61 Cal. App. 4th 561 (1998), p.
           265
               (i)       If a creditor knows that its obligors have agreed between
                      themselves that one will be the principal and the other will be the
                      surety, the latter is bound to the creditor as a surety only, even though
                      he or she appears from the written instruments to be a principal.
Facts: The Meads as trustees to a family trust bought undeveloped property and leased it to the
seller‘s corporation (―Cooley‖), of which the seller was the general partner. The lease stated that
the leasehold would be subordinate to a future construction note, which Cooley obtained as sole
debtor from Sanwa Bank. However, both Cooley, and the Meads as trustees to the family trust
signed the deed of trust, which encumbered both Cooley‘s leasehold, and the Meads‘ fee interest
in the property. The deed of trust also left the Meads with ―no personal liability for Cooley to
Sanwa.‖ Sometime later, Cooley defaulted on both the leasehold, and the note. Sanwa and the
Meads filed suits against Cooley, but extended or dismissed the actions for extensions on
Cooley‘s promissory note. After the extensions expired, Sanwa started a new foreclosure
proceeding, but assured the Meads that it would proceed only against Cooley's leasehold interest.
Sometime thereafter, Sanwa reversed itself and informed the Meads that it intended to foreclose
on its security interest in the fee as well as the leasehold. The Meads demanded Sanwa exhaust
all remedies against Cooley prior to exercising any right under the deed of trust against the
Meads and terminate the pending foreclosure proceedings to the Meads' fee interest in the
property. The trial court granted Sanwa‘s demurrer, the Meads appealed. [AFFIRMED on
procedural grounds.]
Court:
Sanwa argued that the Meads were obligors to the debt, not guarantors, as shown by their
hypothecation as trustee-owners of the property. The court rejected the argument in that
hypothecation is not solely a role of a debtor.
The Meads argued that (1) only Cooley signed the note; (2) the deed of trust recites that it
secures the performance by Cooley of his obligations under the construction loan agreement and
the note; (3) the certificate of authority given by the Meads to Sanwa reiterates that the deed of
trust is given to secure repayment of Cooley's obligations; (4) the deed of trust recites that the
Meads shall have no personal liability for the payment of Cooley's obligations; (4) Sanwa
excluded the Meads from negotiations concerning both the initial terms of the loan and its
subsequent extensions; (5) Sanwa extended the loan three times without the Meads' knowledge
or consent; so Sanwa considered the Meads to be third parties rather than borrowers or principal
obligors.
               (ii)      One who appears to be a principal, whether by the terms of a
                      written instrument or otherwise, may show that he is in fact a surety,
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                      except as against persons who have acted on the faith of his apparent
                      character of principal. It is not necessary for him to show that the
                      creditor accepted him as surety. Cal.Civ.Code § 2832
Prior law required the surety prove the creditor agreed to treat the party as a surety. The law now
provides that the agreement between the debtor and creditor parties applies as known to the
creditor. The Meads pleaded that they were sureties of Cooley, and the facts presented are
sufficient to support their allegation that they are bound to Sanwa as sureties only. However, the
Meads did not demonstrate that their complaint pleads sufficient facts to constitute a cause of
action against Sanwa.
           b) Notes, p. 268
               (i)       Business motives
As Zwicker first owned the property, he could have applied for the loan on his own with the
property securing the note (which it ultimately did). However, by making the sale-leaseback of
the property, Zwicker had both the sale proceeds, and the loan as financial backing for the
project.
               (ii)      Owner as second trust deed holder
By subjecting their fee to the deed of trust, the Meads became holders of a second deed of trust
on the property, and subject to becoming sold-out juniors (as was the result.)
Chapter XI.              Multiple Security
   A) Blanket Liens, p. 269
      1)    Order of Sale, p. 269
         a) There are three ways to use multiple assets to secure a debt.
               (i)     Break the debt into pieces with one deed of trust and note for each
                    asset.
               (ii)    Have one note for the entire debt secured by one deed of trust
                    covering several parcels (blanket lien).
               (iii) Have one note for the entire debt secured by several deed of trust
                    covering several parcels.
           b) Cal.Civ.Code § 2924g(b) Private sale under a single deed of trust
When the property consists of several known lots or parcels they shall be sold separately unless
the deed of trust or mortgage provides otherwise. When a portion of the property is claimed by a
third person, who requires it to be sold separately, the portion subject to the claim may be thus
sold. The trustor, if present at the sale, may also, unless the deed of trust or mortgage otherwise
provides, direct the order in which property shall be sold, when the property consists of several
known lots or parcels which may be sold to advantage separately, and the trustee shall follow
that direction. After sufficient property has been sold to satisfy the indebtedness no more can be
sold. If the property under power of sale is in two or more counties the public auction sale of all
of the property under the power of sale may take place in any one of the counties where the
property or a portion thereof is located.
           c) Cal. Code Civil Procedure § 701.570
(d) Property shall be sold separately or in such groups or lots as are likely to bring the highest
price. The judgment debtor may request that the property be sold separately or together and may
request that the property be sold in a particular order. If the judgment debtor is not present at the
sale, the request may be made in writing and delivered to the levying officer prior to the sale.
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The levying officer shall honor the request if, in the opinion of the levying officer, the requested
manner of sale is likely to yield an amount at least equal to any other manner of sale or the
amount required to satisfy the money judgment. The levying officer is not liable for a decision
made in good faith under this subdivision.
(e) After sufficient property has been sold to yield the amount required to satisfy the money
judgment, no more shall be sold.
           d) Provision Guidance
Most deeds of trust state that, ―Trustee shall sell said property, either as a whole or in separated
parcels, and in such order as it may determine, at public auction to the highest bidder.‖
           e) Commonwealth Land Title Company v. Kornbluth, 175 Cal. App.
              3d 518 (1985)
               (i)     Cal.Civ.Code § 2899, Order of lien sale on multiple properties
Where one has a lien upon several things, and other persons have subordinate liens upon, or
interests in, some but not all of the same things, the person having the prior lien, if he can do so
without risk of loss to himself, or of injustice to other persons, must resort to the property in the
following order, on the demand of any party interested:
1. To the things upon which he has an exclusive lien;
2. To the things which are subject to the fewest subordinate liens;
3. In like manner inversely to the number of subordinate liens upon the same things; and,
4. When several things are within one of the foregoing classes, and subject to the same number
of liens, resort must be had on this order.
(1.) To the things which have not been transferred since the prior lien was created;
(2.) To the things which have been so transferred without a valuable consideration; and,
(3.) To the things which have been so transferred for a valuable consideration in the inverse
order of the transfer.
Facts: The original plaintiffs in this action brought an action against Kornbluth seeking damages
for fraud, trespass, intentional infliction of emotional distress, and to quiet title to certain real
property. The superior court entered a default judgment ($86K) for the plaintiffs. Kornbluth
apparently held 7 properties, on which the plaintiffs recorded five abstracts of judgment. When
the plaintiffs tried to execute on their judgment, they discovered that Kornbluth had transferred
to others all of the real property he owned on the date of judgment. The plaintiffs sold one
property for $54K, and extracted an amount from another owner owned to Kornbluth to lift that
lien. The plaintiffs then lifted another lien in exchange for information on Kornbluth‘s location,
and other assets belonging to him, which the plaintiffs on which the plaintiff were unable to levy.
The court applied only the first sale price to the judgment, and the plaintiffs sold the rest of their
interests in the judgment to Commonwealth. Commonwealth then sought to sell other parcels
Kornbluth had owned, which were by then owned by other persons and separately encumbered.
The trial court ordered the sale, and the order of sale. The owners appealed.
Court: The issues were I – the order of sale of the properties, and II – whether the plaintiff and
Commonwealth waived full value towards the judgment of the properties it released for
information on Kornbluth.
               (ii)    Unencumbered properties are sold first. (Cal. Civ. Code § 2899(2))
The owners argue that the 3rd Avenue Property, which was owned by Kornbluth at the time the
abstracts were recorded and which has no liens subordinate to the abstracts, must be executed
upon first. Commonwealth asserts that Kornbluth never owned this property but rather, was
owned by a relative of Kornbluth with the identical surname. Only the trial court on remand may
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resolve this factual dispute. If the trial court finds that this property was indeed owned by the
judgment debtor at the time the abstracts were recorded, it must order that this unencumbered
property be sold prior to any sale of the presently encumbered properties which were previously
owned by Kornbluth, provided this can be done without risk of loss to Commonwealth. (See Civ.
Code, § 2899, subd. 2.)
                (iii) Encumbered properties are sold in the order of not transferred,
                     transferred without consideration, and lastly transferred with
                     consideration. (Cal. Civ. Code § 2899(4)).
The owners disagreed whether other properties were unencumbered by liens. The court ordered
the trial court to determine whether the properties were encumbered, and if not, sold with the
first set, or if encumbered, sold in the order specified in section 2899, subdivision 4.
                (iv) Subordinated properties transferred with consideration are sold if
                    the current owners had notice of the judgment, in reverse order to
                    when the judgment debtor alienated the properties, and not according
                    to the order in the properties were granted to the current owners.
The owners disagreed whether the order of sale of like categories of property was in forward
order of transfer (oldest first by the debtor‘s transfer) or inverse order (the most recent sale first.)
The traditional rule or doctrine of inverse order of alienation provides that where a portion of
lands subject to a lien has been alienated, the grantees may insist that the land retained by the
grantor or original owner be sold first to satisfy the lien. Where the original owner has alienated
all of the land subject to the lien in separate parcels successively, the parcels alienated or
encumbered are sold in the reverse order of alienation, provided, however, that the subsequent
purchaser or encumberancer had notice of prior conveyances or encumbrances.
On remand, the trial court … order … the property last alienated by Kornbluth ... sold first
(provided that the property was acquired with notice of the previous conveyances from
Kornbluth); next the property alienated just before that should be sold, and so on, until the
judgment lien has been satisfied in full.
II – Full value waiver
Commonwealth, the judgment creditor, had actual knowledge that Kornbluth, the judgment
debtor, had conveyed all of his real property to third parties. Commonwealth did not seek the
consent of any of the other owners of property encumbered by the judgment lien when it released
(1) the Sunburst Property from the lien in exchange for information from the then-owner of the
property, or (2) for payment of a "small amount," a sum equal to the balance due from the then-
owners to Kornbluth on the purchase contract.
                (v)      Following the inverse transfer rule, if one holding a prior or
                      paramount lien covering the property (1) with knowledge of a prior
                      conveyance by the debtor releases (2) the property which is primarily
                      chargeable with the debt, (3) without consent of those interested in
                      property which is only secondarily liable, the latter may insist that the
                      value of the property so released be credited on the debt secured by the
                      prior or paramount lien.
The reason for the rule requiring such credit is: "if the person interested in the property
secondarily liable could not claim such credit when the primary property is released without his
consent, he would, in such a case, be deprived of all benefit of the rule entitling him to have the
primary property first exhausted.‖ Blood v. Munn, 155 Cal. 228, 234 (1909). Following the
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inverse transfer rule, if the trial court finds that Kornbluth sold the "released properties" after he
sold the properties he still owned at the time the abstracts of judgment were recorded, the value
of the released properties must be credited against the amount owing on the judgment lien.
            f) Notes, p. 275
               (i)       Subsequent mortgages by the grantees
What if a grantee of a property sold later by the debtor has more encumbrances (2922(2)) than a
property sold earlier by the debtor (2922(4)(3)).
               (ii)      Which property bears the primary obligation
To invoke the inverse order of alienation rule, a purchaser of property encumbered by a pre-
existing lien must have accepted the deed with notice that the mortgagor‘s (debtor‘s) remaining
property has the primary obligation to pay the debt. Only then does the previously transferred
property become ‗surety‘ to the debt. Irvine v. Perry, 199 Cal, 352 (1897).
               (iii)     Cal.Civ.Code § 3433, Special Relations of Debtor And Creditor
Where a creditor is entitled to resort to each of several funds for the satisfaction of his claim, and
another person has an interest in, or is entitled as a creditor to resort to some, but not all of them,
the latter may require the former to seek satisfaction from those funds to which the latter has no
such claim, so far as it can be done without impairing the right of the former to complete
satisfaction, and without doing injustice to third persons
               (iv)      Cal.Civ.Code § 2912, Extinction of Liens
The partial performance of an act secured by a lien does not extinguish the lien on any part of the
property subject thereto, even if it is divisible.
       2)      Releasing Parcels from the Blanket Lien
            a) Yackey v. Pacifica Development Co., 99 Cal. App. 3d 776 (1979),
               p. 275
Facts: The Yackeys agreed to sell real property to Pacifica. When Pacifica refused to close
escrow, the Yackeys sued. The trial court held that a contract existed, and would have ruled for
the Yackeys, as Pacifica had not performed a single step in the escrow instructions, but the trial
court held that the release clause in the trust deed was so uncertain as to make the entire
agreement void under law and equity. The release clause stated, ―Provided the trustor is not then
in default hereunder or with respect to the payments due on note secured hereby, at his request, a
partial reconveyance may be had and will be given from the lien or amount to apply on the
principal of said note based on the rate of $2500.00 for each acre to be so reconveyed.‖
Court: REVERSED – Judgment for the Yackeys
               (i)       When by mutual consent of the buyer and seller, the terms of such
                      clauses are to be determined at a later date --in effect an agreement to
                      agree--will the contract be deemed void from its inception.
The trial court‘s reliance on White Point v. Herrington, an agreement to agree case, is misplaced
since the White Points did not approve the clause at issue. Furthermore, the necessity of a future
agreement on limited phases of the transaction does not prevent a binding contract on acceptance
since, if the parties cannot agree on those phases, each may force the other to accept the
determination of a court of equity. Also, a release clause will not be deemed uncertain merely
because the parties delegate to the buyer or to the third party lender the right to determine the
property to be released or the power to detail terms of construction in permanent loans. The sales
agreement does not contain an agreement to agree. To the contrary, the precise wording of the
actual release clause to be so included was set forth in haec verba in the instructions.
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               (ii)       A reserve determination by the seller is not unenforceable for
                      uncertainty, but a reserve determination by the buyer is unenforceable
                      if the determination does not sufficiently protect the seller's security
                      from undue risk.
Similarly, if the determination is reserved by or given to the seller, a contract is not thereby
rendered unenforceable for uncertainty, but if the determination is reserved by or given to the
buyer, and it does not contain terms that will sufficiently protect the seller's security from undue
risk, the clause and/or the entire contract may be vulnerable to the claim that it is not, as to the
seller, just and reasonable.
               (iii) A claim of unfairness may be asserted only in an action for
                    specific performance, and not by the party responsible for such
                    uncertainty or unfairness.
It is not available to the party defendants here in an action for damages for breach of contract.
Only the person as to whom the contract is unjust and unreasonable may assert it only as a
defense. The Yackeys have the right to claim that the provision for release was unjust. If there is
an uncertainty or unfairness in the release clause it may not be asserted by the party who was
responsible for such uncertainty or unfairness. In this case the defendants were responsible for
the precise language of the release clause. The Yackeys have the right to avoid the contract if the
defendants sought specific performance. The Yackeys would feel prejudice if any that might
flow from the exercise of the release. Their security would suffer if defendants sought to enforce
their rights under the clause in an unjust or unreasonable fashion.
               (iv) A release clause is not unfair for a possibility of being used
                   unfairly.
The discussions thus far have been based upon the premise of an uncertain release clause. This is
not the fact here. The release clause language here is clear, unambiguous. It provides in simple
terms that for each $2,500 paid on the principal balance on the promissory note, one acre of the
conveyed land be released from the lien of deed of trust securing the note. The partnership
argues uncertainty arises from what remains unstated in the clause, not from its plain, clear
meaning. They argue the lack of language that would allow the buyers to select choice portions
of land for release and leave the seller's security including only the undesirable parts. They wish
to speculate upon their own future inequitable approach to obtaining releases, from a record
absent of such evidence. If the seller is entitled to be relieved from specific performance of the
release agreement it must be because it would not be just or reasonable to specifically enforce the
agreement and the buyer should be entitled to restitution or damages. The escrow agreement here
was not void. It did not contain an agreement to agree in the future. The particular release clause
is certain but perhaps unfair, or capable of being used unfairly as to the seller. However, such
potential unfairness to the seller does not render the entire contract void for uncertainty.
           b) Notes, p. 278
               (i)       Eldridge v. Burns, 76 Cal.App.3d 396 (1978) – release, or refund
Burns bought land from Eldridge on a release contract. Eldridge then refused to release any
acreage properties because Burns had not paid the property taxes on them. The trial court agreed
with Eldridge, but the Court of Appeals reversed on grounds that the tax issue was
inconsequential to the release agreement. The trial court also agreed with Eldridge that Burn‘s
proposed release of a corridor of land was unconscionable for leaving Eldridge with only steep
hills and canyons, as inadequate security for the rest of the property. Though correct in this
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ruling, the court erred by not allowing Burns to either accept a proper mix of acreage, or
restitution of his payments to Eldridge, less unpaid taxes and assessments. Eldridge could also
have conducted a new sale and apply those proceeds to the taxes and note. Lastly, Eldridge could
have let the court select the acreage to release.
               (ii)      Statutory Regulation - Cal. Bus. Prof. Code § 11013, et. seq.
A blanket encumbrance shall be considered to mean a trust deed or mortgage or any other lien or
encumbrance, mechanics' lien or otherwise, securing or evidencing the payment of money and
affecting land to be subdivided or affecting more than one lot or parcel of subdivided land, or an
agreement affecting more than one such lot or parcel by which the owner or subdivider holds
said subdivision under an option, contract to sell, or trust agreement.
It shall be unlawful for the owner … to sell or lease lots or parcels within a subdivision that is
subject to a blanket encumbrance unless there exists in such blanket encumbrance or other
supplementary agreement a provision, hereinafter referred to as a release clause, which by its
terms shall unconditionally provide that the purchaser or lessee of a lot or parcel can obtain legal
title or other interest contracted for, free and clear of such blanket encumbrance, upon
compliance with the terms and conditions of the purchase or lease. §11013.1.
               (iii)     Rights of Juniors
May a subdivider of consolidated holdings and the construction lender negotiate a release
agreement that would be binding on the junior lienors? The development is what enticed the
juniors to sell in the first place, so frustration of the development over the release is contrary to
the purpose of sale. Tower, Inv. v Peoples Bank, 97 Cal. Rptr. 559 (1971) not released for
publication.
   B) Fair Value and Anti-Deficiency Protection
        a) Dreyfuss v. Union Bank of California, 24 Cal. 4th 400 (2000), p.
            281
Facts: The borrowers took a purchase and development loan from the Bank of California secured
by the development property. Under default, the borrowers gave two other deeds under a
modified loan agreement. After subsequent default, the Bank executed non-judicial foreclosure
and sold all three properties to recover its loan. The Bank did not seek deficiency judgments. The
borrowers sued on allegations that the sales were in effect deficiencies as the Bank did not seek
fair market value of the property, or seek to credit such amounts to the debt. The debtors sued,
lost, and appealed.
Court: AFFIRMED for the Bank.
               (i)        Code of Civil Procedure §§ 580a and 580d are not implicated when
                      a creditor merely exercises the right to exhaust all of the real property
                      pledged to secure an obligation.
There is not a requirement under Code of Civil Procedure section 580a that a creditor, after
foreclosing on one item of real property security, obtain a judicial determination of any unpaid
balance remaining on the debt before resorting to additional security. By its express terms, the
statute is concerned only with actions to recover deficiency judgments after the security is
exhausted. The giving of additional security for a note gives the right to exhaust such security.
               (ii)      Appraisal and judicial determination of fair market value are not
                      required as part of nonjudicial foreclosure of real property securing a
                      loan.
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Nor is there any requirement that the sales price approximate the fair market value of the
property. Mere inadequacy of price is not sufficient ground for setting aside a trustee‘s sale
legally conducted, unless the price is so low as to shock the conscience or it raises a presumption
of fraud or unfairness.
               (iii) Successive foreclosure sales of separate items of real property
                    collateral do not require a fair value exception.
Plaintiffs argue that application of the fair market value provisions of Code of Civil Procedure
section 580a is required to avoid a windfall recovery to the creditor. They argue that without
such protection, a borrower who secures a debt with items of multiple security runs the risk that
all of it will be sold to satisfy the obligation, even if the fair market value of one item of security
is sufficient to satisfy the debt. The same balance of considerations applies in the event of a
single nonjudicial foreclosure and a series of foreclosures. There is always the theoretical
possibility that the creditor could eventually sell the real property collateral for an amount greater
than its successful credit bid and the amount of the outstanding debt.
               (iv) The §580a provisions apply only to creditors seeking a deficiency
                   judgment.
We are not persuaded by plaintiffs' proposal that we construe Code of Civil Procedure § 580a in
multiple security situations to permit a borrower who believes the creditor did not credit the fair
value of property recovered in prior sales to set aside a subsequent trustee's sale or provide for
restitution of an unjust recovery, or permit a debtor to go to court to challenge the price obtained
at a nonjudicial foreclosure sale and have subsequent sales enjoined if the sales to date have
satisfied the debt based on a fair market valuation. Such an undertaking is a matter for
legislative, not judicial, action.
               (v)      §580d is applicable only when a money judgment is sought against
                     the debtor for the balance due on a note secured by a deed of trust.
Plaintiffs assert that the bank improperly demanded that the Clinton property and Lot 66 be
pledged as security for any deficiency in the event that foreclosure of the Peppertree deed of trust
did not satisfy the balance of the debt. In lieu of any case law in point, they cite to commentary
in a treatise criticizing Hatch v. Security-First Nat. Bank, supra, 19 Cal.2d 254, and suggesting
that there is little "significant difference between selling additional security and recovering a
deficiency judgment." (Bernhardt, Cal. Mortgage and Deed of Trust Practice (Cont.Ed.Bar 2d ed.
1990) § 8.5, p. 399.) There is a significant difference between selling additional security that has
been pledged for a loan and recovering a deficiency judgment against the personal assets of the
borrower.
               (vi) Underbidding at a foreclosure sale does not violate an implied
                   covenant of good faith and fair dealing.
Finally, plaintiffs contend that the bank violated the implied covenant of good faith and fair
dealing by underbidding at the foreclosure sale. The forbearance agreement, expressly provided
that, upon default, the bank could foreclose on the real property collateral in any order it chose.
Property that must be sold within the strictures of a foreclosure is simply worth less. No one
would pay as much to own such property, as he would pay to own real estate that could be sold
at leisure and pursuant to normal marketing techniques.
           b) Notes, p. 285
               (i)      No sanction
A lender with multiple securities who proceeds by nonjudicial foreclosure rather than by a court
ordered sale is not subject to the one action. Walker v. Community Bank.
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               (ii)      A rule worth saving - Hatch
Requiring a creditor who elects nonjudicial foreclosure to hold fair value hearings after each sale
would cause the foreclosing mortgagee to sell all the properties together, and avoid a hearing if
the sale price exceeded the debt. This would not be beneficial to the debtor.
               (iii)     Marshalling and fair value
Causing a senior lienor to foreclose on the most valuable property would cause the juniors to
complain about being sold-out. Causing a senior lienor to foreclose on the least valuable property
would require a fair value hearing. The senior lienor is stuck both ways.
               (iv)      Elsewhere
Washington State concurs with California, although with dissent that the 580d quid pro quo
exchange of no deficiency for no redemption pushes the sale price lower than it should be.
   C) Deficiency Judgments
        a) Freedland v. Greco, 45 Cal. 2d 462 (1955), p. 286
Facts: The plaintiffs sold a liquor business for $7000 to the defendant, and took two notes, each
for $7000. The business equipment served as chattel mortgage for one note, a real property
owned by the defendant served as security for the other note. The defendant defaulted, and the
plaintiff executed a nonjudicial foreclosure and trustee sale on the real property. The plaintiffs
bought the property for $740. The plaintiff sued to begin foreclosure on the chattel mortgage
note and for a deficiency on the judgment. The defendant lost and appealed.
Court: REVERSED the deficiency judgment.
               (i)       The pursuit of additional security is not a deficiency judgment, and
                      one can not be obtained after a power of sale is executed.
The defendant argued that the plaintiff cannot get a deficiency judgment after a sale on a power
of sale. The defendant did not disagree that both mortgages were subject to foreclosure and
exhaustion. There is not a limitation in §580d that a note must be secured only by a trust deed on
real property, but if a note is secured with or without other security, by a trust deed on real
property, then the protections of §580d arise. Had there been only one note secured by real
property, a deficiency could not issue. Under Hatch, where one note is secured by both real and
personal property, a creditor may execute the power of sale on one security, and then proceed to
exhaust the other security without following 580a. Such is not a deficiency judgment.
               (ii)      The principal obligor cannot waive the provisions of the anti-
                      deficiency legislation (Code Civ. Proc., §§ 580a-580d), because those
                      provisions are not solely for the debtor's benefit but are also for the
                      protection of the public.
The giving of additional security to the note give the creditor the right to exhaust the additional
security. The chattel mortgage does not add to the rights of a creditor towards a deficiency
judgment. Permitting a deficiency judgment would give the debtor the legal effect of a waiver of
the anti-deficiency protections.
           b) Notes, p. 288
               (i)       Multistate security
Laws are mixed whether a creditor with multistate securities may get a deficiency after a
nonjudicial real estate foreclosure in a state permitting them (not California of course) and then
bring the judgment to California for enforcement.
               (ii)      Insurance proceeds and rents
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While §580b prohibits a deficiency judgment after foreclosure, it does not bar a creditor from
taking additional security. The debtor-creditor relationship is not totally extinguished during the
foreclosure proceeding where the creditor purchases the security for less than the debt balance.
   D) Mixed Security, p. 290
        a) Florio v. Lau, 68 Cal. App. 4th 637 (1988), p. 290
               (i)      A creditor whose obligation is secured by personal property
                    generally is entitled to a deficiency judgment for the full difference
                    between the debt and the price obtained from the sale of the personal
                    property (i.e., no fair value limitation).
               (ii)     A „unified sale‟ is appropriate to sell mixed securities together
                    when the real and personal property are closely enough related that
                    selling them as unit is a commercially reasonable choice.
               (iii) Code Civ. Proc. § 726 does not apply to personal property, or
                    fixtures not sold at a unified sale, or to the obligation.
Facts: The Florios, et. al. and the Laus a settled a lawsuit with the Laus agreeing to pay $280,000
to MetLife, plus interest, with the Florios as guarantors secured by the Laus. The Laues gave
three securities to the Florios. One was a deed of trust on real estate, another was a stock
certificates in a Fitness Club, and the last, shares in a commercial partnership. The Laus
defaulted the Florios paid the debt, and sued for judicial foreclosure. The court held for a the
Florios, but withheld a deficiency judgment until after disposition of all the securities. The real
property sold for $50,000, the club bought back the stock for $86,000, but no one bid on the
partnership share. The Florios then made a motion for a deficiency judgment. The Laus filed the
affirmative defense of 726 on the grounds that the a motion for a deficiency judgment was too
late as being filed 5 months after sale of the real property. The Florios replied that 726 did not
apply to a mixed securities situation, and alternatively, if 726 did apply, the attempted sale of the
partnership was less than months before the filing of the motion for a deficiency judgment, so
726 was met. The court adopted the alternative law proposed by the Florios and held for them.
The Laus appealed.
Court: AFFIRMED. The commercial code allows various ways to dispose of mixed security. A
‗unified sale‘ is appropriate to sell mixed securities together when the real and personal property
are closely enough related that selling them as unit is a commercially reasonable choice.
A creditor secured solely by real estate may seek a deficiency judgment only if filed within three
moths after sale of the real estate security, and has a deficiency limit of the difference between
the amount of the debt and the fair value of the property. Conversely, a creditor secured by
personal property is not time limited. The legislature intended real property laws (i.e., 726) to
apply to real property securities, and personal property laws to apply to personal property. The
Cal. Comm. Code [then § 9501(4)(b)(i)] expresses that Code Civ. Proc. § 726 does not apply to
personal property, or fixtures not sold at a unified sale, or to the obligation. Thus the legislature
did not intend creditors to be burdened by 726 for accepting mixed securities before the personal
property was disposed of. A court cannot determine a deficiency amount until all the collateral is
sold, because in the sale of secured personal property the deficiency is the amount between the
sale and the obligation. The statute does not require an immediate sale, and as some personal
goods are seasonal, a creditor may best serve itself and the debtor by waiting for better times to
sell the personal property. The 3-month limitation puts the creditor at risk if losing the security
and runs contrary to minimizing interference with creditors rights and remedies.
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N.B. The court did not rule whether the fair value rule of Code Civ. Proc. § 726 applied to the
real property in a mixed security collateral.
           b) Notes, p. 298
               (i)     The new code – Cal. Comm. § 9604
               (ii)    Unified sales
Actions on unrelated securities must be adjudicated separately.
               (iii)   Purchase Money
Merely by acquiring the real property security interests, the creditor subjects herself and and the
single obligation secured by both real and personal property to the full panoply of one-action,
anti-deficiency, fair value, and reinstatement provisions of the Cal.Civ.Code and Code Civ. Proc.
When a deed of trust and a personal property security interest are given to secure the combined
purchase of both real property and personal property (such as furniture and furnishings), they are
subject to the real property purchase-money anti-deficiency limitations. For example, if the
beneficiary receives a trust deed and a personal property security interest to secure the same
obligation, he can foreclose the lien on the personal property either before or after he has
foreclosed the trust deed. However, if both instruments are given to secure the payment of a
combined purchase price of real and personal property, the beneficiary- mortgagee cannot
recover a deficiency judgment after a foreclosure of the personal property security interest if the
deed of trust is a 'purchase-money' security instrument. Sherwood-Trimble Medical Group v.
10001 Venice Blvd. Partnership, 75 Cal. App. 4th 872, (Cal. App. 1999).
Chapter XII.           Miscellaneous Lender Strategies
   A) Opinion Letters, p. 305
Opinion letters in financial transactions are usually drafted by the lender, and signed by the
borrower‘s attorney, acknowledging that the parties find the valid, and effective. The ABA
released the ―Third-Party Legal Opinion Report‖ in 1991, but it excluded certain opinion issues
on real property liens.
The California Bar and L.A. County Bar Associations released a Legal Opinion Accord in 1995.
A principal topic of the Accord is ―The Remedies Opinion‖ which adopts the Accord as
controlling and provides, ―(i) a contract has been formed, (ii) a remedy will be available with
respect to each agreement of the Client in the contract or such agreement will otherwise be given
effect; and (ii) any remedy expressly provided for in the contract will be given effect as stated.‖
   B) Arbitration, p. 306
        a) Flores v. Transamerica Homefirst, 93 Cal. App. 4th 846 (2001), p.
            306
               (i)      A written agreement to arbitrate a controversy "shall be valid,
                    irrevocable, and enforceable, except on such grounds as exist at law
                    or in equity for the revocation of any contract.
               (ii)     Generally applicable contract defenses, such as fraud, duress, or
                    unconscionability, may be applied to invalidate arbitration
                    agreements.
Facts: The Flores are senior citizens who executed a reverse mortgage with Transamerica
Homefirst. Two years later, the Flores sold their home and applied the proceeds to their reverse
mortgage. They were shocked to learn that the 14-page loan document had a 50% shared
appreciation clause (called ‗contingent interest‘ by Transamerica Homefirst.) The Flores paid the
payoff demand under protest and then filed suit claiming unfair business practices, violations of
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the Consumer Legal Remedies Act, unconscionability, fraud, unlawful prepayment penalties, and
bad faith. Transamerica Homefirst moved to enforce the arbitration clause. The Flores replied
that unconscionability of the contract applied to the arbitration clause as well. The trial court
denied Transamerica Homefirst‘s petition in light of Armendariz v. Foundation Health
PsychCare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz). HomeFirst moved for
reconsideration on the ground that the parties had not been given an opportunity to brief the
question whether justification exists for the lack of mutuality in the arbitration agreement. The
trial court then granted reconsideration but ruled that HomeFirst had failed to demonstrate a
justification, and the court again denied the petition to compel arbitration.
Court: AFFIRMED. Unconscionability is a question of law for the court. (Civ. Code, § 1670.5).
Analysis of unconscionability begins with an inquiry into whether the contract was a contract of
adhesion--i.e., a standardized contract, imposed upon the subscribing party without an
opportunity to negotiate the terms. Unconscionability has both procedural (oppression and
surprise) and substantive elements. Oppression arises from an inequality of bargaining power
that results in no real negotiation and an absence of meaningful choice. Surprise involves the
extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by
the party seeking to enforce them. The substantive element has to do with the effects of the
contractual terms and whether they are overly harsh or one-sided.
Here, the Flores were not given the opportunity to negotiate the mortgage, and the contract
requires the Flores to arbitrate. Meanwhile, Transamerica Homefirst could foreclose either
judicially, or non-judicially, take self-help remedies such as set-off, and get injunctive relief to
obtain appointment of a receiver. HomeFirst could proceed with foreclosure despite the
pendency of disputes brought to arbitration. HomeFirst could also take its remedies as afforded
by law or equity, and may be exercised concurrently, independently, or successively.
Thus, the arbitration clause did not apply to HomeFirst.
HomeFirst argued that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) precludes a holding
under California law that the arbitration agreement is unenforceable on the principle that the
Federal Arbitration Act preempts state laws that single out and thwart arbitration provisions.
However, 9 U.S.C. § 2 contains language virtually identical to that of Cal. Code Civil Procedure
§ 1281.2. A written agreement to arbitrate a controversy "shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract." The United States Supreme Court has recognized that "generally applicable contract
defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration
agreements.‖
           b) Notes, p. 309
               (i)     Revising the contract
If the lender‘s exclusive remedy were arbitration, would that violate the one action rule?
[No, because arbitration is not a ―proceeding in a court of justice.‖]
               (ii)    Substantive unfairness
If the 50% appreciation split had not been in the contract, the Court would not have reached a
different decision, as the entire opinion focused on the remedies of the parties. However, the
Flores probably would not have sued.
               (iii)   Standard clauses
Arbitration clauses are still standard.
               (iv) Statute - The governing statute for arbitration of real estate
                   contracts is Cal. Code Civ. Proc. §§ 1281.6 - 1298.8
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http://www.leginfo.ca.gov/cgi-bin/calawquery?codesection=ccp&codebody=&hits=20
TITLE 9. ARBITRATION
Chapter 1. General Provisions          1280-1280.2
Chapter 2. Enforcement Of Arbitration Agreements 1281-1281.96
Chapter 3. Conduct Of Arbitration Proceedings        1282-1284.3
Chapter 4. Enforcement Of The Award
Article 1. Confirmation, Correction or Vacation of the Award 1285-1287.6
Article 2. Limitations of Time         1288-1288.8
Chapter 5. General Provisions Relating To Judicial Proceedings
Article 1. Petitions and Responses 1290-1291.2
Article 2. Venue, Jurisdiction and Costs      1292-1293.2
Article 3. Appeals      1294-1294.2
Title 9.1. Arbitration Of Medical Malpractice        1295
Title 9.2. Public Construction Contract Arbitration 1296
Title 9.3. Arbitration And Conciliation Of International Commercial Disputes
Chapter 1. Application And Interpretation
Article 1. Scope of Application        1297.11-1297.17
Article 2. Interpretation       1297.21-1297.24
Article 3. Receipt of Written Communications          1297.31-1297.33
Article 4. Waiver of Right to Object 1297.41-1297.42
Article 5. Extent of Judicial Intervention    1297.51
Article 6. Functions 1297.61
Chapter 2. Arbitration Agreements And Judicial Measures In Aid Of Arbitration
Article 1. Definition and Form of Arbitration Agreements 1297.71-1297.72
Article 2. Stay of Proceedings         1297.81-1297.82
Article 3. Interim Measures 1297.91-1297.95
Chapter 3. Composition Of Arbitral Tribunals
Article 1. Number of Arbitrators       1297.101
Article 2. Appointment of Arbitrators         1297.111-1297.119
Article 3. Grounds for Challenge       1297.121-1297.125
Article 4. Challenge Procedure          1297.131-1297.136
Article 5. Failure or Impossibility to Act    1297.141-1297.144
Article 6. Termination of Mandate and Substitution of Arbitrators 1297.151-1297.154
Chapter 4. Jurisdiction Of Arbitral Tribunals
Article 1. Competence of an Arbitral Tribunal to Rule on its Jurisdiction 1297.161-1297.167
Article 2. Interim Measures Ordered by Arbitral Tribunals 1297.171-1297.172
Chapter 5. Manner And Conduct Of Arbitration
Article 1. Equal Treatment of Parties         1297.181
Article 2. Determination of Rules of Procedure       1297.191-1297.193
Article 3. Place of Arbitration        1297.201-1297.203
Article 4. Commencement of Arbitral Proceedings 1297.211
Article 5. Language 1297.221-1297.224
Article 6. Statements of Claim and Defense 1297.231-1297.233
Article 7. Hearings and Written Proceedings          1297.241-1297.245
Article 8. Default of a Party 1297.251-1297.253
Article 9. Expert Appointed by Arbitral Tribunal 1297.261-1297.262
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Article 10. Court Assistance in Taking Evidence and Consolidating Arbitrations 1297.271-
1297.273
Chapter 6. Making Of Arbitral Award And Termination Of Proceedings
Article 1. Rules Applicable to Substance of Dispute 1297.281-1297.285
Article 2. Decision making by Panel of Arbitrators 1297.291
Article 3. Settlement 1297.301-1297.304
Article 4. Form and Content of Arbitral Award        1297.311-1297.318
Article 5. Termination of Proceedings         1297.321-1297.323
Article 6. Correction and Interpretation of Awards and Additional Awards 1297.331-1297.337
Chapter 7. Conciliation
Article 1. Appointment of Conciliators        1297.341-1297.343
Article 2. Representation and Assistance      1297.351
Article 3. Report of Conciliators      1297.361-1297.362
Article 4. Confidentiality      1297.371
Article 5. Stay of Arbitration and Resort to Other Proceedings     1297.381-1297.382
Article 6. Termination          1297.391-1297.394
Article 7. Enforceability of Decree 1297.401
Article 8. Costs        1297.411-1297.412
Article 9. Effect on Jurisdiction      1297.421
Article 10. Immunity of Conciliators and Parties     1297.431-1297.432
Title 9.3. Real Estate Contract Arbitration 1298-1298.8
           c) Avoiding the Full Credit Bid Rule, p. 309
               (i)      The Credit Bid Rule: A lender's contract damages are limited to
                    the difference between the amount secured by the deed of trust and the
                    amount of the lender's credit bid at the foreclosure sale.
               (ii)     The Full Credit Bid Rule: When a lender makes a full credit bid at
                    the foreclosure of its mortgage, it is precluded for purposes of
                    collecting its debt from later claiming that the property was actually
                    worth less.
―The point of defendant's argument is that the mortgagee's purchase of the property securing the
debt by entering a full credit bid establishes the value of the security as being equal to the
outstanding indebtedness and ipso facto the nonexistence of any impairment of the security. As
applied to the factual context of the instant case, the argument is that the purchase by plaintiff-
vendor-beneficiary of the property covered by the purchase money deed of trust pursuant to a
full credit bid made and accepted at the nonjudicial foreclosure sale resulted in a total
satisfaction of the secured obligation. The purpose of the trustee's sale is to resolve the question
of value and the question of potential forfeiture through competitive bidding. A nonjudicial
foreclosure sale, if regularly held, finally fixes the value of the property therein sold. … Where
an indebtedness secured by a deed of trust covering real property has been satisfied by the
trustee's sale of the property on foreclosure for the full amount of the underlying obligation
owing to the beneficiary, the lien on the real property is extinguished.‖ Civ. Code, § 2910.
Cornelison v. Kornbluth , 15 Cal.3d 590, 606 (Cal. 1975).
               (iii)   Bidding full credit eliminates the deficiency
The Cornelison Court recognized that despite the anti-deficiency laws, a creditor could still
recover where the deficiency resulted from bad faith waste. However, the plaintiff bid the full
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amount of the indebtedness, and thus set the value of the home at that amount, which meant she
didn‘t have a deficiency to collect.
               (iv)    Fraudulent misrepresentation at bidding
Other courts found that a full credit bid did not disallow a deficiency judgment when the
defendants perpetrated the basis of the full credit bid. Alliance Mortgage Company v. Rothwell,
10 Cal. 4th 1226 (1995) [Deficiency allowed over full credit bid where in conspiracy with the
defendants, the lender‘s appraiser fraudulently misrepresented the premises and intentionally and
materially mislead the lender into making the full credit bid.]
               (v)     Fraudulent misrepresentation at funding
The Alliance court distinguished an argument made by Alliance that the defendants had also
made material misrepresentations in order to get the loan. ―A lender's suit against its fiduciaries
or agents for fraudulently inducing it to make loans and purchase property is a completely
separate cause of action from a suit for impairment of its security.‖ Id at 1249.
               (vi)    The Alliance Full Credit Bid Rule
―A lender can state a cause of action for fraud against third parties for fraudulently inducing a
loan secured by real property despite the fact that the lender acquired the property after making a
full credit bid.‖ Alliance Mortgage Company v. Rothwell, 10 Cal. 4th 1226, 1234 (1995)
               (vii)   Limitations to deficiency recovery in a tort loss
A lender's tort damages to a property are also limited by the credit bid rule absent a showing that
the insurance company's conduct caused the lender to make the credit bid. Track Mortgage
Group, Inc. v. Crusader Insurance Company, 98 Cal.App.4th 857 (2002).
Chapter XIII. Priorities
   A) Initial Determinants of Priority, p. 317
      1)     Recording Act Priority, p. 317
         a) Schelling v. Thomas, 96 Cal. App. 682 (1929), p. 317
Facts: (Shelter rule)
1) Thomas gave Schelling a promissory note on his timber patent on the McKee property in
    exchange for Schelling co-executing a note for $1000 to the Bank to construct a building on
    the McKee lot.
2) Thomas later gave Schilling an agreement making the property security for the note.
    Schilling recorded the agreement.
3) Thomas then borrowed $2000 from Conley to buy the McKee property. Thomas gave Conley
    a deed of trust to the McKee property.
4) Thomas also borrowed $600 from Douglas‘ and gave them a deed to the McKee property.
5) The Douglas‘ passed the deed of trust to Tooby for $600.
        Thomas defaulted on the Conley note; Conley foreclosed, and received a trustee‘s deed to
the McKee property. Schelling sued Thomas, Conley and Tooby for his timber patent deed to be
declared a land mortgage on the McKee property, $1000 and interest, and sale of property to pay
him. Conley and Tooby responded with their claims.
        The trial court held Tooby to have a first lien, Schelling to have the second, and Conley
to have the property subject to the liens. Conley appealed, arguing that Schelling‘s interest was
not a mortgage on the premises, and that Tooby‘s took assignment with notice of Conley‘s
interest.
Court: AFFIRMED. The writing was an equitable mortgage.
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               (i)      An equitable mortgage is created where as shown on the face of
                    the writing, the execution of the instrument was in good faith for a
                    valuable consideration, and the money it secured went into a portion
                    of the property encumbered.
               (ii)     An equitable mortgage has priority such as any other security.
Thomas intended the property as security for his debt. The form of the writing is not important.
An equitable lien on real property is enforceable against the property in the hands of not only the
original contractor, but also the heirs, administrator, executors, voluntary assignees, and
purchasers with actual or constructive notice. On recording an instrument creating an equitable
mortgage or lien, the lien becomes a matter of record and the entire world has notice that the title
is encumbered.
           b) Notes, p. 319
               (i)     Special Priority cases: homeowner association assessments
Homeowner association deed restrictions are usually recorded before the property is sold, and
provide for liens on unpaid assessments. Then the mortgage deed is recorded after the sale. Thus
a homeowner association assessment related back to the recording of the restriction deed and
predates the mortgage. To avoid priority battles between mortgages and Association
assessments, Cal.Civ.Code § 1367 provides (1) An assessment becomes a debt only when levied;
(2) An unpaid assessment becomes a lien only when a delinquency notice is recorded; and (3) An
unpaid assessment lien is prior to all liens subsequently recorded to the recording of the
assessment notice. Thus, the bidder must take into account all unpaid assessments. See page 335
(§3b) below for assessments recorded after the sale of the property.
               (ii)    Special Priority: cleanup liens
A current owner has the burden of waste cleanup. The buyer must include that determination for
worth of the property.
               (iii)   Mechanics liens
See Ch. 14 for priority of mechanics liens.
               (iv)    After-acquired property clauses
Thomas delivered his equitable mortgage to Schelling before Thomas received the deed. The
mortgage was absent a provision ―that any obligation covered by a mortgage is secured by after-
acquired property.‖ Most forms of deeds do not include such a provision. Look at Cal.Civ.Code
§ 2930.p. 337
               (v)     Deeds as mortgages
Cal.Civ.Code §§ 2925 & 2950 (p. 148) A deed absolute is notice to a person who otherwise takes
without notice that the deed is a mortgage.
           c) Far West Savings and Loan Association v. McLaughlin, 201 Cal.
              App. 3d 67 (1988), p. 320
Facts: On 6/1/82 Geiger bought property and gave a deed of trust to Hancock and properly
recorded. On 7/8/82 GTB bought the property from Geiger and on 8/3/82 gave a deed of trust to
McLaughlin who did not record until 7/1/83. On 7/1/83 GTB recorded its grant deed from
Geiger, and a grant deed to Stapleton, who recorded a deed of trust to Far West. The Far West
funds retired the Hancock debt and deed of trust. McLaughlin did not re-record the deed of trust
from GTB. Stapleton defaulted the next year, Far West foreclosed and bought the property at a
foreclosure sale. McLaughlin then sought to execute his grant deed. Far West sued for a
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declaration of priority and title. The trial court declared McLaughlin's title wild as GTB had not
recorded its deed from Geiger.
               (i)      A grantee of wild grant is without priority.
               (ii)     A wild grant stays wild until it is recorded after the grantor records
                      ownership.
Court: Affirmed. When Far West did its title search, the grant from GTB to McLaughlin would
not have been found. As McLaughlin did not re-record after GTB did file, Far West was still
without notice when it foreclosed. To accomplish bringing his deed into the chain of title,
Mclaughlin needed to record after the grant deed to GTB had been recorded.
           d) Note, Improper Indexing, p. 322
Which lender to a person with a hyphenated last name has priority when the deeds of trust are
indexed, one to the first name and the other for the second? 579 N.Y.S.2D. 2d 175 FNMA v
Levine-Rodriquez (1991)
           e) Caito v. United California Bank, 20 Cal. 3d 694 (1978), p. 323
The Caitos were CoTops while the Caponis were CoTips of a farm. They jointly executed a note
for $30,000 from Bank of America secured by a deed of trust. The Caitos appeared as principals
on the note and deed. They later jointly executed a note for $40,000 from Bank of America,
retired the $30,000 note and executed another deed of trust to Bank of America. The Caitos later
loaned the Caponis $6000 to stay current on the Bank of America note. Meanwhile the Caponis
borrowed $140,000 from UCB secured by other property they held. When UCB later demanded
payment, the Caponis gave UCB a second deed of trust on their share of the farm in return for
UCB's forbearance. The Caitos took over management of the farm when Mr. Caponi became
disabled. The Caitos made partial payment to Bank of American and asked Bank of America to
forbear acceleration. Bank of America refused so the Caitos sued for partition. Bank of America
executed a NJF, sold the farm, retired the debt it held on the farm and deposited the rest with the
court. The Caitos argued they are the only accommodation makers on the B of A loan and did
not encumber their farm. The trial court agreed and awarded the Caitos half of the sale price,
plus the $6000 and the $17500 they paid from rents to B of A. As this exceeded the sum B of A
deposited UCB took nothing.
               (i)       Doctrine of Equitable Subrogation: Advances made by third
                      parties that retire a debt take priority to juniors of that debt.
Court: REVERSED. UCB argued that the Caitos and Caponis shared tenancy of the farm and the
debt. Thus the Caponis were entitled to half of the remaining amount and UCB‘s claim lay in
Capoinis share. UCB also argued that they were without notice of the $6000 debt so the Caponi
share cannot be subordinated to the debt. The court said that joint ownership is not enough to
impose a duty of encumbrance for inquiry of unrecorded agreement between joint owners. UCB
could not have notice the Caitos were only accommodating the B of A debt. UCB is a bona fide
encumbrancer for value without notice of any claim but B of A‘s. Thus the Caitos claim to $6000
cannot be satisfied by priority.[The discussion of the $17500 and $6000 as payment to B of A is
on page 360.] The Doctrine of Equitable Subrogation is not applicable here because the Caitos
advance of $6000 did not retire the entire debt. Thus UCB was entitled to the Caponis half share
of the funds deposited by B of A.
           f) Notes, p. 326
               (i)       Inquiry Notice
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A lender with actual knowledge of circumstance to prudently require inquiry has constructive
notice of the facts cleaned by a reasonable investigation. Cal.Civ.Code § 19
               (ii)      Another view
California Real Property L. Rev. 65 (Cont. Ed. Bar, July 1978)
               (iii)     Notice and the UCC
Priority for personal property is determined by the date on which a claimant perfects its security
interest. Cal. Comm. Code §9322
       2)      Purchase Money Priority, p. 326
            a) Walley v. P.M.C. Inv. Co., 262 Cal. App. 2d 218 (1968), p. 327
               (i)       Unrecorded purchase money mortgage has priority over recorded
                      subsequent lien.
Someone recorded a judgment against Stephens. Four days later, Stephens bought a property and
gave a deed to trust to PMC. The judgment creditor got a writ of execution and sold the property
to Schoettler, who conveyed it to Walley. Walley sued to quiet title free of PMC interest. Walley
agreed that Cal.Civ.Code § 2898 makes purchase money encumbrances subject to recording law,
so his title was superior by taking from the lien. The trial court agreed. REVERSED.
Court: Cal.Civ.Code § 2898 says purchase money mortgages are superior to all other liens
created against the purchaser. A lien of a previously recorded judgment against the purchaser is
subordinated to the mortgage. Case law authority follows this interpretation.
            b) Notes, p. 327
               (i)       Lenders and purchase money priority.
Money advanced by a third party to enable the purchaser to acquire the property is purchase
money (Cal.Civ.Code § 2898. Van Loben Sels v. Bunnell. See Prunty, p. 89.
               (ii)      Other views
A seller and lender who takes deeds of trust with knowledge of each other may not claim to be
bona fide purchasers over the other. A subordination clause is necessary absent statutory priority.
(Colorado) see Brock below.
               (iii)     Brokers‟ obligations re recording
A real estate broker must record the seller‘s purchase money deed of trust within one week after
the close of escrow or advise the seller in writing that recording is necessary.
               (iv)      Liens against an intermediary - Majewskys v. Waugh
Waugh bought the Cuslidge property and sold it to the Majewskys, pocketing the $1500
difference (without the knowledge of the seller or the buyer) the Majewskys paid to Cuslidge.
Waugh however had several recorded judgment liens against him, which attached to the property
when his deed was recorded, The Majewskys learned of the liens nine months later, and sued to
quiet title.
Justice Mosk (Cal. Sup. Ct.) believed a resulting trust arose for the price Waugh used to pay
Cuslidge. Justice Tobriner said it was a constructive trust for Waugh‘s wrongful use of the
Majewsky money. Both held in their dissents that the middleman escrow should not hold subject
to the judgment liens. The majority held that Waugh had been booth legal and equitable owner of
the home, so the liens passed to the Majewskys.
               (v)       Purchase money priority and the UCC
Creditors holding a purchase money security interest in personal property have perfected priority
when the debtor receives possession of the collateral, or within 20 days of receipt.
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           c) Rules for Brock
               (i)       Cal.Civ.Code § 2989(a) – deed of trust has priority
A mortgage or deed of trust given for the price of real property, at the time of its conveyance, has
priority over all other liens created against the purchaser, subject to the operation of the
recording laws.
               (ii)      Cal.Civ.Code § 3046 – vendor‟s lien for the unpaid amount
One who sells real property has a vendor's lien thereon, independent of possession, for so much
of the price as remains unpaid and unsecured otherwise than by the personal obligation of the
buyer.
               (iii) Cal.Civ.Code § 3048 – liens are valid except to an incumbrancer in
                    good faith and for value.
The liens defined in §§ 3046 and 3050 are valid against every one claiming under the debtor,
except a purchaser or encumbrancer in good faith and for value.
           d) Brock v. First South Savings Ass’n, 8 Cal. App. 4th 661 (1992), p.
              328
               (i)       A purchase money mortgage with, or without notice has priority
                      over a vendor‟s unsecured lien.
Facts: Brock sold a property, and took an unsecured note. The buyer also took a loan from First
South Savings Ass‘n and gave them a deed of trust. When First South Savings Ass‘n foreclosed,
Brock sued to have his vendor‘s lien take priority over First South Savings Ass‘n‘s deed of trust.
First South Savings Ass‘n argued that Cal.Civ.Code § 2898(a) give it priority, while Brock
argued that Cal.Civ.Code §§ 3046, 3048 favored him. Neither the parties nor the court found
applicable case law. Brock also agued that First South Savings Ass‘n knew of his position as
seller, and of the he took an unsecured note, which gives rise to a vendor‘s lien. The trial court
found First South Savings Ass‘n did not have priority because it was not a good-faith
encumbrancer.
Court: REVERSED. An encumbrancer in good faith and for value means a person who has taken
or purchased a lien, or perhaps merely the means of obtaining one, and who has parted with
something of value in consideration thereof. In addition, a "good faith" encumbrancer is one who
acts without knowledge or notice of competing liens on the subject property. Since First South
Savings Ass‘n knew of Brock‘s lien, §3048 does not support First South Savings Ass‘n. Sections
2898(a) and 3048 each appear at first sight to give priority to the lien described therein over all
other claims, conditioned only on whether other claimants have notice of that lien. The
legislature made clear it simply codified common law principles.
         The court in Fisk v. Potter (1865) 41 N.Y. (2 Keyes) 64 noted that, the law of equity
which establishes the right of lien in the vendor for unpaid purchase-money of the lands sold to
the vendee, is an anomaly in the law. Unless a subsequent purchaser has actual notice of this lien,
it remains a secret invisible lien or trust, undiscoverable by any search of the public records ...
known only to the vendor and his immediate vendee. Equity would not uphold such a "secret"
lien against the claim of a good faith purchaser without notice.
The seller‘s lien is constructive only, arising by a secret trust by operation of law. The purchase-
money mortgage is a specific legal lien by written contract, and is made a matter of public
record. Where the question is the superiority of liens, between such as are called legal and those
which are called equitable, it is a maxim, coeval with the law of equity, that 'where equities are
equal the law must prevail.‘ The law gives a vendor‘s lien only for the purpose of working out an
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act of justice for the vendor. It would be the clearest injustice to hold its existence against bona
fide mortgagees. Securities intended by, our recording acts would, in effect, be destroyed.
        While Fisk was largely predicated upon the "secrecy" of the unrecorded vendor's lien, the
law prefers legal liens such as the purchase-money mortgage or deed of trust to purely equitable
liens such as the vendor's lien, even where the parties had notice of the other's simultaneously
arising lien. (1) Under the common law the vendor's lien, as a purely equitable lien, was deemed
subordinate to the legal purchase-money mortgage or deed of trust where both liens arose
simultaneously (Fisk.) (2) The California courts, in construing the statutes codifying the common
law of liens, have treated the vendor's lien as an equitable lien notwithstanding its present basis
in statute, it follows that the common law principle of granting priority to the purchase- money
lien over the vendor's lien still controls.
       3)      Priority of Unrecorded Mortgages Against Other Interests
            a) Livingston v. Rice, 131 Cal. App. 2d 1 (1955), p. 331
               (i)        An unrecorded deed of trust executed before a judgment, has
                      priority over the judgment. A recorded judgment only gives an interest
                      in the debtor‟s property.
Facts: In February 1947 Livingston gave a loan to Rice in exchange for a note and deed of trust,
neither of which Livingston recorded. When Rice defaulted in January 1951, Livingston sought
foreclosure, and got Rice to acknowledge the deed of trust, which Livingston recorded. In
December 1951 Livingston filed for foreclosure, and then learned of an April 1950 judgment
recorded against the Rices by Sechini. The trial court ordered Livington paid first, before
Sechini. Sechini argued that her recording predated Livingston‘s so she had priority.
Court: AFFIRMED.
The lien of a mortgage given to secure a loan is created by the execution and delivery of the
mortgage and takes precedence over an attachment or judgment lien obtained after its execution.
The lien of an unrecorded mortgage given to secure a loan is created by the mere execution and
delivery of the mortgage, and takes precedence over a subsequent attachment lien.
There must be an interest to which a creditor's lien can attach; that such lien does not attach to a
mere naked title, but only to the debtor's interest in the property at the time of the levy, and that
if at that time all title and interest has passed from him to a third person, the creditor gets
nothing. Under the provisions of Cal.Civ.Code § 1107, an unrecorded deed takes precedence
over a subsequent attachment lien.
               (ii)      Cal.Civ.Code § 1107
Every grant of an estate in real property is conclusive against the grantor, also against every one
subsequently claiming under him, except a purchaser or encumbrancer who in good faith and for
a valuable consideration acquires a title or lien by an instrument that is first duly recorded.
               (iii)     Cal.Civ.Code § 2897
Other things being equal, different liens upon the same property have priority according to the
time of their creation, except in cases of bottomry and respondentia.
            b) Notes, p. 333
               (i)       Tax and utility liens
The exception to the purchaser money mortgagee first rule is Revenue and Tax Code §3712 that
provides that unpaid property taxes pass title free of an encumbrances except other government
attachments.
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                (ii)      The UCC and unperfected security interests: Cal. Co,, Code
                       §9322(a)(3)
The first security interest or agricultural lien to attach or become effective has priority if
conflicting security interests and agricultural liens are unperfected.
    B) The Effect of Foreclosure
       1)   The Effect on Junior and Senior Liens
A junior mortgage foreclosure has no effect on senior leins.
A judicial sale eliminate all junior liens, encumbrances, and interests joined in the judicial
foreclosure action. Code Civ. Proc. § 701.630
A judicial sale does not eliminate an unnamed junior mortgage.
A nonjudicial foreclosure terminates all junior liens with notice of the sale.
Federal tax liens are not cut off by a foreclosure sale unless the IRS has at least 25 days notice of
the sale. IRC 7425.
        2)      The Effect on Leases
A lease executed prior to a mortgage or deed of trust is not terminated by a foreclosure. A
foreclosure has no effect on a leasehold executed prior to the mortgage or deed of trust.
A leasehold executed after a mortgage or deed of trust is terminated by the judicial foreclosure or
trustee sale where the tenant was a party to the proceeding.
             a) Notes, p. 334
                (i)       Holding on to junior tenants
The majority rule on the United States is that a purchaser at a judicial foreclosure sale can hold a
tenant to the lease if the tenant is omitted as party in the action. While not joining a tenant is
unworkable in a nonjudicial foreclosure, describing only the reversion and right to rent in the
notices of default and sale would exclude the leasehold estates the lender wants preserved.
An alternative view is that the foreclosing creditor should be allowed to unilaterally decide
whether to affirm, or foreclose out junior leases as part of the creditor‘s bargained for recorded
priority. However, allowing the tenant to have an election to terminate would be unfair to the
creditor. These issues are often addressed in commercial leases (next chapter).
                (ii)      Lease assignments and modifications
Where the mortgage is inferior to the lease (i.e., the lease came first), but the landlord and tenant
amended the lease to permit assignment. Could the foreclosing mortgagee evict the subsequent
assignee? No, because the landlord held the original power to accept or reject assignments.
May a mortgage prohibit a mortgagor from acting without mortgagee consent to let tenants
prepay rent, waive defaults, terminate, or consent to lease termination, renew leases, or permit
tenant transfers? No according to New York Real Property Law §291-f.
                (iii)     Rental value, Rent, or Controlled Rent
A foreclosure sale buyer brought an unlawful detainer action against the trustor‘s tenant, whose
lease was executed after the foreclosed deed of trust. However, the Berkeley rent control
ordinance did not have an exception for foreclosure sales, thus the foreclosure purchaser was
treated as a buyer of a building with existing leases. [That the deed was executed before passage
of the ordinance was rejected by the cities police power to modify the rights of the parties.]
New Jersey held that the state‘s anti-eviction statute act (restricting eviction to 13 ‗good causes‘)
does not apply to foreclosing mortgages.
        3)      The Effect on Other Interests, p. 335
                (i)       Easements
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If the mortgagee omits the holder of an easement from as judicial foreclosure action, the
easement survives the foreclosure sale. However, the rights of the junior easement holder are lost
in a nonjudicial foreclosure because the code does not require notice to such persons.
               (ii)    Blanket Deeds & Restrictive Covenants
Lots sold from a foreclosure sale are not subject to the declaration of uniform restrictions where
the recording of the deeds of trust came before the recording of the declaration of uniform
restrictions because the foreclosure removed the lots from the blanket deed. Ironically, the lots
sold before the foreclosure sale were part of the blanket deed, and were subject to the declaration
of uniform restrictions, but those holders could not enforce the restrictions on the late-comers.
       4)      Merger
            a) Merger is not automatic
Merger only applies where the intent of the parties (i.e., expressly shows) that liens merge with
title to the previously encumbered property, and would not result in injury or prejudice to third
person. When a person becomes the owner of property on which she holds a lien, there may be a
merger of the lesser estate (the lien) into the greater estate (the fee.) Therefore, a conveyance by
the mortgagor to the mortgagee will terminate the lien. But if a merger were held to occur, that
would subject the senior mortgagee‘s title to junior liens
            b) Protecting the deed of trust
               (i)     Statutory
Cal.Civ.Code § 1058.5 allows a beneficiary to record a Notice of Nonacceptance to show that
merger is not intended, and make sure its deed of trust is not compromised.
               (ii)    Second chances
A beneficiary whose judicial foreclosure omitted a junior lien may have a second chance to
foreclosure on the junior, or notify the IRS in time to cut off the federal tax lien.
               (iii)   Same interest in deeds of trust
Merger is not present where the lender holds two deeds of trust on the same property. The deeds
of trust are of equal interest, so neither is lesser or greater estate to the other.
               (iv)    Merger depending on who the buyer is
If the lender forecloses on its junior mortgage, and a third party purchases at the sale, the senior
lien is not impaired because the title and lien are hold by two different parties.
If however, the lender buys the property, it then holds both the lien, and title. Merger was held to
have occurred where the lender foreclosed on the senior mortgage, which had a dragnet clause.
Conversely, merger did not occur where the lender foreclosed on it first deed of trust, and paid
full credit bid, but the deed of trust did not have a dragnet clause, and a third party held the
second deed of trust. However, the lender‘s foreclosure eliminated its third deed of trust.
            c) Note, p. 336
               (i)     Restatement §8.5 (Third) of Property
The doctrine of merger does not apply to mortgages or affect the enforceability of a mortgage
obligation.
   C) After-Acquired Property, Fixtures and Mezzanines, p. 337
      1)    Enlarging the Mortgaged Property, p. 337
               (i)     Cal.Civ.Code § 2926, Mortgage, on what a lien, p. 337
A mortgage is a lien upon everything that would pass by a grant of the property.
               (ii)    Doctrine of after-acquired title (Cal.Civ.Code §2930)
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A mortgagor may give a mortgage before she has record title. When she receives record title, the
property immediately becomes subject to the mortgagor‘s lien. Cal.Civ.Code § 2930, Schelling
v. Thomas. A lien of a junior deed of trust re-attaches when the debtor reacquires the property.
Barberi v. Rothchild. Property which a trustor reacquires by post-sale redemption following a
judicial foreclosure is free if liens extinguished by the sale. Cal. Code Civil Procedure §
729.080(e).
               (iii) Things attached to the land, Oakland Bank of Savings v.
                    California Pressed Brick Co., 183 Cal. 295, 298 (1920)
The California Civil Code declares the law as to what constitutes real property as follows: Real
or immovable property consists of:
        1) Land; 2) That which is affixed to land; 3) That which is incidental or appurtenant to
        land; and 4) That which is immovable by law. Cal. Civ. Code § 658.
Land is the solid material of the earth, whatever may be the ingredients of which it is composed,
whether soil, rock, or other substance. Cal. Civ. Code § 659.
A thing is deemed to be affixed to land when it is attached to it by roots, as in the case of trees,
vines, or shrubs; or imbedded in it, as in the case of walls; or permanently resting upon it, as in
the case of buildings; or permanently attached to what is thus permanent, as by means of cement,
plaster, nails, bolts, or screws. Cal. Civ. Code § 660.
Improvements and fixtures become part of the mortgaged property. Cal.Civ.Code § 1013.
               (iv)    Immovability as making personal property a fixture
The boilers were set on a concrete foundation made to receive them and then bricked in by a
wall, so as to retain the heat. The heavy machinery was set on concrete blocks built in the ground
for that purpose with large bolts or rods brought up through the concrete by means of which the
machines were fastened down. The machinery, engine, and boilers were connected together by
pipes, rods, shafts, and belts, so that the engine would operate the machinery, and they were all
attached for the purpose of using them permanently in the plant in the making of brick. They
were affixed to the land so as to become real property, as under § 660. Oakland Bank.
Other cases looked at how necessary the goods or equipment was to the structure.
Yet others looked at what damage would occur to the building were the goods or equipment or
fixtures removed.
           b) Notes, p. 338
               (i)     Competing claimants and after-acquired title
A revived purchase money mortgage is junior to ant new deed of trust given by the owner for
purchase money because the revived lien is equitable in nature.
               (ii)    Moving the boundary line
A lien of a pre-existing mortgage may be extended to encompass property acquired by a
boundary line adjustment with a neighbor. Otherwise, future alienations of either contiguous
parcel would be jeopardized. The additional property is contiguous to the original collateral and
the Subdivision Map Act requires that the entirety of the legal parcel be conveyed or
encumbered.
               (iii)   Other property acquired by the borrower
Restatement Third Property Mortgages 7.5(b); Mortgaging After-Acquired Real Estate.
(a) An "after-acquired property provision" is any language in a mortgage that purports to be
effective against any other parcel of real estate that mortgagor subsequently acquires.
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(b) An after-acquired property provision is effective between mortgagor and mortgagee.* As to
third persons who take an interest in any parcel of real estate subsequently acquired by the
mortgagor, the provision is treated as unrecorded until a notice is recorded that:
        (1) specifically identifies the subsequently acquired real estate,
        (2) refers to the mortgage containing the provision, and
        (3) is in a form that provides record notice under local law.
However, the lien created by such a provision is junior to any purchase money mortgage, as
defined in § 7.2, on mortgagor's after-acquired real estate.
* This is the case even though the subsequently acquired real estate is located in a different
county or state than the real estate originally mortgaged.
       2)      Competing Claimants to Fixtures
            a) Priority between a seller of the chattel, and the mortgagee of the
               real property - Cal. Comm. Code §9334
Real property priorities depend on the date of recording, and notice at the time of execution.
Personal property priorities depend on the date of perfection. Cal. Comm. 9322(a)(1).
A chattel seller who perfects a security interest in good she sold may be able remove them from
real property despite their recharacterization as fixtures by attachment. The issue is then priority
between the seller of the chattel, and the mortgagee of the real property. In such a case, Cal.
Comm. Code § 9334 applies.
               (i)     Cal. Comm. Code §9334
§ 9334. Security interest in fixtures; Priority; Security interest in growing crops
  (a) A security interest under this division may be created in goods that are fixtures or may
continue in goods that become fixtures. A security interest does not exist under this division in
ordinary building materials incorporated into an improvement on land.
  (b) This division does not prevent creation of an encumbrance upon fixtures under real
property law.
  (c) In cases not governed by subdivisions (d) to (h), inclusive, a security interest in fixtures is
subordinate to a conflicting interest of an encumbrancer or owner of the related real property
other than the debtor.
  (d) Except as otherwise provided in subdivision (h), a perfected security interest in fixtures has
priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor
has an interest of record in or is in possession of the real property and all of the following
conditions are satisfied:
  (1) The security interest is a purchase money security interest.
  (2) The interest of the encumbrancer or owner arises before the goods become fixtures.
  (3) The security interest is perfected by a fixture filing before the goods become fixtures or
within 20 days thereafter.
  (e) A perfected security interest in fixtures has priority over a conflicting interest of an
encumbrancer or owner of the real property if any of the following conditions is satisfied:
  (1) The debtor has an interest of record in the real property or is in possession of the real
property and both of the following conditions are satisfied:
  (A) The security interest is perfected by a fixture filing before the interest of the
encumbrancer or owner is of record.
  (B) The security interest has priority over any conflicting interest of a predecessor in title of
the encumbrancer or owner.
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  (2) The fixtures are readily removable factory or office machines or readily removable
replacements of domestic appliances that are consumer goods.
  (3) The conflicting interest is a lien on the real property obtained by legal or equitable
proceedings after the security interest was perfected by any method permitted by this division.
  (4) The security interest is both of the following:
  (A) Created in a manufactured home in a manufactured home transaction.
  (B) Perfected pursuant to a statute described in paragraph (2) of subdivision (a) of Section
9311.
  (f) A security interest in fixtures, whether or not perfected, has priority over a conflicting
interest of an encumbrancer or owner of the real property if either of the following conditions
is satisfied:
  (1) The encumbrancer or owner has, in an authenticated record, consented to the security
interest or disclaimed an interest in the goods as fixtures.
  (2) The debtor has a right to remove the goods as against the encumbrancer or owner.
  (g) The priority of the security interest under paragraph (2) of subdivision (f) continues for a
reasonable time if the debtor's right to remove the goods as against the encumbrancer or owner
terminates.
  (h) A mortgage is a construction mortgage to the extent that it secures an obligation incurred
for the construction of an improvement on land, including the acquisition cost of the land, if a
recorded record of the mortgage so indicates. Except as otherwise provided in subdivisions (e)
and (f), a security interest in fixtures is subordinate to a construction mortgage if a record of the
mortgage is recorded before the goods become fixtures and the goods become fixtures before the
completion of the construction. A mortgage has this priority to the same extent as a construction
mortgage to the extent that it is given to refinance a construction mortgage.
  (i) A perfected security interest in crops growing on real property has priority over a
conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest
of record in, or is in possession of, the real property.
           b) Notes, p. 340
               (i)     Fixture filings
The fixture filing in §(e)(1)(A) is a financing statement covering goods that are or are about to
become fixtures (Cal. Comm. §9102(a)(40)), as recorded at the county recorders. A recorded
mortgage may be effective as a financing statement if it described both the goods and the real
estate. (Cal. Comm. §9502(c).
               (ii)    Removal of fixtures
Cal. Comm. §9609(a)(1) allows a creditor to remove collateral after default.
Cal. Comm. §9609(c) allows the security agreement to require the debtor to assemble the
collateral in a reasonable designated location.
               (iii)   Tenant‟s request
What happens when the conditional sales contract says that the fixtures are personalty, the lease
says all fixtures belong to the landlord, and the mortgage purports to cover all fixtures owned or
used in the premises. ―A mortgagee from a tenant has no greater right to remove trade fixtures
from the premises after the tenant has surrendered possession to the landlord than the tenant
himself would have. With respect to notice, it has also been stated that agreements between
parties, lessor and lessee, as to the character of the property in question are binding between the
parties and against third persons having actual or constructive notice thereof.‖ Bridges v. Cal-
Pacific Leasing Co., 16 Cal. App. 3d 118 (1972).
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       3)      Mezzanine Financing, p. 341
            a) Financing gap
A first mortgage debt may cover 40% to 75% (or less) of a project and requires a current
repayment. Equity debt will cover the last 10% of the project without a current repayment
schedule but is entitled to equity in the project.
            b) Filling the gap
Mezzanine financing is the capital that fills that fills in that 75% (or less) to 90% portion
between debt and equity financing, with low risk and low (10% to 15%) return. Mezzanine
financing is like a second mortgage in having a fixed payment rate and a higher accrual rate with
a subordinated position giving a higher yield than the senior debt.
            c) A matter of collateral
What distinguishes mezzanine financing from a second mortgage is that the collateral secured for
the mezzanine financing is not the project itself, because the holder of the first debt prohibits any
other encumbrance on the project. The collateral may be a business interest (partnership, LLP,
LLC, or corporate shares).
            d) A matter of speed
To make up for the loss of protection, the mezzanine financier provides for a faster way to step-
in to save the investment. This might be by a right to assume control, grant an equity position, or
an assignment of all outstanding interest of the borrower in the business interest.
            e) A matter of notice
To assure the mezzanine financier‘s ability to take quick measures, the mezzanine financier and
real estate mortgagee often have an ‗inter-creditor agreement‘ to notify each other of default.
   D) Priority Protected by Title Insurance, p. 343
      1)    Title insurance described
Title insurance is an agreement by the insurer to indemnify the policyholder from a loss based on
a title condition that existed on the date the policy issued.
            a) Included Risks
Defective title, liens, mortgages, or encumbrances in the title, and unmarketability of title
            b) Defects in Title
Lack of competency, lack of capacity of grantors in a chain of title, forged deeds, instruments
improperly acknowledged, or delivered, and inaccurate legal descriptions
       2)      Cal Ins Code
            a) § 12340.10 (2004) "Abstract of title"
"Abstract of title" is a written representation, provided pursuant to a contract, whether written or
oral, intended to be relied upon by the person who has contracted for the receipt of such
representation, listing all recorded conveyances, instruments or documents which, under the laws
of this state, impart constructive notice with respect to the chain of title to the real property
described therein. An abstract of title is not a title policy as defined in Section 12340.2.
            b) § 12340.2 (2004) "Title policy"
"Title policy" means any written instrument or contract by means of which title insurance
liability is assumed.
            c) Insurers
American Land Title Association
California Land Title Association
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           d) Notes
               (i)     Unmarketability
The California Subdivision Map Act prohibits the sale, lease, or financing of property that does
not constitute a legally created parcel. However, violation of this provision does not make title
unmarketable. Even a recording by the city that construction occurred without a permit, and the
wiring and plumbing were hazardous did not make title unmarketable.
The California Appeals Court declared a third deed of trust marketable where the title search
failed to show that the second deed of trust had a notice of default recorded against it.
               (ii)    Special policies, endorsements, and guarantees
Lenders can obtain a special policy insuring priority of mortgages over mechanics liens arising
from work begun or contracted for before the date of the policy. Endorsements may insure the
priority of additional advances by the mortgagee, or a modification of the mortgage. ALTA also
has mezzanine lender coverage.
           e) Cale v. Transamerica Title Insurance, 225 Cal. App. 3d 422
              (1990), p. 344
Facts: Cale loaned $8000 to the owners of a Sacramento townhouse and received a second deed
of trust. Cale bought title insurance from Transamerica Title Insurance. When the borrowers
defaulted, Cale sought to foreclose. Cale then learned that the townhouse had three liens for
$$4885 (one judgment, one HOA, and one IRS) against it. Cale put in a claim to Transamerica,
which admitted its oversight, but denied the claim until Cale showed he suffered an actual loss
by foreclosing, buying the home, selling the home, and paying off the debts against it.
Cale sued and lost to summary judgment by Transamerica Title Insurance.
Court: AFFIRMED. When the contingency insured against under the policy occurs, the title
insurer is not liable to the insured for damages in contract or tort, but rather is obligated to
indemnify the insured under the terms of the policy.
There is a fundamental distinction between the indemnifiable loss of an insured lender and the
indemnifiable loss of an insured owner of property by virtue of title defects or undisclosed liens.
               (i)     Title defects and liens directly and adversely affect the property
                    owner because the owner is entitled to the full market value of the
                    property and that value is immediately reduced by outstanding title
                    defects and liens.
               (ii)    A mortgagee's loss is measured by the extent the insured debt is
                    not repaid because the value of security property is diminished or
                    impaired by outstanding lien encumbrances or title defects covered by
                    the title insurance.
Superior liens or title defects in claims may exist that reduce the market value of the security
property the value to the owner but do not result in a loss or damage to the insured mortgagee
because the effect of the title problems does not reduce the value of security property below the
amount of an indebtedness secured or because the indebtedness is otherwise secured or paid.
               (iii) Title insurance indemnifies a lender only against loss with respect
                    to the secured indebtedness, not a diminution of profits potentially
                    obtainable from resale of the property.
Transamerica argued Cale had not suffered an indemnifiable loss under the policy because: (1)
the undisclosed senior liens might not be valid and enforceable and (2) Cale might be able to
resell the property on the open market for a price sufficient to discharge the senior liens plus
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Cale's $ 8,000 loan. In fact, Cale had suffered no actual loss. (1) Cale obtained title to the
property for $ 1 through the trustee's foreclosure sale when nobody else bid on the property; (2)
Cale still owned the property subject to the senior liens; (3) Cale had not expended money to
remove the undisclosed senior liens; (4) none of the undisclosed senior lienors had demanded
payment; and (5) Transamerica continued to provide coverage for loss on account of the
undisclosed senior liens.
Cale argued that under Cornelison, he suffered a loss because a nonjudicial foreclosure sale
under Civ. Code, § 2924 is determinative of the value of the property as between the lender and
borrower under a deed of trust. This rule, however, has no bearing on the question whether an
insured lender has suffered an actual loss under the terms of a contract of title insurance.
However, the value of the property in the hands of the foreclosing insured lender is not the
measure of loss under the terms of the policy. While fair market value may provide inadequate
security for Cale's lien, his insured indebtedness continues to be secured against loss by the terms
of the title insurance policy. If one of the senior lienors were to foreclose, or if Cale were to sell
the property on the open market, he might then suffer an indemnifiable loss under the policy, but
only to the extent the proceeds of sale otherwise available to discharge Cale's lien are required
instead to discharge any of the undisclosed senior liens.
               (iv)    Dissent, p. 347
Transamerica advised Cale that his loss could not be determined until he completed nonjudicial
foreclosure proceedings. Cale did what Transamerica requested. His foreclosure left him with the
extinguishment of his lien, the elimination of further remedies to collect his note, and property
nobody else was willing to buy. In essence, Cale argues that, but for Transamerica's undisclosed
liens, somebody would have bought the property, thereby generating cash to be applied at least
in partial satisfaction of his secured note. [I believe] it is wholly immaterial that Transamerica
continues to provide insurance against loss. Transamerica cannot avoid its obligations under the
policy by offering to continue to insure him. The summary judgment should be reversed.
           f) Notes, p. 348
               (i)     Where the senior lien has been paid
Three years later, the Court of Appeals adopted the dissenting view to hold that neither the full
credit bid nor profitable resale mattered. The fair market value of the property on the foreclosure
date measured the creditor‘s loss. Such fair market value was not to be discounted by the
reasonable cost of re-selling the property.
               (ii)    Measuring loss in the absence of the one action rule
If the one-action rule does not get in the way, actual loss can only be established after the
borrower is sued on the outstanding note, and fails to pay the judgment.
               (iii)   Privity as a defense
Whether a lender‘s title insurer can be also be liable to the borrower for failing to discover an
encumbrance depends on the state the borrower is in. New York (lender‘s title insurer), and
Massachusetts (mortgagee‘s attorney) have held that a lack of privity bars the borrower from
recovering. Other states differ.
Chapter XIV. Chapter 14 Alteration of Priorities
   A) The Effect of Statutes of Limitations, p, 349
[The statute of limitations under Cal. Code Civil Procedure §580a starts on the date of the
foreclosure, not the date of recording. Notes, p.73.]
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       1)      Affect on foreclosure
The power of sale under a deed of trust (title theory) is never outlawed. The right to foreclose
(lien theory), judicially, or non-judicially is subject to the statute of limitations on the note
secured by the mortgage.
       2)      Extension agreements
These rules also apply to extension agreements for nonconsenting juniors. A senior mortgagee
who agrees to an extension is bound, but the junior who was not joined in its execution is not
bound. The junior mortgagee can plead the statute, but the mortgagor could not.
The other affect is the reversal of priority. The junior is allowed to foreclose, but the senior is
not.
       3)      Mortgage (lien theory)
Subsequent purchasers and incumbrancers can successfully plead the statute against the holder of
a first mortgage although an extension agreement entered into without their consent subsequent
to the transfer or creation of the junior encumbrance, or the mortgagor's absence from the state,
prevents it from running as between mortgagor and first mortgagee. The law placed on the senior
the duty of ascertaining from the public records the existence of third party interests before
accepting the extension. Ekmann v. Plumas County Bank, 215 Cal. 671, 673 (1932).
       4)      Deed of Trust (title theory)
The rules change for a deed of trust as the holder of a senior deed of trust does not have to worry
about the statute for either trustors or juniors. (Bentley.) The power of sale under a deed of trust
may be exercised after an action on the note is barred. Where the rights of third parties are
involved, somewhat different rules apply for mortgages. The parties had opportunity for
contemplation at the time the they executed the trust deeds. One of the rights was the right to
exercise the power of sale in the trust deed. Summers v. Hallam Cooley Enterprises, Ltd., 56 Cal.
App. 2d 112 (1942).
   B) Waiver and Estoppel, p. 350
      1)  James v. P.C.S. Ginning Co., 276 Cal. App. 2d (1969), p. 350
Facts: James got a loan for Ginning for farm operations, and gave a mortgage on their personal
equipment, and $8000 equity in the house. The next year, James refinanced and raised the equity
collateral to $10,000. Later that year, the James filed a homestead declaration in the house. The
following year the James defaulted and Ginning sued on the note seeking possession of the
personal property. The complaint did not allege that the language "Equity in House" created an
equitable lien nor seek to have the description made certain. The trial granted judgment for
Ginning and decreed that Ginning have immediate possession of the farming equipment and
"Equity in House $ 10,000.00." However, the "equity" was real property, so the order as to it was
a legal nullity.
   James filed voluntary bankruptcy proceedings, claiming their residence to be exempt by virtue
of the homestead. The referee approved the claim, set aside the real property as exempt, and
discharged plaintiffs in bankruptcy. Ginning sought and received a writ of possession for the
specifically described personal property and, to reach the "equity" in the house, obtained a writ
of execution on the money judgment and levied against plaintiffs' equity in the real property.
Ginning purchased what purported to be plaintiffs' equity in the real property at an execution
sale. James filed this action to quiet title against defendant's judgment and execution sale. The
trial court upheld the validity of the homestead.
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Court: AFFIRMED. There is not a third party, or a misunderstanding here. The controversy is
between the debtors and the mortgagee, and both the gin and plaintiffs intended the equity in the
home to be security for the loan. A valid equitable lien was created between the parties even
though the description of the property was vague and indefinite Coast Bank v. Minderhout.
The question is whether the gin, by electing to file a personal action and reduce the indebtedness
to a personal judgment, made an election of remedies (CCP §726) that, by operation of law,
waived its equitable lien priority over plaintiffs' subsequent declaration of homestead. Ginning
argued even though it lost the right to foreclose on the property (CCP §726), CC§1241* gives its
judgment and execution precedence. [*The homestead is subject to forced sale for judgments on
debts secured by the premises that were executed and recorded before recording of the
declaration of homestead. Cal.Civ.Code § 1241, repealed 1983.]
The parties did execute the equitable lien before the James recorded their homestead declaration.
However, Salter holds that a creditor who chooses to disregard his security and sue on the
indebtedness must rely on the title obtained through an execution sale. Nonetheless, the question
is whether Ginning‘s title, which it obtained by purchase at execution sale, relates back to the
date the lien was recorded under Civil Code 1241.
Salter has been interpreted to mean that when the creditor elects to recover a personal judgment
"he loses ALL (my emphasis, JRP) right to his security, thereby relegating himself to the position
of an ordinary judgment creditor.‖
               (i)        A holder of a deed of trust, mortgage, or similar security
                      (including „equity‟ in real property) who elects to foreclose must
                      follow both §§ 726 and 580a for the one-action rule, and the fair value
                      rule.
These prevent a mortgagee from achieving forfeiture by bidding a nominal sum on the property
and obtaining a large deficiency judgment. By suing on the note to obtain a personal judgment in
disregard of its security, Ginning made an election of remedies under §§726 and 580a and thus
waived its lien priority established by the recordation of the security agreements.
Ginning argued on affirmative defense that James waived the homestead declaration by failing to
raise it on the first action. However, James was not required to appear in the original action
unless they wished to force defendant to foreclose the lien pursuant to §§ 726 and 580a. Salter
and Roseleaf. Where a mortgagor is content to have the mortgagee waive its right to foreclose
against the security and proceed to obtain a personal judgment, a counterclaim alleging the
homestead is premature. A declaration of homestead relates to an interest in real property. Until
indebtedness is reduced to judgment, a lawsuit does not encumber plaintiffs' title so there was no
basis for asserting the homestead by counterclaim.
               (ii)      A creditor may not use „home equity‟ to circumvent restrictions on
                      deficiency judgments embodied in §§ 726 and 580a.
Ginning also argued on affirmative defense that the James were equitably estopped from their
defense because they knowingly gave Ginning an equitable lien upon their property to secure a
legitimate loan, and a court of equity should not permit them to evade their indebtedness through
a homestead filing. However, [presuming equitable estoppel were present] Ginning had its
choice of remedy of either foreclosing under §§ 726 and 580a (to enforce the equitable lien], or
to disregard its security, and proceed to obtain a personal money judgment, and forfeit its lien.
By reducing its debt to judgment and selling the property pursuant to a levy of execution in an
attempt to circumvent restrictions on deficiency judgments embodied in §§ 726 and 580a,
Ginning [waived its equitable position.]
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            b) Note: The UCC on Priority – Cal. Comm. Code §9601, Rights of
               secured party after default; Rights of debtor and obligor;
               Relation back of judgment lien. p. 352
               (i)       §9601(a) (1)
After default, a secured party of personal property may reduce a claim to judgment, foreclose, or
otherwise enforce the claim, security interest, or agricultural lien by any available judicial
procedure.
               (ii)      §9601(e)
If a secured party has reduced its claim to judgment, the lien of any levy that may be made upon
the collateral by virtue of an execution based upon the judgment relates back to the earliest of
(1) The date of perfection of the security interest or agricultural lien in the collateral, or (2) the
date of filing a financing statement covering the collateral.
       2)      Valley Title Co. v. Parish Egg Basket, Inc., 31 Cal. App. 3d
               776 (1973), p. 352
            a) Situations destroying a lien on real property:
               (i)       The parties had expressly so agreed and contracted, or
               (ii)      Where the intent of the parties shows that the taking of the later
                      security is inconsistent with the continued existence of the lien
Facts: The Azzaros and Costantinos were the owners of real property. They executed and
recorded a first deed of trust in favor of the Bohnetts in the amount of $ 74,500. The Azzaros and
Costantinos then executed declarations of homestead on the real property. Parish later recorded
an abstract of judgment in the amount of $ 3,880.42 against the Azzaros and Costantinos. The
next month the Azzaros and Costantinos executed and recorded a promissory note and deed of
trust in the amount of $ 4,093.49 in favor of Cali.
The following year, Parish executed a partial release of its abstract of judgment to permit a sale
of a portion of the real property. In return, the Azzaros and Costantinos executed and recorded a
deed of trust as security the payment of the abstract of judgment in favor of Parish on that
portion of the property retained by them. Later that year, Parrish foreclosed, and purchased the
property at the foreclosure sale. The Bohnetts then executed the power of sale under their first
deed of trust and sold the property, netting a surplus of 5,213.40. Both Cali and Parrish claimed
the funds. The trustee, Valley Title Co. filed an interpleader and deposited the funds with the
court.
Court: [The homestead is inapplicable for improper execution.] Parrish argued that the recording
of its abstract of judgment is a lien prior to Cali‘s, although Parrish conceded its deed of trust
was junior to Cali‘s for being recorded after Cali‘s. Cali argued that Parrish lost its lien priority
(if it even had one) when it executed a partial release of the abstract of judgment in favor of a
deed of trust and foreclosed on the deed (rather than trying to execute on the judgment.)
The California Supreme Court described four situations in which the taking of new or additional
security would operate to destroy an existing lien upon real property. Martin v. Becker 169 Cal.
301(1915). One of the situations was where the parties expressly agreed and contracted. Second,
is where by intent of agreement of the parties, that the taking of the later security is inconsistent
with the continued existence thereafter of the lien.‖ [For example,] when the contract between
the parties is such as to force the conclusion that the intent of the parties was to waive the
mechanic's lien, as where a mortgage is taken upon the same property, it is held that these
contracts are inconsistent with the conception of a right to a mechanic's lien.
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               (iii) When the holder of the mechanic‟s lien accepts a mortgage in lieu
                    of the lien, he waives his mechanic's lien because his remedy is
                    limited to one form of action under § 726.
The Court held that the presence of a judgment lien here instead of a mechanic‘s lien was not
distinguishing. Under the one action rule of Cal. Code Civil Procedure §726, a holder of a
mechanics lien is limited to one from of action. Otherwise, it is inconsistent with the further
assertion of a mechanic's lien.
       3)      Note, p. 356
            a) Mechanics’ liens v. vendor’s liens
Martin v. Becker made the analysis that since a vendor‘s lien is lost by the taking of security, so
should a mechanic‘s lien lose its security. However, the Martin rejected the analogy because
while a vendor‘s is present but secret unless recorded, a mechanic‘s lien does not exist unless
recorded. Martin v. Becker, 169 Cal. 301, 315-316 (1915).
   C) Loan Modifications
      1)   Lennar Northeast Partners v. Biuce, 49 Cal. App. 4th 1576
           (1966), p. 355
Facts: Borrowers executed a promissory note and recorded a deed of trust to Bank of America.
Borrowers later executed a promissory note and recorded a subordinate deed of trust to
Chesapeake S&L. Borrowers later executed loan workout agreements with Bank of America for
a second note and extended the Chase note and deed of trust (Chesapeake‘s successor.) Again,
the Chase deed of trust was subordinate to Bank of America, but both deeds of trust required
subordination from other lien holders. Later, the Buice Trust took assignment of the Bank of
America notes, and deed. Chare later foreclosed, and asked that the Trust de declared subsequent
and subordinate to the Chase trust deed. Lennar then bought the loan from Chase and substituted
in. The trial court ruled that the loan workout agreement substantially changed the terms, and
materially affected the Bank of America/ Buice Trust security. The trial court granted summary
judgment to Lennar.
Court: Reversed and Remanded. Buice Trust argued that the changes were not substantial, in
part being an extension, and did not materially affected the security, and in fact benefited the
junior lien holders by not foreclosing. Lennar argued that the additional debt increased the senior
debt, and the property expenses, thus lessening the return available to junior lien holders.
               (i)     A senior lien holder may extend the time for payments of the
                    senior debt provided the extension does not impair the junior lien
                    holder's rights and security.
               (ii)    When the obligation is increased, by an increase in the principal
                    amount or an increase in the interest rate, the junior lien holder‟s
                    position is worsened.
As to the substantiality and materiality of the changes, the Court agreed with Lennar. ―The effect
of the modifications taken together was to increase substantially the amount of secured debt that
was senior to Lennar's lien. As the expenses increase, the value of the property, as measured by
its return, decreases. The decrease in value has a material effect on the value of any existing
junior lien. This change adversely affected Lennar's rights as a junior lien holder and the value of
its security.‖ The remaining question is ―whether the modifications require the Trust's entire lien
to lose its priority, or only the modifications.‖
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[Note 3 – Not addressed by the court: Where a deed of trust secures optional future advances,
priority of the security for such future advances is determined by the circumstances when the
advances are made; if at that time the senior lender has notice of other liens, the other liens have
priority.]
[The Court looked at a case (Gluskin) of a construction lender and buyer-developer who
restructured the construction loan to the detriment of the seller. The seller sued to have his loan
declared superior to the construction loan because the modifications were made in utter disregard
of his rights as junior lien holder. Holding on appeal for the seller, the court said public policy
requires protection of subordinating sellers.]
―A lender and a borrower may not bilaterally make a material modification in the loan to which
the seller has subordinated, without the knowledge and consent of the seller to that modification,
if the modification materially affects the seller's rights. While there was no general obligation on
a lender to protect a subordinating seller from the risk of the buyer's default, the requirement of
fair dealing prohibits conduct between a lender and a buyer that results in destruction of the
seller's interest. If, however innocently, their bilateral agreement or conduct so modifies the
terms of the senior loan that the risk that it will become a subject of default is materially
increased, then the buyer and the lender may subject themselves to liability to the seller if they
proceed without the latter's consent, and if the seller's otherwise junior loan is to be adversely
affected.‖
               (iii) The senior lienor has a duty of care to the junior lienor as to a
                    subsequent modification.
               (iv) When the modification of a senior lien has a material adverse
                    effect on the value of a junior lien, but not the value of the security,
                    the senior lien does not lose priority but the modifications become
                    junior in priority to the junior lien.
The Court looked at Miller and Starr [now updated to 5 Cal. Real Est. § 11:96 (3d ed.) Miller and
Starr, MILCALRE § 11:96, Westlaw] for the principal that the lender and borrower owe the
seller a duty of care for any modification. ―We need not determine whether a material
modification to a senior lien may result in a total loss of priority of the senior lien where the lien
holders are hard money lenders. The equities in this case do not require such a result. Here, the
modification did not affect the value of the underlying security. The impairment to Lennar's
security and its rights as a junior lien holder caused by the modification can be fully eliminated
by denying priority to the modification. At foreclosure the amount due under the Bank of
America note, calculated in accordance with the terms of the note before the 1993 amendment,
can be calculated and given first priority. Any additional amount owing under the amendment
would then be junior to the liens existing as of the date of the modification.‖
[The court noted the severity of the modifications and impact in Gluskin to support that a total
switch of priority is appropriate where the seller is wiped out.]
―Failure to obtain consent results in the modification being ineffective as to the junior lienors and
the senior lienor relinquishing to the junior lienors its priority with respect to the modified terms.
While this sanction ordinarily creates only partial loss of priority, where the senior lienor's
actions in modifying the note or mortgage substantially impair the junior lienors' security interest
or effectively destroyed their equity, the inclination is to wholly divest the senior lien of its
priority and elevate the junior liens to a position of superiority.‖
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       2)      Notes, p. 359
            a) Altering the senior obligation
Most courts will allow a senior lender to change the terms without losing priority to avert a
foreclosure and wipe out the juniors unless the changes are materially prejudicial to juniors.
            b) Altering the duration of the senior obligation
               (i)       Extension on a Deed of Trust – No change in priority
Extending the maturity date of a debt secured by a deed of trust without consent of the junior is
not significant enough to alter priorities.
               (ii)      A change in maturity date of a mortgage backed debt changes the
                      priority.
Extending the maturity date of a debt secured by a mortgage without consent of the junior is
significant enough to alter priorities.
               (iii) Acceleration on a Deed of Trust changes the priority for a
                    subordinated seller, but not simply a subordinated lienor.
Gluskin, and others held acceleration of the maturity date without consent of the junior lienor/
subordinated seller as a factor for subordinating the priority of the senior lienor. Where the junior
lienor was not the subordinated seller, the court held that the junior lienor cannot object to
material alterations in a senior lien.
            c) Replacement mortgages
Most courts do not hold that mechanics liens do not intervene when the same lender replaces its
construction mortgage with a permanent one.
            d) Reserving the right to modify a senior obligation
If the mortgagor and mortgagee reserve the right in a mortgage to modify the mortgage or the
obligation it secures, the mortgage as modified retains priority even if the modification is
materially prejudicial to the holders of junior interests. Restat 3d of Property: Mortgages, § 7.3 .
   D) Equitable Subrogation, p. 360
      1)   Cal.Civ.Code § 2876 Prior liens
When the holder of a special lien is compelled to satisfy a prior lien for his own protection, he
may enforce payment of the amount paid by him as part of the claim for which his lien exists.
       2)      Caito, revisited
One who claims to be equitably subrogated to the rights of a secured creditor must satisfy certain
prerequisites. These are: "(1) Payment must have been made by the subrogee to protect his own
interest. (2) The subrogee must not have acted as a volunteer. (3) The debt paid must be one for
which the subrogee was not primarily liable. (4) The entire debt must have been paid. (5)
Subrogation must not work any injustice to the rights of others." The doctrine of equitable
subrogation is broad enough to include every instance in which one person, not acting as a mere
volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and
good conscience should have been discharged by the latter. However, a debtor-landowner cannot
be subrogated to the priority position of the senior creditor when the debtor satisfied the
obligation owed that creditor, as the debtor is the one liable (Rule 3). When two or more persons
take as tenants in common under an instrument silent as to their respective shares, a presumption
arises their shares are equal. UCB had notice the Caitos and the Caponis were presumably equal
owners and presumably equally obligated on the debt to the Bank of America.
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       3)      Non-paying cotenants
Some cotenants paid off the entire joint debt and sued the lender to compel assignment of the
deed of trust to them to use against the other, non-paying co-tenants. The court rejected the
demand, saying that equitable subrogation was sufficient, including priority over the juniors.
However, since the lien is equitable and unrecorded, it may fail against the claim of a subsequent
bona fide encumbrancer that has recorded.
       4)      Notes, p. 361
            a) New lien, new lender
Mr. Katsivalis refinanced two preexisting obligations secured by property held by the he and his
wife in joint tenancy. He signed for her under a power of attorney. After he died, she sought
cancellation of the promissory note on grounds that they had declared a homestead prior to the
refinancing transaction, and the refinancing trust deed had not been executed in compliance with
the provisions of Civ. Code, § 1242 requiring both homestead claimants to personally execute
and acknowledge the new encumbrance. The court held that the bank had an equitable
subrogation only to the priority of the second lien it had paid off, which was less than the amount
Home Savings had advanced.
            b) Knowing about the intervening interest
               (i)     Restat 3d of Property: Mortgages, § 7.6 Subrogation.
(a) One who fully performs an obligation of another, secured by a mortgage, becomes by
subrogation the owner of the obligation and the mortgage to the extent necessary to prevent
unjust enrichment. Even though the performance would otherwise discharge the obligation and
the mortgage, they are preserved and the mortgage retains its priority in the hands of the
subrogee
               (ii)    Comment
The majority of cases refuse subrogation if the payor had actual knowledge of the intervening
interest, but allow subrogation if the payor's only notice was constructive from the recordation of
the intervening interest.
            c) Officious subrogation
               (i)     He Who Seeks Equity Must Do Equity
Simpson held Stein‘s second deed of trust on a usurious loan. When Stein tried to pay back the
note in full, Simpson refused, and proceeded with foreclosure. At the sale, Stein‘s agent was the
high bidder, but lacked all the cash for the bid. Simpson ordered a new sale, paid off the first
deed of trust, and then bid just higher than the cash amount Stein‘s agent had. Stein sued.
Simpson argued that if Stein was to take the property, Stein owned him the amounts for the first
and second deeds of trust. The court disagreed, ordering that Stein owned Simpson only the
amount of the first deed of trust (the lower of the two).
When Simpson paid the bank, he did not have any other interest in the property than his own
deed of trust. That Simpson ‗mistakenly‘ paid the first deed of trust does not support his
argument that he is owed the amount for both deeds of trust because he did not get assignment
from the holder of the first deed of trust. His payment of the first deed of trust extinguished the
second (his) deed of trust, and placed him by subrogation in the position of the holder of the first
deed of trust to the owner (Stein) of the property. All that Stein owes is the amount of the first
deed of trust that Simpson took by subrogation. Simpson‘s argument of equity to obtain
equitable relief and prevent unjust enrichment is immaterial.
               (ii)    Buying up
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A junior judgment lienor purchased the senior deed of trust to prevent the trustee‘s sale by the
senior lienor. The junior lienor later sought nonjudicial foreclose under the senior deed of trust.
The borrower sought to enjoin the foreclosure arguing as equitable subrogee (junior lienor), the
junior had to judicially foreclose. The court said that when the junior lienor took assignment of
the senior deed of trust, the power of sale went along with it and the junior lienor had his choice
of foreclosure.
   E) Consent to Lower Priority: Subordination, p. 363
      1)  Handy v. Gordon, 65 Cal. 2d 578 (1967), p. 363
Facts: Handy and Gordon signed a sales agreement for Handy to buy Gordon‘s property for $1.5
MM subject to development and financing approvals with a subordination clause. Gordon
backed out, and Handy sued for specific performance with an allegation that the $300,000 down
payment clause was a sham. The trial court held the subordination clause indefinite and granted
summary judgment to Gordon. Handy argued that leaving the number of lots open for him to
decide later was proper in his role as developer. AFFIRMED.
               (i)     Cal.Civ.Code § 3391: Parties who cannot be compelled to perform
WHAT PARTIES CANNOT BE COMPELLED TO PERFORM. Specific performance cannot
be enforced against a party to a contract in any of the following cases:
1. If he has not received an adequate consideration for the contract;
2. If it is not, as to him, just and reasonable;
3. If his assent was obtained by the misrepresentation, concealment, circumvention, or unfair
practices of any party to whom performance would become due under the contract, or by any
promise of such party that has not been substantially fulfilled.
               (ii)    A subordination clause may delegate to the vendee or third party
                    lenders power to determine the details of subordinating loans.
               (iii) An enforceable subordination clause must contain terms that will
                    define and minimize the risk that the subordinating liens will impair
                    or destroy the seller's security.
               (iv) A subordination clause must limit the use to which the proceeds
                    may be put and limit the loans so that they do not exceed the
                    contemplated value of the improvements they finance.
Court: The court appeals held that the sales agreement did not specify the amount of funding, or
how the funds would be used, basically allowing Handy to use the construction loan funds at his
discretion. Consequently, Gordon could not assured that the construction funds were going to be
used for improving the property that represents his security, or that the amount of loans would
not exceed the value of the improvements added to the security. The limits were expressed as lot
maximums without restriction as to lot size. This Gordon could not be assured that if the senior
foreclosed, the total amount of subordinated loans would be small enough for him to bid on the
properties. Finally, Gordon did not receive his down payment to cushion his position, while the
first payment of principal was deferred until three years after the close of escrow.
The contract had nothing for Gordon as assurance of ever receiving anything for his land but
Handy‘s good faith and business judgment. That is not ‗just and reasonable‘ under Cal.Civ.Code
§ 3391.
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        2)      Notes, p. 365
             a) Waiver of subordination
A purchaser was held entitled to specific performance on his contract that included a
subordination clause because he offered to waive it and pay all cash to the sellers without the
vendor‘s consent.
             b) The effect of deficiency exposure
A seller holding a subordinated purchase money deed of trust is not barred by Cal. Code Civil
Procedure §580b from seeking a deficiency judgment after bring sold out by a senior foreclosure.
Spangler v. Memel (1972), p. 77. (Seller attempted only to maximize his development value.)
             c) Using loan proceeds to reimburse the buyer
A loan cannot be used to reimburse the buyer for both his purchase price, and the construction
loan, thereby leaving the entire risk on the seller.
             d) Subordination to a purchase money loan
Risks to a vendor are not present where the vendor agrees to subordinate to a purchase money
loan if the size of the subordinating loan is limited to fixed percentage of the purchase price.
             e) Statutory protections – Cal.Civ.Code §§ 2953.1 - 2953.5
                (i)       § 2953.1. Real property security instrument; subordination clause;
                       subordination agreement
(b) "Subordination clause" means a clause in a real property security instrument where the holder
of the security interest under such instrument agrees that upon the occurrence of conditions or
circumstances specified therein his security interest will become subordinate to or he will
execute an agreement subordinating his interest to the lien of another real property security
instrument which would otherwise be of lower priority than his lien or security interest.
(c) "Subordination agreement" shall mean a separate agreement or instrument whereby the
holder of the security interest under a real property security instrument agrees that (1) his
existing security interest is subordinate to, or (2) upon the occurrence of conditions or
circumstances specified in such separate agreement his security interest will become subordinate
to, or (3) he will execute an agreement subordinating his interest to, the lien of another real
property security instrument which would otherwise be of lower priority than his lien or security
interest.
                (ii)      § 2953.2. Real property security instrument containing
                       subordination clause
Every real property security instrument which contains or has attached a subordination clause
shall contain: (a) At the top of the real property security instrument there shall appear in at least
10-point bold type, or, if typewritten, in capital letters and underlined, the word
"SUBORDINATED" followed by a description of the type of security instrument.
                (iii)     § 2953.3. Subordination agreements
Every subordination agreement shall contain (a) At the top of the subordination agreement there
shall appear in at least 10-point bold type, or, if typewritten, in capital letters and underlined, the
words "SUBORDINATION AGREEMENT."
                (iv)      § 2953.4. Voidability of subordination clause or agreement
(a) Any subordination clause and any subordination agreement which does not substantially
comply with the provisions of §§ 2953.2 or 2953.3 is voidable by the person whose security
interest is to be subordinated or his successor-in-interest exercised within two years of the date
on which the instrument to which his security interest is subordinated is executed; provided that
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such power of avoidance shall not be exercisable by any person having actual knowledge of the
existence and terms of the subordination clause or agreement.
               (v)      § 2953.5. Application of §§ 2953.1 -- 2953.4 to specified loans
(a) §§ 2953.1 through 2953.4 shall not apply to any subordination clause or agreement that
expressly states that the subordinating loan shall exceed twenty-five thousand dollars ($25,000).
 (b) §§ 2953.1 through 2953.4 shall not apply to any subordination clause or agreement executed
with a loan exceeding twenty-five thousand dollars ($25,000).
            f) Subordination after the sale
               (i)      Rescission is not an option
The sellers and holders of first trust deed notes on unimproved real property brought an action
for declaratory relief, seeking a preliminary injunction, after the buyer defaulted on a subsequent
trust deed note and the lender gave notice of default and proposed to foreclose. The escrow
instructions on sale of the property provided that the sellers would, on request, agree to
subordinate their trust deeds to trust deeds securing loans to the buyer for money to be used for
the development of and construction on the property. At the request of the buyer, the sellers had
signed a subordination agreement providing that the buyers could obtain a loan, "a portion of
which may be expended for other purposes than improvement of the land." The agreement did
not spell out the terms of the note and trust deed to which it was being subordinated, and the
seller's trust deeds contained only a brief reference to an agreement to subordinate. The trial
court denied the preliminary injunction. The Court of Appeal affirmed. The court held the
subordination agreement was enforceable because the language in the agreement expressed that
the loan proceeds need not be applied as the escrow instructions in the first trust deed
contemplated. Schneider v. Ampliflo Corp., 148 Cal.App.3d 637 (1983.)
       3)      Protective Equity Trust #83, Ltd v. ByBee, 2 Cal. App. 4th
               139 (1991), p. 367
               (i)      A lender is s beneficiary to a subordination agreement and
                     therefore owes the subordinated seller a duty to disburse the
                     subordination funds according to the purpose of the project.
Facts: PET#83 agreed to sell its property for development to Adams. The original escrow
instructions stated that the seller would only subordinate to a construction loan. PET#83‘s agent
struck out the blanket agreement provision in the subordination agreement that the seller agreed
to all provisions in the note and deed and deed of trust, and a provision that allowed the buyer to
use the funds for other purposes than improvement of the property. PET#83‘s agent added the
provision that the lenders were beneficiaries of the subordinating loan.
After execution, the lender‘s deed of trust was recorded first, the seller‘s deed of trust second,
and the subordination agreement recorded third. The lender disbursed one part of the funds to the
seller for the down payment, and the rest to the buyer. The buyer defaulted on its obligations to
both seller and the lender. The seller obtained title at the trustee sale and sued the lender to quiet
title, and have the seller‘s deed of trust declared superior to the lender‘s. The trial court granted
summary judgment to the lender on priority of recording.
Court: REVERSED. [The seller‘s deed of trust takes priority over the lender.]
The court discussed a comparison case, where the lender had an express duty to oversee use of
the funds, which the lender breached, leading to the buyer‘s default, and the seller‘s success in
the cause of action. The lender here argued that it did not have an express duty.
         The lender argued that since part of its funds were paid the seller, their deed was a
purchase money deed under Cal.Civ.Code § 2898, and because their deed was recorded first,
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they had priority under Cal.Civ.Code § 2897. (Chapter 13, p. 331) The lender argued that the
lender and seller did not have privity so the lender did not owe a duty to the seller, and that the
seller was sophisticated in these matters. Furthermore, the contract stated they would not oversee
use of the funds, so they did not have a duty to oversee how the buyer used the funds. The parties
agreed that whether the lender saw the amended documents during this time was uncertain.
        The seller argued that case law (Middlebrook) provided a duty of the lender to the seller,
and that the subordination agreement was indefinite under Handy.
        The court noted that the lending documents stated that the purpose of the loan was for the
purchase and development, rather than a construction loan. The court also noted that the original
escrow instructions (which the lender did see) stated that the seller would only subordinate to a
construction loan. Therefore, regardless of the other documents, the lender knew the seller‘s
purpose of subordination. Furthermore, the seller‘s deed of trust predated that of the lender, and
the escrow officer stated that she only recorded the lender‘s deed first because of the
subordination agreement. Therefore, the court concluded that the seller‘s deed of trust was
recorded second only because the seller agreed to subordinate to a construction loan.
Furthermore, because of the seller‘s waiver of right to record first under subordination condition,
the lender is a beneficiary of the seller-buyer agreement to the extent of the subordination
agreement. As a matter of policy this beneficial position provides protection of the seller in
subordination situations.
        The court concluded that the lender breached its duty to the seller. The lender was a third
party beneficiary of the subordination agreement, which arose only because the seller agreed to a
subordinate to a construction loan. However, the lender did not issue a construction loan and
therefore had a duty to supervise the buyer‘s use of the funds for a construction purpose. The
lender did not supervise the buyer‘s use of the funds, and breached its duty to the seller.
       4)      Notes, p. 371
            a) Conflicting subordination provisions
A seller may inadvertently waive a conditional subordination provision in the seller‘s deed of
trust by signing a subordination agreement that recognizes the absolute priority of the lender‘s
deed of trust.
            b) Lender’s knowledge
The actual conditions of subordination are not a seller‘s defense. A seller is bound to the seller‘s
conditions of subordination by knowing that the seller is subordinating. California law places a
duty on the lender to consult public records and discover the seller‘s subordination conditions.
The seller and lender must cooperate and coordinate to make the subordination occur. [This
creates a circumstance of actual, inquiry, and constructive notice.] In re Sunset Bay Association,
944 F.2d 1503 (Ninth Cir. 1991).
            c) Modifications after subordination
The remedy for material modifications to the loan made without consent of the seller is loss of
priority for only the modifications. A total loss of priority is not appropriate in such a
circumstance. Lennar Northeast Partners v. Buice (above).
            d) Modifying the construction loan
Public policy requires protection of subordination sellers. Lenders and borrowers may not
unilaterally make a material modification in the loan to which the seller has subordinated,
without the knowledge and consent of the seller. Such an act allows the seller to secure relief on
the ground of fraud, and inherent in the requirement of fair dealing in all contracts and as
expressed in Handy. Gluskin v. Atlantic S&L Ass‘n, 32 Cal. App. 3d 307 (1973).
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However, a later case held that a fiduciary duty does not exist between the construction lender
and borrower to entitle the borrower to sue the lender for progress payments made while the
borrower was having a fight with the contractor.
           e) Equitable relief
The subordinated seller has ownership without subordination subject to an equitable lien of the
lender where both foreclose and buy the property. Jones v. Sacramento S&L Ass‘n, 248 Cal.
App.2d 552 (1967).
           f) Malpractice
See Starr v. Mooslin on page xxix.
           g) Circuitous priorities
               (i)     Circuity of lien
Just before Bratcher recorded a judgment lien against him, Buckner filed a homestead
declaration, and have deeds of trust to his parents, and separately to his attorney. Later, Buckner
needed an SBA loan, so his parents and attorney subordinated to the SBA lien. However, while
his parents and attorney had formerly had priority over the Bratcher judgment, the SBA loan was
junior to the Bratcher judgment by its later recording. When Bratcher executed his lien (23 years
later) the Court of Appeals ordered the SBA to have first priority (it is the government!). Second,
Buckner‘s parents and attorney could have that amount of their loans exceeding the amount of
the SBA loan. Bratcher took third priority. Lastly, anything left over was split to Buckner‘s
parents and attorney for the amounts less than the SBA loan. Bratcher v. Buckner, 90 Cal. App.
4th 1177 (2001).
               (ii)    Attorney discipline
Allowing a client‘s bill to go unpaid for 23 years where the bill is secured by a good lien on
property is suspicious as helping a client defraud his creditors, which is moral turpitude, and
could lead to disbarment. Townsend v. State Bar, 32 Cal. 2d 592 (1948)
   F) Using Subordination, Nondisturbance, and Attornment
      Agreements, p. 374
      1)   Miscione v. Barton Development Company, 52 Cal. App.
           4th 1320 (1997), p. 374
Facts: Barton got a development loan for his company Equities I, from Coast Federal Savings,
and gave them a deed of trust. The Coast deed of trust required Barton to get approval from
Coast for its leases. Apparently, Barton did not get that approval. Westinghouse Credit
Corporation had a second deed of trust. Equities I gave a 5-year lease to Barton Development.
The lease agreement had provisions for attornment, subordination, and nondisturbance. The
subordination clause included a provision for a landlord to request the tenant to subordinate its
lease to the landlord.
Westinghouse foreclosed on its second deed of trust. A few months later, Coast foreclosed on its
first deed of trust. Coast sent letters to all the tenants telling them it was the new landlord and
requested each tenant to send an estoppel certificate to them. Barton Development did not
comply. Later that year, Coast sold the building to Miscione, and the following month Barton
Development abandoned its space with another year left on its lease. Miscione sued Barton and
Barton Development for the rent. Barton argued that Coast‘s foreclosure terminated the lease,
and Coast had not requested subordination as required by the Equities I lease agreement. The
trial court granted summary judgment to Barton.
Court: REVERSED. The court found the lease subordination and nondisturbance clauses invalid.
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The attornment clause meant the lease would not terminate for foreclosure or sale and Barton
would accept landlord in place of Equities I.
               (i)      Lease subordination and nondisturbance clauses are invalid
                    unless the new landlord is in privity to the lease agreement.
               (ii)     A lender has the right to foreclose and terminate a lease unless the
                    lender is in privity to the lease agreement.
               (iii) An attornment clause changes the lease priority to be subordinate
                    to the landlord‟s title and prevents foreclosure from terminating a
                    lease.
First, Coast was not a party to the lease until it became the landlord. The court noted that Coast
would not even know it would be the landlord until it learned it was successful at the foreclosure
sale. Consequently, Coast could not have privity to the lease.
Second, Coast had priority in time, as well as by position. Coast was the project lender, and
recorded its deed of trust two years before Barton became a tenant. Coast had the right to
foreclose and eliminate the rights of the parties beneath it. A lease that Coast was not in privity
to could not change Coast‘s legal rights.
Third, while a nondisturbance clause provides that foreclosure or sale would not terminate the
lease and a new landlord would accept Barton as a tenant, Coast was not a party to the lease, and
by virtue of Coast‘s right of foreclosure, the nondisturbance clause was also invalid.
Lastly, Coast did not terminate the leases, and the attornment clause is, by a matter of public
policy, not invalid as it serves the needs of landlords, tenants, and lenders that the parties will not
have to engage in lease negotiations every time a lender or landlord changes position.
Consequently, Barton is bound by the attornment clause, so Barton is obligated to the lease under
Miscione.
            b) Dissent, p. 377
At common law, a landlord required a tenant‘s approval for alienation of the reversion or
remainder interest in the property. The Statute of Anne abolished this requirement. Cal.Civ.Code
§ 1111 also abolishes it.
       2)      Notes, p. 379
            a) Who has the leverage?
Not all leases have attornment or nondisturbance agreements.
            b) Subordination without Nondisturbance?
Some commentators state that a lease with a subordination agreement automatically has a
nondisturbance clause.
            c) Automatic subordination
The Cal. App. court held that an attornment clause provided automatic subordination, and
required the lessee to execute a new lease with the lessor.
   G) Future Advances, p. 380
      1)   Cal.Civ.Code § 2884
               (i)      A lien may be created by contract to take immediate effect as
                     security for the performance of obligations not then in existence.
The first determinant of priority is whether the advance was mandatory or optional. If the senior
mortgagee was obligated to make the advance, then the additional advance enjoys the priority of
the senior mortgagee, even though the lender has actual knowledge of the junior mortgagee.
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An optional advance made with actual knowledge that a junior lien has attached loses its priority
to the junior lien.
                (ii)    Cal.Civ.Code § 18 Actual and Constructive Notice
Notice is:
 1. Actual--which consists in express information of a fact; or,
 2. Constructive--which is imputed by law.
                (iii)   Cal.Civ.Code § 19 Constructive Notice
Every person who has actual notice of circumstances sufficient to put a prudent man upon
inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by
prosecuting such inquiry, he might have learned such fact.
        2)      Notes, p. 381
[Future advances may attach to real property, as by a home equity line of credit, or construction
loan or to personal property, usually for business purposes such as construction credit. JRP.]
             a) Voluntary versus obligatory advances
The majority (and California) rule is that only actual notice defeats the priority of optional
advances. A minority rule is that constructive notice defeats priority of optional advances. Some
jurisdictions require the mortgage state the maximum amount of indebtedness, including future
advances.
             b) Parol evidence as to future advance agreements
Parole evidence is admissible to show that an advance was mandatory, and not merely optional.
             c) Future advances under the UCC
Cal. Comm. Code §9323 provides for priority in all cases except when a financing statement is
not filed, or when the advance is made without commitment and while the security interest is
temporarily perfected.
The scenario occurs where a buyer-borrower purchases items on credit and uses personal
property, such as machinery, for collateral. The creditor who first fixture files (files a financing
statement) has priority for all subsequent advances made on the same security agreement.
             d) Application of payments
                (i)     Cal.Civ.Code § 1479
Where a debtor, under several obligations to another, does an act, by way of performance, in
whole or in part, which is equally applicable to two or more of such obligations, such
performance must be applied as follows:
One--If, at the time of performance, the intention or desire of the debtor that such performance
should be applied to the extinction of any particular obligation were manifested to the creditor, it
must be so applied.
Two--If no such application be then made, the creditor, within a reasonable time after such
performance, may apply it toward the extinction of any obligation, performance of which was
due to him from the debtor at the time of such performance; except that if similar obligations
were due to him both individually and as a trustee, he must, unless otherwise directed by the
debtor, apply the performance to the extinction of all such obligations in equal proportion; and an
application once made by the creditor cannot be rescinded without the consent of (the) debtor.
Three--If neither party makes such application within the time prescribed herein, the
performance must be applied to the extinction of obligations in the following order; and, if there
be more than one obligation of a particular class, to the extinction of all in that class, ratably:
1. Of interest due at the time of the performance.
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2. Of principal due at that time.
3. Of the obligation earliest in date of maturity.
4. Of an obligation not secured by a lien or collateral undertaking.
5. Of an obligation secured by a lien or collateral undertaking.
               (ii)      Unidentified advances and payments
For the fixture filing recording act to be effective, both the lender, and the borrower must state
the application of advances and payments. A lender who treats future advances as ‗simply‘ part
of the first advance loses the first priority of the advances if the borrower fails to say which
‗advance‘ a payment is to be applied to.
            e) Cutoff notices (notice to the senior of loss of future priority)
Restatement (Third) of Property, Mortgages, §2.3(a) proposes to abandon the mandatory or
optional criteria designation for determining the priority of advances. Under the new §2.3(a)
advances would automatically take the priority.
            f) Future advances made during the bankruptcy of a guarantor
If the guarantor of a loan secured by a mortgage on the guarantor‘s property files bankruptcy, the
lender may continue making future advances to the borrower without violating the automatic
stay. The advances, however, may be junior in priority to the bankruptcy trustee‘s interest.
       3)      Turner v. Lytton Savings and Loan Association, 242 Cal.
               App. 2d 457 (1966), p. 381
               (i)       Cal.Civ.Code § 3136 Priority of original obligatory commitment of
                      lender under mortgage or deed of trust
―A mortgage or deed of trust which would be prior to the liens provided for in this chapter to the
extent of obligatory advances made in accordance with the commitment of the lender shall also
be prior to the liens provided for in this chapter as to any other advances, secured by such
mortgage or deed of trust, which are used in payment of any claim of lien which is recorded at
the date or dates of such other advances and thereafter in payment of costs of the work of
improvement. Such priority shall not, however, exceed the original obligatory commitment of
the lender as shown in such mortgage or deed of trust.‖
Facts: Turner sold a property to Caton, secured by a subordinated deed of trust in favor of the
Lytton construction note and deed and trust. Lytton made a partial disbursement on the
construction loan. The next month, Lytton filed and recorded a declaration of default, then
withdrew it, and continued disbursing loan funds. Caton again defaulted a few months later, and
Lytton again filed a notice of default. Turner filed a declaratory relief action to stop the default
action on grounds that after the first default, the subsequent advances lost the priority of the first
deed of trust.
               (ii)      To enjoy the same priority as obligatory advances, other advances
                      on the same deed of trust must be used (1) in payment of any
                      mechanics' liens recorded at the time of the advances, and (2)
                      thereafter in payment of the costs of improvements on the property.
Court: AFFIRMED. Cal. Code Civil Procedure § 1188.1 (now replaced by Cal.Civ.Code § 3136)
provides that (with exceptions) disbursements on the same property have priority according to
the time of their creation (same as for liens, Cal.Civ.Code § 2897). Since the advances were from
the same loan, they have the same priority. ―Where the deed of trust provided for optional
advances and the optional advances are made, and the money received is used for payment of
services or material which go into a construction project, then the priority of the deed of trust for
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all moneys advanced, including optional advances will be as of the date the deed of trust is
recorded which means, in normal situations, prior to mechanics' liens.‖
       4)      Notes, p. 383
            a) Is the payment necessary?
What is the priority of payment made by the mortgagee to pay a street assessment that the
mortgagor is currently contesting? Security-First Nat'l Bank v. Lamb, 212 Cal. 64 (1931).
The landowner had a mortgage relationship with the bank, upon which the landowner made the
payments as required. A non-party city then assessed the landowner under the Street Opening
Act of 1903, which condemned certain property for improvements. The landowner contested the
assessment but did not prevail in the trial court, so she took an appeal. While that appeal was
pending, the bank paid the assessment to the city. Following that payment, the bank instituted
foreclosure proceedings against the landowner when the landowner did not pay the bank for the
money owed. The landowner answered with her claim that the appeal was pending, and the bank
demurred to that answer. The trial court sustained the bank's demurrer. The landowner appealed.
On review, the court determined that the bank was entitled to instituted foreclosure proceedings
because: (1) the mortgage documents allowed for the same; (2) the city's assessment constituted
a prior lien upon the property unless paid; and (3) the landowner had an option of paying the
assessment under protest and filing suit to recover the funds but opted not to do so.
            b) Completing a partially finished project?
As to whether a mortgagee should finish the project or not, Cal.Civ.Code § 3136 says, ―Such
priority shall not, however, exceed the original obligatory commitment of the lender as shown in
such mortgage or deed of trust.‖
            c) Advances to cover interest, taxes, and insurance
Even if the mortgagee has issued a cutoff notice, ―the mortgagor may not issue the (cutoff)
notice and any notice issued by the mortgagor is ineffective, if: (1) a termination or
subordination of further advances would unreasonably jeopardize the mortgagee's security for
advances already made; or (2) the further advances will benefit persons other than the mortgagor,
and the mortgagee has a contractual duty to provide such benefit. Restat 3d of Property:
Mortgages, § 2.3(c)
            d) The Restatement position: Comments
The optional/obligatory distinction thus attempts to prevent the mortgagor's being placed in the
awkward and unfair position of being unable to use the real estate as security for additional
financing, despite the fact that it may have value well in excess of the existing indebtedness
owing under the mortgage.
While this objective is laudable, the optional/obligatory advance doctrine has turned out to be an
exceedingly blunt and unsatisfactory tool for accomplishing it. A principal problem has been the
difficulty of distinguishing between optional and obligatory advances. For example, in a
construction loan a lender agrees to fund the costs of constructing a building, but often hedges its
commitment with conditions: satisfactory inspections by its architects, satisfactory proof of the
costs of labor and materials used, satisfactory evidence that the project is within a preestablished
budget, and so forth. Lenders are apt to reserve copious amounts of discretion in determining that
these conditions have been met; but if too much discretion is reserved, a court may determine
that the lender in fact had no contractual obligation to make further advances, and hence that all
of its advances should lose priority to intervening liens. Mechanics' lien claimants are commonly
the beneficiaries of this determination. [Notes of Comment (a) of Restat 3d of Property:
Mortgages, § 2.3.]
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   H) Mechanics Liens, p. 384
        a) Connolly Development, Inc. v. Superior Court of Merced County,
           17 Cal. 3d 803 (1976).
               (i)      The recording of a mechanics' lien or the filing of a stop notice
                    constitutes a "taking" of property in the constitutional sense.
               (ii)     Mechanic's lien and stop notice statutes are constitutional and
                    inflict only a minimal deprivation of a property interest.
A "taking" of property under the Fourteenth Amendment encompasses any significant
deprivation of a property interest including even temporary deprivations of the use of property.
This definition impels our conclusion that the recording of a mechanics' lien or the filing of a
stop notice constitutes a "taking" of property in the constitutional sense. Once recorded, the
mechanics' lien constitutes a direct lien (§ 3123) on the improvement and the real property to the
extent of the interests of the owner or the person who caused the improvement to be constructed
(§§ 3128, 3129). The lien is subordinate to recorded encumbrances antedating the
commencement of the work of improvement (§ 3134), but takes priority over all subsequent
encumbrances (§ 3134). By purchase and recordation of a payment bond, however, the owner or
the holder of a subordinate encumbrance may secure priority over mechanics' liens. (See §§
3138, 3139.) The owner, lender, contractor or subcontractor may also secure the release of any
mechanics' lien by purchasing and recording a bond in a sum equal to one and one-half times the
amount of the claim. (§ 3143.) The lien terminates unless the material [supplier] initiates a suit to
foreclose the lien within 90 days after recording of the claim of lien. (§ 3144.)
[The court said the same taking‘s analysis applies to stop notices. JRP]
Mechanic's lien and stop notice statutes are constitutional and inflict only a minimal deprivation
of a property interest. State policy strongly supports the preservation of laws giving the laborer
and material supplier security for their claims. In balancing the respective interests, the
safeguards provided by the law to protect property owners against unjustified liens are sufficient
to comply with due process requirements.
The owner and lender can protect themselves against stop notices by securing and recording a
payment bond from the general contractor. (See §§ 3161, 3162, 3235.) The owner, lender,
contractor or subcontractor may also secure the release of any stop notice by filing a bond equal
to one and one-fourth times the amount claimed in the notice. (§ 3171) The obligation of the
owner or lender to withhold funds terminates unless the claimant files suit to enforce the stop
notice within 90 days after expiration of the period for recording claims of lien. (§ 3172.)
       2)      Notes, p. 385
            a) Lien priority
The priority of the mechanic‘s lien relates back to the commencements of the work, rather than
the date of recording. The proposed Uniform Construction Act of 1987 would require an owner
to file a ―notice of commencement‖ to set a property date.
            b) Statutory procedures
A person providing construction labor, or materials without a contract with the property owner
must give the owner and construction lender a preliminary 20-day notice if that if a bill is not
paid, a lien may be filed. Cal.Civ.Code § 3097
A mechanics lien will not bind the property unless the claimant files a lawsuit to foreclose the
lien within 90-days after recording the claim of lien. Cal.Civ.Code § 3144
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Chapter XV. Part V – Events of Default and Enforcement By
  the Lender: Payment of the Loan
   A) What is a Timely Payment?
      1)  Right of reinstatement and redemption in default
Even in default, a debtor has the right of reinstatement and redemption to avoid foreclosure by
making the necessary payment before foreclosure happens.
       2)      Nguyen v. Calhoun, 105 Cal. App. 4th 428 (2003), p. 389
            a) A foreclosure sale cannot be set-aside if the debt is unsatisfied at
               the time of the foreclosure sale.
Facts: Chavez (in San Jose) stopped making payments on the home loan and entered into a
contract to sell the property to Nguyen. The loan company (Harbor) stated that it would postpone
the trustee's sale if Chavez 's agent could provide proof that the Nguyen 's new loan had funded.
At its discretion, Harbor postponed the foreclosure one day, to Friday the 10th at noon. Nguyen
received his funding on the Thursday the 9th, and closed escrow on Friday the 10th at 8:23 AM
(PST). The title company recorded on Friday.
However, Nguyen‘s agent did not call Harbor (although he had the phone number) and gave the
title company the wrong fax number and wrong employee name at Harbor to advise them of the
close of escrow. Nguyen‘s agent also arranged for express mailing of the payment to Harbor,
rather than a wire transfer. Consequently Harbor (in Houston) did not receive notice of the
funding on Friday and went ahead with the trustee's sale. The recorder's office did not index the
grant deed to Nguyen until the next business day, Monday the 13th. On that day also, Harbor
received Nguyen‘s payment. Nguyen sued to quiet title. The trial court ruled for Nguyen.
               (i)     Perfect tender in time rule. The lender must physically receive the
                     money at the required time.
Court: REVERSED AND REMANDED. The debt was unsatisfied at the time of the foreclosure
sale, so the foreclosure sale cannot be set-aside. There was no irregularity in the foreclosure
proceeding itself warranting invalidation of the trustee's sale. The trial court was directed to enter
a new and different judgment in favor of the foreclosure purchasers and against the buyer.
   B) The Effect of Receiving Timely Payment, p. 390
      1)    Bartold v. Glendale Federal Bank, 81 Cal. App. 4th 816
            (2000)
         a) Slow recording leads to legislative act
―Prior to 1989 there was no specified time period within which a reconveyance had to be
recorded after full payment of the loan. Apparently, lenders were not particularly diligent in
ensuring reconveyance was executed and recorded once the loans was satisfied despite civil
penalties for failure to do so. Many property owners experienced problems selling and clearing
title to their property. Title insurers experienced problems of their own. During this period these
companies employed staff [in some instances, up to 50 percent of their employees] for the sole
purpose of confirming old loans appearing as liens against real property had in fact been paid off.
Glendale was originally the beneficiary of Bartold's deed of trust, but it was assigned to Citimae
and Glendale continued to act as the loan servicer. The loan was paid off on April 16, 1992. On
May 8, Glendale requested the original note and accompanying documents from Citimae.
Glendale received the documents on June 24 and immediately executed and delivered the request
for reconveyance to Verdugo. Verdugo executed the document on July 1 and mailed it to the title
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company handling the loan payoff on July 16. Escrow's title insurer recorded a release of
obligation on July 21.
       2)      Cal.Civ.Code § 2941 Request for full reconveyance
            a) 30 days to Discharge
Within 30 days after any mortgage has been satisfied, the mortgagee shall execute and record a
certificate of discharge in the office of the county recorder where the mortgage is recorded. The
mortgagee shall then deliver the original note and mortgage to the person making the request.
[Amended 2001 after Bartold.]
            b) (1)(A) 21-days to Recording
Within 21 calendar days after receipt by the trustee of the original note, or deed of trust, the
trustee shall execute the full reconveyance and shall record it in the office of the county recorder
in which the deed of trust is recorded.
            c) (d) Personal damages of $500 permitted
The violation of this section shall make the violator liable to the person affected by the violation
for all damages that that person may sustain by reason of the violation, and shall require that the
violator forfeit to that person the sum of five hundred dollars ($ 500). [Added 2002]
   C) Impound Accounts, p. 391
An impound account is money paid by the mortgagor to the mortgagee, for the mortgagee to pay
property taxes, insurance, assessments, etc., on the theory the mortgagee is more responsible
with timely payment. In actual practice, mortgagees were less than completely timely or faithful.
New York law makes mortgagees liable for nonpayment damages.
Cal.Civ.Code § 2954 restricts impound account prepayment of taxes and insurance.
Cal.Civ.Code § 2954.8 requires an institution lender to pay 2% annual interest on impound
accounts for low-density residential housing.
Cal.Civ.Code § 2954.1 restricts impound accounts to the obligation required or 12 USC 2609.
Cal.Civ.Code § 2955 requires impound account funds to be invested in California.
A borrower has the right to terminate an impound account. Kirk v. Source One Mortgage Srv.
Corp. 46 Cal. App. 4th 483 (1996)
   D) Prepayment Clauses, p. 392
      1)   Perfect tender in time
Prepayment at common law and in the majority view is a contractual matter. The mortgagor can
prepay the mortgage only if the loan expressly permitted prepayment. The draft of the
Restatement Third Property (Mortgages) §6.1 proposes to switch the presumption to permissive
prepayment as the default on the theory the non-legal trained portion of society presumes
prepayment is the default rule.
       2)      Gutzi Associates v. Switzer, 215 Cal. App.3d 1636 (1989), p.
               392
               (i)      Payment before maturity is not a breach of the contract but an
                    alternative mode of performance on the borrower's part. Thus, a
                    prepayment charge is not a penalty imposed for default.
               (ii)     A prepayment charge is an agreed form of compensation to the
                    lender for a disadvantage, such as additional tax liability, or interest
                    lost through prepayment.
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Facts: The Switzers purchased commercial property from Gutzi with one note to Gutzi, and
another note (the ‗underlying note‘) to Safeco (which was Gutzi‘s and the Switers were to pay it
off). The Safeco note prohibited payment during the first five years, and thereafter permitted
prepayment with additional consideration. The parties signed a standard form purchase
agreement, but that added a typewritten prohibition of prepayment of the note. The Gutzi note
contained a typewritten provision prohibiting prepayment except for three semi-annual
payments, but also had a printed provision entitling prepayment restrictions to the same as the
underlying note. In the sixth year, the Switzers made prepayment on the Safeco note, and then
told Gutzi they were prepaying that note also. Gutzi filed for declaratory relief to prevent
prepayment on the basis that the Switzers had not assumed liability for direct payment of the
Safeco note. The trial court held the Gutzi note ambiguous on prepayment and held the Switzers.
Court: REVERSED.
                (iii) Statute provides that where a contract is partly written and partly
                     printed, the written parts control the printed parts. Prepayment
                     prohibition is not an unreasonable restraint on alienation.
The typed provision clearly states that prepayment, other than the three principal reductions, is
forbidden. Cal. Civ. Code §1651 provides that where a contract is partly written and partly
printed, the written parts control the printed parts. The word "written" in the statute includes
typewritten. The typewritten provision in the Gutzi/Switzer note, which unequivocally prohibits
prepayment, is paramount to the printed provision regarding prepayment. Either the printed
provision must be read in harmony with the typed provision or, by statutory mandate, the printed
provision must be disregarded.
Early California cases firmly established that a lender may refuse to accept payment of a debt
before the debt is due. Absent a statutory or contractual permission, "a debtor has no more right
to pay off the obligation prior to its maturity date than he does to pay it off after its maturity date.
                (iv) Conditions restraining alienation, when repugnant to the interest
                    created, are void. Cal.Civ.Code § 711.
The present case raises the issue whether a lock-in provision entirely forbidding prepayment of
an all-inclusive promissory note is an unreasonable restraint on alienation. California courts have
upheld prepayment fees challenged as unreasonable restraints on alienation in violation of Civil
Code §711. This rule is not absolute in its application, but forbids only unreasonable restraints on
alienation. There is an expense attached to loaning money on real property, and it is an entirely
legitimate aim of purveyors of credit to loan it for a length of time and at a rate of interest that
guarantees a certain net return on the management of the money. A bargained-for lock-in is "a
trade off of commercially beneficial interests which defendants knowingly made when they
borrowed the money. It [is] appropriate to forbid prepayment restrictions on public policy
grounds to protect commercial borrowers who, in most cases, are well able to bargain on their
own with lenders who have a potential economic advantage. Reasonableness must be tested at
the time the contract was formed and not by the benefit of hindsight. The record indicates that
the Switzers simply dealt with Safeco directly, thus scoring an end run around Gutzi and
presenting Gutzi with a fait accompli. If there is a need for regulation of prepayment provisions,
that subject is better addressed by the Legislature than by the judiciary.
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       3)      Notes, p. 396
            a) Pros and Cons
A lender cannot recall funds because interest rates rise. When interest rate fall, the borrower with
a repayment option can refinance and leave the lender with funds to lend a less interest. Even the
proposed Restatement §6.2(a) (i) says that a non-prepayment agreement is enforceable.
            b) Lock-ins in bankruptcy
One way to get around a lock-in (a.k.a. lockout) is to file bankruptcy.
            c) Liquidated damages
California and most states hold that prepayment clauses are not penalties for breach because
prepayment is merely an exercise of an option the debtor has for an alternative method of
performance. One bankruptcy court disagreed as the court considered the prepayment charge as
unreasonable in light of either its anticipated loss, or actual loss from prepayment, and also
considering the ease of proving a loss had interest rates been lower at the time of prepayment.
            d) Usury?
Usury attacks on prepayment charges usually fail in that the lender is not obligated to accept
prepayment. If the agreement does have a prepayment clause, the clause cannot be usury for a
unilateral act by the borrower.
            e) How Large a Charge?
The lender was the seller would was charged income on the whole of the payments as it was part
interest, and the rest was income from the sale of the property. The prepayment clause (in 1977)
required a 50% penalty of the amount of such overcharge for the first 5-years of the note. The
buyers sued, claiming that the clause interfered with their ability to get financing. The seller‘s
accountant stated in a declaration that in the event of prepayment, the seller would incur taxes on
the prepaid amount of 55%, thus the prepayment charge was a reasonable approximation of the
seller‘s additional costs for accepting prepayment. The court agreed, since the parties had the
opportunity to negotiate the contract. Williams v. Fassler, 110 Cal. App. 3d 7 (1980).
            f) Involuntary prepayment
Moat prepayment clauses apply regardless of whether the prepayment is voluntary, or
involuntary, i.e., acceleration. Consequently, the prepayment clause also applies in default, or a
‗due-on-sale‘ clause. However, Federal Home Loan Bank Board regulation 12 CFR 591
prohibits ‗double whammy‘ fees on owner-occupied low-density residential housing.
Cal.Civ.Code § 2954.10 applies where the federal rule does not.
            g) Statutory regulation
Cal.Civ.Code § 2954.9 limits the charge on owner-occupied single-family residential housing to
six-months advance interest for the first five years of the loan, and no fee thereafter.
B &PC § 10242.6 limits charges for loans handled by mortgage brokers. Other sections of the
California code limits charges for loans to California veterans, installment land contracts, and
open-end credit loans. Federal law provides similar protections for VA loans.
            h) Alternative mortgage transaction parity (switching faces)
               (i)     Nat‟l Home Equity v. Face, 239 F.3d 633 (2001).
The late 1970s and early 1980s witnessed an alarming deterioration in the number of home
mortgage lending institutions-- "housing creditors" -- in part because of their inability to adjust
their long-term mortgage portfolios to the high and widely fluctuating short-term deposit interest
rates. In response, Congress passed … the Alternative Mortgage Transaction Parity Act to
authorize non-federally chartered housing creditors to offer alternative mortgages following
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Federal regulations. Alternative mortgages" refers to mortgages with adjusted or renegotiated
interest rates in which the maturity date could be shortened, or include variations "not common
to traditional fixed-rate, fixed-term transactions." Parity Act, § 803(1), 12 U.S.C. § 3802(1). The
statute permitted a non-federally chartered housing creditor to make a loan either under state law,
or under federal law, and under the authority of the respective statutory agency. The Virginia's
State Corporation Commission announced its position that the Parity Act did not preempt
Virginia statutory law limiting prepayment penalties. The National Home Equity Mortgage
Association, a trade association that includes as members non-federally chartered housing
creditors sued for declaratory relief to enjoin Virginia from enforcing the prepayment penalty
provisions for loans made under the Parity Act. The district court issued a permanent injunction.
The U.S. 4th Circuit Court of Appeals held that the Parity Act operatively provided for state
chartered deposit institutions, and other non-federally chartered housing creditors to make
alternative mortgage transactions as long as they complied to federal regulations. The Act
provides that a non-federally chartered housing creditor may make an alternative mortgage
transaction pursuant to applicable federal regulations despite any State constitution, law, or
regulation. 12 USC 3803(c). Under this authority, late charges, prepayments, adjustments to
home loans, and disclosures for variable rate transactions are appropriate and applicable.
Regulations not identified are inappropriate and inapplicable.
The Parity Act permits a non-federally chartered housing creditor to accept federal governance,
and charge a contractually specified prepayment fee as authorized by federal law, despite
Virginia law.
               (ii)      65 FR 60542-01
The next year, the Office of Thrift Supervision cited state regulation in predatory lending
controls as the reason for issuing a rule that OTS will not construe it authority to frustrate state
efforts on prepayment penalties and late charges.
               (iii)     http://www.ots.treas.gov/alternative95.html (JRP added)
The Alternative Mortgage Transaction Parity Act applies to "housing creditors" that engage in
alternative mortgage transactions, including persons who "regularly make" loans secured by
residential real estate. Natural persons and real estate brokers may be considered "housing
creditors," provided they make more than five such loans within specified time periods.
           i) Methods of Yield Maintenance
               (i)       Present value of payment difference at current loan interest rate
               (ii)      Difference between old loan interest rate and return on a U.S.
                      Treasury with the same maturity (which is always lower than current
                      mortgage rates.)
In re Financial Center Associates of East Meadow, 140 B.R. 829 (Bank. E.D. N.Y 1992)
           j) Defeasance Clauses
Some loans require the debtor to replace the security with Treasury obligations carrying the same
principal and interest payments. ―A mortgagor has the right of release to the mortgage on real
estate provided that the mortgagor gives substitute security equal in value to the mortgage
obligation and any associated fees that are substantially the equivalent of cash.‖ Restatement
§6.2(b). [This may be difficult since T-Bills are not ‗amortized‘ like mortgages and carry lower
interest rates.]
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           k) More Reading
See Dale A. Whitman, Mortgage Prepayment Clauses: An Economic and Legal Analysis, 40
UCLA L. Rev. 851 (1993).
   E) Late Charges, p. 404
      1)    As improper liquidated damages
         a) Garrett v. Coast & Southern Federal Sav. & Loan Assn., 9 Cal. 3d
            731 (Sup. Ct 1973)
               (i)       A provision in a contract liquidating damages for the breach of the
                     contract is void except that the parties to such a contract may agree on
                     an amount, presumed to be the amount of damage sustained by a
                     breach, when, from the nature of the case, it would be impracticable
                     or extremely difficult to fix the actual damage. Cal.Civ.Code §
                     1671(d).
Facts: Garrett and others debtors of Coast & Southern Federal Savings & Loan Association (the
S&L) sued in class action for return of certain late charges, and a declaratory order enjoining the
S&L from assessing those late charges. The S&L assessed late charges as a percentage of the
unpaid principal balance of the loan for the period of default: "The <debtor> agrees that in the
event that payments of either principal or interest on this note becomes in default, the <S&L>
may, without notice, charge additional interest at the rate of two (2%) per cent per annum on the
unpaid principal balance of this note from the date unpaid interest started to accrue until the close
of the business day upon which payment curing the default is received." The plaintiffs alleged
that this same charge is made regardless of whether the obligor makes his payment 11 days late,
or 29 days late, or fails to make it at all in that particular month. Thus the plaintiffs alleged, the
late charges amounted to unreasonable liquidated damages (as incommensurate with actual
damages) and were void under Cal.Civ.Code § 1670. The trial court sustained demurrer by the
S&L without leave to amend. The plaintiffs appealed.
Court: REVERSED. Defendant seeks to avoid the question of damages by maintaining that the
lending agreement, to the extent that it requires the payment of additional interest, merely gives a
borrower an option of alternative performance of his obligation. Construing an agreement
vesting a party with an option to perform in a manner to result in a penalty does not validate the
agreement. To so hold would be to condone a result directly prohibited by the Legislature that
may nevertheless be indirectly accomplished through the imagination of inventive minds.
[Penalties are void that cannot qualify as proper liquidated damages. §§ 1671, 1671.]
Contracts may provide for varying the acceptable contingency performance. However, we ignore
form and seek the substance of arrangements that purport to legitimize penalties and forfeitures.
A borrower on an installment note cannot legally agree to forfeit what is clearly a penalty in
exchange for the right to exercise an option to default in making a timely payment of an
installment. Otherwise the legislative declarations of Cal.Civ.Code §§ 1670 & 1671 would be
completely frustrated.
The increased interest charge is assessed only upon default, and is invalid unless it meets the
requirements of § 1671. Liquidated damages must represent the result of a reasonable endeavor
by the parties to estimate a fair average compensation for any loss that may be sustained. The
parties here did not make a "reasonable endeavor to estimate a fair average compensation for any
loss that might be sustained" by the delinquency in the payment of an installment. They
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contracted for an additional sum paid by the borrower as an interest charge which if, in the
absence of a showing a relationship to any loss that may be suffered, is a penalty.
Interest is a measure of compensation to which an obligee is entitled while a penalty is punitive
in character. A penalty provision compels performance of an act, and usually becomes effective
only in the event of default on which forfeiture is compelled, and without regard to the actual
damages sustained by the party aggrieved by the breach.
               (ii)      Late charges serve a dual purpose to (1) compensate the lender for
                      administrative expenses and the cost of money wrongfully withheld;
                      and (2) encourage the borrower to make timely future payments.
The characteristic feature of a penalty is its lack of proportional relation to the damages that may
actually flow from failure to perform under a contract. If the sum substantially exceeds the
damages suffered by the lender, the provision is an invalid attempt to impose a penalty.
The provision here says that a late borrower is charged an additional amount of 2 percent per
annum for the period of delinquency, as assessed against the unpaid principal balance of the
loan. Such a charge for the late payment of a loan installment as measured against the unpaid
balance of the loan must be punitive in character. It is an attempt to coerce timely payment by a
forfeiture that is not reasonably calculated to merely compensate the injured lender. Because the
parties failed to make a reasonable endeavor to estimate a fair compensation for the loss
sustained on the default of an installment payment, the provision for late charges is void.
A late paying borrower remains liable for the actual damages resulting from his default. The
lender's charges could be fairly measured by the period of time the money was wrongfully
withheld plus the administrative costs reasonably related to collecting and accounting for a late
payment.
Had the amount of the late charges been fixed as a measure of anticipated damages in the event
of a default that the provision would not necessarily have violated §1670. Liquidated damages
can be validly anticipated by the parties' reasonable endeavors to do so if "extremely difficult" or
"impracticable" to fix. The defendant might have been able to establish the impracticability of
prospectively fixing its actual damages resulting from a default in an installment payment. We
would not hold a provision as violative of §1671 for liquidated damages where it is established
that the measure of actual damages would be a comparatively small amount and that it would be
economically impracticable in each instance of a default to require a lender to prove to the
satisfaction of the borrower the actual damages by accounting procedures. If the test of
impracticability is met the court should give effect to a liquidated damages provision resulting
from the reasonable endeavors of the parties to fix a fair compensation.
               (iii)     Extreme and Impracticable
Extreme" means "existing in the highest or greatest possible degree going to great or exaggerated
lengths going beyond the limits of reason, necessity or propriety." (Webster's Third New
Internat. Dict. (1961) p. 807.)
"Impracticable" means "not wise to put into or keep in practice or effect . . . incapable of being
put into use or effect or of being accomplished or done successfully or without extreme trouble,
hardship or expense . . . ." (Webster's Third New Internat. Dict. (1961) p. 1136.)
           b) Notes, p. 408
               (i)       Older justifications
   (1) Additional interest (not a penalty), or
   (2) Penalties for late performance (not additional interest).
Clermont v. Secured Investment Corp., 25 Cal. App. 3d 766 (1972)
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               (ii)    Statutory regulation, Cal.Civ.Code § 2954.4
(a) A charge may be imposed for late payment of an installment due on a loan secured by a
mortgage or a deed of trust on real property containing only a single-family, owner-occupied
dwelling. The charge may not exceed either (1) the equivalent of 6 percent of the installment due
that is applicable to payment of principal and interest on the loan, or (2) five dollars ($5),
whichever is greater. A payment is not a "late payment" for the purposes of this section until at
least 10 days following the due date of the installment.
(e) This section is not applicable to loans made by a credit union (Cal. Fin. §14000), an industrial
loan company (Cal. Fin §18000), a finance lender (Cal. Fin.§ 22000) or loans made or negotiated
by a real estate broker (recall the 10% limit of Cal. B&P §10242.5).
[Also, the Parity Act applies, although OTS‘ current position is that state late charges are not
preempted, p. 402 above.]
               (iii)   Charging a fee or noticing a default for being late
A late fee clause after timely performance is due cannot be a ‗grace period‘ before default as a
matter of law. The clause shows the affect to the ‗time is of the essence‘ clause. The late clause
negates a finding that ‗time is of the essence‘ to the ‗due date.‘ Consequently, equity will not
allow foreclosure to be used to enforce compliance with payment on the ‗due date.‘ Baypoint
Mortgage v. Crest Premium Real Estate Investment Trust, 168 Cal. App. 3d 818 (1985)
(foreclosure not permitted for five to 12 days of lateness.)
               (iv)    Late fees not Usury
A transaction is not usurious where the excessive interest is caused by a contingency act under
the debtor‘s control. The (1.5% per month) late charge is not usury because it is not payment for
the loan or forbearance of any money. A debtor cannot by voluntary act render an otherwise
voluntary act usurious. Southwest Concrete Products v. Gosh Construction Corp., 51 Cal. 3d 701
(1990).
               (v)     Garrett and prepayment – breach of an obligation
A prepayment clause does not penalize for ‗breach of an obligation,‘ under §1670. Prepayment is
not breach, but an option given to the debtor as an alternative debt payment method. Garrett
involved a loan agreement provision for the assessment of percentage of the unpaid balance of
the loan when the installment is in default. Garrett clearly involved the breach of an obligation a
contemplated by the code.
       2)      Rigley v. Topa Thrift and Loan Association, 17 Cal. 4th 970
               (1998), p. 409
Facts: Rigley was an architect and developer, at the time building a luxury homes for speculation
sale. As the construction loan was coming due, he sought a bridge loan. Rigley sign a loan
agreement with Topa Thrift and Loan Association (Topa). The loan agreement included a six-
month interest charge for prepayment during the first 5-years, voluntarily, involuntarily or upon
acceleration of the Note. Rigley objected (the loan was for only 2-years), so Topa added a
provision waiving the prepayment charge if ―all scheduled payments have been received no more
than 15 days after their scheduled due date, and there have been no other defaults under the
terms of this note or any other now existing or future obligation of borrower to Topa.‖ When
escrow on the property was about to close, Topa demanded a prepayment charge, a late fee, and
a ‗demand fee.‘ The buyers paid the demand, and sued for reimbursement.
The trial court held the prepayment clause was a late charge, and a penalty in the nature of an
unenforceable forfeiture. The trial court gave judgment for the plaintiffs. The Court of Appeal
reversed the judgment, saying the prepayment charge was ―not made invalid by conditioning a
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waiver upon a lack of default. The penalty was triggered by the prepayment, so it was a valid
prepayment provision and was not an invalid late charge or forfeiture.‖ The dissenting justice
would have affirmed the judgment on the same ground it was rendered, i.e., that the prepayment
fee conditioned on late interest payments constituted an unenforceable penalty.
               (i)       Assessment of a prepayment fee in the event of default on other
                      terms of the contract is a penalty or forfeiture, and is invalid unless
                      proportionate to the damages sustained.
Court: REVERSED. The prepayment provision bore no relationship to the potential damages
defendant would incur from a late interest payment and was therefore a penalty for delinquency
in meeting the contractual interest payments. Thus the penalty is unenforceable.
               (ii)       Whenever, by the terms of an obligation, a party [to the contract]
                      incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of
                      his failure to comply with its provisions, he may be relieved from [the
                      forfeiture], on making full compensation to the other party, except in
                      the case of a grossly negligent, willful, or fraudulent breach of duty.
                      Cal.Civ.Code § 3275 (1872)
Cal.Civ.Code § 1670 and 1671 broaden Cal.Civ.Code § 3275 to other contracts, but the basis is
the same. A provision for damages (liquidated damages, or late payments) for a breach of
contract determined in anticipation of breach is enforceable only if (1) the damages bear a
reasonable relationship to the range of actual damages that the parties could anticipate as
resulting from breach of contract, and (2) determining actual damages at the time of contracting
was impracticable or extremely difficult. (1872 Civ. Code, § 1670, 1671.) Prepayment charges
are not penalties or liquidated damages for breach, but an agreed form of compensation to the
lender as alternative performance.
Here, the Topa clause is valid if characterized as a prepayment charge. But if viewed as a charge
for late payment of interest, however, the clause has to meet the reasonableness standard of
§1671, and is unreasonable, and unenforceable as a penalty, under Garrett. The complication is
that the charge was contingent on both events, prepayment of principal and late payment of an
interest installment. It is a prepayment charge, and a late payment penalty.
The plaintiffs improved the property with the intent of selling it and had obtained the Topa loan
merely to "bridge" the period until sale [recall the prepayment penalty had a 5-year term, but the
principal term was two-years. – JRP]. A late payment or other default meant that the plaintiffs
forfeited the opportunity to sell the property without penalty before maturity of the loan, so the
provision was particularly significant to the plaintiffs.
Looking to the ‗substance rather than the form' of the disputed provision (Garrett), the intent and
effect of the provision was that any late payment or other default would result in a severe
penalty--the inability to sell the Property without payment of a sizable preset charge. From
Topa's viewpoint, the purpose of the threatened charge was to coerce timely payment of interest,
and not simply compensate Topa for interest payments lost through prepayment of principal.
Thus, the value of the provision to Topa was in its operation as a penalty for late payment rather
than as compensation for prepayment. As the dissenting justice [of the Court of Appeals]
explained … ―to ensure the Ridgleys would not be late on any of their interest payments (or
default on any other terms of the contract), Topa held over their heads the threat of a $ 113,000
prepayment penalty which could be collected only 'in the event of [such] default.‖ This
prepayment penalty was imposed as a penalty for the Ridgleys' default in being tardy with one or
more monthly interest payments and not to compensate Topa for its lost future interest payments
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or extra administrative expenses attendant to relending this money. It is, in substance, an
unenforceable penalty for late payment. (Garrett).
Topa describes the disputed provision as a "conditional waiver of the prepayment charge" and
contends that, "if this Court recognizes the right of Topa to the payment of a charge upon
prepayment of the loan, then it must also recognize that Topa could waive that right upon
conditions bargained for in the context of the commercial transaction at issue." We disagree.
That the prepayment fee might have been imposed without condition does not imply it may
validly be imposed on the condition of plaintiffs' late payment of interest. Under Topa's
"conditional waiver" theory, virtually any penalty or forfeiture could be enforced if characterized
as a waiver. To accept that theory would be to "condone a result which, although directly
prohibited by the Legislature, may nevertheless be indirectly accomplished through the
imagination of inventive minds." (Garrett).
Justice Mosk, dissenting: The prepayment clause was a negotiated agreement between
sophisticated commercial parties. The original loan agreement included a straight prepayment
requirement. For an additional consideration, the lender agreed to modify the loan agreement to
waive the prepayment charge after six months, on the condition that borrowers made timely
payments and avoided default. The condition was not met. Borrowers were late on several
payments. The late payments did not trigger a penalty; indeed, lender waived late fees and even
agreed to a new payment schedule. Borrowers, however, failed to meet the condition that they
had negotiated for avoiding a prepayment charge. They could have continued to make payments
through the life of the loan. They chose instead to prepay. Even with the prepayment charge they
incurred a significant savings--in the amount of approximately two months of scheduled
payments. In this highly specialized area, the Legislature, rather than the courts, is the more
appropriate vehicle for limiting the bargaining options of commercial parties.
Chapter XVI. Defaults and Workouts, p. 415
   A) Events of Default, p. 415
      1)   Hauger v. Gates, 42 Cal. 2d 752 (1954), p. 415
Facts: Hauger and Gates agreed to a sale of ranch, and ranch equipment from Gates to Hauger.
Hauger signed a promissory note and second deed of trust to Gates, who conveyed real property
to Hauger. Hauger said Gates failed to convey the personal property, while Gates said Hauger
failed to pay on the note. Hauger repeatedly told Gates they would pay the overdue installments
if Gates would deliver the personal property. Gates filed a notice and breach, and executed a sale
of the ranch to Chalmers, who knew of the dispute. Hauger sued to set aside the sale, with the
Bank holding the first deed of trust also acting as escrow account.
The trial court sustained Gates‘ demurrer to the purchaser's action to set aside an extra-judicial
sale made under a deed of trust and entered judgment in favor of the sellers.
Court: REVERSED.
               (i)      When cross-demands exist between persons under circumstances
                     that if one had brought an action against the other, a counterclaim
                     could have been set up, the two demands are compensated so far as
                     they equal each other. Neither party can be deprived of the benefits of
                     assignment or death of the other.
Plaintiffs had a setoff that they were entitled to assert. The cross-demands between plaintiffs and
defendants Gates existed at the time the notice of default was declared and the sale under the
deed of trust was held. By reason of their failure to deliver certain personal property to which
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plaintiffs were entitled under the agreement of sale, defendants Gates were indebted to plaintiffs
in a greater sum than the amount of the unpaid installments owing by plaintiffs on their
promissory note. The Code does not require that the cross-demands be liquidated, so the fact that
plaintiffs' demand is an unliquidated claim for damages for breach of the contract of sale with the
Gateses does not affect their right to the setoff.
       2)      Notes, p. 416
            a) The offset statutes
               (i)       Cal Code Civ Proc § 431.70 Defense of payment as to cross-
                      demands for money; Statute of limitations
Where cross-demands for money have existed between persons at any point in time when neither
demand was barred by the statute of limitations, and an action is thereafter commenced by one
such person, the other person may assert in the answer the defense of payment in that the two
demands are compensated so far as they equal each other, notwithstanding that an independent
action asserting the person's claim would at the time of filing the answer be barred by the statute
of limitations. If the cross-demand would otherwise be barred by the statute of limitations, the
relief accorded under this section shall not exceed the value of the relief granted to the other
party. The defense provided by this section is not available if the cross-demand is barred for
failure to assert it in a prior action under Section 426.30. Neither person can be deprived of the
benefits of this section by the assignment or death of the other. For the purposes of this section, a
money judgment is a "demand for money" and, as applied to a money judgment, the demand is
barred by the statute of limitations when enforcement of the judgment is barred under Chapter 3
(commencing with Section 683.010) of Division 1 of Title 9.
               (ii)      Cal Code Civ Proc § 428.10 Causes of action asserted in cross-
                      complaint
A party against whom a cause of action has been asserted in a complaint or cross-complaint may
file a cross-complaint setting forth either or both of the following:
(a) Any cause of action he has against any of the parties who filed the complaint or cross-
complaint against him. Nothing in this subdivision authorizes the filing of a cross-complaint
against the plaintiff in an action commenced under Title 7 (commencing with Section 1230.010)
of Part 3.
(b) Any cause of action he has against a person alleged to be liable thereon, whether or not such
person is already a party to the action, if the cause of action asserted in his cross-complaint (1)
arises out of the same transaction, occurrence, or series of transactions or occurrences as the
cause brought against him or (2) asserts a claim, right, or interest in the property or controversy
which is the subject of the cause brought against him.
            b) Missing or insufficient payments
A beneficiary may declare a default because a payment is late, or inadequate. If the obligation is
an installment note containing an acceleration clause, the mortgagee may accelerate the entire
balance.
            c) Property taxes and assessments
               (i)       Acceleration
If an owner fails to pay taxes and assessments, the mortgagee may accelerate the obligation
without having to show impairment. Cal.Civ.Code § 2924.7, Security First Nat‘l Bank v. Lamb,
212 Cal. 64 (1931).
               (ii)      Pay and be reimbursed
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A mortgagee may pay liens for taxes and assessments, and add those values to the secured debt,
but the mortgagee is not entitled to independently seek reimbursement after foreclosure. San
Mateo County Bank v. Dupret, 124 Cal. App. 395 (1932).
               (iii)   Junior subordination by taxes and assessments
A junior deed of trust is subordinate to taxes and assessments paid on liens by a senior holder of
a deed of trust. Manning v. Queen, 263 Cal. App. 2d 672 (1968).
               (iv)    Timing of payment
A lienholder may only seek reimbursement for lien payments made prior to foreclosure.
Foreclosure means the lienholder considers the security adequate for all debt. San Mateo County
Bank v. Dupret, 124 Cal. App. 395 (1932).
           d) Keeping the property insured, p. 419
An acceleration clause is enforceable for requiring the debtor to maintain insurance on the
security, regardless of whether impairment occurs or not. Cal.Civ.Code § 2924.7.
           e) Transferring or encumbering the property as an event of default
Anti-alienation clauses of low-density residential housing are enforceable to prohibit conveyance
or further encumbrance of mortgaged property. 12 USC 1701j-3.
           f) Waste
               (i)     Substantially impairs
Any act that substantially impairs the mortgagee‘s security is prohibited. Cal.Civ.Code § 2929. A
mortgagor who knows that removal of fixtures and equipment impairs the mortgagee‘s security
commits by the removal and sale of fixtures and equipment without the mortgagee‘s consent. A
mortgagee has actions both in law for damages, and in equity for injunction to stop, and recover,
damages by a mortgagor committing waste. Lavenson v. Standard Soap. Co., 80 Cal. 245 (1889).
               (ii)    One-action rule, New York approach
To avoid the one-action, include a prayer for judicial foreclosure in the waste action. (See the
Note on Lender‘s offsets below). A non-waste covenant in a multi-unit residential mortgage is a
requirement to comply with applicable building codes and allows the mortgagee to accelerate
and foreclose for any code violation if repairs are not made within 30 days when required. New
York.
           g) Injunctive relief for Waste
               (i)     Cal. Code Civil Procedure § 745
The court may, by injunction, on good cause shown, restrain the party in possession from doing
any act to the injury of real property: (a) During the foreclosure of a mortgage on the property.
(b) After levy on the property and before the possession of the property is transferred pursuant to
sale under the levy.
               (ii)    Cal. Code Civil Procedure § 729.090
(a) From the time of the sale until a redemption, the purchaser is entitled to receive from the
person in possession the rents and profits from the property or the value of the use and
occupation of the property. (b) Notwithstanding subdivision (a), the purchaser is liable to the
person who redeems for any rents or profits that have been received by the purchaser pursuant to
subdivision (a). (c) The purchaser, from the time of sale until redemption, is entitled to enter the
property during reasonable hours to repair and maintain the premises and is entitled to an order
restraining waste on the property from the court. Such order may be granted with or without
notice in the discretion of the court.
               (iii)   Restatement 3d of Property: Mortgages, § 4.6(c)
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If the mortgage relationship continues to exist at the time the mortgagee claims waste, an
impairment of security exists if the ratio of the mortgage obligation to the real estate's value is
above its scheduled level. In such cases, the mortgagee may restore the ratio of the mortgage
obligation to the real estate's value to its scheduled level by obtaining an order compelling
correction of the waste or by recovery of damages, limited by the amount of the waste.
            h) Impounds
An impound occurs where a lender can require the borrower to pay the property taxes and
insurance in advance into a fund held by the lender, who then makes the payments.
            i) Minor breaches and impairment
               (i)     Legislative response
The judicial limitation of foreclosure to breaches beyond minor ones (see Baypoint in Chapter
15, p. 408, Note 3) is closed by Cal.Civ.Code § 2947.7. The legislature passed the statute when
the Court of Appeals prevented foreclosure on a mortgagor who refused to buy insurance as
required by his mortgage. In the Court‘s opinion, as the land value was greater than the
mortgage, failure to buy insurance did not impair the security.
The Court limited the mortgagee to buying the insurance and adding the cost to the secured
obligation. Freeman v. Lond, 181 Cal. App. 3d 791 (1986).
               (ii)    Disclaimer
In giving this opinion, we advise you that a California court may not strictly enforce certain
provisions contained in the Loan Documents or allow acceleration of the maturity of the
indebtedness evidence by the Note if it concludes that such enforcement or acceleration would be
unreasonable under the then existing circumstances. (Suggested disclaimer for loan document
opinions by the Report on Legal Opinions if California Real Estate Transactions, 1987).
            j) Inadequate offsets
If the trustor has offset claims but they are less than what the beneficiary is then owned on the
obligation, the offset will not stop a foreclosure. Gluskin v. Lehrfield, 134 Cal. App. 2d 804
(1955).
            k) Lenders’ offsets
A trustor has rights to set off claims to prevent foreclosure. Hauger. A beneficiary who tries to
offset the balance owned under the deed of trust as a defense to a lawsuit brought by the trustor
risks losing the security under the one-action rule. Aplanalp v. Forte (p. 58 above), Security
Pacific Bank v. Wizab (p. 48 above). And Birman v. Loeb, 64 Cal. App. 4th 502 (1998).
       3)      Estoppel
            a) Sutherland v. Barclays American Mortgage Corporation, 53 Cal.
               App. 4th 299 (1977), p. 421
Facts: The February 1994 Northridge earthquake so seriously damaged Sutherland‘s home that
she was required to move out. Sutherland called Barclays, her mortgagee, and spoke with a
collections agent about her situation. The agent told that Barclays would put a three-month ‗stop‘
on her account, her payments would not be due during that time, Barclays would not send any
delinquencies notices would be sent to her during that time, Barclays would not report any
derogatory information to any credit agencies for that time. Sutherland received a call in April
from Barclays that it expected her to make the February, March, and April payments together
with the May payment or to make up the back payments within a short period of time. She
objected that she could not afford that amount and asked Barclays to tack the time and money
onto her mortgage. Barclays said only HUD could do that. Barclays sent Sutherland a letter in
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May demanding she bring her payments fully to date, but the letter also referred her to HUD.
Barclays also filed a notice of default at that time. A few days later, Sutherland sent Barclays her
May payment and coupon. Barclays returned them as incomplete to the full amount due for all
four months. Barclays then contacted HUD to sell HUD her mortgage, and told Sutherland by
letter that she did not need to do anything at that time. As directed, Sutherland did not make any
mortgage payments. In December, HUD told Sutherland it refused to buy the mortgage as a new
policy avoiding earthquake damages premises. Sutherland again sent a mortgage payment to
Barclays, which again sent the payment back uncashed. In February 1995, Sutherland spoke to
the Barclays agent she had spoken with in May, and asked about a forbearance agreement,
suspending payments during that time, and adding them to the end of the loan. Barclays told her
that a forbearance agreement would merely prevent Barclays from foreclosing until the property
was fully repaired; it would not add the payments to the end of the loan period or permit
Sutherland to resume regular monthly payments in the event HUD declined an assignment
request.
Sutherland then brought a 7-count action for (1) declaratory relief that she was not in default, (2)
Barclays had breached the three-month "stop" payment agreement by declaring her in default and
wrongfully refused to accept her mortgage payments beginning in May 1994, (3) a breach of the
covenant of good faith and fair dealing, (4) negligent misrepresentation of the "stop" payment
agreement (knowing that it would later demand that she make a lump sum payment covering
those three months), (5) bad faith denial of the ‗stop‘ agreement, (6) NIED, and (7) injunctive
relief to preclude Barclays from foreclosing on the property. The trial court granted summary
judgment to Barclays.
               (i)     An ambiguous „stop‟ agreement is construed in favor of the
                    borrower. Code Civ. Proc., §§ 1654, 1864
               (ii)    A borrower may act in reliance of the words, and acts of a
                    mortgagee to forebear foreclosure. Promissory Estoppel
Court: REVERSED.
Barclays argued that the ‗stop‘ agreement simply allowed Sutherland to extend her due date for
each month to May. Sutherland argued the ‗stop‘ agreement was an extension of the mortgage. A
mortgagee's statement that it will temporarily "stop" an account does not indicate with
reasonable certainty when the excused payments have to be made. Such a statement is
ambiguous and should arguably be construed in favor of the borrower. (Civ. Code, § 1654.)
Moreover, to the extent the parties' competing interpretations of the "stop" payment agreement
are equally plausible, the agreement should be interpreted in favor of the borrower, since it was
for her benefit that the agreement was made.
Barclays argued that a loan modification must be in writing. The Court rejected that argument
because Barclays was estopped by their words and actions. ―Where the conduct or the acts of the
party whose rights would thus be affected by a waiver have been such as to mislead the other
party, to his prejudice, into the honest belief that a waiver was intended or consented to, then
such conduct or acts will be held sufficient to work an estoppel as against the former; … [while]
a gratuitous oral promise to postpone a sale of property pursuant to the terms of a trust deed
ordinarily would be unenforceable under Civil Code §1698, … the doctrine of promissory
estoppel is used to provide a substitute for the consideration which ordinarily is required to
create an enforceable promise.‖
Sutherland relied to her detriment on Barclays's statement that she could postpone three
mortgage payments. Having orally agreed to such a postponement, Barclays cannot rely on the
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absence of a written agreement in order to declare Sutherland in default for missing those
payments.
Barclays also argued that Sutherland defaulted on the loan by failing to make her regular
payments after the three-month "stop" period. Sutherland mailed Barclays a check for $ 721.91
together with the May payment coupon. However, Barclays returned the check uncashed.
Barclays then informed Sutherland, ―you do not need to do anything,‖ while HUD was
considering whether to take over her loan." After HUD‘s rejection, Sutherland again mailed
Barclays a check, and Barclays again returned the check uncashed. The law did not require
Sutherland to engage in futile or useless acts. Civ. Code, § 3532.
       4)      Notes, p. 424
               (i)     Good faith
Citibank refused to make further disbursements on the construction loan, then foreclosed and
bought the property for a fraction of the value. The investors sued for breach of the implied
covenant of good faith and fair dealing and fraud in the inducement of the loan agreement, and
won at trial ($ 900,001 on the contract claim and $ 40.92 million for fraud.) The Court of
Appeals reversed since a covenant of good faith and fair dealing could not be implied so as to
prohibit the lender from doing what it was expressly permitted to do under the loan agreement,
i.e., to withhold the loan funds when the conditions precedent to its performance had not been
fulfilled to its satisfaction. The lender had no duty to act in good faith; it was required only to
make an objectively reasonable decision. Storek & Storek, Inc. v. Citicorp Real Estate, Inc., 100
Cal. App. 4th 44 (2002)
               (ii)    Lender liability
A debt is not a trust, and there is not a fiduciary relation between the debtor and creditor as such.
Price v. Wells Fargo., 213 Cal. App. 3d 465 (1989). Refusal to give a borrower more time does
not breach the implied covenant of good faith and fair dealing. Conversely, giving the borrower a
little more time during negotiations estops the lender from foreclosure later. Alaska State Bank v.
Fairco, 674 P.2d 228 (1983).
               (iii) Insecurity clauses, Cal U Comm Code § 1208 (2004), Option to
                    accelerate at will (pure heart & empty head test)
A term providing that one party or his successor in interest may accelerate payment or
performance or require collateral or additional collateral "at will" or "when he deems himself
insecure" or in words of similar import shall be construed to mean that he shall have power to do
so only if he in good faith believes that the prospect of payment or performance is impaired. The
burden of establishing lack of good faith is on the party against whom the power has been
exercised.
A debtor can establish a creditor‘s bad faith by proving the creditor did not have the claimed
information. (Illinois). Good faith is irrelevant. 146 Cal. App. 3d 1002 (1983).
               (iv)    Hiding behind the statute of frauds
Michigan requires a borrower to have a written agreement of any waiver by a lender.
California requires a borrower to have a written agreement to loan money, or grant, or extend
credit for loans over $100,000 and not primarily for personal, family, or household purposes.
Cal.Civ.Code § 1624(a)(7).
               (v)     Restatement Property Third Mortgages @8.1(d)
A mortgagor may defeat acceleration and reinstate the mortgage obligation by paying or
tendering to the mortgagee the amount due and owing at the time of tender in the absence of
acceleration and by performing any other duty in default the mortgagor is obligated to perform in
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the absence of acceleration if: (1) such an action is authorized by statute or the terms of the
mortgage documents; or (2) the mortgagee has waived its right to accelerate; or (3) the
mortgagee has engaged in fraud, bad faith, or other conduct making acceleration unconscionable.
[If the mortgagor had defaulted the first step the mortgagee must take to enforce its mortgage
rights is declare all the secured obligations now due. Acceleration.]
   B) Acceleration Clauses, p. 427
      1)    Phrasing
         a) Installment notes provisions
―Should default be made in payment of any installment of principal or interest when due the
whole sum of principal and interest shall become immediately payable at the option of the holder
of this note‖
            b) Deed of Trust provisions
―Should default be made in performance of trustor’s obligation when due the whole sum of
principal and interest shall become immediately payable at the option of the holder of this note‖
            c) FNMA & FHLMC clauses
Allow not less than 30-days for payment under an acceleration clause after notice is mailed.
            d) Court interpretation
               (i)     No loss for waiting
A mortgagee who doesn‘t accelerate on the debt on the first occasion when the mortgagor
defaults does not lose the right to exercise the clause on a subsequent default.
               (ii)    No acceleration without express provision
If there is not an acceleration clause in the note then, (1) Cal.Civ.Code § 728, and (2) of and the
mortgagee forecloses on the security where the mortgagor defaults before the balance on the note
is due, the mortgagee may only require the proceeds applied to the portion of the debt then due
by default or otherwise due.
       2)      Notes, p. 428
               (i)     Acceleration notices
To execute an acceleration clause, the payee must notify the maker of its intent to accelerate the
debt after the default.
               (ii)    Reinstatement
The lender‘s right to accelerate is tempered by the statutory reinstatement right if the obligation
has not matured of its own account.
               (iii)   Balloon payments
Fully amortized means each payment is the same amount as all prior ones and pays off the debt
entirely. A balloon payment occurs when the prior payments leave a large single final payment.
See Cal.Civ.Code § 2957 and 2934i.
The note holder of a balloon payment must give the borrower notice of between 90 to 150 days.
Failure of the note holder to give proper notice extends the due date, and the term of the note,
and defers acceleration until the note holder gives proper notice.
               (iv)    Acceptance of delinquent payments
If the beneficiary accepts a delinquency payment, the default based on the payment is cured and
foreclose based on that delinquency is precluded.
               (v)     Late charges
An additional charge is payment is not timely made. See Chapter 15.
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   C) Junior Responses to Senior Defaults, p. 429
      1)   Windt v. Covert, 152 Cal. 350 (1907), p. 429
Facts: Hardy owed the senior note ($4400) and deed and of trust to Covert‘s property. Windt
owed the junior note ($$375 remaining) and deed and of trust to Covert‘s property. When Hardy
foreclosed, Windt paid of the Hardy mortgage to prevent a senior foreclosure judgment, and then
sued to foreclose on his own note. The trial court granted judgment for Windt on both notes, plus
a deficiency on both debts.
               (i)       A junior may only assert recovery for paying the senior by
                      including the senior debt in the junior foreclosure.
Court: AFFIRMED WITH MODIFICATION (no deficiency).
The Court found that at the time Windt filed suit, Hardy‘s cause of action was already barred by
the statute of limitations. Consequently, Windt would be also unable to sue in his position as
junior to Windt. Covert argued that Windt therefore not be able assert the Hardy mortgage over
her. (Cal.Civ.Code § 2876 and Cal. Code Civil Procedure § 726).
The court noted the timing of Windt‘s purchase (pre-judgment on the senior foreclosure) and
analogized a reverse one-action rule, in that requiring a junior at assert separate actions is
contrary to the statute allowing the junior the acquire and asset the senior debt.
Covert objected to the deficiency on the senior debt. The court agreed in that the senior dent had
been secured and would be barred a deficiency for Hardy to have asserted a judgment. Thus,
Windt was limited to collecting what he could from the foreclosure sale.
       2)      Notes, p. 431
               (i)       Keeping informed about liens
Cal.Civ.Code § 2924e allows a junior lienholder to request notice of extended delinquencies
from the senior(s) if the mortgage encumbers residential property, or the senior loan does not
exceed $300K. Cal.Civ.Code § 2943 allows a junior to request a payoff amount from the senior.
               (ii)      Upstream surplus
The junior lien holder foreclosed where the first lien was $23K, and his second lien was $20K.
The junior lien holder paid off the first, and applied the remaining $10K to his own portion of the
debt. The junior lien holder then sued the trustor for the full amount of the first debt, the
remaining $10K on the junior debt, and $10K in miscellaneous charges. The court held that
(because the first lien was not in foreclosure?) the payoff of the first lien was payment after the
sale, and not recoverable.
In a junior foreclosure, the third party bidder overbid, and also paid off the first lien. Then
claiming to be assignee of the first lien holder, the overbidder then tried to reclaim the amount of
overbid. The court ruled the amount belonged to trustor, as the first lien holder would not have
had a claim to the amount of overbid since that lien was not in the foreclosure.
   D) Alternative to Foreclosure, p. 431
      1)   Workouts, p. 431
The bigger the loan balance, the bigger the need to work things out.
            a) Fair dealing requirement in workouts
The plaintiffs in Price v. Wells Fargo Bank [(1989) 213 Cal. App. 3d 465, 479] had obtained a
secured loan from a bank that was repayable, according to the promissory note, six months after
the loan was made. After the due date, the plaintiffs initiated discussions to restructure the loan,
but the bank insisted on repayment and eventually began foreclosure proceedings. The plaintiffs
made no claim that the bank breached any express contractual obligations, but they argued that
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the bank breached the implied covenant of good faith and fair dealing "by taking a 'hard line' in
repayment negotiations. The court rejected that theory. Contracts are enforceable at law
according to their terms.
               (i)       The covenant of good faith and fair dealing does not impose any
                     affirmative duty of moderation in the enforcement of legal rights.
The equitable doctrines of estoppel or waiver may, of course, bar unfair tactics in the
enforcement of agreements, but appellants have not raised any such equitable defenses. Storek &
Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal. App. 4th 44, 56 (2002)
           b) Auerbach v. Great Western Bank, 74 Cal. App. 4th 1172 (1999),
              p. 432
Facts: In 1988, the Auerbachs borrowed $2 MM from Great Western (GW) signing in a
nonrecourse agreement a promissory note and first deed of trust for the foreclosed commercial
property they purchased. The promissory note had a due on sale clause with an automatic
termination clause for any conveyance of borrower‘s interest. Without GW‘s knowledge or
consent, the Auerbachs conveyed the property from the REO to their family Trust. The Auerbach
Family Trust operated the building as a rental until December 1992 when economic conditions
made the expenses more than the income. Counsel for the Auerbachs (‗the Auerbachs‘) sought a
loan modification. GW asked the Auerbachs to execute pre-workout agreement. The Auerbachs
anticipated a workout and did not make the January payment. GW sent a foreclosure notice. At
the first meeting GW told the Auerbachs they must sign the pre-workout agreement and make
the January payment. [The agreement stipulated that interim agreements made during negotiation
were not binding unless signed the authorized persons of each party, and that by negotiating, GW
still retained, and was not waiving, any rights it had under the existing agreement. The agreement
also placed all negotiation costs on the Auerbachs.] During negotiations, the Auerbachs again
became delinquent. GW again issued a notice of default, which the Auerbachs cured after GW
told them that GW did not negotiate with delinquent borrowers. The Auerbachs then stayed
current. The Auerbachs made various offers, which GW rejected. Once called for a reduction in
principal from $2MM to $800,000. (GW understood this to mean the Auerbachs would pay the
difference upfront, which was not what the Auerbachs were suggesting.) Another suggestion was
for GW to take the deed in lieu of foreclosure. GW initially balked. The Auerbachs offered a title
insurance policy. GW considered, and rejected a shell corporation to hold title. The Auerbachs
then complained in writing to GW of not meeting its duty of good faith and fair dealing.
Negotiations then broke off. Some 11-months later, Auerbach proposed an interest rate
reduction, which GW rejected. The Auerbachs again proposed a transfer of title, and GW sent an
assumption package for the Auerbachs to fill out. The Auerbachs did not follow as they the
Auerbachs were then negotiating with the State of California as a tenant, and feared that GW
would want a recourse loan, instead of the existing nonrecourse loan. Three months later, the
Auerbachs proposed that GW reduce the principal from $1.9 MM to $957K. GW countered with
$1.6 MM, the Auerbachs replied with $1.25 MM. The Auerbachs told GW that the State was
now a tenant, and GW requested a copy of the lease. After reviewing the lease, GW told the
Auerbachs that even the $1.6 MM offer was unlikely to be approved.
Trial: Two years after asking for a workout, the Auerbachs sued GW for breach of the implied
covenant of good faith and fair dealing, breach of contract, and promissory fraud. The complaint
alleged that GW had breached a duty to allow a transfer of the deed, failed to participate in
negotiations for modification of the note, had an undisclosed policy never to modify a
performing loan and acted solely to induce performance. Counsel for the Auerbachs testified that
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if he had known that GW would not modify the loan as long as payments were current, he would
not have acted on behalf of the Auerbachs to cure the delinquencies, and that if he had known
that the offers he presented were not presented to management, he would not have continued to
make the mortgage payments. The Auerbachs alleged damages of about $1 MM in operating
losses, loan performance paid the GW, and expenses negotiation expenses under the pre-workout
agreement. In special verdict, the jury awarded the Auerbachs $207,155 for the various
allegations of breach of contract, and $2.6 MM in punitive damages.
Court: REVERSED & REMANDED.
              (i)       A borrower is already obligated to loan performance, so it is legally
                     impossible for a lender to further bind a borrower to loan
                     performance in workout negotiations
FRAUD: The Auerbachs were already obligated to performance under the loan agreement, so
GW could not further bind the Auerbachs to performance under the loan agreement. The
Auerbachs had the options to perform, or walk away. GW had no other remedy but foreclosure.
By conveying the property to the Family Trust, the Auerbachs unwittingly extinguished the
nonrecourse agreement under its express terms. Consequently, the Auerbachs' purported freedom
to walk away from the loan was illusory, and their primary basis for damages was obliterated by
the terms of the nonrecourse agreement itself. Since the property had been transferred to the
Family Trust, GW could have pursued the Auerbachs individually had they defaulted. As to
damages, the Auerbachs incurred $6750 in expenses in fees under the pre-workout agreement.
These amounts were not preexisting obligations so there is no impediment to their recovery
under a fraud theory. The jury was misled about the amount of compensatory damages it could
award, so its punitive damage award is suspect. As the punitive damages are out of proportion to
the actual damages suffered by the Auerbachs, the punitive damage claim will have to be retried.
              (ii)      A workout agreement is contractual binding.
BREACH OF CONTRACT: The parties conceded the pre-workout agreement was a contract.
Thus, a duty of good faith existed. However, the evidence concentrated on the amount (1) the
Auerbachs lost from a cash flow perspective during the time they held the property and (2)
payments the Auerbachs made during 1993. The first figure had no significance whatsoever. The
latter figure has significance only if the Auerbachs could have stopped payments on the note for
one year, never make up those payments, and yet continue to own the property. Good faith did
not require GW to accede to such a one-sided modification. Without some basis for calculating
the actual financial benefit to the Auerbachs from a temporary moratorium on payments, the
damages awarded by the jury for breach of contract are the result of pure speculation and cannot
be sustained.
DISPOSITION: The judgment on the breach of contract cause of action is reversed. The damage
award for the fraud cause of action is modified to $ 6,750. The award for punitive damages is
reversed and the matter is remanded for retrial on punitive damages.
           c) Notes, p. 438
              (i)       Other terms - Additional provisions in a forbearance (standstill)
                     agreement include:
6) Payment of an extension fee which is not applied to the debt and will be repeated if a second
   extension is later needed.
7) An agreement that all rents from the property will henceforth de deposited directly into an
   account under the lender‘s sole control (a lockbox) agreement.
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8) Acknowledgement by the debtor of the existence and validity of the loan, its unpaid balance
    and the fact of default
9) Release by the debtor of any defenses or claims it may have against the lender
10) A promise to keep everything confidential
11) Acknowledgement of Cal. Evid., Code § 1152 that offers to compromise are not admissible
    to prove liability
               (ii)    Waiver provision
A voluntary bankruptcy filing by the borrower, or a partner of the borrower that includes the
borrower is admission of the borrower‘s bad faith effort to frustrate or delay the foreclosure
proceeding, borrower waives the §362 automatic stay and the termination period under §1121,
and agrees to dismissal of the bankruptcy.
May a borrower waive Code Civ. Proc. §.726 and the anti-deficiency protections?
               (iii)   Negotiating under a foreclosure cloud
The equity of redemption stands as a barrier to renegotiation because of (1) the borrower‘s exit
option of redemption which mitigates the lender‘s monopoly, (2) the unavoidable delay allowing
the borrower to prove default is genuine, and (3) the inability of the lender to force a borrower‘s
loss and concession.
               (iv)    Parties
Borrower, officers and workout specialists of the lender involved as well as junior lenders,
guarantors, tenants, contractors, title company, and affiliated attorneys.
               (v)     Other outcomes
Where the workout won‘t work out, the parties may close with a (1) friendly foreclosure, (2) a
pre-packaged bankruptcy, pre-approved by the creditors, or (3) conveying the deed to the lender.
       2)      Deeds in lieu of Foreclosure, p. 439
            a) Hamud v. Hawthorne, 52 Cal. 2d 78 (1959) p. 439
Facts: In 1951, the Hamuds borrowed money from Hawthorne and gave him a third deed of
trust, a promissory note, and a Quit Claim that provided that the Hamuds conveyed all their
rights in the property to Hawthorne. The Hamuds had objected to the Quit Claim, but Hawthorne
told them to take it or leave, he wasn‘t loaning them anything without it.
Hansen served as escrow officer. Shortly before the appointed time for repayment, Hansen sent
the Hamuds a reminder that the note was coming due. The Hamuds did not reply, ask for an
extension, or pay on the note. Three days after the note was due, and following the terms of the
escrow contract, Hansen recorded the Quit Claim in favor of Hawthorne. Hawthorne paid off the
delinquent second deed of trust, and cured the deficiencies on the first deed of trust. Hawthorne
then conveyed the property to Hansen, who a couple weeks later, conveyed it to Shaffer.
Hawthorne‘s assignee then sued the Hamuds for payment Hawthorne made protecting his third
deed of trust. The Hamuds answered, and argued that by the Quit Claim served as a settlement
between them. The action stayed open.
In June 1955, an oil company representative asked the Hamuds about their mineral rights on the
property. It was then that the Hamuds learned they still owned the mineral rights on the property.
The parties went to court in 1956. Hawthorne testified that the purpose of the quitclaim deed was
to avoid foreclosure if the Hamuds defaulted. The trial court held the quitclaim to be a mortgage
only, with Hansen and Shaffer acting as Hawthorne‘s agents. The court allowed the Hamuds to
redeem the property within 90 days by payment to the court of a determined fee for the benefit of
Hawthorne. Schafer, who had possession of the property, appealed the holding that the quit claim
was a mortgage.
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Court: REVERSED.
Deed transfers to avoid foreclosure are valid where the transactions are fair and honest. The
original agreement provided a deed of trust for the mortgagee, and then after default, the partied
entered into a separate, distinct, and subsequent contract for conveyance of the subject property
to the mortgagee or beneficiary. Such agreements are not void under Cal.Civ.Code §§ 2889,
2924, or 2953.
Here, the agreement was made at the time of the loan, and serves as a waiver of redemption. It is
thus void both under §2889, and under the holding of Salter.
However, the Hamuds consented to the transfer in 1951 (5/4/52), and failed to assert their rights
until 4/30/1956. This is far longer than the statutory right of redemption. Consequently, the
Hamuds are not timely asserted their rights under equity (Cal.Civ.Code § 3521) and are therefore
barred by laches. (Cal.Civ.Code § 3527). Fair value here serves the defendants.
           b) Notes, 442
               (i)       Failure to redeem
The Hamuds would have won, but lost by laches.
               (ii)      Adverse possession by the mortgagee
Hawthorne and his assigns were four days from perfecting adverse perfection.
           c) Gaum Hakubotan, Inc. Furusawa Investment Corporation, 947
              F.2d 398 (9th Cir. 1991), p. 442
Facts: Hakubotan took a loan from Yasuda to finance a property purchase from Camacho.
Hakubotan gave Yasuda a promissory note, a deed of trust, and 12 post-dated checks for interest,
plus a post-dated check for the principal. A month before the principal due date. Hakubotan
requested a 6-month extension. Yasuda hesitated for the fear of having to foreclose, but
Hakubotan offered to deed the property, if it went into default, to Yasuda‘s designee, Furusawa
Investment. The agreement they signed expressly provided for a Warranty Deed transfer to
Furusawa Investment, and cancellation of the note. Six-months later, Hakubotan again asked for
an extension. Although Hakubotan and Yasuda negotiated, they did not reach an agreement.
Hakubotan‘s next check bounced, so Furusawa Investment recorded the Warranty Deed.
Hakubotan then sued to void the deed and treat the transaction and Warranty Deed as an
equitable mortgage extension of the first mortgage and requiring foreclosure. The trial court
ruled for Hakubotan, and held that Hakubotan retained its equitable right of redemption.
               (i)       A mortgagor may sell and convey all his right and interest in the
                      mortgaged premises to the mortgagee where the transaction is fair,
                      honest, and without fraud, and where no unconscionable advantage
                      has been taken of his position by the mortgagee.
Court: REVERSED. (The Guam codes are similar to California‘s) Hakubotan did not argue that
the transaction by not ‗fair, honest, and without fraud,‘ but that the transaction was a
continuation of the original mortgage. His argument is contrary to the facts. At the time he
signed the Warranty Deed, the deed was already secured by the mortgage. The transaction better
shows that Yasuda traded the extension of time to Hakubotan for the less complicated means to
recoup its losses. One question is what, if anything, continued after the conveyance. Here, the
conveyance did not occur until recording of the deed, at which time, Hakubotan‘s debt was
cancelled, as was the debtor-creditor relationship. During the extension period, the parties
maintained their relationship, but recording of the deed erased all of that.
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               (ii)       A mortgagor‟s conditional conveyance after execution of the
                      mortgage is valid, irrespective whether the conveyance took before or
                      after default.
While the conditional sale of the deed on Hakubotan‘s future default looks like a mortgage, this
relationship is permissible under the law (citing Bradbury v. Davenport, Note 1 below) as a valid
conditional sale. Hakubotan‘s failure to sell the property and retain his equity was his mistake
that is not addressable as both parties are sophisticated in real estate matters.
           d) Notes, p. 446
               (i)       Bradbury v. Davenport, 120 Cal. 152 (1898)
To give validity to a sale of the deed in lieu of foreclosure, the mortgagee‘s conduct must be
shown as fair and frank, and that he sold the property for what it was worth.
               (ii)      Other views
Consideration of public policy forbid the enforcement of a contract made by the borrower at
inception of the loan that the borrower would forfeit his interest in the property that he offers as
security if he fails to meet his obligation promptly. The same considerations apply with force on
the renewal of a loan extension of time on the payments. The mortgagor may reduce the equity
of redemption to the mortgagee for a good and valuable consideration when done voluntarily
without fraud or undue influence on him by the creditor.
           e) De Martin v. Phelan, 115 Cal. 538 (1897), p. 448
               (i)       An owner may sell her right of redemption
Facts: De Martin and her thirteen children lived on land worth $390K with a mortgage of 196K.
The De Martins were indigent. Phelan, the mortgagee, was to execute a foreclosure sale, but
Phelan delayed the sale. De Martin had at least $45K of equity in the property. Phelan offered De
Martin first $4K, then later 10K for her equity of redemption. De Martin refused. but finally
accepted Phelan‘s offer of $19K. A month later De Martin learned that Phelan would have paid
her $45K if she had held out. De Martin sued and lost on demurrer.
Court: AFFIRMED. The relation between a mortgagee and a mortgagor is not fiduciary. The
sale was protracted and deliberate. Phelan postponed the sale many times, and did not bring on
the financial severity. He did not prevent her from selling to another person, or obtaining another
loan. There was not any element of fraud, oppression, or unfairness.
           f) Notes, p. 449
               (i)       Phelan I
Phelan earlier quieted title against De Martin. Phelan v. De Martin, 85 Cal. 365 (1890)
               (ii)      Motivations of the parties
Many loan applications now ask if the debtor has made a deed in lieu of foreclosure.
Cal.Civ.Code § 1058.5 allows a lender to record a notice of non-acceptance where a debtor
attempts to force a deed on it. A consensual deed in lieu of foreclosure is attractive if the lender
waives any deficiency liability without the costs of foreclosure. For a junior lender a lieu deed
from the debtor may permit the junior to advance priority.
               (iii)     Other obstacles, worries of a creditor
   1) Rank of lower mortgagor holders. Junior cooperation is possible, or an anti-merger
      provision, or to convey the property to a subsidiary of the lender and give the debtor a
      covenant not to sue on the debt.
   2) A lieu deed may be subject to undoing as a fraudulent transfer if made within one year of
      the debtor filing bankruptcy.
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   3) Environmental contamination and CERCLA costs
   4) Taxes – A mortgagor is Liable for income tax for loan amounts forgiven.
   5) A lieu deed may make ordinary income, or a bad debt loss for the mortgagee.
               (iv)    Title Company Practice
Title insurers may require exceptions for creditors‘ rights (in bankruptcy, or state insolvency law,
or charges of fraudulent conveyance, or preferential treatment). Title insurers may issue a policy
without creditor‘s rights exceptions in some circumstances.
(1) The mortgagor signs an estoppel affidavit stating the mortgagor was fully aware of the
consequence ‗ of delivery of the deed, that the delivery of the deed was not given as a preference,
that the mortgagor is solvent, and that no other creditors have interests in the premises which
could be impaired by the transfer;
(2) The deed contains recitals that it is an absolute conveyance for a fair consideration, that the
consideration given was the full satisfaction of all obligations secured by the mortgage, that the
conveyance was freely and fairly made, and that no agreements other than the deed exist between
the grantor and grantee with respect to the land which would imply the continued existence of
debt, e.g. a leaseback with option to repurchase or an oral agreement to reconvey;
(3) The note secured by the mortgage is surrendered and cancelled and the mortgage or deed of
trust is released of record;
(4) The grantor surrenders possession of the property to the grantee;
(5) The parties provide the tide insurer with an independent appraisal of the land performed by a
qualified person showing the worth of the property is not more than the amount of the principal
and interest owed at the time of the transfer; and
(6) An independent appraisal shows that the mortgagor was solvent on the date the deed in lieu
was executed and not rendered insolvent by the conveyance.
Palomar, Title Insurance Law (West 2002), §6.37
Leaseback prohibitions may originate from Beeler v. American Trust Co., 24 Cal. 2d 1 (1944)
where the deed of trust included a one-year leaseback and option to purchase. Although the
trustor said the lieu deed was a deed, and not a mortgage, the court still held the lieu deed as
actually a mortgage. [The deed contains so many waivers of grantor rights that the deeds looks as
if the grantor was under duress at the time of signing - JRP]
See also http://www.firstam.com/faf/pdf/jmurray/deedslieu.pdf
http://www.mortgage-investments.com/Real_estate_and_mortgage_Forms/form_fr.htm
http://www.mortgage-investments.com/Real_estate_and_mortgage_Forms/formpage/
And click Estoppel-affidavit-of-mortgagor.htm
   E) Attorney’ Fees
Most promissory notes hold the mortgagor (‗the maker of the note‖) responsible for attorney‘s
fees. Deeds of trust usually contain provisions for lenders to recover litigation expenses,
foreclose the deed of trust, or enforce covenants in the deed of trust.
Where the contract specifically provides that attorney's fees and costs, which are incurred to
enforce that contract, shall be awarded either to one of the parties or to the prevailing party,
then the party who is determined to be the party prevailing on the contract, whether he or she
is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in
addition to other costs. Cal.Civ.Code § 1717(a).
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               a. Bernhardt, California Mortgage and Deed of Trust Practice
                  California, Continuing Education of the Bar (1990), Sections
                  7.29-7.33, p. 452
Other clauses entitle the beneficiary to appear in any proceedings concerning senior liens, bring
judicial foreclosure, appoint a receiver, enforce payment of all obligations of the trustor, and
conduct a private foreclosure sale, and in each instance permit the beneficiary to employ counsel.
Therefore, the beneficiary should be able to recover attorneys' fees from the trustor for most
litigated and non-litigated disputes between them arising from the deed of trust provisions. Under
CC § 1717, which makes attorneys" fees provisions reciprocal, the trustor should also be entitled
to recover attorneys' fees when he or she is the prevailing party.
Because the beneficiary is concerned, in the instances enumerated, with its remedies under the
deed of trust rather than the note, it is proper for the attorney's fees clauses to appear in the deed
of trust instead of the note, although the note usually contains such a clause in it too. If the
beneficiary wants to be able to recover attorney's fees, the deed of trust should contain attorneys'
fees provisions, because there is no independent statutory right to such fees and they are not
recoverable unless provided for by contract or statute (CCP §1O21). Although CCP 730 appears
to provide for attorneys' fees in any judicial foreclosure action, this section has been interpreted
to mean that they may be awarded only when the mortgage so provides, and then in an amount
set by the court, regardless of what the mortgage provides. On the other hand, CC 2924c appears
to require payment of attorney's fees as a condition of reinstatement, whether or not the deed of
trust calls for them. It is doubtful, however, that this section would permit a beneficiary to
recover attorneys' fees when reinstatement is not the issue (i.e. after expiration of the
reinstatement period), although CCP 580c appears to all them, by implication.
               (i)     Reinstatement.
If a beneficiary has recorded a notice of default and the trustor wishes to reinstate during the
reinstateI11ent period, CC §2924c requires payment not only of all arrearages, but also of
trustee's or attorney's fees, of $200 plus a decreasing percentage of the unpaid balance over
$50,000. In Sweatt v. Foreclosure Co. 166 Cal. App. 3d 273 (1985), the court held that the
unpaid balance, rather than the amount of the defaulted payment, is the appropriate measure of
the trustees' fees. Because the statute refers to trustee's and attorney's fees disjunctively, it does
not appear that the beneficiary may claim both, even though both are incurred. Also, the fees
must be actu ally incurred, which means that the beneficiary should have a bill from an attorney,
and the attorney should not be house counsel.
Cal.Civ.Code § 2924c refers to attorney's fees incurred in connection with recording the notice
of default and instituting foreclosure proceedings. If the beneficiary incurred additional attorney's
fees for other services related to the deed of trust that are recoverable under the deed of trust, it
may also be entitled to recover them from the trustor as a condition of reinstatement, if the fees
are included in the notice of default. In this instance, previously incurred attorney's fees are like
any collateral advances made by the beneficiary, which may be added to its claim.
               (ii)    Foreclosure and redemption
Cal.Civ.Code § 2924c does not govern attorney's fees when there has been a foreclosure and the
issue is whether:
    1) The surplus from the sale may be applied to attorney's fees;
    2) Attorney's fees may be included in any deficiency judgment against the trustor;
    3) A trustor redeeming before the sale must also pay attorney's fees as part of the cost of
        redemption (see CC 2903-2905); or
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     4) A lender can include its attorney's fees as part of its credit-bid.
If the beneficiary brings an action for judicial foreclosure and the deed of trust provides for
attorney's fees, Cal. Code Civil Procedure § 726 provides that the trial court may award
attorney's fees in an amount "not exceeding the amount named in the mortgage." A somewhat
similar provision, Cal. Code Civil Procedure § §580c, governs attorney's fees for private
foreclosure sales, but it differs from Cal. Code Civil Procedure § 726 in that CCP §580c does not
limit recovery to the amount stipulated in the deed of trust or require that such fees be stipulated
at all in the deed of trust. The decision in Hotaling v. Montieth 128 Cal. 556 (1900), however,
limits attorneys' fees to situations in which the security instrument provides for them, and
probably governs.
Not only should the beneficiary have an attorney's fee clause in the note and deed of trust, but it
should also have an attorney's bill in its possession. A clause in the loan documents does not
entitle it to attorney's fees not actually incurred. Although in Wiener v. Van Winkle, 283 Cal.
App. 2d (1969), a creditor was awarded attorneys' fees despite the fact that the attorney was
working on a contingent fee basis, both the attorneys' fees clause and the contingent fee
agreement were specially worded.
Possessing a bona fide bill from an attorney is, however, no guaranty that the amount billed will
be the amount recovered. The bill must be reasonable, which means that it will depend on the
time spent by the attorney, the size of the debt, and the nature of the issues. If the beneficiary
foreclosured judicially, and the attorney appeared in court to handle the proceedings, the trial
judge already has sufficient evidence of the services and their value. If the services were for
other aspects of the case, evidence concerning them should be offered. If the promissory note
permits recovery of attorneys' fees, the right to fees incurred during the deficiency hearing may
survive entry of a decree of foreclosure.
               (iii)   Recovery of attorneys' fees.
When some aspect of the deed of trust is being litigated, attorneys' fees can generally be sought,
and the amount determined, as part of that action. When there is no judicial action, however, as
in the case of a nonjudicial foreclosure, the beneficiary can seek attorneys' fees by filing an
action for an accounting under CCP §1O50. If the trustor claims that the balance due on the
account is the amount required to redeem and receive a release of the deed of trust, but the
beneficiary claims attorney's fees in addition to this, the trustor may add a cause of action for
accounting to an action asserting the trustor's right to the property, such as an action to set aside
the sale. When a sale has been completed and the trustee does not know how to distribute the
surplus, an action for accounting to determine attorneys' fees may be combined with an
interpleader action filed by the trustee of a straight action for money filed by the trustor or other
claimant. The beneficiary has the same right as the trustor to seek an accounting, because the
beneficiary may incur penalties for wrongful refusal to request reconveyance if the proper
amount had been tendered to it.
An action for accounting brought by the trustor presents the risk that the trustor may have to pay
the beneficiary's attorney's fees in that action, and the trustor may feel that it is not worth
incurring attorney's fees just to determine whether attorney's fees have already been incurred.
Under the wording of the deed of trust, any action in which the beneficiary is compelled to
appear regarding its security entitles it to attorney's fees, and the accounting action is plainly of
that sort. Despite such a clause, however, the court need not award fees to the beneficiary.
Furthermore, CC §1717 provides that either party may recover attorney's fees when there is an
attorneys' fee clause in the contract. Thus, a trustor who is victorious in an accounting action, in
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a claim to the surplus from a sale, or in opposition to a deficiency judgment, will be able to
recover attorney's fees from the beneficiary.
               (iv)    Other actions.
Whenever a beneficiary is forced to appear in an action to defend its security, the deed of trust
entitles it to attorney's fees. This rule clearly applies when the security is threatened by
paramount title or a senior lien. In Shannon v. Northern Counties Title Ins. Co. 270 Cal. App. 2d
686 (1969), a challenge to the beneficiary's security came from the trustor. The holder of a third
deed of trust spent 16-112 days in trial resisting the trustor's suit for $50,000 damages for fraud
and an injunction against foreclosure and was awarded $500 attorneys' fees because most of the
trial concerned the fraud, rather than foreclosure, and the note was for only $1500. In Wagner v.
Benson, 101 Cal. App. 3d (1980), however, the court awarded the lender attorneys' fees incurred
in defending against fraud allegations because the defense was necessary to the lender's ability to
collect on the note.
The trustee, as well as the beneficiary, may be entitled to attorney's fees when there is a bona fide
necessity for its appearance. When the dispute is solely between beneficiary and trustor,
however, the trustee's appearance is only technically necessary, and the trustee is not entitled to
attorney's fees. The holder of surplus funds arising from a foreclosure sale, who brings an
interpleader action, may be awarded attorney's fees. CCP §386.6.
A subsequent owner of the encumbered property who successfully enjoins the lender's attempt to
accelerate the loan may be entitled to recover attorneys' fees under CC § 1717 even though he or
she is a nonassuming grantee (and therefore technically not bound by the covenants in the deed
of trust). Although such a nonassuming grantee would not be personally liable for attorneys' fees,
he or she would have to pay them as a practical matter to avoid foreclosure and would therefore
be entitled to recover them when successful under CC §1717.
           b) Notes, p. 454
               (i)     Judicial foreclosure
Cal. Code Civil Procedure § 2924d(e) (1984) and Cal. Code Civil Procedure § 580c (as
amended) allow court discretion to award reasonable attorney's fees in a judicial foreclosure
action if the note or mortgage so provides.
               (ii)    Non-assuming grantees
Subsequent purchasers who would not have been personally subject to the attorneys‘ fee
provision of the note, and successfully prevent automatic enforcement of a due-on clause may
recover attorneys‘ fees under Cal.Civ.Code § 1717, and under the reciprocal right to attorneys‘
fees in an action of redemption. Saucedo v. Mercury Savings & Loan Assn., 111 Cal. App. 3d
(1980). Likewise, a non-signatory claiming a legal and equitable interest in the mortgaged
property may recover attorneys‘ fees. Abdallah v. United Savings Bank, 43 Cal. App. 4th 1101
(1996)
However, a beneficiary suing a successor owner to recover the deed of trust after a forged
conveyance could not recover attorney‘s fees since the successor owner had not bee a party to
the note.
               (iii)   Recovering the fees
Regardless of the cause of action, in a fight between the beneficiary and the trustor, the trustor is
liable for the beneficiary‘s legal fees engaged by the beneficiary, ―to protect the security.‖ Bisno
v. Sax, 175 Cal. App. 2d 714. The beneficiary may elect to recover those fees as a condition of
reinstatement if the fees are included in the notice of default. An action ―to protect the security‖
includes a trustor‘s attempts to fend off foreclosure and a foreclosure sale. Cal. Code Civil
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Procedure § 580a is not a bar to attorneys‘ fees, even if the foreclosure sale was nonjudicial.
Passanisi v. Merit-McBride Realtors, 190 Cal. App. 3d 1496 (1987). An award made to a seller
does not violate Cal. Code Civil Procedure § 580b even after the purchaser unsuccessfully
attacked the trustee sale.
                (iv)      Limitation on fees
An attorney‘s fee clause may be limited by Cal.Civ.Code § 2924c(d) to the statutory limitations.
Trustee's or attorney's fees may be charged in a base amount that does not exceed [scaled
amounts in the statute] until the notice of sale is deposited in the mail to the trustor if the sale is
by power of sale contained in the deed of trust or mortgage prior to the decree of foreclosure.

Chapter XVII. Chapter XVII. Part VI The Foreclosure Process:
  Pre-Sale Activity
    A) Preliminary Considerations, p. 459
       1)    Choice of Remedy, p. 459
          a) Acceleration
Every from deed of trust in California has a provision that on default of the trustor, the
beneficiary may declare all secured sums immediately due and payable (the acceleration clause),
a provision that the trustee or beneficiary shall file a notice of default, and election for sale of the
secured property (the power of sale clause.)
            b) Trustee sale
After notice of sale is given, the trustee shall without demand of the trustor, sell the property as
stated in the notice of sale, either as a whole or in separate parcels, to the highest bidder (the
trustee‘s sale provision). Trustee shall deliver to purchaser its deed without any covenant, or
warranty. Trustee shall apply the proceeds of sale to payment of all costs, fees, and expenses of
trustee and the trust including cost of evidence in connection with the sale, and all sums not
repaid of accrued interest at 7% per annum, and all other sums then secured, and any remainder
to persons legally entitled to those sums.
            c) McDonald v. Smoke Creek, 209 Cal. 231 (1930)
Cal.Civ.Code § 2933 validates such a provision in a mortgage rather than a deed of trust. As to a
deed of trust, ―Notwithstanding the statutory proceeding embodied in Cal. Civ. Proc. Code § 726
et seq., providing for the foreclosure of mortgages, there is nothing therein which prevents the
making and execution of trust deeds as security for obligations, by the terms of which the
creditor or his trustee may be empowered to sell the premises therein described upon default in
the payment of the debt secured thereby, and upon the conduct of a sale in accordance with the
terms of the power thus conferred the title to the premises granted by way of security in that form
passes to the purchaser upon the execution of a deed by such trustee.
                (i)       A power of sale gives the grantee an added method to obtain
                       payment for the indebtedness.
The power of sale in an indenture, whether it is called a deed of trust or a mortgage, does not
change its character as an instrument for the security of the indebtedness designated, but it is an
additional authority to the grantee or mortgagee, and if he does not choose to foreclose the
mortgage by any of the ordinary methods provided by law, he can proceed under the power
added for the sale of the property, to obtain payment of the indebtedness.
                (ii)       An unexecuted power of sale does not affect the mortgagor's right
                       to redeem.
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The insertion of a power of sale does not affect the mortgagor's right to redeem so long as the
power remains unexecuted and the mortgage is not, as it may be, foreclosed in the ordinary
manner, but when a sale is made of the interest of the mortgagor, his right is wholly divested,
embracing his equity of redemption.‖
Cal. Code Civil Procedure § 725a allows a deed of trust or mortgage with a power of sale may be
judicially foreclosed, despite the power of sale clause.
           d) Garfinkle v. Superior Court, 21 Cal. 3d 268 (1978), p. 460
Facts: The Garfinkles bought a residence subject to a due-on-sale clause [see below] in the deed
of trust held by Wells Fargo Bank. The Garfinkles refused to assume the loan on the terms of the
sellers. When Wells Fargo sought to foreclose, the Garfinkles sought declaratory relief from
respondent trial court, challenging the constitutionality of Cal. Civ. Code §§ 2924- 2924h, a
nonjudicial foreclosure statute, and the validity of the automatic enforcement of the clause.
[*The clause read as follows. "If default be made in the payment of said promissory note . . . or
in case any change is made in the title to all or any part of the said property . . . all sums hereby
secured shall, at the election of the Bank, forthwith become due and payable, without notice, and
the Bank may cause the said property to be sold in order to accomplish the object of these trusts,
and upon demand of the Bank the Trustee shall sell the whole, or such portion of the said
property as the Trustee shall deem necessary to accomplish the purposes of these trusts, and such
sale may be made in any manner provided by law, and if none is provided, then by first giving
notice of the time and place of sale in the manner and for a time not less than that now required
by law for the sale of real property on execution . . . ." JRP]
Court: WRIT DENIED
               (i)       Nonjudicial foreclosure of deeds of trust on real property is a
                      private action, not a state action and so does not invoke the due
                      process constraints of the federal Constitution.
Petitioners writ of mandate challenges the constitutionality of California's procedure for the
nonjudicial foreclosure of deeds of trust on real property. Petitioners contend that this procedure
permits the deprivation of the trustor's property without adequate notice or hearing in violation of
the due process guarantees of the Fourteenth Amendment to the United States Constitution and
of article I, section 7 of the California Constitution. While the Fourteenth Amendment prohibits
the State from depriving any person of life, liberty, or property, without due process of law; it
adds nothing to the rights of one citizen as against another." The Fourteenth Amendment "erects
no shield against merely private conduct, however discriminatory or wrongful."
               (ii)      Nonjudicial foreclosure is not a state action as it is governed by the
                      terms of a contract solely over the parties to the contract, without a
                      power traditionally and exclusively reserved to the state, and limited to
                      a ministerial action of the state.
Petitioners argue that when viewed as whole, detailed statutory provisions pervasively regulate
nonjudicial foreclosures, with significant involvement by state officials, e.g., the county recorder,
and the state court. Mechanics' lien constitute state action because the lien is not only governed
by detailed statutory provisions but also it only becomes effective upon recordation with the
county recorder and can only be enforced by resort to the state courts. There are several
significant differences, however, between the creditors' remedies involved in Connolly and the
remedy of nonjudicial foreclosure pursuant to a power of sale that is at issue in the case at bar.
Unlike the mechanics' lien or stop notice which are authorized by statute and not by the contract
of the parties, the power of sale exercised by the trustee on behalf of the lender/creditor in
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nonjudicial foreclosures is a right authorized solely by the contract between the lender and
trustor as embodied in the deed of trust. These contractual powers are valid and enforceable and
merchantable title is transferred pursuant to that exercise. Koch v. Briggs (1859) 14 Cal. 256.
Petitioners contend that this comprehensive statutory regulation of nonjudicial foreclosures
constitutes state action because it encourages and facilitates use of that remedy. This contention
does not withstand examination. The nonjudicial foreclosure statutes do not authorize or compel
inclusion of a power of sale in a deed of trust or provide for such a power of sale [except where
one has] been included by the parties. Nor do these statutes compel exercise of the power of sale.
The decision whether to exercise the power of sale is a determination to be made by the creditor.
The statutes merely restrict and regulate the exercise of the power of sale once a choice has been
made by the creditor to foreclose the deed of trust in that manner.
Mere recognition of the legal validity of the title transferred by the private arrangements of the
lender and trustor is not sufficient to convert the acts of the lender or trustee into the acts of the
state for Fourteenth Amendment purposes.
These statutory regulations facilitating nonjudicial foreclosure were enacted primarily for the
benefit of the trustor and for the greatest part limit the creditors' otherwise unrestricted exercise
of the contractual power of sale upon default by the trustor.
Furthermore, the acts of the county recorder required by the California nonjudicial foreclosure
statutes are ministerial in nature, and are thus distinguishable from the significant, discretionary
acts of the county recorder under North Carolina's nonjudicial foreclosure procedure, which has
been held to constitute significant state action. Other than these ministerial acts by the county
recorder, we note that there is no participation or intervention by any state official or judicial
officer prior to the trustee's sale and the vesting of title in the purchaser. This absence of judicial
involvement represents another significant difference between the nonjudicial foreclosure of a
deed of trust and the mechanics' lien and a stop notice.
In a mechanics lien, the state has delegated a power traditionally and exclusively reserved to the
state. However, the power of sale exercised by the trustee in nonjudicial foreclosure is created by
contract, not by statute. Thus, it cannot be said that foreclosure under a power of sale has been
traditionally and exclusively performed by the state.
               (iii) The “no deprivation of life, liberty, or property without due process
                    of law” requirement applies to state, not private actions.
Petitioners argue that even if California's due process requirements apply only to action by the
state, the Legislature, pursuant to its police power, has a duty to enact such regulations as would
enable Californians to enjoy their inalienable right to protect their property as guaranteed by [the
U.S. Fifth Amendment equivalent in] the state Constitution. Petitioners argue that the Legislature
must provide by statute for adequate notice and an opportunity to be heard before the trustor's
property can be sold by nonjudicial foreclosure. Just as the Legislature has full power to enact
regulations limiting the means by which individuals may enjoy their rights, as long as there is no
interference with constitutional guarantees, so it has full power to determine what regulations it
should enact to protect and facilitate the individual's enjoyment of such rights. We find equally
unpersuasive petitioners' final contention that notice and a judicial hearing are required prior to
the deprivation of the trustor's property, under the common law principle of procedural fairness.
This common law doctrine, which is not applicable here, requires only a hearing before the
private association or entity involved, and not the judicial hearing which petitioners herein seek.
           e) Notes, p. 465
               (i)     Power of sale clauses
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Cal.Civ.Code § 2924 providing for nonjudicial foreclosure confirms a contractual right. The
Nevada statute confers a power of sale on the trustee and creates a right to act without requiring
the act be taken. Such are not state actions. Charmicor v. Deaner, 572 F.2d 694 (9th Cir. 1978).
               (ii)      Making an irrevocable election
A beneficiary who has filed an action for judicial foreclosure is not precluded for letting it drop
and commencing an extra-judicial sale. Once the foreclosure is entered, it is too late for the
beneficiary to elect a private foreclosure instead. Similarly, a junior beneficiary who has
obtained a decree of foreclosure is not allowed to claim ‗sold-out‘ status even if the senior
mortgagee sold the property before the junior had gone to sale.
Thus, a beneficiary may commence both types of proceedings simultaneously, and elect the final
choice later on. A mortgagee has choices of both foreclosure and the power of sale. At the time
of breach the mortgagor‘s right of redemption is contingent on the mortgagee‘s selection of the
right of foreclosure. If the mortgagee selects to process under the power of sale, the mortgagor
does not have a cause of complaint.
               (iii)     Advantages and disadvantages of judicial foreclosure
Judicial foreclosure allows the lienor to seek a deficiency (but the debtor get redemption).
Judicial foreclosure allows the lienor time to clarify priority or title disputes, resolve
performance trust deeds, or clarify multiple beneficiaries, etc.
Judicial foreclosure allows the lienor ask for a receiver and collect rents.
Judicial foreclosure allows the lienor to be first to the courthouse.
Judicial foreclosure allows the debtor the right of redemption (if there is a deficiency).
Judicial foreclosure allows the possessor to stay until expiration of the redemption period.
Judicial foreclosure is more expensive than nonjudicial foreclosure.
Judicial foreclosure takes longer than nonjudicial foreclosure.
Judicial foreclosure depresses the sale price during the redemption period.
               (iv)      Federal foreclosures, 12 USC §§ 3701ff & 3751ff
HUD may use expedited foreclosure procedures for residential security.
               (v)       The proposed Uniform Act
About 20 states do not permit nonjudicial foreclosure. The Uniform Nonjudicial Foreclosure Act
would establish uniform procedures to satisfy due process concerns, reduce the expense and
delay of judicial foreclosure, permit the purchase and sale of real estate loans on the secondary
market, and allow deficiency judgments where the debtor acted in bad faith.
       2)      Statutes of Limitation, p. 469
            a) Aguilar v. Bocci, 39 Cal. App. 3d 475 (174)
Facts: Bocci represented Aguilar as defendant in a criminal case. Aguilar signed a retainer
agreement obligation to pay Bocci a fee of $ 10,000. Aguilar also executed and delivered to
Bocci a deed of his home, which Bocci recorded. Still having not paid Bocci in 1970, Aguilar
filed an action seeking to quiet title to the property, on the theory that Bocci‘s claim was barred
by the statute of limitations. Bocci filed a cross-complaint to quiet title in him for an undivided
half interest in the property. The trial court ordered that the parties were tenants in common and
ordered that, if Aguilar could not purchase Bocci's share within 90 days, the property was to be
sold and the proceeds divided.
Court: REVERSED.
               (i)       A deed in lieu of payment creates an equitable mortgage that is
                      subject to the four-year statute of limitations for execution. After
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                      tolling of the statute of limitations, the debt and lien are still valid, but
                      the creditor may not foreclose.
The evidence shows that Bocci‘s fee was reasonable, and that Aguilar freely and voluntarily
executed the deed to Aguilar. It is undisputed that the deed was intended to create a security
interest in the property. Thus an equitable mortgage was established (Coast Bank v. Minderhout).
A mortgage does not entitle the mortgagee to possession absent such an express provision in the
mortgage (Civ. Code, § 2927). Thus a mortgagee cannot maintain an action for ejectment and the
mortgagor can defend against an action for possession without paying or offering to pay the debt.
The mortgagee's remedy is by an action to foreclose. Here, however, the statute of limitations
has run upon the debt and upon that remedy (Code Civ. Proc. § 337). Thus Bocci, as a mortgagee
not in possession, does not have a present remedy to quiet title or secure possession.
However, the cloud on Aguilar‘s title persists until the debt is paid. He is entitled to remain in
possession, but cannot clear his title without satisfying his debt. Thus each party has foreclosed
himself from remedy through the courts, appellant by failing to pay the debt his property secures,
and respondent by sleeping upon his rights.
           b) Notes, p. 470
               (i)       Limitation periods, Cal. Code Civil Procedure §§ 335 & 337
The period prescribed for the commencement of actions other than for the recovery of real
property are four years for an action upon any contract, obligation or liability founded upon an
instrument in writing, except as provided in § 336a of this code; provided, that the time within
which any action for a money judgment for the balance due upon an obligation for the payment
of which a deed of trust or mortgage with power of sale upon real property or any interest therein
was given as security, following the exercise of the power of sale in such deed of trust or
mortgage, may be brought shall not extend beyond three months after the time of sale under such
deed of trust or mortgage.
[The statute of limitations is six-years where the mortgage note is a negotiable instrument.]
               (ii)      The effect of the statute of limitations on security incidents
A power of sale as authorized by the mortgage is part is part of the security (Cal.Civ.Code §
858). The power of sale is powerless where the mortgage lien is barred by the statute of
limitations or other result. When the defendant here sought to execute the power of sale, the
mortgagees were dead, and the debt, note, and mortgagee had been long barred by the statute of
limitations. Consequently the defendant‘s power of sale was ineffectual for any purpose. [Faxon
v. All Persons, 166 Cal. 707 (1913), paraphrased - JRP].
While a power of sale in a mortgage (as in Faxon above), or judicial foreclosure (Flack v.
Boland, 11 Ca. 2d. 103 (1938) applying Code Civ. Proc. § 2911) are both subject to the statute
of limitations under Cal. Code Civil Procedure § 725a, the statute of limitations does not apply
to a power of sale in a deed of trust! Travelli v. Bowman, 150 Cal. 587 (1907).
               (iii)     Clearing title after the statute of limitations/
The Faxon court said that where a party to the action owned the debt, the debt was not
discharged, even though the holder could not foreclosure for being barred by the statute of
limitations. Conversely, where the party to the action is not a party to the debt, and the owner of
the land acquired the land by purchase for consideration after tolling of the statute of limitations,
holding the debt on the land ―would result in perpetuating clouds on title where no substantial
equity demands that the merchantability of real property [should] be [so] hampered.‖
               (iv)      The Marketable Title Act, Cal.Civ.Code § 882.020.
Expiration date; lien of security interest of record; power of sale deemed exercised.
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    (a) Unless the lien of a mortgage, deed of trust, or other instrument that creates a security
        interest of record in real property to secure a debt or other obligation has earlier expired
        pursuant to Section 2911, the lien expires at, and is not enforceable by action for
        foreclosure commenced, power of sale exercised, or any other means asserted after, the
        later of the following times: (1) If the final maturity date or the last date fixed for
        payment of the debt or performance of the obligation is ascertainable from the record, 10
        years after that date. (2) If the final maturity date or the last date fixed for payment of the
        debt or performance of the obligation is not ascertainable from the record, or if there is no
        final maturity date or last date fixed for payment of the debt or performance of the
        obligation, 60 years after the date the instrument that created the security interest was
        recorded. (3) If a notice of intent to preserve the security interest is recorded within the
        time prescribed (above), 10 years after the date the notice is recorded.
    (b) A power of sale is ‗exercised‘ on recordation of the deed executed pursuant to the power
        of sale.
    (c) The times prescribed in this section may be extended in the same manner and to the same
        extent as a waiver made pursuant to Cal. Code Civil Procedure § 360.5, except that an
        instrument is effective to extend the prescribed times only if it is recorded before
        expiration of the prescribed times.
[Ascertainable from the record does not include unrecorded documents referred to within the
recorded document.]
               (v)     The approach in other states
Cal.Civ.Code § 2911 states that a lien is extinguished by running of the statute of limitations of
the applicable Cal. Code Civil Procedure for the lienor to bring an action on the applicable
obligation. In most states, the lien is not extinguished by the statute of limitations on the
obligation, but rather by the statute of limitations to recover the property secured.
               (vi)    Federal law
There is not a federal statute of limitations on foreclosure, and 28 USC 2415a does not apply to
mortgages. Thus while a federal agency may be barred to sue on the debt, it can still foreclose on
the security.
               (vii)   Waiver
A trustor can waive a statute of limitations with compliance to Cal.Civ.Code §§ 2911, 360.5 and
369. Elsewhere the statute may bind junior or the statute may be extended by part payment or
assumptions.
               (viii) Adverse Possession
A mortgagee may lose the execution sale by waiting too long (4-years on a note) as the
mortgagor perfects adverse possession. Similarly the mortgagor may lose the ability to recover
by waiting to long the mortgagee. Cal. Code Civil Procedure § 346. Cal.Civ.Code § 2921 permits
an owner to mortgage property even though an adverse possession is already in progress.
       3)      Creditor Disagreements, p. 474
            a) Perkins v. Chad Development Corp., 95 Cal. App. 3d 645 (1979)
Facts: Chad Development executed a note and deed of trust to Wilson & Perkins. Chad
Development initally made the payments to either Wilson or Perkins, then to Wilson only until
Wilson died. Chad Development then made the payments to Wilson‘s wife. Some time later,
Chad Development defaulted and filed to pay taxes as well. Perkins sought to foreclose but Mrs.
Wilson declined to do so. Perkins executed, served, and recorded a notice of default and election
to sell. Perkins bought the property through his agent and sued to quiet title. Perkins prevailed.
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Chad‘s successor appealed on grounds that Perkins could not foreclose unless Mrs. Wilson
joined also as a co-beneficiary.
Court: AFFIRMED.
               (i)      Where there are more than one beneficiary under a single note
                     and deed of trust, any beneficiary may give notice of default and
                     election to sell.
Joint beneficiaries have a community interest in the secured obligation, and any on joint
beneficiary may record a notice of default. While no case seems factually the same, similar cases
exist. A life-tenant‘s foreclosure without joinder of the remainder holder was valid because the
life tenant was protecting the estate from waste and was empowered to take action to protect the
property, including foreclosing on the security on default. Similarity, where there are multiple
notes secured by a single deed of trust the holder of the delinquent note may foreclose.
Just as where there are two notes from a common debtor secured by a common deed of trust the
holder of the delinquent note may foreclose on default, and must notify the other hilder and
permit her to share in the sale proceeds. A cotenant has a right to protect the estate from injury or
loss without the aid to assistance of the other cotenants. Perkins is therefore permitted to execute
the notice of default after give notice to Mrs. Wilson. Chad‘s successor, Janetzky also argued
that Cal.Civ.Code § 860 required all persons to unite in an executed power. However, the trust
deed vests each beneficiary with the power to give the notice of default and election to sell.
Janetzky also argued that in a judicial foreclosing all beneficiaries are indispensable; and must all
execute the notice and election to sell in a non-judicial foreclosure. The authorities cited however
say necessary parties should be joined as defendants. No authority says they must be plaintiffs.
            b) Note, Cal.Civ.Code § 2941.9, p. 476
All beneficiaries signing a document agree to be bound by the decisions made by the majority in
interest. Holders of more than 50% of the record beneficial interest may replace a him. A trustee
receiving conflicting directions from the beneficiaries is not required to act. The impatient
beneficiary must bypass the trustee and bring judicial foreclosure naming the co-beneficiary as
defendant.
   B) Residential Debtor Protection Legislation, p. 477
      1)   Restrictions on Debt Collectors
The Federal Fair Debt Collection Practices Act, 15 USC §1692a, does not exclude mortgages.
The California Rosenthal Fair Debt Collection Practices Act, Cal.Civ.Code § 1788, does provide
these protections, but still applies to ‗acts seeking to collecting a debt.‘ Thus, a workout offer and
foreclosure notice are exempt as these do not seek to collect the debt.
Other protections may apply. Kentucky allows courts to prevent foreclosure of a loan by an
unlicensed mortgage loan company.
       2)      Home Equity Sales Contracts and Foreclosure Consultants
            a) Protections include written contracts, large print, and 3-day
               cancellation.
Debt consultants have called on homeowners in foreclosure with what became fraudulent
services, prompting Cal.Civ.Code § 2945 to 2945.8. These require written contracts, large print,
3-day cancellation, fee restrictions and include civil and criminal sanctions. A deed of trust given
to a foreclosure consultant in violation of these statutes is voidable and unenforceable,
Cal.Civ.Code § 2945.4.
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           b) Protection for duress during occupation
The Home Equity Sales Contract Act, Cal.Civ.Code § 1695-1695.14 has similar protections for
homeowners who sell under the duress of foreclosure, but not for homeowners who vacate
before being approached. Cal.Civ.Code § 1695.13 prohibits unconscionable advantage of a
property owner in a transaction with rescission within 2-years under Cal.Civ.Code § 1695.14,
except to bona fide purchasers and encumbrancers.
   C) Judicial Foreclosure: Pre-Sale, p. 479
Proper venue is any county where the encumbered property is located.
           a) Goodenow v. Ewer, 16 Cal. 461 (1860), p. 479
               (i)       A mortgagor and every owner is a necessary party to the
                      proceeding.
Facts: Downer and Morris, each owned an undivided half of a theatre. Downer mortgaged his
share to Goodenow. Downer and Morris then sold a third share to Ewer. Downer defaulted on his
loan and Goodenow foreclosed. Downer and Morris then sold their shares to Ewer before
Goodenow bought Downer‘s share at the foreclosure sale. Goodenow sued Ewer for possession.
Court: A mortgagee cannot become an owner without purchasing the property, and is still
subject to the right of redemption. A mortgagor is a necessary party to the proceeding. At the
time of suit, Downer‘s lien was to two-sixths of the property, and Ewer was not a party to the
suit. Thus, Ewer‘s interest after the suit was the same as before as he was not a party to the suit.
Ewer‘s interest is subject to the mortgage. The decree acted only on Downer‘s estate as of the
time of suit. Therefore the court did not acquire jurisdiction to condemning any other estate. The
sale and conveyance passed only Downer‘s estate at the time of sale to Goodenow.
           b) Notes, p. 481
               (i)       Omitting the original mortgagor
The foreclosure action can omit the original mortgagor us she has already conveyed the property
to someone else, and the mortgagee is not seeking a deficiency judgment against the mortgagor,
168 Cal. 637 (1914).
               (ii)      Unrecorded grantees, Code Civ. Proc. §726
A holder of an unrecorded deed, mortgage, or lien is not a necessary party to a suit at the
beginning of the suit. The judgment rendered in a suit over real estate is binding on all
unrecorded holders of deeds, mortgages, or liens, etc. on the real estate, just as if they had been
named in the suit. Actual knowledge by the mortgagee is not a defense to a subsequent grantee
who received an interest before filing of the action, but had not recorded. For due process notice
to a junior mortgagee, see 992 F.3d 1380 (5th 1993)
               (iii)     Joining a tenant (see below)
               (iv)      Joining all co-beneficiaries
Perkins said all note holders should be notified, made a party to the proceedings, and permitted
to share in the proceedings.
               (v)       Affirmative defenses
The debtor should plead all defenses to the obligation, and by not doing so, risks losing
fundamental protections. The borrower must use the security first defense on a suit against the
note, or risks losing the purchase money deficiency protection. If the creditor elects a personal
judgment against the borrower, the creditor waives the security.
           c) Code of Civil Procedure § 726, p. 482
See Chapter 2, p. 29-30, or
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http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ccp&group=00001-01000&file=725a-730.5
                (i)       If the decree determines a deficiency maybe ordered then the
                       property will be sold subject to post sale redemption rights,
                       Cal.Civ.Code § 729.010.
            d) Frates v. Sears, 144 Cal. 246 (1904)
Facts: Sear gave a note and mortgage to Redfield on Sear‘s real estate. Sears also gave a note
and mortgage to Frates on the same real estate. Sears defaulted on Redfield who foreclosed and
took the deed without notice to Frates. Sears also defaulted on Frates who foreclosed with notice
to Redfield. At trial, Sears plead that Frates was barred by the statute of limitations (Code Civ.
Proc. §§ 312, 335, 337) to foreclosure from Redfield‘s foreclosure. Frates objected that he was
not a party to the suit, but the trial court overruled his objections.
                (i)       A mortgagee‟s interest is not affected by the statute of limitations
                       applied to another foreclosing mortgagee.
Court: REVERSED. Frates interest began before Redfield foreclosed, and those interests could
not be affected by the Redfield suit as Frates was not a party to the suit. Thus, Frates‘ interest
cannot be affected by any agreement between Sears and Redfield.
            e) Notes, p. 484
                (i)       The right to redeem
Cal.Civ.Code § 2903 Right to redeem; Subrogation
Every person, having an interest in property subject to a lien, has the right to redeem it from the
lien, at any time after the claim is due, and before his right of redemption is foreclosed, and, by
such redemption, becomes subrogated to all the benefits of the lien, as against all owners of other
interests in the property, except in so far as he was bound to make such redemption for their
benefit.
Cal.Civ.Code § 2904 Rights of inferior lienor
One who has a lien inferior to another, upon the same property, has a right:
1. To redeem the property in the same manner as its owner might, from the superior lien; and,
2. To be subrogated to all the benefits of the superior lien, when necessary for the protection of
his interests, upon satisfying the claim secured thereby.
Cal.Civ.Code § 2924c Curing default
Whenever … a portion of … of any obligation secured by deed of trust or mortgage on real
property … prior to the maturity date … become(s) due ... by … default, … the trustor or
mortgagor or his or her successor in interest in the mortgaged or trust property … may pay to the
beneficiary or the mortgagee or their successors in interest, respectively, the entire amount due
… with respect to (A) all amounts of principal, interest, taxes, assessments, insurance premiums,
or advances actually known by the beneficiary to be, and that are, in default …
                (ii)      The purchaser‟s remedy (Senior lienor)
In an earlier case (1870), the assignee of the first lienor foreclosed without naming the junior
lienor to the suit. The assignee purchased the property, obtained the sheriff's deed for the
premises and released the mortgagor from the balance. The trial court ruled for the purchaser
over the junior mortgagee.
―While the rights of the junior mortgagee were not prejudiced by the foreclosure of the first
mortgage, the purchaser at the foreclosure sale succeeded not only to the legal estate of the
mortgagor, but also to the rights of the first mortgagee as against the junior mortgage, and for the
purpose of protecting the purchaser against the lien of the second mortgage except subject to the
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lien of the first, a court of equity would treat the debt secured by the first mortgage as still
subsisting and unsatisfied.‖
This contrary holding of Carpentier v. Brenham, 40 Cal. 221 (1870) is that ―a junior mortgagee
possesses the right to extinguish the senior encumbrance. By whatever mode he may seek to
exercise this right, it operates a satisfaction of the claim of the prior mortgagee and a release
from his lien. A suit of foreclosure, as against younger mortgagees, is a suit to cut off the right of
redemption.‖ The court considered this a case of non-merger in that the purchaser took the place
of the senior, and extinguished the security of the junior lienor. Frates criticized this holding
because the statute of limitations in that case had also already run.
In another court, the senior purchased the security at the foreclosure sale, and sold the property to
a third party. In this case, the court held that merger of the senior security occurred on the resale
so the second mortgage holder became the senior mortgagee.
Patel v. Khan, 970 P.2d 836 (WY 1998).
               (iii)   The omitted junior‟s remedy - redemption
Until the statute of limitations has run on the senior mortgage, an omitted junior only has the
debtor‘s right of redemption to hope to collect. ―The mortgagor agrees that the mortgagee shall
sell the land in case of a breach of the agreement by the mortgagor. The purchaser at such sale
shall acquire the legal title, relieved of the lien, as of the date of the execution of the mortgage. A
subsequent mortgagee knows of this relation between the parties, and what he agrees to accept as
a security for his money is a claim upon the surplus of the proceeds of the first foreclosure sale
beyond the prior debt. His lien upon the land is subject to the prior lien so he has only a right to
be paid out of the excess. That payment is by the mortgagor‘s right to redeem.
If the junior mortgagee is made a party to a foreclosure suit, the mortgagor is given a right to
defend by pleading the statute of limitations, or the invalidity in whole or in part of the plaintiff's
claim, or that it is paid. These are not, however substantive and primary defenses, but grow out
of his right to redeem and his right to have the fund proceeding from the sale as large as possible.
Whenever he files a bill to redeem the former mortgage, or to redeem the former and to foreclose
his own, he may allege and show that the claim of the prior mortgagee has been exaggerated, or
any other kindred fact that will increase the fund.‖
―A junior mortgagor may extinguish a senior mortgage by satisfying it. The satisfaction achieved
here was sale of the property. No doubt a subsequent mortgagee may bring his action against the
mortgagor, without making the prior encumbrancer a party, but any decree in the suit cannot
affect the prior encumbrancer, whose rights are paramount. But if the junior mortgagee shall
bring his senior into Court, he is not permitted to ignore his claims as senior mortgagee. The
right of the plaintiff as against the purchasers at the foreclosure sale was a right to redeem.
               (iv)    Dracula mortgages - the mortgages of the unnamed junior lienors.
After the senior‘s foreclosure, the senior lien, and the junior lien‘s of all names junior lienors are
foreclosed and forever dead to the mortgagor. The mortgages of the unnamed junior lienors still
live in the record. They are alive as to a lien, but dead to the security as an omitted interest
remaining outside foreclosure. Generally, the remedy against an omitted junior is a second
‗strict‘ foreclosure.
               (v)     The role of the senior lienor in a junior foreclosure.
The court has jurisdiction in a foreclosure action to adjudicate the claims of a prior
encumbrancer made a party to the proceeding. Such encumbrancers are not necessary parties, but
they are always proper parties, and it is good practice to join them for the purpose of liquidating
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their claims. Whenever the prior encumbrancer is made a party, it is his right to file a cross-
complaint to foreclose his lien. Van Loben Sels v. Bunnell, 131 Cal. 489 (1901).
               (vi)    Finding out who is missing
Discovery of the possible adverse claimants is easy and inexpensive. A title report from a title
company, routine in all real estate transactions, requires little effort or small cost. Good practice
would require that a person seeking to collect by a foreclosure action money due him will be
careful to see that his foreclosure eliminates any and all claimants junior to his lien. R. W. Blois
Co. v. Imperial Bank, 152 Cal. App. 3d 26 (1984).
               (vii)   Lis pendens
The Cal. Code Civil Procedure authorizes a lis pendens recording for a real property claim, i.e.,
one that would affect title to, or right of possession to real property, (Cal. Code Civil Procedure §
405.4). A lis pendens gives constructive notice of a lawsuit, Cal. Code Civil Procedure § 405.24.
A recorded lis pendens binds a subsequent purchaser even though the purchaser is not joined in
the action. Bolton v. Logan, 30 Cal. App. 2d 30 (1938).
               (viii) Serving the trustee is not enough
In any action affecting the interest of any trustor or beneficiary under a deed of trust or mortgage,
service of process to the trustee does not constitute service to the trustor or beneficiary and
does not impose any obligation on the trustee to notify the trustor or beneficiary of the action.
Cal.Civ.Code § 2937.7. Thus, junior mortgagees and junior beneficiaries must be personally
served. Monterey S.P. Partnership v. W.L. Bangham, Inc., 49 Cal. 3d 454 (1989).
               (ix)    Rights of an omitted easement holder
An omitted easement holder is not affected by a judicial foreclosure of the servient easement,
and has an equitable right of redemption for the statutory redemption period. Diamond Benefits
Life Insurance Co., v. Troll, 66 Cal. App. 4th 1 (1998). The court required the full sale price
because the easement is not separately definable from the property.
               (x)     Reinstatement of delinquent debt
A mortgagee may reinstate a delinquent (and otherwise mature) debt until the decree of
foreclosure is entered.
               (xi)    The notice of levy
A mortgagee who has obtained a decree of foreclosure must then obtain a notice of levy and
identify the owner and description of the mortgaged property. Only then may the mortgagee
obtain a notice of foreclosure sale. Cal. Code Civil Procedure § 700.015. The mortgagee must
then record the notice of foreclosure sale, and serve it on the debtor, and one occupant of the
property. Posting or mail service is permitted if the levying officer is not able to serve an
occupant. If there are post-sale redemption rights a notice of sale may be given 31-days after the
notice is given. Cal. Code Civil Procedure § 729.010(b)(2). If there are not post-sale redemption
rights a notice of sale cannot be sent until 120-days after the notice is given. Cal. Code Civil
Procedure § 701.545.
   D) Nonjudicial Foreclosure: Pre-Sale, p. 488
      1)    The Notice of Default (the “NOD”), p. 488
         a) Statutes regulating procedure before the trustee’s sale
               (i)     Cal.Civ.Code § 2924, Transfer as security deemed mortgage or
                    pledge; Exercise of power of sale, p. 488
               (ii)    Cal.Civ.Code § 2924b ,Request for notice of default & sale, p. 489
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                (iii) Cal.Civ.Code § 2924c, Curing default; Notice of default;
                     Limitation on costs and expenses; Trustee's or attorney's fees;
                     Reinstatement of default, p. 492
Alternatively, see:
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=civ&group=02001-03000&file=2920-2944.5
            b) Notes, p. 493
                (i)     Informing the debtor
A California trustee executing a trustee sale has the duty only to notify the trustor(s) by
registered mail at the address(es) ‗actually known,‘ as those on the deed of trust and at the
property itself. A trustee doe not have a independent common law duty to take reasonable steps
to give actual notice to a defaulting trustor.
A California trustee executing a trustee sale has the duty to check beyond the last known address
and to check local utility or property tax records, and the state drivers licensing bureau.
                (ii)    Informing others, Cal.Civ.Code § 2924b
There is not a duty to notify easement holders of the encumbered property.
                (iii)   Estoppel, Cal.Civ.Code § 2924b(a)
Anyone may record a request for notice of default and sale under a deed of trust, CC §2924b(a).
The deed of trust can state a trustor‘s request for notice, CC §2924b(d). To be recorded, a deed
of trust must contain a trustor‘s request for notice, Cal. Government Code § 2721.5 A trustee
who is aware of that trustor‘s address is different than that on the deed of trust must send the
notice to the trustor‘s last known address, CC §1924b(b)(1).
                (iv)    Defective notices
A beneficiary is bound by the defaults in the notice of default. A beneficiary cannot insist on
grounds of default besides the ones in the notice of default. A sale executed on a ground of
default besides the ones in the notice of default is void.
                (v)     „If any‟ notices
General notices if default, ‗if any‘ does not place the trustor on notice of the specific obligations
that must be cured, and are void.
                (vi)    The UCC
A secured party must give the debtor notice before selling the secured personal property unless
the secured personal property is perishable, threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Cal. Comm. Code §9611(d) or the debtor has signed a
waiver of notice after default.
Failure to give notice may invalidate only the deficiency but not the sale.
These rules apply to foreclosure sales of share or lease ownership in cooperative apartments, but
not the real estate itself (i.e., New York.) Every aspect of a disposition of collateral, including the
method, manner, time, place, and other terms, must be commercially reasonable. Cal. Comm.
Code §9610(b).
                (vii)   Sale costs
The average time of non-judicial foreclosure (power of sale) is four to five months. The average
time of judicial foreclosure is four to five months (3 to 4 weeks in Missouri & Texas, 18- to 20-
months in Vermont and Kansas.) The average cost of non-judicial foreclosure is $530 ($100 in
Maine and Texas, $2000 in Illinois, Maryland, and Utah.)
Lenders are more likely to use a power of sale as it is less costly, and proceeds faster.
Foreclosure is less likely where a right of redemption exists.
The right is recover a deficiency judgment has no affect on foreclosure rates.
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The use of VA and FHA loans reverses the trends between power of sale and redemption.
               (viii) Sales prices
Foreclosure sales rarely produce market rate prices.
               (ix)    The Federal Foreclosure Act
Notification of default and the mortgagee‘s election to accelerate must be contained in the same
notice stating the date, time, and location of the sale, 12 USC §3757.
               (x)     The Uniform Nonjudicial Foreclosure Act
The creditor is required to give Notice of Default to the debtor only and does not have to record
the notice. If default can be cured by a money payment, the Notice must state the amount to be
paid.
               (xi)    Replacing the trustee
The beneficiary may replace the trustee by recording a substitution. The substitute trustee has all
powers held by the former trustee, including the power to conduct the foreclosure sale. If the
substitution occurs after recording of the Notice of Default, all persons entitled to receive the
Notice of Default must receive a notice of substitution. If the substitution occurs after recording
of the Notice of Sale has been given, an entirely new Notice of Sale is required.
       2)      Reinstating the Obligation, p. 488
            a) Cal.Civ.Code § 2924c
Subsection (d) of Cal.Civ.Code § 2924c regulates the trustee‘s and attorney‘s fees at about 0.2%
of the unpaid principal balance (sliding downward as the balance exceed $150,000) or $300,
whichever is greater. Post-notice fees are set by CC §2924f at slightly higher amounts. The
charges are conclusively lawful when within the formula. Courts may take discretion.
            b) Gaffney v. Downey Savings and Loan Association, 200 Cal. App.
               3d 1154 (1988), p. 499
Facts: The Gaffneys gave a first note and deed of trust to Downey. They defaulted on Downey
while trying to arrange a second note and deed of trust to Western. The Gaffneys did not contact
Downey after receiving the late notices but instead separately submitted late and current
payments to Downey. Downey rejected and returned the payments because the Gaffneys did not
state what the payments were for, or include the full amount for the late payments, and
Downey‘s policy was not to accept incomplete late payments. The Gaffneys‘ attorney called
Downey to find out the amount in arrears, but Downey would not discuss the matter with him
without written consent from the Gaffneys. The Gaffneys‘ attorney placed the funds in a trust
account for Downey and gave Downey the account information, but failed to authorize Downey
to withdraw the funds. The Gaffneys did not make any further payments, or contact Downey but
filed suit to cancel the debt. Meanwhile, Downey was foreclosing on the Gaffneys. After
receiving the complaint, Downey called the Gaffney‘s attorney and offered to accept payment
and reinstate the loan without charging late fees or costs. The Gaffney‘s attorney demanded that
Downey pay $500. Downey refused, as did the Gaffney‘s attorney to otherwise pay the funds in
trust to Downey. Western made the late payments and costs for the Gaffneys to prevent Downey
from foreclosing. The Gaffneys‘ attorney filed supplemental suit against Downey for NIED/
IIED. The trial court held judgment for the Downey‘s and their attorney.
               (i)     Cal. Civ. Code § 1501
All objections to the mode of an offer of performance, which the creditor has an opportunity to
state at the time to the person making the offer, and which could be then obviated by him, are
waived by the creditor, if not then stated.
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               (ii)      Cal. Civ. Proc. Code § 2076
The person to whom a tender is made must, at the time, specify any objection he may have to the
money, instrument, or property, or he must be deemed to have waived it; and if the objection be
to the amount of money, the terms of the instrument, or the amount or kind of property, he must
specify the amount, terms, or kind which he requires, or be precluded from objecting afterward.
Court: REVERSED.
A creditor is required, upon a proper request, to disclose information on the status of a secured
obligation, Cal. Civ. Code § 2943. A creditor is not required to anticipate the purposes of a
requested status report and even if the creditor did so that would be legally irrelevant. Nothing a
debtor does with respect to encumbering the property can have any legal effect on the rights of a
senior creditor. A creditor not required on its own to forego its rights under the senior deed of
trust as an accommodation to uncommunicative debtors.
               (iii) A creditor is not required to infer how to apply the debtor‟s
                    payment.
As to the rejected late payments, the error was the Gaffney‘s not Downey‘s processing
procedures. An offer of partial performance is of no effect, Civ. Code, § 1486. Nothing short of
the full amount due the creditor is sufficient to constitute a valid tender, and the debtor must at
his peril offer the full amount. The Gaffneys‘ two partial payments, made without any attempt to
notify defendant that payments would be submitted in that manner, did not constitute a valid
tender of the amounts due.
               (iv) A debtor placing funds in trust for the creditor must make the
                   funds unconditionally available to the creditor.
Cal.Civ.Code § 1501 and Code Civ. Proc. § 2076 are to allow a debtor who is willing and able to
pay his debt to know what the creditor demands so that the debtor may, if he wishes, make a
conforming tender. They do not apply where, as here, the amount of the creditor's demand is
known to the debtor and the amount of the tender is wholly insufficient. Reasonable compliance
is required. The Gaffneys received notice from Downey in early August that the failure to make
their account current by September 8th would result in the commencement of foreclosure action.
this is sufficient compliance with Cal.Civ.Code § 1501 and Code Civ. Proc. § 2076.
As to the trust account, compliance with Civil Code §1500 requires that money deposited in an
account be unconditionally available to the creditor. As created, Downey could not could not
have unconditional access to the funds without the Gaffneys‘ signatures to release any funds to
Downey. Further, neither the Gaffneys nor their attorney intended Downey to have the funds.
Thus, the Gaffneys did not comply with Civil Code §1500 and their deposit of money in a bank
account was not a tender of those funds to Downey. Furthermore, the refusal of Gaffney‘s
attorney to submit payment unless Downey accepted his demand for his fees only served to
reinforce the invalidity of the attempted tender.
               (v)       A creditor does not offend a debtor, or act wrongly by asserting
                      foreclosure as its only remedy.
As to the foreclosure, refusal of Downey‘s offer made clear that the Gaffneys would not make
payment of past due amounts or make future payments. Pursuant to California's one form of
action rule ( Code Civ. Proc., § 726) foreclosure was the only remedy available to Downey.
Downey's sole remedy was foreclosure. Nothing in Downey‘s attempt to pursue that sole
remedy was wrongful or can be construed as evidence of oppression, fraud or malice.
As the Gaffneys, the implied covenant of good faith and fair dealing is a mutual covenant. Each
of the contracting parties must refrain from doing anything to injure the right of the other to
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receive the benefits of the agreement. The standard for tort recovery all persons are required to
act with reasonable regard for the protection of their own interests. The Gaffneys course of
conduct cannot be termed reasonable and non-negligent.
           c) Notes, p. 505
               (i)     Lost checks
The general rule is that payment does not occur until the check is physically received. However,
the payment obligation is extinguished by the debtor‘s performance by the method at the
direction of the creditor, even though the creditor does not receive the benefit of the
performance, Cal.Civ.Code § 1476. That a creditor provides an envelope is a courtesy, not a
method of performance, Cornwell v. Bank of America, 224 Cal. App. 3d 995 (1990).
However, a check is only conditional payment until it clears, Cal. Comm. 3310(b)(1), so even if
the creditor received, and lost the check, payment has not been made.
               (ii)    Thoughts about acceptance of partial payment
After the bank‘s second extension expired, Defendant Bryan mailed money orders to the amount
of $250 to the bank with the following direction: "Please pass to the credit of my loan account."
This was the first and only tender of payment on the note or for moneys advanced by the bank.
The bank received the money orders on the 30th of September, but the amount thereof was not
applied to the defendants' indebtedness until November 1st. Plaintiff Tourny, vice-president and
general manager of the bank, testified: "I had a conversation with Mr. Bryan on or about the first
day of November in respect to the $250 payment mailed by him to the bank. The remittance had
been made but had not been applied for the reason that we did not wish to accept an account
payment, and we never do when we know there is any question of foreclosing, and I told Mr.
Bryan we would return the money, but instead of that he requested us to apply it and that is why
I wrote him this letter. And I told Mr. Bryan that these moneys had not been applied and he said
that notwithstanding the fact that a suit has been commenced you can credit that on my account
and it was in accordance with that statement that the payment was then credited to his account."
Tourny v. Bryan, 66 Cal.App. 426, 429 (1924). [Bryan lost.]
               (iii)   Reinstatement under the Federal Foreclosure Acts
Monetary defaults can be reinstated by payment of the monies due, plus foreclosure costs, and
expenses that are secured by the mortgage. HUD may refuse to cancel a sale is there has been a
previous reinstatement.
               (iv)    The Uniform Nonjudicial Foreclosure Act
The cure period is 30-days for monetary default after the Notice of Default is given. The cure
period is 90-days for non-monetary default after the Notice of Default, but the creditor may
terminate earlier if no one is proceeding diligently to cure the default within the first 30-days.
However, the creditor is not forced to be passive during the reinstatement period. During a
period allowed for cure of a default under this section, a secured creditor may enforce any
remedy other than foreclosure provided for by the security instrument and enforceable under law
other than this [Act] if enforcement does not unreasonably interfere with the ability of the debtor
against which enforcement is sought to cure a default under this section.
See also http://www.law.upenn.edu/bll/ulc/ufbposa/2002act.htm
               (v)     The UCC
There is not a right of reinstatement under the Commercial Code, but there is a right of
redemption for the debtor and other lien holders, Cal. Comm. Code § 9623.
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           d) Hunt v. Smyth, 25 Cal. App. 3d 807 (1972), p. 506
Facts: The Hunts bought property from Smyth, giving a note and first deed of trust to a Bank,
and another note and second deed of trust to Smyth. The Smyth note called for 8-years of
monthly payments of $250, followed by monthly payments of $350 until the Hunts paid off the
note. Smyth allowed Well Fargo Bank to collect the payments. The Hunts‘ payments to Smyth
were frequently late, and developed into more than a year in arrears. Smyth did not object until
1968. The Hunts make up some of the late payments, but were still delinquent in 1969. In March
of 1969, Smyth took over from Wells Fargo Bank and realized that the Hunts had not been
paying the $100 additional amount in 1968 as required by the note. Smyth sent a demand letter to
the Hunts, telling them to bring the note current and pay the monthly $350 as required. The
Hunts sent Smyth $250 for their monthly payments. Smyth returned the check (three months in a
row). The Hunts filed for an injunction to require Smyth to accept the $250 checks on grounds
that his continued acceptance during 1968 was a novation to the contract. The trial court granted
the preliminary injunction, then held for the defendant and passed the case, ―pendente lite‖, to
the Court of Appeals.
Court: AFFIRMED IN PART, MODIFIED, AND REMANDED IN PART.
               (i)       The mere acceptance of partial payments of what is due on an
                      obligation does not discharge the balance, or modify the terms of its
                      payment.
In the absence of agreement, or any expression of intent to accept the $ 250 payment in
satisfaction of a $ 350 payment, rather than merely crediting it on the account, there was no
forgiveness of the delinquency. Here the payments were credited to accrued interest and then to
principal as required by the terms of the note and the applicable law, (Civ. Code, § 1479.) The
plaintiffs' conduct in failing to pay the installments as called for by the note in no way discharged
the indebtedness. The sole effect of the failure to pay the full amount, if not corrected by the time
of the normal maturity of the note, would be to extend the time of maturity without the consent
of the obligee, and force him to lend his money on terms to which he did not consent. An oral
agreement for the extension of time of a future maturity cannot be considered as executed, and
will not be enforced when not supported by consideration.
Furthermore, the corrected notice of default filed on April 16, 1969 was sufficient in from and
properly filed. Plaintiffs did not paid or offer to pay the sum accrued under the note in order to
relieve the default. The trial court found that the Hunts failed to pay principal and interest
according to the terms of said Promissory Note and are in default according to its terms. Thus,
the Hunts were not entitled to a preliminary injunction or a permanent injunction enjoining a
Trustee sale.
               (ii)      A modification or novation requires some consideration as either a
                      benefit to the obligee, or a detriment to the obligor for which the
                      obligee bargained.
When a creditor has accepted deferred payments with notice, express or implied of such default,
he can only reinstate the provisions of the contract requiring prompt payment by giving the
debtor notice to that effect. Smyth told the Hunts that he was insisting that they pay the monthly
sum of $350, which they did not do. As above, the tenders of $250 were insufficient to relieve
the Hunts from default.
The Hunts fail to distinguish between the waiver of a right to rely on an obligor's default as a
ground for accelerating the maturity of an installment obligation, and the right of an obligee to
insist on payment of that portion of the obligation which is due, owing and payable. Where, as
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here, there has been a default under which the obligee may elect and has elected to declare the
whole obligation due and to enforce his security, he may insist that the obligor make his
payments current as a condition of reinstatement of the installment features of the obligation,
Civil Code section 2924c.
Relieving an obligor from acceleration by his default in the payment of a debt is distinguished
from a forfeiture under a contract for the purchase of property because there is no true forfeiture,
merely enforcement of the obligation according to its terms. This right does not extend to have
the payment of the delinquent installments postponed to a time past the normal maturity of the
note. The Hunts failed to prove that the demand was due, and their failure to allege and prove
any tender or payment under §2924c, which would cure the default, rendered the proposed
allegations and the requested amendment superfluous.
               (iii) Remand is proper to determine the amount necessary to cure the
                    default under Cal.Civ.Code § §2924c
The Hunts asked that if their contentions concerning the novation, and waiver of the defendant's
rights to the accrued payments are overruled, the case be remanded in any event for a
determination of the amount necessary to reinstate the loan under Cal.Civ.Code § §2924c.
However, the Hunts have at no time offered to do equity. They have adamantly insisted on an
alleged right to compel the defendant to wait for his money because he has been lenient in the
past. Nevertheless, this action began 13 days before the expiration of the period granted by
§ 2924c in which the plaintiffs could relieve themselves of the foreclosure by paying up
everything due except that portion of the entire obligation which has been accelerated. Many
more payments and collateral obligations such as insurance, taxes, and the attorney's fees
attendant to these proceedings may have become due during the protracted period of this
litigation. The history of the relationship of the parties indicates that further lawsuits are within
the realm of possibility. In the interests of both parties, the case be remanded for a determination
of the amount necessary to cure the default.
[The Court affirmed judgment that the Hunts were ordered to pay on the note, plus attorney fees
and costs. The court modified and remanded to decide the amount due.]
           e) Notes, p. 509
               (i)     Payoff demand
A junior, owner, or successor may obtain ―beneficiary statement‖ (a.k.a. ‗payoff demand
statement) from the senior, showing the loan balance, interest rate, monthly payments, tax and
insurance impounds, arrearages, defaults, etc., by making an appropriate demand and up to $60
or it. See Freedom Financial Thrift v. Golden Pacific Bank, 20 Cal. App. 4th 1305 (1993) to see
who accepts the loss from an understated, but accepted payoff demand.
               (ii)    Reinstating events
Cal.Civ.Code § 2924(e) permits ―reinstatement of a monetary default under the terms of an
obligation secured by a deed of trust, or mortgage [] made at any time within the period
commencing with the date of recordation of the notice of default until five business days prior to
the date of sale set forth in the initial recorded notice of sale.‖ Georgia is not so lenient. A debtor
made good faith attempts to acquire insurance, but was unable to obtain the requisite insurance
until one day after the lender sent the notice of acceleration and foreclosure. The Georgia court
said, the policy did not make allowance for good faith efforts, or failure because of impossibility,
impractability, or non-cooperation of a third party. The debtor tendered the insurance a day after
being due, and that was a day past his ability to defeat the lender‘s right to foreclose, Benson v.
Patella, 362 S.E.2d 217 (Ga, 1987).
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            f) Bisno v. Sax, 175 Cal. App. 2d 714 (1959), p. 510
Facts: Sax held a note and deed of trust from Bisno, who defaulted. Sax recorded a notice of
default. Bisno sent an insufficient amount in an attempt to cure the default, which Sax rejected
and sent back. Sax then filed a notice of sale, but continued the sale. Bisno then filed for, and
received an injunction to stop the sale. The judge made the injunction conditional on the Bisno
curing the default which they did. When the trial court lifted the injunction and allowed the sale,
Bisno filed a lis pendens. Sax sold the property to a third party and Bisno appealed.
Court: REVERSED.
               (i)        The acceptance of payment for a delinquent installment cures that
                      particular default and precludes a foreclosure sale based on that
                      delinquency.
Sax argued that the loan was already accelerated at the time of the foreclosure sale so Bisno
owned the full amount, not just the amount the trial court ordered cured. The court held that
since Bisno cured the default, foreclosure on the acceleration was a forfeiture and abhors by
equity. Though in one case, the Court of Appeals said that acceleration is merely an agreement of
when a debt shall become due and enforceable according to it terms, the California Supreme
Court has said that acceleration is a penalty for the benefit of the payee, which the payee may
waive by accepting interest instead. The court said that enforcing acceleration on the debtor
would work a great hardship on Bisno, which a court of equity could relieve.
Sax also argued that that title had already passed to a third person and the court could not disturb
that title. However, the court noted that Bisno had recorded a lis pendens before the sale so the
buyer took with both that constructive, if not actual knowledge, and in fact, the buyer had actual
knowledge of the suit. Thus, the buyer was in privity with Sax, who is the deed of trust
beneficiary, so both are bound by the judgment of the court.
       3)      Notes, p. 514
            a) Mortgage penalties versus land contract forfeitures
Most of the cases on which Bisno is based are from the installment land contract filed. The
Supreme Court then observed in Smith v. Allen (Chapter 24, p. 721) that many judicially created
relief provisions under a land contract for delinquent purchasers are not available to trustors
under a deed of trust.
            b) Bankruptcy and reinstatement
               (i)       Effect of the automatic stay
By the automatic stay prohibiting the beneficiary from following an acceleration with a trustee‘s
sale, the filing of the bankruptcy also prolongs the reinstatement period as that is tied to the date
of sale. A bankruptcy reorganization plan may permit the debtor to cure past defaults and under a
previous acceleration, 11 USC 1124(2).
               (ii)      Reinstatement
Courts that consider reinstatement rights (deceleration) as a method to cure default (rather than
as modification) may give reinstatement rights to a debtor even though home loans are not
supposed to have their loans modified in Chapter 13, 11 USC 1322(b).
Where the present value of the collateral equals the income stream, the court may ―cram‖ a
modified payment obligation schedule (and perhaps interest rate reduction) on the creditor, 12
SC 1129(b)(2)(A).
A debtor who files bankruptcy before the property is sold at foreclosure is entitled to cure her
default and decelerate the loan after paying the arrearages and the costs of acceleration, 11 USC
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§§ 1124(2)C); 1322(b)(5). The creditor is then treated as unimpaired and is not entitled to vote
on the proposed plan, In Re Southeast Company, 868 F.2d 335 (9th Cir. 1989).
               (iii)   In Re Hurt, 158 B.R. 154, 156-158 (9th, BAP, 1993).
Three theories have evolved to pin point exactly when a debtor may no longer cure: (1) the
pragmatic theory; (2) the state law theories; and (3) the estate theory.
A. The Pragmatic Theory
The "pragmatic" theory suggests that the foreclosure sale is the cutoff date for § 1322(b)(5) cure
provisions. The Sixth Circuit adopted the pragmatic time period primarily because it "works the
least violence to the competing concerns evident in the language of the statute.
B. The State Law Theory
The "state law" theory looks at a specific state's statute to delineate the cutoff point for cure. This
theory, however, is divided into two subcategories: the title/lien theory and the mortgage contract
theory.
          1. The Title/Lien Theory
The Seventh Circuit looked at state law to determine whether or not the mortgagor retained legal
title in the property after filing the bankruptcy petition, such that the property was part of the
estate under 11 U.S.C. §§ 541 and 1306. In Clark, the debtor attempted to cure after foreclosure
judgment, but before the foreclosure sale. The court determined that "the power to 'cure' a default
provided by § 1322(b)(5) permits a debtor to de-accelerate the payments under a note secured by
a residential property mortgage," even though a judgment of foreclosure had been entered on the
property. The court noted that under Wisconsin law the homeowners retained an interest in the
property after the judgment of foreclosure is entered which they could seek to protect as part of
the bankruptcy.
          2. The Contract Theory
Both the Eighth and Third Circuits have adopted the "mortgage contract" theory. Essentially, this
theory states that after a certain point in the foreclosure process, the mortgage contract ceases to
exist. Nevertheless, the two circuits disagree on when the contract is extinguished.
The Eighth Circuit determined that the cure provisions "have particular reference to contractual
mortgage rights and are not applicable after a foreclosure sale has been held." The court reached
its conclusion interpreting analogous "cure" provisions in Chapter 12. The court concluded,
"Congress evidenced its intent to provide additional relief for defaulting mortgagors only as long
as the contractual relationship continues, and to allow state law to control when the relationship
is dissolved." Interpreting South Dakota law, the court found that the mortgage contract was
extinguished after both the foreclosure judgment and the sale.
The Third Circuit determined that the cure provisions expire when the mortgagee obtains a
foreclosure judgment. The Roach court concluded that "after the entry of a foreclosure judgment,
no contractual relationship remains and the mortgagee's rights are those that arise from its
judgment." Interpreting New Jersey law, the court found that "the mortgage is merged into final
judgment of foreclosure and the mortgage contract is extinguished."
C. The Estate Theory
The Tenth Circuit recently developed the "estate" theory. The estate theory cuts off the debtors
right to cure at the foreclosure sale. The court began its analysis stating, "[a] more useful starting
point would seem to be the concept of property of the bankruptcy estate." Sections 541 and 1306
are the logical starting points because "a mortgage debtor must have some legal or equitable
interest in property which enters the bankruptcy estate if he hopes to retain it through the
bankruptcy cure provisions." However, the court did not focus on state mortgage law to
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determine the interests of the debtor in the property. The court stated, "the right to cure in
bankruptcy should resemble its state law analogue, but should not be stifled by archaic property
and mortgage law concepts. Apparently all of the states permit equitable redemption of property
up until the foreclosure sale and approximately half of the states permit statutory redemption
after the foreclosure sale. The court concluded that these redemptive interests were part of the
bankruptcy estate stating that "the concept of property of the bankruptcy estate is broad enough
to include statutory or equitable rights of redemption."
Although this analysis implies that the right to cure beyond the foreclosure sale, the court
nevertheless established the foreclosure sale as the cutoff point for two primary reasons. First,
the foreclosure sale introduces a third party into the equation, specifically, the good faith
purchaser at the foreclosure sale. "Purchase by an independent third party at a foreclosure sale
raises enough additional concerns to justify ending the right to cure in bankruptcy at that point."
Second, the court focused on the distinction between equitable redemption and statutory
redemption. The court stated that: The mortgagor's equitable period of redemption before sale
exists to provide the debtor sufficient time to attempt to refinance the property that appears to be
the same goal as the bankruptcy right to cure. While an opportunity to refinance is also one of
the purposes of statutory redemption, the principal objective of statutory redemption is to assure
that the foreclosure sale brings a fair price. As a result, the inherent philosophy separating the
redemption periods requires the right to cure to stop at the foreclosure sale.
               (iv)    The Uniform Nonjudicial Foreclosure Act
A Notice is recorded and sent to the debtor, persons holding interests in the real property that are
recorded and known to the creditor and anyone who has recorded a request for notice. If the
creditor has elected to accelerate the obligation, that fact must be set forth in the Notice of
Foreclosure. The Notice must also contain a statement of the foreclosure method (auction,
appraisal or negotiated sale) that the creditor intends to use. And if the debtor is a residential
debtor, the Notice must state that she/he has the right to request an informal meeting with the
creditor. The foreclosure must take place at least 90 days and not more than one year after the
Notice of Foreclosure has been given. Although the debtor and subordinate lien-holders have a
right of redemption during this period, they have no right of reinstatement. See also:
See also the 2002 version: http://www.law.upenn.edu/bll/ulc/ufbposa/2002act.htm, or the 2001
version: http://www.abanet.org/rppt/cmtes/rp/i4/waldman-Uniform_Nonjudicial_Foreclosure_Act.pdf ) or
Chapter XVIII. The Sale and After
   A) The Foreclosure Sale, p. 515
      1)    The Notice of Sale (NOS), p. 515
         a) Cal.Civ.Code § 2924b, Request for notice of default and sale, p.
            515
(b) The mortgagee, trustee, or other person authorized to record the notice of default shall (2) At
least 20 days before the date of sale, deposit or cause to be deposited in the United States mail an
envelope, sent by registered or certified mail with postage prepaid, containing a copy of the
notice of the time and place of sale, addressed to each person whose name and address are set
forth in a duly recorded request, directed to the address designated in the request and to each
trustor or mortgagor at his or her last known address if different than the address specified in the
deed of trust or mortgage with power of sale.
(c) The mortgagee, trustee, or other person authorized to record the notice of default shall (3)
At least 20 days before the date of sale, deposit or cause to be deposited in the United States mail
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an envelope, sent by registered or certified mail with postage prepaid, containing a copy of the
notice of the time and place of sale addressed to each person to whom a copy of the notice of
default is to be mailed as provided in paragraphs (1) & (2), and addressed to the office of any
state taxing agency, Sacramento, California, which has recorded, subsequent to the deed of trust
or mortgage being foreclosed, a notice of tax lien prior to the recording date of the notice of
default against the real property to which the notice of default applies.
(4) Provide a copy of the notice of sale to the Internal Revenue Service, in accordance with
Section 7425 of the Internal Revenue Code and any applicable federal regulation, if a "Notice of
Federal Tax Lien under Internal Revenue Laws'' has been recorded, subsequent to the deed of
trust or mortgage being foreclosed, against the real property to which the notice of sale applies.
The failure to provide the Internal Revenue Service with a copy of the notice of sale pursuant
to this paragraph shall be sufficient cause to rescind the trustee's sale and invalidate the
trustee's deed, at the option of either the successful bidder at the trustee's sale or the trustee, and
in either case with the consent of the beneficiary. Any option to rescind the trustee's sale
pursuant to this paragraph shall be exercised prior to any transfer of the property by the
successful bidder to a bona fide purchaser for value. A rescission of the trustee's sale pursuant to
this paragraph may be recorded in a notice of rescission pursuant to Section 1058.5.
            b) Cal.Civ.Code § 2924f, Notice of sale; Posting, publication, and
               recording; Contents; Place of sale; Bids prior to sale, p. 516
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=civ&group=02001-03000&file=2920-
2944.5
            c) Notes, p. 517
                (i)     Failure to serve the notice of sale
While failure in a judicial foreclosure to give notice to a junior beneficiary allows the omitted
beneficiary‘s interest to survive the sale, a nonjudicial foreclosure is not an action, so the result is
that foreclosing senior must bring a second foreclosure action against the omitted junior.
Cal.Civ.Code § 2924b(c)(4) now requires notice of sale to the IRS.
                (ii)    Notice of sale in a judicial foreclosure
The notice of sale must (1) contain the legal description of the property, Cal. Code Civil
Procedure § 701.540; (2) be served and posted 20 days before the sale; (3) serving the debtor
personally or by mail (first class mail is OK for a judicial sale).
The notice of sale must be send to all persons who have or are holding a lien against the property
within the 30 days before the filing of the notice of levy (the notice of sale), and all persons who
have requested notice.
The notice of sale must be published three times in a general publication newspaper before the
sale with first publication at least 20 days before the sale.
                (iii)   Special procedures with obligation for services or goods
Owners of owner-occupied residences and Unruh Act governed retail installment sales must
receive a second notice about the sale with advice to see an attorney, if the default is not cured
within 30-days after recording of the Notice of Default, Cal.Civ.Code § 2924f(c). Also, 10 Days
prior to Sale Date, the trustee may accept purchase offers, and if accepted by owner and
beneficiary, the sale is postponed.
                (iv)    Notice of Sale under the Single Family Mortgage Act
HUD may use a combined Notice of Default and Notice of Sale, 12 U.S.C. 3757. The combined
notice must (1) state the property description, sale location, date, & time, and bid deposit, (2) be
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published weekly for three weeks, and (3) be sent by certified or registered mail, at least 21-days
before the sale, to all persons who hold a recorded interest as of 45-days before the sale date.
The Multi-Family Mortgage Foreclosure Act requires (1) last publication not less than 4-days, or
more than 12-days before the sale, and (2) posting on the property for 7-days before the sale.
               (v)       Advertising a sale under the Uniform Nonjudicial Foreclosure Act
A sale by auction must be advertised (following the Cal.Civ.Code procedures) but must also (not
like California) identify (1) the minimum bid amount, (2) state that title evidence is available
from the creditor, (3) state whether the property is accessible, and (4) be sent to all persons
entitled to the Notice of Foreclosure not less than 21 days before the sale.
       2)      Postponement of the Sale, p. 519
            a) South Bay Building Enterprises, Inc. v. Riviera Lend-Lease, Inc.,
               72 Cal. App. 4th 1111 (1999), p. 519
Facts: Archer gave notes and deeds of trust on his house to both South Bay (for $116K) and
Riviera (for $127K). Riviera recorded first. Archer defaulted on both, and Riviera nonjudicially
foreclosed. Riviera held two foreclosure sales, and postponed both with ready, able, and willing
bidders. Riviera later held a third sale at which no bidders showed. Riviera was the only bidder
and gave an overbid of $225,487.03. Riviera allowed Archer to rent the house for several
months. After 8-months, Riviera evicted Archer for non-payment of rent, and re-sold the home
for $800,000. South Bay sued Archer and Riviera alleging conspiracy of a fraudulent
conveyance to avoid paying South Bay as the junior lender.
Trial Court: Archer settled out of court for 120K. Riviera said that it took a loss on the property
because it has spent $214K in expenses, plus $129K in repairs, and its $127K loan. The trial
court granted a directed verdict for Riviera on the fraud claim because South Bay had not shown
reliance on any Riviera representation, and also on the conspiracy claim because South Bay did
not show it met right of possession element of conversion.
Court: REVERSED, South Bay to amend its complaint to allege statutory fraud.
               (i)       Setting aside the sale is not the only remedy for fraudulent
                      foreclosure. A junior lienor retains the right to recover tort damages
                      from the trustee, and beneficiary and a criminal sanction also exists,
                      Cal.Civ.Code § 2924h(g).
Riviera‘s asserted that South Bay did not suffer damages, and that its overbid had been an
inadvertent mistake. Riviera relies upon the fact that it (Riviera) ultimately suffered a financial
loss when it sold Archer's property to a third party. This is a nonsequitur. The point is that as a
result of the foreclosure sale, South Bay's lien was extinguished and it never received any
payment on its debt. South Bay showed that a bona fide purchaser was present was the first sale,
whose purchase would have made both the junior and senior liens. Archer testified that Riviera‘s
overbid was not a mistake but that Riviera had overbid to keep other bidders away. South Bay, as
a junior lienholder, clearly falls with the class for whose benefit Cal.Civ.Code § 2924h was
enacted and therefore may use defendants' violation of the statute to establish civil liability.
            b) Notes, p. 522
               (i)       Statutory regulation of postponement
See Cal.Civ.Code § 2924g (c)(1) through (e)
               (ii)      Postponement and the right to reinstate the loan
Cal.Civ.Code § 2924c(e), 2924g(c) and 2924g(d) lead to the following conclusions about how
the postponements of the sales affects the trustor‘s right of reinstatement. 24 CEB RPLP 195.
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1.       For the first three-month period following a notice of default, and for the first 15 days of
the 20-day period following the notice of sale, there is a right of reinstatement, i.e., a right to
have the trustee sale cancelled by paying all the arrearages without having to pay the entire debt.
2.       During the final five business days before the scheduled sale, there is no right of
reinstatement. There is only the right of redemption, i.e., the right to pay the entire debt before
the hammer falls.
3.       A sale date can be rescheduled either by a new notice of sale, or by a notice of
postponement. While a new notice of sale must comply with all the formalities of the original
notice of sale, the notice of postponement is accomplished by a making a "public statement" at
the time and place of the original sale.
4.       A new notice of sale also carries with it a new five-day reinstatement right; whereas a
notice of postponement does not revive the right of reinstatement unless the new date is more
than five days in the future. (Thus, a four-day postponement during the final five-day period does
not revive the right of reinstatement.)
5.       But, the beneficiary can make only three notices of postponement, after which the
beneficiary must send out a new notice of sale, which revives a right of reinstatement. (So a
beneficiary seeking to avoid that revival should (a) postpone rather than renotice a sale, (b) set
each new date less than five days hence, and (c) not postpone more than three times.)
6.       The three-postponement limit does not apply to postponements made while federal or
state stays or injunctions are in effect. Such postponements can be made as often as necessary,
without thereby reviving the right to reinstate. (This makes it rather silly to limit such
postponements to four-day periods, but that is probably what the code sections require.)
7.       There must be a seven-day wait before going to sale after the stay or injunction has been
lifted. According to Hicks v. Legg, 89 Cal. App. 4th 496 (2001), however, that does not mean
that the postponements necessary to get through that week have to be for seven-day periods; two
four-day postponements are permissible (assuming that the three-postponement quota has not
been used up), and will keep reinstatement rights from reviving. [In Hicks, the trustee postponed
the sale 25 times in 4-months without creating a new right of reinstatement.
8.       But, the beneficiary should not delay furnishing the trustor with a statement of the
amount necessary for reinstatement until the final five-day period has arrived. He got away with
that in Hicks only because the trustors' mala fides seemed to exceed his own.
               (iii)   Economic effects of postponement
Postponement of the sale means that all bids are cancelled. This might affect the final sale price.
The reinstatement right continues until 5-days before the new sales date if the sale is postponed
for more than 5-business days, Cal.Civ.Code § 2924c.
               (iv)    Re-Noticing a sale after the bankruptcy stay has been lifted
Cal.Civ.Code § 2924g(d) requires that notice of any postponement be given: California law does
not permit the postponement of a foreclosure sale under a deed of trust without notice. The
statute further specifies what notice is required: ―The notice of each postponement and the reason
shall be given by public declaration by the trustee at the time and place last appointed for sale.
Such a public declaration of postponement shall also set forth the new date, time, and place of
sale and the place of sale shall be the same place as originally fixed by the trustee for the sale.
No other notice of postponement need be given.‖
In three types of circumstances the foreclosure sale may be postponed without the knowledge of
the mortgagor: (1) a postponement by the trustee; (2) a postponement by order of court, and (3) a
postponement by operation of law. A trustee occasionally postpones a foreclosure sale, usually at
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the request of the beneficiary. A postponement by order of court usually results from an
injunction that prohibits the conduct of the sale.
Probably 99% of California continuances of foreclosure sales result from the automatic stay
imposed by the filing of a bankruptcy case. These continuances are required by Bankruptcy Code
§ 362(a), which stops virtually all debt collection actions against a bankruptcy debtor. The
bankruptcy exception is the principal exception to the notice requirement of the California
foreclosure statute. Absent the statutory exception, this would not occur. The general practice in
the California creditor community is to continue a foreclosure sale for a month at a time.
Cal.Civ.Code § 2924g does not require that notice be given to the mortgagor of any
postponement resulting from the operation of law, such as a postponement in consequence of the
automatic stay resulting from the filing of a bankruptcy petition, so bankruptcy debtors
commonly lose track of the dates of pending foreclosure sales. Once they lose track of the next
pending foreclosure sale, they often have considerable difficulty in finding out when the next
sale is scheduled.
[Because notes secured by residential real estate are frequently sold in the secondary market, a
debtor frequently has never done business with and does not even know the identity of either the
beneficiary or the trustee under the deed of trust. A debtor often sends the monthly payments to a
local servicing agent, which may or may not be the original lender who made the loan to the
debtor. Indeed, the owner of the deed of trust may change several times before foreclosure is
initiated, and the notice of default may come to a mortgagor from a total stranger. Rarely does a
debtor know enough about property recording procedures to check to see whether the original
mortgagee has sold the mortgage to another party, and a much rarer debtor who would think to
check the property records for this information absent all actual notice of any such transfer.]
Once relief from stay has been granted, secured creditors have traditionally assumed that they
may proceed with foreclosure under state law, uninhibited by any further limitations of
bankruptcy law. The bankruptcy statute and rules are silent on this subject.
The Court finds that this assumption is not warranted: a secured creditor may not foreclose on
property of the estate without giving further notice beyond the minimum required by California
law. This Court holds that a secured creditor must at least republish its notice of sale and give
notice to the owner, as required by Cal. Civ. Code § 2924 et seq., before it may conduct a non-
judicial foreclosure sale of property of the estate. This Court holds that the minimum notice
required for sale of property of the estate after the grant of relief from the automatic stay is the
republication of the notice of sale with actual notice to the debtor and junior lienholders, as
provided by the California foreclosure statute. In re Tome, 113 B.R. 626 (Bankruptcy C.D. Cal.
1990). [Note that Tome is the minority rule.]
               (v)     Charging to postpone
Where a borrower induced the lender to forebear foreclosure for one month on a debt then due of
$50,000, a $500 fee for a postponement of the foreclosure is usurious as an APR of 11.88%, thus
exceeding the state 10% maximum under Cal. Const. art. XX, § 22, Buck v. Dahlgren, 23 Cal.
App. 3d 779 (1972).
               (vi)    Postponement of judicial sales
A judgment debtor and judgment creditor together may request in writing that a sale be
postponed to an agreed day and hour, The request shall be delivered to the levying officer
conducting the sale at the time and place last appointed for the sale. No other notice of postponed
sale need be given, Cal. Code Civil Procedure § 701.580.
               (vii)   Postponing federal sales
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A foreclosure commissioner may adjourn a sale to a later time that same day if circumstances are
not conducive a fair sale for the mortgagor. An adjournment for up to 31 days is permitted with
publication of a new combined notice of default and sale. Single Family and Multifamily
Mortgage Foreclosure Acts, 12 U.S.C. §§3760(c), 3710
       3)      Conduct of the Sale, p. 526
            a) Cal.Civ.Code § 2924g, Regulating Trustee Sale, p. 526
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=civ&group=02001-03000&file=2920-
2944.5
A sale may be postponed up to three times by merely announcing the postponed sale at the time
of the scheduled sale without giving a new notice of foreclosure sale.
http://www.californiamortgageassociation.com/quarterly.php?a=view&id=26
            b) Notes, p. 528
               (i)     Unified sales
A creditor may hold a unified sale of personal property and real property, Cal. Comm. 9604. The
personal property must be described in the Notice of Sale, Cal.Civ.Code § 2924f(b)(2).
               (ii)    Time and place of sale
A foreclosure sale must take place in the county where the property is located, between 9 AM
and 5 PM. Cal. Code Civil Procedure § 701.570. Federal sales have the additional requirement of
being held either at the courthouse, or where real estate foreclosure auctions are customarily
held. 12 U.S.C. 3760.
               (iii)   Sales where the security consists of several parcels
See Cal.Civ.Code § 2924g(b); Cal. Code Civil Procedure §§ 701.570(d); & 701.570(e), and
Chapter 11. Deeds of trust may attempt to circumvent the statutory requirements by giving the
lender discretion to decide the order of collateral sale, but are subject to the equitable doctrine of
marshalling of assets.
               (iv)    Defective parcels
A beneficiary is permitted to sell property ‗as is,‘ Cal.Civ.Code § 2924h(g). Otherwise a
beneficiary may be liable for failing to disclose adverse physical conditions in the security
despite the California Transfer Disclosure Law (Cal. Code Civil Procedure §1102) exemption of
foreclosure sales.
A trustee or beneficiary does not have a duty to a purchaser to explain what encumbrances exist,
or have merged, or would vanish under the foreclosure sale.
The proposed Uniform Nonjudicial Foreclosure Act requires a creditor to get title evidence, but
frees a creditor from liability for errors of information given to prospective bidders unless the
creditor had actual knowledge of the error at the time.
            c) Nomellini Construction Co. v. Modesto Savings & Loan Assn, 275
               Cal. App. 2d 114 (1969), p. 529
Facts: Modesto Savings & Loan Assn held the third deed of trust to secured property owned by
Nomellini Construction as well as judgment junior to its deed of trust. Nomellini defaulted on all
of its deed of trust. The holder of the first deed foreclosed, and held a cash only trustee sale.
Nomellini bid $65K cash, plus cancellation of its $10K deed of trust and judgment lien. The
trustee accepted a third party cash bid of $68K and rejected Nomellini‘s bid. Nomellini sued to
have the trustee accept its bid. The trial court granted summary judgment against the Nomellini.
Court: AFFIRMED.
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               (i)     A trustee may consider only the cash offer where the deed of trust
                    requires a cash only sale.
               (ii)    A trustee is not required to accept a credit bid of a junior lienor
                    bidding on a senior foreclosure.
               (iii) When the holder of a first lien deed of trust bids in the property he
                    need not tender cash that would only immediately be returned to him.
Nomellini argued that the trustee should have it accepted its bid in the best interest of all parties
concerned by paying off the senior and junior liens. The court countered that Nomellini‘s
position overlooked that this would (1) tear up the contract (the trust deed) the parties entered
which required a sale at public auction for cash; (2) which from the standpoint of the trustee that
is a most important provision. If the trustee had to determine and weigh the validity and dollar
value of credit bids (facing personal liability if his appraisal was wrong) his would be an onerous
burden; (3) a public auction at which credit bids must be so determined and weighed would
"chill the sale" so far as cash bidders are concerned and thus defeat the purpose of a public
auction.
Where the sale is held pursuant to a power of sale in a trust deed (Civ. Code, § 2924) and the bid
is made by a junior lien-holder who proposes to use the claimed balance of the junior paper as a
part of the bid, the bid should be rejected by the trustee, California Continuing Education of the
Bar, California Land Security and Development, §15.4.
               (iv) The trustee is not required to hold up the sale while a bidder leaves
                   to get cash.
               (v)     A trustee may not reject a valid bid.
This was not a case where the bidder sought to leave and get the cash, or where the trustee/lienor
refused to accept the bidder‘s cash at a cash sale.
               (vi) That a bid is sufficient to pay off the junior‟s lien does not make
                   the sale for the benefit of the junior.
Nomellini also argued that because it had made a bid, the cash part of which was adequate to
satisfy all prior liens, "in effect, the auctioneer then was conducting the sale for the benefit of
Nomellini." The court that incorrect as the trust deed provisions were designed to encourage
competitive bidding and thus obtain the best price obtainable.
               (vii) A bidder may make prior credit arrangements with the foreclosing
                   lienor.
Nomellini argued the sale was invalid because the trustee announced that two parties had
arranged credit with the beneficiary of the first trust deed -- on whose behalf the sale was being
held -- to the end that, to the extent of that credit, their bids would be considered as cash bids.
(Plaintiff was not one of such parties.) Obviously such an arrangement had the same effect as a
cash bid.
               (viii) Priority of sale proceeds: costs, fees and expenses of sale, and then
                   to the foreclosing lienor. Any balance is called surplus to pay
                   subordinate liens in order of their priority. Any surplus then
                   remaining is payable to the mortgagor or trustor.
           d) Notes, p. 531
               (i)     Trustee‟s discretion in accepting bids
The trustee‘s sole obligation is to obtain the highest possible price. Under Cal.Civ.Code § 2924,
a bidder may present cashier checks made to himself rather than the trustee for endorsement on a
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successful bid. Disqualifying such a bidder improperly thwarts the bidding to reduce the
potential funds available to the trustor/debtor. Baron v. Colonial Mortgage Service, Co., 111 Cal
App. 3d 316 (1980).
               (ii)    Acquisition by the trustee
A trustee may personally purchase the encumbered property at the sale, Stephens v. Hollis, 196
Cal. App. 3d 948 (1987), but an officer conducting a judicial sale may not be a purchaser, Cal.
Code Civil Procedure § 701.610.
               (iii)   Bidding at the judicial foreclosure sale
A foreclosing mortgagee may make a credit bid regardless of whether the sale is a trustee sale, or
a judicial foreclosure. If the highest bid is more than $5000, the bidder may deposit the highest
of $5000, or 10% of the bid. A bidder then failing to pay the balance within 10 days loses the
purchase to a new sale, and is liable for the amount less than the bid and not paid by the next
highest bidder, plus the costs from the resale, plus costs, interest, and attorney‘s fees, Cal. Code
Civil Procedure § 701.600(b)(c).
               (iv)    The effect of bidding
Each bid is an irrevocable offer, and revokes earlier bids, Cal.Civ.Code § 2924h(a), and
acceptance of the bid completes the sale (despite a failure to execute the trustee‘s deed.) A sale is
‗perfected‘ as of 8 AM on the actual sale date if the trustee‘s deed is recorded within 15 days
(extended for business closure on the 15th day,) Cal.Civ.Code § 2924h(c).
               (v)     How Much to Bid
Creditors are advised to underbid to allow them to go after additional collateral, correct for
computational errors, assert counter-claim offsets in later suit, tax benefits, and allow suit later
for waste or fraud. However, a small bid invited federal government tax lien redemption (in
nonjudicial, or judicial sale) and a charge of fraudulent conveyance if the trustor files bankruptcy
within one year.
               (vi)    The trustee‟s decision to continue the sale
A trustee has discretionary authority to postpone the sale to protect either the trustor's or the
beneficiary's interest. Thus, a trustee‘s decision to continue the sale is valid where the trustors
attend and create disorder and confusion, which interferes with the orderly understanding by the
bidders on what property is for sale at that moment, Hatch v. Collins, 225 Cal. App. 3d 1104
(1990).
The trustee has authority to postpone the sale upon request of the beneficiary, Cal. Civ. Code §
2924g(c)(1). Once the sale is postponed, all bids are automatically cancelled. Cal. Civ. Code §
2924h(e).
               (vii)   Ambiguous bids
An auctioneer has a duty to the parties of a deed of trust sale to explain to the bidders how to
make a bid. The simple expedient of halting the sale for a few moments to explain bidding
requirements would have insured that the auctioneer satisfied his primary duty, which is to create
a free market for the property, Bank of Seoul & Trust Co. v. Marcione, 198 Cal. App. 3d 113,
119 (1988).
               (viii) Bidding under the Federal Foreclosure Acts
http://www.law.cornell.edu/uscode/html/uscode12/usc_sup_01_12_10_38.html
If a HUD sale is not for all cash, then the notice of sale must state the required deposit, and terms
of payment, 12 U.S.C. 3757. Only HUD and bidding parties may participate and bids must be
sealed, 12 U.S.C. 3760 (Single Family Mortgage Foreclosure Act) and 12 U.S.C. 3710
(Multifamily Mortgage Foreclosure Act.)
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               (ix)      Bidding under the Uniform Nonjudicial Foreclosure Act
Unless the advertisement allows a lower figure, the highest bidder must deposit 10% of the bid at
the end of the sale and pay the remainder of the bid within 7 days after the auction.
           e) Lo v. Jensen, 88 Cal. App. 4th 1093 (2001), p. 535
Facts: Lo owned a condominium and defaulted in the Homeowner‘s Association obligations.
The HOA foreclosed and held a foreclosure sale. Two of the bidders were Jensen and Ko, both
seasoned foreclosure buyers, who instead of competing against each other, decided to act
together in the purchase. While each had planned to bid $100K, and valued the property for
$150K, by not biding against each other, they bought the property for $5412. Lo sued. The trial
court ruled they violated Cal.Civ.Code § 2924h(g).
Court: AFFIRMED
               (i)       Bid rigging prohibiting, Cal.Civ.Code § 2924h(g)
It shall be unlawful for any person, acting alone or in concert with others, (1) to offer to accept or
accept from another, any consideration of any type not to bid, or (2) to fix or restrain bidding in
any manner, at a sale of property conducted pursuant to a power of sale in a deed of trust or
mortgage. However, it shall not be unlawful for any person, including a trustee, to state that a
property subject to a recorded notice of default or subject to a sale conducted pursuant to this
chapter is being sold in an "as-is" condition.
In addition to any other remedies, any person committing any act declared unlawful by this
subdivision or any act which would operate as a fraud or deceit upon any beneficiary, trustor, or
junior lienor shall, upon conviction, be fined not more than ten thousand dollars ($ 10,000) or
imprisoned in the county jail for not more than one year, or be punished by both that fine and
imprisonment.
               (ii)      If a nonjudicial foreclosure sale has been unfairly or unlawfully
                      conducted, or is tainted by fraud, the trial court has the power to set it
                      aside.
Ko and Jensen sometimes saw each other at sales. Ko knew that Jensen was interested in "small
money deal condo liens," such as the subject property. He expected Jensen and others to bid on
the property. The day before the sale, Ko approached Jensen and asked whether he was going to
attend. On learning that he was, Ko suggested that they join together in one bid. He told Jensen
that by joining together, they could get the property cheaply.
               (iii) Courts may vacate a foreclosure sale where there has been fraud
                    in the procurement of the foreclosure decree or where the sale has
                    been improperly, unfairly or unlawfully conducted, or is tainted by
                    fraud, where there has been such a mistake that to allow it to stand
                    would be inequitable to purchaser and parties.
A sale may be set aside where two otherwise ready and willing competitive buyers combine in
restraint of competition, resulting in an artificially low price that amounts to unfairness to the
defaulting owners. The trial court rejected the argument that Jensen and Ko had formed a lawful
joint venture and found that they "had as their primary motive to restrict competition and not an
intent to carry on as co-owners of a business venture. This is precisely the conduct that section
2924h(g) forbids.
               (iv) A debtor may apply to a court of equity to set aside a trust deed
                   foreclosure for unfairness or irregularity that, coupled with the
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                        inadequacy of price obtained at the sale, mean that it is appropriate to
                        invalidate the sale.
Jensen and Ko barely knew each other before the sale, did not know how much repair the
property needed, and had agreed on few details for their venture, and would have entered into the
joint bid even if there was no possibility of sharing expertise.
             f) Notes, p. 537
                 (i)       Other ways to misbehave
Paying a third person to bid in order to get others to pay more is fraud on the buyer and permits
rescission. Acting to discourage (‗chill‘) bidders is fraud on the seller and permits rescission.
                 (ii)      Trustee‟s deed
A trustee's deed conveys the absolute legal title to the purchaser, as against all claims
subordinate to the deed of trust, but subject to all prior rights, interests, and titles. A trustee's
deed does not carry to the grantee any better right or title than the trustors had when they
executed the deed of trust. Brown v. Copp, 105 Cal.App.2d 1, 6 (1951)
                 (iii)     Foreclosure and junior interests
See Chapter 3.
        4)      Disposition of the Surplus, p. 537
             a) Priority distribution when the liens are eliminated.
A trustee (nonjudicial sale) must notify all parties with recorded interest in the property if there
are surplus funds and give them 30-days to make a claim to the funds, Cal.Civ.Code § 2924j. A
trustee may deposit the funds with the court and allow the court to distribute the funds, first for
sales expenses, the foreclosed mortgage, junior lines, and finally the trustor, Cal.Civ.Code §
2924k. Interpretation of Cal. Code Civil Procedure § 727 for judicial sale follows the same path.
             b) Priority distribution when the liens are not eliminated.
If there is a surplus, a junior lien or encumbrance attaches to the surplus, even though the junior
lien to the property itself is eliminated. The equitable principle of ―persons legally entitled,‖
(Cal. Code Civil Procedure § 727) allows that the lesser lienors will take the surplus before the
trustor. However, the doctrine does not apply where the unpaid liens survive the sale, i.e., senior
liens and federal tax liens. Consequently, the surplus is paid to first to junior secured lienors,
then the unsecured creditors, as the government‘s lien continues. Sohn v. Cal. Pac. Itel Ins. Co.,
124 Cal. App. 2d 757 (1954).
    B) The Fair Value Hearing, p. 539
         a) Cal. Code Civil Procedure § 726, p. 539
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=civ&group=00001-01000&file=722-726
             b) Notes, p. 540
                 (i)       Timing questions
A judicially foreclosing beneficiary who fails to apply for a fair value hearing within 3-months
from the date of sale forfeits the right to a deficiency judgment, and is barred by that statute of
limitations to relief for grounds of mistake, inadvertence, or excusable mistake.
                 (ii)      Notice questions
Cal. Code Civil Procedure § 726(b) requires all persons against whom a deficiency is sought be
given notice at least 15-days before the deficiency hearing. However, the complaint requested
adjudication of a deficiency judgment, then notice of the hearing is not required.
                 (iii)     Fair value or fair market value
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Fair value refers to the intrinsic value of the property without price-reducing circumstances of
the foreclosure, such as redemption, Rainer Mortgage v. Silverwood Ltd, 163 Cal. App. 3d 359
(1985). However, this does not mean that the debtor and creditor may ignore market conditions
on the date of the foreclosure sale to arrive at a ‗recession,‘ or ‗pre-recession‘ value respectively.
The date of the foreclosure sale provides for certainty in the marketplace, and ensures all
valuations are based on that same date.
               (iv)     Fair value elsewhere
Fair value means a fair and equitable value to the parties, North Dakota. The fair and reasonable
market value is the value on the date of auction, or an earlier date if there had been any market
value previously to the property, New York.
Competent evidence of fair value includes expert opinion testimony, comparable sales,
anticipated time and holding costs, the cost of sale, and the necessity and amount of discount
applied to the future sales price to arrive at the current fair market value. Texas.
               (v)      Whose burden? Restatement Third of Property (Mortgages) (1996)
                     §8.4Foreclosure: Action for a Deficiency.
(a) If the foreclosure sale price is less than the unpaid balance of the mortgage obligation, an
action may be brought to recover a deficiency judgment against any person who is personally
liable on the mortgage obligation in accordance with the provisions of this section.
(b) Subject to Subsections (c) and (d) of this section, the deficiency judgment is for the amount
by which the mortgage obligation exceeds the foreclosure sale price.
(c) Any person against whom such a recovery is sought may request in the proceeding in which
the action for a deficiency is pending a determination of the fair market value of the real estate as
of the date of the foreclosure sale.
(d) If it is determined that the fair market value is greater than the foreclosure sale price, the
persons against whom recovery of the deficiency is sought are entitled to an offset against the
deficiency in the amount by which the fair market value, less the amount of any liens on the real
estate that were not extinguished by the foreclosure, exceeds the sale price.
               (vi)     Attorneys fees
Attorney‘s fees for a hearing may be recovered if the promissory note or deed of trust permits
recovery.
               (vii)    The Single Family Mortgage Foreclosure Act
12 U.S.C. § 3768(a)(1). Deficiency judgment
If after deducting the payments provided for in § 3762 of this title, the price at which the security
property is sold at a foreclosure sale is less than the unpaid balance of the debt secured by the
security property, resulting in a deficiency, the Secretary may refer the matter to the Attorney
General who may commence an action or actions against any or all debtors to recover the
deficiency, unless such an action is specifically prohibited by the mortgage. [A fair value hearing
is not required.]
               (viii) UCC and Deficiency Judgments
Every aspect of the disposition of collateral, including the method, manner, time, place and other
terms must be reasonable. Cal. Comm. §9610(b). [A fair value hearing is not required.]
A creditor must send notification of the disposition to the debtor and other lien holders; (9611)
notice ten or more days before the sale is reasonable (9612 – consumer transactions excepted). A
creditor failing to comply with Division 9 is credited for deficiency purposes with the amounts
that would have been realized if the creditor had complied.
               (ix)     Bankruptcy and deficiencies
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The claim of an under-secured creditor is divided until a secured portion, and an unsecured
portion. The unsecured portion is treated as an allowed claim in bankruptcy even though the loan
may have been nonrecourse, such as a purchase money mortgage subject to Cal. Code Civil
Procedure § 580b.
In bankruptcy court, the automatic stay provisions of the Bankruptcy Code bar the creditor‘s
options of a judicial or nonjudicial foreclosure sale. (11 U.S.C. § 362 (a)(4) [estate property] and
(a)(5) [property of the debtor].) The creditor may request relief from the stay. (11 U.S.C. § 362
(d)); however, the decision whether to lift the stay lies in the discretion of the bankruptcy court.
If relief from the stay is granted unconditionally, then the creditor, at its election, may proceed
with a judicial or nonjudicial foreclosure sale of the property under the procedures of state law. If
relief from the stay is not granted, disposition of the property must then be determined under
bankruptcy law. One available means is a sale of the property "free and clear of liens." The
option of a sale "free and clear of liens" belongs solely to the bankruptcy trustee or the debtor-in-
possession, and is for the benefit of all creditors, not merely those holding liens on the thing, in
that the creditor rights are transferred from the thing to the sale proceeds. A sale "free and clear
of liens" is thus favored if the debtor has equity in the real property and the sale is in the debtor's
best interest. The debtor‘s best option is to obtain the highest price. The trustee or debtor-in-
possession sets the minimum price in a private sale. The court sets the minimum price in a
judicial sale. In a bankruptcy sale, the court has the further discretion to refuse sale to the highest
bidder where the sale price is grossly inadequate. Coppola v. Superior Court, 211 Cal. App. 3d
848, 857 (1989).
The ―fair value" limitation provisions of sections 580a and 726 of the Code of Civil Procedure
do not apply to a sale "free and clear of liens" under the Bankruptcy Code. By statute, the "fair
value" limitation provisions apply only to judicial foreclosure sales (§§ 725a, 726) and
nonjudicial foreclosure sales (§ 580a). A sale "free and clear of liens" under the Bankruptcy
Code is neither a judicial nor a nonjudicial foreclosure sale under California law. Coppola v.
Superior Court, 211 Cal. App. 3d 848, 857 (1989).
               (x)     The Uniform Nonjudicial Foreclosure Act
 A fair market hearing is not required, but the fair market value of the property becomes an issue
if the creditor sues for deficiency. The debtor may offer proof that the sale price was less than
90% of the fair market value. If the court agrees, the debtor is given credit for the higher figure.
An action to recover a deficiency must be filed within 90 days after the foreclosure.
   C) Foreclosure Steps and Time Frame (added notes)
(http://www.cimarrontrustee.com/steps.htm)
       1)      Within 1 month of recording the Notice of Default
Day 1                  Record Notice of Default -- 2924
Within 10 Days         Mail Notice of Default -- 2924(b)(1) and 2924b(e);
                       Publish Notice of Default --when necessary -- 2924b(e)
Within 1 Month         Mail Notice of Default -- 2924b(c)(1)(2) and 2924b(e)
After 1 Month          Mail advise to see a lawyer to owners of owner-occupied residences
                       and Unruh Act governed retail installment sales -- 2924f(c)
       2)      After 3 Months - Set Sale date -- 2924 & 2924f(b)
       3)      Four weeks before the Sale
25 Days prior to Sale Date        Send Notice of Sale to IRS when required by IRS
20 Days prior to Sale Date        Publish Notice of Sale -- 2924f(b);
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                                 Post Notice of Sale -- 2924f(b);
                                 Mail Notice of Sale -- 2924b(c)(3);
                                 2924b(e) -- include any state taxing agency
Within 10 days from first        Request for directions to the property -- 2924(b)
publication of Notice of Sale
       4)      Two weeks before the Sale
14 Days prior to Sale Date       Record the Notice of Sale -- 2924f(b)
10 Days prior to Sale Date       Trustee may accept purchase offers - 2924f(c), if accepted by
                                 owner and beneficiary, sale is postponed.
       5)      The last week before the Sale
7 Days prior to Sale Date        Trustee cannot sell for 7 days after expiration of court order --
                                 2924g(d)
5 Business Days prior to Sale    Right to reinstate -- 2924c(e)
Date
       6)      Sale Date: Sell, Notarize and Record

Chapter XIX. Chapter 19 Contesting Foreclosure and
  Redemption
   A) Attacks on Foreclosure, p. 545
      1)    Presale Attacks, p. 545
         a) Jessen v. Keystone Savings and Loan Association, 142 Cal. App.
            3d 454 (1983), p. 545
Facts: The Jessen‘s had loans on several development condominiums, and defaulted. Keystone
filed a foreclosure action, to which the Jessen‘s defended based on Cal.Civ.Code § 3387, which
held only at the time that real property was unique. The trial court ruled against them.
Court: The Jessen‘s have condos 8 and 15 price tagged an on the market. The Jessens are
holding condos 2 and 4 for rental and possible occupancy depending on the marketplace. Condos
8 and 15 are not unique in that they are replaceable by another other similar investment and may
be foreclosed. As condos 2 and 4 have a possible occupancy value to the Jessen‘s these are
unique and are excepted from the foreclosure action,
            b) Notes, p. 548
               (i)     A new presumption, Cal.Civ.Code § 3387 amended
The presumption of inadequacy applies only to single family dwellings the plaintiff intends to
occupy.
               (ii)    Federal actions
National banks believed that they were not subject to being enjoined. However, the Supreme
Court held that National Banks do not have a license to inflict irreparable harm free from
equitable relief.
               (iii)   Liability for wrongful injunctions
A trustor who enjoins a sale is liable for damages for the decline in value of the property, and
may be required to post a bond.
               (iv)    Requiring a bond, Cal. Code Civil Procedure § 529
Undertakings
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(a) On granting an injunction, the court or judge must require an undertaking on the part of the
applicant to the effect that the applicant will pay to the party enjoined any damages, not
exceeding an amount to be specified, the party may sustain by reason of the injunction, if the
court finally decides that the applicant was not entitled to the injunction. Within five days after
the service of the injunction, the person enjoined may object to the undertaking. If the court
determines that the applicant's undertaking is insufficient and a sufficient undertaking is not filed
within the time required by statute, the order granting the injunction must be dissolved.
(b) This section does not apply to any of the following persons: (1) Either spouse against the
other in a proceeding for legal separation or dissolution of marriage. (2) The applicant for an
order described in Division 10 (commencing with § 6200) of the Family Code. (3) A public
entity or officer described in § 995.220.
               (v)     Arbitrator‟s power, Cal. Code Civil Procedure § 1298
Provision in contract; Notice to precede indication of assent or nonassent; Escrow
  (a) Whenever any contract to convey real property, or contemplated to convey real property in
the future, including marketing contracts, deposit receipts, real property sales contracts as
defined in Section 2985 of the Civil Code, leases together with options to purchase, or ground
leases coupled with improvements, but not including powers of sale contained in deeds of trust
or mortgages, contains a provision for binding arbitration of any dispute between the principals
in the transaction, the contract shall have that provision clearly titled "ARBITRATION OF
DISPUTES."
   If a provision for binding arbitration is included in a printed contract, it shall be set out in at
least 8-point bold type or in contrasting red in at least 8-point type, and if the provision is
included in a typed contract, it shall be set out in capital letters.
   (b) Whenever any contract or agreement between principals and agents in real property sales
transactions, including listing agreements, as defined in Section 1086 of the Civil Code, contains
a provision requiring binding arbitration of any dispute between the principals and agents in the
transaction, the contract or agreement shall have that provision clearly titled "ARBITRATION
OF DISPUTES."
   If a provision for binding arbitration is included in a printed contract, it shall be set out in at
least 8-point bold type or in contrasting red in at least 8-point type, and if the provision is
included in a typed contract, it shall be set out in capital letters.
   (c) Immediately before the line or space provided for the parties to indicate their assent or
nonassent to the arbitration provision described in subdivision (a) or (b), and immediately
following that arbitration provision, the following shall appear:
  "NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION
OF DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS
TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING
IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO
DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED
IN THE 'ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO
ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED
TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS
VOLUNTARY."
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   "WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF
DISPUTES' PROVISION TO NEUTRAL ARBITRATION."
 If the above provision is included in a printed contract, it shall be set out either in at least 10-
point bold type or in contrasting red print in at least 8-point bold type, and if the provision is
included in a typed contract, it shall be set out in capital letters.
   (d) Nothing in this section shall be construed to diminish the authority of any court of
competent jurisdiction with respect to real property transactions in areas involving court
supervision or jurisdiction, including, but not limited to, probate, marital dissolution, foreclosure
of liens, unlawful detainer, or eminent domain.
   (e) In the event an arbitration provision is contained in an escrow instruction, it shall not
preclude the right of an escrowholder to institute an interpleader action.
           c) In re Duncombe, 143 B.R. 243 (Bankruptcy Cal. 1992), p. 549
Facts: Duncombe‘s home was in foreclosure, with a sale pending at 11 AM. On the day of the
sale, Duncombe sought to file bankruptcy, but Duncombe had difficulty finding the courthouse,
as well as attending to the administrative matters. Consequently, Duncombe was unable to file
bankruptcy and stay the sale. After the sale, the purchaser‘s agent went to the trustee‘s office to
pick up the foreclosure deed and take it to the Recorder‘s Office. However, the trustee‘s office
was slow in processing the paperwork, and did not have the deed ready until 3 PM. After that,
the purchaser‘s agent still had to drive to the Recorder‘s Office for recording. Meanwhile,
Duncombe managed to file the bankruptcy petition, but he still had to get to the Recorders Office
to record and perfect the stay. Duncombe recorded at 3:21 PM. The purchaser‘s agent was
slowed by traffic and did not record until 4:01 PM. In bankruptcy, Duncombe argued that his
deed was valid as he recorded first. The purchaser argued that he had ownership at the sale.
Codes:
               (i)     Cal.Civ.Code § 1214
Every conveyance of real property or an estate for years therein, other than a lease for a term not
exceeding one year, is void as against any subsequent purchaser or mortgagee of the same
property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is
first duly recorded, and as against any judgment affecting the title, unless the conveyance shall
have been duly recorded prior to the record of notice of action.
               (ii)    11 U.S.C. §544 (The strong arm statute)
Trustee as lien creditor and as successor to certain creditors and purchasers (a) The trustee shall
have, as of the commencement of the case, and without regard to any knowledge of the trustee or
of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or
any obligation incurred by the debtor that is voidable by - (1) a creditor that extends credit to the
debtor at the time of the commencement of the case, and that obtains, at such time and with
respect to such credit, a judicial lien on all property on which a creditor on a simple contract
could have obtained such a judicial lien, whether or not such a creditor exists; (2) a creditor that
extends credit to the debtor at the time of the commencement of the case, and obtains, at such
time and with respect to such credit, an execution against the debtor that is returned unsatisfied at
such time, whether or not such a creditor exists; or (3) a bona fide purchaser of real property,
other than fixtures, from the debtor, against whom applicable law permits such transfer to be
perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the
time of the commencement of the case, whether or not such a purchaser exists.
Court: REVERSED.
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               (iii) An owner who records a bankruptcy filing prevails over a
                    foreclosure purchaser who later records the foreclosure deed.
A bankruptcy trustee has the status as a matter of law of a hypothetical bona fide purchaser, and
no from of notice defeats this status. A foreclosure sale does not perfect the transfer of title under
California‘s race-notice recording statute. Retroactive perfection applies under the UCC but the
legislature has not done the same with real property.
            d) Notes, p. 552
               (i)       A Statutory response, Cal.Civ.Code § 2924h(c)
For the purposes of this subdivision, the trustee's sale shall be deemed final upon the acceptance
of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual date of sale if
the trustee's deed is recorded within 15 calendar days after the sale, or the next business day
following the 15th day if the county recorder in which the property is located is closed on the
15th day.
               (ii)      The effect of the stay on giving notice of sale
Filing bankruptcy creates an automatic stay that prevents the sale of property owned by a debtor
in bank, 11 U.S.C. § 362. However, the stay does not apply to continued publication of the
Notice of Sale while the bankruptcy case is pending. Tully v. World Savings, 56 Cal. App. 4th,
654 (1997).
       2)      Post Sale Attacks
            a) Sorenson v. Hall, 219 Cal. 680 (1934), p. 553
Facts: Hall, he trustor, sued to set aside a foreclosure sale on grounds that notice was
inadequate. Sorenson, the successor to the foreclosure purchaser, produced three deeds, the deed
of trust signed by Hall and his wife, the foreclosure deed, and deed to him from the foreclosure
purchaser. The foreclosure deed stated that notice was given and the statutory from notice was
given, and that the facts recited within the deed were conclusive proof of the facts recited. The
trial court ruled for Sorenson.
               (i)        A deed stating that a lienor posted notice of foreclosure and notice
                      of the subsequent sale are sufficient evidence that the lienor fulfilled
                      these statutory requirements.
Court: AFFIRMED. A trustee's deed does not, by virtue of its recitals, carry to the grantee any
better right or title than the trustors had when they executed the deed of trust. However, Sorenson
does not claim more, but only what the deed recites. To this extent, they are effective, and no
further evidence is necessary.
            b) Notes, p. 554
               (i)       Conclusive presumption statutory recitals, Cal.Civ.Code § 2924
A recital in the deed executed pursuant to the power of sale of compliance with all requirements
of law regarding the mailing of copies of notices or the publication of a copy of the notice of
default or the personal delivery of the copy of the notice of default or the posting of copies of the
notice of sale or the publication of a copy thereof shall constitute prima facie evidence of
compliance with these requirements and conclusive evidence thereof in favor of bona fide
purchasers and encumbrancers for value and without notice.
               (ii)      The content of the recitals - typical trustee‟s deed
(a) Default was made in the obligations for which such transfer in trust was given as security and
notice of default was recorded in the Office of the County Recorder of each county in which the
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property described in said deed of trust, or any part thereof, is situated, the nature of such default
being the failure to: Such default still existed at the time of sale.
(b) Not less than three months elapsed between the recordation of said notice of default and the
posting and first publication of the notice of sale of said property.
(c) The beneficiary made due and proper demand upon said trustee to sell said property pursuant
to the terms of said deed of trust.
(d) Said trustee gave notice of the time and place of the sale of said property in accordance with
the laws of the State of California and the terms of said deed of trust.
(e) All requirements of law regarding the mailing, publication and personal delivery of copies of
the notice of default, and of all other notices have been complied with.
               (iii)   Non-signing juniors
The purpose of the conclusive presumption is to promote certainty in favor of validity of private
foreclosure sales, to encourage public bidding and benefit the trustor. The effect of Cal.Civ.Code
§ 2924 is to deny a trustor, or third party a challenge as to whether the trustee complied with the
notice requirements. The statute is not irrational, arbitrary, or unreasonable.
               (iv)    Sale after cure, p. 556
The Court not only rebuffed the beneficiary who tried to claim a ground for a default not stated
in the notice of default (Note, 4, p. 495, Tomczak v. Ortega, 240 Cal. App. 2d 902 (1966)) but
also rejected the deed recital (―Such default still existed at the time of sale.‖) permitting sale on
any default existing at the time of sale. ―To accept this recital as binding would be contrary to the
public policy purpose behind Civil Code § 2953. "Any express agreement made or entered into
by a borrower at the time of or in connection with the making of or renewing of any loan secured
by a deed of trust, . . . whereby the borrower agrees to waive the rights, or privileges conferred
upon him by §§ 2924, 2924b, [or] 2924c of the Civil Code . . . shall be void and of no effect."
The purchaser in this case was not a BFP, but the mortgagee.
               (v)     Recitals and the Uniform Act
Under the Uniform Nonjudicial Foreclosure Act, a foreclosure buyer takes title subject to the
interest of any person with interest and without notice of the sale, §603. However, recording of
the notice of sale, the foreclosure deed, and an affidavit summarizing the proceeding
conclusively establishes compliance with the Act in favor of the buyer in good faith for value,
§605. If notice is improper and the sale terminates an interest, the holder of that interest may
recover damages from the creditor.
               (vi)    Inquiry Notice
A form recital may not merely state a conclusory statement that the trustee has complied with the
notice statute, but must recite the facts specifying that the trustee did to comply with the law.
Failure of the foreclosure deed to recite the compliant acts invalidates the foreclosure sale,
Rosenberg v. Smidt, 727 P.2d 778 (Alaska 1986).
               (vii) Reversal of underlying judgment, Cal. Code Civil Procedure §
                   701.680 (90 days to challenge the judicial foreclosure sale)
(a) Except as provided in paragraph (1) of subdivision (c), a sale of property pursuant to this
article is absolute and may not be set aside for any reason.
 (b) If the judgment is reversed, vacated, or otherwise set aside, the judgment debtor may recover
from the judgment creditor the proceeds of a sale pursuant to the judgment with interest at the
rate on money judgments to the extent the proceeds were applied to the satisfaction of the
judgment.
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 (c) If the sale was improper because of irregularities in the proceedings, because the property
sold was not subject to execution, or for any other reason:
 (1) The judgment debtor, or the judgment debtor's successor in interest, may commence an
action within 90 days after the date of sale to set aside the sale if the purchaser at the sale is
the judgment creditor. Subject to paragraph (2), if the sale is set aside, the judgment of the
judgment creditor is revived to reflect the amount that was satisfied from the proceeds of the sale
and the judgment creditor is entitled to interest on the amount of the judgment as so revived as if
the sale had not been made. Any liens extinguished by the sale of the property are revived and
reattach to the property with the same priority and effect as if the sale had not been made.
 (2) The judgment debtor, or the judgment debtor's successor in interest, may recover damages
caused by the impropriety. If damages are recovered against the judgment creditor, they shall be
offset against the judgment to the extent the judgment is not satisfied. If damages are recovered
against the levying officer, they shall be applied to the judgment to the extent the judgment is not
satisfied.
  (d) For the purposes of subdivision (c), the purchaser of the property at the sale is not a
successor in interest
               (viii) When to raise the issue, p. 557
While a judicial foreclosure sale must be attacked within the 90-days statute of limitations, there
is not a statute of limitations to attack a non-judicial foreclosure sale. The standard is whether the
rights of any third party (subsequent purchaser or encumbrancer) would be affected. The first
opportunity is the defense to unlawful detainer. The losing trustor may then bring a later
independent action unless the issue was fully tried in the first action (res judicata.)
               (ix)    Challenging a sale after delivery of the trustee‟s deed
Part I - Setting Aside Foreclosure Sales; 24 CEB RPLR 80 (March 2001)
http://rogerbernhardt.com/pages/columnstext4.html#SettingAside
Seldom in the commercial world will a clerical error force its maker to suffer a $90,000 loss
when no harm was shown to result from it and the error was discovered before the deal actually
closed. But then, mortgage law has never pretended to include much commercial common sense
in its rulings, as 6 Angels, Inc. v Stuart-Wright Mortgage, Inc. (2001) 85 CA4th 1279, 102 CR2d
711, illustrates. (The case is reported on page 84.)
In 6 Angels, the beneficiary discovered that its intended foreclosure bid of $100,000 had been
mistakenly converted into a bid of $10,000 (on a debt with an outstanding balance of about
$145,000), thereby permitting a professional foreclosure bidder to increase the bid by one cent
(to $10,000.01) and thus prevail at the trustee sale. But before anything else happened (the
opinion does not say precisely when, but only says ―shortly thereafter‖), the beneficiary
discovered the error and instructed the auctioneer not to deliver a trustee‘s deed to the ―high‖
bidder, who then brought this action to compel delivery of that deed. This raises two intertwined
issues regarding the nature of the mistake and the timing of its discovery.
                 When Is a Foreclosure Sale Complete?
A sale is ordinarily ―set aside‖ only after it has become a completed sale; before then, there is
really nothing to set aside. Just as is true for the conventional real estate sales contract,
significant changes of status occur between before and after the execution of the contract, and,
again, between the execution of the contract and its consummation at the close of escrow:
equitable conversion ends and the parties switch from seller/buyer to grantor/grantee.
Specifically, before a binding sales contract is signed, the seller is the sole owner of the property
and the buyer is merely an interested third party or perhaps an offeror; after the sales contract has
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been fully performed (by a close of escrow), then the buyer is the sole owner and the seller is
merely a former owner and perhaps a secured creditor if money is still due. Between the
execution and the completion of the contract, however, the seller holds the legal title and the
buyer‘s right to have specific performance means that she or he holds the equitable title, which
can make a difference when people die or other unexpected events occur in that time period.
Is a trustee sale subject to the same distinctions? Do we treat an event differently according to
whether it occurred before the hammer fell, after the hammer fell, or after the trustee‘s deed was
delivered? Elsewhere, passage of title requires delivery of a deed; the sale is not final just
because the auctioneer pounds her hammer. Civil Code §2924h(b) defines sale completion as the
falling of the hammer (or acceptance of the last and highest bid; see §2924h(c)), but it is pretty
clear that this definition was created to allow the foreclosure bidder to win the race against the
bankruptcy trustee when the bankruptcy petition is filed after the hammer falls and before the
trustee‘s deed is recorded. Furthermore, the code provision making the statutory recitals of
compliance in the trustee‘s deed conclusive (CC §2924) seems clearly to require that the deed be
delivered for compliance to occur. I think considerable uncertainty remains as to rights and
duties between the fall of the hammer and delivery of the deed (Suppose, for example, that an
earthquake damages the property in the intervening period. Who is liable to a bypasser injured on
the property at that time?)
Thus, we have cases like Angell v Superior Court (1999) 73 CA4th 691, 86 CR2d 657, Whitman
v Tran-state Title Co. (1985) 165 CA3d 312, 211 CR 582, and Little v CFS Serv. Corp. (1987)
188 CA3d 1354, 233 CR 923 (not all of which were mentioned in the 6 Angels opinion), which
are far more generous in undoing sales when the trustee‘s deed was not delivered, than are
Moeller v Lien (1994) 25 CA4th 822, 30 CR2d 777 (and perhaps Estate of Yates (1994) 25
CA4th 511, 32 CR2d 53), when the deed had been delivered.
6 Angels does make this distinction, but applies it only in terms of the preclusive effect of
trustee‘s deed recitals. It acknowledges that the plaintiff must show that the buyer was not a bona
fide purchaser only when the plaintiff attacks a sale after the deed has been delivered, but
otherwise applies the same standard to evaluating the underlying challenge. I think that
disregards the significance of the fact of whether or not the deed has been delivered.
                 Part II - 26 CEB RPLP 160 (July 2003)
I complained that the court in 6 Angels had overlooked the difference between a foreclosure sale
where the high bid has been accepted but the trustee's deed has not yet been delivered and a sale
where that deed has already been delivered. I suggested that when the high bidder is seeking to
compel delivery of the deed, the test ought to be whether that relief was "just and reasonable':
whereas the standard in cases where delivery had already occurred should be whether there were
grounds to set aside a completed foreclosure sale. In Residential Capital, however, the court goes
even farther, stating: "[I]f the trustee's deed with the appropriate recitations has been issued to a
bona fide purchaser, the purpose of the statutory scheme to provide a prompt and efficient
remedy for creditors is implemented by the [CC] section 2924 statutory presumption of finality:'
This suggests to me that the court believes that delivery of a trustee's deed completely validates
an otherwise invalid trustee sale.
I am not so sure that a delivered trustee's deed does that much. It is true that it includes some
recitals about sale propriety, but to me those afford only partial comfort. Civil Code §2924
provides that mailing, delivery, and posting of the notices of default and sale are conclusively
deemed proper in favor of a BFP, but it says nothing about whether the sale was conducted in
violation of a postponement agreement (or in violation of any other time constraint). Thus, the
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code section does not necessarily imply that a trustor who wishes to challenge the sale as
premature must do so before the trustee's deed is actually delivered, or that the trustor is barred-
in case of a sale to a third party-from seeking to set the sale aside once delivery has occurred. I
think we have to wait until that issue is actually litigated before we know the answer.
The existing cases answer only the easy questions-involving either sale defects that were
undisputed and acknowledged before the deed was delivered, thus making it completely proper
for the trustee to decline to deliver the deed, (e.g., the beneficiary agreed that it had consented to
postpone or the trustee discovered that it had failed to send a notice), or irregularities that were
held not to constitute defects in a post-delivery challenge (e.g., a beneficiary's bid that was
clerically incorrect). They offer no guidance as to what should happen when the outcome is less
clear. If the trustor tells the trustee that there was an agreement to postpone, but the beneficiary
denies it, how should the trustee behave? Should it act like an escrow agent-or even a common
agent, as the opinions often say it is-and interplead or freeze until the matter is resolved, or
should it act only as the beneficiary's agent and ignore everything the trustor says?
I suggest - at least until there is further judicial or legislative clarificationthat trustees, when
confronted with conflicting stories, ought to continue to follow the beneficiary's instructions as
to moving ahead with the sale or delivery of the deed, but at the same time should make sure that
the foreclosure purchaser is informed of the trustor's contention. It is not up to the trustee to
decide who is right, but the trustee may well have a duty to see that information potentially
affecting value (e.g., that might lead to invalidation of the sale) is not withheld from the buyers.
What the parties then decide to do about the information is not up to the trustee - it at least has
discharged its duties in not suppressing what it knew.
               (x)     The necessity to tender, p. 560
The basic rule is that a debtor, or junior lienor challenging a completed sale must tender the
amount originally owed. The rule is not firm, as when (1) the debtor‘s challenge includes that
nothing is owed, (2) the amount owned is at also issue (and tendering the disputed amount
affirms the disputed amount), or (3) the opinion of the court is that the junior lienor did not owe
the debt.
               (xi)    Procedural defect plus injury
To set aside a foreclosure sale, the attacker must show both an error in the foreclosure
proceeding and (standing) that the attacker suffered injury.
Thus a trustor who does not exercise request a right to a one-day postponement, and could have
redeemed, fails to show a procedural error by the defendant. 25 C.A.4th 822
Also, a trustor who fails to show a procedural error by the defendant cannot recover even though
the sale price was one-quarter the market value. 152 Cal. 443 (1907)
Likewise, a trustor fails even if the trustee‘s deed is not delivered to the buyer. [6 Angels]
However, the 9th Circuit reversed a trustee sale because the notice misdescribed the property,
albeit without apparent affect. The Court said the misdescription might have deterred other
bidders, although the district court found the misdescription insignificant.
               (xii)   Adequacy of the sale price
Generally, a sale will not be set aside because the sale price is not high enough. The Single
Family Mortgage Foreclosure Act provides for a conclusive presumption that a property has
been sold for a price that is reasonable, and equal to the fair market value of the property, 12
U.S.C. 3760(e). However, the Restatement Property Third Mortgages provides that a sale price is
grossly inadequate, and renders the foreclosure sale defective if the sale price is less than 20 per
cent of the fair market value.
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Arizona will set aside a judicial sale there is both a procedural irregularity, and the foreclosure
price is inadequate, although the Arizona Supreme Court adopted the Restatement position.
The rule elsewhere is that the greater the discrepancy between the value and the bid, the lesser
the need to show serious irregularity.
                (xiii) Setting aside a sale under the Single Family Mortgage Foreclosure
                    Act
A sale that complies with the statutory procedure is conclusively presumed to be legal fair, and
conducted in a reasonable manner, 12 U.S.C. 2760(e).
                (xiv) Financial adjustments after the set-aside
If the court does set aside the sale, then parties must work out the financial adjustments of rents,
payments due the trustor, against the debts of the trustor.
            c) BFP v. Petitioner v. Resolution Trust Corporation, 511 US 531
               (1994), p. 562
Facts: BFP was a partnership of the Pedersens and Barton) formed to buy a home from the
Foremans. Imperial Saving Association (Resolution Trust Corporation succeeded Imperial) held
the first deed of trust (for the Pedersen‘s partnership interest), and the Foreman‘s held the second
deed of trust. Imperial filed a notice of default and scheduled a foreclosure sale. BFP‘s creditors
petitioned for an involuntary bankruptcy of BFP, which stayed the sale. The court dismissed the
petition and Osborne bought the property at the foreclosure sale for $433K (the value of the 1st
and 2nd liens). BFP filed Chapter 11, and a complaint to set aside the foreclosure sale as a
fraudulent transfer, alleging the value was $725K at the time of sale. The bankruptcy court found
the sale complaint to California law, and dismissed the petition. The district court, BAP, and
Ninth Circuit affirmed.
Court: AFFIRMED
                (i)      A bankruptcy trustee may avoid a sale where the debtor received
                      "less than a reasonably equivalent value in exchange for such
                      transfer."
A foreclosure sale may be avoided if the bankruptcy trustee establishes (1) that the debtor had an
interest in property; (2) that a transfer of that interest occurred within one year of the filing of the
bankruptcy petition; (3) that the debtor was insolvent at the time of the transfer or became
insolvent as a result thereof; and (4) that the debtor received "less than a reasonably equivalent
value in exchange for such transfer." 11 U.S.C. § 548(a)(2)(A). BFP argues the last requirement
is violated.

Though the circuit courts use different standards, the Ninth Circuit adopted the view that
consideration received at a noncollusive, regularly conducted real estate foreclosure sale
constitutes a reasonably equivalent value under § 548(a)(2)(A). An alternate view is for use of
"fair market value," which though it is a well-established concept, does not appear in § 548. In
contrast, § 522, dealing with a debtor's exemptions, specifically provides that, for purposes of
that section, "'value' means fair market value as of the date of the filing of the petition." 11
U.S.C. § 522(a)(2). Section 548, on the other hand, uses the novel phrase "reasonably equivalent
value." However, market value, as it is commonly understood, has no applicability in the forced-
sale context; as it is the very antithesis of forced-sale value. "Fair market value" presumes market
conditions that, by definition, simply do not obtain in the context of a forced sale. Consequently,
market value cannot be the criterion of equivalence in the foreclosure-sale context.
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An appraiser's reconstruction of "fair market value" could show what similar property would be
worth if it did not have to be sold within the time and manner strictures of state-prescribed
foreclosure. But property that must be sold within those strictures is simply worth less. No one
would pay as much to own such property as he would pay to own real estate that could be sold at
leisure and pursuant to normal marketing techniques.
Another artificially constructed criterion might be what is the "reasonable" or "fair" forced-sale
price. Courts that follow the Durrett rule have in mind 70% of fair market value as the outer limit
of "reasonably equivalent value" for forecloseable property.
However, the Bankruptcy Code gives us no apparent authority to make policy here. Foreclosure
sales are not standard, and vary from state to state.
Many States require that the auction be conducted by a government official, and some forbid the
property to be sold for less than a specified fraction of a mandatory presale fair-market-value
appraisal. When these procedures have been followed, however, it is "black letter" law that mere
inadequacy of the foreclosure sale price is no basis for setting the sale aside, though it may be set
aside under state foreclosure law, rather than fraudulent transfer law if the price is so low as to
―shock the conscience or raise a presumption of fraud or unfairness.‖
However, federal statutes impinging upon important state interests ―cannot be construed without
regard to the implications of our dual system of government.‖ To displace traditional state
regulation in such a manner, the federal statutory purpose must be "clear and manifest,"
otherwise, the Bankruptcy Code will be construed to adopt, rather than to displace, pre-existing
state law.
               (ii)      The measure of value of a home sold in foreclosure is the
                      reasonable forced- sale price, not the fair market value.
We decline to read the phrase "reasonably equivalent value" in § 548(a)(2) to mean, in its
application to mortgage foreclosure sales, either "fair market value" or "fair foreclosure price"
(whether calculated as a percentage of fair market value or otherwise. Although collusive
foreclosure sales are likely subject to attack under § 548(a)(1), which authorizes the trustee to
avoid transfers "made . . . with actual intent to hinder, delay, or defraud" creditors, that provision
may not reach foreclosure sales that, while not intentionally fraudulent, nevertheless fail to
comply with all governing state laws.
           d) Notes, p. 567
               (i)       Preferences in bankruptcy
A preference in bankruptcy is (a) a transfer of property to, or for the benefit of a creditor, while
(b) the debtor was insolvent, (c) for an antecedent debt, (d) made within 90 of filing the
bankruptcy petition (or a year if the transferee was related to the debtor), 11 U.S.C. 547. A
foreclosure sale may come within this category, and be subject to avoidance. ―The purpose of
this provision is to discourage creditors from racing to the courthouse to dismember the debtor
during his slide into bankruptcy' and to facilitate the prime bankruptcy policy of equality of
distribution among creditors of the debtor. A concern is that a debtor, aware of imminent
bankruptcy, will try to pay favored creditors it may want or need to deal with in the future, at the
expense of not paying other creditors. When a transfer is avoided the recipient of the transfer
must return the property or equivalent value to the debtor estate. A preference exists only when
the creditor has received more under the foreclosure than it would have under Chapter 7
liquidation. There is not a statute prohibiting the creditor from purchasing the property in a
liquidation sale, just as at foreclosure. §547(b)(5) presumes a liquidation sale is similar to a
forced foreclosure sale. Thus, a creditor who purchases at a regularly conducted foreclosure sale
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has not received more than it would have under a Chapter 7 liquidation sale‖ (In re Ehring)
Ehring v. Western Community MoneyCenter, 900 F.2d 184 (9th 1990).
                (ii)      Performance
Another concern for unsecured creditors is (1) the secured creditor who takes security
significantly more valuable than the debt, or (2) after-acquired clauses allowing a mortgagee to
take as security to the detriment of unsecured creditors, property the mortgagor later acquires.
                (iii)     Post-petition sales
BFP means simple compliance with state foreclosure laws is sufficient without other federal
constraints than Bankruptcy Court approval, In re Affordable Housing Development Corp, 175
B.R. 324 (9th Cir. BAP 1994).
            e) Munger v. Moore, 11 Cal. App. 3d 1 (1970), p. 569
Facts: Munger loaned construction funds to Reichert, and took a third deed of trust to the
property. Home Savings had the first deed of trust, Atwill, a former owner of the property, had a
second deed of trust (with Valley as trustee). Reichert gave Munger a grant deed in exchange for
further funding and a re-purchase option. Reichert defaulted on his obligations. Atwill filed a
notice of default and intent to sell. Munger tried to cure the Atwill default but Moore told Valley
to refuse to accept the funds as the Home deed was also in default, so Munger‘s tender was
insufficient to cure all defaults. Moore and Atwill bought the property at the foreclosure sale.
Munger sued Moore for tortious interference with the trustee sale. The trial court awarded
Munger $30K. Moore appealed that (1) the trial court used the wrong standard for measuring
damages; and (2) in any event there was no evidentiary support for the court's finding as to
damages.
Court: AFFIRMED.
                (i)       A trustee or beneficiary may be liable for a wrongful sale of
                       property.
The general rule is that a trustee or mortgagee may be liable to the trustor or mortgagor for
damages sustained where there has been an illegal, fraudulent or wilfully oppressive sale of
property under a power of sale contained in a mortgage or deed of trust. This arises from the
basic principle of tort liability that every person is bound by law not to injure the person or
property of another or infringe on any of his rights, Civ. Code, § 1708.)
                (ii)      A successor has the statutory right to cure a default of the
                       obligation secured by a deed of trust or mortgage within the time
                       prescribed, Civil Code section 2924c.
Since the subject tort liability inures to the benefit of a mortgagor or trustor, it also inures to the
benefit of the successor in interest to the trust property. Munger, as Reichert's successor in
interest in the trust property was entitled to tender the amount due to cure any default in the
obligation to defendant and to institute the instant action for damages for the illegal sale which
resulted from the failure to accept the timely tender.
Moore argued that Munger only lost his security, but the trial court held that Munger was a
purchaser for valuable consideration.
                (iii) A third party may be liable for tortious interference that causes a
                     wrongful sale of property.
Civil Code section 3333 provides that the measure of damages for a wrong other than breach of
contract will be an amount sufficient to compensate the plaintiff for all detriment, foreseeable or
otherwise, proximately occasioned by the defendant's wrong. In instructing Valley to foreclose
upon the subject real property, Moore intentionally, wrongfully and pursuant to an intentional
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design with regard to plaintiff and that because of such conduct plaintiff lost all of his right, title
and interest in said property, damaging plaintiff in the sum of $ 30,000.
                (iv) The measure of damages for tortuous interference affecting the
                    sale of property is based on the fair market value of the property.
The trial court also found that the fair market value of the subject property on the date of the
foreclosure was $ 30,000 more than the composite liens and encumbrances against it on that
date.
            f) Notes, p. 571
                (i)     Damages for an improper foreclosure sale
A junior‘s recorded lis pendens may be expunged where the junior‘s complaint is that the senior
foreclosure sale was a fraudulent attempt to wipe out the junior lien, but the junior claim was
only for money damages, and not a claim for title or possession of the property.
A trustor may be entitled to damages when the trustor and beneficiary have an oral agreement to
postpone the sale, but the beneficiary executes the sale after learning the trustor was negotiating
with prospective purchasers.
A trustee may be liable for damages arising from failing to sell encumbered properties in the
order stated by the beneficiary.
Prospective bidders may only claim consequential damages in compensation for time and effort
in preparing for a sale, but not lost opportunity.
                (ii)    Cancellation of sale
First American Title foreclosed and bought the property for $166K at its trustee sale. First
American then learned that it has not given notice to the IRS as required, and the property was
subject to a $530K tax lien. First American requested, and the court granted, cancellation of the
sale to de-merge the lender‘s lien and title, so First American‘s lien reverted behind that of the
IRS.
                (iii) Conspiracy to interfere with a mortgage: Webber v. Inland Empire
                     Investments, 74 Cal. App. 4th 884, (1999).
Forecast Mortgage Corporation bought four parcels from Hyatt, gave a note and first deed of
trust on all four parcels to Sanwa for a loan, and gave a note and deed of trust on Parcel 4 to
Hyatt. Hyatt assigned its note and deed of trust to Webber. Forecast Mortgage transferred all four
parcels to Forecast Corporation, which conveyed the parcels to All Cities Mini-Storage. Inland
Empire bought the Sanwa note and deeds. Forecast Mortgage defaulted on Hyatt, and the Sanwa
note, although it could have paid. Inland foreclosed on All Cities and acquired the properties at
the trustee sale, which extinguished Webber‘s junior lien on parcel 4. Webber sued alleging that
the two Forecast companies, Inland, and All Cities were sham corporations of Previti (the sole
shareholder of all four firms). The court found that the alter ego doctrine applied. The jury
awarded Webber $1.255K in general damages from Previti and the companies, plus punitive
damages from the companies. The companies appealed and pointed fingers at Previti, arguing
that in acquiring the Sanwa note, and foreclosing, Inland was only doing what it was legally
entitled to do, which wasn‘t tortious interference to eliminate Webber‘s lien.
The court agreed that Inland was correct in principle, but distinguished Inland‘s behavior in that
the purpose was solely to defeat the junior lien.
The companies also objected to application of the alter ego doctrine against them. The Court
rejected the argument, in that, ―the alter ego doctrine is applied to avoid inequitable results, not
to eliminate the consequences of corporate operations‖ that would work an injustice on a third
person. The Court noted that the firms sought to use the alter ego doctrine as a sword to preclude
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liability, but the trial court found the second requisite of applying the doctrine was not present,
i.e., it did not find that failure to disregard the corporate entity would sanction a fraud or promote
injustice. As the trial court considered the equitable doctrines, it was correct to apply the doctrine
where the first requirement of unity of ownership and interest was clearly met.
   B) Post Sale Redemption, p. 573
      1)   The Statutory Right of Redemption, p. 573
While every mortgagor has a common law right of redemption, California law holds that
nonjudicial sales under the power of sale are absolute conveyances without redemption. In many
states, a mortgagee cannot purchase at its own sale.
           a) The Statutes, p. 574
See http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ccp&group=00001-
01000&file=725a-730.5
               (i)     Cal. Code Civil Procedure § 729.010
If the decree of foreclosure of a mortgage or deed of trust on real property pursuant to Section
726 determines that a deficiency judgment may be ordered against the defendant, the real
property (other than a leasehold estate with an unexpired term of less than two years at the time
of levy) shall be sold subject to the right of redemption.
               (ii)    Cal. Code Civil Procedure § 729.020
Only the judgment debtor, or the judgment debtor‘s successor in interest may redeem property
sold subject to the right of redemption. The purchaser of the property at the foreclosure sale is
not a successor in interest.
               (iii)   Cal. Code Civil Procedure § 729.030
The foreclosure sale redemption period ends (a) three months after the date of sale if the
proceeds of the sale are sufficient to satisfy the secured indebtedness with interest and costs of
action and of sale, or (b) one year after the date of sale if the proceeds of the sale are not
sufficient to satisfy the secured indebtedness with interest and costs of action and of sale.
               (iv)    Cal. Code Civil Procedure § 729.060
(a) A person who seeks to redeem the property shall deposit the redemption price with the
levying officer who conducted the sale before the expiration of the redemption period.
(b) The redemption price is the total of the following amounts, less any allowed offset: (1) the
purchase price at the sale; (2) the amount of any assessments or taxes and reasonable amounts for
fire insurance, maintenance, upkeep, and repair of improvements on the property; (3) any amount
paid by the purchaser on a prior obligation secured by the property to the extent that the payment
was necessary for the protection of the purchaser's interest; (4) interest on the amounts described
above at the rate of interest on money judgments from the time such amount was paid until the
date the deposit is made; and (5) if the purchaser at the sale has any liens subordinate to the lien
under which the property was sold, the amount of the purchaser's lien, plus interest at the rate of
interest on money judgments from the date of the sale until the date the deposit is made.
(c) Rents and profits from the property paid to the purchaser or the value of the use and
occupation of the property to the purchaser may be offset against the amounts above.
               (v)     Cal. Code Civil Procedure § 729.080
(a) If the redemption price is not deposited before the expiration of the redemption period, the
levying officer who conducted the sale shall promptly execute and deliver to the purchaser a
deed of sale.
(b) If the person seeking to redeem the property deposits the redemption price during the
redemption period, the levying officer shall tender the deposit to the purchaser, … (and)
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promptly execute and deliver a certificate of redemption to the person seeking to redeem and
shall immediately record the certificate.
           b) Dyer, Judicial Foreclosure After the Revised Enforcement of
              Judgment Act, VI Cal. Real Property L. Rptr 53 (1983), p. 575
              [Discussing the 1983 Amendments]
Cal.Civ.Code § 2903 – 2905 allow the debtor to exercise the common law equity of redemption
to pay off the entire amount before the sale. Thereafter, a debtor (after judicial foreclosure) has a
statutory right of redemption to pay off the purchase price, (rather than the note) plus interest,
and costs of the sale. This right of redemption depresses bids at a foreclosure sale by delaying the
time until the purchaser actually has title, which could be as long as one year, Cal.Civ.Code §
725a. Additionally, a debtor in an inflationary market has further incentive to prolong
redemption as the value of the property increases, while the redemption price only rises by 2/3rds
of one per cent, Cal.Civ.Code § 702.
Previously, a junior lienor could redeem from the sale, but not any more. If the junior wishes
(and can afford to) protect the junior interest, the junior lienor must reinstate the senior lien by
paying the senior default, Cal.Civ.Code § 2924c, before entry of the judgment of foreclosure, or
redeem the senior lien before the sale, Cal.Civ.Code § 2903-2905, and foreclose the junior lien.
Before the sale, the junior lienor could acquire the property from the debtor, and then exercise
redemption after the sale. The junior lienor can also participate in the sale to acquire the
property, or hope to drive up the price to cover the junior debt.
Cal.Civ.Code § 729.080(e) provides that liens extinguished by the sale do not reattach after
redemption (and eliminates a prior law allowing re-attachment). This gives the lienor only one
chance to satisfy a lien from the encumbered property, and adds to a junior lienor‘s incentives to
participate in the foreclosure sale.
           c) Notes, p. 577
               (i)     Payment of liens held by the foreclosure sale purchaser
Cal.Civ.Code § 729.060(b)(5) (1984) also includes in the cost of redemption, the amount of any
subordinate liens the foreclosure purchaser has on property.
               (ii)    Reacquisition of title after a nonjudicial sale
Cal.Civ.Code § 729.080(e) prevents reattachment of liens by redemption after a judicial sale, but
the law does not apply to nonjudicial sales, and such reattachment has been upheld, Barberi v.
Rothchild, 7 Cal. 2d 537 (1936).
           d) United States v. Stadium Apts, 425 F.2d 358 (9th 1970), p. 578
Facts: Stadium Apartments executed its mortgage with FHA insurance which expressed stated
that the mortgagor waived all homestead, exemption, stay, and redemption rights. Stadium
Apartments defaulted, the lender turned the loan over to FHA, which get a default judgment for
judicial foreclosure. The judge also included a 1-year period of redemption. The government
appealed.
Court: REVERSED.
               (i)     FHA insured loans are not subject to a period of redemption.
While the federal government has previously not contested rights of redemption, the position of
the federal government is opposite that of the amices curiae filing states (CA, WA, AZ, Guam).
Prior case law shows that the federal government has not adopted state law as its source of law
on mortgages and first mortgages. Furthermore, the federal government has not adopted state
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redemption statutes as part of federal law. Lastly, the federal courts should not adopt local laws
granting post-foreclosure redemption in those 26 states that grant it.
The federal policy is to protect the treasury and to promote the security of federal investment.
This in turn promotes the prime purpose of the Act -- to facilitate the building of homes by the
use of federal credit -- and becomes predominant. Local rules can not be adopted that limit the
effectiveness of the remedies available to the United States for breach of a federal duty.
Also, the periods of redemption vary widely as do other conditions to redemption and the rules
governing right to possession, right to rents, making repairs, and other matters arising during the
redemption period. There is a split of authority as to whether the right of redemption can be
waived. Similarly, there is a split of authority as to the right of the mortgagee to recover the
value of improvements made during the redemption period. Making FHA subject to the vagaries
of the laws of the several states is contrary to the policy of federal program. As to forcing full
market price, the redemption statutes do not achieve that goal, and in part hold the property back
from the buyer.
Moreover, the policy of FHA is to bid the fair market value at the foreclosure sale. For this
purpose, it has the property carefully appraised before bidding. Presumably, if the property is
worth more, others will increase the bid, the government will be paid in full, and the excess will
go to junior lien holders and, if there be sufficient funds, to the mortgagor.
            e) Notes, p. 587
               (i)     SBA loans – US v. MacKenzie, 510 F.2d 39 (9th 1975)
There are no applicable federal statute or administrative regulations expressly establishing the
rights and duties of the government and debtor on the government‘s foreclosure for an SBA loan.
Consequently, federal deference to state law is involved and the SBA legislation is not impaired.
Thus the SBA debtor here has the protection of state law.
               (ii)    The Revised Enforcement of Judgment Acts
California law provides that the only people who can redeem now are the mortgagor and the
mortgagor‘s successor.
               (iii)   Redemption and market value
Mandatory post-sale redemption rights ad 10 to 39 basis point for the 3 to 11-month redemption
periods respectively, to the interest rate charged by lenders in those jurisdictions.
               (iv)    The Federal Foreclosure Acts
Federal foreclosures do not have post-sale redemption rights, 12 U.S.C. §§ 371(d), 3763(e),
although HUD had a deficiency recovery right under the Single Family Mortgage Act, 12 U.S.C.
3768.
               (v)     The Uniform Nonjudicial Foreclosure Act
There is not a right of redemption once foreclosure is completed and recorded under the Uniform
Nonjudicial Foreclosure Act.
       2)      The Right to Possession During the Redemption Period, p,
               588
            a) Cal. Code Civil Procedure § 564(b)(4); Appt of a receiver
A receiver may be appointed … after sale of real property pursuant to a decree of foreclosure,
during the redemption period, to collect, expend, and disburse rents as directed by the court or
otherwise provided by law.
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           b) Cal. Code Civil Procedure § 729.090; Rents and profits;
              Maintenance of property; Waste
(a) From the time of the sale until a redemption, the purchaser is entitled to receive from the
person in possession the rents and profits from the property or the value of the use and
occupation of the property.
(b) Notwithstanding subdivision (a), the purchaser is liable to the person who redeems for any
rents or profits that have been received by the purchaser pursuant to subdivision (a).
(c) The purchaser, from the time of sale until redemption, is entitled to enter the property during
reasonable hours to repair and maintain the premises and is entitled to an order restraining waste
on the property from the court. Such order may be granted with or without notice in the
discretion of the court.
           c) Cal. Code Civil Procedure § 746, Damages for waste after sale
              pursuant to levy
When real property has been sold pursuant to a levy, the purchaser of the property, or any person
who has succeeded to the interest of the purchaser, may recover damages from the person
causing the injury for injury to the property after levy and before possession is delivered to the
purchaser or the person who has succeeded to the interest of the purchaser.
           d) Cal. Code Civil Procedure § 1161a(b); Removal of person holding
              over after notice to quit
A person who holds over and continues in possession of a manufactured home, mobile home,
floating home, or real property after a three-day written notice to quit the property has been
served upon the person, or if there is a subtenant in actual occupation of the premises, also upon
such subtenant, as prescribed in § 1162, may be removed as prescribed in this chapter:
(1) Where the property has been sold pursuant to a writ of execution against such person, or a
person under whom such person claims, and the title under the sale has been duly perfected.
(2) Where the property has been sold pursuant to a writ of sale, upon the foreclosure by
proceedings taken as prescribed in this code of a mortgage, or under an express power of sale
contained therein, executed by such person, or a person under whom such person claims, and the
title under the foreclosure has been duly perfected.
(3) Where the property has been sold in accordance with Section 2924 of the Civil Code, under a
power of sale contained in a deed of trust executed by such person, or a person under whom such
person claims, and the title under the sale has been duly perfected.
           e) Carpenter v. Hamilton, 24 Cal. 2d 95 (1944), p. 589
               (i)     A possessor of property during the period of redemption is a
                    tenant, and the purchaser at an execution sale is entitled to receive
                    from the tenant in possession the rents of the property sold, or the
                    value of the use and occupation of the property.
               (ii)    A trustor does not have a statutory right of possession during the
                    period of redemption.
Facts: The defendant judicially foreclosed and purchased the property at the execution sale. The
trustors remained in possession during the period of redemption, and sued to quiet title. The trial
court held for the defendant, and awarded him rents according to his cross-complaint.
Court: AFFIRMED.
The trustor defendants argued that they were not tenants during the period of redemption.
Cal.Civ.Code § 236 provides for the crediting of rent received by the purchaser against any
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amount paid on redemption. Tenant in possession means the judgment debtor as well as his
lessee. However, the period of redemption is not time for the debtor to make a profit of the
estate, but time for the debtor to raise money to redeem.
           f) Harris v. Foster, 97 Cal. 292 (1893), p. 590
Facts: A mortgagor (Stone) and his daughter (Harriet) each owned a one-half interest in real
property. The mortgagor mortgaged his interest to a mortgagee. When the mortgagor defaulted
on the mortgage, the mortgagee filed a foreclosure action. After the mortgagor was declared
insolvent, an assignee (Bush) was appointed, who, with the daughter's guardian (Burke), leased
the property to the tenant, who paid rent in advance and occupied the property as grazing land for
his cattle. The mortgagee obtained a foreclosure judgment and purchased the property at a
sheriff's sale. The tenant stayed on possession one month past the lease. The mortgagee then filed
an action against the tenant to recover the value of the use of the property after the foreclosure
sale. The trial court entered judgment in favor of the mortgagee.
Court: AFFIRMED.
               (i)     A mortgagee is entitled to receive from a tenant in possession the
                    rents of property sold through a foreclosure sale, or the value of the
                    use and occupation.
               (ii)    A tenant who has constructive notice of the mortgage is liable for
                    rent to the mortgagee, despite her payment of rent in advance to the
                    assignee for the entire term.
The defendant argued that as he leased the land before it was purchased by the plaintiff at the
foreclosure sale, and paid to the then owners the rent in advance for the whole term, in
accordance with the agreement contained in the lease, that he is not liable to the plaintiff, as
successor in interest of one of his lessors, for any portion of the value of the use and occupation
of the premises under that lease. As support, the defendant cited Cal.Civ.Code § 1111, ―Grants of
rents or of reversions or of remainders are good and effectual without attornments of the tenants;
but no tenant who, before notice of the grant, shall have paid rent to the grantor, must suffer any
damage thereby.‖
               (iii) If the purchaser or lessee has either actual or constructive notice
                    of such mortgage, A subsequent grant or lease of mortgaged premises
                    is subject to the prior mortgage.
The court rejected the argument on the basis that ―not only was the plaintiff‘s mortgage on
record, but a judgment foreclosing it, as against one of defendant's lessors, had been entered
before the defendant obtained his lease or paid any rent.‖ Thus, the defendant accepted the lease
and paid the rent with knowledge that plaintiff then had the right to have an undivided half of the
land so leased sold to satisfy the judgment of foreclosure; and that "the purchaser, from the time
of the sale until a redemption," would be "entitled to receive from the tenant in possession the
rents of the property sold, or the value of the use and occupation thereof," Cal. Code Civil
Procedure § 707.
If the law were otherwise, it would be in the power of the mortgagor to materially diminish the
value of the mortgaged property as security for the debt for which the mortgage was given, by
simply leasing it for a long period and collecting the rent in advance, or by leasing it for such
period for a nominal rent.
The defendant continued in possession for one month after the expiration of the lease. The court
below found the value of the use and occupation for that period to be one hundred dollars, and
gave judgment against defendant for one half that sum.
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           g) Note – Junior Leases, p. 592
               (i)       A buyer is charged with constructive notice of occupancy of the
                      property. Fowler v. Lane Mortg. Co., 58 Cal. App. 66 (1922)
Facts: The property owner gave a deed of trust to secure payment of a loan made to him by the
tenant, a mortgage company, and leased the property to the tenant until he could repay the loan.
The tenant paid a rental for the entire term in advance. The lease was never recorded. The buyer
obtained a judgment against the owner and purchased the property at the resulting judicial sale.
He then sued the tenant to recover rent allegedly accrued during the redemption period, with
judgment for the buyer.
Court: On appeal, the court held that: (1) although the unrecorded lease for a term of years was
void as to the buyer, the fact that the tenant had subleased the property to another person, who
remained in open and actual possession of the land in question when the buyer purchased the
land placed the buyer on notice of the tenant's right to the property; and (2) under the
circumstances, the buyer was not a purchaser in good faith and could not therefore charge the
tenant with rent.
Where a leasehold is acquired subsequent to the execution and record of a mortgage, the lessee,
since chargeable with constructive notice thereof, takes the property subject to the same, and if a
sale is had under a decree of foreclosure the purchaser, as provided by the Code of Civil
Procedure §707, is, as against the lessee, entitled to the rents during the period of redemption,
even though paid in advance to the owner. This for the reason that the rights of the mortgagee, of
which both the lessee and lessor have notice, could not be impaired by the subsequent acts of the
parties.
               (ii)      Munkelt v. Kumberg, 22 Cal. App. 2d 369 (1937)
A purchaser at a mortgage foreclosure sale, after redemption may sue for the reasonable rental
value, and if it be assumed that an agreed rental would be controlling as to the liability of a
tenant, it would at least be incumbent upon the tenant to prove, as a partial defense, that he held
under a lease and what the agreed rental was for the period in question.
               (iii) A tenant does not have an absolute right of interest in a mortgage
                    of the property. The tenant has only a contingent right to enjoy the
                    premises. McDermott v. Burke, 16 Cal. 580 (1860)
Facts: The mortgagor of property executed a lease to the lessee for the term of five years.
Subsequently, the mortgagor defaulted, the mortgagee foreclosed, and defendants purchased the
property at the sheriff's sale. When a personal judgment was obtained against the lessee, his
interest in the property was sold at a sheriff's sale and was purchased by an individual who, then,
assigned the property to plaintiff. Plaintiff brought an ejectment proceeding, contending that he
was entitled to possession of the property until the expiration of the five-year lease. The trial
court awarded plaintiff possession of the property.
Court: REVERSED. The foreclosure suit and sale extinguished the legal rights of the lessee.
Thus, there was no privity of contract between the lessee of property and a subsequent purchaser,
so the lessee did not have a right to possession of the property on the sale of the same.
A mortgagor cannot make a lease binding his mortgagee, where the lessee at the time had notice
of the mortgage, either actual or constructive. The interest of the lessee in such case is dependent
for its duration except as limited by the terms of the lease, upon the enforcement of the
mortgage. As long as the mortgage remains unenforced, the lease is valid against the mortgagor,
and in the state against the mortgagee; but with its enforcement the leasehold interest is
determined.
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There is no privity of contract or of estate between the purchaser upon the decree of sale and the
tenant. The purchaser may treat the tenant as an occupant without right, and maintain ejectment
for the premises. He cannot, for the want of such privity, count upon the lease, and sue for the
rent or the value of the use and occupation. The relation between the purchaser and tenant is that
of owner and trespasser until some agreement, express or implied, is made between them with
reference to the occupation. Until then, both are equally free from any contract obligations to
each other. Until then, both are equally free from any contract obligations to each other. The
tenant is not bound to attorn to the purchaser, nor is the latter bound to accept the attornment, if
offered. The purchaser may prefer to have the possession, and the tenant may also prefer to
surrender it.
Chapter XX. Part VII – Lender’s Commitment to Lend, and
  Borrower’s Commitment to Provide Security – Chapter 20
  – Lender’s Commitment to Lend or Pay Liens on the
  Borrower’s Property.
   A) Lender’s Commitment to Make a Loan, p. 597
        a) First National State Bank of New Jersey v. Commonwealth
           Federal Savings and Loan Association of Norristown, 610 F.2d
           164 (3rd Cir. 1979), p. 597
Facts: Mathema Developers started construction of a shopping center with a permanent (i.e.,
operating or standby) loan by Commonwealth. The project was well over 50% completed at that
time but the contract did not include rental or completion requirements. Mathema concurrently
goy s first construction loan from South Jersey National Bank, and a construction loan from First
National State Bank contingent on Commonwealth‘s assignment to FNSB. Commonwealth
consented and FNSB funded Mathema, which paid of the SJNB loan. A year later the shopping
mall was partially in business with only 25% occupancy, and importantly, Commonwealth still
had not closed the loan. With the mall in grave economic condition, FNSB asked
Commonwealth to close and fund the permanent (operating) loan. Commonwealth‘s ‗adviser‘
reported that construction was incomplete, so Commonwealth refused to fund. The assignment
allowed FNSB to pay $17,500 for an extension of the Commonwealth funding commitment.
FNSB tendered payment, which Commonwealth rejected under protest from FNSB. FNSB again
tendered payment, which Commonwealth again rejected under protest from FNSB. FNSB
foreclosed on the mall, and became the mall operator. FNSB and Mathema sued Commonwealth
for breach of contract. The trial court held for FNSB finding that construction was substantially
finished at the time of Commonwealth‘s rejection.
               (i)      A permanent (i.e., operating or standby) lender is expected to fund
                    to fund an ongoing concern after substantial completion of the project
                    because the lender presumably had the business acumen to know what
                    to fund before execution.
               (ii)     A lender commitment is a contingency loan for a developer, or
                    assignee to call on the lender to refinance a construction loan, often
                    at the conclusion of construction.
               (iii) A breach of funding is subject to the remedies of (1) specific
                    performance where the breaching party agreed to perform an act the
                    breached party is burdened with, and monetary damages are
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                      inapplicable or impossible to ascertain; and (2) monetary damages
                      would place the breached party in the position the party would have
                      been if the breach had not occurred.
Court: AFFIRMED. The court rejected Commonwealth‘s arguments, finding (1) agreeing with
the finding of the trial court, (2) Commonwealth was not a beneficiary of FNSB, (3) specific
performance of funding was appropriate to a going concern, of indefinite damages, and (4)
damages for interest and cost was appropriate. Commonwealth‘s duty was to fund, it did not, and
presumably it had and has the business acumen to know what to fund before execution. The early
lenders relied on Commonwealth as the permanent lender. Although this works a substantial
hardship on Commonwealth, as neither lender wants to operate a shopping center,
Commonwealth agreed to its role, and breached that role. Making the aggrieved party whole is
proper, and the funds should have come from Commonwealth, not FNSB. A standby
commitment obligates the permanent lender to refinance the construction loan, if called on to do
so by the developer, but in addition, generally provides the borrower with the option to search for
an alternative with more advantageous terms.
           b) Notes, page 602
               (i)       Standby charge
A standby charge is an extra premium a developer pays to not take a loan when interest rates go
down.
               (ii)      Statutory requirement of a writing, Statute of Frauds is n/a
A loan commitment over $100K for commercial purposes must be in writing, Cal.Civ.Code §
1624(a)(7).
A promise to loan money to buy real estate does not invoke the Statute of Frauds. Landes
Construction v. Royal Bank of Canada, 833 F.2d 1365 (9th 1987).
Good faith and fair dealing is no longer a requirement in negotiations (absent statute).
               (iii)     Bankruptcy of an obligatory lender
A trustee may assume or reject all executory contracts and unexpired leases of a debtor. Except
contracts to make a loan, or extend other debt financing accommodations, to or for the benefit of
the debtor. 11 U.S.C. 365(c)(2).
               (iv)      Interest rate commitments
An interest rate increase in a loan commitment may support a cause of action for negligence if
due to delays in processing a loan, fraud if the rate was misrepresented to the borrower, or
possibly unfair competition or RICO liability if the lender was collecting loan fees based on
fraudulent statements.
               (v)       Fairness in lending
Redlining discrimination of financial assistance for race, color, religion, sex, marital status,
national origin, or ancestry prohibited. Cal. Health & Safety Code § 35811.
A showing in defense of equal opportunity negligence counters an allegation of discrimination.
Green v. Santa Margarita Mortgage Co., 28 Cal. App. 4th 686 (1994).
Discrimination for race, color, religion, sex, marital status, national origin, or ancestry in
financial assistance is prohibited. Fair Housing Act, 42 U.S.C. 3605, Title VII of Civil Rights
Act.
               (vi)      Misleading the permanent lender
A construction lender has a contractual or fiduciary duty to disclose information to a permanent
lender about a borrower‘s financial condition. WFB v. Arizona Labors, Teamsters, and Cement
Masons, Local No. 35 Pension Trust Fund, 38 P3d 12 (AZ 2002).
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   B) Lender’s Commitment to Make Additional Loans (Future
      Advances), p. 605
      1)    Introduction
         a) Statute – Cal.Civ.Code § 2884
A lien may be created by contract, to take immediate effect, as security for the performance of
obligations not then in existence.
           b) Standard title company deed of trust provision
―Trustor agrees to (1) pay the principal and interest on the note of even date herewith; (2)
perform each agreement in this deed of trust; and (3) pay such further sums as the then recorded
owner of the property may hereafter borrow from Beneficiary, when evidenced by another note
(or notes) reciting it is so secured."
           c) Commentary
There is not a legal requirement that a security instrument come into existence simultaneously
with the creation of the underlying obligation. A lender may fund a loan unsecured, and later
take security to cover both the pre-existing, and a subsequent loan. R. Bernhardt, Cal. Mortgage
and Deed of Trust Practice , 3rd §9.58 (Cont. Ed. Bar. 2000).
           d) Tapia v. DeMartini, 77 Cal. 383 (1888), p. 606
[No facts or factual analysis presented.]
               (i)      A mortgage made in good faith to cover future advancements or
                    endorsements is valid between the immediate parties to the instrument,
                    and if properly recorded, also against subsequent purchasers, or
                    encumbrancers.
               (ii)     A mortgage is not invalid for not disclosing its purpose if the
                    amount of liability is expressly limited.
               (iii) An agreement to make advances is not required to be in writing.
               (iv) A mortgage is a lien against subsequent encumbrances for the
                    whole sum advanced from the time of its execution. Any lien is valid
                    simply for each advance from each time of advancement, but a
                    mortgage lien on an advance is enforceable only from the time the
                    advancement is made.
               (v)      Constructive notice, as by recording of advances is not sufficient to
                    enforce a mortgage lien. Actual notice is necessary.
               (vi) A mortgage is not required to state the amount of future advances
                    to which the security applies, but the notice must be sufficient to put
                    subsequent encumbrancers on inquiry to ascertain the extent of the
                    lien, or suffer the consequences.
           e) Note, loans secured by personal property. p. 606
A security agreement may provide that collateral secures, or that accounts, chattel paper,
payment intangibles, or promissory notes are sold in connection with, future advances or other
value, whether or not the advances or value are given pursuant to commitment. Cal. Comm.
Code §9204(c).
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           f) Atkinson v. Foote, 44 Cal. App. 149 (1919), p. 606
Facts: Bouchard owned property subject to a first deed of trust held by Phleger, and a second
deed of trust held by Atkinson. Bouchard defaulted on both. Atkinson foreclosed and purchased
at his own sale. Phleger sold her note and deed of trust to Bouchard‘s mother, who then
foreclosed, bought at her own sale, and paid $600 over the mortgage amount. Atkinson claimed
the $600 as surplus, but Mrs. Bouchard said it was the sum she loaned her son to pay Phleger.
Atkinson sued for the surplus and won.
               (i)     The surplus of a bid over the lien amount belongs to the owner of
                    the property, not the trustor of the mortgage.
               (ii)    The lien amount is the amount in actual notice.
Court: AFFIRMED.
Notice of a lien must be actual notice, not simply constructive notice, (Tapia.) If the mortgage
contains enough information to show a contract between the parties, then it stands as security to
the mortgage for such indebtedness as arises in future dealings, and puts a purchaser or
encumbrancer on inquiry. If not, the mortgagee is not entitled to protection as a bona fide
purchaser. The rule is that a the mortgage lien of a superior, or prior mortgagee will not operate
to secure optional advances made under such a mortgage after the mortgagee has acquired actual
notice of an encumbrance, subsequent in point of time to his mortgage, so as to defeat or impair
the rights of the second encumbrancer.
               (iii) Advances made outside of a prior lien take subsequent priority to
                    intermediate liens, even if made to make payments on prior liens.
While Mrs. Bouchard indirectly made the payments to Mrs. Phleger, at the time she acquired the
note, and deed of trust, and foreclosed, her son was no longer the owner, as Atkinson had already
foreclosed and purchased at that time. Mrs. Bouchard had at least constructive notice,
(Cal.Civ.Code § 1213). Furthermore, the second lien to Atkinson before his purchase put her on
notice that advances to her son would be subsequent to Atkinson‘s liens.
           g) Notes, p. 609
               (i)     Priorities.
Later advances by a senior lender under the future advance clause create priority issues when
there are junior liens.
               (ii)    Parole evidence
Parole evidence may be admitted to show a deed was given to secure indebtedness future as well
as existing indebtedness, as it is a showing of what indebtedness the agreement intended to be
secured.
               (iii)   Covering other obligations, Cal.Civ.Code § 2891
The existence of a lien upon property does not of itself entitle the person in whose favor it exists
to a lien upon the same property for the performance of any other obligation than that which the
lien originally secured.
           h) Langerman v. Puritan Dining Room Co., 21 Cal. App. 637 (1913),
              p. 609
Facts: Puritan owned the bank $5000. Goodbody gave the bank his deed to secure the debt. In
return, the bank gave Goodbody a defeasance document that the deed was security for all debt
then or later due to the bank by Goodbody or, Puritan. Puritan then gave the bank a $5000 note,
borrowed another $3900, and gave another note on the $3900. Puritan never paid, so the bank
sued to foreclose both notes on the deed. The bank won, Goodbody appealed.
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               (i)       A mortgagee may accept security for an existing indebtedness that
                      also serves as security for future indebtedness.
Court: Goodbody argued that ―moneys due or here after to become due,‖ meant only existing
debts as the payments became due. The court rejected the argument because debts are due at the
time they exist, regardless whether it is mature or not. Furthermore, looking to the intent of the
parties, the court found the phrase to be more elastic than otherwise construed, so such
interpretation was proper. That the language was general without referring to a specific
indebtedness showed that the parties contemplated there might be future additional indebtedness
for the mortgage to secure. Otherwise the words would have no meaning at all. Also, the bank
did advance more money after execution of the mortgage.
   C) Lender’s Commitment to Repay Existing Loans (All Inclusive
      Trust Deed), p. 612
        a) Wraparound loans
Wraparound loans are loans combining the note of both the first lender (such as the construction
lender) and the second lender (the vendor/ seller). The second note is an aggregate of both loans,
with a blended interest rate. The borrower has only one payment schedule, and the junior pays
the first lender. The borrower might pay an escrow holder who then pays the first lender, and the
vendor. The question here is if the junior forecloses, must the junior pay the aggregate amount,
or only its equity (the unpaid amount of the junior loan).
           b) FPCI Re-Hab 01 v. E&G Investments, Ltd., 207 Cal. App. 1018
              (1989), p. 612
Facts: Project 80‘s Development Corp. bought property. E&G held an all inclusive trust deed
(AITD) subject to encumbrances senior to E&G. Rehab advanced purchase money funds to
Project 80‘s Development Corp. for which FPCI took the note and deed of trust as Rehab‘s
general partner. Project 80‘s Development Corp. defaulted on Rehab and the E&G, but not the
senior obligations. E&G filed notice of default, and offered to reconvey if the AITD equity
(about $226K) was paid. Project 80‘s Development Corp. did not cure the default, and the trustee
held the sale for the full amount of the AITD of $845K. E&G was the only bidder and credit the
full amount. Rehab sued E&G on contract and tort claims. The trial court granted summary
judgment to E&G.
               (i)      Foreclosure of an All Inclusive Trust Deed is for the aggregated
                      amount, not simply the amount in default.
Court: AFFIRMED.
Rehab argued that E&G chilled the bidding by claiming that the total amount of indebtedness
was due, rather than just the junior wraparound portion of $266K. The court noted that before a
junior lienor may set aside a non-judicial foreclosure of real property under a deed of trust
because of irregularities in the sale, the junior lienor must first tender the full amount owning on
the senior obligation.
Since the beneficiary of the overriding deed of trust is obligated to pay the senior included debt,
it should be provided expressly that a failure to pay the overriding note by its terms is a default
under the overriding note and deed of trust only. The documents should also provide that the
purchaser receives title subject to the senior included lien.
               (ii)      The foreclosing junior may not include in its credit bid the senior
                      encumbrance principal also due.
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E&G‘s AITD provided that the total indebtedness was all due, and payable on default. Thus the
notice of amount at the foreclosure sale was correct. Although the AITD also required the
beneficiary to deduct from its credit bid the amount of senior encumbrance principal due, this is
not material. Rehab was required to produce a willing, ready, and able buyer. That the
subsequent purchaser, Waldman, was present and later bought the property from E&G for an
amount sufficient to pay both E&G‘s equity, and Rehab‘s junior note, is not supportive of an
irregularity, as Waldman paid less than 10% in cash, and took the property subject to the AITD,
and E&G‘s 4th deed of trust.
               (iii) A complainant alleging an improper trustee sale must show
                    someone present at the sale as a ready, willing, and able buyer.
Rehab did not present evidence that Waldman could have paid a cash price at the sale to pay off
E&G‘s note, much less its own. Rehab is insolvent, and never offered to pay E&G‘s note. Rehab
failed as matter of law to establish provable changes by E&G‘s alleged misconduct.
           c) Notes, p. 615
               (i)     Reaching additional collateral
The AITD was over $600K when Armsey foreclosed and credit bid his $457K note. The
remainder of the AITD was $105K under a first deed of trust, and $54K under a second deed of
trust. The court held that Armsey‘s credit bid was not a full credit bid, as the indebtedness of the
wraparound deed of trust was the full amount of the three liens, and the amount that Armsey was
entitled to, even though the senior liens were not in default, and Armsey foreclosed only on his
own equity interest.
               (ii)    Restatement Property Third Mortgage §7.8
If a mortgagee has a contractual duty to the mortgagor to perform an obligation secured by
another mortgage of higher priority on the same real estate, the mortgagee may seek to recover in
foreclosure only the amount by which the balance owing on the obligation secured by the
mortgage being foreclosed exceeds the balance owing on the mortgage obligation that the
mortgagee has a duty to pay, together with appropriate fees and costs.
               (iii)   Allocating obligations in a wraparound deed of trust
Unanswered questions.
Chapter XXI. Borrower’s Commitment to Furnish Additional
  Security, or to have Existing Security Secure Additional
  Debts (Dragnet Clauses)
   A) Dragnet clause of Wong v. Beneficial Savings and Loan
      Association, 56 Cal. App. 3d 286 (1976), p. 620.
―For the purpose of securing [the payment of Trustor's promissory note (of $____) and]
payment of such additional amounts as may be hereafter loaned by lender or its successor to
the Trustor or any of them, or any successor in interest of the Trustor, with interest thereon,
and any other indebtedness or obligation of the Trustor, or any of them, and any present or
future demands of any kind or nature which the lender or its successor may have against the
Trustor, or any of them, whether created directly, or acquired by assignment, whether absolute
or contingent, whether due or not, whether otherwise secured or not, or whether existing at
the time of the execution of this instrument, or arising thereafter.‖
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   B) Pre-existing debt of the mortgagor and co-tenants
        a) Gates v. Crocker-Anglo National Bank. 257 Cal App. 2d 875
           (1968)
Facts: Gates and Abell were tenants in common of real property when they executed a note
(loan) and secured deed of trust to Crocker-Anglo. The purpose of the loan was to refinance a
secured indebtedness of Abell, and the deed of trust expressed a dragnet clause. At the time
(1962), the Gates did not know that Abell also had an unsecured loan with Crocker-Anglo which
was then in default. Some time later the parties sold the property for more than the then existing
loan balance. Crocker-Anglo seized the surplus proceeds against Abell‘s default. The Gates sued
on the basis that Crocker-Anglo had not told them of the unsecured default until they seized the
proceeds. The trial court held the dragnet clause valid, & that Crocker-Anglo did not have a duty
to give notice.
               (i)       A dragnet clause in a deed of trust does apply to a pre-existing,
                      unsecured debt of one co-tenant against the secured commonly owned
                      property, unless all co-tenants have notice, and intend the dragnet
                      clause to apply to the secured commonly-owned property.
Court: REVERSED.
Dragnet clauses are subject to careful scrutiny and strict construction, and may be overturned for
concealment, haste, or deception. Permitting one interest to bind the interest of another without
knowledge of the interested party invites abuse and unfair dealing by a power of attorney to
impose a lien on one person‘s interest for another‘s benefit.
               (ii)       A 'dragnet' clause means that each mortgagor pledges his
                      undivided interest in the mortgaged premises to secure, in addition to
                      the specifically named joint indebtedness: (1) Any other existing or
                      future joint indebtedness of the mortgagors to the mortgagee; (2) Any
                      other existing or future individual debt of the mortgagor whose
                      interest is sought to be foreclosed upon; and (3) Any existing or future
                      debt of the other mortgagor which was known to the one whose
                      interest is sought to be held and by him consented to or acquiesced in
                      as being included in the lien upon his interest.
There was no direct evidence that the parties intended the "dragnet" clause to apply to Abell's
pre-existing, unsecured obligation. The was no evidence that the parties discussed the clause or
knew that it was included in the printed deed of trust from. The deed of trust omitted any
reference to Abell's pre-existing obligation in favor of defendant bank. Both the bank and Abell
were aware, at the time the deed of trust was executed, of the latter's prior indebtedness in favor
of the former. The Gates were totally unaware of Abell‘s obligation and presumably would not
have executed the deed of trust had they known that the "dragnet" clause contained therein would
render them liable as sureties for Abell's individual debt.
           b) Notes, p. 619
               (i)       Telling the borrowers
The bank has a duty to notify to notify a co-trustor where a dragnet clause is placed in a loan that
attaches to the secured co-trustor.
               (ii)      Restatement Third Property Mortgage §2.4
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A mortgage may secure future advances where (a) the parties agree that future advances will be
secured, and (b) the advances must be made in a transaction similar in character to the mortgage
transaction.
Comment (b): A dragnet clause can have only a prospective effect. The mortgage will not secure
that indebtedness if the clause refers in general terms to preexisting indebtedness. It is a simple
matter for them to make specific reference to that debt in the mortgage or in a concurrent
agreement. When this is not done, it is reasonable to assume that the parties did not focus their
negotiations on the preexisting debt, and did not intend to make the mortgage secure it. On the
other hand, a mortgage may secure preexisting indebtedness if it specifically identifies that debt.
               (iii) Covenants about after-acquired property - Restatement Third
                    Property Mortgage §7.5(b)
A mortgagor‘s covenant on after-acquired property is effective between the mortgagor and the
mortgagee.
   C) Applying the security to the debt
        a) Wong v. Beneficial Savings and Loan Association, 56 Cal. App. 3d
           286 (1976), p. 620
Facts: Wong bought eight parcels from Roerden and assumed the notes held by Beneficial.
When Wong defaulted, the mortgagee filed eight notices of foreclosure. Two weeks before the
sale, Wong tendered payment for three of the parcels. Beneficial refused the tender as inadequate
for all eight parcels. Wong filed a TRO, and tendered a payment for a fourth lot. Beneficial
refused that tender also, but offered (1) to consolidate the loans and deeds of trust for partial
payment, or (2) accept the four tenders for easements granting access to the remaining lots. The
Wongs refused both offers. The court dismissed the injunction suit and Beneficial non-judicially
foreclosed, and bought the parcels at the trustee sale. Beneficial then sold the lots to third party
on a single deed of trust. The Wongs sued for damages, alleging they were unaware of the
dragnet clause making the eight parcels effectively one parcel to the note and deed. The trial
court ruled for Benficial. The Wongs appealed.
Court: AFFIRMED. The literal effect of (the dragnet clause here) is to make each deed of trust
security for all eight loans (and conversely, to secure each loan with all eight deeds of trust).
Clauses such as this are often termed "dragnet" or "anaconda," as by their broad and general
terms they enwrap the unsuspecting debtor in the folds of indebtedness embraced and secured in
the mortgage that he did not contemplate.
―The literal meaning of this clause extends the deed of trust to cover every past and present
obligation between the debtor and the creditor. The clause purports to say that a bank holding a
deed of trust on a borrower's property to secure his real estate loan from it may turn to that deed
of trust any time he falls behind on a personal loan from it, misses a payment on his automobile
loan from it, or overdraws his checking account at the bank. It also appears to mean that any
other creditor of the debtor can sell his obligation to the bank, which can then tack that debt to its
deed of trust. (California Real Estate Secured Transactions (Cont. Ed. Bar 1970) page 135, §
4.18, p. 152, Roger H. Bernhardt). ―The burden should be on the proponent to show that both
parties intended the other loan to be included.‖ (Id.) This is the law in California.
               (i)      In determining the reasonable intention of the parties, two
                     significant considerations are apparent: (1) the relationship of the
                     loans, and (2) the reliance on the security.
For the first part, the rationale here is basically one of ejusdem generis: The phrase 'all other
debts' means all other debts similar to the primary debt. ―Under such a test, items like overdraws
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on a checking account . . . are so different in nature that they should not be included within the
security unless the parties specifically describe them.‖ [See p. 622 for further discussion].
In the second case, the dragnet clause constitutes a continuing offer by the borrower to secure
further loans under the security. To determine whether the lender accepts the offer when a
second loan is made, his intent must be ascertained, and there can be no such intent when the
lender takes different security instead. Thus, an automobile loan (with the vehicle as security)
should not come under a deed of trust held by the same bank.
As to the first factor, the Wongs were not aware of the dragnet provision, but they did not sign
the original deed of trust and note they later assumed. However, they saw the complex and
purchased it as a single unit in one transaction. Also, zoning laws would have prohibited
construction of the back units alone from the front; the eight units shared commonly constructed
facilities, and common control over the parcels. As to the second factor, that each parcel had a
separate deed of trust does not militate against express reliance in the security. The back lots
would lose value if separated from the front lots, and coupled with the single transaction strongly
suggests true reliance was present. As to the equity of the dragnet clause, the Wongs showed
little regard for equity by refusing to offer an easement for the back lots.
           b) Note, p. 624 – The effect of a separate agreement
A mortgage including the real estate and all fixtures and articles of personal property does not
cover furniture secured by a separate simultaneously executed security agreement.
           c) Union Bank v. Wendland, 54 Cal. App. 3d 393 (1976), p. 624
Facts: Wendland separately executed three loans from Union Bank‘s predecessor. Wendland‘s
home secured the first loan (a non-purchase money loan), and the second loan (improvements)
was unsecured. The third loan paid off the second loan, made partial payment on the first loan,
and took a second deed of trust on the home. Wendland defaulted and Union Bank nonjudicially
foreclosed on the first deed of trust ($32K). Union Bank bought the residence (FMV $25K) at
the trustee sale (for $17K), sold the home to a third party (for $20K), and then sued Wendland on
the third note (10K). The trial court held that (1) the second deed of trust was worthless by the
foreclosure on the first deed, (2) the second deed of trust was not given to Union Bank to pay the
purchase price it secured, (3) the first deed of trust was not intended to secure the third note, and
(4) Wendland had defaulted and owned Union Bank. Wendland appealed, arguing that since a
deficiency judgment could not be obtained upon a sale of the residence under the first deed of
trust (Cal. Civ. Proc. Code § 580b), no recovery could be had upon a suit on the third note.
Court: REVERSED.
               (i)      A "dragnet" clause has the effect of making the security
                    instrument security for the debtor's past, present and future
                    obligations to a particular creditor.
               (ii)     Refinancing a property loses the purchase money protection
                    afforded by §580b.
Section 580b is inapplicable because Wendland purchased the real property without giving the
first deed of trust as security for the purchase money within the meaning of section 580b. The
first loan went to pay off the purchase loan from the savings and loan association and to obtain
additional funds for defendant's business account. The third loan paid off the second note and the
balance was applied to payments due under the terms of the first note. When defendant
refinanced the property he lost the purchase money protection afforded by § 580b.
However, Wendland‘s proper defense to the complaint under the antideficiency statutes is
afforded by § 580d. ―No judgment shall be rendered for any deficiency on a note secured by a
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Golden Gate University                 Spring 2004                                 October 26, 2011
deed of trust or mortgage on real property executed in which the real property has been sold by
the mortgagee or trustee under power of sale contained in such a mortgage or deed of trust.‖
Union Bank argued that because Wendland‘s wife did not sign the third note, the parties of the
first and third notes were different. The court rejected the argument as the dragnet clause
includes, ―the payment of additional sums and interest thereon now or hereafter due or owing
from Trustor (or any of them) to Beneficiary,‖ and both persons were specifically designated as
the "Trustor" in the first deed of trust. Thus, she was a debtor to the third note.
As to whether the third note may be interpreted as a future advance of the first deed of trust, the
applicable test is the "relationship of loans" test, and the "reliance on the security" test. ―If the
first loan is made to enable the borrower to erect improvements on his real estate and the purpose
of the second loan is only to finance more improvements on the real estate, it is not hard to tie
the two loans together under one deed of trust.‖ (R. Bernhardt, Cont. Ed. Bar, §§ 4.23 and 4.24,
pp. 157-160, 1970.)
               (iii) A second deed of trust on the same security by the same
                    beneficiary merges into the first deed of trust.
First, when a different security is taken for the second loan it cannot be inferred that parties
intended to rely on the security for the first loan. Here, the third loan was [clearly] protected by
the original real estate security. Second, that the third note was not intended by the parties to be
secured by the first deed of trust [as found by the trial court] is wholly irreconcilable with the
evidence. The third note was used to pay off the second note, and the balance applied to
payments due under the terms of the first note. There was clearly a relationship between the
loans. The execution of the second deed of trust was superfluous.
Wendland‘s continuing offer in the dragnet clause of the first deed of trust to secure further loans
under the real estate security conveyed was accepted by the Bank when it agreed to take the
same security under the second deed of trust. Thus the Bank unequivocally relied on defendant's
residence as security for the third note. Having relied on the same security provided for in the
first deed of trust there was no need or necessity for the execution of a second deed of trust.
Under these circumstances, the second deed of trust merged into the first deed of trust.
A "merger" occurs when a greater estate and a lesser coincide in the same person in one and the
same right without any intermediate estate. Here the second deed of trust was the lesser estate. It
was annihilated or merged in the greater estate, i.e., the first deed of trust, without any
intermediate estate intervening. The question is one of intent, actual or presumed, of the person
in whom the interests are united.
               (iv) A lender‟s secured interest under the anti-deficiency rule includes
                   all debts under a dragnet clause. Cal. Civ. Proc. Code § 580d.
The purpose of the antideficiency statute is to discourage the overvaluing of the security, and that
the risk of inadequate security because of overvaluation is placed on the purchase money
mortgagee. Cal. Code Civil Procedure §580b. To permit Union Bank to avoid the effect of
§ 580d by what amounts to a method of paper shuffling, i.e., the execution of the second deed of
trust with the same security on which the Bank relied as security in making the original loan, is
to countenance an evasive device and to permit a circumvention of the antideficiency statutes.
Wendland transferred his residence to the trustee as security for the first note and for future
advances. The Bank knew or should have known the value of the residence it received as
security. When it designated the residence as security for the third note it clearly evidenced an
intention that the residence was to secure the first as well as the third note. Had its intention been
otherwise it would have demanded a different security for the third note.
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           d) Notes, p. 628
               (i)    The rest of the decision
The dissent pointed out that the bank demanded and secured a second mortgage. In doing so, it
and the borrower each manifested an intent that the second loan, which was expressly referred to
in the second deed of trust, was not to be considered as a further advance under the first deed of
trust. Moreover, the bank was entitled to memorialize any further advance to avoid conflict with
any intervening claim of liens. Here the security was exhausted by the sale under the first deed of
trust at a loss to the creditor. There was no attempt to minimize the amount bid below what the
evidence showed was the fair market value. As between the borrower and the lender, the loss
should fall on the borrower. He should not receive a windfall because he secured new funds from
one who was also the holder of the first deed of trust.
               (ii)   Merger
Merger of the deed of trust means that a person cannot have a mortgage to herself on the
property. ―If the holder of both a junior and senior mortgage forecloses the junior and buys it in
on foreclosure sale it is generally held that, in the absence of an agreement to the contrary, the
mortgagor's personal liability for the debt secured by the first mortgage is extinguished.‖ Board
of Trustees v. Ren-Cen Indoor Tennis & Racquet Club, 377 N.W.2d 432 (Mich. App. 1985). At
equity, this works where the mortgagee holds the first and second deed of trust, forecloses on the
second deed of trust and the fair value outweighs the amount of the first deed of trust.

				
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