Problem Loans in Turbulent Times
Issues to Consider
Barry A. Smith, Esq.
Scott O. Smith, Esq.
A Professional Law Corporation
Los Angeles San Francisco
1000 Wilshire Boulevard, Suite 1500 333 Market Street, 25th Floor
Los Angeles, CA 90017-2457 San Francisco, CA 94105-2126
Telephone: (213) 891-0700 Telephone: (415) 227-0900
Facsimile: (213) 896-0400
Orange County Scottsdale
18400 Von Karman Avenue, Suite 800 16435 North Scottsdale Road, Suite 440
Irvine, CA 92612-0514 Scottsdale, AZ 85254-1754
Telephone: (949) 760-1121 Telephone: (480) 383-1800
Facsimile: (949) 720-0182 Facsimile: (480) 824-9400
Western Independent Bankers
Troubled Asset Forum
June 23-24 2009
San Francisco, California
The text that follows is intended to be highlights only of the topics discussed under
California law. These materials are designed to be used in conjunction with this lecture and they
are not intended to answer all questions under all circumstances. Therefore, if you have any
questions regarding a fact and/or legal situation which may not fall within the distinct parameters
of these materials, it is recommended that you contact your supervisor and/or legal counsel prior
to taking any action. The information contained in this summary is not intended to constitute,
and should not be received as, legal advice.
The law with regard to these topics changes periodically. Again, if you have any
questions, it is recommended that you talk them over with your attorney.
TABLE OF CONTENTS
I. INTRODUCTION ............................................................................................................. 1
II. THE INITIAL COLLECTION PROCESS ........................................................................ 1
A. Confirmation That The Loan Closed In Strict Compliance With The Loan
Terms ..................................................................................................................... 1
1. Were the loan funds received by the appropriate persons?........................ 1
2. Were all of the loan documents duly executed by the appropriate
3. Were the lender’s security instruments duly filed and/or recorded? ......... 1
4. Was the loan policy of title insurance issued in strict compliance
with the lender’s instructions? ................................................................... 1
B. The Lenders Need To Regularly Monitor The Loan To Determine If It Is
Performing ............................................................................................................. 2
1. Have the loan payments been received in a timely manner? ..................... 2
2. Is the required insurance in full force and effect?...................................... 2
3. Has the borrower duly complied with all reporting requirements
contained in the loan documents? .............................................................. 2
4. Has the borrower breached any of the loan covenants? ............................. 2
C. Initial Responses to Loan Defaults ........................................................................ 2
1. Immediately contact the borrower to confirm the existence of the
default and ascertain how the default will be cured ................................... 2
2. Adequately document the contact with the borrower, including the
borrower’s proposal to cure the default ..................................................... 2
3. Calendar for “follow-up” the proposal to cure the default ........................ 2
4. Do not take measures which may compromise your title insurance
coverage ..................................................................................................... 2
5. Engage all relevant parties: ........................................................................ 2
6. The Pre Workout Agreement ..................................................................... 2
7. The Forbearance Agreement ...................................................................... 2
D. Restructuring of the Loan ...................................................................................... 3
1. Introduction ................................................................................................ 3
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2. Obtain a written agreement of all relevant parties to the
restructured loan......................................................................................... 3
3. Have all of the restructured loan documents duly executed ...................... 3
E. The Decision to Declare a Default and Commence the Collection Process .......... 3
1. Introduction ................................................................................................ 3
2. Is the loan file in a condition to be produced in a deposition? .................. 3
3. Is the lender prepared to be deposed by the borrower’s counsel? ............. 3
4. Is the lender’s decision to declare a default and commence the
collection process ready to be reviewed by a judge and a jury? ................ 3
III. THE PREJUDGMENT WRIT OF ATTACHMENT ........................................................ 3
IV. THE RECEIVERSHIP PROCESS .................................................................................. 10
A. What is a Receiver? ............................................................................................. 10
1. Receiver in General.................................................................................. 10
2. California Receivership Law ................................................................... 11
3. Federal Law ............................................................................................. 13
B. When is the Appointment of a Receiver Necessary? ........................................... 14
C. How is a Receiver Appointed? ............................................................................ 14
1. Ex Parte Appointment .............................................................................. 14
2. Information Required to Seek the Ex Parte Appointment of a
Receiver ................................................................................................... 15
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3. Pleadings Required in seeking Ex Parte Appointment of Receiver ......... 15
4. The Receiver’s Bond (CCP §§ 566(b); 567(b) ....................................... 15
5. Failure to Procure Receiver ..................................................................... 16
6. Noticed Motion to Seek Appointment of Receiver.................................. 16
V. FORECLOSURE OF REAL PROPERTY ...................................................................... 20
A. Foreclosure Basics ............................................................................................... 20
1. Judicial Foreclosure Overview ................................................................ 20
2. Non-Judicial Foreclosure Overview ........................................................ 21
3. Judicial Foreclosure versus Non-Judicial Foreclosure ............................ 21
4. Choice of Judicial or Non-Judicial Foreclosure....................................... 21
5. The One-Action and Security First Rules- CCP §726(a)......................... 22
6. Anti-Deficiency Rules ............................................................................. 26
7. Guarantor Liability................................................................................... 31
B. Mechanics Of Judicial And Non-Judicial Foreclosures....................................... 35
1. Judicial Foreclosures ................................................................................ 35
2. Non-Judicial Trustee Sales ...................................................................... 36
C. Debt Secured by a Combination of Real and Personal Property ......................... 46
1. Non-judicial Foreclosure of Real Property First ...................................... 47
2. Simultaneous Judicial Foreclosure of Personal and Real Property ......... 47
3. Proceeding Against Guarantors Only ...................................................... 47
4. The Sale of Personal Property Collateral First ........................................ 47
5. Applicability of the Antideficiency Legislation to Real and
Personal Property ..................................................................................... 48
6. The Single-Action Rule ........................................................................... 48
D. Secured and Unsecured Multiple Obligations ..................................................... 48
VI. PRESERVING YOUR TITLE INSURANCE COVERAGE DURING THE
LOAN WORKOUT AND FORECLOSURE .................................................................. 49
1. Introduction .............................................................................................. 52
2. A Trustee’s Sale Guarantee, in the Opinion of the Title Insurer, Is
Not a Policy of Title Insurance ................................................................ 52
3. The Loan Policy Does Not Insure The Validity Of The Foreclosure ...... 52
4. The Credit Bid.......................................................................................... 53
5. Obtaining an Owner’s Policy of Title Insurance After the
Foreclosure Sale ....................................................................................... 54
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VII. CONCLUSION ................................................................................................................ 57
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PROBLEM LOANS IN TURBULENT TIMES
ISSUES TO CONSIDER
Once a loan has been made, the challenge of the collection of that loan begins. The loan
pre and loan post loan closing actions will determine if the loan was ever repaid.
The lender has frequently been viewed by the public with some skepticism. However,
due to the recent “credit crunch” in real estate, that skepticism has become exacerbated.
Accordingly, a number of federal and state laws and regulations have recently been enacted to
respond to perceived notions of inappropriate behavior on the part of lenders. A recent example
of this is SB 1137 which was signed by the Governor on July 8, 2008, as urgency legislation. In
summary, SB 1137 establishes pre conditions to the non-judicial foreclosure of the principal
residence of a borrower. These enactments reflect a public perception that the current problems
in lending, especially real estate lending, are the result of misconduct by lenders. Accordingly,
when you are confronted with a defaulted loan, it is important to keep in mind that your actions
will be scrutinized with this perception in mind.
THE INITIAL COLLECTION PROCESS
A. Confirmation That The Loan Closed In Strict Compliance With The Loan Terms.
1. Were the loan funds received by the appropriate persons?
2. Were all of the loan documents duly executed by the appropriate persons?
3. Were the lender’s security instruments duly filed and/or recorded?
a. Was the UCC-1 duly filed?
b. Was the Deed of Trust duly recorded and indexed?
4. Was the loan policy of title insurance issued in strict compliance with the lender’s
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B. The Lenders Need To Regularly Monitor The Loan To Determine If It Is Performing.
1. Have the loan payments been received in a timely manner?
2. Is the required insurance in full force and effect?
3. Has the borrower duly complied with all reporting requirements contained in the
4. Has the borrower breached any of the loan covenants?
a. Has the property been sold in violation of the loan documents?
b. Has the property been further encumbered in violation of the loan
C. Initial Responses to Loan Defaults.
1. Immediately contact the borrower to confirm the existence of the default and
ascertain how the default will be cured.
2. Adequately document the contact with the borrower, including the borrower’s
proposal to cure the default.
3. Calendar for “follow-up” the proposal to cure the default.
4. Do not take measures which may compromise your title insurance coverage.
5. Engage all relevant parties:
6. The Pre Workout Agreement.
a. What is it?
b. Why is it obtained?
c. When is it obtained?
d. What if you can’t obtain it?
7. The Forbearance Agreement.
a. What is it?
b. Why is it obtained?
c. When is it obtained?
d. What if you can’t obtain it?
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D. Restructuring of the Loan.
It is not uncommon to need to restructure a loan. However, unlike the documentation of
the original loan, the documentation of the restructured loan is done under a totally different set
of circumstances. Accordingly, the lender must exercise a high degree of wariness with respect
to the restructuring of the loan.
2. Obtain a written agreement of all relevant parties to the restructured loan.
3. Have all of the restructured loan documents duly executed.
4. Obtain title insurance on the restructured loan (i.e., CLTA Endorsement 110.5).
E. The Decision to Declare a Default and Commence the Collection Process.
The decision to declare a default and commence the collection process should not be
undertaken lightly because that decision may be subject to scrutiny by a judge and a jury. On the
other hand, the decision to declare a default and commence the collection process should not be
avoided merely because the decision may be subject to scrutiny by a judge and a jury.
2. Is the loan file in a condition to be produced in a deposition?
3. Is the lender prepared to be deposed by the borrower’s counsel?
4. Is the lender’s decision to declare a default and commence the collection process
ready to be reviewed by a judge and a jury?
THE PREJUDGMENT WRIT OF ATTACHMENT
NOTE: Not every state has an Attachment statute. This summary follows California law. As
each state’s attachment laws may differ, you are advised to seek the advice of a local attorney to
determine your rights and remedies.
A. What Is a Writ of Attachment?
It allows a plaintiff creditor to secure assets of a debtor prior to trial.
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B. What Does It Do?
1. It is a provisional remedy provided by statute that gives a plaintiff a pre-judgment
lien on a defendant’s assets as security for payment of any judgment that plaintiff
may recover against the defendant in a legal action.
2. It is an effective settlement tool if the attachment is legitimately sought to secure
C. What Does It Not Do?
1. It does not put assets in the hands of the creditor.
2. It does not determine who prevails at trial.
D. What do You Have to Show to Get a Writ?
1. The claim must be based on a contract, either express or implied, in an amount in
excess of $500.00.
2. It must be a money claim.
3. Usual types of cases —
Claim for goods sold and delivered
A Promissory Note
Plaintiff must be unsecured or undersecured
The amount of the debt must be a readily ascertainable amount
The plaintiff must establish the probable validity of the claim — show by way of
declarations that on the facts presented, the plaintiff would be entitled to
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E. Who Can Be Sued?
An attachment is available against a corporation, partnership, LLC or unincorporated
If the defendant is a “natural person”, the plaintiff must provide admissible evidence that
the claim or claims arose out of the conduct of the defendant in their trade, business or
The underlying obligation, when arising out of a sale, lease or other transaction must not
have been incurred primarily for the defendant’s (natural person) personal, family or
An attachment may also issue in any action for recovery of money brought against any of
the following defendants:
1. An individual who is not a residence of California.
2. A foreign corporation not qualified to do business in California.
3. A foreign corporation that has not filed a designation under California
Corporations Code 15700.
F. What Property Is Subject To A Pre-Judgment Writ Of Attachment?
All property of a corporation, partnership, LLC or unincorporated association is subject
to attachment so long as there is a method of levy provided by statute. The following
property of a natural person is subject to levy by writ of attachment:
1. All interests in real property, including mineral rights but excluding leasehold
interests with unexpired terms of less than one year.
2. All accounts receivable, with principal balance of more than $150.00.
3. All equipment and inventory.
4. Farm products.
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5. Judgments arising out of the conduct by the natural person of a trade, business or
6. All money on the premises where a trade, business or profession is conducted.
7. All securities, negotiable documents and negotiable instruments.
8. All but the first $1000 in an individual’s bank account.
G. What Property Is Exempt From Attachment?
Property which is necessary for the support of the individual defendant and certain family
members, and wages, salaries, commissions and like compensation payable to a
defendant - employee by an employer for personal services performed by the defendant.
H. How Soon after Filing a Lawsuit May You Apply for a Prejudgment Writ of Attachment?
The day the Complaint is file or anytime thereafter.
I. How Long Do You Have to Wait after Filing a Writ of Attachment for a Hearing?
If an attachment is sought at the commencement of a lawsuit, at least 21 days before the
date set for the hearing plus five days notice, the defendant must be served with the
attachment papers in the same manner as a Summons & Complaint may be served. The
defendant must be personally served with the papers.
J. What Type of Emergency Relief Is Available to a Plaintiff When it Can’t Wait 15 Days
for a Hearing?
An aggressive attorney will file the Complaint early in the morning along with the Writ
of Attachment papers and appear that day, Ex Parte, in court. You may seek an
attachment of a defendant’s property without any notice to them or opportunity for them
to be heard only if you can show “extra ordinary circumstances.” A Writ of Attachment
on an Ex Parte basis will only be issued on a showing by affidavit of facts demonstrating
great or irreparable injury to the plaintiff if issuance of the order were delayed until a
noticed hearing has taken place.
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The defendant’s general insolvency;
An impending event such as the close of an escrow or the defendant plans
to flee the country;
Defendant’s past history of dishonesty; or
Those factors which indicate a plaintiff will have a difficult time levying
on the defendant’s assets if required to wait until the date of the regular
Writ of attachment hearing.
K. Must a Plaintiff Tell the Defendant Which Assets the Plaintiff Will Try to Levy on?
Yes and no.
When a defendant is not a natural person, all assets are attachable. When the defendant is
a natural person, the statute states that the assets to be attached must be specifically
CAVEAT: The court has the discretion to determine whether the properties
described by the plaintiffs application exceed the amount necessary to secure any
judgment and in that case, to limit the amount of the property to be levied upon.
If the plaintiff attaches more property than is reasonably necessary to ensure satisfaction
of its claim, the plaintiff is subject to potential liability for wrongful attachment.
L. What Elements Must Be Proved to Obtain a Writ of Attachment Order?
Generally speaking, for all defendants there are four basis elements (as set forth below).
Where the defendant is a natural person, a fifth element of “trade, business or profession”
must be shown. The basic elements are as follows:
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1. A claim for money.
The dollar value must be $500.00 or more. Estimated costs, allowable attorney’s
fees and interest may be included in the amount to be attached.
2. Arising out of a contract.
The contract may be express or implied.
3. A fixed or readily ascertainably amount.
The contract or the law applied to the contract must set the “measure” of the
damage. The specific amount may be proven by affidavit.
4. The debt to be attached is unsecured or under secured.
5. When the defendant is a natural person — did the debt arise from the trade,
business or profession?
The intent is to protect individuals from attachments being issued arising out of
personal, household, or consumer debts.
M. Is a Writ of Attachment Available Against a Guarantor?
Guarantees are treated as obligations separate from the primary debt. Therefore, a
plaintiff may obtain an attachment against the assets of an individual guarantor, if the
guarantee agreement is unsecured.
NOTE: In order for a Writ of Attachment to become available, the guarantor must
be involved in a management position and in the day-to-day operations of the
trade, business or profession.
N. How Long Does a Writ of Attachment Last Once Issued?
The Writ of Attachment has a three year initial term. It may be renewed annually, up to a
total of eight years.
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O. Must I Put up a Bond in Order to Obtain a Writ of Attachment?
A plaintiff seeking a Writ of Attachment must provide to the defendant an undertaking
that is collateral for any amount he may recover for a wrongful attachment. This amount
is set by the court at the time of the hearing on the application. Undertakings given by the
defendant to the plaintiff for the release of the property pursuant to a Writ of Attachment
are expressly permitted by statute.
P. Can the Plaintiff Be Sued for Wrongful Attachment? Yes.
The plaintiff may be liable for wrongful attachment in certain types of cases, such as:
1. Levying in a case where attachment is not authorized.
2. Where plaintiff does not prevail and recover judgment.
3. Where plaintiff levies on exempt property.
4. If plaintiff levies on an excessive amount of property.
5. The action is maliciously prosecuted.
6. The attachment is used for an improper purpose (abuse of process).
The injured defendant may choose to proceed on the plaintiffs posted bond by a noticed
motion in the main action. In the alternative, the defendant may file a separate lawsuit for
damages, not limited to the bond, on legal theories such as abuse of process or malicious
Q. What Can the Defendant Do If He Does Not Want His Assets Levied Against?
A defendant has a right to post a bond in lieu of having their assets levied upon.
Assuming the defendant has sufficient assets to collateralize upon, posting a bond allows
a defendant to limit the damages from a plaintiffs levy.
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R. What Happens If the Defendant Files Bankruptcy after the Writ of Attachment Is
Up to approximately 2 years ago, California law provided that if the plaintiff prevailed on
its Writ of Attachment and there was a lien in place for at least 90 days prior to the filing
of the bankruptcy, the defendant filing a bankruptcy would not effect the Writ of
Attachment lien and the plaintiff would be considered secured in the bankruptcy.
However, California’s Ninth Circuit held that the only way a plaintiff who has obtained a
writ of attachment can remain secured on the property attached is to obtain a judgment
and at that point, you will be perfected. Under this decision, the only way to perfect is to
continue with the lawsuit. This requires the plaintiff to file a Relief from the Automatic
Stay action in the bankruptcy court to seek permission from the bankruptcy court to
continue the state court action to obtain a judgment thereby securing your lien rights on a
relation back theory (your lien rights revert back from the date of judgment to the date of
obtaining the writ of attachment).
This decision is being greatly criticized by creditors everywhere as taking away one of
the major advantages of a writ of attachment even in light of a pending bankruptcy.
THE RECEIVERSHIP PROCESS
A. What is a Receiver?
1. Receiver in General
A Receiver is a court appointed officer that acts as a “neutral” appointed to manage
property and/or other assets and businesses as on-going concerns that are the subject of a legal
dispute. A Receiver can also be appointed to act as a liquidator of such assets as necessary. In
many circumstances, however, a Receiver’s primary role is to efficiently preserve assets. The
concept of the Receiver arose from the Chancery Courts developed by William the Conqueror in
1066. These Chancery Courts acted as courts of equity wherein “chancellors” were appointed to
manage assets of debtors and landowners so that their debts could be paid efficiently. The term
“Receiver” began to be used commonly in England in the mid 16th Century. The United States
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traces its equitable courts to Article 3, Section 2, of the Constitution where judicial power of the
federal government was established to all cases “at law and in equity.”
2. California Receivership Law
a. California Courts have defined a Receiver as follows:
A receiver is a ministerial officer, agent, creature, hand, or arm of, and a temporary
occupant and caretaker of the property for the court, and he represents the court appointing him,
and he is the medium through which the court acts.” Pacific Independent Co. v. Workman’s
Compensation Appeals Bd., 258 Cal. App. 2d 35, 65 Cal. Rptr. 429 (1969).
b. California Rule of Court 1903:
“The Receiver is an agent of the court, not of any party to the litigation and as such:
1. is neutral;
2. acts for the benefit of all who may have an interest in the receivership property;
3. holds assets for the Court, not the plaintiff nor the defendant; and
4. may not directly or indirectly agree to, or enter into a contract, arrangement, or
understanding with any party, or agent, or assignee thereof, about (1) the receiver’s role with
respect to the property following a trustee’s sale or termination of the case, without specific
court permission, (2) how the receiver will administer the receivership or how much the receiver
will charge for services or pay for services to appropriate and/or approved third parties hired to
provide services, (3) who the receiver will hire, or seek approval to hire, to perform necessary
services to administer the receivership, (4) making expenditures for any capital improvements to
c. Code of Civil Procedure Section 564 (authorizes appointment of receivers
(upon an adequate showing to the court):
1. to preserve a common fund or property in dispute and danger of
injury or dissipation [Section 564(B)(1)];
2. to preserve liened real property during judicial or non-judicial
foreclosure under a right of action in a note and deed of trust
[Sections 564(b)(2) and (b)(10)];
3. to enforce judgments [Section 564(b)(3)];
4. to preserve property pending appeal [Section 564(b)(4)];
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5. to take charge of corporate assets when a corporation is insolvent
(or in imminent danger of becoming insolvent) on behalf of a
judgment creditor [Section 564(b)(5)];
6. at the request of one of several identified state regulatory
commissions [Sections 564(b)(7) and (9)];
7. to collect assigned rents, issues or profits [Section 564(b)(11)];
8. to allow a lender to inspect liened real property for hazardous
materials or conditions [Section 564(c)]; and
9. “In all other cases where receivers have heretofore been appointed
by the usages of courts of equity.” [Section 564(b)(8)].
d. A few additional statutory California bases for appointment of a receiver
1. Corporations Code Section 15028 – authorizing appointment of a
receiver in enforcing a charging order against a general partner’s
interest in a partnership;
2. Code of Civil Procedure Section 565 – to take charge of a
dissolved corporate estate to effect a liquidation and distribution of
3. Corporations Code Section 1803 – Upon suit for involuntary
liquidation of a corporation by shareholders or directors, to
preserve assets until determination of the merits of the suit;
4. Code of Civil Procedure Section 699.070 – To preserve perishable
property pending determination of ownership;
5. Code of Civil Procedure Section 564(b)(6) – To preserve property
pending completion of an unlawful detainer action.
e. Express statutory authority to seek appointment of a receiver is also
granted to many California police and regulatory agencies and
commissions, to assist them in the performance of their regulatory duties.
A few examples are:
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1. The State Attorney General may seek appointment of a receiver to
wind up a corporation operating in violation of law (Corporations
Code Section 1801(a)(c));
2. The California Commissioner of Corporations may seek
appointment of a receiver over a corporation operating in violation
of the Corporations Code (Corporations Code Section 29540(a);
3. The California Commissioner of Real Estate may seek
appointment of a receiver over a licensee operating in violation of
state real estate law (Business and Professions Code Sections
10081 and 10081.5).
3. Federal Law
a. Rule 66 of the Federal Rules of Civil Procedure authorizes the
appointment of receivers by federal court judges with the somewhat
backhanded language: “The practice in the administration of estates by
receivers or by other similar officers appointed by the court shall be in
accordance with the practice heretofore followed in the courts of the
United States or as provided in rules promulgated by the district courts.”
b. Numerous sections of Title 28 of the United States Code, which governs
the judicial and judicial procedure, address the conduct of receivers and
rules of governing receivers in various contexts. For example, Title 28
section 959 provides:
1. Trustees, receivers or managers of any property, including debtors
in possession, may be sued, without leave of the court appointment
them, with respect to any of their acts or transactions in carrying
on business connected with such property. Such actions shall be
subject to the general equity power of such court so far as the same
may be necessary to the ends of justice, but this shall not deprive a
litigant of his right to trial by jury.”
c. Title 28 Section 754, dealing with conduct of a receiver over receivership
property located in judicial districts different than that of the appointing
court, is another example.
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d. The federal system, unlike California, relies primarily upon decisional law
– the reported usages of equity – rather than upon statutes to delineate
when and under what circumstance receivers may be appointed.
e. Express statutory authority to seek appointment of a receiver in the
assistance of performing its regulatory duties is also granted to federal and
quasi-federal agencies and commissions. For example, the Securities and
Exchange Commission may seek appointment of a receiver over an d
entity acting in violation of securities laws (Securities Exchange Act of
1934, Section 27, 15 U.S.C. Section 778a; securities Act of 1933, 15
U.S.C. Section 77v(a). Others routinely seek receivers as a form of
injunctive relief generally available in federal court.
B. When is the Appointment of a Receiver Necessary?
The appointment of a Receiver is an equitable procedure wherein a Court believes that a
party to an action is not in a position or, in some circumstances, refuses to comply with the
desires of the Court. A Receiver is also a provisional remedy that allows Courts to preserve
and/or maintain assets so that “waste” does not occur and so the value of an asset in dispute can
A common situation in which a Receiver is appointed is one in which a secured lender
seeks the appointment of a Receiver to preserve its collateral. It may be as simple as a Receiver
being appointed to manage a rental property and continue to collect rents until the dispute over
the Real Property is adjudicated or it may result in a more complicated situation where a
Receiver is asked to takeover the day to day operations of an ongoing business in order to
preserve that business.
C. How is a Receiver Appointed?
1. Ex Parte Appointment
In many instances the need for the appointment of a Receiver is immediate. California
Rule of Court 379 allows for the ex parte appointment of a Receiver. The standard for the
appointment of a Receiver on an ex parte basis requires a similar showing to that of an
application for the issuance of a Temporary Restraining Order. Any ex parte appointment of a
Receiver is conditional and the conditionally appointed Receiver will need to be confirmed.
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2. Information Required to Seek the Ex Parte Appointment of a Receiver
a. Nature of emergency and irreparable injury;
b. Detailed description of property or assets and names and addresses of
those in possession of such property or assets;
c. A description of the impact of the appointment of Receiver on a business.
(Required because it allows the Court to determine the amount of the bond
it needs to issue).
d. Reasonable diligence to provide all pertinent information to the Court if
complete details are not available.
3. Pleadings Required in seeking Ex Parte Appointment of Receiver
a. Complaint (Receivership Cause of Action).
b. Declaration of Notice (always check local rules).
c. Declarations by Movant regarding need for Receiver.
d. Declaration by Receiver regarding qualifications and disinterest (CCP
e. Proposed Receivership Order.
f. Order to Show Cause re: Confirmation of Conditional Receiver (must be
within TEN DAYS from date of Order). CRC §1901.
g. Temporary restraining order against dissipation of assets [CCP §527(b)].
(TRO is only valid until hearing on preliminary injunction not to exceed
15 days or 20 days with good cause and/or extraneous circumstances).
4. The Receiver’s Bond (CCP §§ 566(b); 567(b)
a. Plaintiff/Applicant is required to post a bond in an amount to be fixed by
the Court, to the effect that the Applicant will pay to the defendant all
damages the defendant may sustain by reason of the appointment of the
Receiver and the entry by the Receiver upon his or her duties, in case the
applicant shall have procured the appointment wrongfully, maliciously or
without sufficient cause.
b. Receiver is required to post a bond to the State of California in such a sum
as the Court may direct, to the effect that the Receiver will faithfully
discharge his/her duties and obey orders of the appointing court.
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5. Failure to Procure Receiver
a. In the event a Receiver is not procured, Applicant is advised to seek
alternative relief to preserve property. This may in the form of a
Temporary Restraining Order or requesting an Order to Show Cause re:
Appointment of a Receiver without the conditional appointment of a
Receiver (or both).
6. Noticed Motion to Seek Appointment of Receiver
a. A strong showing of necessity is required [except regarding appointment
of Receiver to collect rents and issues and profits Receiverships
b. Motion should include request for preliminary injunction against
collection of income or rents, transferring or dissipating property, from
interfering with Receiver and should order the turnover of all books and
records and monies held.
c. Declarations by Movant regarding need for Receiver.
d. Declaration by Receiver regarding qualifications and disinterest (CCP
e. Memorandum of Points and Authorities
g. Proof of Service (check all local rules)
h. Bond Requirements (see above)
i. Proposed Order Provisions
1. The Receiver’s power to operate and/or liquidate a business.
2. The receiver’s power to enter into contracts or leases. Note that a
receiver has general authority to enter into leases for up to one year
in length (which includes any option periods) or minor contracts
without specific court authorization.
3. The receiver’s authority to redirect mail.
4. The receiver’s authority to use a locksmith to enter the receivership
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5. The receiver’s authority to bring unlawful detainer actions (or
possibly to engage in other litigation).
6. The receiver’s obligation to investigate, report about, and maintain
adequate insurance coverage regarding the receivership estate.
7. The receiver’s authority to utilize the tax identification number(s)
previously utilized in connection with the operation of the
receivership business or property.
8. A provision regarding payment of the receiver’s fees and costs, as
well as the fees and costs of other professionals employed by the
receiver. The typical provision specifies that these fees and costs
may be paid from the receivership estate each month upon service
of the receiver’s monthly report, subject to future court
confirmation. Copies of the detailed bills of the receiver and other
professionals should be included in the receiver’s monthly reports.
9. The form orders for rents, issues and profits receiverships give the
parties 20 day within which to object to the receiver’s proposed
fees. Sometime, the court orders give the parties a specified time
period (usually 5 – 14 days) in which to object before the receiver
may pay such fees and costs. If there is an objection in such an
instance, the court will intervene (upon request) to resolve the
objections. This procedure can be expensive in a case where one
party routinely objects to everything.
10. A provision specifying when the receiver must file his/her
inventory with the court. California Rule of Court 1905 specifies
30 days unless the court orders some other time.
11. A provision specifying the amount of the receiver’s bond.
(a) The bond premiums are paid annually from the funds in the
(b) The annual bond premiums typically are 1% of the face
amount of the bond (for example, $1,000 per year for a
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(c) The bonds are personally guaranteed by the receiver. The
guarantees include attorneys’ fees and costs incurred by the
bonding companies in connection with claims against the
bonds. Consequently, non-meritorious bond claims are
extremely disfavored by receivers.
(d) The bonds cover theft from the receivership estate. They
do not provide coverage for negligence.
12. A provision authorizing the receiver to borrow funds.
(a) A receiver may not borrow funds without such specific
(b) A receiver issues receiver’s certificates (which are
essentially IOU’s issued by the receiver) in exchange for
(c) The receiver’s certificates usually bear interest and have a
first priority right to be paid from the assets in the
receivership estate, with only costs of administration
having a higher priority right of payment. As long as other
secured creditors are given notice about the application for
such authorization, the court can prioritize the right of the
holders of the receiver’s certificates above the rights of
those other pre-existing secured creditors.
13. A provision that the receiver may sell real or personal property of
the estate. Code of Civil Procedure §568.5. A receiver is not
bound by Commercial Code standards in selling personal property.
14. A provision stating that the receiver and the parties may apply at
any time for further instructions.
15. A provision authorizing the receiver to open bank accounts.
16. A provision authorizing the receiver to collect rents, income,
17. A provision authorizing the receiver to compromise debts [CCP
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18. A provision authorizing the receiver to sell real or personal
property upon order of the court [CCP §568.5 (such sales are not
subject to redemption)].
19. A provision authorizing the receiver to avoid liens (general equity
receivership) [Commercial Code §9301].
20. A provision expressly stating that any obligation or liability
incurred by the receiver is solely in his official capacity and is to
be satisfied by receivership funds only.
21. The order, similar to a broad injunction, should be recorded in
every county where receivership estate real property is located.
22. The Proposed Order is the most important pleading because it
is the document which creates the parameters in which the
Receiver is ordered to operate. If an important provision is
missing from the order, a Receiver may be limited in its ability to
carry out his duties properly. (It must be noted that as a case
unravels it may be necessary from time to time to amend the
Receiver’s confirming order). The Confirming Order should be
drafted to anticipate the powers and instructions that the Receiver
may require. It is beneficial to have the proposed Receiver review
the order before it is filed. Also, issues such as filing of taxes,
authority to open cabinets, authority to change mailing address and
other minute details should be accounted for in the proposed order.
23. A Receiver’s ability to employ employee and professionals is
critical in many receiverships and the employment of such
professionals should be explicit in the Receiver’s Confirming
Order. A Receiver cannot employ an attorney without a specific
court order authorizing such employment. An application to
employ an attorney must be in writing and must state the necessity
for the employment, the name of the attorney, and that the attorney
is not the attorney for, is not associated with nor employed by an
attorney for any party to the action. (CRC §1904).
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j. Stay Orders
1. Common practice in general equity receivership brought on behalf
of a governmental agency, to obtain order staying any acts by
creditors against the receivership estate without leave of court.
These orders have been found constitutional. S.E.C. v. Wencke,
622 F.2d 1363 (9th Cir. 1980).
k. The Receiver and the Borrower’s Bankruptcy
Because of the dramatic effect which the appointment of a Receiver can have upon a
Borrower, it is not uncommon for the Borrower to attempt to eliminate the Receiver by the filing
of a bankruptcy. However, the creditor is entitled to request the Bankruptcy Court to excuse the
Receiver from compliance with 11 U.S.C. Sections 543(a) and 543(b)(1) and permit the Receiver
to continue to perform all the functions authorized by the Superior Court. See, Exhibit “B”.
FORECLOSURE OF REAL PROPERTY
A. Foreclosure Basics.
1. Judicial Foreclosure Overview.
In those situations in which a deficiency judgment is not prohibited by operation of law, a
deficiency judgment may be obtained by proceeding with a judicial foreclosure — that is, a
lawsuit seeking a court judgment that the encumbered property be sold at a foreclosure sale, that
the proceeds of the sale be applied to the secured debt, and that judgment be entered against the
debtor for any deficiency. In a judicial foreclosure, unlike a non-judicial foreclosure, the debtor
is entitled to credit for the net “fair value” of the property sold. In addition, unlike the situation
in a non-judicial foreclosure, the debtor has one year if a deficiency remains (three months if
there is no deficiency) to redeem the property — that is, to repurchase the property for the same
amount paid for the property at the foreclosure sale (including all costs of sale), plus interest.
The fair value application must be filed within three months of the date of the foreclosure sale.
Although there is no published case law on point in California at this time, a decertified decision
held that guarantors are entitled to the benefits of the fair value statute and that failure to include
guarantors in a fair value hearing may exonerate them from liability under their guaranties for
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2. Non-Judicial Foreclosure Overview.
Fundamentally, the non judicial foreclosure process is one that occurs in the absence of
court supervision. The right of non judicial foreclosure is created by contract between the
parties, generally by way of a power of sale in a Deed of Trust. The exercise of the power of
sale is regulated by statute, Civil Code §2924 et seq. The constitutionality of the non-judicial
foreclosure procedure was upheld by the California Supreme Court in Garfinkle v. Superior
Court (1978) 21 Cal.3d 268. By statute, the entire procedure can be completed in a minimum of
111 days. However, even the most expeditious foreclosure will run close to 120 days, which is
still generally much quicker than a judicial foreclosure. Unlike a judicial foreclosure, in a non
judicial foreclosure the debtor has no redemption rights following the foreclosure sale.
3. Judicial Foreclosure versus Non-Judicial Foreclosure.
a. Basic advantages of Judicial Foreclosure over Non-judicial Foreclosure:
1. The right to a deficiency judgment against the debtor is preserved;
2. Guarantors can be joined as defendants in the same lawsuit.
b. Basic advantages of Non-judicial Foreclosure over Judicial Foreclosure:
1. Non-judicial foreclosure is quicker and less expensive;
2. The debtor does not have a right of redemption.
4. Choice of Judicial or Non-Judicial Foreclosure.
a. A Lender’s decision to proceed with a judicial or non-judicial foreclosure
is generally contingent on the Lender’s desire for a deficiency judgment
against the Borrower. In deciding whether to pursue a deficiency claim,
the Lender must consider the following:
1. Whether the Loan provides for recourse liability.
2. The liability of third-party guarantors.
3. The Lender’s conduct and liability to the Borrower.
4. The current and anticipated future value of the property.
5. The Lender’s time constraints.
6. The time required to process a judicial foreclosure.
7. The Borrower’s statutory exemption rights.
8. The expense of a judicial foreclosure.
9. The Borrower or Guarantor’s ability to pay.
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10. The possibility and effect of a bankruptcy.
b. The two remedies, judicial and non judicial foreclosure, are not mutually
exclusive. Both remedies can be pursued at the same time, and no election
between them need be made until that remedy is concluded, i.e., sale under
the power of sale or judgment in the foreclosure action. With judicial
foreclosure, Guarantors can be joined as defendants in the same lawsuit.
c. Unlike a judicial foreclosure decree, which is also a decree of title, a non
judicial foreclosure proceeding does not result in a decree of title; title
may be an issue even after the foreclosure sale. The title a purchaser
receives at a Trustee’s sale entitles him to immediate possession, and an
unlawful detainer action may be brought on behalf of a purchaser at a
Trustee’s sale against the Trustor or anyone holding under him who
refuses to relinquish possession after the sale.
5. The One-Action and Security First Rules- CCP §726(a)
CCP §726 provides as follows:
“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 ... and the application of
the proceeds of the sale to the payment of ... the amount due plaintiff.”
A Lender’s only permitted remedy to recover a deficiency on a defaulted real property
secured loan is judicial foreclosure and subsequent deficiency judgment. A Lender may not elect
to waive its security and bring a simple money action to recover the debt, as is the law and
practice in many other U.S. jurisdictions. Furthermore, the Lender is prohibited from bringing
more than one action to exhaust the security, even if the security consists of multiple parcels of
1. If a Lender sues on the Note, ignoring the mandate to proceed first
against the security, the Borrower may assert §726(a) as an
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affirmative defense (Western Fuel Co. v. Sanford G. Lewald Co.
(1922) 190 Cal. 25) or may later in the action utilize §726(a) as a
sanction barring pursuit of the Lender’s other remedies (Walker v.
Community Bank (1974) 10 Cal.3d 729). The omission of some
security in the single foreclosure action may release the omitted
security from the lien of the Lender’s Deed of Trust (Walker,
2. What constitutes an “action?”
(a) A judicial foreclosure action on some but not all security –
YES (Walker, supra).
(b) Filing a cross-complaint for money damages in response to
a Borrower’s complaint –YES (Pitzel v. Maier Brewing Co.
(1912) 20 Cal.App. 737).
(c) Pre-judgment attachment of assets not pledged as security
for the debt for the decline in the value of the real property
security – NO (Code of Civil Procedure §483.012).
(d) A suit on the Note – YES (Kirkpatrick v. Westamerica
Bank (1998) 65 Cal.App 4th 982).
(e) Conducting a non-judicial Trustee’s foreclosure sale –NO
(Hatch v. Security-First Nat’1. Bank (1942) 19 Cal.2d 254).
Because this is an attempt to realize on the pledged
security, it does not violate the security-first principle.
(f) Filing a complaint, and entry of a default, without entry of
judgment – NO (In re Madigan (BAP 9th Cir. 1991) 122
(g) Offset and assertion of bankers liens – NO, but these steps
do violate the security first aspect of the rule (Sec. Pac.
Nat’ l. Bank v. Wozab (1990) 51 Cal.3d 991).
(h) Drawing on a Letter of Credit pledged as additional
collateral for the loan – NO (CCP §580.5).
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(i) Conducting a UCC sale of personal property pledged as
additional collateral for the loan – NO (UCC 9604).
(j) Actions not based on the obligation itself, such as Fraud,
Rent Skimming, Mistake, Waste or Environmental
Impairment – NO.
c. Sword or Shield.
1. Section 726(a) can be a shield when pled as an affirmative defense
to an action other than foreclosure. Failure to plead it as an
affirmative defense allows the Lender to obtain a money judgment
without first exhausting its security (Salter v. Ulrich (1943) 22
2. Over time, §726(a) has also developed into a sanction, a sword
wielded by a debtor who failed (or chose not) to plead the
(a) The sanction aspect of 726 may be activated when the
Lender obtains a judgment and has thereby made an
election of remedies, or other conduct a court may consider
to be an improper form of action or a form of multiple
(b) The extent of the sanction has gradually expanded. Older
decisions allowed the Lender to retain assets obtained
through a valid judgment where the Borrower failed to
plead §726(a) or non judicial offset, although in so
violating §726(a), the Lender loses its rights not included,
in the judgment (i.e., the security interest in property)
(c) In Wozab, supra several alternative sanctions are provided,
dependent on the parties’ behavior and intent. In Wozab,
the Lender had offset $3000 from the Borrower’s account,
and the Borrower claimed that this caused the forfeiture of
the Lender’s $1,000,000 loan. The decision suggests that if
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the Lender’s improper action were “inadvertent” and if the
funds were restored to the Borrower’s account promptly,
then the appropriate sanction would be interest and special
damages on the offset amount for the period before
restoration. However, if the offset is deliberate or the funds
are not promptly restored, then the appropriate sanction is
expanded to include loss of both the security and, if the
Borrower demands return of the offset funds, the entire
d. Special Protections.
(a) Generally, the one-action rule cannot be waived in
connection with the making or renewal of a loan. Civ. C.
(b) A deed in lieu of foreclosure delivered at the time of the
making of the loan is deemed an invalid disguised waiver
(Hamud v. Hawthorne (1959) 52 Cal.2d 78).
(c) The power of sale provision in a Deed of Trust is clearly
intended as a waiver of the requirements of §726(a), but it
has always been permitted, probably because the security
first principle is honored and because the Borrower is not
subject to further actions.
(d) Whether waivers in a workout agreement are considered to
be made in connection with the making or renewal of a
loan is an open question. A loan modification or extension
could be considered a renewal, especially if there are
changes in loan amounts or interest or maturity. If the
workout is strictly a “forbearance,” where no loan terms are
modified, waivers of the one-action rule might be found to
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6. Anti-Deficiency Rules.
a. Following Non-Judicial Foreclosure - CCP §580d
CCP 580d provides as follows:
“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.”
CCP §580d is a true anti-deficiency statute. It provides that after a non judicial
foreclosure sale there can be no action for a deficiency judgment against the Borrower. This
statute applies to any type of loan secured by real property, However, this section may not be
applicable to loans issued or guaranteed by Federal agencies such as the Veterans
Administration, Small Business Administration or Federal Housing Authority.
As stated above, a non-judicial foreclosure will also bar any deficiency against any
guarantors of the obligation unless the guarantee includes specific and comprehensive “Gradsky”
waivers. Union Bank v. Gradsky (1968) 265 Cal.App.2d 40, 71 Cal. Rptr. 64.
By case law, Borrower fraud or waste are exceptions to application of §580d. Section
580d has been held not to be a bar to recovery against third party non-borrowers for fraud.
If the foreclosure (judicial or non judicial) of a senior lien wipes out a junior lienholder,
the sold-out junior can sue directly on the note evidencing the debt. Note, however, that this
exception does not apply to purchase money notes. A junior lienholder can be the successful
bidder at the foreclosure of the senior lien and still sue on its note. However, if the junior
purchases the property at the senior lienholder’s foreclosure, the junior must file its complaint
within three months of the sale. Citrus State Bank v. McKendrick (1989) 215 Cal.App. 3rd 941.
If the debt is secured by multiple parcels of real property and the creditor forecloses non
judicially pursuant to a power of sale against any one parcel, the right to obtain a deficiency
judgment against that debtor on any of the secured parcels forever will be waived. However, the
creditor can still foreclose and sell the other parcels pursuant to a power of sale.
The protections afforded by CCP 580d cannot be waived at the time of loan origination.
Although there was at one time authority to the effect that the anti-deficiency rules could be
waived in connection with the workout of a defaulted loan, DeBerard Properties v. Lim (1999)
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20 Cal.4th 659, has settled that issue in favor of Borrowers. Lenders should act under the
assumption that any purported waiver of the anti-deficiency rules is invalid.
b. Purchase Money Loans-CCP §580b
CCP 580b provides as follows:
“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
CCP §580b is not connected to the Lender’s election to conduct a non-judicial or judicial
foreclosure. Rather this statute prevents personal liability on two classes of debt as specified by
statute case law.
First, there is no deficiency judgment allowed on a purchase money loan for residential
property of I to 4 units in which the Borrower occupies at least one unit. Thus, §580b does not
apply to refinanced loans, or home equity loans or lines of credit or loans for more than 4 units.
Second, no deficiency judgment is allowed on a seller carry back loan representing part
of the purchase price regardless of the type of property involved. As such even commercial
loans, apartment building loans, and loans on unimproved land are covered by §580b.
A fruitful source of litigation is the issue of what constitutes a purchase money
transaction. Simply put, if a loan or transaction does not support the purpose of Section 580b,
the anti-deficiency protections of the statute will not apply. Transactions not subject to Section
580b include the following:
1. A claim against the guarantor of a purchase money note.
2. A claim for payment on a letter of credit provided as additional
collateral for a purchase money note.
3. Multiple non-judicial foreclosures of non-purchase money notes.
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4. An action to enforce payment of an unsecured note given in
connection with the note holder’s sale of property to the Borrower.
5. A seller of land who subordinates his or her security interest in
favor of a construction lender.
The California appellate courts have held that the term “purchase price” includes any
loans made by a creditor to construct a residence on the real property. For example, if the
customer purchased unimproved real property and, some time later, obtained a loan secured by a
trust deed on the property to construct a dwelling (which he or she then occupied) on the
property, the loan would probably be subject to the antideficiency prohibitions of section 580b.
c. Conflict of Laws
The antideficiency rules have mixed applications where the real property and/or
Borrower are not both in California.
1. A foreclosure, judicial or non-judicial, is an in rem proceeding
subject to the procedural laws of the situs of the real property.
Real property not located in California is not subject to
California’s one-action rule [CCP §726]. In such a case, the note
holder may sue the Borrower of the note in California without first
foreclosing on the out of state security. However, an action on the
note is an in personam proceeding subject to the law of the state
where the action against the debtor or guarantor is filed. Thus, a
California deficiency judgment may be prohibited under either
CCP §580d or §580b, as applicable, if the transaction has sufficient
contacts with California or if the loan documents provide for the
application of California law. Kish v. Bay Counties Title Guar.
Co. (1967) 254 Cal.App.2d 725, 62 Cal.Rptr. 494; Consolidated
Capital Income Trust v. Khaloghli (1986) 183 Cal.App.3d 107,
227 Cal.Rptr. 879. Where the loan documents provide for the
application of another state’s law, then CCP §580b may not apply
even if California property is involved. [Kish, supra &
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2. A California debtor has no protection where a foreign deficiency or
money judgment may be entitled to full faith and credit even if a
California court would not have entered such a judgment. See
Stuart v. Lilves (1989) 210 Cal.App.3d 1215, 258 Cal.Rptr. 780.
3. A money judgment entered in another state against a debtor
personally sued in that state, should be valid in California even
though such judgment may release the California security under
CCP §726(a). Ould v. Stoddard (1880) 54 Cal. 613. If California
real property is first foreclosed by private sale against a debtor who
resides in another state, a subsequent deficiency judgment rendered
in such other state may be valid even though CCP §580d would bar
such relief in California. Kerivan v. Title Ins. & Trust Co. (1983)
147 Cal.App.3d 225; 195 Cal.Rptr. 53; United Bank v. K & W
Trucking Co. (1983) 147 Cal.App.3d 217, 195 Cal.Rptr. 49.
4. At the time the Borrower executes the security instrument and loan
documents, the statutory provision prohibiting a deficiency
judgment after a foreclosure sale cannot be waived. However,
such a provision may be waived by the Borrower subsequently in a
separate document supported by separate consideration. [CC
§3513; Freedland v. Greco (1955) 45 Cal.2d 462,189 P.2d 463;
Morello v. Metzanbaum (1944) 25 CaL2d 494, 154 P.2d 670]
d. Fair Value-CCP §726 (b), CCP §580a
1. When the Lender seeks a deficiency judgment, or money judgment
representing the difference between the debt and the proceeds of
the foreclosure sale, the Lender must demonstrate the fair value of
the property as of the date of the foreclosure sale. The Lender may
recover no more than the difference between the amount of the
debt and the property’s fair value or credit bid, whichever is
(a) The Lender must bring its action or application for a
determination of deficiency within three months of the date
BN 3711403v1 -29-
of foreclosure. This time limit is considered a statute of
limitations from which no relief may be granted. Life
Savings Bank v. Wilhelm (2000) 84 Cal.App.4th 174.
(b) The court may appoint a probate referee to appraise the
property as of the time of sale. The referee may be called
and examined as a witness.
2. The purpose of the fair value limitations is to require the Lender to
exhaust the security before seeking a deficiency and to induce the
Lender to obtain fair market bids at the foreclosure sale.
3. The fair value limitation applies following judicial foreclosure. It
does not apply to a non judicial foreclosure sale which, in any
event, precludes a deficiency judgment under section 580d.
4. Mixed Collateral
(a) California Commercial Code §9604 (formerly 9501)
governs foreclosure on mixed collateral (a security interest
in both real property and personal property).
(b) A determination of fair value is not required upon the
foreclosure of a personal property lien. However, in a
judicial foreclosure of mixed collateral (a “unified” sale),
the personal property is subject to the fair value limitation.
(c) The three-month limitations period does not apply when the
debt is secured by both real property and personal property.
Florio v. Lau (1998) 68 Cal.App.4th 637. This is because
the Commercial Code sets no time limit for seeking a
deficiency judgment after foreclosure of personal property
security, and the court cannot determine the amount of a
deficiency until all collateral is sold.
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7. Guarantor Liability
a. Promise to Answer for the Debt of Another (Civ. C. §2787)
1. A guarantor who is the spouse of the Borrower whose separate
property is pledged to secure a debt is liable on the guaranty, even
if the loan is used to pay community debts.
2. A guarantor who was an undisclosed principal in a purchase and
purchase money loan transaction is entitled to anti-deficiency
3. A guarantor who is a general partner of the partnership’s
obligations is entitled to antideficiency protection since the
guarantor is personally liable for the obligations of the partnership.
4. A guarantor who is a shareholder of Borrower corporation
(member of LLC) is liable on the guaranty, unless the corporation
is a sham or the alter ego of the Borrower. Then, the guarantor is
the Borrower and is entitled to anti-deficiency protections.
“Sham” is a question of fact; if the Lender induces the creation of
the entity and ignores its financial condition, the entity may be
found to be the guarantor’s alter ego (River Bank America v. Diller
(1995) 38 Cal.App.4th 1400).
5. An affiliate of Borrower which executes a master lease of the
secured property may be considered a guarantor (4 Miller & Starr,
California Real Estate, §10:263, p. 813).
6. A guarantor who is Trustor, Trustee and Beneficiary of a revocable
intervivos trust which pledges its real property as security for its
debts is in effect the principal obligor and is entitled to anti-
deficiency protection (Torre Pines Bank v. Hoffman (1991) 231
Cal.App.3d 308). However, if the trust is a separate legal entity,
an independent Trustee has no personal obligation for the trust’s
debts, and the Trustee which guaranties such a debt is liable on the
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Caveat: Guarantor’s are now attempting to expand this
doctrine to a guaranty of their limited liability companies.
b. Deficiency Judgments
1. After a judicial foreclosure sale in which the Guarantor was a
named party, the Lender is not restricted by CCP §580d and may
pursue a deficiency against the Borrower or the Guarantor. Name
the Guarantor in the action for judicial foreclosure to avoid
exoneration of the Guarantor.
2. After a non-judicial Trustee’s foreclosure sale, the Lender may be
estopped from proceeding against the Guarantor because the
Borrower has a §580d defense against both the Lender and the
Guarantor in an action for subrogation. Since the Lender elected a
course which destroys the Guarantor’s subrogation rights and
exhausts the security, the Lender may not pursue the Guarantor
who has no possibility of reimbursement either from the Borrower
or the security (Union Bank v. Gradsky (1968) 265 Cal.App.2d
40). However, if the Guarantor effectively waives its subrogation
rights, the Lender may proceed against the Guarantor after a non
judicial foreclosure. Although the courts have repeatedly
confirmed that subrogation rights may be waived, they have just as
consistently found one reason or another why each waiver being
considered was not effective. See Gradsky, supra (the court will
not strain to find a waiver); Cathay Bank v. Lee (1993) 14
Cal.App.4th 1552 and RTC v. Titan Fin. Corp. (9th Cir., 1994) 22
F.3d 923 (waiver “of any defense arising out of the loss of any
right of reimbursement or subrogation” did not sufficiently
describe the Gradsky defense being waived); Mariners Sav. &
Loan Ass’n. v. Neff (1971) 22 Cal.App.3d 232 (waiver of fair value
defense effective, but failure of the Lender to tender the loan to the
Guarantor precludes action against the Guarantor).
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3. Civ. C. §2856 broadly endorses a Guarantor’s ability to waive (and
rejects judicial requirements that any particular language must be
included) all of a Guarantor’s statutory and judicial rights of
subrogation, reimbursement, indemnification, contribution,
election of remedies, rights and defenses under CCP Sacs. 580a,
580b, 580d and 726. §§2856(c) and (d) provide form for effective
waiver of the election of remedies defense.
c. Fair Value Limitations
Because of the rule that the Guarantor’s obligations cannot exceed those of the principal
Borrower (Civ. C. 2809), the Lender’s claims against the Guarantor may be limited by the fair
value defense (and by procedural requirements in connection therewith). This defense has not
been fully decided by the courts.
d. Purchase Money Rules
Neither the Legislature nor the Supreme Court has directly addressed whether Guarantors
are protected by the deficiency limitation of §580b, and a number of appellate courts and the 9th
Circuit have ruled that a Guarantor is not. See, e.g., Katz v. Haskell (1961) 196 Cal.App.2d 144;
Paradise Land & Cattle Co. v. McWilliams Ents. (9th Cir., 1992) 959 F.2d 1463). However,
given the Gradsky decision, there seems little rationale to permit Guarantors to be liable for a
deficiency in a purchase money case, when the Borrower has no personal obligation to be
e. Guarantor Defenses
1. One-Action Defense
(a) Unsecured Guaranty
Highly suspect older case law holds that a guarantor may
be sued directly on an unsecured guaranty before any effort
is made to exhaust the principal security for the debt. Most
commentators agree that with the abolition of the
distinction between sureties and guarantors, guarantors
gained the protection of the one-action rule, i.e., (unless the
guarantor knowingly waives the defense), no separate
action may be brought to enforce a guaranty prior to
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foreclosure. See Calif. Mortgage and Deed of Trust
Practice, supra, at §9.92.
(b) Secured Guaranty
Where a Deed of Trust is given to secure a Guaranty, the
Guarantor is entitled to the defense of the one-action rule
(Indusco Mgmt. Corp. v. Robertson (1974) 40 Cal.App.3d
456). If the Guaranty is secured by personal property, then
there is no requirement to proceed first against the secured
(c) Exoneration via Gradsky
Absent the appropriate waivers, a Lender cannot proceed
against a guarantor following the non-judicial foreclosure
of a deed of trust. The basis for this rule is that, by
foreclosing non-judicially, the Lender has destroyed the
guarantor’s subrogation rights and is therefore estopped
from pursuing its claims. Union Bank v. Gradsky (1968)
265 Cal.App.2d 40.
Unlike the primary obligor, guarantors can waive anti-
deficiency and one-action protections. Pursuant to Civil
Code §2856, a guarantor can waive all suretyship defenses
including any defense based on an election of remedies
(i.e., judicial v. non judicial foreclosure). The statute
makes clear that a waiver need not contain specific terms.
However, the statute contains form language that should be
used by the Lender whenever possible.
f. Alter Ego Defenses/Sham Guarantees
To avoid manipulation of the transaction so as to avoid the negative affect of Sections
726 and 580d, the courts have made clear that Lender efforts to create recourse liability where
none exists will not be condoned. As a result, the courts will not permit a deficiency should the
court determine that the guarantor is, in fact, the primary obligor. Likewise, a guarantor may
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assert anti-deficiency protection in situations where the guarantor is the “alter ego” of the
principal obligor. Alter ego situations include the following:
1. Guarantor is general partner of partnership debtor.
2. Guarantor is sole shareholder of Shell Corporation.
In the event of doubt as to a guarantor’s status, the Lender should proceed via a judicial
B. Mechanics Of Judicial And Non-Judicial Foreclosures.
1. Judicial Foreclosures
As noted, judicial foreclosure is a process by which the court supervises a Lender’s
enforcement of its lien on a property for repayment of a debt. A judgment ordering the sale of
the property is obtained, the property is sold and the proceeds from the sale are then applied to
the debt. A deficiency judgment may be obtained if the proceeds from the property’s sale are
insufficient to satisfy the Borrower’s indebtedness. The purposes of a judicial foreclosure are to
establish that the Deed of Trust being foreclosed is valid, foreclose any junior interests or liens,
prioritize any claims, and determine the deficiency owed. These actions are equitable in nature
and equitable principles apply. Kirkpatrick v. Stelling, 36 Cal.App.2d 658 (1940). Thus, even if
there is the potential that a deficiency judgment will be levied against the Borrower, there is no
right to a jury trial. Downing v. Le Du, 82 Cal. 471,472-73 (1890); Van Valkenburgh v. Oldham,
12 Cal.App. 572 (1910) (relying on Downing, supra). California Code of Civil Procedure
§§725a -730.5 and California Civil Code §§2947, et seq., govern judicial foreclosure actions.
The customary steps in the judicial foreclosure process are as follows:
a. Filing Complaint.
b. Recording lis pendens.
c. Serving summons and complaint on defendants.
e. Entry of judgment of foreclosure and order of Sale.
f. Obtaining writ of sale.
g. Conducting sale.
h. Issuance of deed of sale or, if post-sale redemption rights exist, the
issuance of a certificate of sale.
i. Filing of levying officer’s accounting.
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j. If the property is not redeemed, a deed of sale will be issued.
2. Non-Judicial Trustee Sales
The right of non-judicial foreclosure is created by contract between the parties, generally
by way of a power of sale in a Deed of Trust. The exercise of the power of sale is regulated by
statute, Civil Code §2924 et seq. The constitutionality of the non-judicial foreclosure procedure
was upheld by the California Supreme Court in Garfinkle v. Superior Court (1978) 21 Cal.3d
268. By statute, the entire procedure can be completed in a minimum of 111 days. However,
even the most expeditious foreclosure will runt close to 120 days.
a. Non-Judicial Foreclosure Process
1. Beneficiary Instruction Letter/Request for Default. Usually the
Beneficiary will make a written demand on the Trustee to
commence a foreclosure through instructions or a request for
default to the Trustee. This demand will include the loan status
(i.e. unpaid principal balance, note interest rate, due date under the
note, type of breach, any advances, amount of monthly payment if
applicable, amount of monthly late charge if applicable), the
common address of the property, the address of the Borrower if
different than the property, the social security number of the
Borrower if known, and the name under which the Beneficiary
wants to foreclose. Delivery of the demand to the Trustee usually
includes a copy of the note, Deed of Trust, any applicable
assignments, and the Lender’s title policy.
2. Substitution of Trustee
The Beneficiary substitutes the foreclosure Trustee in place of the
named Trustee in the Deed of Trust. The Deed of Trust contains a
provision for substituting the Trustee. The statutory provision
concerning substitutions of Trustee is contained in CC §2924a.
The code section applies when the Deed of Trust confers no other
obligations on the Trustee other than those incidental to exercise
the power of sale. Otherwise, the Deed of Trust provisions control.
3. Notice of Default Recorded
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The foreclosure process commences with the recordation of
a notice of default [CC §2924]. The notice must identify the
mortgage or Deed of Trust by stating the name or names of the
Trustor(s) and give the recording information where the security
deed can be found in the public records. The notice must be
recorded in the county in which the property is located. The notice
must fully and accurately describe the nature of the breach. A
suggested form to use is set forth in the code. [CC §§2924,
2924c(b)(1)] There is a three month waiting period after
recordation of the notice. A foreclosure based on a defective
notice of default is invalid. Anderson v. Heart Federal Sav. &
Loan Assn. (1989) 208 Cal.App.3d 202, 256 C.R. 180. A new
notice of default may be recorded to correct a mistake, or
perceived mistake, in a notice of default. An action based on a
mistake in the notice of default will not necessarily result in
invalidation of the foreclosure. The test is whether the Borrower
was misled or prejudiced by the mistake. This is decided on a case
by case basis. Importantly, a Lender can foreclose only for the
defaults described in the notice of default. If the listed defaults are
waived, the notice of default must be rescinded. The Lender may
not proceed with other known but unlisted defaults.
Within 10 days of recording the notice, copies of the notice
must be mailed to the Trustor(s) and to all persons who have
recorded a Request For Notice. [§2924(b)(1)] These must be
mailed by both regular mail and registered or certified mail return
receipt. A certificate of mailing is prepared and kept by the
Within 30 days of the recordation of the notice, copies of
the notice must be mailed to all junior lienholders of record and
other parties as specified in CC §2924b(c). These must be mailed
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by both regular mail and registered or certified mail return receipt.
A certificate of mailing is prepared and kept by the Trustee.
If the Deed of Trust does not contain a request for notice
and corresponding mailing address, Civil Code §2924b(d) requires
the Notice of Default to be published or personally served.
Publication must be once a week for four successive weeks in a
publication of general circulation in the county in which the
property is located. The first publication must be within ten
business days after the notice of default is recorded. Personal
service must be within ten business days after the notice of default
is recorded or prior to completion of the publication of the notice,
or by posting the notice on the property in a conspicuous place and
mailing a copy to the last known address of the Borrower. CC
If the Trustor is deceased, the administrator/executor of the
estate “essentially becomes the Trustor” and is entitled to receive a
CC §2924b(b) notice. Where the Trustee is put on inquiry notice
of the death through a Trustee Sale Guarantee or other means,
notice should be given to the estate representative. Estates of Yates
(1994) 25 Cal.App.4th 511; 32 Cal.Rptr.2d 53. Under the holding
of Yates, it is prudent for the Trustee to obtain the actual address of
the estate representative from the public records to avoid an attack
on the foreclosure sale. A Trustee is to follow the express
statutory requirements in giving notice I.E. Associates v. Safeco
Title Inc. Co. (1985) 39 Cal.3d 281; 216 Cal.Rptr. 438 but cannot
ignore actual knowledge of other addresses to which to serve the
Notice of Default.
4. Notice of Sale
The sale date may be set at the end of the three calendar
month period following recordation of the Notice of Default. The
contents of the Notice of Sale including the required special
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statement and the type size are proscribed by statute. [CC §2924f]
The Notice of Sale is published once a week for three weeks prior
to the sale and posted in a public place in the county in which the
property is located and at the property to be sold. [CC §2924f(b)]
The first publication and the posting must be at least 20 days prior
to the sale. Proof of publication is issued by the newspaper and a
certificate of posting is issued by the poster. The notice of sale is
also mailed to all parties entitled to receive the Notice of Default
and any new parties who have recorded an interest on the property
since the Notice of Default. The notice of sale is also mailed by
both regular mail and registered or certified mail return receipt. A
certificate of mailing is prepared and kept by the Trustee. The
Notice of Sale is recorded at least 14 days prior to the sale. [CC
§§2924b and 2924f(b)] The foreclosure sale may be conducted
any time after the 20 day notice period.
IRS Liens and Notice: There is no statutory requirement to
give notice to the Internal Revenue Service when the IRS has
placed a junior tax lien on the property. If such notice is not given
to the IRS, the purchaser of the property at the foreclosure sale
takes the property subject to the tax lien. If a junior federal tax lien
is properly recorded, the Trustee will usually give notice as
required by federal law in order to terminate the lien. [26 U.S.C.A.
§7425(b)(1), (c)(1)] If the federal tax lien is recorded at least 30
days prior to the foreclosure sale, the Notice of Sale must also be
served on the local District Director (Chief, Special Procedures
Section) of the IRS at least 25 days prior to the sale in order to
terminate the lien. [IRC §7425(c)(1)] The contents of the notice
of sale to the IRS are proscribed by IRC §7425(c). Whether or not
the federal tax lien is extinguished by the foreclosure sale, the IRS
has 120 days to redeem the property after either a judicial or non
judicial foreclosure sale. [26 U.S.C.A. §7425(b), (d)] To redeem,
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the IRS must pay the amount paid by the purchaser at the sale plus
interest and expenses to the date of redemption, plus any amounts
paid to a senior lienholder, less any rent received or the value of
the buyer’s use of the premises. [26 U.S.C.A. §7425(d)(2); 28
U.S.C.A. §2410(d); 26 CFR §301.7425-4(b)(1)(iv)] If redeemed,
the IRS receives full title to the property as if it had bought the
property at the foreclosure sale. [26 U.S.C.A. §7425(d)(3)(C)]
This means that the title is not subject to any liens that may have
attached after the foreclosure sale. Olympic Federal Sav. & Loan
Ass’n v. Regan (9th Cir. 1981) 648 F.2d 1218. The IRS may
redeem the entire real property sold at the foreclosure sale even if
the recorded IRS lien was only against a joint tenant record owner
in the real property. See Vardanega v. Internal Revenue Service
(9th Cir. 1999) 170 F.3d 1184.
Just prior to the publication of the notice of sale, the
Trustee usually orders a “date down” of the Trustee Sale Guarantee
from the title company to determine whether additional notices or
liens have been recorded against the property. If an IRS lien is
found, the foreclosure sale is set at least 31 days out in order to
provide time to comply with the notice requirements to the IRS.
Since title companies usually except IRS liens from coverage, title
is effectively not marketable during the redemption period.
California Postponed Property Tax Lien: The State
Controller must be given notice of the foreclosure sale for any lien
that has priority over a recorded State of California lien for
postponed property taxes under the Senior Citizens and Disabled
Citizens Property Tax Postponement Law of 1977 (R&TC
§§20581-20586). If the state lien was recorded at least 30 days
prior to the sale date, the Controller must be given at least 25 days
notice prior to the sale. [Govt. Code §15187(b)]. As above, if the
“date down” of the Trustee Sale Guarantee just prior to publication
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picks up a property tax lien, the sale is set far enough out to give
the property notice to the State Controller.
5. Foreclosure Sale
The sale must be held in the county where the property, or
some part of it, is located between the hours of 9:00 a.m. and 5:00
p.m. on any business day, Monday through Friday. It must be by
public auction. [CC §2924g(a)] The sale is complete when the
Trustee accepts the last and highest bid. [CC §§2924g(a) &
Civil Code §2924h(g) permits the auctioneer to declare that
the property is being sold “as is”. However in Karoutas v.
HomeFed Bank (1991) 232 Cal.App.3d 767; 283 Cal.Rptr. 809, the
court held that a foreclosing Lender with actual knowledge of facts
materially affecting the value of the property has a common law
duty to disclose those facts to prospective bidders at the Trustee’s
Upon acceptance of the final bid, the sale is completed and
the Trustor’s right of the equity of redemption is terminated.
Under Civil Code §2924h(c) the sale is 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.
Prior to the sale the Lender must submit bidding
instructions and total debt to the Trustee. Bidding less than the full
amount owed may avoid full credit bid prohibitions and have other
potential advantages if:
The obligation is secured by other additional collateral or
Insurance or condemnation proceeds are available;
A receiver is holding accumulated rents and profits;
There is a desire to reduce the amount realized for income
tax purposes by excluding unpaid interest from the bid.
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The sale may be postponed anytime prior to completion.
The Trustee may postpone the sale at its own discretion or on
instructions from the Beneficiary. [CC §2024g(1)] The sale may
be postponed up to one year without having to repeat the Notice of
If the sale is postponed, no new notice must be given to the
Trustor. The future date, place, and time just must be “cried” or
announced along with the reason for the postponement at the time
and location for the specified sale. [CC §2924g(a)] If the sale is
postponed due to a bankruptcy or other injunction, the new sale
cannot be held sooner than 7 calendar days after the dismissal of
the action, or expiration or termination of the injunction, order, or
stay, whichever is earlier, unless the court orders otherwise. [CC
§2924g(d)] A bankruptcy relief from stay order made in
accordance with Rule 4001(a)(1) stays the sale until the expiration
of 10 days after the entry of the order, unless the court orders
otherwise. In effect, a sale may have to be postponed 17 days after
the entry of a bankruptcy order allowing the sale to go forward. To
avoid this delay, or a resulting challenge to the foreclosure sale if
the sale is not postponed 17 days, request a waiver of Rule
4001(a)(1) in the bankruptcy relief from stay motion and
Once the sale is completed and the Trustee’s Deed
recorded, the foreclosure process has been completed.
b. Title Insurance
1. Trustee Sale Guarantee
At the inception of a foreclosure a Trustee Sale Guarantee should be purchased from the
title company. This policy assures the identity of (1) the vested owner of the property and (2) the
parties entitled to receive statutory notices during the foreclosure process. If the guarantee
shows the Lender’s Deed of Trust in a position different than the Lender intends (i.e. first
priority Lender shown in second or third priority), this can often be corrected by providing a
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copy of the loan origination title policy to the title company issuing the Trustee Sale Guarantee,
provided the Lender is in the correct position on the loan origination policy.
The guarantee also gives assurances on,
(a) The name of the vested owner(s) of the property.
(b) The names and address disclosed of record of person who
have recorded requests under CC §2924b(a), (d) to receive
a copy of a notice of default and sale.
(c) The names and address disclosed of record of persons who
are otherwise entitled to receive notice under CC
(d) The names and addresses of the taxing agencies that are
entitled to receive notice under CC §2924b(c)(2)(F).
(e) The city or judicial district where the land is located in
order to find a newspaper qualified to publish notice under
CC §2924f usually the guarantee gives the name of one or
more publications to use.
2. Post Sale Title Policy
If at the foreclosure sale the property reverts to the foreclosing lender, obtaining a new
owner’s policy should be considered. The foreclosure sale itself is not covered by the original
Lender’s policy. Any equity in the property in excess of the principal amount of the Lender’s
loan is unprotected by the original Lender’s policy. Factors to consider are (1) loan to value
ratio, and (2) the differences in the measure of damages between the Lender’s and the owner’s
The ALTA Lender’s policy protects the Beneficiary up to the foreclosure sale but would
not continue to cover the Lender as an owner of the property if the property were to revert to the
Lender at the foreclosure sale. Also the measure of damages in the Lender’s policy is more
limited than in an owner’s policy. If a Lender intends to resell the property, from a cost and
sales standpoint, it is often advisable at least to obtain an owner’s binder.
The right of reinstatement is the right to terminate the foreclosure process by curing the
default. For a default that is curable by a monetary payment, the Trustor has certain
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reinstatement rights by virtue of CC §2924c. The Trustor may reinstate any installment
obligation by (a) paying the missed installments and allowable costs and/or (b) curing other
defaults as required under the Deed of Trust and permitted by statute.
Under CC §2924c(a)(1), the reinstatement remedy is available to:
1. The Trustor;
2. The Trustor’s successors; and
3. Anyone holding a subordinate lien or encumbrance of record on
Reinstatement is allowed up to five business days before sale at which time the Lender
may demand full payoff. [CC §2924c(e)]. If the sale is postponed or renoticed to a date more
than five business days beyond the scheduled date, the reinstatement period is automatically
extended. Within five business days of the sale, a Lender does not have to accept reinstatement
but the foreclosure sale may be avoided by paying off the loan.
A Trustor may reinstate under CC §2924c(a) by (1) tendering to the Lender the amount
stated in the notice of default plus reasonable costs and expenses under CC §2924c(c), Trustee’s
and attorney’s fees under CC §2924c(d), and (2) offering to cure additional defaults such as
recurring obligations. Usually a Trustor obtains a reinstatement quote prior to tendering
If the loan is reinstated, the Lender is required to cause the Trustee to record a rescission
of the notice of default. [CC §2924c(a)(2)] if the loan is paid off; the Borrower is entitled to a
reconveyance. [CC §§2939, 2941]
d. Possession and Proceeds
The successful bidder at the foreclosure sale is entitled to
possession of the property. Farris v. Pacific States Aux Corp.
(1935) 4 Cal.2d 103. If the property is occupied, the unlawful
detainer (eviction) process must be followed. A Trustor who
remains in possession after the foreclosure sale is subject to an
immediate unlawful detainer action. [CCP §1161a] Any lease
executed after the Deed of Trust on which the property foreclosure
is conducted is extinguished by the foreclosure and any tenants in
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possession under such a lease are subject to an immediate unlawful
detainer action. [CCP §1161a] The foreclosure sale should also
extinguish any unrecorded lease exceeding one year executed prior
to recordation of the Deed of Trust on which the foreclosure is
based. (See CC §1214) However, if the lease is executed and
recorded prior to the Deed of Trust on which the property
foreclosure is conducted, the successful foreclosure bidder takes
subject to such lease absent subordination of the lease to the lien of
the Deed of Trust. In such case, the successful bidder cannot evict
the tenant and the tenant cannot terminate its obligations under the
lease. Calidino Hotel Co. of San Bernardino v. Bank of Am. Nat’l
Trust & Sav. Ass’n (1939) 31 Cal.App.2d 295, 87 P.2d 923.
The foreclosing Lender may credit bid the amount owed to
it. If the property reverts to the foreclosing lender, there are no
proceeds from the sale to distribute.
Civil Code §2924h(b) prescribes the forms of payment that
may tendered at the foreclosure sale by third parties. The purchase
price may be in the form of cash, a cashier’s check drawn on any
state or national bank, a check drawn by a state or federal credit
union, or a check drawn by a state or federal savings and loan
association, savings association, or savings bank authorized to do
business in California, or a “cash equivalent” that has been
designated as acceptable in the notice of sale. The notice of sale
usually designates the sale for cash payable at the time of the
foreclosure sale. A Trustee cannot reject negotiable cashier’s
checks payable to the bidder which can be endorsed to the Trustee.
Baron v. Colonial Mortgage Service Co. (1980) 111 Cal.App.3d
316,168 Cal.Rptr. 450. The Trustee does have the discretion to
accept payment in some form other than cash or its equivalent even
where the notice of sale designates the sale for cash. Py v.
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Pleitmer (1945) 70 Cal.App.2d 576, 161 P.2d 393 [Trustee
accepted promissory note]; Nomellini Const. Co. v. Modesto Say.
& Loan Ass’n (1969) 275 Cal.App.2d 114, 79 CR 717.
If the sale results in proceeds being given to the Trustee,
the proceeds of sale are to distributed in the following order [CC
(a) Costs and expenses of exercising the power of sale and of
(b) Payment of the obligations secured by the Deed of Trust
which is the subject of the foreclosure sale;
(c) Payment of obligations secured by junior liens or
encumbrances in order of their priority; and
(d) To the Trustor or the Trustor’s successors in interest.
If there are excess proceeds and the order of priority cannot
be determined, the Trustee is to give notice to those possibly
entitled to proceeds unless the Trustee immediately files an
interpleader action. This notice is to be given within 30 days of
execution of the Trustee’s deed. [CC §2924j] If there is no
resolution of the priority for distribution within 90 days after
giving this notice, the Trustee may deposit the proceeds into the
court and the court will decide the distribution from the claims
made by the competing claimants. One of two procedures may be
selected by the Trustee: (a) application to the court to use the
deposit and summary procedure under CC §2924j(c)-(d); or (b) an
interpleader action CC §2924j(e).
C. Debt Secured by a Combination of Real and Personal Property.
When the debt is secured by a combination of real and personal property, the legal issues
regarding foreclosure are extremely complex. Proceeding without careful thought against one
piece of collateral may result in a waiver of the right to a deficiency judgment or a waiver of the
other items of security. Alternative courses of action are discussed below. Creditors should
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consult the leading case on this issue, Walker v. Community Bank (1974) 10 Cal.3d 729 and
Commercial Code, section 9601.
1. Non-judicial Foreclosure of Real Property First. If the creditor proceeds to sell
the real property security under the power-of-sale provision of the trust deed, the
creditor will waive any right the creditor may otherwise have to a deficiency
judgment. This procedure should not be followed unless it is clear that the
security is sufficient to satisfy the obligation or there is no reason to pursue a
2. Simultaneous Judicial Foreclosure of Personal and Real Property. Another
alternative is to proceed to foreclose on the debtor’s rights to the personal
property collateral and judicially foreclose on the real property security in the
same legal proceeding, and simultaneously obtain a judgment for any deficiency
(provided that such a deficiency judgment is not barred by the antideficiency
legislation). Such a course of conduct may be advisable when a writ of
possession is required to obtain possession of the personal property collateral.
(See the discussion on writs of possession in earlier sections of these materials.)
3. Proceeding Against Guarantors Only. Another alternative is to proceed directly
against any guarantor and delay foreclosure proceedings on the security provided
by the primary debtor. Of course, this situation may be more complicated if the
guarantor has also provided the creditor with personal property security.
4. The Sale of Personal Property Collateral First. Another alternative is to repossess
and sell the personal property collateral in the manner required by the
Commercial Code (or the Rees-Levering Act) in order to preserve the creditor
right to a deficiency judgment. After such sale, the creditor will be in a position
to determine whether the value of the real property security is sufficient to satisfy
the balance of the debt. If so, the creditor may proceed to foreclose on the real
property under the power-of-sale clause in the trust deed. If there is likely to be a
deficiency after foreclosure on the real property, the creditor may consider
proceeding instead by judicial foreclosure.
However, if the creditor does use this approach, the debtor may claim that
the creditor sale of the collateral was not “commercially reasonable” in an attempt
BN 3711403v1 -47-
to enjoin foreclosure on the real property security or to defend against any lawsuit
the creditor may file on the debt.
5. Applicability of the Antideficiency Legislation to Real and Personal Property.
The antideficiency legislation applies to any obligation secured by a trust deed on
real property, whether or not the obligation is also secured by personal property
collateral. Accordingly, if the antideficiency legislation prohibits the obtaining of
a deficiency judgment against the debtor on a debt secured by real property, the
existence of personal property collateral will not revive any right to a deficiency
6. The Single-Action Rule. Under the California Code of Civil Procedure, there can
be but a single lawsuit filed for the recovery of a particular debt, and any
judgment rendered in that lawsuit will be deemed to be a final determination of
the rights and obligations of the parties. Thus, if the creditor instructs the creditor
attorney to file a lawsuit on a promissory note and does not judicially foreclose on
all remaining security for that obligation in the same lawsuit, the creditor may be
deemed to have waived the creditor right to any collateral not foreclosed upon
before the lawsuit was filed.
Accordingly, when the creditor instructs the creditor attorney to file a
lawsuit on a debt, be sure to inform the creditor attorney of all of the security for
D. Secured and Unsecured Multiple Obligations.
The situation is even more complicated when there are multiple obligations of the
borrower, some of which are secured and others unsecured. Some security agreements and deeds
of trust provide that the security described therein is also security for all the borrower’s other
obligations to the creditor. (This is commonly referred to as a dragnet clause.)
For situations in which a dragnet clause exists, the creditor must determine whether there
are other obligations of the borrower to the creditor. If there are, proceeding to judgment on the
unsecured obligation may result in a waiver of security on the other obligations. For example, if
there is an unsecured $5,000.00 promissory note and, unbeknownst to the creditor, a $300,000.00
note secured by a deed of trust containing a dragnet clause, if the creditor enters the judgment on
BN 3711403v1 -48-
the $5,000.00 obligation a court in the future may hold that the right to the security on the
$300,000.00 note was waived.
PRESERVING YOUR TITLE INSURANCE COVERAGE DURING THE LOAN
WORKOUT AND FORECLOSURE
The enforceability of its lien on the real property security is of utmost importance to the
mortgage lender. Frequently, the real property security is of primary importance because of the
borrower’s financial condition.
Equally important to the mortgage lender is the loan policy of title insurance which
insures the mortgage lender against loss or damage in the event that the lien of the insured
mortgage is not a valid and enforceable lien, with the appropriate priority, on the real property
When a mortgage lender makes a loan secured by real property and obtains a policy of
title insurance the lender enters into two separate contracts (i.e. the first contract between the
borrower and the lender and the second contract between the lender and the title insurer). While
those two contracts are separate and distinct they are heavily intertwined. In the event that the
borrower repays the loan in accordance with the loan terms, the lender is rarely concerned with
the interaction between its contract with the borrower and its contract with the title insurer.
However, should the borrower fail to repay the loan in accordance with the express terms of the
loan documents, the lender must be concerned both with the obligations which the borrower
owes to the lender and the obligations which the title insurer owes to the lender.
A lender should assume that everything which is done after and before the recordation of
the insured deed of trust will be carefully examined by the title insurer to determine if it affords a
possible ground for the denial of coverage to the lender.
This paper assumes that before the close of the loan, the lender had taken appropriate
measures to protect itself through the required written disclosures to the title insurer, appropriate
escrow instructions, the appropriate policy of title insurance and the appropriate endorsements to
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the loan policy of title insurance. The lender’s ability to protect itself after the close of the loan
and the recordation of the insured deed of trust will be highly dependent upon the measures
which the lender took before the close of the loan and the recordation of the insured deed of
The lender should assume that any deviation, no matter how slight, from the express
terms of the loan documents will be raised by the title insurer as a ground to deny coverage to the
lender. Accordingly, the lender should not do anything to modify the lender’s contract with the
borrower without the prior written consent of the title insurer.
It is not uncommon for a lender to not obtain the prior written consent to the title insurer
before the lender’s contract with the borrower is modified. Frequently, lenders seek to justify
this conduct on the grounds that the title insurer would have required an undue amount of time to
provide its written approval to the modification or that it would not have approved the proposed
modification. While the author is sympathetic with the plight of the lender, the lender must keep
in mind that there are two separate and distinct contracts which the lender should be concerned
about, and the lender’s modification of its contract with the borrower, without the prior written
consent of the title insurer, may well afford the title insurer a possible ground to deny coverage
to the lender.
If the lender is faced with a limited “window of opportunity” within which it needs to modify its
contract with the borrower, at a minimum, it is good practice to give written notice to the title
insurer of the need to modify the contract with the borrower, advise the title insurer in writing of
the limited “window of opportunity” and the lender’s need to mitigate any damages which it
might suffer if it does not enter into the modification and request that the title insurer
immediately consent to the requested modification and advise the title insurer that if the written
consent is not forthcoming within the prescribed period of time that the lender may be forced to
enter into the modification to mitigate its damages and preserve its security and it will be the
lender’s position if the title insurer fails to promptly provide its written request to the proposed
modification, will be estopped to deny coverage in the future.
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B. Deeds in Lieu of Foreclosure
It is not uncommon for a borrower who is in default to offer to provide a deed of
lieu of foreclosure to the lender in consideration for being released from any personal liability for
a deficiency. Frequently, a deed in lieu of foreclosure will be attractive to a lender because it
permits the lender to obtain title to the property without the time and expense which would be
incurred in a foreclosure, even if the borrower did not contest the foreclosure or did not seek the
protection of the bankruptcy laws. Accordingly, a deed in lieu of foreclosure can be very
attractive to a lender. However, it must be remembered that deeds in lieu of foreclosure also
carry with them a high degree of risk. The lender should assume that if the borrower is not
paying the obligation which it owes to the insured lender that there may be other unpaid
obligations of the borrower including, but not limited to junior deeds of trust, prejudgment writs
of attachment and abstracts of judgment, all of which may have attached to the borrower’s
interest in the subject real property.
The lender, by accepting a deed in lieu of foreclosure will acquire title to the
subject real property, subject to all of the interests which attached against the borrower when title
to property was vested in the borrower. In addition, unless otherwise provided, the borrower will
be discharged from the obligation on the loan. In addition, the lender should anticipate that the
title insurer will take the position that the deed in lieu of foreclosure results in an elimination of
any further title insurance coverage. Accordingly, it is good practice for the lender, which is
considering accepting a deed in lieu of foreclosure, to obtain the title insurer’s written consent to
have the loan and the insured deed of trust assigned to a special purpose entity and to obtain a
CLTA 107.11 Non-Merger Endorsement to the lender’s existing policy of title insurance. In
addition, the agreement between the lender and the borrower should specifically provide that
there will not be a merger by reason of the assignment of the loan and the insured deed of trust to
the special purpose entity and that the deed of trust remains a valid and enforceable lien on the
subject real property.
If the lender does accept the deed in lieu of foreclosure (whether by a conveyance
to a special purpose entity or to the lender) it is good practice to also obtain an owner’s policy of
title insurance as of the date of the recordation of the deed in lieu of foreclosure. If the lender
plans to resell the property to a third party, a lender may wish to consider obtaining a binder for
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an owner’s policy and thereby potentially avoid a portion of the cost for a new policy of title
insurance on the resale of the property.
Irrespective of the manner in which the deed in lieu of foreclosure is structured,
the lender’s objective should be to retain title insurance coverage in an amount equal to or
greater than the unpaid loan balance.
C. Foreclosure of the Insured Deed of Trust
In the event that the borrower fails to pay the loan and a satisfactory alternative is
not agreed upon, the lender is confronted with the need to foreclose the insured deed of trust.
Since the lender’s actions in foreclosing the insured deed of trust are “post-policy” actions the
lender should assume that it would be the title insurer’s position that anything done during the
foreclosure process is not covered by the policy of title insurance. Accordingly, care needs to be
taken in structuring the foreclosure so as to not lose title insurance coverage.
2. A Trustee’s Sale Guarantee, in the Opinion of the Title Insurer, Is Not a
Policy of Title Insurance
It must be remembered that it will be the position of the title insurer that the
Trustee’s Sale Guarantee is not a policy of title insurance and only provides limited assurances
for the trustee relative to the names of the owner’s of the property, the persons who are entitled
to receive a copy of a notice of default and a notice of sale and the newspaper in which notices
may be published. Therefore, the lender should put no reliance upon the Trustee’s Sale
Guarantee beyond these limited assurances which are given for the benefit of the trustee of the
deed of trust in preparing a non-judicial foreclosure.
It is possible that the Trustee’s Sale Guarantee may be found to be an Abstract of
Title or the issuer may be held liable under the Restatement of Torts as professional supplier of
information. However, to the author’s knowledge, there are no published California decisions in
3. The Loan Policy Does Not Insure The Validity Of The Foreclosure
In general, the lender should anticipate that it will be the position of the title
insurer that the policy of title insurance does not insure the foreclosure process beyond insuring
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the lender against loss or damage in the event that it does not have a valid and enforceable deed
of trust. Therefore, the entire foreclosure process, both non-judicial and judicial, should be
viewed by the lender as being outside of the coverage of the policy of title insurance. By way of
example, if the Trustee’s Sale Guarantee fails to adequately identify all of the persons who
should receive notice of a non-judicial foreclosure, the lender should anticipate that the title
insurer will take the position that it has no responsibility for any loss or damage caused thereby
under the loan policy of title insurance. Accordingly, it is good practice to obtain the Trustee’s
Sale Guarantee from the same title insurer which issued the loan policy of title insurance. It is
not infrequent that if different title insurers are used for the loan policy of title insurance and the
Trustee’s Sale Guarantee that differences will arise. Frequently, this is as the result of deeds of
trust which have been paid but, where deeds of reconveyance have not been recorded. The
author recognizes that there may be situations where it is appropriate to obtain a Trustee’s Sale
Guarantee from an insurer which did not issue the original loan policy. However, in that
situation, the lender should carefully compare the loan policy of title insurance with the Trustee’s
Sale Guarantee to see if there are any differences and have those differences resolved before
proceeding with the foreclosure.
4. The Credit Bid
Frequently a lender will enter a credit bid at the foreclosure sale of its deed
of trust. While this avoids the need for the lender to bid cash at the foreclosure sale, the use of a
credit bid also raises additional issues which can adversely impact title insurance coverage.
b. Lenders Considerations For the Entry Of A Credit Bid
If the lender decides to enter a credit bid at the foreclosure of its insured
deed of trust, the first issue will be the amount of the credit bid. In general, the lender should
enter as low of a credit bid as possible to protect its claims against the title insurer and against
other assets such as fire insurance on the property. The Restatement Of Security says that if a
credit bid is less than 20 percent of the value of the property and there are any irregularities then
the sale that a Court may invalidate the foreclosure sale.
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If there is competitive bidding at the foreclosure sale, it may be necessary
for the lender to increase its credit bid to avoid being over bid by a third party. However, in
entering the credit bid, the lender must keep in mind that it is reducing its claim against the
borrower and may be reducing the amount of its title insurance coverage. There has been
extensive litigation relative to the effect of a credit bid on title insurance coverage and other
claims against persons other than the borrower. See, Alliance Mortgage Co. v. Rothwell (1995)
10 Cal. 4th 1226; GN Mortgage Corp. v. Fidelity Nat. Title Ins. Co. (1994) 21 Cal.App. 4th 1802,
1803 (“In this appeal we consider whether a full credit bid at a nonjudicial foreclosure sale
extinguishes all claims of a lender against the participants in a tortuous conspiracy to defraud the
lender, none of whom is the buyer. We shall conclude it does.”); Michaelson v. Kent (1999) 72
Cal.App. 4th 955, 969 and Kolodge v. Boyd (2001) 88 Cal.App. 4 349, 365.
Until there is a definitive reported appellate decision on this issue, a
foreclosing lender should assume that the title insurance company will take the position that the
lender’s credit bid reduced the amount of the insurance coverage in the amount of the bid and if
there were a full credit bid that the entire policy of title insurance has been extinguished.
5. Obtaining an Owner’s Policy of Title Insurance After the Foreclosure Sale
In the event that the lender acquires title to the property at the foreclosure sale, it
is good practice to obtain either a binder or an owner’s policy of title insurance because the loan
policy of title insurance will continue to provide coverage only to the extent that there an unpaid
D. Litigation, Bankruptcy, Insolvency and Creditor’s Rights.
A lender which commences a foreclosure against a borrower should anticipate that the
borrower may attempt to delay or stop the foreclosure sale through litigation and/or bankruptcy.
In the event that the borrower files a complaint which questions the insured’s lender’s
right to foreclose its deed of trust, that complaint should immediately be tendered to the lender’s
title insurer which issued the loan policy of title insurance on the deed of trust in issue.
Depending upon the nature of the allegations, there may be one or more causes of action which
are not potentially covered by the policy of title insurance. However, if only one of the causes of
action is potentially covered by the policy of title insurance, then the title insurer is obligated to
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defend the insured lender as to the entire action. See, Buss v. Superior Court (1997) 16 Cal. 4th
35 and Horace Mann Ins. Co. v. Barbara B. (1993) 4 Ca. 4th 1076, 1084. In addition, where there
is a potential for coverage under the policy of title insurance, the insurer’s duty to defend
commences immediately on the insured’s tender of defense of the complaint. See, Lambert v.
Commonwealth Land Title Ins. Co. (1991) 53 Cal. 3rd 1072, 1077.
The lender’s ability to tender to the insurer the borrower’s bankruptcy or attacks on the
insured transaction based upon other creditor’s rights claims may be dependent as to whether the
lender had deleted Exclusion 6 of the 2006 ALTA loan policy and had obtained an ALTA 21
endorsement to the policy.
E. LENDER CONSIDERATIONS IF THE TITLE INSURER ACCEPTS THE
TENDER OF DEFENSE
In the event you have any reason to suspect that you may have a claim on your title
policy immediately (i.e., within twenty four (24) hours) give written notice of the claim by
Federal Express to your title insurer. There is nothing to be gained (and much to be lost) by you
attempting to conduct an investigation or to resolve any problem which you have identified.
Immediately retain a lawyer who is experienced in dealing with title insurers. Your claim
will be handled by claims agents of the title insurer who spend all of their time in dealing with
title insurance claims. You will be at a severe disadvantage if your attorney does not have an
equal amount of knowledge about title insurance claims as the claims agent with whom they are
dealing on behalf of the title insurer. Title insurance claims involve a unique “mixture” of real
property and insurance law. If your lawyer is not an expert in title insurance claims, you may
find yourself “hoodwinked” by the claims agents of the title insurer.
Examples of “hoodwinking” by the title insurer can include the following:
1. Assigning you a lawyer, who you believe is to represents you, but who has an
undisclosed conflict of interest because the lawyer was formerly employed by a title
insurer, derives the majority of his or her income from the title industry or currently
represents the title insurer on other matters.
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2. Needless purported “investigations” of your claim which are protracted,
unnecessary and accomplish nothing but delay payment of your claim.
3. Filing of litigation in your name which is not for your benefit and which may
result in your being sued.
4. Modification of your loan documents without appropriately explaining the need
for the modification and appropriately endorsing your policy to cover the new additional risks
which you are encountering.
F. THE EFFECT OF THE VALUE OF THE REAL PROPERTY
SECURITY ON YOUR TITLE INSURANCE CLAIM
Few lenders would make a loan secured by real property if they were not convinced that
the value of the property exceeded the amount of the loan. Unfortunately, because of such
reasons as defects in title, fraudulent appraisals, etc., it is unknown for a lender to have a deed of
trust on real property security which may be worth less than the balance of the loan. In the event
that the lender has reason to believe that the value of the real property security is less than the
balance of the loan, care needs to be taken as to how this information is disseminated. The
lender should assume that the title insurer will, at most, pay up to the value of the lender’s equity
as determined by an appraiser selected by the title insurer. Differences between appraisers can
be very extreme. In one instance, the author saw an appraisal by the appraiser retained by the
title insurance company which opined that the damages caused by the defects in title at most
were $10,000.00. However, the appraiser retained by the insured opined that the damages
caused by the defects in title were in excess of $800,000.00 and the action settled by a payment
from the title insurer to the insured of more than $800,000. Accordingly, the insured should
view any appraisal prepared on behalf of the insurer with a degree of skepticism. In addition, the
insured should consider retaining a qualified independent appraiser to review any appraisal
submitted by an appraiser retained by the title insurer and to independently opine on the damages
caused by the defects in title.
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2. Date of Evaluation of the Insured Lender’s Damages
The date of evaluation for the insured lender’s damages will typically either be the date
that the insured lender foreclosed on the property or the date that the insured lender sells the
property after having acquired title to the property at the foreclosure sale. See, Cale v.
Transamerica Title Ins. Co. (1990) 225 Cal. App. 3rd 422 and Karl v. Commonwealth Land Title
Ins. Co. (1997) 60 Cal. App. 4th 859.
3. Additional Damages
In addition to the damages caused by the defects in title, the lender also may be entitled to
recover from the title insurer additional damages. Native Sun Inv. Group v. Ticor Title Ins. Co.
(1987) 189 Cal.App. 3d 1265, 1274. In the event that the title insurer delays payment to the
insured of the damages which it has suffered by reason of defects in title, the insured may be
entitled to recover additional damages. In Nebo, Inc. v. Transamerica Title Ins. Co. (1971) 21
Cal. App. 3rd 222 the Court of Appeal held that a lender who was not able to foreclosure its
insured deed of trust was entitled to recover from its title insurer rents which were generated on
the property, but which the lender was not able to collect because of the defects in title.
Depending upon the circumstances, the insured lender may be entitled to recover from the title
insurer the cost of a survey [Overholtzer v. Northern Counties Title Ins. Co. (1953) 116 Cal.
App. 2nd 113, 126]; prejudgment interest in excess of the policy limits [23 ALR. 5th 75];
attorneys fees [White v Western Title Ins. Co. (1985) 40 Cal. 3rd 870] and punitive damages
[Moe v. Transamerica Title Ins. Co. (1971) 21 Cal. App. 3rd 289, 299-300].
The foregoing is a general overview of issues which can be anticipated to arise where
there is a default in a loan which is secured by real property collateral. This paper does not
attempt to review all of the challenges which a lender may face when it attempts to collect a loan
which is secured by real property collateral. Frequently, when the loan is made, the real property
collateral is not as critical as it is perceived after the loan goes into default. Indeed, frequently
the real property collateral will be the principal, if not the only, source of recovery for the loan.
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