Problem Loans in Turbulent Times

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					         Problem Loans in Turbulent Times

                          Issues to Consider
                                      By


                          Barry A. Smith, Esq.
                          Scott O. Smith, Esq.
                               Buchalter Nemer
                        A Professional Law Corporation


                             bsmith@buchalter.com
                             ssmith@buchalter.com


           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
                                         DISCLAIMER



       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

                                                                                                                                        Page

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
                             persons?...................................................................................................... 1
                  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


                                                    I.
                                        INTRODUCTION

        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.
                                                 II.
                           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
                instructions?




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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
                loan documents?
        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
                       documents?
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:
                a.     Borrowers
                b.     Guarantors
                c.     Partners
        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.
        1.      Introduction.
        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.
        1.      Introduction.
        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?
                                                   III.
                      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
                the debt.

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 —

                       Equipment Leases

                       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
                judgment.

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E.      Who Can Be Sued?

        An attachment is available against a corporation, partnership, LLC or unincorporated
        association.

        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
        profession.

        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
        household purposes.

        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
                profession.

        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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        Examples are:

                        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
        described.

                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
        prosecution.

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
        Obtained?

        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.
                                                 IV.
                               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
the property.”
                 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
                    are:
                    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
                           corporate assets;
                    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
be preserved.
        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.



 BN 3711403v1                                  -14-
       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
                      §566).
               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.

BN 3711403v1                                      -15-
       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
                      CCP§564(b)(8)].
               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
                      §566).
               e.     Memorandum of Points and Authorities
               f.     Complaint
               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
                               premises.



BN 3711403v1                                    -16-
               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
                            receivership estate.
                     (b)    The annual bond premiums typically are 1% of the face
                            amount of the bond (for example, $1,000 per year for a
                            $100,000 bond).

BN 3711403v1                          -17-
                     (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
                              authorization.
                     (b)      A receiver issues receiver’s certificates (which are
                              essentially IOU’s issued by the receiver) in exchange for
                              funding.
                     (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,
                     profits, etc.
               17.   A provision authorizing the receiver to compromise debts [CCP
                     §568].

BN 3711403v1                             -18-
               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).

BN 3711403v1                          -19-
                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”.
                                                  V.
                            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
any deficiency.
 BN 3711403v1                                    -20-
        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.

 BN 3711403v1                                  -21-
                       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.     Application.
        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
property.
                b.     Violations.
                       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

 BN 3711403v1                                    -22-
                    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,
                    supra).
               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
                              BR 103).
                    (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).



BN 3711403v1                             -23-
                           (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
                           Cal.2d 263).
                    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
                           affirmative defense.
                           (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
                                  actions.
                           (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)
                                  (Walker, supra).
                           (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

BN 3711403v1                                 -24-
                                    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
                                    debt,
               d.   Special Protections.
                    1.     Waiver
                           (a)      Generally, the one-action rule cannot be waived in
                                    connection with the making or renewal of a loan. Civ. C.
                                    §2953.
                           (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
                                    be valid.



BN 3711403v1                                    -25-
        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)

 BN 3711403v1                                    -26-
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
                purchaser.”
        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.



 BN 3711403v1                                    -27-
                      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 &
                              Consolidated, supra.



 BN 3711403v1                                  -28-
                    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
                          greater.
                          (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.




BN 3711403v1                           -30-
       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
                             protection.
                      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
                             guaranty.



BN 3711403v1                                  -31-
                                 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).

BN 3711403v1                               -32-
                      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
guaranteed.
                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

 BN 3711403v1                                   -33-
                                     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
                                     property.
                             (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



 BN 3711403v1                                    -34-
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
foreclosure.
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.
                d.     Trial.
                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.

 BN 3711403v1                                    -35-
                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

 BN 3711403v1                                   -36-
                          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
               Trustee.
                          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



BN 3711403v1                       -37-
                    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
                    §2924b(d).
                           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

BN 3711403v1                         -38-
               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,

BN 3711403v1                     -39-
               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

BN 3711403v1                    -40-
                    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) &
                    2924h(c)]
                            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
                    sale.
                            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
                            guaranties;
                            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.

BN 3711403v1                           -41-
                                      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
                              Sale procedure.
                                      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
                              subsequent order.
                                      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

 BN 3711403v1                                   -42-
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
                                         §2924b(c)(1)-(2).
                                (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
policy.
          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.
                 c.      Reinstatement
          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

 BN 3711403v1                                      -43-
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
                                  the property.
        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
reinstatement finds.
        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
                         1.       Possession
                                         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.
               2.   Proceeds
                           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
                              §2924k]:
                              (a)     Costs and expenses of exercising the power of sale and of
                                      sale;
                              (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
                deficiency judgment.
        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

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                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
                judgment.
        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
                that debt.
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



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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.
                                                 VI.
     PRESERVING YOUR TITLE INSURANCE COVERAGE DURING THE LOAN
                              WORKOUT AND FORECLOSURE

A.      INTRODUCTION

        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
security.

        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
trust.

         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
        1.      Introduction

                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
this regard.
        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

                a.     Introduction

                       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
loan balance.
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

 BN 3711403v1                                    -54-
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
 1.     Introduction

        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].
                                                 VII.
                                          CONCLUSION

        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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