In the recent case of Tarlesson v. Broadway Foreclosure Investments, LLC (May 17, 2010), the California Court of Appeal upheld a debtor's homestead exemption despite the fact that she had deeded away the property at one point because it was deeded back to her.
It appears that the creditor attempted to have a judicial foreclosure or otherwise levy debtor's residence. Debtor claimed a $150k exemption in the home (pursuant to California Code of Civil Procedure 704.740 and Article XX, section 1.5 of the California Constitution) and creditor objected on the grounds that Debtor had not owned the property continuously.
The Court upheld earlier precedent that since the debtor had continuously resided at the property, that was a sufficient equitable interest to claim a homestead exemption.
Additionally, the creditor argued that debtor should have only been entitled to $50k for her exemption, but the debtor gave evidence (a declaration) that she was single, over age 55, and earned less than $15k/yr to qualify her to a larger homestead exemption.
What is interesting about this case is that although the court looked at the "equitable" interest that debtor had in the property, there was no discussion of whether she had unclean hands or engaged in otherwise inequitable conduct in deeding her property back and forth.
Many private money (or "hard" money) lenders enjoyed the consistency of borrower payments during the economic boom. The recession has put a real squeeze on borrowers and many are now defaulting on their loans. While some may be angling for a "strategic default," many borrowers who wish to keep their home or their business will file a bankruptcy petition and seek the protection of the automatic stay to halt their creditors from foreclosing.
What does the Automatic Stay mean? Exactly what it sounds like, it stays all creditor acts until or unless the bankruptcy court grants the creditor relief from the automatic stay.
How does a creditor seek "relief from the automatic stay"? In the traditional loan secured by real estate, the creditor can allege that they are not adequately protected by a sufficient equity cushion or that the debtor does not need the property as part of their reorganization (Section 362). Often this requires an appraisal of the collateral to determine just what the equity cushion is.
Does the Debtor/Borrower have to make payments to the lender even during their bankruptcy? Depends. Again, this goes back to whether or not the Debtor is trying to reorganize their debt and their bankruptcy plan. In a Chapter 13 ("Wageearner") filing, the debtor is obligated to make post-petition payments. Alternatively, creditors can seek "adequate protection" payments in the alternative to terminating the automatic stay.
What if my loan is underwater? Beware the CRAMDOWN or LIENSTRIPPING. Here in Santa Clara county, there has a been a flurry of lienstripping where underwater junior liens are "stripped" – but that is a topic for another day.
When a judgment creditor has gone all the way to verdict, has obtained the Judgment, the first thing the Judgment creditor does is record an Abstract of Judgment in the counties where the creditor thinks or knows that the debtor owns real estate.
For example if the judgment creditor is the prevailing party in a litigation Santa Clara County, and the debtor owns real property in Santa Clara County, then that is the logical place to record the Abstract.
A judgment is an unsecured obligation. Once an abstract of judgment is recorded in the county where the debtor owns property, then it attaches to the debtor's asset and actually becomes a secured lien.
This means the judgment creditor would be treated differently in bankruptcy, as a secured creditor as opposed to an unsecured creditor and is generally paid more in a reorganization. Secured obligations are also not discharged by the bankruptcy.
However, now the judgment creditor must do more than just record the Abstract of Judgment, under a recent California Appellate court ruling, the creditor must also record a Request for Notice. [BANC OF AMERICA LEASING & CAPITAL, LLC, Plaintiff and Respondent, v. 3 ARCH TRUSTEE SERVICES, INC., Defendant and Appellant. (2009) 180 Cal. App. 4th 1090; 103 Cal. Rptr. 3d 397]
Let me explain:
Say you have a judgment against Joe Smith. He owns a house in Palo Alto or Mountain View. You record your abstract of judgment for $50k in Santa Clara County. You request a title search or property profile from your buddy in customer service at the title company to verify that your abstract is showing up in the title search. Turns out Mr. Smith has a big loan from Wells Fargo for $600k and another home equity line of credit in the amount of $100k from Chase bank. Your judgment goes behind those two mortgage trust deeds.
Smith defaults on his loan. Wells Fargo starts the foreclosure and records a Notice of Default, they order their Trustee's Sale Guarantee and your abstract does NOT show up as someone Wells Fargo must notify. They do not notify you and they conduct the sale. There are many bidders, the final bid is $785k, which would have been enough to pay all mortgages off and satisfy your judgment lien. Except–you were not notified of the sale, you did not get notified of a surplus and you did not submit a claim for the overbid amounts. Debtor Smith has his homestead exemption and receives the $85k.
What went wrong? Why weren't you notified of the foreclosure sale and overbid? Answer – because the Trustee is only required to notify other mortgage holders and those who record a Request for Special Notice. That means judgment creditors, tax lien claimants, mechanic's lien claimants, easement holders and lessees are not protected.
The Court concluded that the Trustee did not have any obligation to further search public records or do anything more than was required under the California Civil Code Section 2924 et seq. The fact pattern of the case had a lot to do with timing, since in the BofA case, the creditor actually recorded his Abstract of judgment just one month before the sale had been conducted, so they were not included in the Trustee's Sale Guaranty and the Trustee did not get an update before sending out the notice of surplus claims.
When should it be recorded? Technically, the Code allows the creditor to record it anytime after the lien and anytime before the Notice of Default. That means, do it the same time that you record your Abstract and just ask the recorder to make the Notice second.
EVERYONE'S FAVORITE TOPIC - more on CALIFORNIA'S ANTI-DEFICIENCY LAWS
This week’s reader Dhillon writes: “To my understanding, under 580(d), if a junior lender uses non-judicial means to foreclose on the property, then he or she is barred from seeking a deficiency judgment (please correct me if this is wrong).
Now, suppose a homeowner obtained a non-recourse/purchase money loan from BANK X. Subsequently, the homeowner obtained a HELOC, also from Bank X. Next, the homeowner fails to make his payments on both loans. BANK X uses non-judicial means to sell the property at auction for defaulting on the non-recourse loan/purchase money.
Normally (at least I think), when you have a senior and junior lender, they are not the same party. In that situation, it would be unfair to bar the junior lender (promissory note) from seeking a deficiency judgment after the senior lender chooses to use non-judicial means to foreclose the property since he had no choice in the matter.
Also, 580(d) would be of no moment because the junior lender did not foreclose on the property, the trigger to 580(d). However, here, the junior and senior lender are the same party. BANK X triggered 580(b) when it foreclosed on the property on the basis of a default on the purchase money loan through non-judicial means. I think that much is clear.
"580(d) reads: 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."
Now, did BANK X also trigger 580(d) with respect to the HELOC, barring any deficiency judgment on the second deed of trust, since, tracking the language of 580(d), it, BANK X, the trustee or mortgagee, sold the real property securing its loan through non-judicial means?"
Dear Dhillon – this is a common fact pattern because with real estate prices being so high in Santa Clara County, most purchasers did have to take a 2nd loan to buy the property (“purchase-money” or “piggyback” second) or the properties appreciated so steeply that many homeowners took out a Home Equity Line of Credit (HELOC) to remodel.
Let me rephrase your question because what it sounds like you are asking is, “If the 1st and the 2nd lender are the same bank, can that lender still go after you on the 2nd loan if the 1st forecloses?”
Essentially, does that “junior” lender retain its “sold-out junior lienholder” status if it the same bank?
Normally, when thinking about 580(d), you are correct, it is usually 2 different lenders. As I addressed in last week’s Mailbag with Julia entry, there is no “sale” on the 2nd loan and so the lender is still free to sell the note to a debt collection agency.
When the same lender has both loans against the same property and attempts to enforce the junior loan, the California Court of Appeals has said the Bank is NOT a sold-out junior and cannot pursue the borrower under the Note.
Tthe California Court of Appeals addressed this fact pattern in Simon v. Superior Court [4 Cal.App.4th 63, 5 Cal.Rptr.2d 428 Cal.App. 1 Dist.,1992.] The actual lender there was Bank of America who held both the first and the second loans against the borrower’s property. The Simons apparently defaulted on their $1.575M worth of loans so BofA foreclosed (non-judicial sale) under the power of sale in the senior deed of trust.
The bank then sued the borrowers on the junior note.
The Court shot Bank of America down and said: “…we hold that, where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust's power of sale, thereby eliminating the security for its junior deed of trust, section 580d of the Code of Civil Procedure bars recovery of any “deficiency” balance due on the obligation the junior deed of trust secured.”
The Court went on further to explain the rationale: “As the holder of both the first and second liens, Bank was fully able to protect its secured position. It was not required to protect its junior lien from its own foreclosure of the senior lien by the investment of additional funds. Its position of dual lienholder eliminated any possibility that Bank, after foreclosure and sale of the liened property under its first lien, might end up with no interest in the secured property, the principal rationale of the court's decision in Roseleaf. (59 Cal.2d at p. 41, 27 Cal.Rptr. 873, 378 P.2d 97.)”
So there you have it. Two notes held by the same lender at the time of foreclosure? No deficiency arises from the bank’s own actions and the borrower is protected by 580D.
Here’s the twist – what happens if Chase has the 1st and later aquires the bank (Washington Mutual or World Savings Bank) holding the 2nd through a merger or sale?
Should the same rule apply? I would argue YES, the lender should be barred from seeking a deficience because the bank who acquires the 2nd still has the power to decide how they want to handle the foreclosure aspect.
The case of Martinez v. Wells Fargo Bank started in San Francisco over an $800 underwriting fee that the lender charged the borrowers.
The borrowers tried (unsuccessfully) to argue that the fee was an "overcharge" and violated Section 8(b) of RESPA and California's Unfair Competition Law.
The lower court shot it down and yesterday the Ninth Circuit shot it down as well. First, that section of the Real Estate Settlement and Procedures Act prohibits fee splitting or charges for services not actually rendered. It does not restrict how much the bank or title company can charge for that service if it actually rendered.
Secondly, the bank is governed by Federal law, and state law (like California's UCL) would only kick in if there was no conflict or existing federal law that addressed the issue. Apparently the OCC does have regs that address the issue and therefore, no state law interference can disrupt the federal banking system (first year law students here are all nodding because they know where this is coming from!).
What the ruling left open is lenders who are not banks. Ie, private money lenders like your grandparents who make a loan from their pension plan…if they or their agents charge for their services, is there still a potential UCL claim lurking?
Martinez v. Wells Fargo Home Mortgage, Inc., No. 07-17277 (March 9, 2010) 9th Circ.
When I started this blog, it was an added service for my clients, but I find that I am getting constant phone calls and emails from people who are not my clients. To be clear, I work with lenders (private money investors, mortgage pools) and do not engage in borrower or debtor work. 99% of these calls and emails I receive are from borrowers who want free legal advice. I don't work like that, but I do believe in giving time and general knowledge to my community. I thought the best way to deal with this was to just start posting some of the fact patterns and my responses.
It's not intended to be legal advice, but I hope it is sufficient general education for people who have an interest. Remember –
I am not your attorney, you are not my client and no attorney-client relationship has been formed by this general discussion.
Today's question (with details removed) from Reader R.B. –
"I have a 80/20 loan on a foreclose primary residence home in
Ok, RB – lots of wrong assumptions in this message that I am not sure even where to begin to correct. Obviously I do not have all the facts of your situation either and cannot provide a meaningful analysis. Also, I do not give tax advice, and you need a tax specialist for that.
That said, you should understand that if you have two loans, you have two lenders who could have foreclosed. If one lender foreclosed, so only one lender was “paid” by the foreclosure sale. That lender used the power of sale in the Deed of Trust (one of the two loan documents, listen to my DirtLaw Primer Podcast series for more explanation of your loan documents.) If the “sale price” at that foreclosure sale did not satisfy the loan amount, the law is still that the lender is deemed fully paid, and the deficiency is what you may receive a 1099 for.
However, the other lender is not paid and is still owed money. And, now there is no collateral for that bank to foreclose on. They are what we call a “sold-out second” or “sold-out junior lienholder.” Accordingly, that unpaid lender can sell the Promissory Note to a debt collection company. The collection agency can continue to pursue the debt on the unpaid loan.
There is no "deficiency" in this circumstance for the 2nd lender. There must be an actual sale to create the deficiency. Since the property was only sold once here, only that lender conducting the sale ended up with a deficiency between the value of the collateral and the amount of their loan. The 2nd lender ("sold-out junior lienholder") had no sale and no deficiency and therefore the borrower has no anti-deficiency defense or protection as to the sold-out second lender.
You should contact your local county bar association and ask for the Lawyer Referral Service for a
bankruptcy attorney or other real estate attorney to answer your questions.
Other assumptions – do not assume that the