The DirtLaw Blog

Mailbag with Julia - Collecting on Family Law Support Judgments

Recently a family law attorney in Southern California wrote to me to ask if child support judgment holders needed to also record a special request for notice (Civil Code Section 2924) after I wrote about the recent case of BANC OF AMERICA LEASING & CAPITAL, LLC, v. 3 ARCH TRUSTEE SERVICES, INC., [ (2009) 180 Cal. App. 4th 1090].

The answer is yes.  

    If you are a judgment holder, and you are behind a bank loan or mortgage (deed of trust), ie, your judgment is after or "junior" to the bank, when they begin their foreclosure process on the borrower (your judgment creditor), they do NOT have to provide you a notice of the trustee's sale.

    While you may have no intention of actually reinstating the loan and conducting your own sheriff's sale on the property to levy or collect on your judgment, you still want to be on the special request for notice list because if there are surplus proceeds from an overbid, you want the Trustee to send you a claim form.

    The form is not on the Judicial council website, but many title companies should have one.

Mailbag with Julia - How Does the Abstract of Judgment Work?

S. Family writes:

 

"Do you know how we can get a judgment lien against a property when our judgment is in the name of the individual but the property is in the name of the individual's revocable trust?"

Dear S. Family -

 

If you already have a judgment, you should absolutely record an abstract of that judgment against the debtor (individuals) in the county where they own property.  This form is freely available from the Judicial Council Forms website.

 

There is caselaw that there isn't much difference between an individual and their trust.  The issue is, will your abstract attach to the debtor's property if the name on the abstract and the name on the title are not identical.  The answer is--it depends. 

 

Counties are set up on a Grantor/Grantee index.  If you spell the individual's name wrong on the abstract - you have a problem.  If you spell it correctly, but it does not match the Grantee index exactly, you will not know if a title company will pick up until you try it yourself.

 

The normal scenario on a payoff is that if the debtor tried to sell the house, your abstract would show up on the preliminary title report.  So, the practical response is for a judgment creditor to record the abstract in the county (for example if the debtor owns real estate in San Jose, that would be Santa Clara county), and then a few weeks later, contact the customer service department of a title company to see if they can pull it up in their search.

 

Mailbag with Julia - "What Happens To the 2nd Loan After Foreclosure if Both Loans are Owned By the Same Bank?"

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.  Same lender? No deficiency arises from the bank’s own actions.

 

Here’s the twist – what happens if Chase or Wamu has the 2nd and later the bank who had the first acquires the 2nd through a merger or sale? Should the same rule apply? I would argue yes because the bank who acquires the 2nd still has the power to decide how they want to handle the foreclosure aspect.  What about the reverse? 2 simultaneous loans go on with the same lender but the lender sells one later and now 2 different lenders hold the notes? Think in that circumstance, then one lender cannot control what the other is doing and clearly, if the new 1st forecloses, there is a strong argument that the 2nd is a genuine sold-out junior lienholder.  Other legal minds and real estate attorneys may disagree and argue that in choosing the split the loan into two parts, rather than making one large loan, the lender assumed the risk of becoming barred by 580(d) and their sale does not “morph” that loan.

Mailbag with Julia - "Why is my lender still trying to collect even after a foreclosure sale?"

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 California effective 2009. The first loan did a 1099c which charged off $$$k and can be excluded from as an income per Califnornia Debt forgiveness law and second loan that did NOT do a 1099 and instead tranferred the account to a collection agency with the outstanding balance of $$$k. Since its a primary residence, am i still covered by the anti-deficiency law or Federal Debt Morgage Act 2007 that will exclude me for being responsible for the 83k debt deficiency? Since they are not issuing a 1099, how will this affect my 2009 taxes and what's the best way to take care of this?"

 

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 California tax rules and the Federal tax rules on mortage debt forgiveness relief are the same.  They are not and the California FTB explains this here:

http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml