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134 Cards in this Set
- Front
- Back
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In real estate finance, what is the evidence of debt?
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Evidence of Debt is promissory note, if borrower stop paying, based just on note the remedy is breach of K.
If only note, there is no security document. |
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What is the evidence of security or the security document?
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Security document is the deed of trust or DOT
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What are the two parts that make up real estate finance?
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Debt Part - Promissory Note
Security part - Deed of trust |
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What does a NJF require?
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Must have security party aka. Deed of trust
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What are the steps to evicting an owner?
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1. Notice of default - must bring current within 90 days
2. Notice of sale - statutory form 2924 3. Hire trustee, who hires auctioneer 4. Minimum Bid is what the bank is owed, if not one bids that amount, bank credit bids and becomes owner. |
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As an owner, what can the bank do to the previous occupant?
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Bank cannot change locks
Bank cannot cut off utilities Usually pays occupant to leave, otherwise must get an unlawful detainer from court - Then after judgment, must file a writ of possession - Get US marshall to evict tenant |
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What are the BIG 3 in California?
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-580(b)
-580(d) -726 |
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What are the Big 3 Designed to do?
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-They are designed to shift risk of economic downturn to the lender
- Bank must bear deficiency - Deficiency is the difference between what the borrower owes and what the property bears at sale - Theory is that Bank is more sophisticated lender |
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In light of the Big 3, when is the only time a lender can get a deficiency judgment from a borrower?
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- Bank does a JF (lawsuit where you pray for a remedy from the court and judge issues a decree of judgment for foreclosure sale)
- Ask court for deficiency judgment - See if borrower has other assets and try to get at other assets |
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580(b)
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- if borrower makes a purchase money loan (any loan used to buy real property) or borrows to buy a house on a 1-4 unit that is owner occupied, the no DF
- no DF on seller carryback loan (is owner has a house and finances the borrowers purchase of the house, no DF) |
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580(d)
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- If lender opts to do a (NJF or power of sale foreclosure or trustee sale), they waive the right to deficiency judgment --> lender can get property back in 111 days
- 580(d) applies (thus no Deficiency judgment) if the property is sold under power of sale, but does not apply if sold by JF |
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Why is a lender foreclosing under NJF, power of sale foreclosure or trustee sale allowed?
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-Allowed to do this because the borrower agreed in the promissory note to allow the bank to sell the house without filing a lawsuit
- good thing for lender is quick (111 days) bad thing is no deficiency |
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726
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- one form of action rule
- once lender secures promissory note with DOT, lender must foreclose property first and may not sue on the note (breach of K) - lender cannot go after other assets if the borrower has other assets |
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What is the priority rule?
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- whenever a property is subject to two or more liens, the lien filed first has priority
- priority matters when there is not enough equity to cover all liens |
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What happens if a bank is owed money and they foreclose?
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- If a bank forecloses and they credit bid, they now own the property and the only debt left on the property is the DOT that is held on the property, the original debt is merged with the outstanding equity left on the house
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What are the proportionalities in liens?
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- principle of priority is absolute proportionality
- 100% to first and then next and so on - no pro rata payment - Senior lien foreclosing wipes out junior liens |
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What is a cure provision in a contract with the bank?
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- cure provision allows the bank to pay off the note of the other bank if a senior lien forecloses
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What is a judgment lien?
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- it is an involuntary note that is award by court, once recorded it has the same effect as one from a bank
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CC 2897
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- other things being equal, different liens upon the same property have priority according to time of creation "first in time, first in right"
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CC 1214 "Far West" Case
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- O --> A not recorded
- A --> B recorded - O --> C Recorded - C has senior rights as to B because A was never in the chain of title, if C was going through the index, B's name would remain unknown to C |
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What does the 1214 "Far West" case create?
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- Creates a race/notice system "a later created lien can take priority over earlier one if earlier lien was not recorded, later lienholder was without notice of earlier lien, later lienholder gave value for the lien, and the later lien was recorded first
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Bank of Italy v. Bentley
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- Lawsuit or action on a note secured by a DOT may not be brought by the holder of the note unless and until the security is exhausted
- Plaintiff may not sue personally on a note secured by a DOT unless that land or security interest is valueless |
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Purchase Money Priority CC 2898
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Purchase money DOT given for purchase of real property has priority over all other liens against the purchaser subject to the recording laws
- makes purchase money lender for real property superior to all other liens that may attach |
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Priority of liens
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-Senior liens are not affected by anything junior liens do
- Effect on leases, when a bank forecloses, if the lease was executed after the foreclosing lien was recorded, the lease is terminated - Easement: in a JF, easement needs to be named or he is not affected |
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What is the Merger doctrine?
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When a person becomes an owner of a property on which she holds a lien, there is a merger of the lesser estate (lien) into the greater estate (the fee)
- Only applies when no buyer and lienholder credit bids |
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What are the two prongs of 726 "one action rule"
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- 726 prevents secured creditor from ignoring its security and suing directly on the note ore debt, violated when:
1. when secured creditor attempts by judicial action to reach unpledged assets of debtor before first exhausting security (trustee sale not an action) 2. Omission of some of the security from an action may discharge the omitted security from liability for the obligation - trustee sale is private contractual remedy that parties agreed to - when lender does NJF, they give up deficiency judgment so legislature not concerned with one form of action - Only through judicial foreclosure is lender bound by security first and one action rule |
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What are the sanctions for violating one action rule?
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-Lender is found to have waived the security
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What is a seller carryback financing and its relation to 580(b)?
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-Seller carryback financing is when the seller of the property agrees to carry the loan and finance part of the purchasers' purchase price, if this is done, the seller CANNOT get a deficiency judgment even in a JF
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What is the relation of a purchase money loan to 580(b)?
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- If Bank makes a loan to purchaser, and it s a purchase money loan (money used to buy a house that he lives in), and it is owner occupied 1-4, 580(b) prevents deficiency judgment even if JF
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Is refinancing a loan protected by 580(b)?
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- No, by definition a refinance is not purchase money loan, so no 580(b) protection
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Brown v. Jensen
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- 580(b) case
- In Brown, the borrower made 2 trust deeds, 1 to the bank, and another to the Brown - Because both loans were purchase money trust deeds, court held that after the bank had foreclosed and wiped out Brown from recovering, Brown was still barred from recovering because the purchase money loan carried the flavor of purchase money even though Brown was wiped out. - Thus even though Brown was never able to get value for his trust deed, the flavor of purchase money loan carried on from 1st TD to 2nd TD and 580(b) prevented Brown from collecting deficiency |
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Roseleaf v. Cherighino
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- One form of action 726 does not apply to sold out junior because after foreclosure and sale there is nothing left to sell
- 580(b) will only apply if the factual circumstances come within the purposes of the section - If transaction is a variation on the standard purchase money mortgage or DOT transaction, it should be examined if it serves the purpose of 580(b) - Changes rationale to 580(b) protection --> states that 580(b) was implemented to place the risk of downturn on the lender so it discourages the lender from overvaluing the property |
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Spangler v. Memel
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- Spangler made loan to old Grandma, who had hinted that she planned to remodel the building for commercial use
- Grandma agreed to sign a waiver of her right to no deficiency judgment upon taking on additional financing for commercial use modification - Building flopped, and commercial lender (union bank) foreclosed and wiped out Spangler's 2nd Trust deed - Spangler then sued for deficiency and Grandma asserted 580(b) - Court held that subordination clause of purchase money loan was enough to remove it from automatic application of 580(b) -Subordinated junior that is sold out when senior lien secured by construction loan rather than acquisition is not a standard transaction - This is because the use of the land has changed - Where a purchase money loan is subordinated to a construction loan that will materially alter the nature of the land, the land has changed and no 580(b) protection for borrwer |
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Can a borrower waive 580(b) protection?
Deberard v. Lim |
- Deberard did seller carryback financing on a shopping center
- Lim defaulted and could no longer pay loan to bank and Deberard, thus agreed to waive 580(b) protection - Case holds that both PRE and POST default, borrower cannot waive 580(b) protection - Thus lenders can never legally get borrower to waive 580(b) - Hinders loan workouts because lenders cannot get defaulters to waive 580(b) - Once 580(b) always 580(b) |
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Federal Pre-emption
Carter v. Dewinski |
- VA can always get at a borrower personally if they default, 580(b) does not apply to a federal agency
- VA is not a private litigant, limited by state law, its is an arm of the federal government and canot be deprive of benefits of federal law |
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Broker carryback commissions not covered by 580(b)
Kistler v. Vasi |
- Broker took a TD in lieu of commission payment
- Buyer paid 0, Broker paid 50, seller got full million - When borrower defaulted, court said it was not a purchase money loan or seller carryback - Thus because not and TD was to broker, it was not purchase money and did not get 580(b) protection |
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Unsecured Notes not covered by 580(b)
Van Vleck Realty v. Gaunt |
- If no security on the note, simple breach of contract claim and lender can get a judgment and levy it against any and all assets
- Here, borrower said that they used the borrowed money to purchase a home, even though not TD, wanted 580(b) protection - Court said no, none of the anti-deficiency statutes cover any note that is unsecured by a DOT |
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Loretz v. Cal Cost Dev Corp
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- Lender may judicially foreclose, thus permitting a right of redemption for 1 year and get deficiency
- Or can use power of sale and waive deficiency judgment - If you have legitimately different notes and TD's that were truly different loans, then no 580(b) protection |
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Are HELOCS covered by anti-deficiency statutes?
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- No, by definition HELOS are not purchase money loans, so not covered by anti-deficiency statutes.
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What does CC 2924 provide, and what does it allow for?
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- 2924 allows for the power of sale clause to be within DOT
- Every DOT in CA has a form that says if the borrower makes a promise and defaults, deed can have an acceleration clause - 2924 also limits the power of the lender by allowing the borrower to cure default by paying the amount owed |
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Garfinkle v. Superior Court
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- Homeowner argued foreclosure denied him due process, court said no, Contract was a private contract and there was no state action
- Power of sale arose from contract rather than statue - Due process implicated because it was a contract - Although statutes regulate NJFs, they are designed to put a brake on the ability of the trustee to force a sale - Garfinkle allows for power of sale clauses to be in contractual agreements |
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What is and what is the purpose of a performance trust deed?
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- PTD can be executed to secure a promise (eg. trespasser damages land and promises to pay, trespasser can execute a PTD to the land owner to secure the promise
- If there is default, to enforce a PTD, it must be closed by JF! - Lots of issues of fact where it would need to be presented in front of jury |
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Statute of Limitations
Aguilar v. Bocci |
- Guy was arrested and hires a lawyer,he executes a DOT to the lawyer
- SOL passes and guy trues to quiet title to the land - Lawyer tried to foreclose, court said he slept on rights - Because note was unenforceable due to SOL, the TD was also unenforceable - Guy entitled to keep property, but he could not clear title without clearing debt - Lien is incindental to the principal secured, there the lien is extinguished when the SOL has run on the principal - 2911 - when SOL has run on a note secured by DOT, subsequent oner may bring action to quiet title - Thus new owner can quiet title but old owner cant - Old owner can just sell the land to a new owner and they can quiet title |
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Power of Co-Beneficiaries
Perkins v. Chad Development Corp |
- Any co-beneficiary of a DOT can make an election for either a trustee sale or a JF
- Any beneficiary may opt to chose how to foreclose or force a sale - Where there is more than one beneficiary under a single note and DOT, in the event of default, any one of them is empowered to give notice of default and election to sell - Even if one trustee does not want to sell, if another trustee has the right to sell and wants to sell, they may elect to do so - Where there are multiple notes secured by a single DOT, the holder of the delinquent note is entitled to foreclose - 2941.9 - tries to clear up mess by allow for an agreement among all beneficiaries to sign a document to agree to be bound by decisions made by a majority of interest |
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Judicial Foreclosure and naming parties
Goodenow v. Ewer |
- Because CA is a lien theory state, lender does not have title to property
- If a necessary party is omitted, the sale is defective and the omitted party may have remedies: may have sale set aside if beneficiary is the purchaser (not BFP they are credit bidding), recover damages actually incurred, in some cases have the sale invalidated - If beneficiary or trustee omits key party, if that party has his property taken away it is a violation of due process, must leave his interest intact, give him damages, or set the sale aside - In JF, everyone who has a lien must be brought in because their rights are affect (court state action issue) |
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CC 2903 - Junior Lien holders and notice
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- All junior lienholders should be named as defendants in a JF action to cut off their liens, and terminate their rights
- In JF, all junior lien holders must receive notice - In JF, if lender gets deficiency judgment, borrower has one year to redeem the property by paying what he owes |
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CC 2924 - Procedure for NJF
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- Statute governing NJF to ensure due process
- NOD- once borrower defaults, monetary or non-monetary, under power of sale clause in a trust deed, beneficiary must give NOD --> then wait 90 days to allow borrower to cure - Day 91 - lender can file notice of sale: notice says how much is owed at that time, not the entire loan amount, just the amount owed - 2924 says 5 days before the sale, borrower may 'reinstate' - bring the loan current, and pay back fees, interest and penalties (not have to pay off entire loan - If less than 5 days before sale, lender can require borrower to pay the ENTIRE loan off |
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NJF foreclosure, borrower must tender full payment, lender doesn't have to jump through hoops
Gaffney v. Downey Savings |
- Borrower sent checks, but bank sent checks back to defendant
- Borrower argued that because bank rejected payment, they own land free and clear - Borrowers placed check into a lawyers trust account - Court held that Bank did not have a duty to take partial payments and consider trust account - Because NJF is non judicial, borrower must unambigously tender entire amount due and lender not obligated to go through receipts and total up various partial payments |
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What is rule regarding lost checks?
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- Check is only conditional payment until it clears
- Even if check RECEIVED by lender and lost, Payment is NOT made - Sticks it to borrower, if borrower gets notice, must walk check and get receipt for payment - Burden on borrower |
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Hunt v. Smyth
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- Borrower has to bring late payments current, or pay off loan
- When trial court looks to grant injunction on sale of house, it looks to see if peoples rights have been violated, where they are not, no injunction |
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Borrower good faith attempt to repay
Bisno v. Sax |
- Bisno got loan and defaulted
- Lender foreclosed and Bisno tried to repay arrearages, which the bank refused, claiming that it was insufficient as to the time to repay - Bisno filed injunection - Court granted because they held taht Bisno attempted to repay in good faith - Thus unfair to take peoples property away when they are willing to cure their default - Court set aside sale that lender made to new buyer |
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What are the notice of default (NOD requirements)?
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- Record - 2924(a)
- Service - 2924(b): must serve notice on borrower at last known physical address (address actually known if contained within DOT or subsequent notification of address) - Garfinkle: last known physical address is valid as long as lender can show they sent the service by regular and certified mail to address (if signs for mail cant deny he got it, if he refuses theres proof he denied it) - Failure to serve (Goodenow) and sale takes place, several remedies if plaintiff is junior lien, trustee or BFP: void (gets money back) voidable (different parties get different things) |
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What are the requirements of Notice of Sale (2924f)?
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- more onerous 4 requirements
- Record: 21 days before sale - Serve: 20 days before sale - Post: must be put on the property in a conspicuous place AND at a public place in city or county (courthouse/library) - Publish: must be published once a week for 3 consecutive weeks in a newspaper of general circulation at least 20 days before sale |
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What is rule regarding lost checks?
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- Check is only conditional payment until it clears
- Even if check RECEIVED by lender and lost, Payment is NOT made - Sticks it to borrower, if borrower gets notice, must walk check and get receipt for payment - Burden on borrower |
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Hunt v. Smyth
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- Borrower has to bring late payments current, or pay off loan
- When trial court looks to grant injunction on sale of house, it looks to see if peoples rights have been violated, where they are not, no injunction |
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Borrower good faith attempt to repay
Bisno v. Sax |
- Bisno got loan and defaulted
- Lender foreclosed and Bisno tried to repay arrearages, which the bank refused, claiming that it was insufficient as to the time to repay - Bisno filed injunection - Court granted because they held taht Bisno attempted to repay in good faith - Thus unfair to take peoples property away when they are willing to cure their default - Court set aside sale that lender made to new buyer |
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What are the notice of default (NOD requirements)?
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- Record - 2924(a)
- Service - 2924(b): must serve notice on borrower at last known physical address (address actually known if contained within DOT or subsequent notification of address) - Garfinkle: last known physical address is valid as long as lender can show they sent the service by regular and certified mail to address (if signs for mail cant deny he got it, if he refuses theres proof he denied it) - Failure to serve (Goodenow) and sale takes place, several remedies if plaintiff is junior lien, trustee or BFP: void (gets money back) voidable (different parties get different things) |
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What are the requirements of Notice of Sale (2924f)?
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- more onerous 4 requirements
- Record: 21 days before sale - Serve: 20 days before sale - Post: must be put on the property in a conspicuous place AND at a public place in city or county (courthouse/library) - Publish: must be published once a week for 3 consecutive weeks in a newspaper of general circulation at least 20 days before sale |
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2924(h) - criminalizing fraud, irrevocable bids
Southbay Building |
- Trustee and debtor decided to collude to delay foreclosure and trustee let debtor live on property
- 2924(h) criminalizes any act which would operate as a fraud or deceit upon any beneficiary or junior lienholder - Unlawful to fix or restrict bidding, any beneficiary, trustor or junior lender that is injured may be awarded damages fines and the person can be imprisoned - Bids made at trustee's sale are deemed irrevocable bids even though no consideration - Goes against statute of frauds which requires sale of real property to be in writing and signed to be effective |
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Postponing auctions
2924(g) |
- At any time before foreclosure sale is completed, trustee may postpone the sale at the instruction of the bank who can simply cry (tell) at the sale for a new time
- All that is necessary is for auctioneer to cry new date and location of sale - As of 1/1/06, new NOS must be given under CA law if sale is postponed for period totaling more than 365 days |
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Bad law requiring bank to disclose defects
Karoutas |
- Required foreclosing bank to disclose defects but criticized as bad law because seller had no duty himself to disclose defects, so how can we expect lender to know
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Junior Lien Credit bids
Nomellini v. Modesto |
- 3rd TD offered cash and credit bid which would have exceeded the amount that the trustee got from sale
- Trustee said that they did not care about credit bid, wanted cash - Only person foreclosing can credit bid, anyone else can't use whats owed as cash - Other trust deeds cannot use credit bids as cash |
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2924h(b)
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- Cash euquivalent is cash, cashiers check or money order
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Deference to trustee at sale
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- Trustee acts in discretion in postponing sale under 2924(g)
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2924(h)(g) - prohibits collusion
Lo v. Jenson |
- 2 people tried to invest in a property and got property that was valued over 100k for 5k
- Asserted that they were business partners and that they bought property as such - Court found that they were individual investors that agreed not to bid so they could get property at a low price - Voided the sale pursuant to 2924(h)(g) |
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Why should lender avoid the full credit bid?
Cornelison |
- If amount owed is 500, and property only valued at 350, if creditor does a full credit bid, it is viewed as payment of full amount owed
- Although it wouldnt matter because of 580(b) no deficiency, it matters for bad faith waste - When bad faith waste (trashing house intentionally or maliciously) exception to 580(d) and let lender go after borrower for damages - But if lender is stupid enough to FCB, then no BFW - Lenders should always bid the FMV of the house |
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3rd Party Fraud in credit bids
Alliance |
- If lender is induced by fraud of 3rd party to make a full credit bid on foreclosure, it may recover in tort for fraud despite bid
- Must show nexus between fraud and the full credit bid |
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What is a due on sale clause?
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- Lenders have a security interest in the property, if property damaged, can impede ability to sell property
- DOS clause allows lender to contract for the ability to call the entire amount of he loan if the borrower sells the property to another buyer because new buyer has no privity of contract with lender - Thus no privity, lender has no remedy against new buyer except foreclosure |
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Junior Lien Credit bids
Nomellini v. Modesto |
- 3rd TD offered cash and credit bid which would have exceeded the amount that the trustee got from sale
- Trustee said that they did not care about credit bid, wanted cash - Only person foreclosing can credit bid, anyone else can't use whats owed as cash - Other trust deeds cannot use credit bids as cash |
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2924h(b)
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- Cash euquivalent is cash, cashiers check or money order
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Deference to trustee at sale
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- Trustee acts in discretion in postponing sale under 2924(g)
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2924(h)(g) - prohibits collusion
Lo v. Jenson |
- 2 people tried to invest in a property and got property that was valued over 100k for 5k
- Asserted that they were business partners and that they bought property as such - Court found that they were individual investors that agreed not to bid so they could get property at a low price - Voided the sale pursuant to 2924(h)(g) |
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Why should lender avoid the full credit bid?
Cornelison |
- If amount owed is 500, and property only valued at 350, if creditor does a full credit bid, it is viewed as payment of full amount owed
- Although it wouldnt matter because of 580(b) no deficiency, it matters for bad faith waste - When bad faith waste (trashing house intentionally or maliciously) exception to 580(d) and let lender go after borrower for damages - But if lender is stupid enough to FCB, then no BFW - Lenders should always bid the FMV of the house - Cornelison FCB on house, tried to argue that the defendant or defendants predecessor had rendered the house uninhabitable - Court said that because they full credit bid on house, the lender had admitted that he had been paid in whole, thus lender suffered no damages |
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3rd Party Fraud in credit bids
Alliance |
- If lender is induced by fraud of 3rd party to make a full credit bid on foreclosure, it may recover in tort for fraud despite bid
- Must show nexus between fraud and the full credit bid |
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What is a due on sale clause?
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- Lenders have a security interest in the property, if property damaged, can impede ability to sell property
- DOS clause allows lender to contract for the ability to call the entire amount of he loan if the borrower sells the property to another buyer because new buyer has no privity of contract with lender - Thus no privity, lender has no remedy against new buyer except foreclosure |
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What is bad faith?
Osuna Hickman |
- Failure to care for property during depressing might constitute waste, but court did not specify what happens when market decreases, failure to pay property taxes was waste but no bad faith
- Not maintaining vines and orange trees and lender asserted bad fait but court did not find bad faith |
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Federal Rule for Bad Faith
Haddon |
- Rejects Cornelison, Fed holds that waste must be actionable preceisely because the lenders have suffered through a deficiency judgment
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3rd party liability for Bad Faith
- US financial v. Sullivan |
- 3rd parties that negligently damage property can be sued on a tort theory
- Any 3d party payment to the lender, reduces trustors balance owed to the lender - Action for waste against 3rd party can be brought by lender or debtor |
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Environmental contamination
726.5 736 |
- Lender secured by environmentally impaired property may waive its security and proceed against the debtor apart from the note
- 736 provides a remedy beyond foreclosing for breach of an environmental provision - gets past one form of action |
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What is a guarantor/surety and what can lenders do to them?
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- Guarantor is someone who is signing off to guarantee a borrowers debt, statute of frauds applies and must be in writing
- Borrower may not waive anti-deficiency, but guarantors can - If debtor defaults, guarantor held liable to lender AND has the right to go after debtor - Can step into lenders shoes and go after debtor for subrogation |
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2845 (require lenders to go after lender first for any debt) and the GRADSKY waiver
Loeb v. Christie |
- Lender went after guarantor first without exhausting the security
- Guarantor said tis not fair because lender did not go after debtor first - Court said guarantor can always go after debtor and security himself - Loeb may not be good law after 2845 - guarantor may require the creditor to go after the lender first for any debt - Guarantor of DOT is not protected by one action rule - After 2845, lender must get guarantor to waive 2845 rights - Lender can do a JDF, then go after guarantor |
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Guarantor not afforded with 580(b) protection
Heckes v. Sapp |
- Guarantors were not included within the purpose of 580(b), (to prevent aggravation of the downturn in depression times) thus guarantor is not shielded from a deficiency judgment by 580(b)
- Debtor sued by guarantor for reimbursement is still protected by anti-deficiency judgment - Guarantor also cannot go after the debtor for a deficiency judgment if the lender does an NJF |
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Union Bank v. Gradsky
(establishes Gradsky waiver) |
- When lender does a 580(d) NJF, he cannot go after the guarantor for deficiency because the lender cut off the ability of the guarantor to go after the debtor for deficiency by doing an NJF
- Only applies to non-purchase money loan because debtor has no 580(b) protection - Max guaranteed Bess' Loan - Bank NJF after Bess defaults, didnt do a JF or sue Max first - Thus bank impaired subrogation rights of Max by NJF because Max can no longer subgrogate Bess fo deficiency - Bank has a duty not to impair subrogation rights of guarantor, if they do, bank estopped from going after guarantor for any deficiency - If foreclosure is by lender NJF sale and it is non 580(b) loan, because it impairs the guarantors subrogation right, lender is estopped from further recovery from guarantor - NJF vests debtor with personal immunity from deficiency judgment, both against guarantor and lendor, because lender could avert this by JF or sue guarantor (Gradsky waiver) they are estopped from deficiency judgment - If 580(b) loan, lender is not estopped through NJF because guarantor could never go after debtor for deficiency |
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Gradsky Waiver
2856 |
- Allows for a guarantor to waive all rights and defenses against a lender and does not require specific language
- Thus a lender can do an NJF on a non-purchase money loan, and still go after guarantor for deficiency if the guarantor waived his Gradsky rights to subrogation |
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Bauman v. Castle
Purchase money loan with guarantor |
- Similar facts as Gradsky, but it was a seller carryback and thus 580(b) loan
- Because 580(b) protected debtor from deficiency judgment, even if the lender did an NJF, it did not matter -Bad idea for guarantor to back a seller carryback loan - Because lender's NJF did not prejudice guarantors rights of subrogation against debtor (because he had none due to 580(b)), lender could still go after deficiency judgment against guarantor - 580(b) would have barred deficiency following NJF so guarantors remedies not altered by lenders decision |
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Sham guaranty
Riverbank America v. Diller |
- A sham guaranty is where the lender tries to use a corporate entity as the guarantor when the controllers of the entity are still the borrowers to get around deficiency 580(d) legislation
- Here, the borrowers were required to pledge their corporation as general partners to a guarantor - Court held that it was a shame gauranty - Where supposed guarantors are nothing more than the principal obligors under another name, it is a sham guaranty |
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RESPA
- Good faith estimates of loan costs disclosed in advance |
- Requires good faith estimates of loan costs disclosed in advance
- Where RESPA applies, no one may pay any kind of fee to 3rd party, unless 3rd party takes some action of value to merit being paid, unearned fee is considered a kickback - Broker exception - unearned fees between licensed brokers is prohibited by RESPA unless loan broker has expertise in loan apps, helps fill out a loan, then can receive payment |
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Yield Spread Premiums
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- Not violations of RESPA
- Mortgage can go to multiple sources for the borrower to secure a loan - Lender tells broker that if he gets borrower to pay 5%, they will get a 1/4 percentage, but if get borrower to pay 6, broker gets 1% - Legal as long as they insert in the loan that it could affect interest rates - Predatory lending restricted |
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Usury
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- Interest that by statute is the maximum that can be charged
- Defined by CA state constitution - Violations of usury mean that lender cannot get any interest from loan - 1916.1 - allows broker to make or arrange loan that is exempt from CA usury law, all hard money lenders are mortgage brokers or have one employed - Exempted from usurious - Must also be secured in part or whole by a piece of real estate |
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Del Mar v. Caspe
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- Borrower goes after lender for usury violation
- Broker here did not make (fund) the loan to the borrower - Definition of arrange: soliciting negotiating or arranging the loan for another - Court held Caspe did arrange the loan - Thus because broker arranged, usury laws didnt apply - Pro broker case, if broker arranges loan secured by Real estate, then exempt from usury |
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Gibbo v. Berger
Broker violation of usury |
- Rejected Caspe, stated broker did not work in meaningful way to help prepare loans
- Broker used pre-printed forms, ordered title insurance and disbursed funds - Here broker didnt do all the things that Capse did, court said that broker was merely a clerk that filled things out - Stated "Broker must be a third party intermediary, rather than just a party to the loan that causes the loan to be obtained or procured" |
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Homesteads
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- Even if declared or recorded homestead, can still foreclose on it
- Homeowners are able to protect certain amounts of equity from judgment creditors NOT secured creditors - Big difference because one is voluntary from contract (secured) and one is involuntary (judgment) |
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Arbitration clauses unenforceable
Flores v. Transamerica |
- Arbitration clause unenforceable by lender because of 1 form of action rule
- Should not be in loan docs - Flores suing for unfair business practices - Lender had require borrower to submit in arbitration - Court held arbitration clause both procedurally and substantively unconscionable -Thus revocable because only one necessary to be found unconscionable |
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Bankruptcy
Automatic stay |
- Automatic Stay
- must file motion for relief from stay - Lender must show security is impaired or at risk |
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In re Kinney (BK case)
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- Family postponed foreclosure 10 times by filing bk
- Court threatened to sanction lawyer for helping then do it - Cannot abuse automatic stay |
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In r Weisman (BK)
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- Applied race- notice statue to BK trustees
- Wife filed BK, Trustee seized property because her estate - Court held that trustee had no interest because if they researched, would have seen that wife actually had no interest in property - Court felt bad for husband |
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Post Sale - Redemption
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- People trying to enjoin (set aside) the sale
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Requirements for injunction
Jessen v. Keystone Savings and Loan |
- Pre-sale TRO on the sale, usually lose
- Jessen tried to request injunction before foreclosure - Whenever plaintiff wants to get injunction or TRO, must she that you will win on the merits and that there is more at stake than money - Court said that because trustee sales are constitutional if done fairly, where there is no evidence of unfairness, no evidence of irreparable injury, and no evidence that money wasn't adequate, no TRO |
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Requirements for TRO or injunction
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- Must show PROCEDURAL irregularity coupled with Prejudice or harm to borrower
- If just procedural irregularity and no harm, borrower loses, must ahve harm to plaintiff (either lender or borrower) |
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In re Duncombe (Bufford)
2924(h) - notice of default |
- Debtor and buyer were racing in bk case to record deed and bk filing
- Debtor filed bk case first, and Bufford held that debtor prevailed over purchaser - In response, CA legislature amended 2924(h) saying that purchaser has 15 day grace period to file a trust deed, and if they file within 15 days of purchase, sale will be deemed perfected as of 8am on day of sale - Thus, now you must file BK before the sale to get automatic stay |
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Drawbacks to post-sale attacks
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- If sale is upheld because purchaser prevails, borrower has no opportunity to reinstate the loan
- In contrast, if trustor loses action to enjoin before sale, court usually grants additional time to reinstate (Hunt) - Borrower could also be faced with attorneys fees (if in contract) |
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Sorenson v. Hall
- Attack on titles and deeds |
- Plaintiff claimed title to property, as proof, he showed 3 deeds and recitals on boilerplate forms and rested case
- Defendant wanted more extrinsic evidence - Court said recitals were conclusive and sufficient, P didnt have to prove clauses - Legal sufficiency satisfied, recitals taken for face value, not challenging equity of recitals - Presumption is that recitals are valid, onus on defendant to prove they weren't |
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BOFA v. La Jolla
- Bank sold land when shouldnt, attacked BFP status through arguing buyer was professional investor |
- Trustee had no power to hold sale, when buyer bought, it was void sale
- Borrower had reinstated loan after foreclosure proceedings, trustee accidentally carried on sale because bank failed to tell trustee - Bank argued purchaser was buyer and paid less than market value - Court ACCEPTS fact that buyers pay less than FMV, doesn't render them not BFP |
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Melendrez v. D&I investments
- Definition of BFP |
- Broker bought 15 properties, value was 150k more than sale price
- Someone argued broker was not BFP because paid less than FMV - Court held BFP = - Purchaser for value - And no knowledge of the asserted rights of another |
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6 Angels v. Stuart Wright
- Clerical error in sale |
- Court unwilling to set aside a sale when the bene discovered its intended bid of 100k had been incorrectly submitted as 10k on the ground that it was a clerical error under bene's control
- No substantive irregularity only clerical error which court would not second guess` |
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Knapp v. Doherty
- Procedural irregularity must be Prejudicial |
- Procedural irregularity borrower complained of was notice of sale sent early, thus wanted court to set aside sale
- Court held it was not a prejudicial procedural irregularity - IRREGULARITY here did NOT CONTRIBUTE to inadequacy of sale price, thus not prejudicial - Courts will entertain attacks on sale with irregularities if they are - more than minor - caused the prejudice - Procedural defect plus injury |
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BFP v. Resolution Trust Corp
- USSC says all we are looking for in BK sale is reasonably equivalent value |
- Debtor at foreclosure sale does not have to pay FMV just has to pay reasonable value considering the facts and circumstances
- Actual price paid is sufficient as long as there is compliance with state foreclosure laws |
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Munger v. Moore
- Damages and standing |
- Any party having right to reinstate loan should have standing to set aside a trustee sale that was improper
- If BFP and hes protected, borrower is plaintiff, their remedy may be against lender for damages for wrongfully depriving equity of redemption - 3333 compares damages in wrongful foreclosure case with those in conversion of personal property |
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Right of Redemption
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- After NJF no right of redemption
- After sale, trustor is finished and even BK will not help - Quid pro quo is giving up right to deficiency |
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Consequence of right of redemption
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- If JF, and lender gets deficiency judgment, if buyer buys at sale, they do not get trustee deed
- Get Certificate of Sale --> has to wait a year to actually buy house to see if the borrower redeems - During year, borrower has superior right to possession of property - BFP has no right of possession to tenants, but does have right to rents - But if tenants don't pay rent, law does not allow eviction because they are there under color of borrower's ownership and entitled to keep possession - If borrower or renter does not pay rent, BFP cannot bring unlawful detainer action or action for ejectment |
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When do you typically see a JF?
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- On a larger commercial property and the bank has gotten a receiver who can go in and collect rents
- If debtor has other assets to cover any monetary judgments |
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Junior liens in a foreclosure sale
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- If there is 2, 3, 4 and 1 does a JF and gets deficiency judgment, all junior liens are sold out
- Foreclosing lender or purchaser gets title (fee simple) and the other liens disappear - Same in NJF |
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Judicial foreclosure and Right of redemption
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- If 1 does a JF, wipes out 2,3,4
- Certificate of redemption given to new purchaser - After 11 months borrower who got hit with deficiency judgment pays pack judgment - New purchaser gets money back and goes away, even if havent collected rents from tenants - 729.080(e) Liens do not automatically reattach and prohibits creditor of 2,3,4 from reattaching lien - Theory is that juniors were part of JF so they know whats going to happen and they better buy property at the sale or accept being sold out - Maybe per Brown, Jensen and Spangler, junior can sue directly on the promissory note if there is no 580(b) problem - Otherwise junior could cure 1 at foreclosure sale and buy property |
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What are the two types of possible transfer by mortgagors (borrowers)
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- Assumption: buyer takes over existing loan - like novation or modification of an agreement
- Subject to: buyer takes subject to the existing loan without any privity between him and the lender |
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What are the dangers of a subject to purchase?
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- Due on sale clause, old owner could be faced with a due on sale clause against lender when lender finds out buyer transferred to new buyer, they could do notice of default and do a NJF (acceleration clause)
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Acceleration Hypo (IMPORTANT)
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Buyer
Seller 1st TD from bank for 300k Land worth 500k 1. Buyer can assume (assumption) 300k loan, seller carryback financing for 200k - Here, seller cannot get deficiency, would need to step into the shoes of 1st TD, foreclose, and get value of property 2. Seller could put TD in escrow (subject to) and transfer to Buyer - Buyer would have to be approved by BOFA, because it would be new loan 3. Buyer could tell seller he will take over the TD and simply make payments (under the table) - No privity between buyer and seller, bank has no remedies as to buyer, but could foreclose on property - Seller still subject to deficiency judgment, but cannot get anything from buyer, only bring him in on a JF and kick him off property - Seller faces all exposure because he is obligor 4. Buyer could put 100 down, take over TD of 300, and take wraparound (all inclusive) DOT loan - Seller carries 100, drafts second DOT (wraparound) that says Buyer will be pay 400k and withint 400k includes a payment of the 300k Bofa Loan, but Buyer pays 5% and seller pays Bofa loan for 3% and makes difference on spread - Still risk of Due on sale clause |
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Braun v. Crew
- Subject To case |
- Seller liable for a deficiency judgment in subject to loan
- Seller may seek indemnity from buyer for any deficiency judgment - Seller may require indemnity from purchaser - Grantees are strangers to note, not liable for DJ - If you are grantor and transfer property on subject to basis, you are on hook for everything although you may get indemnity from grantee |
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Hopkins v. Warner
- Assumption case |
- On formal assumption of debt, grantee becomes principal debtor, and grantor becomes surety
- If grantee does not pay, bene may enforce the assumption made to the grantor - This is based on JF, plaintiff can bring anyone in under one roof - Go after assuming grantee first, if grantee does not pay, go after grantor - Grantor can still have liability after grantee has been exhausted |
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Robson v. Otoole
- 5 Assumptions all liable |
- Last guy to assume is primarily responsible, but other four are still liable as sureties
- Original grantor not protected from deficiency - If borrower 5 defaults, most responsible, but 1 is still liable for deficiency |
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Laforgia v. Kolsky
- Changes in loan type |
- Original loan was non purchase money
- General rule is that if its originally 580(b), it will keep its character with successive transfers - But here, lender entered new transaction and gave vendor 580(b) financing - Originally non-purchase money, transforms into purchase money on the ground that creditor who participates in sale and agrees to make subsequent purchaser new buyer, then its is treated as seller carryback - Disincentive to workout, if creditor gets involved with sale, then under Laforgia, lender may be considered seller carryback |
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Due on sale theories
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- Contractual covenant that says if borrower transfers the loan is due and bank will accelerate
- Bank argument is that transferring property would impair their security - Counter is that under anti-deficiency, banks is already impaired from going after borrower for deficiencies |
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711
- No restrain on alienation of property |
- No one may take any action to restrain the alienation of someone else's property
- where Lender is making due on sale clauses preventing seller from selling, this was restraint on alienation and against 711 |
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Wellenkamp v. BOFA
- No due on sale clauses |
- Mans sell property to Wellencamp
- Wellenkamp assumes loan and makes payment to Bofa - Bofa returns check saying Mans has to pay balance or renegotiate at higher rate - Court says unreasonable restraints will not be allowed - Alienation restrained whenever seller's lender threatened to call its loan or demanded an increased rate from prospective buyer - Court felt no justification for acceleration - Felt that lending industry bore burden of bad economic projections and not fall on homeowners - Doesn't force bank to assume loan, just can accelerate it, ALTHOUGH bank may be better off by having new buyer assume loan because new buyer is on the hook for deficiencies in security |
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Federal home loan bank board
- Conflict between federal law and state law |
- Congress wanted federal savings and loans to reject Wellenkamp
- Thus for federal banks, due on sale clauses are enforceable |
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Garn St. Germain
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- Congress stepped in and preempted 711, validated auto enforcement of due on sale clauses despite any contrary state law
- Thus, due on sale clauses are valid for all transaction on a sale, even an owner occupied 1-4 - INVALIDATES 711 - But Garn allows for transfer to inter-vivos trust where borrower remains occupant, cannot say its a violation of due on sale clause |
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Prepayment penalties
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- If promissory note and DOT say that borrower agrees that this is a 30 yea loan and if borrower pays back loan early, then there is a certain percentage penalty
- Could be liquidated damages clause --> where parties agree on amount of damages is hard to discern, agree in advance - Owner occupid 1-4 limits prepayment penalty to 6 months |
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Due on sale clause and Prepayment penalty?
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- CA passed law that if property is owner occupied 1-4, lender enforces due on sale clause it cannot get a prepayment penalty
- If not 1-4: - can get prepayment penalty if theres a section borrower has to sign separately |
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Tranfers of notes by the Bank
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- Mirrors assignments in contracts
- Bofa can assign loan to new lender, Bofa records assignment of note and trust deed, new lender steps in and borrower makes payment to new lender - Short sale is when lienholder takes less than what he is owed in order to release the lien |
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Security follows note
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- If creditor transfers note but not DOT, transferee still receives a secured note, security follows note legally
- But if you have DOT and no note, no evidence of debt - Note is key |
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Rogers v. Peckham
- Constructive notice for transfers when recorded |
- Borrower no notice if lender transfer to another lender and it was recorded
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RESPA
- Transfer restrictions |
- Respa says that lender that is assigning interest to lender 2 must give notice to the borrower that he's doing it, borrower can continue making payments to old lender for 60 days
- Provides borrower a defense against late payments or NOD |
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Adler v. Newell
- one with NOTE has paramount rights |
- One person had DOT and one person had note
- Even if wrongful transferor transfers, the one with the note is always in paramount position |
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Short Sales
Tax implications |
- If bank authorizes a short sale, new buyer can get taxed on the amount that was relieved - imputed income
- Exempted for 2010 |
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Home Equity sales contracts
- 1695: special kind of form when requirements are met |
- When:
- Seller lives in house, as opposed to investor - NOD has been filed against his house - Residential 1-4 and - Buyer does not intend to live in house - Legislature views it as vulture investor and special kind of form must be used - Contract must also provide seller with a 5 day right of recission, bold 12 point font stating right - Seller can alos prove within 2 years that sale was unconscionable and then rescind |
