Trust Deeds, Priority and Foreclosure

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July 18, 2018

Trust Deeds:
Probably the number one lien that a title examiner will have come across his or her desk is the recorded deed of trust (trust deeds) or sometimes known as a “deed of trust and assignment of rents”. The title examiner finds trust deeds securing various types of loans or obligations: Construction, purchase money, refinance, "hard money", home equity, lien contract, among others. A construction trust deed indicates a work of improvement and the risk of broken mortgage lien priority unless the record indicates later completion and a lapsed lien period.

First In Time:
Other things being equal, different (consensual) liens upon the same property have priority according to the time of their creation (Civil Code §2897). This applies to both voluntary liens (deeds of trust) and judicial liens. Tax liens are, of course, always an exception to the general rule of first to record has priority over junior recordings. The standard is not difficult to see, but complicated when applied. If
a trust deed, for example, is executed and delivered on January 1, 2014, it will have priority, generally, over deeds of trust and other liens recorded after January 1, 2014.

Priority of Purchase Money Deed of Trust – An Exception to the General Rule:
Civil Code §2898 states, in relevant part, the following: “(a) A . . . deed of trust given for the price of real property, at the time of its conveyance, has priority over all other liens created against the purchaser, subject to the operation of the
recording laws.”

Civil Code §2898 refers to the special priority given to a recorded purchase money trust deeds. That is, a lien taken by the seller of real property to secure the balance of the purchase price paid by the buyer/borrower. California courts deem purchase money obligations to have higher priority to other lienholders whose interests attached earlier in time. For that reason, such earlier recorded liens may be
shown as junior exceptions from coverage in a policy insuring a purchase money lender ‐‐ with management approval. See DMC. Inc. v. Downey Sav. & Loan Ass'n (2002) 99 Cal App 4th 190. This is an area of extreme important for the title officer to recognize the “special” rule that applies pursuant to

Civil Code §2898.

Agreeing to a Change in Priority:
The priority given to the purchase money deed of trust in favor of a seller can be modified by an agreement in writing. An adjustment of priority by subordination requires careful and analytic examination of the subordination agreement. Only valid, present, specific subordination agreements should be relied upon. And management and/or counsel should be consulted. Future or "automatic" subordinations are not recognized for most purposes – but, in 2013, they are still “out there” ready to be an obstacle to a proper closing. The industry has developed five standard forms of subordination agreement that meet statutory and title insurance requirements. Each form carries a letter designation:

A. Existing recorded trust deed to one about to be recorded;
B. Trust deed to one recorded concurrently;
C. Second trust deed to an additional advance on the first trust deed;
D. Recorded lease to trust deed about to be recorded; and
E. Recorded trust deed to lease about to be recorded.

Lease Priority:
It has become common in commercial real estate practice to employ an "attornment, nondisturbance and subordination" instrument signed by a borrower, a lessee and a lender. When the title examiner is covering the interest of the lender whose deed of trust is intended to encumber the fee, he/she may find that an unrecorded lease exists. Upon examination, each lease may contain various and
conflicting (and different) language of attornment, non‐disturbance or subordination. Some leases, favorable to the lessee, state a clear non‐disturbance provision but only state that the lessor "may request" a subordination of the lease to a mortgage (or deed of trust). In this situation, the lease is prior to the lien of the proposed mortgage, and any subordination agreement would still be subject to the
non‐disturbance provision. Among the other unrecorded lease documents, the title examiner may find automatic or future subordination language to rely on, but a non‐disturbance provision should be considered. And, if there is any question, management or counsel should be consulted.

In order to subject the interest of the owner of the fee (the underlying real property) to the lien of the deed of trust executed by a lessee, the fee owner must join in the execution of the deed of trust or he/she must execute a supplemental deed of trust. The usual language of subordination does not satisfy this requirement. Again, if there is any question in the mind of the title examiner, consult management or legal counsel.

Run, Do Not Walk, to the Recorder’s Office:
In short, the California Civil Code creates a “race” to the courthouse by two separate lienholders or two separate buyers. Section 1214 does, in fact, establish a race‐notice jurisdiction in California that does permit a later recorded lien to take priority over an earlier lien that is not recorded but only when four separate and distinct facts apply:
1. The first lien was not recorded;
2. The second later lien was recorded without the holder of lien knowing about the earlier lien;
3. The holder of the later recorded lien gave value of the lien (loaned money); and
4. The later lien recorded before the earlier lien.

If all four of the elements set forth above are not present, the earlier lien has priority over the later lien in the State of California. See Citizens for Covenant Compliance v. Anderson (1995) 12 Cal. 4th Under the race‐notice rules in California, a bona fide purchaser (or lender) for value without notice who first records prevails in a priority dispute.

Bona Fide Purchaser or Lender for Value:
The Grant Deed to the purchaser must be recorded – properly. The deed of trust must be recorded – again, properly. Being indexed, copied into the official records may sound great, but if the lien or the grant deed is outside of the chain of title a court can kick the claim of the grantee and/or lender that they are bona fide purchasers/bona fide lenders, right out the proverbial courthouse door. The grantee of lender must give value. “Value” is subject to review because more than nominal value is required, but the amount need not equal the full market value of the property when there is a sale.

Concurrent Recording or “Who’s On First?”
Generally, no priority can be assumed between concurrently recorded trust deeds. If no rank of priority is shown in recitals on the recorded documents. then the questioned priority may be shown as a recital beneath each item. not expressly approved by parties holding interests acquired subsequent to the subject trust deed causes the deed of trust to lose priority to such intervening interests. Such
modification is shown with the deed of trust in a junior position, following the intervening matters. Racing to the Recorder’s office resulted in a tie in the following case that shows there are always exceptions to the rule:

In the case, two banks held competing purchase money deeds of trust secured by the exact same property and the exact same borrower, and whose deeds of trust were simultaneously timestamped by the Los Angeles County Recorder’s Office. The borrower had obtained loans from two different banks. He was to secure the deeds of trust against the same piece of property. The borrower signed the trust deeds on the same day, but before two different California notaries. In Los Angeles, title companies sometimes can deliver trust deed to the recorder’s offices in large batches before opening time (8:00 a.m.). As luck would have it, both lenders delivered their trust deeds to the office of the Los Angeles Recorder before 8:00 a.m. on the same day. Both trust deeds were examined and both were given an 8:00 a.m. time stamp. The two documents were indexed thereafter. Of course, one of the deeds of trust was indexed before the other. And, with a good argument, the holder of the deed of trust that was indexed earlier claimed it had priority over the later indexed deed of trust.
The court decided, however, that the functions of indexing and recording were different and although the code required that recording be done “without delay”, there is no such requirement for indexing.

The court, logically, but arguably in a pickle, decided that simply because the recorder’s office indexed one of the deeds of trust before the other, because of the recorder’s own internal process, did not give the prior indexed deed of trust priority. Instead, the court indicated that since neither document was indexed at the time it was recorded, 8:00 a.m., neither lender who would have searched the records at 8:00 a.m. would have been able to determine that the other document had been recorded.

In its decision, the court concluded that, curiously, both banks were “bona fide [lenders] for valuable consideration who took without notice” because they would not have been able to determine that the other deed of trust had the lenders, either of them, examined the public record at the time of recording at 8:00 a.m. Both deeds of trust had equal priority.

But the case, First Bank v. East West Bank (2011) 199 Cal.App.4th 1309, is atypical because of the fraud perpetrated by the borrower against the two lenders who really did not know about the other because of the fraudulent conduct of the borrower. The court split the baby, so to speak, giving each bank equal priority.

Tax and Assessment Liens:
California Revenue & Taxation §2192.1 states, the following: Every tax declared in this chapter to be a lien on real property, and every public improvement assessment declared by law to be a lien on real property, have priority over all other liens on the property, regardless of the time of their creation. Any tax or assessment described in the preceding sentence shall be given priority over matters including, but not limited to, any recognizance, deed, judgment, debt, obligation, or responsibility with respect to which the subject real property may become charged or liable.

Accordingly, because property tax liens have super priority over all previous liens, section 2192.1 gives priority even over all previous liens, recorded or not recorded. See Isaac v. City of Los Angeles (1998) 66 Cal.App. 4th, 586, 600. The tax man always seems to win.
Marketable Record Title Act: “The Sixty Year Old Mortgage/Deed of Trust” A deed of trust or mortgage is extinguished sixty (60) years from the recording date of the document unless a timely Notice of Intent to Preserve Security is recorded, or the time is extended by
agreement. Civil Code §882.020 (a) (2). A deed of trust or mortgage stating the maturity date on the record expires 10 years from the maturity date stated, subject to any recorded notice of intent or extension agreement. Civil Code § 882.020(a) (1). Title examiners need to actually read the deed of trust to see if a maturity date for the note secured by the deed of trust is set forth.

Foreclosure of the Trust Deed:
The title examiner should note any obvious irregularity in foreclosure proceedings that the record discloses. The power of sale contained in a deed of trust is a private power of sale, not created by statute. But Civil Code §§2924 through 2924k et seq provide a comprehensive framework for the regulation of a non‐judicial foreclosure proceeding. Essentially, this is what happens:

The beneficiary of the deed of trust requests the trustee to commence foreclosure (or asks a different trustee to act as beneficiary's agent). The trustee takes detailed instructions from the beneficiary, prepares a Notice of Default (NOD), and asks a title insurance company to record it. At this point in time, the Trustee usually asks the title insurance company for a Trustee's Sale Guarantee describing the property in question. The trustee may postpone the sale at any time before the sale is completed, subject to proper notice being given.

The trustee's sale is final when the trustee accepts the last and highest bid. The trustee distributes surplus funds, if any, according to law. The trustee prepares and delivers the Trustee's Deed Upon Sale to the successful buyer at the trustee’s sale. The Trustee’s Deed is recorded. During the foreclosure process, the debtor/trustor may cure the default by paying all delinquencies and reinstating the terms of the loan, including any postponement. The trustor may also pay all sums due prior to the sale of the property at foreclosure and thus avoid the sale. In either case, the NOD is then rescinded. Generally, interests recorded subsequent to the foreclosing trust deed are
extinguished at the time the trustee’s sale occurs and the trustee’s deed upon sale records, provided that proper notice was given to each of them. But, as discussed above, real property taxes are a paramount lien regardless of when they attach (Revenue & Taxation §2192.1). The borrower is not permitted to make a post foreclosure redemption when a non‐judicial foreclosure occurs, but the IRS
may exercise post‐foreclosure redemption up to 120 days after the sale. The Federal Government through the IRS might come forward with public funds and redeem the property from the sale. Rare, but it does occur.

In extraordinary cases, the Trustee is allowed to rescind the Trustee's Deed. Proper foreclosure of a purchase money trust deed extinguishes not only subsequent liens and encumbrances, but the Trustee's Deed Upon Sale conveys title free of any judgment liens against the borrower that recorded prior to the deed of trust being foreclosed. This includes Federal Tax Liens but does not include
judgments in favor of the United States. If the borrower re‐acquires title after non‐judicial foreclosure, then all junior trust deeds reattach (and also all judgment liens, etc. attach).

An improperly conducted trustee’s sale creates no right in the highest bidder at the sale. Such a bidder is entitled only to refund of his/her/its money plus interest. Residential Capital LLC v. Cal‐Western Reconveyance (2003) 108 Cal App 4th 807 (Trustee consummated sale unaware of an agreement between the beneficiary and trustor that the sale would be postponed).

Richard D. Marks, Esq. - Special thanks to Lawrence Lacombe for portions of his materials used with his permission.

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