Priority of Payments at Trustee's Sale

The final step in a non-judicial foreclosure in California is a Trustee's Sale of the real property, and Civil Code § 2924k, subdivision (a), specifies that the proceeds of a trustee’s sale must be distributed in the following order of priority:

(1) To the costs and expenses of exercising the power of sale and of sale,

(2) To the payment of the obligations secured by the deed of trust or mortgage which is the subject of the trustee’s sale (the lien being foreclosed),

(3) To satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority, and

(4) To the trustor or the trustor’s successor in interest (the borrower).

When a junior lienholder forecloses on a second deed of trust at a nonjudicial trustee’s sale, the senior lienholder is not entitled to any proceeds from the sale because the property is purchased at the sale subject to the first deed of trust. If there are any surplus proceeds of the sale, they cannot be recovered by a senior lienholder.

California has adopted a “first in time, first in right” system of lien priorities, under which, as a general rule, liens have relative priorities among themselves according to the time of their creation.  Civ. Code § 2897 provides that “Other things being equal, different liens upon the same property have priority according to the time of their creation" (signing by the borrower).
In the recent case of MTC Financial v. Nationstar Mortgage, the two competing deeds of trust were both signed on December 5, 2003, and the time of their creation did not determine their priority.

The date of recording was not determinative in that case. Generally, liens that are recorded earlier take priority over subsequently recorded liens.  An instrument is deemed to be recorded when, being duly acknowledged or proved and certified, it is deposited in the Recorder’s office, with the proper officer, for record.  In MTC Financial, both deeds of trust were deposited in the recorder’s office at 8:00 a.m. on December 16, 2003.

In MTC Financial, the deed of trust on the home equity line of credit (a HELOC) was assigned instrument number 2003-0603657 and the deed of trust on the mortgage was assigned instrument number 2003-0603658. Therefore, based upon the instrument numbers, the HELOC was in senior position because it was indexed first. However, if two deeds of trust are submitted at the same time for recording, the order in which they are indexed is not determinative of priority.  

Absent evidence of timing that was determinative, the trial court in MTC Financial reasonably relied on the apparent intent of the parties to determine the priority of the two liens. (Civ. Code § 2897 [system of first in time applies only if “[o]ther things being equal.”].)

Given that Countrywide was the original lender on both loans, the reasonable expectation is that it would secure the larger mortgage loan for $205,080 in the primary or senior position to the HELOC for $15.000.  This understanding was further supported by reference to the usual understanding of the relationship between a mortgage and an equity line of credit. The HELOC allows the borrower to access large credit lines that are secured by the existing equity in the home (i.e., the difference between current market value and current indebtedness).

Because the trial court found that the HELOC was intended to be recorded second, and the foreclosure was on the HELOC loan, the larger loan was in a senior position, and the surplus funds of $73,085 were properly distributed to the Homeowners Association on its lien, and the balance to the borrower who was foreclosed upon.  This result did not harm the senior lienholder because it retained its secured lien on the property.

This case illustrates the variety of issues present in real property disputes based upon the law that may seem complicated, and the court's ability to fashion remedies that may be peculiar to the facts of the case.  
Experienced legal advice may assist in clarifying the priority of liens on property, resulting in a recovery by the foreclosed borrower.

Liquidated Damages Clause

A clause in a contract for liquidated damages, which is a specified amount or percentage to calculate, for a contractual breach has a long history in California.  Under some circumstances, the provision can be designed and operate as a contractual forfeiture (a rare finding because "the law abhors a forfeiture"). 

California's Civil Code § 1671 places limits on liquidated damages clauses, especially for certain contracts, such as for consumer goods and services, and leases of residential real property. 

A provision for liquidated damages is valid, unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

A liquidated damages clause will generally be considered unreasonable and unenforceable if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would result from a breach.  The amount specified in the contract must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.

In the standard residential purchase agreement, the liquidated damages clause is in paragraph 21 B,  and it provides that if the buyer fails to complete the purchase because of buyer's default, seller shall retain, as liquidated damages:

            a.         The deposit actually paid, unless

            b.         The property is a dwelling with no more than four units, one of which the buyer intends to occupy, then the amount retained shall be no more than 3% of the purchase price.

            c.          Any deposit in excess of the maximum allowed shall be returned to the buyer.

Any clause in the agreement that specifies a remedy, such as a release or forfeiture of deposit or making a deposit non-refundable, for a buyer's failure to complete the purchase in violation of the agreement is invalid, unless the clause independently satisfies the statutory liquidated damages requirements in the Civil Code. (Paragraph 21 A.)

Because the deposit is limited to 3% for residential homes of 1-4 units in the standard residential purchase agreement, sellers of such properties should always insist on  an initial deposit of 3% of the purchase price to maximize their recovery if there is a breach by the buyer.  For other properties, the seller can attempt to get an increased amount as a deposit in a clause that is part of the agreement, but it has to be reasonable under the circumstances. 

Understandably, buyers would prefer to deposit a sum much less than 3% of the purchase price, or no deposit at all, to minimize their exposure if they breach the contract.

           

A liquidated damages clause is valuable in because it specifies the amount of damages in a breach of contract claim., often leaving only issues of liability to be decided. Consideration should be given to including a liquidated damages clause in every contract as it will simplify determining the amount of damages for any breach.  Typically, it is the seller who benefits from a liquidated damages clause that allows retention of a deposit, but they can be structured as mutual, if it was reasonable for the parties to suffer damages from the breach of the other.

As with most legal matters, it is a best practice to consult with an attorney regarding all contract documents, especially with regard to liquidated damages provisions, in order to avoid expensive lawsuits to resolve contractual disputes.

Landowners Normally Have No Duty To Persons Crossing The Street

The Supreme Court, both state and the federal, is not usually unanimous, but in the recent California Supreme Court decision in Vasilenko v. Grace Family Church, the court unanimously ruled that a landowner does not have a duty to assist invitees in crossing a public street, when the landowner does no more than maintain a parking lot that requires invitees to cross the street to access the landowner's premises, so long as the street's dangers are not obscured or magnified by some condition of the landowner's premises or by some action taken by the landowner.

Plaintiff Vasilenko contended that the Church owed him a duty of care to assist him in safely crossing the public street, and that the Church was negligent in failing to do so,  causing him to be injured. The Church argued that it had no control over the public street, and therefore, did not owe Vasilenko a duty to prevent his injury under the principle that landowners have no duty to protect others from dangers on abutting streets unless the landowner created the dangers.

The Church did not control the public street, and it did not create the dangers on the street. But the Church, by locating its parking lot on the other side of the street and directing Vasilenko to park there, foreseeably increased the likelihood that Vasilenko would cross the street at that location and thereby encounter harm.

However, the Court concluded that a landowner does not have a duty to assist invitees in crossing a public street when the landowner does no more than site and maintain a parking lot that requires invitees to cross the street to access the landowner’s premises, so long as the street’s dangers are not obscured or magnified by some condition of the landowner’s premises or by some action taken by the landowner. Because Vasilenko did not allege that the Church did anything other than maintain a parking lot on the other side of that street, the Court found that the Church did not owe him a duty to prevent his injury.

A plaintiff in a negligence suit must demonstrate a legal duty to use due care, a breach of such legal duty, and the breach as the proximate or legal cause of the resulting injury.  California Civil Code section 1714(a), establishes the general duty of each person to exercise, in his or her activities, reasonable care for the safety of others. Courts invoke the concept of duty to limit the otherwise potentially infinite liability which would follow from every negligent act.

In determining whether policy considerations weigh in favor of finding a duty is owed, Courts have applied a complicated analysis of the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved. The issue is not whether these factors (the Rowland factors) support an exception to the general duty of reasonable care on the facts of the particular case, but whether carving out an entire category of cases from that general duty rule is justified by clear considerations of policy.

In Vasilenko, because the general duty to take ordinary care in the conduct of one’s activities applies to choosing the location of a parking lot for one’s invitees and to training one’s employees, the issue was stated as whether a categorical exception to that general rule should be made exempting those who own, possess, or control premises abutting a public street from liability to invitees for placing a parking lot in a location that requires invitees to cross the public street.

Two of the Rowland factors — foreseeability and certainty — weighed in favor of finding a duty, while four — closeness, preventing future harm, burden, and moral blame — weighed against duty, with the insurance factor weighing in neither direction. In assessing duty, the Courts do not merely count up the factors on either side. 

In Vasilenko, the policy of preventing future harm loomed particularly large. In light of the limited steps a landowner can take to reduce the risk to its invitees, especially when compared to the ability of invitees and drivers to prevent injury, and in light of the possibility that imposing any duty will discourage the landowner from designating options for parking, the Supreme Court held that a landowner who does no more than site and maintain a parking lot that requires invitees to cross a public street to reach the landowner’s premises does not owe a duty to protect those invitees from the obvious dangers of the public street.

This decision is a good illustration of the type of analysis that a Court will apply to determine if a legal duty exists, and whether the defendant breached the duty, and whether the breach was the proximate or legal cause of the resulting injury. 

Partition Sale Can Force Sale of Jointly Owned California Real Property

            Co-owning real estate by relatives, friends, or mutual investors can be a lucrative financial investment, as they can pool their credit and funds to buy real property, and hold it as joint tenants or probably more appropriately, as tenants in common. Eventually, one of the co-owners will decide that they need to sell the property, and the other may refuse, typically because they are living in the property. 

            In California, a co-owner of property has an absolute right to sue for partition (i.e., division of value of the property among owners by sale under specified terms), unless barred by a valid waiver.  This means that although one owner who lives in the property and may or may not be paying any portion of the mortgage opposes the other owner who wants to sell the property to avoid foreclosure or to liquidate the equity, the selling owner can file a legal action to obtain the Court's judgment for a sale.

            The judgment of partition will require the property to be sold to the highest offer under specified conditions.  Such conditions typically include the identity of the listing broker, escrow and title company, procedure for deciding amount of list price and acceptance of offers, and related decisions concerning price and terms of the sale.

            In a representative case, two brothers decide to purchase a single family residence, and jointly live there and share all expenses, including the mortgage.  They fail to prepare a written co-ownership agreement.  Thereafter, disagreements occur related to living conditions and one of the brothers stops paying his share because he was not sufficiently employed to bear his share of the costs.  The other brother moves out, but continues to pay all of the mortgage and property taxes to avoid a tax lien or foreclosure.  Eventually, the paying brother wants to sell the property so they can divide the equity of $300,000, and the brother residing at the house refuses because he will have to move and start paying rent somewhere else.

            The paying brother files a legal action for partition, to which there is seldom a good defense, or than to argue credits and debts to change the normal equal split.  The opposing brother soon realizes that not only is he paying his attorney to resist the action, but he may eventually be responsible for one-half of the attorney's fees for the paying brother.  So in effect, if he resists the partition action, he may increase the amount of the attorney's fees that may be paid out of the equity in the house, and he may end up paying 75% of the attorney's fees and costs.  Protracted litigation can potentially off-set the entire amount of the equity, leaving both brothers with no net gain from the sale.

            Reasonable people quickly realize after the lawsuit is filed that a settlement for either a buy-out or a sale is the best economic decision.   Settlement of a partition action can include interim stipulations (i.e., express written agreements, typically approved by the court), that provide for a continuance of the trial, and a specific procedure to list and sell the property and keep the net proceeds in an escrow.  Thereafter, the parties can proceed to trial of the claimed credits and debts.  However, after the funds are liquidated and on deposit in a trust account and available for distribution upon the court's approval and signing of the judgment, the parties often become more reasonable and motivated to make a deal that provides for them receiving distribution checks.       

            The settlement should include terms for resolution of the attorney's fees and costs incurred because a legal action was made necessary by the opposing party.  Unless there is an agreement, statutory costs are apportioned among the parties in proportion to their interests, or the court can make such other apportionment as it determines may be equitable.  Attorney's fees that were incurred for the common benefit in the action are required to be apportioned among the parties to the action under Civil Code § 874.010, et seq.

           

            Sometimes, a legal action for partition will provide the forum for a negotiated settlement that resolves the dispute.

Co-Owners' Title to California Real Property

Co-Ownership Options

Ownership of real property in California by more than one person is referred to as co-ownership, co-tenancy, or concurrent ownership. There are four basic options to hold title of ownership of real property, and the best option depends upon the characteristics of each option in relation to the goals of the owners.  The options are tenancy in common, joint tenancy, partnership (or corporation or limited liability company), and community property.

1.         Tenancy in Common

A tenancy in common is created when the deed conveying title specifies that the owners are "tenants in common" or "in common."  If the deed does not specify the type of ownership, a tenancy in common may be created by operation of law.  Any number of persons may own property as tenants in common, and their interests may be equal (50% - 50%) or unequal (60% - 40%), but the interests must total 100%. 

Tenants in common may acquire their interests at different times and from different sources, and they may sell or borrow against their interest without the knowledge or consent of the other owners.  The main characteristic of this type of ownership is that there is no right to survivorship.  Therefore, the ownership interest of a deceased tenant in common passes by testate (e.g., will or living trust) or intestate succession (without a will or trust), and not by operation of law to the surviving cotenants.

Unless they have agreed differently as specified in the deed transferring title, all tenants in common have equal rights to the ownership.  They have equal rights of possession to the property, and neither may exclude the other from any part of the property, even if only one tenant is actually in possession of the property.  In other words, if only one tenant actually resides on the property, that tenant cannot exclude other tenants even if they never reside on the property.

All rents and profits, including the appreciation of the property, are shared among the co-tenants in proportion to their undivided interests.  This sharing also applies to any expenses (e.g., taxes and mortgages), and losses in value of the property.

2.         Joint Tenancy

Another common form of ownership is a joint tenancy, and it requires a single transfer that expressly declares that the form of ownership is a joint tenancy (e.g., "as joint tenants" or "in joint tenancy").  Married persons often hold title as joint tenants. To create a joint tenancy, there must be four unities of time, title, interest (must be equal), and possession.  The joint tenancy can only last as long as the four unities of title exist, and if one of the joint tenants unilaterally conveys its interest, then the joint tenancy is severed, and the remaining joint tenants hold their interests as tenants in common with the transferee.

The main benefit of holding title by joint tenancy is the right of survivorship that provides that upon the death of one of the joint tenants, the title of the deceased tenant automatically vests in the surviving tenants by operation of law, with no need for probate.  Therefore, if the joint tenants want the deceased tenant's interest to pass automatically to the other tenant (e.g., husband to wife, or parent to child), a joint tenancy should be used.  If the joint tenants want to be able to bequeath their respective interests by will or trust to another (e.g., husband wants to leave his share to his son by an earlier marriage), then a joint tenancy should not be used.

3.         Partnership

If the persons are investing in real property as a business proposition, then a form of ownership they could use is a partnership.  A partnership is an association of two or more persons to carry on a business for profit, and the real property is owned by the partnership, and not by the partners individually.  The property can only be conveyed in the name of the partnership, and the partners can only use or possess the partnership property on behalf of the partnership.

A partnership may be general or limited, and a similar type of business arrangement that can be used is a corporation or limited liability company.  A corporation or limited liability  company have the advantage of the corporate shield that may provide protection to the shareholders and members that a partnership may not provide.

4.         Community Property

The fourth form of ownership in California is community property, which is typically property acquired by a married person or registered domestic partner during the marriage or domestic partnership while he/she is domiciled in California.  There is a general presumption in California's family law statutes that all property acquired during marriage is community property, and a written agreement (e.g., pre-nuptial or post-nuptial agreement) is typically used to defeat the presumption and make the interests separate property.  Title can be taken in the name of "Joe Smith and Nancy Smith as community property with right of survivorship".

Regardless of the type of co-ownership, each of the owners typically have an equal right to the possession, use and benefit of the entire property.  One of the misunderstandings of some owners is that they can divide the property into separate parcels by defining the percentage of ownership in the title.  But when property is owned by co-owners, the ownership is to the entire property, in the percentages of ownership specified (e.g., Joe as to 70% and Jane as to 30%), or equal shares if no percentages are specified.  One cotenant has no right, absent an action for partition, to force another co-tenant to change the boundaries of the possessory interest.

The ownership of real property can be complicated and the form of ownership should be carefully considered based upon the unique characteristics of each type, and the goals of the parties.