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election of remedies must be made by the lender,273 which most likely will pursue a nonjudicial foreclosure because of its lower cost, shorter time span, and the lack of a borrower’s post-trustee sale redemption right (though there is a right to reinstate the loan274 and to pay the loan in full275 before the trustee sale), rather than the more costly judicial foreclosure that involves a lengthy lawsuit and provides a lengthy postjudgment period of redemption276 for the borrower.277 A lender may not obtain a deficiency judgment278 against the delinquent borrower when there is a purchase money loan279 or when the lender elects to foreclose by trustee sale.280 “Non-standard” purchase money loans can be an exception to the bar against deficiency judgments281 and purchase money loan protection can be lost when such a loan is refinanced.282 In fact, many of the foreclosures that occurred during the financial crisis were defaults of refinance loans in which borrowers paid off the existing loan and pulled out cash based on the equity they had in the property’s value.283 After a lender has complied with all preforeclosure statutory requirements, the notice of default can be recorded ninety days later the notice of trustee’s sale can be recorded,284 and the sale may be held no sooner than three months and twenty days later.285 Both the notice of default and the notice of trustee’s sale must strictly follow the statutory requirements.
273 Vlahovich v. Cruz, 213 Cal. App. 3d 317, 321–22 (1989); Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 43 (1963).
274 CAL. CIV. CODE § 2924(c) subd. (a)(1) (West 2013).
275 CAL. CIV. CODE §§ 2903–2906 (West 2013).
276 CAL. CODE CIV. P. § 725(a), § 729.010 et seq. (2013).
277 CAL. CODE CIV. P. § 726 subd. (e) (2013); Vlahovich, 213 Cal. App. 3d at 321; 4 MILLER & STARR, CAL. REAL EST. § 10:180 (3d ed. 2002). For a comparison of non-judicial and judicial foreclosures, see id. § 10:221.
278 Deficiency judgment is generally defined as a judgment in favor of the lender in the amount of the balance of the debt after a foreclosure, “limited to the difference between the fair market value of the property and the amount for which it was sold.” Ghirardo v. Antonioli, 14 Cal. 4th 39, 48 (1996) (citation omitted).
279 CAL. CODE CIV. P. § 580b (2013) (“No deficiency judgment shall lie in any event after a sale of real property... for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property....” ) (italics added); see also Ghirardo, 14 Cal. 4th at 49; Krone v. Goff, 53 Cal. App. 3d 191, 193 (1975).
280 CAL. CODE CIV. P. § 580d (2013).
281 See Spangler v. Memel, 498 P.2d 1055, 1062, 7 Cal. 3d 603, 614 (1972); Roseleaf Corp. v.
Chierighino, 378 P.2d 97, 100, 59 Cal. 2d 35, 41 (1963).
282 See DeBerard Props., Ltd. v. Lim, 976 P.2d 843, 845, 20 Cal. 4th 659, 663 (1999) (citations omitted).
283 SOWELL, supra note 1, at 23.
284 See CAL. CIV. CODE §§ 2924(a)(2)–(3), 2924f(b)(1) (West 2013). The notice of trustee’s sale must be posted, mailed, and recorded twenty days prior to the sale; it must also be published for three consecutive weeks.
285 CAL. CIV. CODE § 2924(a)(4) (West 2013).
California law authorizes a lender’s automatic credit bid at the foreclosure sale in the full amount owed by the borrower, including trustee’s fees and expenses.286 A lender may bid a lesser amount if it prefers.287 A prudent lender will be cautious with regard to the credit bid it submits because there are disadvantages to a full credit bid, including a bar to recovery of a deficiency judgment when, for example, there is a non-purchase money loan288 or when the borrower commits bad-faith waste.289 It is best to reserve the option to pursue a deficiency judgment for that occasion when the costs and fees attributable to compliance with the CVAPO are substantial and the subject loan is within an exception to the antideficiency rule. As a consequence, claims for deficiency judgments may become more common, although it is unlikely that a claim for bad faith waste would arise out of a borrower who merely allows the property to show “evidence of vacancy” as defined by the CVAPO since such acts of nuisance would rarely if ever rise to bad faith waste. If the underlying circumstances involve something less egregious than bad faith waste, the lender probably does not have the factual support to file a lawsuit in good faith to obtain a deficiency judgment and instead will limit itself to the remedy of the nonjudicial foreclosure.
Either way, lenders and their counsel must evaluate whether California law would even support a deficiency judgment claim before they determine the optimum credit bid amount.
286 CAL. CIV. CODE § 2924h(b) (West 2013).
287 See Cornelison v. Kornbluth, 15 Cal. 3d 590, 607–08 (1975).
288 See Goodyear v. Mack, 159 Cal. App. 3d 654, 656-57 (1984). However, “there is no flat rule that the nature of a loan secured by a trust deed never changes in subsequent sales transactions. Instead, the proper inquiry is whether the facts are such that the purposes of the antideficiency statute will be advanced by applying it to a particular variation on a standard purchase money mortgage.” LaForgia v.
Kolsky, 196 Cal. App. 3d 1103, 1112 (1987).
289 See Cornelison, 15 Cal. 3d at 604–06 (affirming summary judgment in favor of defendant (purchaser’s grantee who did not assume underlying debt) against cause of action for waste because plaintiff (seller-beneficiary of deed of trust) did not prove that defendant committed waste in bad faith, defined as reckless or malicious despoliation of the property). Thus, bad faith waste can be committed by the willful failure to irrigate, cultivate, fumigate, and fertilize an orchard that served as security for the loan, Hickman v. Mulder, 58 Cal. App. 3d 900, 908 (1976), the willful non-payment of real property taxes, Nippon Credit Bank, Ltd. v. 1333 N. Cal. Boulevard, 86 Cal. App. 4th 486 (2001), and possibly by the demolition of the building that secured the loan, Fait v. New Faze Dev., Inc., 207 Cal. App. 3d 284, 299 (2012) (reversing summary judgment against lender’s bad faith claim because genuine issue of material fact existed as to whether former owner and others committed bad faith waste by demolishing the building; broadly defining “‘bad faith’ waste [as that which] occurs whenever the owner’s impairment of the value of the security is not caused by the economic pressures of a market depression, whether the owner acts recklessly, intentionally, maliciously, or with some other mental state”).
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 399
2. Lender’s Credit Bid Includes Loan Principal Balance, Interest, Fees, and Costs The lender290 that pursues nonjudicial foreclose of the property can submit at the trustee’s sale a full (or partial) credit bid that will be the sum (or portion) of the outstanding loan principal, interest, fees, and costs.291 The amounts of the delinquent loan principal and interest are of course calculated according to the loan documents and the borrower’s payment history. Fees and costs related to prosecuting the foreclosure are rigidly regulated and limited by statutes that separate them into two categories, distinguished by the notice of default292 and the notice of trustee’s sale.293 As part of the statutory costs, expenses, and fees that are added to the principal amount owed by the borrower in a standard nonjudicial foreclosure, a lender can recover property taxes, assessments, insurance premiums or advances made by the lender in accordance with the terms of the deed of trust.294
Other expenses not directly related to the foreclosure, such as those incurred under the CVAPO mandate, present another category of lender exIn California, one appellate court has ruled that a party need not possess the promissory note to start a non-judicial foreclosure. See Debrunner v. Deutsche Bank Nat’l Trust Co., 204 Cal. App. 4th 433 (2012).
291 See CAL. CIV. CODE §§ 2924c, 2924d (West 2013).
292 Once the lender records a notice of default, a lender can recover “all reasonable costs and expenses... which are actually incurred in enforcing the terms of the obligation.” CAL. CIV. CODE § 2924c(a)(1)(C) (West 2013). Costs and fees are limited “to the costs incurred for recording, mailing, including certified and express mail charges, publishing, and posting notices required by Sections 2924 to 2924i, inclusive, postponement pursuant to Section 2924g not to exceed fifty dollars ($50) per postponement and a fee for a trustee’s sale guarantee or, in the event of judicial foreclosure, a litigation guarantee.” CAL. CIV. CODE §2924c(c) (West 2013). Attorney’s fees are recoverable as well, but a schedule sets out in the statute limits the fees to a base amount plus a percentage of the unpaid principal balance, both of which are adjusted based upon the unpaid principal amount. CAL. CIV. CODE § 2924c(d) (West 2013).
293 See CAL. CIVIL CODE § 2924d(b) (West 2013) (when the notice of sale is recorded, “reasonable costs and expenses, to the extent allowed by subdivision (c) of Section 2924c, which are actually incurred in enforcing the terms of the obligation and trustee’s or attorney’s fees” are recoverable by a lender). Again, attorney’s fees are set out in a schedule that limits the amount to a base amount and a percentage of the unpaid principal, both of which are adjusted depending on the unpaid principal amount. See CAL. CIV. CODE § 2924d(a) (West 2013). Attorney’s fees authorized by § 2924d “shall be in lieu of and not in addition to those charges authorized by subdivision (d) of Section 2924c.” Id.
294 CAL. CIV. CODE § 2924c(a)(1) (West 2013). Pursuant to the typical loan agreement, the borrower’s payments for property taxes, assessments, and insurance premiums are combined into the monthly loan payments.
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penses. There does not appear to be any California case that addresses the question of whether abandoned-property-ordinance-mandated costs incurred after a notice of default has been recorded are recoverable through the lender’s credit bid at the foreclosure sale.
Advances paid by the lender on behalf of the borrower typically involve other expenses. Cal. Civ. Code §§ 2924c and 2924d set out the costs and expenses recoverable in a foreclosure, but “do not serve to define or limit the contractual obligation of the parties.”295 Advances may be added to the debt owed by the borrower as long as the deed of trust contains a provision that permits the lender to make advances on behalf of the borrower to protect the security.296 Attorney’s fees incurred to protect the security are like other advances paid by the lender under the terms of the deed of trust that can be added to the secured debt.297 Standard expenses to complete a nonjudicial foreclosure are authorized by §§ 2924c and 2924d.298 Because the CVAPO forces lenders to incur what appear to be nonforeclosure expenses to comply with its regulation, the question arises as to whether these expenses, together with related attorney’s fees, are advances paid by the lender on behalf of the borrower to protect the security, and thus recoverable at the foreclosure sale.
One initial problem might occur when the lender inadvertently schedules the recording of a notice of default relative to preforeclosure efforts to communicate with the borrower and the timing of the lender’s inspection, registration, and maintenance duties under the CVAPO. If the lender inspects and registers the property before or during the pre-notice of default thirty-day window, there may be a violation of Cal. Civ. Code § 2923.5 if the lender takes steps in pursuit of its foreclosure remedy prior to or during communication with the borrower.299 California courts have yet to rule on whether inspections, registration, payment of registration fees, or maintenance before or during the thirty-day window are a violation of § 2923.5.
Nor has a court ruled that a lender’s fees, costs, and advances that were incurred during the window can be included in or excluded from the lendSee Passinisi v. Merit–McBride Realtors, Inc., 190 Cal. App. 3d 1496, 1512 n.10 (1987) (holding “[t]hat [Civil Code § 2924d] provides amounts which may be claimed as reasonable costs and expenses of foreclosing upon the property, it does not serve to define or limit the contractual obligation of the parties”) (citing Buck v. Barb, 147 Cal. App. 3d 920, 924–25 (1983)).
296 See id.; see also Caruso v. Great W. Sav., 229 Cal. App. 3d 667, 676-77 (1991) (holding “the statutory schedule does not so restrict the attorney’s fees in the present case”); Bruntz v. Alfaro, 212 Cal. App. 3d 411, 421 (1989) (“Under appropriate contract provisions, such expenses may be treated as collateral advances and added to the amount of the debt.”).
297 See Buck v. Barb, 147 Cal. App. 3d 920, 924–25 (1983).
298 See supra notes 291–92 and accompanying text.
299 See supra notes 244–45 and accompanying text.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 401 er’s automatic credit bid at the foreclosure sale.300 However, this may not be a problem in San Diego County where a local federal district court—the venue where Chula Vista is located—has ruled that § 2923.5 is preempted by federal law.301 These lender advances seem to fall into two categories. First, costs to inspect, maintain, and keep secure the property appear to be made on behalf of the borrower in that these costs directly relate to the trust deed covenants that obligate the borrower to maintain and keep secure the collateral property. It is certainly understood by the parties at the formation of the loan agreement that the borrower promises to maintain and keep secure the property he owns and possesses. If the lender must undertake these duties, it stands to reason that the expenses it incurs are for the borrower’s account.
Thus, the advances could be added to the borrower’s debt.