Thursday, February 15, 2018

FYI: Cal App (1st Dist) Holds Intent of Parties Determines Priority of Simultaneous Lien Recordings

The Court of Appeals of California, First District, recently concluded that 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.  Instead, according the Court, the intent of the parties will determine priority. 

In this case, one originating lender extended two loans secured by the same real estate, and it was apparent that the expectation was that the larger mortgage loan would have priority. The trial court had held that the defendant was the senior lienholder even though the defendant's mortgage was indexed after the other mortgage.  The trial court then concluded that as a senior lienholder the defendant's lien would remain on the property, and the defendant was not entitled to any of the sale proceeds from the plaintiff's nonjudicial foreclosure under California Civil Code § 2924k. 

The Appellate Court also observed that the second lien was a home equity line of credit as further support that the defendant's lien was intended to have priority.  Accordingly, the Appellate Court affirmed the ruling of the trial court.

A copy of the opinion is available at:  Link to Opinion

In 2003, a borrower obtained two loans from the same lender, each of which was secured by a deed of trust on certain real property located in California. One loan was a closed-end mortgage in the principal amount of $205,080 and the other loan was a home equity line of credit in the principal amount of $15,000. Both deeds of trust were recorded with the county recorder's office at the same time on the same day.

The deed of trust for the equity line received a recorder's instrument number of 2003-0603657, and the deed of trust for the closed-end loan received a recorder's instrument number of 2003-0603058. Through a series of transfers, the HELOC subsequently was assigned to a bank, and the closed-end loan was assigned to another entity and serviced by the defendant.

After borrower defaulted on the equity line, the plaintiff trustee for the bank conducted a nonjudicial trustee sale of the property. The plaintiff received $105,000 from the sale. After payment of all funds due the bank and the fees and costs of the sale, a surplus of $73,085.50 remained.

Three parties claimed entitlement to the surplus: the borrower, the homeowners association, and the defendant. The trustee deposited the surplus funds with the court and commenced the action to resolve the conflict between the three claimants. The trial court concluded that the parties intended for the defendant's closed-end mortgage lien to have priority over the HELOC lien recorded simultaneously. 

Because the defendant's lien had priority, the trial court concluded the defendant closed-end mortgage servicer was not entitled to any of the proceeds from the HELOC lienholder's nonjudicial foreclosure.  Instead, according to the trial court, the property was sold subject to the defendant's senior lien.  The surplus was distributed to the homeowners association and borrower. 

The defendant closed-end mortgage lien servicer appealed the trial court's ruling.

On appeal, the defendant closed-end mortgage lien servicer argued that the deed of trust on the home equity line was assigned a lower instrument number than its mortgage lien.  According to the defendant, this made its lien junior to the home equity lien. 

Which lien had priority was a critical ruling because if defendant's lien was junior to the HELOC trustee's, the defendant would be entitled to some of the surplus proceeds from the trustee's sale of the property. 

As the Court of Appeal pointed out, under California Civil Code § 2924k(a), 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; (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.  

"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."

The Court of Appeal acknowledged California followed the "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."  However, when liens are both signed on the same day, like they were in this case, "the time of their creation does not determine their priority."

The Court added, "the date of recording also is not determinative in this instance."  Even though liens that are recorded earlier take priority over subsequently recorded liens, both deeds of trust were deposited in the recorder's office at the same time on the same day.

The Court relied on prior rulings with similar facts to establish it is the intent of the parties that is determinative of the priority.  First, in Phelps v. American Mtg. Co. (1936) 6 Cal.2d 604, 609 [59 P.2d 95], overruled in part on other grounds, two deeds were both executed and recorded on the same day.  Although one of the trust deeds specifically stated it was to be the first lien trust deed, it was indexed by the recorder with a higher number than the other trust deed. 

The California Supreme Court rejected the trial court's finding that the priority of the deeds of trust was established based on the sequence in which the two documents were indexed. The Phelps court explained that if the deeds of trust "were filed at the same time or in their proper order and the reverse order of recordation was an inadvertence, that mistake should not be permitted to alter the intended relations of the parties when an examination of the recorded documents would provide notice of the true priorities."

Next, in First Bank vs. East West Bank, 199 Cal.App.4th 1309 [132 Cal. Rptr. 3d 267] (2011), two banks granted loans to a borrower and secured them with trust deeds on the same property.  Both deeds were executed and recorded on the same day.  Both banks sought a declaratory judgment on whose lien had priority.  The trial court concluded that both liens were recorded concurrently and, as a result, the liens had equal priority. The Court of Appeal in First Bank affirmed, holding that "because both trust deeds were executed on the same day and are deemed recorded simultaneously, neither bank is a subsequent [encumbrancer]."  The First Bank court further explained that it "would disrupt the statutory scheme to make priority turn on the random act of indexing, as defendant advocates, especially where banks and title insurers have no influence over when the recorder indexes trust deeds."

Relying on this precedent, the Court of Appeal here concluded that it is the intent of the parties that determines the priority of the two liens.  In this case, because the originating lender was the same on both loans, "the reasonable expectation is that it would secure the much larger mortgage loan in the primary position."  The Court stated that the usual understanding of the relationship between a closed-end mortgage and an equity line of credit also supports its conclusion. 

Finally, the First District rejected the defendant's argument that the borrower was given a windfall by receiving approximately $60,000 on the loss of her property. 

The defendant argued it should be entitled to those proceeds because it had no recourse against the party who purchased the property in the trustee's sale.  The Court, however, concluded that the record appears to give the purchaser notice of the defendant's lien. 

Moreover, the title report showed the two liens recorded simultaneously which, according the Appellate Court, gave the purchaser notice and he could have taken additional steps to determine their priority. The Court stopped short of concluding that the purchaser had actual notice he was purchasing the property subject to the defendant's lien.

Accordingly, the Court of Appeal affirmed the trial court's findings that the intent of the parties will determine the priority of liens that are recorded simultaneously.


Eric Tsai
Maurice Wutscher LLP 
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Email: etsai@MauriceWutscher.com

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