Lien Priority MattersWritten By: Bob Hunt
When it comes to liens, California has adopted a "first in time, first in right" system of priorities. As authors Miller and Starr, the widely-acknowledged gurus of California real estate law, put it, liens, "have >Though, as we can learn from a recent appellate case MTC Financial v. Nationstar Mortgage, First Appellate District Court of Appeal, Jan. 22, 2018 it can still get complicated.
In 2003 a borrower obtained two loans from Countrywide Home Loans, Inc. Each loan was secured by the same residential property. One loan was a standard residential mortgage in the principal amount of 205,080. The other was a home equity line of credit HELOC for 15,000. This transaction was done as a refinance of an existing Countrywide first trust deed in the amount of 173,000.
The two new loans were secured by deeds of trust. Those two instruments were recorded the same day, Dec. 16, 2003. As is quite common, they were both stamped as deposited in the Recorders office at 8:00 A.M. on that day. As, no doubt, were a number of other documents un>Subsequently, the equity line was assigned to Bank of New York Mellon and the mortgage was assigned to Nationstar. Alas, the borrower ultimately defaulted on the equity line. The Bank of New York Mellon foreclosed. Apparently, by then, the value of the home had increased. After payment of all the funds due the Bank, plus the fees and costs of the foreclosure auction, there was a remaining surplus of 73,085. So, who should get that?
California Civil Code 2924 spells out how the proceeds of a trustees auction foreclosure sale are to be distributed. First, to the cost and expenses of conducting the sale; second, to payment of the obligations which were the subject of the sale; third, to the outstanding balance of any junior liens in the order of their priority; and, finally, if theres anything left, to the borrower.
Three parties made claim to the surplus: the borrower, a homeowner association a junior lien holder, and Nationstar. The trial court ordered distribution of 13,572 to the HOA, and the balance to the borrower. Nationstar appealed.
Nationstar argued that, according to the indexing numbers, it was junior to the equity line and, per the distribution priorities listed above, it was first in line to receive any of the surplus. But the appellate court said "no". In its decision it pointed to a 1936 California Supreme Court case where the Court said, if 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 >Its really curious. Nationstar took the position that it deserved the 73,000 surplus because its 205,000 mortgage had been wiped out due to the equity lines seniority. The Court said, "No, you were in senior position. You werent wiped out. Your loan is still secured. The buyer at auction is taking the property subject to your mortgage." Nationstar should be happy with that result.
The foreclosure auction buyer, on the other hand, may be less than happy. We dont know. The buyer was not a party to any of these legal actions. We just have to hope he wasnt
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