Ac S Spring Property Outline

Property Outline

Definitions:

1. Encumberance: a claim or liability that is attached to property (lien or mortgage).
2. Encumberancer: one having a legal claim
3. Subrogation: the substitution of one party for another whose debt the party pays.
4. Giving the paying party the rights of the creditor
5. Surety: a person primarily liable for paying another’s debt or performing another’s obligation.
6. Guarantor: one who makes a guaranty or gives security for a debt.
7. While a surety’s liability begins w/ that of the principal, a guarantor’s liability does not begin until the principal debtor is in default.
8. Guarantee: the assurance that a K or legal act will be duly carried out
9. something given or existing as security, such as to fulfill a future engagement or a condition subsequent.
10. One to whom a guaranty is made
11. verb
12. Guaranty: a promise to answer for the payment of some debt, or the performance of some duty, in case of the failure of another who is liable in the first instance.
13. Mortgagee: the party that holds the mortgage, the creditor.
14. Mortgagor: the party that grants the mortgage, the debtor.
15. Deficiency judgment: a judgment against a debtor for the unpaid balance of the debt if a foreclosure sale fails to yield the full amount of the debt due.
16. Redemption: the act of reclaiming possession by paying a specific price.
17. The payment of a defaulted mortgage debt by a borrower who does not want to lose the property.
18. Assumpsit: a promise by 1 person to pay another.
19. Any action based on the D’s breach of an implied promise to pay a debt to P.
20. Judicial foreclosure: a costly & time consuming foreclosure method that sells mortgaged property thru a court proceeding requiring many standard legal steps.
21. Nonjudicial foreclosure: no court, no stringent notice requirements, burdens or delays
22. Trust deed: the document that evidences the lien on the property that secures the note.
23. Real property: collateral

Mortgages

A. History of Mortgages (see pictures)

1. Unsecured debt = no collateral.
2. The creditor got wise to the debtor running off w/out paying the debt, so he began to ask for collateral. A hostage for the debt. If the debtor doesn’t pay, the creditor gets the collateral.
3. Most people’s most valuable asset is their house. Their real estate.
4. In the old days, the title of the house was actually transferred to the creditor. This was called a title theory mortgage.
5. The creditor was the mortgagee.
6. The debtor was the mortgagor.
7. The IOU was formalized into a promissory note. (Cr  debtor).

1. In CA, there is a different system.
2. Originally set up:
3. The debtor owns a piece of real property.
4. The right in the real property is held by a trustee.
5. The debtor is the trustor.
6. The creditor is the beneficiary of the trust.
7. The instrument that sets this up is the deed of trust (or trust deed). It gives the creditor the right to seize and sell the property in the event of a default. This gives the creditor great opportunities to force the debtor to pay on time.
8. The deed of trust is the document evidencing the lien in the hands of the creditor/ beneficiary.

1. Lien: any interest in property that secures an obligation.
2. There is a whole world of liens.
3. There are nonconsensual liens (judgment liens, attachment liens, statutory liens – imposed w/out the consent of the debtor) – we saw this in Orr v. Byers.
4. There are consensual liens.
5. There is personal property and real property.
6. In personal property (Article 9), we have copyright, patent and trademarks.
7. In real property, we have mortgages and trust deeds.

1. Real Trusts (as in the law of wills and trusts).
2. rich grandfather & a grandchild.
3. The rich grandfather gives the trust to a trustee to hold on behalf of the grandchild.
4. The trustee holds that money. This is a res corpus.
5. The grandchild is the beneficiary.
6. The rich grandfather is called the trustor/ settlor.
7. The trustee has legal title.
8. The beneficiary has equitable title.
9. The trustee is paid to be a responsible person on behalf of the beneficiary.

1. The trustee in a trust deed (a real estate transaction) is not a fiduciary. The trustee exercises the rights of the creditor on behalf of the creditor.
2. Usually what happens is that the trustee is the captive entity of the bank.
3. The trustee in a trust deed situation almost becomes identical to the creditor.
4. This becomes almost like a mortgage.
5. In a mortgage, you can only judicially foreclosure.
6. In a trust deed, you have 2 options, which bring us to Gradsky.
7. This is not like the grandson transaction. The trustee does not take care of what is in the trust like in the grandson example.
8. The bank is the beneficiary. The power is in the beneficiary. In a trust (as in wills and trusts), the power is in the hands of the rich grandfather, not the beneficiary.

1. In CA, under a TD, the purchaser still owns title to the property even though he hasn’t finished paying off the property.

1. Authorities are mixed as to whether a purchaser w/ a TD on the land has equitable and/or legal title.
2. In CA, the purchaser has both equitable and legal title. The bank just has a lien.
3. In other states, owner has equitable title and the TD holder has legal title.

1. If you’re a bank, you make sure that the property is worth a lot more than what you lend.
2. loan to value ratio (LTV).
3. If the creditor sells the property and gets all of the money from the sale, the left-overs go to the debtor.

h. Note is the obligation to pay. The trust deed is the document that evidences the lien that

secures the note. They are not the same thing.

B. §580d – no deficiency in an nfj; triggered by nature of foreclosure (njf)

1. No judgment shall be rendered for deficiency
2. upon a note secured by a deed of trust or mortgage
3. upon real property
4. or an estate for years therein
5. Lease
6. hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee
7. mortgagee: one to whom the property is mortgaged (the creditor or lendor)
8. under power of sale
9. trustee’s sale is an njf
10. contained in the mortgage or deed of trust.
11. The effect of 580d is to permit deficiency judgments only in those cases in which the creditor, by foreclosing judicially, allows the debtor the opportunity of exercising his right of redemption.
12. The debtor in an njf would not have a right of redemption in an njf. 580d tries to make up for this loss by not allowing the bank to go after the debtor for the rest of the money owed on the debt (the deficiency).

C. Partial v. Full Credit Bid

b.Full Credit Bid: if a bank submits a full credit bit, the bank pays the amount of the whole debt for the property.

1. If the bank does this, it waives any claim against the guarantor.

1. Partial Credit Bid: a bid of what the property is really worth (usually less than the debt). Then the bank can go over after the guarantor for the remainder of the debt.
2. This is the bank admitting that the property is not worth enough to cover the debt.
3. The bank does this b/c the bank, while not able to collect from the debtor, can possibly collect from the guarantor, an insurance company, and/or an intentional tortfeasor who has impaired the value of the property.
4. if the intentional tortfeasor is the debtor the bank can go after the debtor under the theory of bad faith waste.

D. Union Bank v. Max Gradsky - §580d prevents deficiency from debtor + guarantor (see picture)

a. Facts: Bess Gradsky executed a 1st TD securing a note for $100k. Max Gradsky, the

general contractor, agreed to be the guarantor. In signing the papers as guarantor, he waived

“any right to require the bank to proceed against Bess or to apply any security it may hold or to

pursue any other remedy.” Bess was late w/ her payments and the bank foreclosed in a

nonjudicial foreclosure. The bank bought the property at the foreclosure sale and applied the

proceeds to advances for delinquent taxes, costs of sale, interest and $A owed on the note. The

bank sought to recover the difference from Max.

1. As a guarantor, Max signed on for a certain obligation. If that obligation is altered, Max would be exonerated. This obligation was altered, but Max consented, so he is not exonerated.
2. There is some authority that if you change the time of payment, that might not exonerate the guarantor.

1. In an njf, there is no right of redemption.

c. I: (1) did the legislature intend 580d to shield the debtor only from a deficiency judgment

obtained by the creditor OR did it intend to protect him from all personal liability in each

instance where he has no right to redemption?

I: (2) did the legislature intend to extend 580d protection to anyone other than the original debtor (the guarantor)?

1. H: (1) The legis did intend to shield debtor (Bess) from all personal liability in each instance where he has no right of redemption.  shield from lender (mortgagee) and guarantor

H: (2) Yes. The bank, having destroyed the guarantor’s (Max’s) subrogation rights against principal debtor by having an njf, was estopped from recovering from Max the unpaid balance on the note.

1. The problem here is that this is an action against the guarantor. 580d’s plain language only really bars deficiency is against the borrower of the note.

1. The bank had 3 remedies:
2. Judicial foreclosure
3. It could have brought an action for judicial foreclosure, joining Max and Bess.
4. The debtor has a one-year right of redemption. The debtor has one year to come back and buy the property for the amount that it was sold at the jf.
5. this discourages low-ball bidding b/c if the buyer pays a really low price, the chances are high that the debtor can come in and buy the property back after 1 year.

1. It could have sued Max upon his guarantee for the full amount of the unpaid balance of the principal obligation w/out proceeding against either Bess or the security.
2. At common law, this is not an option. The bank must first go after Bess.
3. But, here, Max waived this right, so the bank can go after Max even if they don’t exhaust their remedies against Bess.
4. Guarantee of Payment: if the debtor doesn’t pay that triggers the payment of the guarantee. The bank can go after the guarantor w/out first exhausting its remedies against the debtor.
5. Guarantee of Collection: if you can’t collect from the debtor, then the bank can go after the guarantor. But the bank must first go after the debtor. This is the common law rule!  here you have to exhaust the remedies.
6. If the bank went after Max first, 580d is not implicated b/c there has been no njf.

1. Nonjudicial foreclosure: NFJ triggers 580d.
2. At common law (and by statute), as soon as the guarantor pays the creditor, he gets to claim under the rights of the creditor.
3. Subrogation means that you get to assert the rights of the creditor after you pay off the debt. You step into the creditor’s shoes.
4. This is almost like a right of indemnity.
5. But, in an njf, the debtor is protected from deficiency payments. So, b/c the bank can’t sue Bess, then Max, stepping into the shoes of the bank, can’t sue Bess either.
6. 580d doesn’t say anything about the guarantor. But if the guarantor is allowed to go after the debt (even though the bank can’t), the result is to allow a recovery of the deficiency judgment against the debtor following an njf.  we don’t want this!
7. by implication, 580d prevents deficiency by the guarantor against the debtor.

1. R: B/c 580d prevents deficiency against the debtor by anyone after an njf, it must also shield the guarantor from deficiency payments b/c:
2. If 580d is interpreted to shield Max from liability from the bank, the ultimate impact of the loss falls upon the bank, which had an election of remedies.
3. If the section does not apply to Max, and Max is able to collect deficiency $ from Bess, the ultimate impact of loss falls on Bess, whose remedies were destroyed at the njf.
4. If the section does not apply to Max, and he is required to pay the deficiency to the bank and cannot go after Bess, the loss falls upon him, who had no remedies after the njf.

1. Last issue: Max waived his rights. The court says that the waiver was not explicit enough. He never waived not to have an election of remedies.

E. Gradsky waiver: 580d protects the debtor, so it cannot be waived. There is nothing in 580d, however, that says that it can’t be waived for the guarantor.

a. In the wake of Gradsky, we got incredibly detailed waivers and the courts began to say they

were too specific.

b. The bank then came up w/ §2856.

2856(a):

-any guarantor, including a guarantor of a note or other obligation secured by real property or a lease, may waive any or all of the following:

(1) you can waive your right to claim reimbursement at all.

1. 2787-2855: you can waive almost all defenses.

(2) any rights or defenses the guarantor may have in respect of his or her obligations as a guarantor or other surety by reason of any election of remedies by the creditor.

1. This gives broad authorization for waivers.

(3) any rights or defense the guarantor may have b/c the principal’s note is secured by RP or a lease. These rights or defenses include any rights or defenses that are based upon the application of 580a, 580b, 580d, or 726 to the principal’s note or other obligation.

1. This is broader than Gradsky.

2856 (b):

-This is a saving clause in an imperfect Gradsky waiver.

2856 (c):

-the guarantor waives all rights and defenses that the guarantor may have b/c the debtor’s debt is secured by real property. This means:

(1) the creditor may collect from the guarantor w/out first foreclosing on any RP.

(2) If the creditor forecloses on any RP,

(a) The amount of the debt may be reduced only by the price for which that RP is sold at the foreclosure sale, even if the collateral is worth more than the sale price.

(b) The creditor may collect from the guarantor even if the creditor, by foreclosing on the RP, has destroyed any right the guarantor may have to collect from the debtor.

2856 (d):

-the following provision shall be effective to waive all rights and defenses the guarantor or other surety may have in respect of his or her obligations as a surety by reason of an election of remedies by the creditor:

• The guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as an njf, has destroyed the guarantor’s rights of subrogation and reimbursement against the principal by the operation of 580d.

1. c & d are directly overlapping.
2. This is expressly aimed at Gradsky.

2856 (e):

-waivers shall not apply to a guaranty made in respect of a loan secured by a TD or mortgage on a dwelling for not more than 4 families when the dwelling is occupied, entirely or in part, by the borrower and that loan was used to pay all or part of the purchase price of that dwelling.

2856 (f):

-the validity of a waiver executed before Jan. 1, 1997, shall be determined by the application of the law that existed on the date that the waiver was executed.

F. §580b: Spangler rule; triggered by nature of the debt.

a. no deficiency judgment shall be given in any event

b. after sale of RP or lease

c. for failure of the purchaser to complete his or her K of sale or under TD or mortgage

d. given to the vendor

e. to secure the payment of the balances of the purchase price of the RP or lease or under a

TD or mortgage

Part II:

1. or under a TD or mortgage
2. on a dwelling for not more than 4 families
3. given to a lendor
4. to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling
5. occupied, entirely or in part, by the purchaser.

Residential

Commercial

Vendor

VPMTD

Lendor

LPMTD

1. B/c the statute does not talk about what happens in the LPMTD/Commercial setting, the silence implies that deficiencies are allowed. (quadrant 4)
2. This is a debtor protector statute and it CANNOT be contractually waived.
3. Policy behind 580b: vendors overvalue the property, banks do not. That’s why lenders are not prohibited from getting deficiency under 580b.
4. Protection under 580b:
5. 580b protects the debtor ONLY on a deficiency on a VPMTD or an LPMTD on a house.
6. The guarantor is NOT protected in when a vendor forecloses b/c the creditor has not altered the rights of the guarantor. The guarantor had no rights against the debtor in these situations b/c the vendor had no rights against the debtor.
7. If we allowed the guarantor any rights against the debtor, this would circumvent the statute.
8. There is an argument that if the vendor can go after the guarantor, overvaluation is not prevented b/c the vendor can still collect the full value of the property.
9. But, this might prevent guarantor from agreeing to execute a guaranty if the guarantor knew that the vendor could come after him for deficiency.

1. Originally:
2. Vendor has RP. Purchasers want to buy the RP, but don’t have the $. So, they enter into a long-term purchase K where the purchaser agrees to buy the property over a very long time. The vendor keeps the title to RP. At the end of the deal, then land is transferred to the purchaser.

1. Vendor takes back paper scenario (see picture).
2. The vendor conveys the property to the purchaser for $100k. The purchaser usually gives a down-payment ($20k). The purchaser then gives the vendor a note for $80k and a TD on the property. That TD secures the balance of the purchase price on the property. This is a TD held by the vendor. This is a Purchase Money TD (the $ is used to purchase the property).
3. It’s a vendor held purchase money trust deed (VPMTD) and, therefore, there is no deficiency under 580b.
4. Here, the purchaser still has title to the property (if in CA).

1. Steps:
2. (1) transfer property
3. (2) downpayment of cash
4. (3) note for balance
5. (4) getting the vendor a TD to secure the balance of the purchase price.
6. Ideally, the bank supplies the buyer w/ the money to cash the vendor out. Then the bank holds the TD and the buyer becomes indebted to the bank.

1. HYPO 1: (see picture)
2. Purchaser w/ great income, but no savings, wants to come in and buy the property.
3. The purchaser doesn’t have money for a downpayment.
4. The bank loans the debtor $80k. (usually the debtor has saved up enough for a dp on their own).
5. The purchaser now gives the bank a note and a first TD on that property.
6. The purchaser pays $80k in cash to the vendor, gives the vendor a note for $20k, and executes a VPMTD2.  junior trust deed on the property.
7. This is a bad idea, but less bad then issuing a straight VPMTD.
8. If the debtor defaults and the bank forecloses, the vendor is barred from deficiency against the debtor.
9. The VPMTD2 is extinguished. And the vendor is barred from receiving payment on the $20k note b/c of 580b. 580d would not come in at all b/c the vendor is not the one that njfs.
10. 580d only applies when the bank njfs.

1. HYPO 2: the right way to do this (see picture)
2. Debtor bought a house for 4 units or less worth $100k.
3. The bank lends the debtor $80k.
4. The debtor executes a note and a TD on the house for $80k to the bank.
5. The debtor gives the $80k to the vendor and a $20k downpayment that the debtor has saved up. The vendor is cashed out.
6. This is a lender held purchase money trust deed. LPMTD.
7. Here, if the buyer defaults the bank is barred from getting a deficiency once they foreclose b/c of 580b.

G. Refinancing under 580b – LMPTD in a residential setting (see picture)

1. There is one CA case that says that if a home is refinanced, Lender 1 can get a deficiency in the event of default.
2. Schechter is not sure about this.
3. Underwater property: see picture.
4. Lender 2 makes this deal b/c he can charge high interest rates.
5. Lender 2 is undersecured b/c there is not enough value in the property to cover the debt.  this is called under water.
6. Negative Pledge Clause: bank 1 can make the debtor promise not to have any other creditors.

H. Spangler v. Memel – 580b; exception to the rule that VMPTD cannot get deficiency payments