Background; The Emergence of the Trust Deed
The deed of trust (often referred to as “trust deed”) is the most common instrument by which real property serves as security for the performance of an obligation. It is simply a contract to provide to the lender a remedy for non-payment. That is a contract by which the borrower agrees that if they fail to make the payments the lender may sell the property at a private sale. It is not considered an action but a private contract.
A brief historical.
A detour is helpful in understanding the modern legal consequences of the deed of trust which emerged as a device to circumvent various debtor protections to relieve the harsh consequences of mortgage defaults. (See generally Hetland, California Real Estate Secured Transactions 11; 1 Miller & Starr, California Real Estate 315.) In the 15th century, the security instrument commonly used in England was a mortgage, which took the form of a conveyance of real property by a debtor to a creditor. Although an absolute conveyance on its face, a mortgage was subject to a condition subsequent by which the debtor could retake or “redeem” title when the debtor performed the underlying obligation. If the debtor did not perform, by the specified deadline, the property was effectively forfeited to the creditor. Gradually, equity courts began to permit debtors to redeem the property although the secured obligation was performed long after the designated time for performance. In response, creditors sought to
bar the debtors’ equity of redemption. The courts granted equitable decrees ordering debtors to redeem by a specified time or be forever foreclosed from redeeming. (See e.g., 3 Powell on Real Property 546-49; 1 Miller & Starr, California Real Estate 314-15.)
California recognizes the common law right of redemption. [Civ. Code § 2889; see e.g., Hamud v. Hawthorne (1959) 52 Cal.2d 78, 84; 338 P. 2d 387.] However, equitable redemption was effectively negated by the California Supreme Court’s sanction of the use of the deed of trust. Koch v. Briggs (1859) 14 Cal. 256; 73 Am.Dec. 65.] The court considered a transaction in which a debtor simultaneously executed a promissory note and a deed conveying the debtor’s property to a trustee with a power of sale. The power of sale gave the trustee the authority to sell the property at public auction if the debtor defaulted on the debt and to apply the proceeds of sale to satisfy the obligation. The court ruled that, although the deed of trust was a conveyance executed to secure a debt, it was not a mortgage, and consequently, there was no equity of redemption or necessity of foreclosure.
Although some cases followed the conveyance-of-title theory °f Koch, a series of Supreme Court cases culminating in Bank of Italy Nat. Trust & Sav. Assn. v. Bentlev (1933) 217 Cal. 644; 20 P.2d 940 emphasized that mortgages and trust deeds served identical purposes and functions and applied most mortgage rules and theoriesto trust deed problems. Today,. . . in California there is little practical difference between mortgages and deeds of trust, . . . they perform the same basic function, and … a deed of trust is practically and substantially only a mortgage with power of sale. . . [D]eeds of trust are analogized to mortgages and the same rules are generally applied to deeds of trust that are applied to mortgages. Domarad v. Fisher & Burke, Inc. (1969) 270 Cal.App.2d 543, 553; 76 Cal.Rptr. 529.
2. Statute of Limitations
Although most of the distinctions between the deed of trust and mortgage have been abolished, one significant difference remains: the effect of the statute of limitations on the exercise of the power of sale. When recovery on the underlying obligation is barred by the statute of limitations, a creditor cannot judicially foreclose on either a mortgage or deed of trust. [Flack v. Boland (1938) 11 Cal.2d 103, 106; 77 P.2d 1090.] Likewise, the statute of limitations will bar the exercise of a power of sale in a mortgage. A lien is extinguished by the lapse of time within which an action can be brought on the underlying obligation [Civ. Code § 2911(1)]. The lien of the mortgage includes the power of sale to enforce the lien; therefore, when the statute of limitations runs on the obligation, the lien, including the power
of sale, expires. Faxon v. All Persons (1913) 166 Cal. 707; 137 P. 919.
A different rule applies to the power of sale in a deed of trust. The anachronistic view that a deed of trust constitutes a transfer of title rather than a lien still governs judicial analysis of the operation of the statute of limitations. Since the deed of trust is not construed as a lien, Civil Code § 2911(1) does not apply, and the creditor may exercise the power of sale even after recovery on the underlying obligation is time barred. (E.g., Flack v. Boland,, 11 Cal.2d 103, 106; Napue v. Gor-Mev West, Inc. (1985) 175 Cal.App.3d 608, 616; 220 Cal.Rptr. 799.) As the Court of Appeal summarized,
. the running of the statute of limitations on the principal obligation did not extinguish the debt or operate as payment [citations omitted], it did not affect the title of the trustee under the deed of trust [citations omitted], nor did it operate to extinguish the power of sale conferred upon him. The power of sale under a deed of trust may be exercised after an action on the principal obligation is barred. Sipe v.’ McKenna (1948) 88 Cal.App.2d 1001, 1005-06; 200 P.2d 61.
Special rules, however, apply to bar ancient deeds of trust. (See Civ. Code, §§ 882.020 et sea.)
3. Form of Deed of Trust
While a deed of trust must contain certain information, no particular form is statutorily mandated. A permissive form of mortgage appears in Civil Code § 2948, and many of the rules and formalities applicable to mortgages apply to deeds of trust. A deed of trust must be in writing and be signed by the party to be charged. (Code of Civ. Proc. § 1971; see Civ. Code § 2922.) A deed of trust must describe the property and should also indicate the “conveyance” to the trustee with power of sale and the beneficial interest of the beneficiary. (Hetland, California Real Estate Secured Transactions 10.)
Today, most deeds of trust are on preprinted forms prepared by the lender or title company. Despite a great deal of similarity among these forms, there are variations. Some institutional lenders use uniform documents approved by the Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Special provisions may be contained if the loan is insured by the Department of Housing and Urban Development (HUD) or guaranteed by the Veterans Administration.
Such content variations aside, deeds of trust generally fall within two broad categories — “long form” or “short form.” The long form contains all of the lengthy, boilerplate provisions of the trust deed. The short form is usually a one-page document
which omits many of the standardized clauses but incorporates these provisions by reference to a fictitious deed of trust which was earlier recorded in the county in which the actual deed of trust is to be recorded. Civil Code § 2952 provides for this practice of recordation of a fictitious deed of trust, and further, declares that the parties are bound by the terms of the incorporated fictitious deed of trust as though the incorporated terms were included in the executed deed of trust. Among the advantages of the short form are lower costs for printing and recordation. However, whether fictitious trust deed provisions will continue to be enforceable under developing views on adhesion contracts and unconscionability is unclear.
Both long and short preprinted trust deed forms are adhesion contracts, Wilson v. San Francisco Fed. Sav. & Loan Assn. (1976) 62 Cal.App.3d 1, 7; 132 Cal.Rptr. 903; Lomanto v. Bank of America (1972) 22 Cal.App.3d 663, 669; 99 Cal.Rptr. 442.]
Courts have held adhesion contracts unconscionable if they surprise the weaker, adhering party with terms outside of that party’s reasonable expectation. [See e.g., A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486; 186 Cal.Rptr. 114.] In Lomanto, the Court stated that while the lender was not required to call attention to a usual provision in a trust deed, the lender may have to accentuate an unusual provision by oral disclosure, “print of distinctive size,” or “placing it in a box with heavy
borders.” (22 Cal.App.3d at 669-70.) In the context of trust deeds, special adhesion questions arise with the short form trust deed. A borrower may be extremely surprised by a term incorporated from a fictitious document of which the borrower has no actual knowledge. Yet superficially, Civil Code § 2952 permits such surprise. However, the statute can be harmonized with the court’s view that borrowers should be relieved of the operation of unconscionable provisions as expressed in cases like Lomanto.
Section 2952 binds the borrower to the incorporated terms in the fictitious trust deed as though the terms were set forth in full. But, to the extent that Lomanto requires that the terms receive special emphasis if they actually were set forth, some special emphasis should be given in the short form to the incorporated terms. The special emphasis would need to apprise the borrower of the unusual provisions which have been incorporated by force of law.
The uncertainties surrounding the potentially unconscionable use of fictitious trust deeds have prompted some lending institutions to use only long form trust deeds. (See 1 Miller & Starr, California Real Estate 322 n. 9.) Many title companies have taken a different tack, using a short form deed of trust modified to include the remaining provisions from the fictitious trust deed on the reverse. To save recording charges, only the front side of the modified short form is recorded. Since the recorded front side
still refers to the fictitious trust deed, that reference incorporates the provisions on the unrecorded reverse side. In any case involving a short form deed of trust, it should be determined whether the trust deed actually executed contained more terms than revealed by the recorded copy on the front side of the short form.
4. Parties to a Trust Deed
The trustor is an owner of any interest in real property (see Civ. Code § 2947) who gives a security interest in that real property.
Although the trustor is usually the debtor, the trustor can give a deed of trust to secure someone else’s debt [see e.g., Everlv Enterprises, Inc. v. Altman (1960) 54 Cal.2d 761; 8 Cal.Rptr. 455.] or to secure the trustor’s guarantee of someone else’s performance. [See e.g., Indusco Management Corp. v. Robertson (1974) 40 Cal. App.3d 456; 114 Cal.Rptr. 47.]
The trustor need not necessarily be the sole owner in order to encumber the property, but if there are multiple owners and not all execute the trust deed, the effect of an encumbrance depends on whether the property is held as community property, joint tenancy, or tenancy in common.
(1) Issues Arising if Title is Held as Community Property
Civil Code § 5127 provides, in pertinent part, that “both spouses either personally or by duly authorized agent, must join in executing any instrument by which such community real property . . . is sold, conveyed, or encumbered. . .” (emphasis added). [See also O’Banion v. Paradiso (1964) 61 Cal.2d 559; 39 Cal.Rptr. 370; Italian American Bank v. Canepa (1921) 52 Cal.App. 619, 621; 199 P.55.] The purpose of this provision is to give each spouse veto power over disadvantageous dispositions of community property. [See Strong v. Strong (1943) 22 Cal.2d 540, 544; 140 P.2d 386.] However, a transfer or encumbrance made without the consent of one spouse is not void but merely voidable by the no consenting spouse, not by a creditor or other third party, and will be treated as valid until voided. [See, e.g., Clar v. Cacciola (1987) 193 Cal.App.3d 1032, 1033; 238 Cal.Rptr. 726; Jack v. Wong Shee (1939) 33 Cal.App.2d 402, 415; 92 P.2d 499.] The transaction may be set aside in its entirety during the life of the transferring or encumbering spouse, but after that person’s death, the no consenting spouse can only set aside the transfer or encumbrance as to one-half the property or interest. [See e.g., Britton v. Hammell (1935) 4 Cal.2d 690, 692; 52 P.2d 221; 1 Qgden’s Revised California Real Property Law 323.]
The law has been recently clouded by Mitchell v. American Reserve Ins. Co. (1980) 110 Cal.App.3d 220; 167 Cal.Rptr. 760 and
its progeny. In Mitchell, the husband executed a promissory note and deed of trust on the couple’s home without the wife’s knowledge, for the purpose of obtaining a bail bond from a third party. In the wife’s action to void the encumbrance, the court granted only limited relief from the lien and none from the underlying obligation. The court held that the nonconsenting wife could remove the lien only as it related to her interest. The encumbrance was held to be valid and enforceable as to the consenting husband’s interest. The court further ruled that the underlying obligation, as distinct from the security interest created by the trust deed, remained the obligation of both spouses since the property of the community is liable for the debts of either spouse incurred during marriage. (See Civil Code § 5116.) The holding in Mitchell preserving the lien against the consenting spouse has been followed and rejected. [See Wolfe v. Lipsev (1985) 163 Cal.App.3d 633, 642; 209 Cal.Rptr. 801 (“an encumbrance of community property by one spouse contrary to the provisions of Civil Code section 5127 is valid and binding as to the consenting spouse’ s one-half interest . . . but voidable as it relates to the non-consenting spouse’s one-half interest.”); Head v. Crawford (1984) 156 Cal.App.3d 11, 17-18; 202 Cal.Rptr. 534 (following Mitchell); Andrade Development Co. v. Martin (1982) 138 Cal.App.3d 330, 336 n. 3; 187 Cal.Rptr. 863 (rejecting Mitchell); see also Harper v. Rava (1984) 154 Cal.App.3d 908, 912; 201 Cal.Rptr. 563 and In re Jones (C.D.Cal. 1985) 51 B.R. 834 (following Andrade).] The court in Jones concluded that the non-consenting spouse could
set aside a trust deed before the death of the consenting spouse, the dissolution of the marriage, or a change in the community character of the property; after these events, the non-consenting spouse could set aside a conveyance only as to his or her one-half interest.
Even if the no consenting spouse can avoid the encumbrance, he or she has to overcome several additional obstacles. The no consenting spouse may be estopped to contest the transaction or be deemed to have waived the community property interest if he or she knew about the transaction and participated in the negotiations or failed to object. MacKav v. Darusmont (1941) 46 Cal.App.2d 21, 26-27; 115 P.2d 221; Bush v. Rogers (1941) 42 Cal.App. 2d 477, 480-81; 109 P.2d 379.] The no consenting spouse may also be estopped if he or she authorized the other spouse to make the encumbrance and accepted the benefits of the transaction. Pin re Nelson (9th Cir. 1985) 761 F.2d 1320, 1323.] Moreover, between a bona fide encumbrancer without knowledge of the marriage and a no consenting spouse, the latter has been required to satisfy the obligation as a condition of avoiding the encumbrance. [See Mark v. Title Guarantee & Trust Co. (1932) 122 Cal.App. 301, 310-13; 9 P.2d 839.] The court in Mark reasoned that although the husband sold the property without his wife’s consent and squandered the proceeds, the receipt of the sale price benefitted the community, and the community should not be able to void the conveyance without returning the consideration. In addition, if record title to the
property is held in the name of one spouse, transfers or
encumbrances by that spouse are presumed valid, and the
nonconsenting spouse can assail thetransfer or encumbrance for
only one year after its recordation. (Civ. Code § 5127.)
(2) Joint Tenancy and Tenancy in Common
If the deed of trust and obligation are executed by all joint tenants or tenants in common, the entire property is subject to the encumbrance. See Caito v. United California Bank (1978) 20 Cal.3d 694, 701; 144 Cal.Rptr. 751.] All tenants need not consent for a valid encumbrance to be created. A tenant in common or joint tenant may encumber his or her interest without the consent of any other co-tenant. The encumbrance will not affect the interest of the no consenting co-tenant. [See Caito v. United California Bank,, 20 Cal.3d at 701; Schoenfeld v. Norbera (1970) 11 Cal.App.3d 755, 765; 90 Cal.Rptr. 47 (tenancy in common); Kane v. Huntley Financial (1983) 146 Cal.App.3d 1092, 1097; 194 Cal.Rptr. 880; Clark v. Carter (1968) 265 Cal.App.2d 291; 70 Cal.Rptr. 923 (joint tenancy).]
A couple of special issues arise with a joint tenancy. The encumbrance is limited to the joint tenancy interest held by the encumbering joint tenant. [See People ex rel. Dept. of Pub. Works v. Noaarr (1958) 164 Cal.App.2d 591, 593; 330 P.2d 858.] The creation of the lien is a nullity as against the right of
survivorship of the other joint tenant.” Hammond v. McArthur (1947) 30 Cal.2d 512, 515; 183 P. 2d 1.] At death, the encumbering joint tenant’s interest in the real property ceases, and the survivor’s interest expands to include the interest formally held by the decedent. Since the decedent’s interest “ceased to exist, the lien of the mortgage expired with it.” (People ex rel. Dept. of Pub. Works v. Noqarr,, 164 Cal.App.2d 591, 594.) Accordingly, “the mortgage or trust deed beneficiary may not enforce the security after the death of the joint tenant executing the security device.” Clark v. Carter,, 265 Cal.App.2d 291, 294 (emphasis in original); Hamel v. Gootkin (1962) 202 Cal.App.2d 27, 29; 20 Cal.Rptr. 372.]
Conversely, if the none cumbering joint tenant dies first, the interest of the survivor, the encumbering joint tenant, expands to the decedent’s interest, and the encumbrance covers the survivor’s broadened interest. [See generally Civ. Code § 2930; Parry v. Kellev (1877) 52 Cal. 334.]
The encumbrance of one joint tenant’s interest does not sever the joint tenancy. Clark v. Carter,, 265 Cal.App.2d 291, 294; Hamel v. Gootkin,, 202 Cal.App.2d 27.] However, a foreclosure sale on the encumbering joint tenant’s interest while both joint tenants are living will terminate the joint tenancy status of the debtor’s interest, and the buyer at the sale will become a tenant in common with the other owners. [See Kane v.
Huntley Financial,, 146 Cal.App.3d 1092, 1098; see generally Zeialer v. Bonnell (1942) 52 Cal.App.2d 217, 219; 126 P.2d 118 (execution sale on judgment lien of joint tenant’s interest terminates joint tenancy with buyer becoming tenant in common) and People ex rel. Dept. of Pub. Works v. Noqarr,, 164 Cal.App.2d 591, 595 (judgment lien and mortgage lien have virtually identical effect on joint tenancy).]
(3) Creditor Reliance on Record Title; A Special Problem with Spouses
Special problems arise where there is a question as to exactly how a husband and wife hold title to real property. As discussed above, the ability of a spouse to set aside an encumbrance may depend on whether the property is held as community property, joint tenancy, or tenancy in common. Each of these forms of ownership is unique (Civ. Code § 682), and a husband and wife may hold title in any of these forms (Civ. Code § 5104), although title cannot be held simultaneously in more than one form. [See e.g., Siberell v. Siberell (1932) 214 Cal. 767, 773; 7 P.2d 1003.]
All real property acquired during marriage (except for separate property defined in Civ. Code §§ 5107 and 5108) is declared to be community property if acquired after January 1, 1975, or is presumed to be community property if acquired before that date unless a contrary intention is expressed in the
instrument of conveyance. (Civ. Code § 5110.) A contrary intention would be, for example, that the property was acquired in joint tenancy. Siberell v. Siberell,, 214 Cal. 767, 773.] Although real property acquired during marriage is considered community property, the law before 1985 permitted spouses to convert community property into separate property and vice versa [see e.g., Estate of Furtsch (1941) 43 Cal.App.2d 1, 5; 110 P.2d 104] by agreement — whether express or implied, written or oral [e.g., Beam v. Bank of America (1971)
6 Cal.3d 12, 25; 98 Cal.Rptr. 137] — without any consideration other than mutual consent if the transaction is fair. Estate of Wilson (1976) 64 Cal.App.3d 786, 798; 134 Cal.Rptr. 749.] Beginning in 1985, a transmutation of property must be in writing and is ineffective against third parties without notice of it unless the document declaring the transmutation is recorded. [Civ. ‘Code § 5110.730.] A transmutation is also subject to the law governing fraudulent transfers. [Civ. Code § 5110.720.]
The form of the transaction is not dispositive of the true state of title as between the spouses. Extrinsic evidence can be used to show that spouses intended property to remain in the community though property is held by one spouse as his or her separate property or is held by both spouses as tenants in common or joint tenants. Tomaier v. Tomaier (1944) 23 Cal.2d 754, 757; 146 P.2d 905; see e.g., Gudeli v. Gudeli (1953) 41 Cal.2d 202, 212; 259 P.2d 656.] Extrinsic evidence can also show that property nominally held as community property was actually held as a tenancy in common, Tompkins v. Bishop (1949) 94 Cal.App.2d 546; 211 P.2d 14.] Property, however, cannot be held in joint tenancy, regardless of the parties’ intention, unless the existence of a joint tenancy is declared in the instrument of conveyance. [See e.g., Civ. Code § 683; Cordasco v. Scalero (1962) 203 Cal.App.2d 95, 103; 21 Cal.Rptr. 339.]
Although the form in which title is held does not necessarily determine the true state of the title between spouses, as between a no consenting spouse and a bona fide encumbrancer for value and without notice, the courts have tended to uphold the encumbrancer’s reliance on record title, notwithstanding how the spouses intended to retain title. In Kane v. Huntley Financial,, 146 Cal.App.3d 1092, the Court of Appeal held that the recording laws protected the lien obtained by a bona fide encumbrancer for value and without notice from a husband who appeared on the record as a joint tenant on a residence which he had orally agreed was his wife’s separate property. Although the trust deed purported to encumber the entire property, the trust deed was held to bind only the husband’s purported one-half interest. [See Caito v. United California Bank,, 20 Cal.3d 694 (recording laws protect bona fide encumbrancer from unrecorded liens, equities, and agreements between co-tenants); see generally Rilev v. Martinetti (1893) 97 Cal. 575; 32 P. 579; Pepin v. Stricklin (1931) 114 Cal.App. 32; 299 P. 557 (husband’s judgment creditor purchasing at execution sale
takes free of wife’s unrecorded equity).]
Under the terms of a deed of trust, the trustor nominally conveys title to the trustee with the power to sell the encumbered property to satisfy the terms of the secured obligation in the event of the trustor’s default. Despite the name “trustee,” a trustee under a deed of trust has not been held to the duties of a trustee under an express trust: “Just as a panda is not an ordinary bear, a trustee under a deed of trust is not an ordinary trustee.” Stephens, Partain & Cunningham v. Hollis (1987) 196 Cal.App.3d 948, 955; 242 Cal.Rptr. 251.] Rather, “[t]he rights and powers of trustees in nonjudicial foreclosure proceedings have long been regarded as strictly limited and defined by the contract of the parties and the statutes.” n. E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281, 287; 216 Cal.Rptr. 438.]
Although the trustee has been referred to as the common agent of the trustor and the beneficiary [see, e.g., Ainsa v. Mercantile Trust Co. (1917) 174 Cal. 504, 510; 163 P. 898], the trustee does not have the general common law duties of an agent. (See I. E. Associates., 39 Cal.3d at 285, 287-88.) For example, in the absence of any fraud, irregularity, or misconduct, the trustee can purchase property at the foreclosure which the trustee conducts. Stephens, Partain & Cunningham v. Hollis,, 196 Cal.App.3d
948, 955-56.] In addition, service of process on the trustee does not constitute service on the trustor or beneficiary and does not impose any obligation on the trustee to notify the beneficiary or trustor of the action. (Civ. Code § 2937.7.)
Nevertheless, the trustee cannot enter a side agreement with one of the parties that impairs the rights of the other party. See Ballenaee v. Sadlier (1979) 179 Cal.App.3d 1, 5; 224 Cal.Rptr. 301.] In addition, the trustee’s breach of its duties to the trustor to conduct a fair sale may be imputed to the beneficiary who profits from the breach. [See Bank of Seoul & Trust Co. v. Marcione (1988) 198 Cal.App.3d 113, 120; 244 Cal.Rptr. 1.]
Since the trustee begins to play a significant role in the trust deed relation only upon the foreclosure or reconveyance of the trust deed, the nature of the trustee’s duties will be discussed in detail in later entries.
The trustee need not formally consent to be named as trustee in the deed of trust. [See Huntoon v. Southern Trust and Commerce Bank (1930) 107 Cal.App. 121, 128; 290 P. 86.] Frequently, organizations such as title companies make available to the public printed trust deed forms designating the organization as the trustee. A creditor and debtor can use such a deed of trust form, thereby appointing the designated organization as trustee, without notice to the trustee that it has been appointed and without obtaining the trustee’s consent.
A new trustee may be substituted pursuant to Civil Code § 2934a or the terms of the trust deed. The manner of substitution provided in the trust deed may be restricted by Civil Code § 2934a [see Civ. Code § 2934a(c)], but all of the provisions of the statutory method of substitution do not necessarily have to be followed. [See U.S. Hertz, Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 83-85; 116 Cal.Rptr. 44.]
A trustee has authority to sue to carry out the trustee’s statutory duties. [Code Civ. Proc. § 369(b).]
The beneficiary is the secured party. If there is more than one beneficiary under a deed of trust, each beneficiary may protect the security without joining with the others, and each is empowered to initiate a foreclosure in the event of default. [See Perkins v. Chad Development Corp. (1979) 95 Cal.App.3d 645, 650-51; 157 Cal.Rptr. 201.]
The deed of trust is accessory to the primary obligation — it is a mere incident to the debt — and is not enforceable separate from the underlying debt. [See e.g., Civ. Code § 2909; Adler v. Sargent (1895) 109 Cal. 42; 41 P. 799.] The assignment of the underlying obligation carries with it the security of the
deed of trust. [See e.g., Civ. Code § 2936; Seidell v. Tuxedo Land Co. (1932) 216 Cal. 165, 170; 13 P.2d 686; Domarad v. Fisher & Burke, Inc.,, 270 Cal.App.2d 543, 554.] An assignment of the deed of trust without a transfer of the debt is, as the Supreme Court observed in Adler, without effect and gives the assignee of the trust deed no rights. Adler v. Sargent,, 109 Cal. 42, 48-49; see e.g., Kellev v. Upshaw (1952) 39 Cal.2d 179, 192; 246 P.2d 23.] Therefore, the beneficiary’s assignee must have also received an assignment of the underlying obligation in order to enforce the terms of the trust deed. But if the assignee of the beneficiary’s interest has also received an assignment of the debt, the assignee can enforce the trust deed even though the trust deed does not name the assignee.
The beneficiary may serve as trustee under the deed of trust [see e.g., Witter v. Bank of Milpitas (1928) 204 Cal. 570, 576; 269 P. 614; More v. Calkins (1892) 95 Cal. 435, 438; 30 P. 583] and, as trustee, may bid at the sale Bank of America Nat‘ 1 Trust & Sav. Ass’n. v. Century Land & Wat. Co. (1937) 19 Cal.App.2d 194, 196; 65 P. 2d 110] and collect a trustee’s fee California Trust Co. v. Smead Inv. Co. (1935) 6 Cal.App.2d 432, 435; 44 P.2d 624]. However, such a two-party trust deed under certain circumstances may be construed as a mortgage with power of sale [see Godfrey v. Monroe (1894) 101 Cal. 224; 35 P. 761], the enforcement of which may be barred by the statute of limitations. [See First Federal
Trust Co. v. Sanders (1932) 192 Cal. 194; 219 P. 440; see also “Statute of Limitations”,. 1
In addition, if the beneficiary serves as trustee at the foreclosure sale and acquires the property, the sale is voidable by the trustor if the trustor offers to redeem the property from the beneficiary after the sale. Copsev v. Sacramento Bank (1901) 133 Cal. 659; 66 P. 7.] This right, often neglected, has very significant applicability to foreclosures conducted by a so-called “in-house” or “captive” trustee which is a subsidiary of the foreclosing creditor. [See Karlsen v. American Sav. & Loan Ass’n. (1971) 15 Cal.App.3d 112, 116; 92 Cal.Rptr. 851.]
5. Execution, Acknowledgment and Delivery of the Trust Deed
A lien on real property is created by execution and delivery of a deed of trust. [See Livingston v. Rice (1955) 131 Cal.App.2d 1, 3-4; 280 P.2d 52.]
a. Execution or Signing of the Trust Deed by the Trustor
The trustor must sign the trust deed. [Code of Civ. Proc. § 1971; see Civ. Code §§ 1091 and 2922.] If someone signs on behalf of the trustor, the trustor’s authorization for that person to sign
must be in writing. (See Civ. Code §§ 1091, 2309, 2922 and 2933.) The trust deed also may be executed by someone other than the trustor at the trustor’s request and in the trustor’s presence. [See Blaisdell v. Leach (1894) 101 Cal. 405, 409; 35 P. 1019; Rich v. Ervin (1948) 86 Cal.App.2d 386, 395; 194 P.2d 809.] The trustor may also be estopped to deny the signature if the trustor knows of the unauthorized signature, permits it to be used, and accepts the benefit of the transaction. (See Blaisdell v. Leach,, 101 Cal. 405, 409-10.)
b. Acknowledgment of the Trust Deed by the Trustor
Acknowledgment of the trust deed before a notary is not necessary to create a binding lien between the parties. [See e.g., Civ. Code § 1217; Bank of Ukiah v. Petaluma Sav. Bank (1893) 100 Cal. 590; 35 P. 170.] However, acknowledgment is required to record the deed of trust (Civ. Code § 2952; Gov. Code § 27287) and preserve its priority from later bona fide purchasers or encumbrancers. (Civ. Code § 1214.)
c. Delivery of the Trust Deed
To be effective, a trust deed must be delivered. [See Civ. Code §§ 1054, 1091, 2922; Code of Civ. Proc. § 1933; Stirton v. Pastor (1960) 177 Cal.App.2d 232, 234; 2 Cal.Rptr. 135; see also Hahn v. Hahn (1954) 123 Cal.App.2d 97; 266 P.2d 519; Richardson v. Suiter (1946) 74 Cal.App.2d 682, 685-86; 169 P.2d 252.]
Whether delivery has occurred is a question of fact. Delivery requires that the trustor intended the trust deed to operate presently to create a security interest in favor of the beneficiary. How the intention is manifested does not matter, and actual physical delivery is not determinative. [E.g., Huth v. Katz (1947) 30 Cal.2d 605, 608-09; 184 P.2d 521; Hotalina v. Hotalina (1924) 193 Cal. 368, 382-85; 224 P. 455; Meyer v. Wall (1969) 270 Cal.App.2d 24, 27; 75 Cal.Rptr. 236.] Delivery cannot be conditional. (See Civ. Code § 1056.) While the cases in this area deal with deeds, the reasoning should fully apply to trust deeds viewed either as a grant of title to the trustee or a grant of a lien under the rules applicable to mortgages. (See Civ. Code § 2922.) If the trust deed has not been delivered, it is void— invalid not only against the beneficiary but also against any bona fide purchaser or encumbrancer of the beneficiary’s interest. [See Marlenee v. Brown, (1943) 21 Cal.2d 668, 679; 134 P.2d 770; Trout v. Tavlor (1934) 220 Cal. 652, 656; 32 P.2d 968; Gould v. Wise (1893) 97 Cal. 532, 535-36; 32 P. 576; see also Brvce v. O’Brien
(1936) 5 Cal.2d 615, 616; 55 P.2d 488.] However, even if the requisite element of delivery is not present, the trustor’s subsequent “ratification” can validate the deed of trust. [See Marlenee v. Brown,, 21 Cal.2d 668, 679.] Also, nondelivery may be overcome if the trustor’s conduct establishes negligence or an estoppel. [See Civ. Code § 3543; Trout v. Taylor,, 220 Cal. 652, 656-57; Shirley v. All Night & Day Bank (1913) 166 Cal. 50, 55; 134 P. 1001; Gould v. Wise,, 97 Cal. 532, 536-37.]
6. Trust Deeds on Encumbered Property
The trustor’s nominal transfer of title in creating the first trust deed does not preclude the trustor’s creation of other trust deeds. Davidow v. Corporation of America (1936) 16 Cal.App.2d 6; 60 P.2d 132.] Theoretically, there is no limit on the number of trust deeds which can be given on a parcel of real property.
7. All Inclusive Trust Deed
An all inclusive trust deed (“AITD”), also known as a “wrap around” or overriding trust deed, is a trust deed securing the trustor’s indebtedness to the beneficiary, but the amount of the indebtedness includes a debt owed by the beneficiary on a senior trust deed covering the same property. [See Armsev v. Channel Associates, Inc. (1986) 184 Cal.App.3d 833, 837; 229 Cal.Rptr. 509.] For example, suppose A sells property to B for $50,000
subject to a first trust deed of $25,000. B makes a down payment of $10,000 and gives A a promissory note and deed of trust for $40,000. Since the $40,000 note includes the $25,000 first trust deed loan, the $40,000 note and trust deed are considered all inclusive; they “wrap around” the existing first trust deed loan. The trustor’s debt is for the full face amount of the note, including senior obligations, and the trust deed secures the entire indebtedness. (Id. at 838-39.) Thus, if a trustor fails to make payments on one of the obligations underlying the AITD, the beneficiary can accelerate the entire unpaid balance due under the AITD and set that amount, rather than the amount owed under the underlying obligation, as the minimum bid. [See FPCI Re-Hab 01 v. E&G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1023; 255 Cal.Rptr. 157.]
B. The Obligations Secured by a Deed of Trust
1. The Underlying Obligation
The validity of the trust deed depends on the validity and enforceability of the underlying obligation:
The mortgage must stand or fall with the note. It is well settled in California that a mortgage or mortgage lien is a mere incident of the debt or obligation which it is given to secure. [Citations omitted.] There
cannot be a mortgage if there is no debt or other obligation to be secured. [Citations omitted.] A mortgage in California has no existence independent of the thing secured by it. Coon v. Shrv (1930) 209 Cal. 612, 615; 289 P. 815.
[See e.g., Adler v. Sargent., 109 Cal. 42; Turner v. Gosden (1932) 121 Cal. App. 20, 22; 8 P.2d 505.]
2. Obligation to Pay Accelerated Balance
A note and/or a deed of trust invariably contain a provision permitting the secured party to accelerate the balance due on the obligation, including accrued interest, in the event the obligor/trustor defaults on making any installment payment or performing any additional obligation contained in the deed of trust. The trustor then is obligated to pay the full amount. (But see Civ. Code § 2924c discussed infra.) In any conflict between an acceleration provision in the note and deed of trust, the provision in the note governs. Pacific Fruit Exchange v. Duke (1930) 103 Cal.App. 340, 345; 284 P. 729.]
However, even without an acceleration clause, the secured party may be able to accelerate. The power of sale clause has the same effect as an acceleration clause because it provides for the sale of the property on any default to satisfy the entire debt.
(See also Code of Civ. Proc. § 728 involving judicial foreclosure.)
3. Other Obligations Imposed by the Deed of Trust
The deed of trust invariably imposes several obligations on the trustor other than the payment of the obligation, such as payment of taxes, insurance and prior encumbrances. These obligations are discussed in the following sections. In the event the trustor breaches these obligations, the trust deed affords the beneficiary two options: (1) foreclosing without advancing money to perform the obligation, or (2) performing the obligation, demanding reimbursement, and foreclosing if reimbursement is not made. The amount advanced because of the trustor’s default is covered by the security of the trust deed under a provision generally securing future advances or specifically securing advances to perform the trustor’s obligations. [See also Civ. Code §§ 2876 and 2904 (2).] Thus, in addition to the failure to pay an obligation, the trustor’s failure to reimburse the amount advanced by the beneficiary is also a breach of the trust deed, authorizing foreclosure. [See Security-First Nat. Bank of Los Angeles v. Lamb (1931) 212 Cal. 64; 297 P. 550.] For any breach, the beneficiary can invoke the acceleration clause and foreclose on the entire amount due.
a. Fire Insurance and Eminent Domain Proceeds
(1) Obligation to Pay Premiums
One of the most standard obligations of the trustor is the maintenance of adequate fire insurance. The lender may require that the trustor maintain hazard insurance coverage in an amount up to the replacement value of the improvements on the property. (Civ. Code § 2955.5.) If the trustor fails to pay, the beneficiary may pay for the insurance and add the amount advanced to the principal. [See Freeman v. Lind (1986) 181 Cal.App.3d 791, 806; 226 Cal.Rptr. 515; see also Campbell v. Realty Title Co. (1942) 20 Cal.2d 195, 197-98; 124 P.2d 810; Covne v. Mason (1936) 13 Cal.App.2d 176, 178-79; 56 P.2d 541.] A beneficiary may accelerate and foreclose if the trustor fails to pay fire insurance premiums notwithstanding whether the failure to pay the premiums causes any impairment of the security interest in the real property. (Civ. Code § 2924.7; Fin. Code §§ 1227.2, 7461.) These statutes abrogate case authority which prevented the beneficiary from declaring a default if the beneficiary’s security interest in the property was not impaired by the trustor’s failure to maintain insurance. [See Freeman v. Lind,, 181 Cal.App.3d 791; see also Kreshek v. Sperling (1984) 157 Cal.App.3d 279; 204 Cal.Rptr. 30; Stats. 1987, ch. 397, § 5; Stats. 1988, ch. 179, § 3.]
The beneficiary will most likely advance money to purchase a fire insurance policy before foreclosing to avoid a potential fire loss (especially since the trustor’s liability may be limited to the missed premium or by the antideficiency statute if the fire loss is considered waste).
Issues that counsel representing a property owner in this situation should consider include: (1) whether the beneficiary placed the insurance with an insurer affiliated or related in some way with the beneficiary, (2) whether the beneficiary received a commission on the sale of the insurance, and (3) whether the insurance premium is higher than the trustor paid and higher than the rate available on alternative policies. The beneficiary is bound by the covenant of good faith and fair dealing implied in deeds of trust. [See generally Schoolcraft v. Ross (1978) 81 Cal.App.3d 75; 146 Cal.Rptr. 57; Milstein v. Security Pac. Nat. Bank (1972) 27 Cal.App.3d 482; 103 Cal.Rptr. 16.]
Moreover, to the extent that the beneficiary is acting as an insurance broker, the beneficiary is acting on behalf of the debtor as his or her agent [see Ins. Code § 33; Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 117; 132 Cal.Rptr. 796] and should procure insurance at a favorable premium. [See Colpe Investment Co. v. Seeley & Co. (1933) 132 Cal.App. 16; 22 P.2d 35; Anno., Inadequacy of Property Insurance Procured, 72 ALR 3d 747, 758.] In Colpe, the court held that if one undertakes to obtain insurance for another,
. . . it is the duty of an agent to exercise good faith and reasonable diligence to procure insurance on the best terms he can obtain; and if he is a professional agent he should be required to exercise the particular skill reasonably to be expected of such an agent, and to have knowledge as to the different companies and terms available with respect to the commission assured by him. Colpe Investment Co. v. Seeley & Co.,, 132 Cal. App. at 19.
A beneficiary’s excessive charge for insurance may be a breach of the beneficiary’s implied covenant of good faith and fair dealing and/or the beneficiary’s duties as an insurance broker. The foreclosure may be attacked if the premium is excessive. The amount owed to cure the default may be affected by the nature and extent of the beneficiary’s breach.
(2) Beneficiary’s Control of Insurance and Eminent Domain Proceeds
The standard trust deed provides that the beneficiary controls the disposition of insurance and eminent domain proceeds and may apply the proceeds to reduce the unpaid balance of the obligation. Courts have held that this provision is tempered by the implied covenant of good faith and fair dealing which requires the
beneficiary to permit the trustor to use insurance proceeds for the rebuilding of damaged improvements if the value of the beneficiary’s security interest is not impaired. (Schoolcraft v. Ross,, 81 Cal.App.3d 75, 77; see Kreshek v. Sperling,, 157 Cal.App.3d 279, 283.) In Kreshel, the court held that the beneficiary was not entitled to insurance proceeds even though the trustor was not going to rebuild because the beneficiary’s security interest was not impaired. (157 Cal.App.3d at 283.) Kreshek and Schoolcraft rely on the reasoning of Milstein v. Security Pac. Nat. ,, 27 Cal.App.3d 482 which held that a beneficiary’s right to apply condemnation proceeds to reduce the trustor’s outstanding indebtedness had to be construed in light of the covenant of good faith and fair dealing; as a result, the beneficiary could not retain condemnation proceeds in excess of those necessary to prevent any impairment of its security interest.
However, if the trustor is in longstanding default and has no right of reinstatement and if allowing the trustor to rebuild would indefinitely postpone the beneficiary’s matured right to foreclose, the beneficiary may apply insurance proceeds to the reduction of the unpaid debt. Ford v. Manufacturers Hanover Mortgage Corp. (9th Cir. 1987) 831 F.2d 1520.]
Statutory changes after Schoolcraft and Kreshek recognize that the beneficiary’s right to dispose of insurance proceeds is enforceable notwithstanding whether the beneficiary’s security
interest in the property has become impaired by the loss that caused the insurance proceeds to become payable. [Civ. Code § 2924.7(b) (effective 1-1-89); Fin. Code §§ 1227.3, 7462.] Uncodified statements of legislative intent make clear that these statutes do not abrogate Schoolcraft;s holding that the lender may not prohibit the use of insurance proceeds for rebuilding absent a showing that the lender’s security interest in the property has been impaired. (See Stats. 1987, ch. 397, § 5; Stats. 1988, ch. 179, § 3.]
A lien resulting from unpaid property taxes or other assessments takes priority over all other liens, even those created before the property tax or assessment lien. (Rev. & Tax Code § 2192.1.) To preserve the property as security for the debt, trustors are charged generally with the duty of paying all taxes and assessments. [See Donkin v. Killefer (1939) 32 Cal. App.2d 729, 732; 90 P.2d 810.] Notwithstanding this general principal, trust deeds routinely specify that the trustor must pay taxes and assessment within some period, often ten days, before delinquency.
If a delinquency occurs, the deed of trust permits the beneficiary to pay the delinquent taxes, add the amount paid to the secured debt, and foreclose if not reimbursed even though there are no other defaults. (See Security-First Nat. Bank of Los Angeles
v. Lamb,, 212 Cal. 64, 68-9.) The beneficiary has similar rights to advance money to pay taxes even in the absence of any express authority in the trust deed and is entitled to subrogation. [See Civ. Code §§ 2876, 2904 (2); Beeler v. American Trust Co. (1946) 28 Cal.2d 435, 440; 170 P.2d 439; Savings & Loan Society v. Burnett (1895) 106 Cal. 514, 536; 39 P. 922; Stafford v. Russell (1953) 117 Cal.App.2d 326, 333; 255 P.2d 872; Diehl v. Hanrahan (1945) 68 Cal.2d 32, 37; P.2d 853.]
The beneficiary, however, is not required to pay delinquent taxes and assessments. Dowd v. Glenn (1942) 54 Cal.App.2d 748, 756; 129 P.2d 964.] But, the trust deed usually provides that the trustor’s mere failure to pay taxes is grounds to accelerate the maturity of the debt and foreclose. (Civ. Code § 2924.7; Fin. Code §§ 1227.2, 7461.)
If a senior lienholder pays delinquent taxes and adds the amount advanced to the secured debt, the junior lienholder can declare a default and foreclose even though all payments due to the junior lienholder are current since the junior’s security has been reduced by the increased amount owed the senior, Manning v. Queen (1968) 263 Cal.App.2d 672, 674; 69 Cal.Rptr. 734.] Presumably, the borrower could relieve the default by reimbursing the senior encumbrancer even though the junior may demand an amount equivalent to what the senior advanced as a condition for reinstating the junior lien.
The failure to pay property taxes also constitutes waste, but the ability of the secured party to sue for damages and collect by means other than foreclosure is governed by the one form of action and anti-deficiency rules. Osuna v. Albertson (1982) 134 Cal.App.3d 71; 184 Cal.Rptr. 338; see Civ. Code § 2929; Code of Civ. Proc.
§§ 580b, 580d, 726; but see Krone v. Goff (1975) 53 Cal.App.3d 191, 195; 127 Cal.Rptr. 390.]
c. Impound Accounts
Some secured obligations require the trustor to maintain an impound account for the payment of taxes and insurance (and perhaps other purposes) related to the property. The failure to make periodic impound account payments is deemed a default even though taxes and insurance premiums are not yet due.
An impound account may not be required under an obligation secured by a deed of trust covering a single-family, owner occupied dwelling unless an impound account is required by a state or federal regulatory authority; the loan is made, guaranteed, or insured by a state or federal agency; the trustor fails to pay timely two consecutive tax installments; the original amount of the loan is 90 percent or more of the sale price or appraised value; or the combined principal amount of all loans secured by the
property exceeds 80 percent of the appraised value of the property. [Civ. Code § 2954(a).] The parties may agree to an impound if the beneficiary furnishes the trustor with a written statement indicating that an impound account is not required and whether interest will be paid. (Id. ) The beneficiary may not require that the amount maintained in the account exceed the amount necessary to pay tax, insurance, and other covered obligations as they become due. [Civ. Code § 2954.1(b).]
d. Senior Encumbrances
Most trust deeds require that the trustor must pay all sums due to holders of senior encumbrances. A default on a senior encumbrance is often expressly made a default on a junior encumbrance. In addition, the deed of trust permits the junior lienholder to advance money to the senior lienholder to satisfy any delinquency, add the amount advanced to the security of the junior lien, declare a default on the junior lien, and foreclose. Similar authority is provided by statute. [See Civ. Code §§ 2876, 2903-05; Windt v. Covert (1907) 152 Cal. 350, 352-54; 93 P. 67; Little v. Harbor Pac. Mortgage Investors (1985) 175 Cal.App.3d 717, 720; 221 Cal.Rptr. 59; Stafford v. Russell,, 117 Cal.App.2d 326, 333.]
Junior lienholders may learn of delinquencies on senior encumbrances not subject to a notice of default through the notice
of delinquency request procedure. The beneficiary or mortgagee of any trust deed or mortgage on real property containing one to four residential units may, with the trustor’s or mortgagor’s consent, submit a request to a senior lienholder for written notice of all delinquencies of four months or more in principal or interest payments even though the requester’s lien is not in default. [Civ. Code § 2924e(a).] The trustor’s or mortgagor’s consent must be effected by a signed and dated agreement separate from the loan and security documents or disclosed in at least 10-point type. (.Id.)
The request covers delinquencies until any of the following occurs: the date the request is withdrawn, the date the requester’s interest terminates as stated in the request, or five years from mailing except that it may be repeatedly renewed for five year periods within six months of expiration. [Civ. Code § 2924e(b).] The beneficiary must give notice of delinquency within 15 days following the end of four months from any delinquency; however, no delinquency notice is required if the senior lienholder files a notice of default. [Civ. Code § 2924e(c).] The senior lienholder is liable for damages and a $300 statutory penalty for failing to give the notice unless the failure was the product of a bona fide error notwithstanding the use of procedures reasonably adapted to avoid the failure. [Civ. Code § 2924e(d).]
(1) Foreclosure on Breach of Duty to Maintain
The standard trust deed requires the trustor to maintain the property in good condition and repair and also prohibits the trustor from removing or destroying buildings or committing acts of waste. The law provides that a person whose property is subject to a mortgage lien or deed of trust may not do anything to impair substantially the value of the property. [Civ. Code § 2929; Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 599; 125 Cal.Rptr. 557.] Waste can be committed by the mere failure to maintain the property; affirmative misconduct need not be shown to establish waste. In re Mills (9th Cir. 1988) 841 F.2d 902, 905; but see Krone v. Goff,, 53 Cal.App.3d 191, 195.] Failure to pay taxes can constitute waste since a tax lien becomes senior to all others, and a sale of the property to pay taxes will extinguish all deeds of trust. (Osuna v. Albertson,, 134 Cal.App.3d 71.)
In addition to maintaining the property, most trust deeds require additional acts, such as keeping the property free of mechanics’ liens. Many of these acts have little or nothing to do with sufficiently preserving the value of the property as adequate security for the debt. Consequently, failure to perform these acts might not constitute a basis for foreclosure, since the gravamen of the anti-waste provision and Civil Code § 2929 is preventing
action which would impair the ability of the creditor to realize the debt from the value of the security [see Cornelison v. Kornbluth,, 15 Cal.3d 590, 606-08; Easton v. Ash (1941) 18 Cal.2d 530, 539; 116 P.2d 433; Buckout v. Swift (1865) 27 Cal. 433, 437; 87 Am.Dec. 90; Robinson v. Russell (1864) 24 Cal. 467, 473.] In order to be a breach permitting foreclosure, the acts or omissions of the trustor must threaten the creditor’s ability to satisfy the obligation out of the proceeds of the sale of the property. [See Bart v. Streuli (1935) 5 Cal.2d 67, 68; 52 P. 2d 922.] However, a beneficiary is permitted to accelerate the maturity of the debt and foreclose if the trustor does not make timely payments of taxes, rents, assessments, or insurance premiums notwithstanding whether the failure impairs the value of the security interest in the real property. (Civ. Code § 2924.7; Fin. Code § 1227.2, 7461.)
No case has dealt with the situation where a beneficiary’s loan relied on a certain loan-to-value ratio and the beneficiary later faces an act by the trustor diminishing the value of the property. Can the beneficiary foreclose based on the reduced loan-to-value ratio even though the reduced value is sufficient security for the debt?
(2) Damages for Breach of Duty to Maintain
The trustor who commits waste may be liable for damages. In Comelison,, the Supreme Court held that if the obligation is purchase money, the trustor will not be liable for a deficiency judgment resulting from waste unless bad faith (i.e., reckless, intentional or malicious conduct) is proven. (15 Cal.3d at 603-04; see In re Mills,, 841 F.2d 902, 905.) If the obligation is not purchase money and the foreclosure is nonjudicial, the trustor will not be liable for a deficiency resulting from waste unless bad faith is proven. (15 Cal.3d at 604-05.) Even if the waste is committed in bad faith, no recovery can be had if the debt is satisfied at the foreclosure sale by the proceeds of a third party’s purchase or by the beneficiary’s full credit bid. [15 Cal.3d at 606-08; see Sumitomo Bank v. Taurus Developers, Inc. (1986) 185 Cal.App.3d 211, 217-222; 229 Cal.Rptr. 719.] Although the lienholder can avail himself of the injunctive remedy to prevent waste and the damage remedy for recompense [e.g., Lavenson v. Standard Soap Co. (1889) 80 Cal. 245, 247; 22 P. 184], it appears to be undecided whether an action for damages for waste is barred by the one form of action rule. [See Code of Civ. Proc. § 726; American Sav. & Loan Assn. v. Leeds (1968) 68 Cal.2d 611, 614; 68 Cal.Rptr. 453; cf. Krone v. Goff,, 53 Cal.App.3d 191, 193-95.]
Comelison is not followed in waste actions involving FHA insured trust deeds. [See United States v. Haddon Haciendas Co. (9th Cir. 1976) 541 F.2d 777 (case involving operator of a housing project).]
f. Prepayment Penalties
Promissory notes secured by trust deeds routinely require that the trustor must pay a penalty if all or a portion of a loan is repaid earlier than scheduled. In home loan transactions, state law generally provides that the borrower can prepay 20 percent of the original principal amount in any one-year period, but the creditor may subject the borrower to a penalty of up to a maximum of six months’ advance interest on the amount prepaid in excess of 20 percent of the original principal amount. (Civ. Code § 2954.9.) A similar rule applies to loans obtained through mortgage brokers. (Bus. & Prof. Code § 10242.6.) Prepayment penalty clauses commonly provide for this type of penalty formula and have been commonly upheld. [See, e.g., Meyers v. Home Sav. & Loan Assn. (1974) 38 Cal.App.3d 544; 113 Cal.Rptr. 358; Lazzareschi Inv. Co. v. San Francisco Fed. Sav. & Loan Assn. (1971) 22 Cal.App.3d 303; 99 Cal.Rptr. 417.]
If the prepayment penalty clause imposes a payment for “involuntary prepayment,” the lender can demand a prepayment penalty if the lender accelerates the balance upon the trustor’s default. (See Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn. (1986) 184 Cal.App.3d 817, 824-25; 229 Cal.Rptr. 269.] The obligation to pay the prepayment penalty is secured by the deed of trust. [See Golden Forest Properties, Inc. v. Columbia Sav. & Loan Assn. (1988) 202 Cal.App.3d 193, 199; 248 Cal.Rptr. 316.]
Accordingly, the trustor and junior lienholders would have to pay the penalty to redeem the property. (See Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn.,, 184 Cal.App.3d 817, 825.) Moreover, the foreclosing creditor is entitled to recover the amount of the penalty from foreclosure sale proceeds. (See Golden Forest Properties, Inc. v. Columbia Sav. & Loan Assn.,, 202 Cal.App.3d at 199.)
However, if the prepayment penalty provision does not apply to involuntary prepayment, i.e. payment forced as the result of the lender’s acceleration of the debt, the lender is not entitled to collect the penalty. [See Tan v. California Fed. Sav. & Loan Assn. (1983) 140 Cal.App.3d 800, 809-11; 189 Cal.Rptr. 775.]
g. Late Payments
Promissory notes secured by trust deeds routinely provide that the trustor must pay a late charge if an installment is not made by the due date or within a short period following the due date. The amount of the late charge and the length of a grace period, if any, following the due date within which a payment can be made without a late charge is subject to some statutory regulation. [See, e.g., Civ. Code § 2954.4 (6% late charge, 10-day grace period on certain loans secured by single family, owner occupied dwellings); Bus. & Prof. Code § 10242.5 (10% late charge, 10-day grace period on loans made or arranged by real estate brokers and
subject to the Necessitous Borrowers Act); Fin. Code § 15001 (6% late charge, no grace period on credit union loans secured by real property.]
If payment can be made after the due date before a late charge may be assessed, payments made after the so-called “due date” but before the payments are deemed “late” are considered to be timely. [See Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal.App.3d 818, 827; 214 Cal.Rptr. 531.] Foreclosure may not be used as a remedy for minor delays in paying installments. (Id. at 827, 831.)
h. Attorney’s Fees
Deeds of trust routinely provide that the trustor must pay attorney’s fees and costs incurred (1) in any action in which the trustee or beneficiary may appear, and (2) in connection with the protection of the security. Attorney’s fees are an issue in three contexts: fees incurred for processing a foreclosure, fees incurred for advising the beneficiary or trustee, and fees incurred in litigation.
(1) Processing the Foreclosure
Civil Code § 2924c permits a trustor to cure a default and reinstate the obligation, notwithstanding the acceleration of the
debt, by paying the arrearage, costs, and trustee’s or attorney’s fees as limited by Civil Code § 2924c(d). Trustee’s or attorney’s fees incurred after mailing of the notice of sale are limited by Civil Code § 2924d. Since the statutes use the disjunctive “or,” trustee’s or attorney’s fees, but not both, may be assessed. (See Hetland, California Real Estate Secured Transactions 172; 1 Miller & Starr, Current Law of California Real Estate 521.)
The limitation on attorney’s fees provided by these statutes, however, concerns fees incurred in the processing of the foreclosure. If the beneficiary incurs attorney’s fees for other purposes and if the trust deed authorizes the recovery of their fees, they may also be recovered. [See Passanisi v. Merit McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1512 n. 10; 236 Cal.Rptr. 59; Hetland, California Real Estate Secured Transactions 173; 1 Miller & Starr, Current Law of California Real Estate 520.]
(2) Fees for Advising the Beneficiary or Trustee
Most deeds of trust provide that the beneficiary may retain counsel at the trustor’s expense to take necessary steps to protect the security. These attorney services need not involve litigation; for example, the services of an attorney for an elderly widow which consisted of writing letters and making telephone calls to determine whether the property was covered by a fire insurance policy were held covered by this provision. Buck v. Barb (1983) 147 Cal.App.3d 920, 924-25; 195 Cal.Rptr. 461.] Similarly, attorney’s fees for checking insurance, coverage; warning unpaid material providers not to remove fixtures; recovering fixtures already removed; and meeting with general creditors, unpaid subcontractors, and others interested in refinancing and completing the trustor’s project were all properly chargeable to the trustor. O’Connor v. Richmond Sav. & Loan Assn. (1968) 262 Cal.App.2d 523, 526-29, 68 Cal.Rptr. 882, disapproved on other grounds in Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 738; 1108 Cal.Rptr. 845; see also Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496, 1511-12.]
If these attorney’s fees expended for protection of the security pursuant to the terms of the deed of trust are set forth in the notice of default [see Bisno v. Sax (1959) 175 Cal.App.2d 714, 720; 364 P.2d 814], payment of these fees may be made a condition of reinstatement. (See Buck v. Barb,, 147 Cal.App.3d 920, 925.)
The provision of the trust deed allowing the beneficiary to claim reimbursement for legal expenses incurred to protect the security is potentially subject to abuse. A beneficiary interested in frustrating the trustor’s ability to reinstate could inflate the amount needed for reinstatement by incurring attorney’s fees. The Buck case suggests that attorney’s fees for essentially nonlawyer services, such as making a telephone call to inquire about fire insurance coverage, are permissible. As a result, an unscrupulous beneficiary could hire an attorney to accomplish routine tasks in order to pad the amount needed to cure the default.
The use of the trust deed provision permitting the recovery of expenses for preserving the security cannot be used to sanction the incurring of unnecessary legal expenses. The purpose of the trust deed provision is to allow the beneficiary to take needed steps and incur reasonable expense to protect the property securing the obligation to assure that the value of the security is not impaired. Whether the steps taken are necessary will depend on the facts of the case and the parties involved.
For example, a beneficiary has the clear right to insist on the maintenance of a fire insurance policy covering the real property securing the obligation.
The beneficiary may need to inquire whether this insurance is in force. In Buck, an inexperienced, elderly widow was the beneficiary under a trust deed representing part of the purchase price of the home which she sold. The trustor repeatedly defaulted on the obligation and failed to furnish proof of fire insurance on the property, and the elderly widow was obliged to seek the aid of an attorney. (See 147 Cal.App.3d at 923-24.) That this elderly widow was obliged to retain an attorney does not furnish justification for a financial institution, real estate broker, sophisticated investor, or other experienced beneficiary to retain an attorney to inquire about fire insurance.
A lawyer representing a homeowner should evaluate any charge for attorney’s fees purportedly incurred to protect the security. If the charge is unreasonable, unnecessary, or unrelated to the protection of the security, the charge is not allowed under the terms of the trust deed. If the amount is not properly due under the obligation, it need not be paid to effect reinstatement which requires payment only of the amount then due. [See Civ. Code § 2924c(a)(1).] Moreover, the beneficiary’s imposition of an unneeded charge which hampers the trustor’s ability to reinstate the obligation may constitute a breach of the covenant of good faith and fair dealing. [See section VA 7, “Duty of Good Faith and Fair Dealing Between Lenders and Borrowers”, The best procedure would be to obtain a judicial determination of the reasonableness of the charge. [See Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496, 1504, 1512; de la Cuesta v. Superior Court (1984) 152 Cal.App.3d 945, 950; 200 Cal.Rptr. 1.]
(3) Litigation Fees
(a) Beneficiary’s Litigation Fees
Attorney’s fees may be awarded to the beneficiary in an action under the deed of trust if it so provides. [E.g., Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cap.App.3d 36,46; 198 Cal.Rptr. 418; Melnvk v. Robledo (1976) 64 Cal.App.3d 618, 621; 134 Cal.Rptr. 602; Nevin v. Salk (1975) 45 Cal.App.3d 331, 339; 119 Cal.Rptr. 370; Johns v. Moore (1959) 168 Cal.App.2d 709, 715; 198 Cal.Rptr. 418.] These fees are secured by the deed of trust and take priority over junior liens. (See Wutzke v. Bill Reid Painting Service, Inc.,, 151 Cap.App.3d 36, 46-47.)
If the demand for attorney’s fees is set forth in the notice of default, the payment of the fees may be made a condition of reinstatement. (See Bisno v. Sax,, 175 Cal.App.2d 714, 720.) In Hunt v. Smyth (1972) 25 Cal.App.3d 807, 837; 101 Cal.Rptr. 4, the court authorized the imposition of attorney’s fees and costs at both the trial and appellate levels as a condition of reinstatement. The Hunt opinion does not discuss whether attorney’s fees were demanded in the notice of default, but since the notice of default pre-dated the litigation, the amount of attorney’s fees and costs could not have been specified.
If the beneficiary has obtained a judgment for attorney’s fees, for example by prevailing in an action to enjoin the foreclosure, the beneficiary may add the amount of the judgment to the balance owed under the obligation. (See Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496.) The beneficiary may enforce the judgment apart from the secured obligation and is not affected by the antideficiency and one form of action provisions.
(Id. at 1505-09.) However, the beneficiary is barred by res judicata from claiming entitlement under the trust deed to a greater amount of attorney’s fees in connection with the litigation than was awarded by the court. (Id. at 1510.) If the beneficiary’s bid exceeds the amount of the debt, costs and expenses, and the attorney’s fees to which the beneficiary is entitled, a surplus is created. (Id. at 1510-12.) If the trustor has a right to the surplus, the trustor can offset the surplus against the amount of the judgment the trustor owes for attorney’s fees and can compel acknowledgment of the offset through a motion for satisfaction or partial satisfaction of judgment. (Id. at 1513.)
In addition to attorney’s fees, the beneficiary may also be able to obtain sanctions against a trustor who engages in frivolous tactics to delay foreclosure. [See Code Civ. Pro. §§ 128.5, 907; Cal. Rules of Court, Rule 26(a); Kapelus v. Newport Equity Funds, Inc. (1983) 147 Cal.App.3d 1, 9; 194 Cal.Rptr. 893.] The trustor should likewise be able to recover sanctions against a beneficiary who engages in frivolous tactics.
(b) Trustor’s Litigation Fees
The trustor, however, is not without an attorney fee remedy. Under Civil Code § 1717, the prevailing party in an action concerning the deed of trust is entitled to attorney’s fees. Thus,
if the trustor prevails in litigation, the trustor is entitled to reasonable attorney’s fees, and the same rule applies to the trustor’s successor in interest even if he or she did not expressly assume the obligation under the deed of trust. valley Bible Center v. Western Title Ins. Co. (1983) 138 Cal.App.3d 931; 188 Cal.Rptr. 335; Wilhite v. Callihan (1982) 135 Cal.App.3d 295, 301-02; 185 Cal.Rptr. 215; Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309; 168 Cal.Rptr. 552; see Buck v. Barb,, 147 Cal.App.3d 920.] In Valley Bible Center, the court clearly held that the trustor could recover attorney’s fees in an action brought by the trustor to challenge the beneficiary’s and trustee’s rights under the trust deed. (138 Cal.App.3d at 932.)
(c) Trustee’s Litigation Fees
An attorney’s fee provision in a trust deed also generally covers the trustee. The trustee may be entitled to attorney’s fees if the trustee’s participation is necessary to the resolution of the litigation. [See Title Guarantee and Trust Co. v. Griset (1922) 189 Cal. 382, 389-91; 208 P. 673; Mitau v. Roddan (1906) 149 Cal. 1, 15-17; 84 P. 145.] However, in Field v. Acres (1937) 9 Cal.2d 110; 69 P.2d 422, the Supreme Court held that the trustee was not involved in a judicial foreclosure, that the proceeding was between the beneficiary and the trustor, and that the trustee was not entitled to attorney’s fees although it had been named by the beneficiary in the action. Since the cases view a trustee under
a deed of trust as “only a functionary of limited power, under a type of mortgage conferring upon him the power to convey under the prescribed conditions” (Carpenter v. Title Ins, & Trust Co., (1945) 71 Cal.App.2d 593, 597; 163 P.2d 73), the trustee serves essentially a technical function. Accordingly, Professor Hetland concludes that “when the dispute is solely between the beneficiary and the trustor, the trustee’s appearance is only technically necessary, and he cannot have attorney’s fees.” (Hetland, California Real Estate Secured Transactions 175.)
4. The Obligations of Successors and Assigns
Deeds of trust routinely contain a clause binding the successors and assigns of all parties; however, many of a trust deed’s rights and obligations are transferred by operation of law.
a. The Trustor’s Transferee
The grantee of property on which a trust deed has been placed is not personally liable on the underlying obligation unless the grantee assumes it. [E.g., Braun v. Crew (1920) 183 Cal. 728, 731; 192 P. 531; Andres v. Robertson (1918) 177 Cal. 434, 439; 170 P. 1129; Hibernia Sav. & Loan Soc. v. Dickinson (1914) 167 Cal. 616, 621; 140 P. 265.] Nevertheless, a grantee who does not assume the obligation takes the property subject to the trust deed, and the property becomes primarily liable for the payment of the debt
(Braun v. Crew,, 183 Cal. 728, 731). As a result, although not personally liable, a nonassuming grantee’s property can be sold to satisfy the secured debt. [See e.g., Rodgers v. Peckham (1898) 120 Cal. 238; 52 P. 483; Hohn v. Riverside County Flood Control & Wat. Conserv. Dist. (1964) 228 Cal.App.2d 605; 39 Cal.Rptr. 647.] A nonassuming grantee may, however, be liable for bad faith waste. (Cornelison v. Kornbluth,, 15 Cal.3d 590.)
b. The Beneficiary’s Transferees
The assignee of the note and deed of trust may enforce them against the trustor in the same manner as the original beneficiary. See Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735, 744; 155 Cal.Rptr. 132, app. dis. 444 U.S. 948; section c, at p. 1-10,; see generally McCown v. Spencer (1970) 8 Cal.App.3d 216, 225) 87 Cal.Rptr. 213.] The assignee may actually have superior rights as a holder in due course taking free of personal defenses which could have been asserted against the original beneficiary. [See Comm. Code §§ 3302-3305; see e.g., Szczotka v. Idelson (1964) 228 Cal.App.2d 399; 39 Cal.Rptr. 466 (foreclosure by holder in due course of usurious note).] For example, the assignee is not under an obligation to make inquiry to discover the existence of defenses “unless the circumstances or suspicions are so cogent and obvious that to remain passive would amount to bad faith” or unless “the failure to make inquiry arose from a suspicion that inquiry would disclose a vice or defect in the
instrument or transaction. . . .” Cameron v. Security First Nat. Bank (1967) 251 Cal.App.2d 450, 458; 59 Cal.Rptr. 563; see e.g., Mann v. Leasko (1960) 179 Cal.App.2d 692, 697-98; 4 Cal.Rptr. 124.] A holder in due course of a promissory note likewise takes the deed of trust securing the note free of personal defenses. [See e.g., Gribble v. Mauerhan (1961) 188 Cal.App.2d 221, 225; 10 Cal.Rptr. 296; Mann v. Leasko,, 179 Cal.App.2d 692, 696-97.]
Moreover, recorded documents may not impart notice of any defense or claim to a person who otherwise meets the holder in due course criteria. [Comm. Code § 3304(5); see Ross v. Title Guarantee & Trust Co. (1934) 136 Cal.App. 393; 29 P.2d 236; cf. Haulman v. Crumal (1936) 13 Cal.App.2d 612, 621; 57 P.2d 179.] In Ross, the plaintiff sued to cancel a note and deed of trust on the grounds of no consideration and fraud and filed a lis pendens naming the payee. Subsequently, a person who met the standards of a holder in due course acquired the note and deed of trust from someone who had previously acquired them from the defendant named in the lis pendens. The court concluded that the lis pendens imparted no notice to negate the person’s status as holder in due course of the note and as bona fide purchaser of the trust deed since his immediate transferor was not named in the lis pendens.
The strict reading of the holder in due course rule has been substantially abrogated in several areas affecting consumers. The Unruh Act specifically declares that assignees of the seller under a retail installment sale are subject to all of the equities and defenses which the buyer could assert against the seller, but the assignee’s liability may not exceed the amount owing at the time of the assignment [Civ. Code § 1804.2(a)]. A seller of goods or services to be used for personal, family, or household purposes may not enter a credit sale contract or accept the proceeds of a purchase money loan unless the consumer’s obligation contains a prescribed clause subjecting the holder of the obligation to the claims and defenses which the consumer could assert against the seller, but the consumer’s recovery is limited to the amount which the consumer already paid. (16 C.F.R. Part 433.) In addition, if the seller and financer of the transaction are too closely connected or if the financer takes too active a part in the seller’s business or the particular sale at issue, the financer will not be able to take the sanctuary of the holder in due course doctrine. see Vasouez v. Superior Court (1971) 4 Cal.3d 800, 822-25; 94 Cal.Rptr. 796; Morgan v. Reasor Corp. (1968) 69 Cal.2d 881, 893-896; 73 Cal.Rptr. 398; Commercial Credit Corp. v. Orange County Machine Works (1950) 34 Cal.2d 766; 214 P.2d 819; see also Unico v. Owen (1967) 50 N.J. 101; 232 A.2d 405.]
5. Servicing Agent
Frequently, the beneficiary may designate another to act as the beneficiary’s agent to collect payments due on the secured obligation. A loan servicing agent must be licensed as a real estate broker unless exempt from disclosure. [See Bus. & Prof. Code §§ 10130/ 10131(d).] Most financial institutions are exempt from the licensing requirements. (See Bus. & Prof. Code § 10133.1.)
The beneficiary transferring the servicing of a loan secured by a single family residence to a different servicing agent and the new servicing agent must give the trustor written notice before the borrower becomes obligated to pay the new servicing agent. [Civ. Code § 2937(e).]
The servicing agent is also required to give the beneficiary a copy of a notice of default recorded in connection with the serviced obligation, notice of a notice of default recorded by a senior lien holder/ and notice of the time and place of a scheduled sale of the property unless the beneficiary has requested notice under Civil Code § 2924b. (Civ. Code § 2924.3.)
6. Beneficiary’s Obligation To Provide Beneficiary or Payoff Demand Statement
The trustor and junior lienholders, among others, may require the beneficiary to deliver a beneficiary statement or a payoff demand statement. [Civ. Code § 2943(b), (c).] A “beneficiary statement” contains a statement of the amount of the unpaid obligation, the interest rate, the total amount of overdue
installments of principal and interest, the amount of the periodic payments, the maturity date, the date on which taxes and assessments were paid, the amount of hazard insurance in effect and the term and premium of that insurance, the amount in any impound account for taxes and insurance, the nature and amounts of charges, costs or expenses which have become a lien on the property, and whether the obligation may be transferred. [Civ. Code § 2943(a)(1).] A “payoff demand statement’7 sets forth the amount required as of the date of its preparation to satisfy fully the entire indebtedness and information reasonably necessary to calculate the payoff amount on a per diem basis for the period of time, not exceeding 30 days, during which the per diem amount is not changed by the terms of the note. [Civ. Code § 2943(a)(5).]
The beneficiary statement may be made before or within two months after the recordation of a notice of default, and the beneficiary must deliver the statement within 21 days of the receipt of a written demand for it. [Civ. Code § 2943(b).] The beneficiary must deliver a payoff demand statement if the beneficiary receives a written demand for it before the first publication of a notice of sale and must deliver the statement within 21 days of the receipt of the written demand. [Civ. Code § 2943(c).]
The trustor and junior lienholders may rely on the beneficiary and payoff demand statements, and any amendments made to them, to determine the amount necessary to satisfy fully the obligation until the foreclosure sale auction is concluded. [Civ. Code § 2943(d)(1), (d)(3)(B).] Any amount not included in the statements remains owing as an unsecured obligation. [Civ. Code § 2943(d)(3).]
If the beneficiary willfully fails to deliver a beneficiary or payoff demand statement within 21 days after receipt of a written demand, the beneficiary is liable for damages and a $300 statutory penalty. [Civ. Code § 2943(e)(4).]
The beneficiary may charge $60 for each statement. [Civ. Code § 2943(e)(6).]