Facts: An owner of property encumbered by a mortgage contracts for renovations. The contractor is not paid and records a mechanic’s lien on the property. The homeowner defaults on the mortgage and the mortgage holder records a notice of default (NOD). In a pre-foreclosure workout, the homeowner conveys the property to the mortgage holder by a deed-in-lieu foreclosure in exchange for cancellation of the mortgage debt.
The mortgage holder discovers the junior mechanic’s lien and records a notice of default (NOD) under their trust deed. The mortgage holder acquires ownership of the property at the trustee’s sale. The holder of the mechanic’s lien now seeks to foreclose on its lien and clear title of the mortgage holder’s interests in the property.
Claim: The contractor claims the mortgage holder’s right to foreclose under their trust deed was eliminated and the trustee’s sale is void since the security interest under the trust and title merged, eliminating the trust deed when the mortgage holder became the property owner under the deed-in-lieu of foreclosure.
Counter claim: The mortgage holder claims their ability to foreclose was not eliminated when it accepted the deed-in-lieu of foreclosure and the trustee’s sale was valid and wiped out the contractor’s mechanic’s lien.
Holding: A California court of appeals held the mechanic’s lien was eliminated by the trustee’s foreclosure sale, leaving the contractor with no interest in the property to foreclose since the trust deed holder was not barred by a merger from foreclosing under their trust deed after becoming the owner under the deed-in-lieu of foreclosure. [Decon Group Inc v. Prudential Mortgage Capital Company, LLC (June 30, 2014)_CA4th_]
Editor’s note — As a long established rule, California courts hold that when a trust deed holder accepts a deed-in-lieu of foreclosure from an owner in default, the trust deed and title do not merge to eliminate the trust deed when there is a junior lien on title. Thus, the trust deed holder retains the right to foreclose and eliminate any junior liens encumbering the property, even though they became the owner of the property before foreclosing. [See first tuesday Form 406]
My junior mechanics lien was eliminated in the Decon Vs Prudential appeal and without notice PMCF purchased this with the equity of 13.5 million and four months later sold this fully remodeled lien free property for 28 million gaining in excess of 15. This was accomplished by simply recording the timely documents at little expense and effort. Improvements add value and remain when sold the related liens should follow as just.
I am in a bit of a quandary in the entire fiasco of not only the Zillow buy out of Trulia but the Realtor.com and Redfin being allowed to openly steal the very system that we as Licensed Realtors and Members of the NAR and our local Associations have built and paid for. Now that this has been allowed to occur, we are losing ground in our own business. The same outside entities are allowing the general public free access into their websites and double downing by charging realtors to have to advertise in the websites. The way this is progressing, these outside websites are heading toward becoming the uber real estate companies that will force all of us out of business as independent realtors and left with the only option of working directly for them for a fraction of our current percentage based fees.This is the issue that needs to be immediately addressed by NAR and all of the Local Real Estate Boards and Local Associations before it is too late.