May multiple loans be secured by a single trust deed without affecting the priority of the loans?

Facts: An owner’s property was subject to several trust deeds. The owner refinanced, consolidating some of the loans into a new loan made by a new lender, secured by a new trust deed. In addition, the owner partially paid off another existing loan secured by an existing trust deed on the property. In exchange for the partial payoff, the existing lender entered into a subordination agreement with the new lender to subordinate its existing trust deed to only the new loan secured by the new trust deed. After the subordination agreement was recorded, the new lender recorded the new trust deed, which secured the new loan and two other loans. Later, the owner defaulted on the new loan and was unable to cure the default by paying off all three loans secured by the new trust deed. The new lender began foreclosure. At the trustee’s sale, the new lender made a bid in the amount of the new loan to acquire the property, thus extinguishing the existing lender’s lien.

Claim: The existing lender sought to enforce the existing trust deed as the senior lien, claiming the new lender voided the subordination agreement by using the new trust deed to secure two additional loans, improperly increasing the debt with priority over the existing lender’s trust deed.

Counterclaim: The new lender claimed the subordinated trust deed was extinguished by the trustee’s sale since the two additional loans did not have priority over the existing lender’s trust deed, and the new loan, not the two additional loans, was the subject of the foreclosure.

Holding: A California court of appeals held the existing lender’s subordinated trust deed was extinguished by the trustee’s sale since the two additional loans did not have priority over the existing lender’s trust deed, and the new loan, not the two additional loans, was the subject of the foreclosure. [R.E. Loans, LLC v. Investors Warranty of America, Inc. (2013) 212 CA4th 1432]

Editor’s note – One trust deed may secure multiple debts without altering the priority of the separate debts. In this case, the existing lender equated the owner’s duty to pay off the “cross-defaulting” notes to cure the default to mean all three loans were senior to its existing trust deed. The existing lender’s failure to identify the correct priority of the debts cost it the case, attorney’s fees and the chance to protect its interest by bidding at the trustee’s sale for the amount of the new loan – the only loan senior to its existing trust deed.