simultaneously recorded liens

Simultaneously Recorded Liens and Priorities

Updated on July 5, 2022

Part one of this two-part series discussed California’s system of lien priorities.  To summarize, California applies a “first in time, first in right” system, under which, generally, the priority of liens is determined according to the time of creation.  However, a question of priority arises when liens are simultaneously recorded.  Part two of this series addresses this issue below.

Earlier this year, a California court of appeal (“COA”) heard MTC Financial, Inc. v. Nationstar Mortgage where it decided the case of simultaneously recorded liens against Nationstar and held that Nationstar was the senior lienholder.  As discussed below, the case turned “on the apparent intent of the parties.” (MTC Financial, Inc. v. Nationstar Mortgage (2018) 19 Cal.App.5th 811, 816.)

The Facts of the Case
In 2003, a borrower obtained two loans from Countrywide Home Loans, Inc (“Countrywide”) each secured by a deed of trust against the borrower’s property.  The first loan was a mortgage for $205,080.00 (the “Mortgage Loan”), and the other loan was a home equity line of credit for $15,000.00 (the “HELOC Loan”). Countrywide simultaneously recorded both loans.  The HELOC Loan was recorded as instrument number 2003-0603657 and the Mortgage Loan was recorded as instrument number 2003-0603658.  The HELOC Loan was assigned to the Bank of New York Mellon and the Mortgage Loan to Nationstar.

On the borrower’s default, MTC Financial, Inc (“MTC”), the trustee for Bank of New York Mellon, foreclosed on the HELOC Loan.  After the foreclosure sale, $75,085.50 remained as surplus.  Claiming status as a junior lienholder Nationstar demanded rights to remaining proceeds.

In going through its analysis, the COA first applied the law on distribution of proceeds following foreclosure.  Specifically, under Civil Code section 2924k, subdivision (a)

the proceeds of a trustee’s sale must be distributed in the following order of priority: “(1) To the costs and expenses of exercising the power of sale and of sale …. [¶] (2) To the payment of the obligations secured by the deed of trust or mortgage which is the subject of the trustee’s sale. [¶] (3) To satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority. [¶] (4) To the trustor or the trustor’s successor in interest.” (MTC Financial, Inc. v. Nationstar Mortgage (2018) 19 Cal.App.5th 811, 814; [emphasis added].)

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Nationstar argued that it was entitled to the proceeds because its Mortgage Loan was junior to the HELOC Loan.  As support, Nationstar pointed out that the Mortgage Loan had the higher instrument number (2003-0603658) than the HELOC Loan (2003-0603657).  The Court, however, disagreed and went with precedent law which holds “that if two deeds of trust are submitted at the same time for recording, the order in which they are indexed is not determinative of priority.” (MTC Financial, Inc. v. Nationstar Mortgage (2018) 19 Cal.App.5th 811, 815.)

To reach its conclusion that Nationstar held a senior interest, the COA instead relied on the “apparent intent of the parties.”  (Id. at 816.)  Specifically, the COA held that the reasonable expectation of the parties was that Countrywide would have secured the Mortgage Loan, with the “much larger mortgage loan amount”, as senior to the HELOC Loan. (Id.)

Accordingly, as the senior lien holder, Nationstar was not entitled to the surplus proceeds because the borrower’s property was purchased at the sale subject to the first deed of trust.  (Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609, 1614, 42 Cal.Rptr.2d 414; Ostayan v. Serrano Reconveyance Co. (2000) 77 Cal.App.4th 1411, 1422, 92 Cal.Rptr.2d 577.)

Our real estate attorneys at Schorr Law have a great deal of experience with real estate matters and disputes. To see if you qualify for a free 30-minute consultation, contact us today!

By Randy Aguirre, esq.

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