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.)
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.
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].)
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.)
By Randy Aguirre, esq.
See related: 3 Keys to Mechanics Liens in California