American College of Mortgage Attorneys

The Greenbrier

White Sulfur Springs

October 25, 2003



A Critical Analysis of Recent Cases



Roger Bernhardt

Robin Paul Malloy

Grant Nelson




Roger Bernhardt


Roger Bernhardt is Professor of Law at Golden Gate University in San Francisco. He is the author of two California Continuing Education of the Bar books: California Mortgage and Deed of Trust Practice and Bernhardt’s California Real Estate Cases. He is also the Editor (and commentator) of CEB’s California Real Property Law Reporter.  His other publications for attorneys include Bernhardt’s California Real Estate Codes and Deskbook of Federal Real Estate Laws.  In addition to these books for attorneys, Professor Bernhardt has also written for law students Casebook on Real Property, Real Property in a Nutshell, The Black Letter Law of Real Property, all for West,  and also a Casebook on California Real Estate Finance.


Robin Paul Malloy

Robin Paul Malloy is Professor of Law, and Economics of Law, and Director of the Program in Law and Market Economy at Syracuse University College of Law.  He is the author of 9 books, 8 book chapters, and some 25 articles.  His work is primarily focused on real estate transactions and development, law and market theory, land use, property, and commercial law.  His emphasis is on understanding law in a market context, and on exploring property issues in the context of globalization.  Among his books are Real Estate Transactions 2nd (with James Smith, Aspen 2002) and REAL ESTATE (with James Smith, Aspen 2000).  He has worked in China on property law issues related to the transition to a market economy, and has a working relationship with the Land and Real Property Initiative Group at The World Bank.

Grant Nelson


Grant Nelson is Professor of Law at University of California, Los Angeles. He teaches Real Estate Finance, Advanced Real Estate Transactions, Property, Land Use Regulation, and Remedies. He is the recipient of the School of Law's Rutter Award for Excellence in Teaching in 2000and the university's Distinguished Teaching Award in 2002. He was the Co-Reporter for the American Law Institute's Restatement of Property (Third)--Mortgages (1997), serves on the Law School Editorial Advisory Board of the West Publishing Company, and has served as a Commissioner of the National Conference of Commissioners on Uniform State Laws for nine years.

While in law school, Professor Nelson was an editor on the Minnesota Law Review. After serving as an officer in the U.S. Army during the Vietnam era, he practiced real estate finance at Faegre and Benson, a large Minneapolis law firm. He taught at the University of Missouri-Columbia School of Law for twenty-four years, where he was the Enoch H. Crowder & Earl F. Nelson Professor of Law and was elected Outstanding Professor by three classes. He was elected Professor of the Year at two other law schools where he was visiting. He chaired the Missouri State Bar Property Committee.

Professor Nelson has published many books on real estate finance law, property, and remedies, the most recent of which include: Land Transactions and Finance (3rd ed., with Whitman, 1998); Real Estate Transfer, Finance and Development (5th ed., with Whitman, 1998); and Contemporary Property (with Stoebuck and Whitman, 1996).

1. Bryant v. Mortgage Capital Resource Corp., 197 F. Supp. 2d 1357 (N.D. Ga. 2002).

MCR (Mortgage Capital Resource) made loans to the plaintiffs against their home equity.  The loans came under HOEPA (The Home Equity Protection Act of 1994).  The loans were than transferred to RFC and Chase Manhattan Bank  (as Indenture Trustee in care of RFC).  The plaintiffs allege that MCR made phone calls to them to introduce them to low cost loans and took their loan applications over the phone.   On closing the loans the MCR people allegedly rushed the paperwork and used forms for high cost loans.  They also dated the forms incorrectly so as to look like the borrowers had their 3-day rescission period pass even though everything was done at once.   The loans were then sold to RFC and Chase.  RFC and Chase assert that the action cannot be raised against them in this case.

HOEPA permits an action against a buyer and assignee of loans.  It makes all defenses against MCR actionable against RFC and Chase.    RFC and Chase argue that the documents were signed by each of the borrowers and the dating therefore creates ‘conclusive’ proof of compliance with the regulation per the TILA .  The TILA also has a provision that only creates a presumption of compliance.    The court has to decide which to apply and it holds that it is simply a presumption.  Thus, it can take evidence as to the improper dating of the documents to see if the plaintiffs were able to exercise their 3-day rescission rights under TILA.

There is also an issue related to tolling of the statute as more than a year has passed by the time plaintiffs bring their claim.    In this case the court held that there was not sufficient support for equitable tolling and dismissed the claim as to all loans beyond the time period.

2. In re Consolidated Mortgage Satisfaction Cases, 780 NE2d 556 (Ohio, Dec. 18, 2002).


An Ohio statute requires that the holder of residential mortgage record a satisfaction of it within 90 days after it has been paid. A number of mortgagors brought actions against a number of lenders for violations of that statute and the trial court first consolidated their actions and then certified the proceedings as a class action.


The District Court of Appeal reversed the class certification on the ground that each plaintiff would have to individually prove “his status as residential mortgagor, and the fact and date of the satisfaction of the indebtedness, and the date the satisfaction of the mortgage was recorded”; concluding that there was not one common element for the class. The Ohio Supreme Court reversed the Court of Appeal and upheld the class certification.


There was a common question of law as to whether each lender violated its statutory duty to record satisfactions, which is not rendered inappropriate for class treatment merely because different facts are associated with each individual claim, and the trial court is in the best position to decide upon the feasibility of gathering and analyzing this class-wide evidence. Furthermore, class treatment is a superior method of achieving fair and efficient adjudication of this controversy since the small statutory penalty of only $250 makes it impossible for the plaintiffs to pursue these claims on an individual basis and will cause wasteful duplication of judicial resources.

Two dissenting justices thought that the numerous individualized evidentiary issues defeated the claimed predominance of the common issues.
3. Eastern Savings Bank, FSB v. Pappas, 2003 WL 21939714 (D.C.App.2003)

In 1990, Pappas executed a deed of trust on D.C. land to secure a loan made to her by Citibank Federal in the amount of $159,000. The deed of trust was promptly recorded. In 1992 and 1996 two judgments against Papas were recorded in the D.C. land records and became liens against Pappas’ land. After going into default on the Citibank deed of trust, Pappas secured a loan from Eastern Savings Bank (Eastern) to refinance the Citibank loan. She executed a note and deed of trust in the amount of $168,000 to Eastern, of which $153,800 was used to pay off the Citibank loan. The title company that performed a title search on the real estate for Eastern discovered the first judgment for against Pappas for $3,461.  The title company believed and represented to Eastern that this judgment had been entered against Pappas solely in her capacity as a former Personal Representative of a family member’s estate. In fact the judgment was against Pappas personally.  The second judgment for $62,397 against Pappas, also against her personally, was not discovered and Eastern had no knowledge of it.

Shortly thereafter the Eastern deed of trust went into default and a foreclosure proceeding was commenced.   In connection with this foreclosure, Eastern discovered the existence of the second judgment and also determined that the first judgment was against Pappas personally. It then brought suit against the judgment holders, claiming that its lien deed of trust lien was superior to their judgment liens under the principle of equitable subrogation. The trial court rejected this argument and granted the judgment holders summary judgment.

On appeal, the District of Columbia Court of Appeals reversed and endorsed the application of Restatement (Third) of Property: Mortgages § 7.6 comment e (1997):

Perhaps the case occuring most frequently is that in which the payor is actually given a mortgage on real estate, but in the absence of subrogation it would be subordinate to some intervening interest, such as a junior lien.  Here subrogation is entirely appropriate, and by virtue of it the payor has the priority of the original mortgage that was discharged.  This priority is often of critical importance, since it will place the payor’s security in a position superior to intervening liens and other interests in the real estate.  The holders of such intervening interests can hardly complain of this result, for it does not harm them; their position is not materially prejudiced, but is simply unchanged.

Many judicial opinions dealing with a mortgagee who pays a preexisting mortgage focus on whether the payor had notice of the intervening interest at the time of the payment.  Most of the cases disqualify the payor who has actual knowledge of the intervening interest, although they do not consider constructive notice from the public records to impair the payor’s right to subrogation.  Under this RESTATEMENT, however, subrogation can be granted even if the payor had actual knowledge of the intervening interest; the payor’s notice, actual or constructive, is not necessarily relevant.

Note that the both the amount and interest rate of Eastern’s refinancing loan exceeded those two amounts on the loan that was paid off. The court of appeals returned the case to the trial court to calculate the extent to which subrogation should be allowed. It quoted from Restatement language that states that "a payor is subrogated only to the extent that the funds disbursed are actually applied toward payment of the prior lien.  There is no right of subrogation with respect to any excess funds." Restatement, comment e.  Thus part of Eastern’s lien –  the excess principal ($11,000) and the amount representing the higher new interest rate – should presumably be subordinate to the judgment liens.

To the extext that this "subrogation friendly" doctrine is adopted by more courts, does this mean that a new title examination will no longer be necessary each time property is refinanced? Can this doctrine thus play a role in reducing refinancing costs? 

4. Fidelity National Title Insurance Company v. Matrix Financial Services Corp.,  255 Ga. App. 874; 567 S.E. 2nd 96 (2002)

In 1991 H & D Haygood with assistance of their broker, Mock, sell their property to Jones for $115,000.  Jones gives Haygood a Security Deed for $105,000 and a Security Deed to Mock in the amount of $3,240 (for part of the commission).  In 1992 because of failure to pay Haygood seeks to foreclose.  Jones gives a deed in lieu of foreclosure to Haygood in Sept. 1992 but Haygood fails to record, and Jones is permitted to remain in possession.

In 1997 Jones seeks to ‘refinance’ the property for $105,000.  It applies to Premier, a loan originator, for a loan to be funded by Matrix.  Matrix has an attorney named Fudge representing it and also acting as an agent for Fidelity Title Insurance.  July 2, 1997 Fudge does title search and discovers the security deeds issued to Haygood and Mock in 1991.  He arranges for cleaning up these liens by getting a cancellation/release from each party and recording it.  Jones obtains the cancellations for recording.  Simultaneously with obtaining the releases Jones signs new Security deeds with Haygood ($170,000 on July 7), and Mock ($5,061.50 on July 8).  The new Security Deeds are recorded on July 10.  The loan is funded by Matrix on July 28, 1997, and Matrix assigns to Residential Funding.  Jones fails to pay and Haygood sues Jones in foreclosure on June 9, 1999.  Residential Funding informed Fidelity about the prior Security deeds and requested Matrix to repurchase the loan.  Matrix repurchased the loan and filed a claim against Fidelity.   Fidelity refuses to cover the claim or to take action on grounds that the Security Deeds dated in 1997 are ineffective since Jones had given a deed in lieu of foreclosure years earlier, and because Matrix assumed the risk by not bringing a quiet title action, and by repurchasing the loan.  Fidelity says that Matrix assumed, accepted, or agreed to the defect and thus not covered under its standard lender’s policy.  The trial court grants summary judgment against Fidelity and this court affirms.


5. Fischer v First International Bank, 1 Cal Rptr 3d 162,(2003.


Two loans were arranged and the loan documents provided that the borrowers’ home secured only loan #2 (loan #1 was secured by other property). However, when the borrowers later sold their home, the lender not only used the proceeds to pay off loan #2, but also applied the balance against loan #1. The borrowers sued for breach of contract.


The trial court granted summary judgment in favor of the lender on the ground that although the deed of trust for loan #2 specifically referred only to that note, nevertheless it also contained a dragnet clause defining indebtedness and including “all obligations . . . of borrower to lender”.


The court of appeal reversed. There was a triable issue of fact as to whether the parties had intended to cross-collateralize the loans and interpretation of the dragnet clause must depend more on the parties’ actual expectations than upon its boilerplate language.

6. In Re: Golden Books, 269 B.R. 311 (2001)

This is not a real estate case but it sets up a nice opportunity to talk about some intellectual property issues in the real estate context.


In this case Golden Books publishes a variety of books and home entertainment products that include characters owned by others.  As part of this proceeding Golden Books seeks to assume and assign a license agreement to use and distribute materials with characters from the series ‘Madeline’.   The issue that arises relates to the ability to transfer the license without the consent of the owner of the copyright, DIC Entertainment, L.P.


The court has to consider the nature of the license agreement to see if it is an ‘executory contract’ under the Bankruptcy Code and then to see if it can be freely transferred.  The court holds in this case that it is an executory contract and determines that it is an exclusive license so it is freely transferable.


A key issue here is to imagine that you have made funding available to Golden books.  Perhaps the funding is as part of the mortgage loan to acquire and equip the building that Golden will use for book production.  As lender, you take an interest in a number of assets including the land, building, equipment, and contracts that will provide cash flow for the enterprise.  This includes the license agreement between Golden and DIC.   In the event that Golden defaults on the loan will you be in a position to takeover the license agreement and continue to operate the business?  This is a difficult issue and an important one since the license agreement is an important asset of the enterprise.  The case tells us how to approach such an issue.


It is important to think of a variety of intellectual property issues that are linked to real estate transactions.  The issues may arise when dealing with licenses or inventory, or in other contexts such as when dealing with ‘smart buildings’ and green buildings’.

7. Graves v American Acceptance Mortgage Corp., 467 Mich 308 (Oct 22, 2002).

Pursuant to a divorce, the parties’ interest in real estate held under a land contract was given to the husband and the wife was given a lien on it for moneys owed to her, which she recorded on September 7.  That same day, the husband obtained a mortgage loan, which he used to pay off the land contract, but the mortgage was not recorded until October 5. Both the mortgagee and the wife subsequently brought foreclosure actions, each asserting priority over the other. The trial court held in favor of the wife on the ground that her recorded lien was constructively known to the mortgage lender. The Court of Appeals reversed on the ground that the mortgage had purchase money priority over all other liens, even those recorded first.

The Michigan Supreme Court reversed the Court of Appeals, holding that Michigan’s race-notice recording act does not include or permit a special exception for purchase money priority. The first recorded instrument has priority over subsequently recorded instruments regardless of their nature. A prior contrary decision was distinguished on the ground that it arose in the context of a situation where there was actual knowledge of the other lien, which fact rendered the recording statute inapplicable.  Where the recording act does apply, there is no room for a special purchase money priority exception.




8. Kasdan, Simonds, McIntyre, Epstein & Martin v World Sav. & Loan Ass’n (In re Emery),  317 F3d 1064 (9th Cir 2003)

The defendant law firm settled its clients’ claims against their contractor for construction defects and paid over to the clients $335,000, while retaining $200,000 for its own fees. The clients then defaulted on their deed of trust and filed bankruptcy. Ultimately the lender foreclosed, underbid, and then filed suit against the law firm for converting funds that belonged to it, i.e. the settlement proceeds, and also for converting its cause of action for the construction defects. The bankruptcy court rejected the lender’s claims, but the district court reversed. The Ninth Circuit reversed the district court, thereby holding in favor of the law firm.

The deed of trust did cover funds arising from any action against third parties “for injury or damages to the Property . . . and which arose or will arise before or after the date of this Security Instrument” which clearly included this settlement.  But it also stated that the funds were to be applied to “any amount that I may owe to Lender under the Note and this Security Instrument”. Since the trustors were not then in default on their loan, the court held that nothing was then owed and none of the settlement funds could thus be taken. Other provisions in the deed of trust refer to “sums secured,” but that phrase was not employed in this provision.

The court also held that the law firm had not converted the lender’s cause action to sue for construction defects, since the deed of trust did not make its right to sue exclusive and the not divest the trustors of their own right to litigate. Any failure to give notice to the lender might be a breach of contract by the trustors, but not a conversion by their attorneys.

9. Kaufman’s Carousel, Inc. v. Syracuse Industrial Development Agency, 301 A.D. 2d 292; 750 N.Y.S.2d 212 (2002).

Petitioners operate department stores in Carousel Mall in Syracuse, NY.   In preparation for a $2 billion dollar expansion of the existing Mall, to be renamed Destiny, USA, the Syracuse Industrial Development Association (SIDA) exercised its power of eminent domain to acquire certain rights under the lease terms of their agreements with the Mall operator (Pyramid).  The stores objected to the elimination of certain terms that had been bargained for in their lease agreement.  These terms covered such things as having a say in future development and location decisions related to any mall expansion.  Also at stake were certain special rights under the Operation and reciprocal Easement Agreement with Pyramid.  Some of the specific interests involved were related to:  1) changes in the layout of Carousel Mall, including design, layout, configuration, and additions or subtractions to the Mall; 2) parking and traffic circulation; 3) easements in the Mall, parking, common areas, facilities and lighting; 4) the design, phasing, and timing of all construction improvements; 5) the obligations of the other stores; 6) the operation and management under the name Carousel Mall.

In order to reduce the need for agreement from these anchor stores, with respect to plans related to the Destiny expansion, these lease and contract provisions were taken.  The stores complain that this is a Constitutional violation of their contract rights since there was no taking of property associated with the action.  SIDA already owned the fee for the project and the leases were not taken, only the contract provisions that gave the stores a say in the operation and management of the Mall.

The court held that the provisions in question were lease provisions and as such involved real property.  Thus, the power of eminent domain was properly used when exercised by SIDA to effectuate a public purpose, the advancement of Destiny, USA.

This case raises some questions for lenders.  In securing the value of loans to either the Mall developer or the Anchor stores, one accounts for particular lease terms that influence control within the mall.  These lease terms cam be individually identified and ‘taken’ without taking the leasehold interest.  Provision should be made in the lease and loan documents for the resulting
implications for loan security and value. 


10. McNeill Family Trust v Centura Bank, 60 P3d 1277 (Wyo Jan 8, 2003).


Centura Bank, holding a defaulted $87,000 mortgage, sent it to its attorneys for foreclosure by power of sale. A sale was held and the property was purchased by McNeill, the only bidder, for $20,000.  Centura’s attorneys then sought to set the sale aside because it was conducted in violation of an automatic stay, no notice had been given to the holder of a junior mortgage on the property, no attorney for Centura had shown up for the sale; McNeill had been given a brief delay while he went to get a certified check necessary to complete his purchase and the auctioneer inquired as to who should be named as payee, McNeill was unjustly enriched, and the bid price was unconscionably low.


The trial court did vacate the sale, but the Wyoming Supreme Court reversed. Foreclosure sales should be set aside only when necessary to do so in order to avoid prejudice to the borrower; here the fact that the borrowers had gone into bankruptcy meant they would not suffer because of any sale improprieties. Furthermore, the bank lacked clean hands since all of the irregularities resulted from the acts of its own attorneys. As for the automatic stay violation, the bankruptcy court had retroactively annulled the stay and validated the sale in order to not let the lender profit from its own wrong. Adequate legal relief was available to Centura either by way of buying out the other parties or by suing its own attorneys for negligence. Finally, it would be impossible to truly restore all parties to their previous positions, especially in light of the fact that McNeill had meanwhile paid off the omitted junior mortgage lender.


As for Centura’s other contentions, there is no requirement either by statute or in the deed of trust that an attorney representing be present at the sale. There is no requirement that

other lienors be given notice of the sale for it to be valid. And the delay granted for McNeill to get a check and identify a payee was harmless.


Finally, there was no unjust enrichment to McNeill in allowing the sale to stand. His bid was properly made. Although some jurisdictions set an arbitrary standard as to bids that fall below a certain percentage of the value of the property, that is not done in Wyoming, where there is instead a “thorough examination of the facts and equities of each case.”

11. Resolution Trust Corp. v. Key Financial Services, Inc. , 280 F. 3d.12 (Mass. 2002)

In 1998, Key sold 335 first and second residential mortgages to Home Owners valued at $16.7 million.  Home Owners paid full value plus 1.5% for the loans.  The parties entered into a ‘Mortgage Loan Purchase Agreement’ and it included 33 representations and warranties.  It also provided that a material breach of any representation or warranty would require Key to repurchase, upon demand, the non-conforming mortgages.

As the market in New England soured in the early 1990’s certain loans under performed.  This prompted Home Owners to carefully review the loan files.  It found a number of non-conforming loans.  In particular it found that about 100 loans did not have the required ALTA title insurance coverage required by the agreement.  They were insured by Stewart Title on non-ALTA forms.  The Stewart forms contained exceptions not acceptable to Fannie Mae and Freddie Mac, another representation and warranty being that they be acceptable to these entities.  The Stewart forms did not insure against real estate taxes that were presently due or past due, they included a survey exception, contained an exception regarding rights of tenants in possession that was broader than permitted by Fannie Mae and Freddie Mac; and they were not ALTA forms as required by the representations and warranties.

The court had to consider the appropriate standard for a material breach (one that goes to the essence of the deal, or one that would be taken into account by a party).  It also spent considerable time dealing with the remedy.  Home Owners wanted regular contract damages.  Key wanted to limit its damages to the repurchase of mortgages still held by Home Owners.  In the ten-year of litigation, however, many of the loans had gone off line (having been paid or sold).

The court held the breach to be material and determined that the breach was of an independent covenant entitling Home Owners to contract damages and not limiting them to an amount related to the repurchase of the currently held loans. 

12. Rothschild Reserve International Inc., v Silver, 830 So.2d 224 (Florida District Court of Appeal, Nov 13, 2002).

Rothschild purchased a home for $600,000 and borrowed $500,000 of the price on a one year note. He did not pay and at the end of the year the lender sued to foreclose. The parties negotiated a settlement giving Rothschild two additional months to cure all his default and permitting him to stay in the property for those two months; Rothschild also deposited a warranty deed with the lender’s attorney, which would be returned to him if he did make the required payments.

Rothschild again failed to perform, filing bankruptcy instead. The lender had the stay lifted, recorded the deed, and obtained a writ of possession under its original foreclosure action. The trial court rejected Rothschild’s argument that the constituted only a mortgage which had to be foreclosed to become operative. The court of appeal affirmed.

Although Florida has a statute declaring that “All conveyances . . . for the purpose of  . . .  of securing the payment of money . . . shall be deemed and held mortgages, and shall be subject to the same rules of foreclosure . . .” that does not apply in a situation where a conventional mortgage is being foreclosed. Its purpose is to protect the borrower’s equity of redemption when a formal mortgage is lacking, not where the borrower already has “the right to a foreclosure sale and an equity of redemption from the very beginning.” Thus the trial court was correct in finding as a matter of fact that this settlement agreement was “a contractual resolution of already litigated issues and claims and not a mortgage.”


13. Westmark Commercial Mortgage Fund IV v. Teenform Associates, L.P., 362 N.J.Super. 336, 827 A.2d 1154 (2003)

Defendant Teenform executed a promissory note and mortgage to plaintiff Westmark, for $3,145,000. It was to be partially amortized over 5 years and, at the end of that period, the note was to balloon. The interest rate was 8%. The note also provided for a prepayment premium and specified the method of its calculation. The note stated in large caps that "Borrower acknowledges and agrees that it has no right to prepay this note in whole or in part without the prepayment premium except as specifically provided hereinafter, and borrower specifically acknowledges and agrees that it shall be liable for the prepayment premium on any acceleration of this note in accordance with its terms at any time." Several months later, defendant defaulted in its payment of monthly installments, plaintiff accelerated the note and commenced a judicial foreclosure of the mortgage. The trial entered a foreclosure decree and included in the foreclosure amount the full amount of the prepayment premium. It also found that the prepayment premium was reasonable.  Defendant objected to inclusion of the prepayment premium on the ground that payment of the accelerated debt after a payment default did not constitute a "prepayment"of the mortgage obligation.  Defendant relied on a prior New Jersey and federal case supporting this proposition. See Clinton Capital Corp. V. Straeb, 248 N.J.Super. 19, 589 A.2d 1363 (Ch.Div.1990); In re LHD Realty Corp., 726 F.2d 327 (7th Cir.1984).

The Appellate Division rejected the Clinton case, affirmed the trial court, and expressly adopted the position of the Restatement (Third) of Property: Mortgages § 6.2, comment c (1997):

Controversy has sometimes arisen concerning the collectibility of a prepayment fee when the prepayment results from the mortgagee’s acceleration of the secured debt on account of the mortgagor’s default. Such prepayments have occasionally been described as "involuntary."  In the first instance, the question is simply whether the relevant clause in the mortgage or the debt instrument purports to cover this sort of prepayment. If it clearly does so, there is no general reason courts should refuse to enforce it. * * * The mortgagee obviously has no duty to refrain from accelerating a defaulted loan, and the acceleration gives rise to a payment that may impose costs and risks on the mortgagee identical to those flowing from a voluntary prepayment.

The court also relied on similar analysis by Professor Dale Whitman. See Dale A. Whitman, Mortgage Prepayment Clause: An Economic and Legal Analysis, 40 U.C.L.A. L. Rev. 851, 871-72 (1993). The court noted that the defendant presented no evidence at trial that the prepayment charge was "unreasonable." [The court also upheld as "reasonable" a late fee of 6% calculated on pre-acceleration late installments and a default interest charge of 2%].

Note that courts are increasingly upholding commercial loan prepayment charges in so-called "involuntary prepayment" cases where the language of the documents makes it clear that the charge is collectible in such situations.  

14. Uniform Nonjudicial Foreclosure Act.

The Act provides for three methods of foreclosure and permits the secured creditor to elect the method to be used.  The first is conventional foreclosure by means of an auction sale, conducted by a representative of the foreclosing creditor.

The second method is foreclosure by negotiated sale.  Such a sale will be consummated in much the same way as other real property sales; the property will probably be listed by the lender with a real estate broker and advertised extensively.  The creditor notifies the debtor and junior lien holders of the foreclosure amount that it is willing to offer for the property, and they can simply disapprove the sale if they are dissatisfied with that amount.  If the amount is reasonable, and is more than the debtor and junior lienors could expect to recover from an auction sale, they have every reason to permit the sale to proceed. If one or more of them disapproves, the foreclosing creditor has three choices: (1) to discontinue the negotiated sale and resort to a different method of foreclosure; (2) to exclude the objecting party from the effect of the foreclosure, so that the objector will be unaffected by the foreclosure; or (3) to pay off the objecting party, if that person holds a lien. This last alternative is likely to be employed only when the objecting party’s lien is for a minor amount.

The third foreclosure method authorized by the Act is foreclosure by appraisal.  This method leaves the property in the hands of the secured creditor, who will have the burden of liquidating it after the foreclosure is completed.  In a sense, foreclosure by appraisal is similar to common law strict foreclosure, but in the Act it is surrounded with much more extensive safeguards to protect the interests of the parties who are being foreclosed and to ensure the integrity of the appraisal’s result.  The lender selects the appraiser, but the appraiser must meet reasonable professional standards of qualification and may not be an employee of the lender or servicer of the loan.  As with foreclosure by negotiated sale, the secured creditor notifies the debtor and junior lien holders of the foreclosure amount that it is willing to offer for the property.  Any debtor or junior lienor who is dissatisfied with the amount can simply disapprove it and, as with a foreclosure by negotiated sale, the foreclosing creditor must either exclude the objector from the foreclosure, pay off the objector, or discontinue the foreclosure by appraisal and employ a different method of foreclosure.

In a foreclosure by negotiated sale or by appraisal, the foreclosure amount is, in effect, an offer by the creditor.  That offer need not be identical to the property’s selling price (in the case of a negotiated sale) or the property’s appraised value (in the case of a foreclosure by appraisal), but it must be at least 85 percent of that amount.  The 15% margin is intended to allow the creditor ample latitude to cover the expenses of holding and marketing the property.


The New Uniform Nonjudicial Foreclosure Act: Should It Be Federal Legislation?

[The following material is derived from a draft of an article by Grant S. Nelson and Dale A.Whitman. Copyright 2003 by Grant S. Nelson and Dale A. Whitman. It is not to be reproduced without the written consent of the authors.]


In 2002 the National Conference of Commissioners on Uniform State Laws (the "Commissioners") promulgated the Uniform Nonjudicial Foreclosure Act ("UNFA").1 UNFA is the product of years of drafting and reflects the contributions of some of the nation’s leading real estate finance practitioners and scholars.2 It is designed to make American foreclosure law uniform by providing for the prompt and efficient nonjudicial liquidation of real estate collateral while affording substantial safeguards for defaulting borrowers.  Residential borrowers receive special protection under UNFA.  More important, its foreclosure provisions  represent a major innovation in thinking about the foreclosure process.  Not only does it provide for conventional foreclosure by public auction sale,3 it also authorizes foreclosure by appraisal.4 Most important, it endorses foreclosure by negotiated sale, a process that is designed to duplicate how real estate is sold outside of the foreclosure setting.5 "Such a sale will be consummated in much the same way as other real property sales; the property may be listed with a real estate broker and advertized extensively."6 The aim of the negotiated sale alternative has long been advocated by land finance scholars and is designed to produce a higher foreclosure price than the usual auction sale, a result which would benefit both the borrower and junior lienholders.

The purpose of this Article is to provide a major examination of UNFA.  First, we focus on the absence of uniformity in substantial areas of American real estate mortgage law.7 In so doing, we describe a hodgepodge of divergent state substantive and procedural rules governing real estate mortgages and their foreclosure. Next, we provide an overview of UNFA and its central themes.8 Then we analyze extensively UNFA’s major provisions and the extent to which they are consistent with and diverge from the current dominant themes of state law. 9 Finally, the Article endorses UNFA and assesses its likely impact.10 We conclude that there is only a remote likelihood that it will be adopted by a substantial number of states. Consequently, we advocate the Act’s ultimate adoption by Congress, a position that we defend as consistent with the values of federalism and the Conference.11


A.  State Law Divergence: An Overview

"Uniform" is hardly a word one would appropriately use to describe the current law of real estate finance.  Indeed,  real estate mortgage law varies substantially from state to state and represents an often perplexing amalgam of English legal history, common law and legislation. This is the reality despite numerous attempts during the past century to achieve greater uniformity and even though the mortgage market is both national and international in scope and a driving force in the nation’s economy.

This is especially the case with respect to mortgage foreclosure In forty percent of the states mortgages may only be foreclosed judicially.12 A typical judicial foreclosure entails a long series of steps: filing of a foreclosure complaint and lis pendens notice; service of process on all parties whose interests may be prejudiced by the proceeding; a hearing, frequently by a master in chancery who then reports to the court; the decree or judgment; the notice of sale; a public foreclosure sale usually conducted by a sheriff; post-sale adjudication as to the disposition of the foreclosure proceeds and, if appropriate, the entry of a deficiency judgment.13 In some cases, an appeal may follow. In a contested judicial foreclosure, delay is endemic and the result is both a time-consuming and costly process.14 On the other hand, other states utilize "power of sale" foreclosure, a nonjudicial process that is substantially less complicated and costly than its judicial counterpart.15 After varying degrees of notice, the mortgaged property is sold at a public sale by a disinterested third party, such as a sheriff or a trustee. Since this process does not normally entail a hearing, it frequently is consummated in a matter of a six to eight months.

In almost half of the states the foreclosure sale is not the end of the road for the borrower. A concept commonly characterized as "statutory redemption" allows the mortgagor-debtor and, in many instances, junior lienholders, up to a year to regain title after the foreclosure sale by paying the foreclosure purchaser the sale price plus accrued interest.16 In the vast majority of these states, the mortgagor will have the right to remain in possession during this post-foreclosure period.  Moreover, statutory redemption is frequently available in both judicial and power of sale foreclosure although in some states it is inapplicable in the power of sale setting.17 For proponents, statutory redemption is praised as "allowing time for the mortgagor to refinance and save his property, permitting additional use of the property by the hard-pressed mortgagor, and probably most important, encouraging those who bid at the sale to bid in a fair price."18 For an increasing number of critics, statutory redemption is counterproductive. In their view, the fact that a foreclosure purchaser acquires a defeasible title probably suppresses bidding and results in lower sale prices.19

Perhaps most troubling is the varied state law treatment of borrower personal liability and post-foreclosure deficiency judgments.  In about half the states, a lender may obtain a judgment for the amount of the mortgage obligation and seek to collect it by enforcing it against borrower’s other assets.  If the judgment cannot be satisfied in this manner, the lender can foreclose on the mortgaged real estate for the balance.20 Alternatively, the lender may foreclose first and sue for a deficiency judgment after the foreclosure sale.21 The amount of this deficiency judgment is the difference between the foreclosure sale price and the mortgage debt.22 Other states reject this common law solution by adopting a "one-action" approach that requires the lender  to use the second option – the lender must first foreclose and a deficiency judgment may be obtained only incident to the foreclosure proceeding .23 Several states go further and simply prohibit any borrower personal liability on purchase money mortgage obligations.24 Even where deficiency judgments are permitted, some states use "fair value" legislation to limit the deficiency to the difference between the mortgage debt and the fair value of the foreclosed real estate rather than to the difference between the debt and the foreclosure sale price.25 In sum, this area of mortgage law is a mosaic of divergence – while, at one extreme, some states impose virtually no limitation on deficiency judgments and personal liability, the polar opposite is represented by California26 and a few other states where personal recourse against a borrower is usually unavailable.  Many other states fall somewhere in between these doctrinal poles.

B. The Impact of the Secondary Market for Mortgages

Traditionally, this state mortgage law hodgepodge may have been only a minor problem because most lenders, institutional or otherwise,  continued to own the mortgages they originated. However, the unprecedented expansion of the secondary mortgage market ( the purchase of mortgages from their original holders) over the past several decades has made the argument for uniformity in mortgage law much more compelling.  A variety of federally-sponsored institutions – Fannie Mae (formerly Federal National Mortgage Association),Federal Home Loan Mortgage Association (Freddie Mac), and Government National Mortgage Association (Ginnie Mae) – purchase large blocks of mortgages from local lenders and thus greatly expand the amount of money available for housing purchases.27 These quasi-federal enterprises finance their activity by issuing bonds and equity for sale to the investing public. However, for the most part, the mortgages are "securitized" – packaged into mortgage pools to support mortgage-backed securities for sale to institutional and personal investors worldwide.28 Because the foregoing secondary market entities guarantee the payment of the principal and interest on these securities, they are especially attractive to the investment community.  While this secondary mortgage market has been a major factor in a vibrant national housing economy, "there can be no doubt that legal differences from state to state act as a serious impediment to the carrying of these business arrangements."29

C. Efforts to Achieve Uniformity

The Uniform Laws Approach.  While there have been several attempts to achieve mortgage law uniformity though state legislative adoption of uniform acts, they have been singularly unsuccessful.  In 1927 the Commissioners promulgated the Uniform Real Estate Mortgage Act and in 1940 they proposed the Model Power of Sale Foreclosure Act.30 Neither of these proposals was adopted by a single state.31 Moreover, a similar fate befell a major recent initiative by the Commissioners to achieve uniformity in state real estate security law, the 1985 Uniform Land Security Interest Act (ULSIA).32 Intended to be the real estate equivalent of UCC Article 9 for personalty, it received substantial scholarly attention and praise.33 Under ULSIA the preferred foreclosure method was by power of sale.  Only "protected parties" were immune from deficiency judgments and statutory redemption was abolished for all mortgagors, protected or otherwise.  On the other hand, it proved to be a dismal failure politically– no state adopted it.

The Restatement Approach. The American Law Institute’s recent attempt to achieve uniformity in the common law of mortgages, however, has been marginally more successful. The Restatement (Third) of Property (Mortgages), promulgated by the Institute in 1997, seeks to "unif[y] the law of real property security by identifying and articulating legal rules that will meet the legitimate needs of the lending industry while at the same time providing reasonable protection for borrowers."34 Indeed, in the past several years numerous state courts have adopted various provisions of the Restatement.35 Nevertheless, because state court adoption of Restatement provisions is voluntary, achieving national uniformity via this route is difficult to achieve and, in any event, is a painfully slow and piecemeal process.

Uniformity through contract. Both Fannie Mae and Freddie Mac have sought to create mortgage law uniformity through the law of contract.  Both entities promulgate mortgage and note forms and mandate their use by lenders who wish to sell their mortgage loans to either of these secondary market enterprises.36 While each state has its own mortgage form containing language uniquely applicable to that state, every form incorporates 21 uniform provisions.37 These "Uniform Mortgage and Deed of Trust Covenants" have undeniably created greater nationwide uniformity in a variety of substantive mortgage law contexts. For example, these forms have been especially effective in the casualty insurance context.  State default rules governing whether the lender or the mortgagor controls the disposition of insurance proceeds after a casualty loss are in substantial conflict. Absent specific language in the mortgage, many states give the lender the right to prepay the mortgage obligation,38 while other courts generally allow the mortgagor to use the proceeds to rebuild unless the lender’s security would be impaired.39 The Fannie Mae – FHLMC uniform covenant language mandates that they "shall be applied to restoration or repair of the Property damaged if the restoration or repair is economically feasible and the Lender’s security is not lessened."40 As a practical matter, because  the use of these forms in residential transactions is pervasive, the foregoing language has undoubtedly become a national norm.

However, there are clear limits to this contract law approach – uniformity can be achieved only to the extent that state law permits lenders and borrowers to vary state mortgage law by agreement. On most important questions, such as foreclosure method, deficiency judgments, and statutory redemption, state courts are unwilling to permit the parties to use form language to avoid the impact of state law.

Congressional intervention. Beginning in the late 1960's, Congress became actively involved in the mortgage law uniformity process.  In 1973 the Nixon Administration proposed the adoption of the Federal Mortgage Foreclosure Act. 41 Under this far-reaching proposal, foreclosure by power of sale would have been mandated for any mortgage made, owned, insured, or guaranteed by any federal instrumentality.42 Moreover, it would have invalidated state statutory redemption rights.43 This effort, part of the Housing Act of 1973, failed to win congressional approval.44

During this same period, however, Congress enacted federal legislation focusing on two specific residential borrower consumer issues. The first of these statutes, the Truth-in-Lending Act of 1968,45 mandates that lenders disclose to home borrowers a wide variety of information including of the amount of the loan, the finance charges stated in terms of "the annual percentage rate," the payment schedule, delinquency charges and prepayment penalties.46 The second statute, the Real Estate Settlement and Procedures Act of 1974 ("RESPA")47 requires lenders in federally-related mortgage loans to deliver to mortgagors prior to settlement forms detailing all charges that the mortgagor will incur at the settlement or closing of the home loan transaction. It also regulates the amounts borrowers are required to pay into mortgage escrow accounts.48 Finally, RESPA restricts the payment of fees and "kickbacks" in connection with settlement49 services. Neither of these statutes, however, directly supplant state law.

The 1980's, however, witnessed the enactment by Congress of three statutes that preempt state mortgage law in a direct and forceful manner. Each statute was the product of the extremely high interest rates and the Savings and Loan crisis of the late 1970's and the early 1980's and the general economic upheaval of that era. The first, the Depository Institutions Deregulation and Monetary Control Act,50 effective in 1980, preempted state usury laws for all "federally-related" loans secured by first liens on residential real estate. Interest rate ceilings, as well as restrictions on discount points and other finance charges, were covered.  This legislation was especially aimed at preempting usury limitations that were enshrined in state constitutions and thus impervious to change. Second, Congress enacted the Garn- St. Germain Depository Institutions Act of 1982,51 which makes enforceable the due-on-sale clause, a pervasively used mortgage provision that enables a lender to accelerate the debt and foreclose if the real estate is transferred without the lender's permission. Conflicting state case law and legislation of this period had created substantial turmoil over due-on-sale enforcement52 and Congress directly intervened to preempt (with certain minor exceptions) this state law labyrinth.53

The Alternative Mortgage Transactions Parity Act of 198254 was the third part of this preemptive effort.  It authorized state-chartered financial institutions to make mortgage loans using alternative formats (adjustible rate, graduated payment and reverse annuity mortgages) that were approved by federal regulatory agencies for federally-chartered lenders, even though such loans would otherwise violate state law.55 It was designed to equalize federal and state institutions in their ability to experiment with new mortgage formats. Ironically, several federal decisions have gone beyond this equal footing principle to hold that all aspects of alternative mortgages, including features having nothing to do with their "alternative" character, are preempted from state regulation.56

Finally, even though in Congress in 1995 considered, but, as was the case in 1973, failed to enact a comprehensive federal power of sale foreclosure proposal that applied to all federally owned, insured or guaranteed loans, the 1980's and 90's saw the enactment of two less sweeping federal foreclosure statutes.  Each provides for nonjudicial foreclosure of residential mortgages held by the Housing and Urban Development Department ("HUD").  The Multifamily Mortgage Foreclosure Act of 198157 ("Multifamily Act") authorizes nonjudicial power of sale foreclosure for federally insured and certain other mortgages on property other than one-to-four family dwellings held by the Secretary of HUD.  The Single Family Mortgage Foreclosure Act of 199458 ("Single Family Act") does the same for HUD-held mortgages on one-to-four family residences. The Single Family Act is substantially identical to the Multifamily Act and both preempt state antideficiency and statutory redemption legislation.59 Regulations implementing both Acts were consolidated in one regulation in 1996.60 Power of sale foreclosure under the Acts may be utilized even though the mortgage contains no power of sale.  After a default occurs and the decision to foreclose is made, the HUD Secretary designates a Commissioner to conduct the foreclosure and sale.

Foreclosure under the Acts is initiated by the service of a Notice of Default and Foreclosure Sale containing information concerning the property being foreclosed, the date and place of sale and related information.61 This notice must be published once a week for three consecutive weeks and posted on the property for at least seven days prior to the sale.62 In addition, it must be sent by certified mail, return receipt requested, at least twenty-one days before the date of foreclosure sale to the original mortgagor, to those liable on the mortgage debt and to the "owner" of the property and, at least ten days before the sale, to all persons having liens thereon.63 On the other hand, neither the Acts nor the Regulations require mailed notice to lessees, holders of easements and others holding interests junior to the mortgage being foreclosed. Finally, although the Acts themselves do not mandate a hearing, the Regulations require that with respect to multifamily foreclosures, "HUD will provide to the mortgagor [and current owner] an opportunity informally to present reasons why the mortgage should not be foreclosed.  Such opportunity may be provided before or after the designation of the foreclosure commissioner but before service of the notice of default and foreclosure."64

* * * One should not be tempted to overemphasize the foregoing efforts to foster uniformity. Mortgage law and especially the rules governing foreclosure remain largely the province of the states. Local divergence is still the norm.* * *

Should UNFA’s Be Enacted by Congress?

This article establishes, we believe, that UNFA represents an innovative, flexible and efficient foreclosure procedure and, as such, should be especially appealing to lenders.  Moreover, from the borrower’s perspective, the watchword is fairness. Residential debtors are afforded a variety of special safeguards including substantial grace periods and, normally, immunity from deficiency judgments. In short, UNFA reflects a careful balancing of the legitimate interests of both lenders and debtors and represents a major advance in conceptualizing the foreclosure process.   What then is the likelihood of UNFA’s adoption by the states?  If the past is prologue, its chances are slim indeed. While we fervently hope otherwise, it seems highly likely that if the quest for uniformity is left to the states, UNFA will suffer the same fate as it ULSIA predecessor.

As a result, we believe UNFA’s future lies with Congress. In view of the enormous impact of mortgage financing on the national economy and the dramatic growth of the secondary market for mortgages, the current hodgepodge of state foreclosure law and its attendant inefficiencies makes the case for uniformity increasingly compelling. We recognize, of course, that this view is not universally held. Professor Michael Shill, for example, has taken the position that the case for uniformity has yet to be convincingly made.65 In his view, "non-uniform mortgagor protection laws in the context of residential real estate [are] likely to generate only modest costs."66 In any event, he concludes in 1999, "even if the laws were costly and inefficient, there [is] no reason for the federal government to supplant the judgment of the citizens of states [that had enacted these laws], at least in the absence of significant externalities."67 However, a 2003 impressive study by Karen Pence for the Federal Reserve System points to significant externalities.68 Even though she concludes that statutory redemption laws "do not appear to affect the mortgage market substantively,"69 and her findings about the impact of deficiency prohibitions are inconclusive, she establishes "a robust inverse relationship between a judicial foreclosure requirement and mortgage loan size."70 Overall, she finds that "defaulter-friendly" foreclosure laws "are correlated with a four percent to six percent decrease in loan size.71 This result suggests that defaulter-friendly foreclosure laws "may assist homeowners experiencing hard times, but they also impose costs on a much larger pool of borrowers at the time of loan origination."72

Congressional adoption of UNFA could take a variety of forms. The most far-reaching approach would be for Congress to make it applicable to every mortgage transaction in the United States. In other words, every lender in the country would have the option to utilize UNFA as a non-judicial foreclosure remedy. Note that even this approach would mainly affect only state foreclosure procedure and would not alter substantive mortgage law. For example, such a congressional enactment of UNFA would have no impact on local law governing priorities, subrogation, mortgage modification, future advances, payment and discharge and countless other substantive law issues. A less sweeping approach would be for Congress to make UNFA applicable simply to the foreclosure of mortgages that have been sold on the secondary market. An even less dramatic option would entail applying UNFA only to the foreclosure of mortgages held by federal agencies and the government sponsored secondary market entities( Fannie Mae, Freddie Mac and Ginnie Mae). Such an approach would assure secondary market investors that the time and cost of foreclosure of mortgages will not vary based on where the mortgaged real estate is located.

Another course of action would invoke a variation on the "states as laboratories" concept. Under this view, there is a danger that if uniformity is achieved by Congress, unwise legislation may harm the entire nation until it is appealed or amended. On the other hand, if legislation is adopted one state at a time, the harm is more localized and can be corrected before the country as a whole is injured.73 To apply this philosophy to UNFA would mean waiting for several years to see if it has been adopted in at least a handful of states. If this were to occur, then there could be careful analysis of its impact. A favorable assessment would suggest adoption by Congress. A less positive evaluation would point to its rejection or substantial amendment by Congress. Of course, if, as is likely, state enactment of UNFA does not occur, further delay by Congress would not be justified and federal action would be called for.

Moreover, congressional adoption of UNFA in any of the above variants clearly would survive a Commerce Clause challenge. Under current Supreme Court jurisprudence, Congress can reach "those activities that substantially affect interstate commerce."74 To be sure, unlike the UCC, which focuses on the sale and mortgaging of moveable property, UNFA deals with real estate, which, by its very nature, remains in one place.  Nevertheless, under the Court’s current approach, even though an isolated local mortgage foreclosure may not substantially affect commerce in more than one state, a rational Congress surely could conclude that the cumulative impact of such transactions on the national mortgage market does so.75

Implications for the National Conference of Commissioners on Uniform State Laws

Some may argue that for Congress to adopt a Uniform Act threatens the underlying values of NCCUSL   To be sure,  NCCUSL's main raison d'etre since the late 19th Century has been to "promote uniformity in the law among the several states on subjects as to which uniformity is desirable and practicable."76 Nevertheless, since both of us have had substantial involvement with the Commissioners,77 we can attest to the fact that, however desirable the goal of uniformity,  it is secondary to a more compelling concern –  the threat of federal preemption. Commissioners commonly argue that "unless we act, Congress will do it for us."  Under this view, an underlying federalist ideology dictates that uniformity should only be achieved by the individual assent of each of the several states. Our intuitive reaction, on the other hand, is much more pragmatic. At least as to commercial issues,  if uniformity is so important, why not let Congress do it?  After all, with the exception of such major projects as the Uniform Commercial Code, uniform acts are rarely adopted by all of the states.   Even well-received products such as the Uniform Fraudulent Transfer Act, the Uniform Transfers to Minors Act, and the Uniform Probate Code fail to achieve unanimous adoption.78 Thus, the promulgation of most uniform acts fails to achieve the desired uniformity.

Perhaps its time for NCCUSL to adopt a new perspective.  A strong case can be made that uniform acts dealing with commercial transactions ought to be enacted by Congress under its Commerce Clause power. Under this approach, future versions of the UCC would be enacted by Congress.  So too would be UNFA. Only acts dealing primarily with local social and cultural concerns, such as the Uniform Marriage and Divorce Act and the Uniform Probate Code, would continue to be produced for adoption by state legislatures.

This "bifurcated function" approach for NCCUSL is hardly a radical suggestion. Uniform acts undergo a time-consuming, deliberate, multi-draft  process that generally takes at least three or four years, and the result is almost always a high quality product. State influence on uniform acts is substantial.  Such acts are drafted and considered by a body largely financially supported by state governments.79 Perhaps more important,  the membership of NCCUSL  is comprised of leading lawyers, judges and academics who are appointed by the political process in each of the states.80 Indeed, uniform acts probably receive much more local and state input than normal legislation enacted by Congress.  Consequently, if uniformity in commercial matters is desirable, why not let it come in the form of a Congressionally enacted uniform act produced by NCCUSL's careful deliberative process that reflects state concerns in a substantial manner?  If anything, NCCUSL could achieve an impact in the new millennium that far exceeds its influence on the development of the law in the past century.  

Treating Installment Land Contracts (Contracts for Deed) as Mortgages

Professor Dale Whitman and I served as Co-Reporters for the Restatement (Third) of Property: Mortgages (1997).  Section 3.4(b) states that "[a] contract for deed creates a mortgage."  The recent edition of our treatise defends this approach:

[We] demonstrate  that, with the possible exception of those states that have institutionalized forfeiture,  the installment land contract is an unpredictable and unreliable financing device from the perspective of vendor and vendee alike. We have seen that courts increasingly use a variety of devices to limit the availability and harshness of the forfeiture remedy.  Courts and legislatures are increasingly applying a mortgage law analogy in assessing the rights of contract parties.  Moreover, this same uncertainty confronts the vendor who seeks specific performance or other non-forfeiture remedies.  On the other hand, forfeitures are sometimes enforced against purchasers with substantial equity in the real estate—the tardy purchaser can never be completely certain when the tender of arrearages or the contract balance will forestall forfeiture.  In addition, title problems abound for vendor and  vendee  alike.  Also, as we will see later in this treatise, serious questions concerning the nature of the installment land contract  bedevil bankruptcy courts.  Equally important,  use of the installment land contract  poses substantial problems for third parties.  The rights of judgment creditors of the contract parties are often ambiguous and unpredictable and this situation is sometimes made more complicated by judicial invocation of equitable conversion or similar analytical abstractions.  More important, potential secured lenders to either vendor or vendee  face substantial uncertainty about the priority of their security interests and their rights in the event the main contract goes into default.  This significantly impedes the marketability of their security interests on the secondary market. * * *

[H]ow does one explain the continued use of the installment land contract  in  states where power of sale foreclosure is relatively inexpensive and efficient and where post-sale redemption rights and other "pro-mortgagor" provisions are minimal?  States like Missouri and Utah fall into this category.  Several explanations are perhaps plausible.  First, in some instances there may simply be information failure.  This may be the case in border areas where installment land contracts  may "spill over" from jurisdictions where mortgage law "tilts" in favor of mortgagors (and their use may therefore in some measure be sensible) to adjacent states where their use is difficult to understand or may even be dangerous for vendors.  Second, many vendors may use installment land contracts  in low down payment settings and take their chances that their vendees will be too unsophisticated to record or otherwise protect their interests.  Stated another way, vendors may take the chance that the purchaser will believe that the contract means what it says.  Indeed, what Professor Warren asserted several decades ago may still be the case: "[T]he vendor continues to use the [contract for deed] . . .  because he is willing to gamble that the vendee’s rights under this device will never be asserted and his own contractual advantages will not be challenged."  Third, some vendors may simply want the psychological assurance that they will regain their land back in the event the purchaser defaults. Rural lawyers sometimes suggest that sellers of farm land, especially, want the "security" of knowing that they are retaining "title" until the contract is paid off.  With a mortgage or deed of trust, of course, the mortgagee will regain the land only if he or she outbids potential third party purchasers at a public foreclosure sale.  However, given the uncertainty as to the enforceability of forfeiture clause in these jurisdictions and the other substantial problems associated the contract for deed, the prospect of "never really giving up" one’s land seems an especially dubious reason for its use.

While we advocate the judicial adoption of the Restatement approach to installment land contracts, this advocacy  should not be interpreted as rejecting the idea that it is socially advantageous for the law to provide a relatively quick and inexpensive mechanism for a land seller to realize on his or her security in the event of default by a purchaser.  The availability of such a procedure probably encourages the extension of credit to individuals whose credit-worthiness is so poor that institutional or other third party financing would be unavailable.  Indeed, the law has traditionally encouraged the extension of credit by the land sellers in other contexts.  For example, under the "purchase money mortgage" doctrine, vendor and other purchase money mortgagees are given lien priority over other liens or interests previously arising through the purchaser-mortgagor.  However, the solution to this need for special incentives to land sellers should not be the installment land contract.  In most states this device has proved to be unreliable for vendor and vendee alike.  Instead, the solution lies within the confines of traditional mortgage law.  The first step would be judicial adoption of the Restatement approach.  Legislatures may then have to act.  In those states that currently permit only foreclosure by judicial action, legislatures should authorize power of sale foreclosure of mortgages and deeds of trust. States that already have non-judicial foreclosure legislation should amend it to provide special incentives for land seller financing.  A dual track foreclosure process could permit quicker foreclosure of a vendor purchase money mortgage where the mortgagor has not satisfied a specified minimum percentage of the original mortgage obligation.  Moreover, other mortgagor protections could be modified.  For example, in those states that afford mortgagors a statutory redemption period after the foreclosure sale, that redemption right would be unavailable unless the requisite percentage of the mortgage obligation had  been satisfied.

The use of installment land contracts in states that have institutionalized the  forfeiture remedy by statute pose a more difficult question.  In these states, the installment land contract "works"—forfeiture not only is enforced, but it produces a marketable title in the vendor relatively cheaply and efficiently. Why "mess with success?"  Why not leave well enough alone?  The Minnesota legislation, especially, triggers these questions.  It works relatively efficiently.  Forfeiture is enforced, but its harshness is ameliorated by giving the purchaser a 30 or 60 day period after notice of default to pay arrearages and certain other costs.  However, once forfeiture occurs, no post-forfeiture redemption is permitted.  This latter feature makes the statute attractive to sellers because a six month redemption period applies to power of sale foreclosure of mortgages.

While it is true that the Minnesota system and others like it work well with respect  to the forfeiture remedy, the "third party" problems with the contract for deed are just as serious and perplexing in these states as they are in states that have not institutionalized the forfeiture process.  The rights of third party creditors, secured and unsecured, are just as problematic.  This is because the installment land contract conceptually is both contract and financing device, "fish as well as well as fowl." These problems would be obviated if all states, including Minnesota, returned to a unitary land finance system, with mortgage law and the power of sale mortgage or deed of trust as its foundation.  Of course, in states like Minnesota this process cannot begin with a judicial adoption of the Restatement approach.  Where the installment land contract is regulated by statute and authorizes forfeiture, absent constitutional deficiencies, courts may not supplant what legislatures have mandated.  Rather, the answer in such states lies in the legislature.  In Minnesota, for example, the path to a unitary system seems relatively simple.  First, the installment land contract termination statute should be repealed.  Its substance should be incorporated into that state’s power of sale mortgage foreclosure legislation.  Thus, land sellers who take back a purchase money mortgage would be able to obtain a non-judicial foreclosure sale subject to the same notice requirements and the same post-default grace period now mandated under the current contract for deed termination statute.  The same arrearages provisions would be applicable.  No post-sale redemption would be permitted.  Even though the current installment land contract  legislation does not distinguish between purchasers who have substantially reduced the contract balance and those who have not, the new "mortgage law" version should make the "fast track" available only when a minimum specified percentage of the mortgage obligation is unpaid.  In all other situations, the "normal" power of sale requirements would be triggered, including the current six month post-sale redemption period.  The only significant change from current Minnesota installment land contract procedure would be that the defaulting vendee would have the right to a public foreclosure sale of the property.  This public sale and valuation of the land could in some instances result in a surplus for the purchaser-mortgagor.  Vendor would not automatically regain the land via forfeiture -- he  or she would be required to purchase at the sale.

1 Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law (Practitioner Treatise Series) 143-147 (4th ed. 2002). Copyright 2002 by West Group, a Thomson Company. This excerpt is not to be reproduced without the consent of the copyright holder.

1 Unif. Nonjudicial Foreclosure Act (2002).

2 The drafting committee consisted of Carl H. Lisman, Chair, John H. Burton, Lani Liu Ewart, Dale G. Higer, Reed L. Martineau, Robert L. McCurley, Jr., Lisa Kelly Morgan, Willis E.Sullivan, and Dale  Whitman, Reporter. Ira Waldman served as the American Bar Association Advisor and Grant Nelson as a representative from the American College of Real Estate Lawyers.

3 Id. at art.3 §§ 201-210.

4 Id. at art.5 §§ 501-505.

5 Id. at art.4 §§ 401-405.

6 Id., "Features of the Act."

7 See § IIA, infra.

8 See § III, infra.

9 See ------infra.

10 See------infra.

11 See------infra.

12 Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law 558 (4th ed. 2001)

13 Id. at 559-560.

14 The delays and inefficiency associated with foreclosure by judicial action are costly.  They increase the risks of vandalism, fire, loss, depreciation, damage, and waste.  The resulting costs raise the prices of private mortgages and erode the economic value of government subsidy programs involving mortgages.  They add to the portfolio of foreclosed properties held by lenders, secondary mortgage market investors, and government insurers and guarantors of mortgages.

Unif. Nonjudicial Foreclosure Act  pref.note at 7.

15 Id. at 580-581. According to a recent paper by Karen M. Pence,

Judicial procedures are substantially more time-consuming than power of sale procedures. Wood (1997) finds that judicial foreclosures, on average, take 148 days longer than nonjudicial foreclosures, while Freddie Mac’s guidelines for mortgage servicers indicate that foreclosures in the most time-consuming state, Maine (a judicial foreclosure state), take almost 300 days longer than in the quickest state, Texas (a power-of-sale state).

Karen M. Pence, Foreclosing on Opportunity: State Laws and Mortgage Credit 5, Published for the governors of the Federal Reserve System  (2003).

16 Id. at 689.

17 Id. at 689-90.

18 Comment, The Statutory Right to Redemption in California, 52 Cal.L.Rev. 846, 848. (1964).

19 Nelson & Whitman, supra note 12 at 691.

20 Restatement (Third) of Property: Mortgages § 8.2, cmt. a (1997) [hereinafter RESTATEMENT] Grant S. Nelson, Deficiency Judgments After Real Estate Foreclosure in Missouri: Some Modest Proposals, 47 Mo.L.Rev. 151, 152 (1982);

21 Id; Lakeside Ventures v. Lakeside Development Co., 68 P.3d 516 (Colo.App.2002).

22 Id.; Restatement § 8.4, cmt. a .

23 See, e.g., Cal.Civ.Proc.Code § 726(a); Idaho Code § 6-101 (1994); Mont.Code Ann. § 71-1-222 (1999); Nev. Rev.Stat. § 40.430 (1997); Utah Code Ann. § 78-37-1 (1996).

24 See, e.g., Ariz.Rev.Stat. § 33-729(A); Cal.Civ.Proc.Code § 580(b); N.C. Gen.Stat. § 45-21.38. Many states prohibit deficiency judgments after power of sale foreclosure. See, e.g., Alaska Stat. § 34.20.100; Ariz.Rev.Stat. § 33-814(E); Cal.Civ.Proc.Code § 580(d).

25 See West’s Ann.Cal.Code Civ.Proc. § 726(b); N.Y.Real Prop.Actions & Proc.Law § 1371; 42 Pa.Con.Stat.Ann. § 8103©) So.Dak. Codified Law 21-47-16; Vernon’s Tex.Code Ann. Prop.Code §§ 51.004, 51.005; Nelson & Whitman, supra note 12, at 661-662. The statutes use a variety of terms to define the "value" of the property for purposes of a deficiency judgment, including "fair value," "true value," "true market value," "reasonable value," "appraised value," "actual value", and "market value." See Nelson & Whitman, supra note 12 at 661-662, n.6.

26 See Nelson & Whitman, supra note 12 at 667-688.

27Housing Enterprises: Potential Impacts of Several Government Sponsorship, U.S. Gen.Acct.Off, 16 (1996) [hereinafter Housing Enterprises].

28These mortgage pools receive the interest and principal payments on the mortgages in the pools and pass them on to the investor-purchasers. Housing Enterprises, supra note 26 at 16. The secondary market enterprises also protect investors by guaranteeing this flow of interest and principal. Id. In 2001 57.6% of all 1-4 family mortgage loans were sold to the secondary market. Fannie Mae, A Statistical Summary of Mortgage Finance Activities, 2002, p.16 (Table 16). Indeed, as of 2003, Fannie Mae and Freddie Mac alone "either owned or guaranteed nearly half of all home mortgages, and about 75% of those less than $322,700." Wall Street Journal, June 12, 2003, c3. Commercial mortgage loans are also increasingly sold on the secondary market. During the third quarter of 2002, Fannie Mae, Freddie Mac and private secondary mortgage institutions purchased 40.5% by quantity and 51.9% by dollar volume of originated commercial mortgages. MBA Commercial Mortgage Banker Origination Study, 3d Quarter 2002, available online at Foreign purchase of mortgage securities is substantial. For example, foreign ownership of Freddie Mac’s long-term debt financing stood at over 33% as of the end of 2002. See Leland C. Brendsel, Chairman and CEO, Freddie mac, Remarks at Annual Northeast Regional Conference of Mortgage Bankers Associations (March 19, 2003)(transcript available at At Fannie Mae, foreign ownership in 2001 of its noncallable benchmark securities was at 32.5%. See Trends in Foreign Central Bank Activity in Fannie Mae’s Debt Securities, FUNDING NOTES (Fannie Mae, D.C.), July/August 2001, at 5 (fig.5), available at

29 Restatement (Third) of Property: Mortgages 3 (1997).When a default occurs in a pool mortgage, the speed and efficiency with which the mortgaged real estate is liquidated depends on where it is located. Thus, if the mortgage is on land in Texas, where foreclosure is nonjudicial and quick,[see Debra Pogrund Stark, Foreclosing on the American Dream: An Evaluation of State and Federal Foreclosure Laws, 51 Okla. L.Rev. 229, 266 (1998)] the money will be returned to the pool promptly and inexpensively. On the other hand, if the mortgaged real estate is in, for example, Kansas, where foreclosure is by a costly and cumbersome judicial action, [ see id. at 260] the cost to the pool is increased.  This lack of legal uniformity probably inhibits the attractiveness of these pools to potential investors

30 Michael H.Schill, Uniformity or Diversity: Residential Real Estate Finance Law in the 1990's and the Implications of Changing Financial Markets, 64 S.Cal.L.Rev. 1261, 1277 (1991); Reeve, The New Proposal for a Uniform Real Estate Mortgage Act, 5 Law & Contemp.Probs. 564, 570 (1938); Jo Anne Bradner, The Secondary Mortgage Market and State Regulation of Real Estate Financing, 36 Emory L.J. 971, 1001 n.139 (1987). Moreover, the Central Housing Committee, a federally sponsored committee, proposed a revised Uniform Real Estate Mortgage Act in 1937 that was equally unsuccessful. See R.Skilton, Government and the Mortgage Debtor (1929 to 1939) 203-04 (1944).

31 Id.

32 Uniform Land Security Interest Act §§ 101-604, 7A U.L.A. 403-74 (1999).

33 See, e.g., Patrick A. Randolph, The Future of American Real Estate Law: Uniform Foreclosure Laws and the Uniform Land Security Interest Act, 20 Nova L. Rev. 1109 (1996); Norman Geis, Escape From the 15th Century: The Uniform Land Security Interest Act, 30 Real Prop. Prob. & Tr. J. 289 (1995); Curtis J. Berger, ULSIA and the Protected Party: Evolution or Revolution, 24 Conn. L. Rev. 971 (1992); Marc B. Friedman, Rentals Roulette: The Mortgagee’s Rights to Rent under Connecticut Law and ULSIA, 24 Conn. L. Rev. 1093 (1992); Roger Bernhardt, ULSIA’s Remedies on Default -- Worth the Effort?, 24 Conn. L. Rev. 1001 (1992).

34 See Restatement, supra note 19, at 3.

35 See, e.g., Krohn v. Sweetheart Properties, Ltd., 203 Ariz. 205, 52 P.3d 774 (2002) (§ 8.3 – adequacy of foreclosure price); New Milford Sav. Bank v. Jajer, 244 Conn. 251, 708 A.2d 1378 (1998) (§ 8.6 – marshaling); East Boston Sav. Bank v. Ogan, 428 Mass. 327, 701 N.E.2d 331 (1998) (§ 7.6(a) – subrogation); The Cadle Co. v. Bourgeois, 821 A.2d 1001 (N.H. 2003) (§ 5.1, comment 1– land remains encumbered when transferred); Westmark Commercial Fund IV v. Teenform Associates, L.P., 827 A.2d 1154, 362 N.J.Super. 336 (2003) (§ 6.2, comment c – prepayment); Kim v. Lee, 145 Wash.2d 79, 31 P.3d 665 (2001) (§ 7.3 – mortgage modification and subrogation); McNeill Family Trust v. Centura Bank, 60 P.3d 1277 (Wyo.2003) (§ 8.3 – adequacy of foreclosure price); Land Holdings (St. Thomas) Ltd. v. Mega Holdings, Inc., 1999 WL 10044836 (D. Virgin Islands) (§ 8.5 – merger). Many other courts have cited provisions of the Restatement favorably without formally adopting them. See, e.g., Bankers Trust Co. v. Collins, 2003 WL 21516214 (Tenn.Ct.App.) (§ 7.6 – subrogation); Burney v. McGlaughlin, 63 S.W.3d 223 (Mo.App. 2001) (§ 7.3 – mortgage modification); Coleman v. Hoffman, 115 Wash.App. 853, 64 P.3d 65 (2003) (§ 4.1 – duty of care of a mortgagee in possession); In re Smink, 276 B.R. 156 (N.D.Miss. 2001) (§ 2.4 – dragnet clauses).

36 Grant S. Nelson & Dale A.Whitman, Real Estate Transfer, Finance & Development 1201 (6th ed. 2003).

37 See id. at 1204-1218.

38 See, e.g., San Roman v. Atlantic Mut. Ins. Co., 250 A.D.2d 585, 672 N.Y.S.2d 396 (1998); English v. Fischer, 660 S.W.2d 521 (Tex.1983); First State Bank v. State Farm Fire & Cas. Co., 840 P.2d 1267 (Okla.App.1992); Nelson & Whitman, supra note 12 at 168.

39 See, e.g., Schoolcraft v. Ross, 81 Cal.App.3d 75, 146 Cal.Rptr. 57 (1978);Starkman v. Sigmund, 184 N.J.Super. 600, 446 A.2d 1249 (1982); Restatement, supra note 19 at § 4.7(b); Nelson & Whitman, supra note 12 at 169.

40 Fannie Mae/Freddie Mac Single Family Security Instrument, Clause 5.

41 See S. 2507, 93d Cong., 1st Sess. §§ 401-419 (1973) reprinted in Administration’s 1973 Housing Proposals: Hearings Before the Senate Committee on Banking, Housing, and Urban Affairs, 93d Cong., 1st Sess.394 (1973).

42 Id. at § 404.

43 Id. at § 415(d).

44 Shill, supra note 29 at 1280.

45 15 U.S.C. §§ 1601-1665.

46 See 15 U.S.C. § 1638.

47 12 U.S.C. § 2603.

48 12 U.S.C. § 2609.  The definition of "federally-related" loan is so broad that it encompasses almost all home mortgage loan transactions. See 12 U.S.C. § 2602(1); Shill, supra note 29 at 1280, n.111.

49 12 U.S.C. § 2607(a).

50 12 U.S.C. § 1735f-7. Regulations issued under this statute are found in 12 CFR Part 590.

51 See 12 U.S.C. § 1701j-3. See generally, Grant S. Nelson & Dale A. Whitman, Congressional Preemption of Mortgage Due-on-Sale Law: An Analysis of the Garn-St. Germain Act, 35 Hast. L.J. 241 (1983).

52 See Nelson & Whitman, supra note 12 at 326-327, 331-332.

53 Id. at 335-356.

54 12 U.S.C. § 3801 et seq. The applicable regulations are found in 12 CFR § 560.220.

55 See Nelson & Whitman, supra note 12 at § 11.4, at note 120 et seq.

56 See National Home Equity Mortg. Ass’n. v. Face, 239 F.3d 633 (4th Cir.2001) (Virginia limitation on prepayment charges preempted); Shinn v. Encore Mortgage Services, Inc., 96 F.Supp.2d 419 (D.N.J.2000) (New Jersey limitation of prepayment charges preempted). Contra: Glukowsky v. Equity One, Inc. 821 A.2d 485 (N.J.Super.A.D.2003)(1996 federal regulation authorizing state-chartered lenders to impose prepayment charges held to be ultra vires).

57 12 U.S.C. §§ 3701-3717.

58 12 U.S.C. §§ 3751-3758.

59 See 12 U.S.C. §§ 3751-3758. See generally, Patrick A. Randolph, The New Federal Foreclosure Laws, 49 Okla. L. Rev. 123 (1996); Stark, supra note 28 at 238-240.

60 See 24 CFR §§ 27.1-27.123.

61 12 U.S.C. §§ 3706, 3757; 24 CFR 27.15, 27.103.

62 12 U.S.C. §§ 3708, 3758(3); 24 CFR 27.15, 27.103.

63 12 U.S.C. § 3708(2)(3); 24 CFR 27.15©), 27.103.

64 24 CFR 27.5(b). For an analysis of the Acts and post-1994 Congressional attempts to expand their coverage to other federally-held mortgages, See Patrick A. Randolph, The New Federal Foreclosure Laws, 49 Okla.L.Rev. 123 (1996).

65 Michael H. Schill, The Impact of the Capital Markets on Real Estate Law and Practice, 32 John Marshall L.Rev. 269, 286-287 (1999).

66 Id. at 286. In two earlier articles, Professor Shill found "that the effect of anti-deficiency judgment laws was statistically insignificant and that an eleven month statutory right of redemption was associated with an increase of only seven basis points." Id. See Michael H. Schill, Uniformity or Diversity: Residential Real Estate Finance Law in the 1990's and the Implications of Changing Financial Markets, 64 S.Cal.L.Rev. 1261 (1991); Michael H. Shill, An Economic Analysis of Mortgagor Protection Laws, 77 Va.L.Rev. 498 (1991).

67 Schill, supra note 159 at 286-287.

68 Karen M. Pence, Foreclosing on Opportunity: State Laws and Mortgage Credit, Federal Reserve System Paper (2003).

69 Id. at 27.

70 Id.

71 Id. at 1.

72 Id. at 27-28. Other studies have found higher interest rates in defaulter-friendly states. See Mark Meador, The Effect of Mortgage Laws on Home Mortgage Rates, 34 Journal of Econ. & Bus. 143-148 (1982); Claudia E. Wood, The Impact of Mortgage Foreclosure Laws on Secondary Market Loan Losses. Ph.D. thesis, Cornell University (1997).

73 See New Age Ice Co. v. Liebmann, 285 U.S. 262 (1932), in which a dissenting Justice Brandeis noted:

Denial of the right to experiment may be fraught with serious consequences to the Nation. It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

Id. at 311 (Brandeis, J., dissenting).

74 United States v. Lopez, 514 U.S. 549, 558-559 (1995). See Grant S. Nelson & Robert J. Pushaw, Jr., Rethinking the Commerce Clause: Applying First Principles to Uphold Federal Commercial Regulations but Preserve State Control Over Social Issues, 85 Iowa L.Rev.1, 4-5, 168 (1999); Grant S. Nelson, A Commerce Clause Standard for the New Millennium: "Yes" to Broad Congressional Control Over Commercial Transactions; "No" to Federal Legislation on Social and Cultural Issues, 55 Ark.L.Rev. 1213, 1248 (2003).

75 Nelson & Pushaw, supra note 168 at 168.

76 National Conference of Commissioners on Uniform Laws Const. § 1.2.

77 Grant Nelson was a Commissioner from Missouri from 1982– 1991 and Dale Whitman served as Reporter for UNFA from 1997 – 2022.

78 The Uniform Fraudulent Transfer Act has been adopted by 39 states, the Uniform Transfers To Minors Act by 48 states and the Uniform Probate Code by 16 states. See 7A U.L.A. 2002 Cum.Supp. at 1; 8C U.L.A. 2002 Cum. Supp. at 1-2; 8 U.L.A. 2002 Cum.Supp. at 1. Even the Uniform Commercial Code, as adopted by all of the states, is not totally uniform. See note 87 supra.

79 (June 5, 2002) ("The major portion of financial support for the Conference comes from state appropriations. Expenses are apportioned among the states by means of an assessment based on population.").

80 While the method of appointment of commissioners to NCCUSL varies among the states, three patterns are discernable. In some states, they are appointed by the governor and confirmed by the senate. In other states, the sole appointing authority is the legislature. In a third approach, some states give both the governor and the legislature the exclusive authority to appoint a fixed number of commissioners. Telephone conversation between John M. McCabe, Legislative Director and Legal Counsel of NCCUSL, and the author,  June 4, 2002.

From Robin Paul Malloy & James C. Smith, Real Estate Transactions 2nd (2002) (re Fidelity National Title Insurance Company v. Matrix Financial Services Corp.)

ATTORNEYS' TITLE OPINIONS AND CERTIFICATES: An attorney who writes a title opinion or title certificate is performing an important task and is held to a high standard of care. The client has hired the attorney based on the belief that she has the professional skills and judgment that are needed to protect the client's expectations concerning the real estate transaction.

A title opinion or certificate does not guarantee the client that title is in fact marketable. It only reflects the attorney's professional opinion that based on the evidence she has, it appears to be marketable. This means that when a title problem arises causing grief or loss to the client, the attorney is not necessarily liable just because the opinion has turned out to be false. Just like a physician does not guarantee that a certain operation or treatment will help a patient, a title attorney does not guarantee that title is perfect, with no chance of unpleasant surprises in the future. With our system of public records, coupled with the many types of off-record claims that may have validity, an attorney's undertaking to guarantee title would be foolhardy. All the title attorney promises, by implication if not expressly, is that she has done competent, professional work, complying with the norms established by and followed in the legal community where she practices. If there is a recorded interest that the attorney does not locate, or if she locates an instrument but reaches the conclusion that it does not affect or no longer affects the subject property, she is liable only if her failure to find or failure properly to evaluate is negligent. Attorneys aren't infallible, though perhaps too often they pretend to be. When an attorney makes a mistake in a title matter, the client may be able to prove that mistake constitutes negligence or malpractice, but this depends on the circumstances. In Bass v. Farr, 434 S.E.2d 274 (S.C. 1993), the Basses contracted to buy a small piece of commercially zoned land, planning to move a nearby house on the tract, to renovate it, and to resell it as an office building. They hired Farr, an attorney, to search title and close the purchase. He discovered a recorded covenant that limited the property to residential use. Farr, however, concluded the covenant had no effect because of the commercial zoning and the use of the property for commercial purposes for several years. The Basses purchased, relying on Farr's opinion that title was marketable. They prepared the property for resale as a professional office site, signing a contract with a buyer. The buyer learned that nearby homeowners were opposed to the office use, and the buyer's attorney claimed title was unmarketable. The Basses sued Farr, alleging negligence, and sued their buyer, alleging it breached its promise to buy the property. At trial, the Basses lost both claims on directed verdicts. The trial judge ruled that, as a matter of law, Farr was not negligent in certifying title to be marketable. He also ruled that the Basses' title was unmarketable. The court of appeals reversed, finding the trial judge's directed verdicts to be inconsistent, but the supreme court reversed. "[T]he trial judge's ruling as to Farr's negligence is not inconsistent with the finding that title was not marketable. The fact that an attorney is incorrect as to the ultimate marketability of a title to real estate does not establish that he was negligent."

When an attorney issues a title opinion or certificate to her client, obviously she owes a professional duty of care to the client. Usually the client will be a purchaser or a mortgagee making a loan based on title to the property. Also, title insurance companies often hire attorneys to do title searches in counties where the insurer does not maintain an office staffed with employees who do searches or maintain a private title plant. Such attorneys give opinions or certificates to title insurers, who in reliance thereon issue polices insuring purchasers and mortgagees.

Sometimes third parties--nonclients--claim that they have relied on an attorney's title opinion, which was negligently prepared and has caused them to suffer loss. Should an attorney be liable, provided the person can prove negligence, reliance, and loss? The issues are much the same as for abstractor's duties to persons other than the immediate customer, discussed previously in this chapter in First American Title Insurance Co. In the context of attorney liability to nonclients with respect to title matters, courts have split, just as they have for the topic of abstractor liability. The general trend in law practice is to extend attorney liability to nonclients, and this is also true in the title area. One area where this change is occurring is when a mortgagee hires an attorney to check title and the mortgagor-purchaser does not employ an attorney of her own. For example, in Seigle v. Jasper, 867 S.W.2d 476 (Ky. Ct. App. 1993), a bank hired Coots to search title on land being purchased by its prospective borrowers, the Seigles. Seigles were obligated to pay, and did pay, Coots' fee as part of their loan closing costs. Coots wrote a title letter to the bank, which failed to disclose a recorded underground pipeline easement. A bank officer told the Seigles "that Mr. Coots had run the title and that everything was clear." Nine years later the pipeline company required that the Seigles move their mobile home because it encroached upon the easement. The Seigles brought action against Coots, alleging he negligently failed to advise them of the easement's existence. The trial court granted summary judgment in favor of Coots, but the appellate court reversed. "Coots' duty to exercise ordinary care in the performance of the title examination extended to the Seigles. . . . [V]iewing the facts most favorably to the Seigles, Coots . . . failed to exercise reasonable care or competence in obtaining or communicating information and supplied false information for the guidance of Peoples Bank . . . and the Seigles in their business transactions that has subjected the Seigles to a pecuniary loss as a result of their justifiable reliance upon the information."

Other courts have resisted this tendency, reasoning that conflicts of interest may result if a mortgagee's attorney is given a legal duty to protect the purchaser. See, for example, Page v. Fraizer, 385 Mass. 55, 445 N.E.2d 148 (1983). In Page, a bank hired Frazier to search title on land being purchased by its prospective borrower, Page. The bank's mortgage application form stated: "(1) The responsibility of the attorney for the mortgagee is to protect the interest of the mortgagee, notwithstanding the fact that (a) the mortgagor shall be obligated to pay the legal fees of said attorney, and (b) the mortgagor is billed for such legal services by the mortgagee. (2) The mortgagor may, at his own expense, engage an attorney of his own selection to represent his own interests in the transaction." The chain of title led back to instruments with land descriptions that were hard to decipher. Frazier made a mistake, certifying to the bank that title was marketable when in fact it was not. Page closed his purchase, and two years later when he contracted to resell the land, the defect surfaced. Page sued Frazier for damages for negligent misrepresentation but lost. The supreme judicial court recognized "a general common law trend permitting recovery by injured nonclients for the negligent conduct of attorneys . . . [but stated, here] we deal with the attorney's liability to another where the attorney is also under an independent and potentially conflicting duty to a client. [Citations omitted.] As the judge noted in the instant case, 'It is not only in the matter of items such as prepayment rights, disclosure law, late charge provisions and special mortgage provisions where a conflict of interest could arise if the attorney represented both bank and borrower, but many experienced conveyancers would acknowledge that there is a conflict of interest even with respect to title as there are some title defects which will not make the property unsatisfactory as a security but which would concern a buyer.' . . . Where, as here, a nonclient takes the chance that the client's interests are in harmony with his own, and does so in the face of an express warning that the interests may differ, his claim of foreseeable reliance cannot be rescued simply because, in retrospect, the interests are shown not to have differed."

A Massachusetts statute requires an attorney hired by a mortgagee to certify title also to certify title to the mortgagor if the mortgagor pays any of the cost of the title work. Mass. Gen. Laws ch. 93, 70 (enacted 1972). This legislation applies to residential property, with no more than four dwelling units, to be occupied by the mortgagor. The act didn't protect Page because he purchased unimproved land.* * *

For these reasons a real estate attorney should almost always use title insurance, rather than a title abstract or a title opinion. This is true regardless of the type of transaction: whether the client is a homebuyer, a purchaser of commercial property, a developer, or a lender; and whether the client's investment is small, such as a modest house or condominium, or large.  In fact, given the changing nature of the housing and mortgage markets a strong case can be made that a lawyer failing to obtain title insurance for a home buyer or lender is guilty of malpractice.  See Robin Paul Malloy and Mark Klapow, Attorney Malpractice for Failure to Require Fee Owner’s Title Insurance in a Residential Real Estate Transaction, 74 St. John’s L. Rev. 407 (2000).  This argument recognizes that real estate markets are no longer local or even regional.  Integrated financial and sales markets have made real estate markets national, and in some respects (by way of secondary mortgage market activities) international in scope.  As a result, the standard of professional conduct has been elevated and title insurance has become the expected norm.  There are title risks that can not be discovered even when using the highest degree of care and diligence.  Only title insurance provides coverage for these risks because liability is strict rather than fault based.   Therefore, the attorney owes it to the client to obtain title insurance to cover these known risks.

Ultimately, of course, the decision whether or not to obtain title insurance is the client's.  The lawyer must, however, inform the client about the risk of proceeding without title insurance and should recommend against so doing.  Furthermore, the disclosure form should be detailed and specific in informing the client of the risks of the American system of recording, and of the existence of off record and impossible to find title defects.  (For full text examples of such a disclosure form see the above referenced article by Malloy and Klapow.) 

From a forthcoming article: Robin Paul Malloy, Real Estate Transactions: Policy Considerations for Law, Technology, and Globalization (Law and Policy, 2004).

Integrating Technology into Real Estate Development. Real estate transactions are primarily about real property.  Nonetheless, they involve a number of mixed property issues.  For example, many commercial real estate projects such as office buildings, shopping centers, warehouses, industrial parks, and public buildings involve complex issues of real property along with personal property, intangibles, fixtures, and intellectual property, as well as non-property matters such as those related to contract, securities, corporate, and environmental law.1 Each of the above categories of property has different legal rules that apply to them and, thus, a commercial real estate project raises a number of issues with respect to ownership.  Of particular interest is the fact that law typically treats real property issues in accordance with the law of the place where the project is located, but permits other types of property matters to be governed under the law of any jurisdiction with a reasonable connection to the transaction.

In this part of the essay attention is focused on some of the major policy considerations present when various elements of intellectual property are integrated into a real estate project.   This is of interest in the context of globalization because the intellectual property rights may be governed by the law of a jurisdiction (or by an international convention) other than that of the jurisdiction where the property is located.  This means that real estate development projects in developing countries, and in countries with emerging market economies, may have important elements of ownership governed by non-local law.   It is also important because the developed and developing country may have very different interests when it comes to protecting certain types of property such as intellectual property.2

In exploring the basic issues in this area, discussion addresses such matters as ‘smart buildings’, and ‘green buildings’.  It will also address concerns regarding project names, corporate documents, logos, trademarks, copyrighted business plans, architectural drawings, security systems, and even restaurant menus.   All of these add value to a project and are necessary to operating a project as a going concern.  Discussion will include mention of third party and creditor concerns.

Integrating Technology into Construction. A number of policy considerations are raised by the integration of technology into real estate construction projects.  In many developments these integration projects are commonly referred to as ‘smart buildings’, and ‘green building’.

Smart buildings use technology to control heating and cooling systems, to regulate lighting systems, and to provide elaborate communication and security systems.3 Sensors regulate the building environment and turn lights on and off based on the presence of people in a room.  They also use technology to regulate water in the washrooms and elsewhere.  Communication systems include a variety of computer and phone needs as well as teleconferencing and networking systems.  Security systems can control access to different parts of a building, protect computer systems and networks, identify people in a variety of ways for individual access, provide electronic ‘eyes’ and supervision of spaces inside and outside of the building, and deliver information to inside and outside security personnel.  In some developing countries smart building also include their own water purification systems and utility support mechanics.

Green buildings often contain many of the same features as smart buildings.4 They are known as green buildings however because they incorporate technology in a way that seeks to support the ideas of sustainable development and environmental awareness.  Such buildings are designed to make the best use of sunlight in providing light and heat, and to incorporate building materials made from recycled materials.  They generally incorporate technology that dramatically reduces the use of fossil fuels in the building, and they provide ‘on property’ sewage treatment and purification systems while blending in with the natural surroundings.

A number of these same technology features are integrated into residential construction and into public development projects.  Residential buildings include a number of devices for controlling the environment of the home and for making the home accessible to a broad range of modern communication devices and systems.  Public development projects such as airports, schools, water works, and power plants also integrate numerous technologies.  Many public projects now require a high degree of security related infrastructure.

In each of the above type of examples it is important to keep in mind that many of these technologies are built into the real estate project itself and serve as the technology infrastructure and platform for technology uses within the building environment.  They are not the uses themselves.  This technology supporting infrastructure adds value to the real estate project.  It also typically increases the energy and power consumption needs for the project.  Consequently, unless renewable energy sources are employed these buildings add to demand on public utility systems and energy uses.

These buildings also raise a number of legal problems.  As technological infrastructure is integrated into the building there are issues concerning the status of ownership.  For instance, when does a technology become so integrated into a building that it becomes a fixture (governed under the law of fixtures rather than that of personal, or intangible property law and having different consequences for treatment under mortgage law and the law of secured transactions) or even part of the real property itself (governed under the law of real property and mortgage law).  Ownership rights, and the rights of creditors of the ‘owner’, will vary with the classification of the technology in property terms.  This can relate to all four characteristics of property ownership in terms of one’s right to use and possession of the technology, the right to exclude others from it, the right to transfer it including using it as collateral for the extension of credit, and the right to capture the economic benefits of the technology.  These are complex issues, even in the context of a well developed property law system such as that of the United States.  The problems become even more acute in a developing country with a rudimentary or newly enacted property law system.  Policy concerns are compounded when considering that property classification other than real property will generally permit issues of technology ownership to be governed by law other than the law of the local jurisdiction where the property is located.  This is particularly significant when one considers the perspective of third party lenders on these projects.   In the event of a default on credit they need to be sure that they will have rights to the technology since that provides a significant element of value to the real estate.   Securing these rights is important because of the significant role of credit financing in real estate development.

Intangibles and Going Concern Value. Additional policy considerations arise when dealing with intangible intellectual property that forms an important part of the going concern value of a real estate development project.  Examples include corporate names, logos, trademarks, copyrighted business plans, architectural drawings, security systems, and even restaurant menus.5

As a simple example consider a large shopping mall.6 The mall has a name, sign, and investment in advertising its identity and location.  These are valuable assets.  It also has corporate documents and business plan information. There are architectural plans and design features that the architect seeks to control, and legal documents governing the organization and operation of the mall that the lawyer’s may seek to control as special work products.  These issues are also true of the major anchor stores in the mall.  Within the mall a number of logos and trademarks are used for merchandise and for store and brand identification.  Questions arise with respect to the ownership and control of these valuable intellectual property assets.

Further consideration must be given to protected notions of ‘trade dress’ for some of the tenants in the mall, and perhaps for the mall itself.7 For example, consider the unique value of the Hard Rock Café, the Rainforest restaurants, Johnny Rockets, and the layouts of different department stores that are identifiable from the moment one enters.  All of these valuable assets need to be protected from misappropriation.  They give the real estate value but they are not real property.  Consider also the role of third-party lenders.  A lender extends credit against the collateral.  In the United States if the collateral is real property it is covered under mortgage law, but if it is intangible or personal property it is governed by Article 9 of the Uniform Commercial Code (U.C.C.).8 If a lender has to take over the mall, or a business such as a restaurant or a pub within the mall, it will need rights in the defaulting entity’s name, trademark, business plan, menu, liquor license, lease rights, service contracts and other intangibles.9 These are not real property but they are interests that add value to the real estate and which involve intellectual property issues.

Again, it is important to appreciate the implications of these integrated ownership issues in the context of globalization.  They raise complex definitional questions, conflicts of law issues in terms of applicable jurisdictional law, and control issues that effect not just the value and operation of a project but also the cultural meanings and implications of the project.

1 To get a feel for the variety of legal issues involved in real estate transactions see Robin Paul Malloy & James C. Smith, Real Estate Transactions 2nd (2002); Robin Paul Malloy & James Charles Smith, Real Estate, (2000).

2 Developed countries have a tremendous incentive to protect intellectual property because it is a major source of economic value and a key ‘product’ for export.  Developing countries, on the other hand, do not typically have intellectual property as a major source of economic activity.  Developing countries need the intellectual property invented elsewhere, and often times have little incentive to prevent locals from pirating or misusing it.  This creates tension in property law systems and fuels conflict between developed and developing countries.

3 See e.g. Ann Carrns, Are Buildings Really Smarter: Fad or State-of-the-Art, High-Tech Upgrades Lure Tenants, 12/13/96 Wall St. J. B20 (tenants want buildings that provide multiple services providers for communications and security systems, and they want the ability to control and adjust the work environment from on and off the premises.); Joanne Lipman, Smart Doesn’t Always Mean Better in Computer-Controlled Buildings, 12/2/85 Wall St. J. (1985 WL-WSJ 210059) Sensors and computers control everything for you, even closing the window blinds when it is sunny); Herb Nadel, Manager’s Journal: How High is Your Buildings’ IQ?, 9/23/85 Wall St. J. (1985 WL-WSJ 213173) (Smart buildings can command 20% higher rents than similar but low-tech buildings); Connecticut provides an example of a state that has defined smart buildings and set up legislation to encourage their development. C.G.S.A. § 32-23d (gg) (2002):

“Smart building” means a building that houses, for use by its tenants, an information or communications infrastructure capable of transmitting digital video, voice and data content over a high-speed wired, wireless or other communications intranet and provides the capability of delivering and receiving high-speed digital video, voice and data transmissions over the internet.


From CEB Real Property Law Reporter,  May 2003

Making Sense Out of Insurance, Condemnation, and Settlement Clauses in Deeds of Trust

Roger Bernhardt


I predict that two consequences will flow from the Ninth Circuit’s recent decision in Kasdan, Simonds, McIntyre, Epstein & Martin v World Sav. & Loan Ass’n (In re Emery) (9th Cir 2003) 317 F3d 1064, holding that moneys received by trustors in settlement of their damage claims against their contractor need not be turned over to their lender. First, no other court is likely to agree with the logic announced by the court. Second, all lenders will rewrite their deed of trust forms to completely escape that reasoning—and its consequences—anyway. To a large degree, therefore, this commentary may be an exercise in futility, although I will try to redeem it by some broader observations at the end.

(For those of you who have not yet read the case summary, what happened is that a law firm settled with their clients’ contractor over construction defects, paid $335,000 of the funds received over to the clients, and retained $200,000 for their fees. The clients, trustors under a deed of trust, pocketed the money, defaulted on their loan, and filed bankruptcy. The lender got the stay lifted, foreclosed, underbid, and then went after the law firm for converting money that it said belonged to it. The bankruptcy court held for the law firm, the district court held for the lender, and the Ninth Circuit ultimately held for the law firm, on the ground that no funds belonging to the lender had been converted.)

Was Anything Owed?

The reasoning of the Ninth Circuit in concluding  that none of the settlement belonged to the lender is so unusual that it forms the basis of my first opinion that other courts are unlikely to agree. The deed of trust provision covering funds arising from any action against third parties “for injury or damages to the Property . . . and which arose or will arise before or after the date of this Security Instrument” clearly included this settlement, and nobody seemed to contend otherwise on that issue. But the fact that the funds were assigned to be applied to “any amount that I may owe to Lender under the Note and this Security Instrument” is what killed the lender. Since other provisions in the document refer to “sums secured,” the court declared that the amount owed was “zero,” so long as the trustors were not currently in default on their payments. (I must observe with amusement that this same deed of trust, in defining the note, stated: “The note shows that I owe Lender U.S. $450,000 plus interest” (my italics). I got this and a few other facts from the underlying file rather than from the opinion itself.)

Well, I wish I could state on my loan applications that I do not “owe” anything on all my debts, simply because I happen to not be in default on them at that moment. And when I asked two friends how much they owed on their mortgages, they each replied with the principal balances on their loans, not the overdue arrearages. A case I have in my casebook on dragnet clauses says (Langerman v Puritan Dining Room (1913) 21 CA 637, 642, 132 P 617):

A debt, whether legally enforceable at the present time or at some future time, constitutes an existing obligation, and when we refer to a debt we at once understand thereby that thus there is resting upon some one an obligation to pay money to another when the time fixed by the parties, or by law, for its payment has ripened.

I take this to mean that money can be owed long before it is payable. To me, the way the court uses the word “owe” is not at all what most of us mean when we use it.

Hedging Against Similar Results

But kicking around an opinion just because you think the judges got it wrong is not productive activity. (Law professors may delight in doing so, but it too readily seduces students into thinking they can ignore any rule they don’t like.) Even though people may continue to speak and write the same way as before, it is not impossible for judges to begin limiting “owed” to “amounts currently due and payable,” despite its common contrary usage, as happened here. Careless inclusion of that word in a document could become costly.

As a result of this opinion, the obvious change I would expect this lender to make is to revise its deed of trust provision covering assignment of litigation proceeds to have the money applied to all “sums secured”—the term that is used in the related insurance and governmental taking provisions—and to make sure that the definition of that phrase is broad enough to cover all possibilities. If the lender lost the Emery case because of what its deed of trust said, then saying it differently should let it win the next one.

I would also suggest that attorneys make a computer scan of all of their documents for the word “owed” to see if it appears in any dangerous context. (For instance, if interest is to be charged on all sums owed, do you really want to make the unpaid balance due interest-free?) Too often, one paragraph of a document is revised in response to some recent adverse ruling without due consideration of all the companion paragraphs in the instrument.

Don’t Let Consistency Trump Sensitivity

The above advice does not, however, mean that the three paragraphs in a deed of trust covering insurance, condemnation, and settlement proceeds should be identical in all respects. Based on past cases, there are different lessons to be learned for each, a few of which I will mention here in the remaining space allotted to me.

1. Insurance Proceeds. Property insurance proceeds are products of private contracts, so insurance proceeds paid after a casualty to the trustors’ property do not belong to the lender. The lender can reach them only if the deed of trust was properly worded. If the particular risk was not required to be covered—as is true of earthquakes, for example—then a trustor who has independently elec­ted to insure against that risk can keep the proceeds de­spite the effect on the lender’s security. See Ziello v Superior Court (1995) 36 CA4th 321, 42 CR2d 251; Foothill Village Homeowners Ass’n v Bishop (1999) 68 CA4th 1364, 81 CR2d 195. (However, a back door route to these funds may exist if the deed of trust assigns all insurance proceeds to the lender, even for hazards that were not required to be covered. See JEM Enters. v Washing­ton Mut. Bank (2002) 99 CA4th 638, 121 CR2d 458; Martin v World Sav. & Loan Ass’n (2001) 92 CA4th 803, 112 CR2d 296.)

Emery, of course, advises lenders that such assigned insurance proceeds should not be limited to being applied to what the trustor then owes. On the other hand, in Schoolcraft v Ross (1978) 81 CA3d 75, 146 CR 57, the judges’ refusal to allow a lender to claim the proceeds when the trustor wanted to use them to rebuild is probably not a result that better drafting can overrule. But the permission granted to lenders by CC §2924.7(b) to reach the funds, regardless of any impairment of security issue, seems to mean that even the amply oversecured lender can take the entire award without needing a special clause to that effect.

2. Condemnation Awards. Because these awards constitute substitute security, a lender has a claim to them even when the deed of trust is entirely silent on that issue. But here the doctrine of impaired security may come into play and limit that claim to only what is necessary to restore the lender’s previous loan-to-value ratio. See Milstein v Security Pac. Nat’l Bank (1972) 27 CA3d 482, 103 CR 16; People ex rel Dep’t of Transp. v Redwood Baseline (1978) 84 CA3d 662, 149 CR 11. The elimination of the impairment requirement in CC §2924.7 applies only to insurance awards, and I cannot really say whether good language will let the lender keep the entire award, even when its loan is quite safe anyway.

3. Litigation Awards and Settlements. This situation got off to a bad start in 1968 when Justice Traynor held that a deed of trust provision covering damages awarded for injury to property did not apply to the money received by the trustors in settlement of their fraud claims against their sellers. American Sav. & Loan Ass’n v Leeds (1968) 68 C2d 611, 68 CR 453. That probably explains the far broader language used in Emery, as well as why that clause goes on to say that “injury or damages” includes claims for breach of contract, fraud, concealment, and negligent or intentional acts. Without this provision, some of those recoveries might qualify as substitute security, but many would not. And—if impairment of security is a factor—when does the security become impaired upon the discovery of a previously unknown defect?

Finally, all of this still leaves open the very interesting question that the Ninth Circuit left unresolved: To what degree must the borrowers’ lawyers take steps to ensure that the security interests of their clients’ lender remain protected. When is the last time you thought it wise to tell your homeowner clients that you felt duty bound to notify their bank in order to make sure that their recovery would be taken away from

them by the bank as soon as they got it?
From the CEB Real Property Law Reporter, March 2001:


Setting Aside Foreclosure Sales

Seldom in the commercial world will a clerical error force its maker to suffer a $90,000 loss when no harm was shown to result from it and the error was discovered before the deal actually closed. But then, mortgage law has never pretended to include much commercial common sense in its rulings, as 6 Angels, Inc. v Stuart-Wright Mortgage, Inc. (2001) 85 CA4th 1279, 102 CR2d 711, illustrates. (The case is reported on page 84.)

In 6 Angels, the beneficiary discovered that its intended foreclosure bid of $100,000 had been mistakenly converted into a bid of $10,000 (on a debt with an outstanding balance of about $145,000), thereby permitting a professional foreclosure bidder to increase the bid by one cent (to $10,000.01) and thus prevail at the trustee sale. But before anything else happened (the opinion does not say precisely when, but only says “shortly thereafter”), the beneficiary discovered the error and instructed the auctioneer not to deliver a trustee’s deed to the “high” bidder, who then brought this action to compel delivery of that deed. This raises two intertwined issues regarding the nature of the mistake and the timing of its discovery.

When Is a Foreclosure Sale Complete?

A sale is ordinarily “set aside” only after it has become a completed sale; before then, there is really nothing to set aside. Just as is true for the conventional real estate sales contract, significant changes of status occur between before and after the execution of the contract, and, again, between the execution of the contract and its consummation at the close of escrow: equitable conversion ends and the parties switch from seller/buyer to grantor/grantee. Specifically, before a binding sales contract is signed, the seller is the sole owner of the property and the buyer is merely an interested third party or perhaps an offeror; after the sales contract has been fully performed (by a close of escrow), then the buyer is the sole owner and the seller is merely a former owner and perhaps a secured creditor if money is still due. Between the execution and the com­pletion of the contract, however, the seller holds the legal title and the buyer’s right to have specific perform­ance means that she or he holds the equitable title, which can make a difference when people die or other unexpected events occur in that time period.

Is a trustee sale subject to the same distinctions? Do we treat an event differently according to whether it occurred before the hammer fell, after the hammer fell, or after the trustee’s deed was delivered? Elsewhere, passage of title requires delivery of a deed; the sale is not final just because the auctioneer pounds her hammer. Civil Code §2924h(b) defines sale completion as the falling of the hammer (or acceptance of the last and highest bid; see §2924h(c)), but it is pretty clear that this definition was created to allow the foreclosure bidder to win the race against the bankruptcy trustee when the bankruptcy petition is filed after the hammer falls and before the trustee’s deed is recorded. Furthermore, the code provision making the statutory recitals of compliance in the trustee’s deed conclusive (CC §2924) seems clearly to require that the deed be delivered for compliance to occur. I think considerable uncertainty remains as to rights and duties between the fall of the hammer and delivery of the deed (Suppose, for example, that an earthquake damages the property in the intervening pe­riod. Who is liable to a bypasser injured on the property at that time?)

“Do we treat [a foreclosure defect] differently according to whether it occurred before the hammer fell, after the hammer fell, or after the trustee’s deed was delivered?”

Thus, we have cases like Angell v Superior Court (1999) 73 CA4th 691, 86 CR2d 657, Whitman v Tran­state Title Co. (1985) 165 CA3d 312, 211 CR 582, and Little v CFS Serv. Corp. (1987) 188 CA3d 1354, 233 CR 923 (not all of which were mentioned in the 6 Angels opinion), which are far more generous in undoing sales when the trustee’s deed was not delivered, than are Moeller v Lien (1994) 25 CA4th 822, 30 CR2d 777 (and perhaps Estate of Yates (1994) 25 CA4th 511, 32 CR2d 53), when the deed had been delivered.

6 Angels does make this distinction, but applies it only in terms of the preclusive effect of trustee’s deed recitals. It acknowledges that the plaintiff must show that the buyer was not a bona fide purchaser only when the plaintiff attacks a sale after the deed has been delivered, but otherwise applies the same standard to evaluating the underlying challenge. I think that disregards the significance of the fact of whether or not the deed has been delivered.

What Are Sufficient Grounds To Stop or Set Aside a Sale?

All courts agree that gross inadequacy of price alone is not enough to set aside a completed foreclosure sale (i.e., when the deed has been delivered), but that it is sufficient if there was also some irregularity in the sale. In 6 Angels, there was clear gross price inadequacy, but was the beneficiary’s clerical error in the bidding instructions a sufficient irregularity? Continuing the distinction I made above, I think that most courts would hold that the error would not suffice to set aside the sale had it been discovered only after the foreclosure deed was delivered, but I doubt that they would have the same reaction to a predelivery discovery of that error.

Granted, the kind of irregularities that defeat sales usually result from mistakes made by the trustee, rather than the beneficiary. But the overriding consideration seems to be whether the irregularities lead to lower bidding. A trustee’s mistake regarding the date or location of the sale, or the location of the property, is a significant irregularity because there will then be fewer bidders for the property. On the other hand, when the bid is entered at $10,000 rather than $100,000, how much should it matter that the mistake was made by the beneficiary rather than the trustee? Perhaps this mistake might not rise to the dignity of an irregularity if the deed has already been delivered (although many decisions state that only a “slight irregularity” is required), but when no delivery has occurred, that standard seems too high.

The standard that ought to apply in predelivery cases is whether the purchaser is entitled to specific performance (which is what this sort of action is, in fact). That requires the bidder to show that the contract was just and reasonable, and the consideration adequate. See CC §3391(2). And since I doubt that $10,000 is adequate consideration for a property worth over $100,000, this sale might not be upheld even though there was no irregularity caused by the trustee.

Who Cares?

The fact that it was the beneficiary who suffered injury in this case may have had a lot to do with the outcome. Courts often show little sympathy for lenders, even when their mistakes are innocent. Because of CCP §580d, the trustee sale was the end of the line for this lender, and the remaining $135,000 of the money it lent is now a total loss. Because of §580d, the trustors were not hurt by the misbid and were probably legally and factually indifferent to the struggle between the beneficiary and the foreclosure bidder.

But suppose this had been a judicial foreclosure (of a nonpurchase money debt) where the mistake was discovered before delivery of the sheriff’s deed and the trustor was likely to be personally liable for a deficiency judgment. (Our statutory fair value requirement might help, but only some: If the fair value of the property was $95,000, rejecting the beneficiary’s bid of $100,000 would cost the trustor $5000 of deficiency protection.) Would a court still regard this irregularity as inconsequential and order the sheriff to deliver the deed? Or suppose the note was guaranteed (by a guarantor who had waived all of her Gradsky rights). Could the misbidding beneficiary—after being outbid at the sale—then make the guarantor pay? (Our antideficiency and fair value statutes don’t apply to guarantors.) If so, could the guarantor act to stop delivery of the deed?

A “yes” answer to questions like these suggests that the real distinction should not pertain to when the irregularity occurred, or whether it was significant or slight, but rather whether the loss was suffered by the debtor or by the creditor. None of the cases say that, but it is a conclusion that seems hard to resist when mortgages are involved.


From the CEB California Real Property Law Reporter,  May 2002


The Yield Spread Premium Controversy

In 1974, in response to public outcries over high real estate closing costs, and the disclosure that lawyers, lenders, and title companies were all paying kickbacks in order to get the business, Congress enacted the Real Estate Settlement Procedures Act (RESPA) (12 USC §§2601–2617). As is typical of much legislation, there was brave bold language at the start (12 USC §2607, §8(a)): “No person shall give [or] accept any fee, kickback, or thing of value pursuant to any agreement . . . that business . . . shall be referred. . . .” That was then followed by language taking most of it back (§2607, §8(c)): “Nothing in this section shall be construed as prohibiting . . . (2) the payment to any person of . . . compensation . . . for goods or facilities actually fur­nished or for services actually performed. . . .” So kickbacks were out, but fees for goods or services or facilities were in. Those provisions in RESPA are still the same, but the world has changed.

The New World of Mortgage Lending

In the 1970s, people got mortgage loans by borrowing from the bank or S&L where they saved and did business. After the loan was made, the lender kept the mortgage in its portfolio, using the interest earned to satisfy the interest demands of their savings depositors.

But the S&Ls failed in the 1980s, and that style of lending vanished. Instead, real estate funds from Wall Street started purchasing large pools of mortgages guaranteed by the government or rated by an agency. A mortgage lender was no longer an institution making its own loans from its own deposits, but rather was an “originator” who borrowed funds from A just long enough to lend them to C on a mortgage and then sell the mortgage to D. The secondary market had arrived.

If it made economic sense to disconnect lenders from funding sources, it also made sense to disconnect them from borrowers. No sense in paying a lot of money to keep up a fancy building downtown and paying a large staff to always be on call to serve any potential borrower who might walk in, when others were performing the lending function more cheaply. So with the rise of the new lenders arose also the new mortgage loan brokers, who maintained little storefront offices in shopping malls and were willing to provide personalized service, like making night visits to their customers to help them get mortgage loans. The lender became an anonymous institution that had a virtual office at best. (Whoever heard of Standard Federal Bank, the defendant in Glover v Standard Fed. Bank (8th Cir 2002) 283 F3d 953, although it lends billions per year?)

In this new world, homeowners or home buyers have their “retail” mortgage loan broker shop around among “wholesale” mortgage lenders, who send the brokers daily rate sheets showing what the market rate is for each kind of loan available. According to many economists, this new market has been good for everybody, especially borrowers, who have seen mortgage interest rates fall significantly. (The interest rate spread between mortgages and U.S. Treasury bills—that most secure of loan instruments—is only half of what it used to be). As a result, there are over 30,000 mortgage loan brokers around doing business with over 150 large mortgage wholesale lenders, amounting to half of the mortgage market.

Compensation in the New System

In the old days, when one institution did it all, compensation was not a complicated issue: The lender’s interest rate covered all of the services and nothing had to be broken out. In the new piecemeal lending world, however, far more sophisticated accounting techniques are required.

Since the wholesale lender does not intend to keep the loan (i.e., it will sell the loan), a sale price must be set for it—and the marketplace does that easily. If the loan is for $100,000 at 7-percent interest, and the current rate for new loans is also 7 percent, then the market price of this loan is $100,000. But if new loans are being made at only 6.9 percent, then this 7-percent loan is worth more, and will sell for a premium—more than $100,000—just like a bond. And, conversely, if today’s rate is higher than 7 percent, this old loan will sell for a commensurate discount.

More complicated is the question of how much the lender should pay to get the loan in the first place. Initially, the loan application comes to it from the mortgage loan broker, who expects payment for the service of “placing” the loan. Even if the mortgage loan broker’s services benefit the lender as well as the borrower, the borrower is the one who will pay for them, since lenders pass through the cost for all of their services. The problem arises when borrowers don’t have the cash to pay the mortgage loan broker—indeed, lack of cash is probably why they are borrowing money in the first place.

Thus, the mortgage loan broker’s compensation generally will be paid out of the funds being loaned from the lender to the borrowers, by way of the spread between what will be given by the lender and what will be received by the borrower. This could be accomplished by a differential in the principal—e.g., $101,000 is lent but only $100,000 is received—but loan limits and loan-to-value ratios may get in the way, so the spread is achieved through an interest rate differential instead.

The daily rate sheets sent by each wholesale lender to mortgage loan brokers show the current rate the lender is charging on loans that day, say, 7 percent (the par rate). The lender has no aversion to making a loan at 7.1 percent instead (or at 6.9 percent), and will be happy to do so for appropriate compensation. It will make a loan at 6.9 percent if it is paid, say $1000, to make the loan (or if it remits only $99,000 for the $100,000 note it receives); and if it is asked to make the loan at 7.1 percent, it will send an extra $1000 along with the $100,000, that premium being calculated on the same basis as determines how much a purchaser of an existing 7.1-percent loan pays for it if the current rate is only 7 percent. If this “yield spread premium” is used to compensate the mortgage loan broker, then the cost to the borrower for these services is capitalized and spread out over the life of the loan rather than coming out of the borrower’s pocket as an up-front cost. Again, everybody should be better off, since borrowers who don’t want the higher rate can elect to pay the cost themselves and get a loan at par instead.

The RESPA Risk

All this seems perfectly sensible . . . but now comes RESPA. When a mortgage loan broker lends his own funds and then sells the loan to a real lender for a profit based on yield spread, there is no legal problem, because RESPA specifically does not apply to secondary market sales of loans; furthermore, the payment premium for an above-par loan is obviously not a kickback or illegal referral fee.

But there is a potential problem when the loan funds come from the wholesale lender rather than the mortgage loan broker at the start: The arrangement no longer constitutes an exempt secondary market transaction because it does not involve the sale of an existing loan by the mortgage loan broker to the wholesale lender (in contrast to what occurs the next day when the wholesaler sells the loan to an investor). The economics are still the same—a wholesale lender will pay the same premium for the opportunity to make a 7.1-percent loan as it would pay to purchase an existing 7.1-percent loan (assuming the par rate is 7 percent). Now, however, because the transaction does not involve the sale of an existing loan, it is no longer exempt from RESPA.

With respect to RESPA, the yield spread paid for the opportunity to make an above-par loan has this quirk: The check for the yield spread came to the mortgage loan broker from the lender and the lender was chosen by the mortgage loan broker, so it looks somewhat like a fee paid for the referral of business. (The similarity is deceptive, since each mortgage broker receives the daily rate sheets of numerous lenders and chooses loans for his customers based upon their competitive par rates, not based upon the comparative spreads above and below those par rates, which are merely mathematical derivatives; but, as a matter of form, the broker did choose the lender and the lender did pay the broker).

Even if a yield spread premium paid to the mortgage loan broker does look like it might fit under RESPA §8(a), is it not saved by §8(c)’s legalization of compensation “for goods or facilities actually furnished or services actually performed”? Although there is no doubt that the mortgage loan broker has performed services that old full-service lenders used to (but no longer need to) provide through their own employees and in their own facilities, the Eleventh Circuit Court of Appeals last year held that the yield spread premium could not be said to have been given “for” those services and facilities, since it was never calculated according to their worth, but rather was measured by the spread between the actual loan rate and the par rate. Culpepper v Irwin Mortgage Corp. (11th Cir 2001) 253 F3d 1324. (An obvious response to this contention—that the compensation is based on the fact that the loan is above par—cannot be made because that would be treating the loan as a “good,” which HUD says it is not, since the loan has not yet been made. The rest of us might think that there is no real difference between the value of an opportunity to make a loan and the value of a loan already made, when both are at the same rate, but government bureaucrats can nevertheless find distinctions there.)

Now, in Glover, the Eighth Circuit has weighed in, rejecting the Eleventh Circuit’s formal analysis and instead endorsing HUD’s more substantive standard of looking at the total compensation paid to the mortgage loan broker, without a showing of exactly how much of the yield spread premium covered which services and facilities the broker performed or furnished. Only compensation that is unreasonable will be treated as an illegal referral fee.

The Class Effect

The Glover test has both a substantive and procedural impact, the latter probably the more important. Substantively, many more yield spread premiums are likely to be upheld than would be the case under the Culpepper requirement of showing which dollar was for which service. Culpepper set a standard that could probably never be met, whereas Glover makes the basic arrangement legal, outlawing it only in cases of actual abuse.

Procedurally, the Glover standard eliminates yield spread premiums as class action candidates: Each individual yield spread premium will have to be scrutinized in the context of that loan and those services to see whether it constituted reasonable compensation for goods, services, and facilities actually rendered. That sort of analysis makes class treatment all but impossible. As potential class actions, yield spread premium claims were attractive to the plaintiff bar; well over 100 such cases had been filed around the country. If the other circuits side with the Eighth Circuit rather than the Eleventh Circuit, the logistics may well change. Many mortgage loan brokers may well be charging unreasonable fees for their services, but it is doubtful that even statutory attorney fees and treble damages will make these cases as attractive to attorneys as the prospect of successful class certification.


From The California CEB Real Property Law Reporter, October 1996


Paying the Wrong Debt

If your client is putting new money into a venture to pay off an old lien, he or she probably expects to take over the same position occupied by the old lien. There are a number of ways to do that.

The safest way is to buy the old paper, i.e., take an assignment of the mortgage and thereby acquire all of the rights and priorities of the former lender. See Strike v Trans-West Discount Corp. (1979) 92 CA3d 735, 155 CR 132. This may be impractical, however, if the old lender is unwilling to sell, or if the terms of the old loan don’t fit the new deal and other parties won’t go along with the changes your client and the debtor have worked out. See Flack v Boland (1938) 11 C2d 103, 77 P2d 1090. If the existing lienors are accommodating, another alternative is to have them execute subordination agreements putting your client in the proper position. Finally, if your client has done all this without you and didn’t get the proper consents, you can hope that equitable subrogation may come to the rescue.

Equitable subrogation is a doctrine that, in certain circumstances, permits a creditor to pay off a debt that someone else owes and then step into the shoes of the original creditor and assert that creditor’s rights against the debtor and that creditor’s priority as against other creditors. Under Lawyers Title Ins. Corp. v Feldsher (1996) 42 CA4th 41, 49 CR2d 542, however, those circumstances have to be very right for the doctrine to apply. One little glitch and your client may instead end up having bestowed a “gift” on the debtor or junior lienholders.

Feldsher sold a business to Razzano and took as payment a $750,000 note secured by a fourth deed of trust on Razzano’s property, behind liens of $265,000, $210,000, and $50,000 (in that order). Feldsher agreed that he would subordinate his deed of trust to a new first, not to exceed $250,000. Several months later, Greenberg, an experienced, hard-money lender, lent Razzano $300,000, intending that $210,000 of it would pay off the old second and put him in that position, on the belief that Feldsher was subordinating his deed of trust to Greenberg’s new loan. The title company issued a policy to Greenberg insuring his $210,000 deed of trust in second position, senior to Feldsher, and his $90,000 deed of trust in fifth position, junior to Feldsher. Feldsher, however, had agreed to subordinate only to a new first, not to a second, so Greenberg’s entire $300,000 was fifth. When Razzano defaulted on his note to Feldsher, Feldsher foreclosed, wiping out Greenberg’s entire $300,000. As a result, Lawyer’s Title paid Greenberg for his interest in the purported second and then sued to establish an equitable lien on the property (now held by Feldsher) as Greenberg’s assignee.

Because his money had paid off a lien prior to Feldsher’s, Greenberg seemed to have a pretty good claim to equitable subrogation: Feldsher had $210,000 more equity than he would have had without Greenberg’s money. But the court of appeal rejected the claim for technical and equitable reasons, both of which are rather counter-intuitive and should cause attorneys to be cautious.

The technical reason Greenberg lost was that he had actual knowledge of Feldsher’s lien when he made his loan. According to the court, this knowledge, coupled with his experience as a lender, made him guilty of “culpable and inexcusable neglect” for not assuring himself that Feldsher had signed a subordination agreement. It is true that some cases had stated that a new lender’s actual knowledge of an existing lien could impair equitable subordination rights, but this statement was always made in the context of holding that mere constructive notice (i.e., the fact that the existing lien was recorded) was not enough to preclude equitable subrogation. See, e.g., Darrough v Herbert Kraft Co. Bank (1899) 125 C 272, 57 P 983; Smith v State Sav. & Loan Ass’n (1985) 175 CA3d 1092, 223 CR 298 (relied on by the trial court). Lack of actual knowledge always seemed to be used merely as an extra reason for reaching that result. After all, the junior lienholder profits just as much from having the senior debt paid off by a payor with constructive knowledge as it does when the payor has actual knowledge.

I had thought that the “actual knowledge” exception was intended to exclude cases in which the new lender was deliberately trying to keep the existing junior down or manipulate the value of the property—i.e., as a sort of antimeddling, antifraud requirement (see, e.g., Stein v Simpson (1951) 37 C2d 79, 230 P2d 816)—and that a new lender who mistakenly believes that a prior lien was validly subordinated to the new lien is more like the lender who mistakenly believes that there is no other interest already of record (i.e., who has only constructive notice of it). The court, however, went the other way. It held that Greenberg’s failure to get a proper subordination “demonstrates negligence far more culpable than the mere failure to search the records for an intervening lien.” 42 CA4th at 52.

I have trouble with that distinction (and with even characterizing as culpable negligence the failure to take steps necessary to protect only yourself), so from now on I will admonish a lender never to assume that it can safely pay off an existing loan and put its new loan in the same position if it has any knowledge of a junior interest, even if the funds are used entirely to cancel the old debt and the transaction seems to make the old junior better off.

I say this because the court, while recognizing that its result seemed to create a windfall for Feldsher, justified the result by claiming that it was necessary to avoid prejudice to Feldsher. It is very odd prejudice, however. The old $210,000 second and the $50,000 third were due soon after the sale from Feldsher to Razzano. “To revive the $210,000 second trust deed which was paid off with funds provided by the Greenberg loan would be contrary to the Feldshers’ agreement for the sale of their company and deprive the Feldshers of the benefit of their bargain.” 42 CA4th at 53. If refinancing a maturing loan is prejudicial to a junior lender, it seems to me that anything can be called prejudicial. The juniors I know generally dread rather than welcome the maturing of a senior loan. And how likely is it that the existing second and third loans would have been “retired as scheduled” in light of the fact that Razzano found it necessary to borrow money to refinance them, and immediately thereafter (so I calculate, because Feldsher’s trustee sale was held four months later) defaulted on the fourth (the Feldsher loan)?

Equitable subrogation is applied rarely enough as it is. (Last year I tried, unsuccessfully, to persuade the American Law Institute to have its new Restatement of Mortgages drop the requirement that a junior must pay off a senior loan in full to claim such rights, so that juniors who are forced to make installment payments to reinstate defaulted seniors might get some of the priority of the senior.) No investor should ever consciously count on protection from the doctrine. Equitable subrogation means discretionary subrogation, which too often can mean whimsical nonsubrogation. Getting the paperwork right is the only safe course.



From the CEB Real Property Law Reporter, Sept. 2003.

THE EDITOR’S TAKE (on Fischer v First Int’l Bank). Sometimes lenders just cannot resist shooting themselves in their feet. Like those who make full-credit bids at their own foreclosure sales, some also seem unable to stop including in their deeds of trust the same clauses that got them into so much trouble earlier.

Back in 1979, in the first edition of my California Mortgage and Deed of Trust Practice (Cal CEB 1979), I wrote, “creditors will not solve their problems by writing increasingly broad dragnet clauses, but rather by tending toward more specificity in describing subsequent obligations to be included.” (The other obligation in this case was contemporaneous rather than subsequent, but the lesson is the same.)

When lenders woke up to that problem, they eliminated the language under which the deed of trust secured any and every obligation anybody could think of, and replaced it with new phrasing under which it secured only notes specifically referenced. But now comes Fischer v First Int’l Bank (2003) 109 CA4th 1433, 1 CR3d 162, and, in wanting to have it both ways, the lender forgot the original lesson. Its securing clause refers only to one particular note, but then adds “the indebtedness,” and defines that as including everything under the sun. Well, if a lender can get into trouble for making its security provision too broad, it’s not going to escape that trouble by moving the broadness over to the definition provision instead.

However, this arrangement was ambiguous, given that the loan agreement stated that the other loan was not covered and the deed of trust said that it was. That means that parol evidence will come in to explain it, and that means that the borrower’s interpretation is sure to prevail. If these borrowers say that they did not intend to have their home secure the real estate loan, there is more than enough in the loan documents alone to support that interpretation.

The bank was lucky here: It merely lost its claim that the security covered both the real estate loan and the equipment loan, although it may end up having to pay damages for having taken that position. It could have been worse: Once a loan document is ambiguous, borrowers can probably have it construed either way,  whichever is best for them. In a different setting, for instance, the bank might lose its claim entirely if the borrowers claimed that the mortgage also secured their other loan and the bank violated the one-action rule by unilaterally releasing its security for that loan!

Cross-collateralization is a powerful tool, but in California it can blow up in a lender’s face. Lenders and their lawyers should be far more cautious about using it. —Roger Bernhardt

THE EDITOR’S TAKE (on Residential Capital, LLC v Cal-W. Reconveyance Corp. (2003) 108 CA4th 807, 134 CR2d 162). This decision holds that a high bidder at a foreclosure sale, who is later denied a trustee’s deed because of a purported foreclosure defect discovered after its bid was accepted, has no claim to “benefit of the bargain” damages. (Specific performance was not pled as an alternative remedy, but it seems fairly certain that that relief would also have been denied.) What is uncertain is whether the bidder went remediless because the sale was bad for being conducted in violation of a postponement agreement or because that fact was discovered in time, i.e., before delivery of the deed. Both conditions existed and it is hard to know their comparative importance. What would the result have been if the deed had already been delivered before the postponement agreement was discovered? Or, what if the claimed postponement agreement had ultimately turned out not to exist?

In a column discussing 6 Angels, Inc. v Stuart-Wright Mortgage, Inc. (2001) 85 CA4th 1279, 102 CR2d 711, I complained that the court had overlooked the difference between a foreclosure sale where the high bid has been accepted but the trustee’s deed has not yet been delivered and a sale where that deed has already been delivered. I suggested that when the high bidder is seeking to compel delivery of the deed, the test ought to be whether that relief was “just and reasonable” (see CC §3391(2), enumerating grounds for refusing specific performance), whereas the standard in cases where delivery had already occurred should be whether there were grounds to set aside a completed foreclosure sale. In Residential Capital, however, the court goes even farther, stating: “[I]f the trustee’s deed with the appropriate recitations has been issued to a bona fide purchaser, the purpose of the statutory scheme to provide a prompt and efficient remedy for creditors is implemented by the [CC] section 2924 statutory presumption of finality.” This suggests to me that the court believes that delivery of a trustee’s deed completely validates an otherwise invalid trustee sale.

I am not so sure that a delivered trustee’s deed does that much. It is true that it includes some recitals about sale propriety, but to me those afford only partial comfort. Civil Code §2924 provides that mailing, delivery, and posting of the notices of default and sale are conclusively deemed proper in favor of a BFP, but it says nothing about whether  the sale was conducted in violation of a postponement agreement (or in violation of any other time constraint). Thus, the code section does not necessarily imply that a trustor who wishes to challenge the sale as premature must do so before the trustee’s deed is actually delivered, or that the trustor is barred—in case of a sale to a third party—from seeking to set the sale aside once delivery has occurred. I think we have to wait until that issue is actually litigated before we know the answer.

The existing cases answer only the easy questions—involving either sale defects that were undisputed and acknowledged before the deed was delivered, thus making it completely proper for the trustee to decline to deliver the deed, (e.g., the beneficiary agreed that it had consented to postpone or the trustee discovered that it had failed to send a notice), or irregularities that were held not to constitute defects in a post-delivery challenge (e.g., a beneficiary’s bid that was clerically incorrect). They offer no guidance as to what should happen when the outcome is less clear. If the trustor tells the trustee that there was an agreement to postpone, but the beneficiary denies it, how should the trustee behave? Should it act like an escrow agent—or even a common agent, as the opinions often say it is—and interplead or freeze until the matter is resolved, or should it act only as the beneficiary’s agent and ignore everything the trustor says?

I suggest—at least until there is further judicial or legislative clarification—that trustees, when confronted with conflicting stories, ought to continue to follow the beneficiary’s instructions as to moving ahead with the sale or delivery of the deed, but at the same time should make sure that the foreclosure purchaser is informed of the trustor’s contention. It is not up to the trustee to decide who is right, but the trustee may well have a duty to see that information potentially affecting value (e.g., that might lead to invalidation of the sale) is not withheld from the buyers. What the parties then decide to do about the information is not up to the trustee—it at least has discharged its duties in not suppressing what it knew. —Roger Bernhardt


From “ULSIA's Remedies on Default - Worth the Effort?” by Roger Bernhardt, 24 Connecticut Law Review 1003 (1992) (most footnotes omitted):


I.  Introduction

The problems arising around the question of what remedies a  mortgagee ought to have on default is what makes mortgage law  unique, difficult, and important.  If either all mortgagors paid  their debts or if mortgagees could take any steps their documents  permitted, there would be no foreclosure process as well as no  restrictions on it by courts and legislatures.  Mortgage documents  would be less than a page long, freedom of contract would  prevail  and society would have little need for mortgage lawyers.

Mortgage law is so complicated because mortgagees desire to  and have the power to have their documents provide effective and  efficient relief in cases of default at the time the loan is made  while, at the same time, judges and legislators do not want to let  mortgagees strictly enforce the rights they have given themselves  after their mortgagors have defaulted.  Most of the substantive  law of mortgages therefore consists in rules restricting the  contractual and property remedies mortgagees have written for  themselves in their mortgages to apply in cases of default.

Thus it is hardly surprising that a chief motivation for  promulgating the Uniform Land Security Interest Act was to improve  the collection process in cases of default, and that most of the  text and commentary of the Act deals with that topic.   The  Uniform Law Commissioners' Introduction makes a token bow to other  advantages of uniformity, but gets to the real the point when it  complains of how "delays in completing real estate foreclosures  have increased risks of vandalism, fire loss, depreciation,  damages and waste" and "plainly increased the cost of private  mortgages, and have significantly eroded the economic value of  many government subsidy programs involving real estate mortgages."  To correct these shortcomings, the Commissioners believe that  "the availability of a uniform, less expensive, and more  expeditious foreclosure procedure would ameliorate these  conditions and facilitate the sale and resale of secured real  estate loans."  An improved foreclosure process is what ULSIA  is all about, and is how it should be judged in states considering  its enactment.

The arsenal of protections which the judiciary and  legislatures have thrown up over the centuries to protect  mortgagors in distress has plainly irritated the lending industry.  Starting from the Chancellor's original refusal to let mortgage  deeds operate according to their terms as giving the mortgagee a  fee simple absolute automatically and immediately upon default  five hundred years ago, and running through the equity of  redemption, the delays of foreclosure, the replacement of strict  foreclosure by sale foreclosure, postsale redemption, deficiency  judgment limitations and moratoria, up to mandatory restructuring  today, to name but a few of the obstacles, a mortgagee generally  anticipates with dread having to enforce its remedies on default.  The prospect of taking the pound of flesh without shedding a drop  of blood may be too risky an undertaking.  Since these impediments  are treated as "superior equities" of the mortgagor which do not  arise from the terms of the documents, they can rarely be waived  by improved language in the documents; indeed, nonwaivability of  protection[1] becomes the main protective rule in mortgage  transactions.  Improvement of the state of affairs therefore must  come not from forcing mortgagors to agree to more onerous terms  but from appealing to the rule makers to soften the rules.

This Act is one such appeal.  There may be some perceived  advantages in uniformity, but the real motive behind ULSIA is to  quicken and cheapen the foreclosure process.[2] One the one  hand special protections are granted to one class of borrowers,  "protected parties", but in return the entire collection process  is intended to be simpler, faster, cheaper and more effective in  all other respects.  Speedy power of sale foreclosure is to  replace inefficient judicial foreclosure, and self help mortgagee  in possession status is to replace judicial receivership for  access to the rental income from the property prior to  foreclosure.  In return for protected parties having expanded  redemption rights and extensive immunity from deficiency  liability, other mortgagors will have far fewer cushions after  default than many jurisdiction now provide.  This is the  philosophical trade-off offered by ULSIA.

Overall, the strategy has had some success.  ULSIA has the  blessings of the American College of Real Estate Lawyers and  the Real Property Section of the American Bar Association.    However, although it was first promulgated in 1985, the Act has  not yet been adopted in any jurisdiction nor received much  consideration in the law reviews or trade journals.[3] * * *


XII. Conclusion

The precondition for the political success of any proposed  uniform law is some recognition that the old system needs  overhaul.  That seems certainly true for mortgage law in most  jurisdictions.  Lenders, borrowers and their attorneys are more  than ready to complain of the complexity of both making mortgage  loans at the outset and collecting on them when they have gone  delinquent.  Both mortgage documents and mortgage foreclosures are  too long, complicated by unintelligible provisions and procedures,  and generally overencumbered by restrictive state laws.

But a proposed reform act, especially a uniform one, cannot  succeed by merely pointing to the demerits of the present system.  It should also offer tangible improvements, making the law, the  documents and the collection process simpler, more understandable,  more efficient, fairer, and more consistent, or at least some of  the above.  I cannot conclude that ULSIA does this.

Simplicity. Little is made simpler or easier to understand by ULSIA.  Indeed, the new concepts it introduces often add rather than  reduce complexity.  The redefinition of default, for instance, may  well force attorneys to invent new words and rules for nondefault  nonperformance and force mortgagees to lengthen their documents by  adding previously unnecessary provisions specifying all  nonperformance as a default.  Similarly, the making of rents into  an automatic part of the security is offset by new requirements  that in order to acquire any meaningful access to the rents, new  forms of rent clauses must be incorporated into mortgages, meaning that the parties must continue bargaining over wording in  much the same way as they currently negotiate over rents and  profits clauses in important cases.  In both default and rent  situations, we may expect to find as much boilerplate  as ever  and to see both sides still forced to incur significant costs for  legal advice due to the complexities of the issues.  Practitioners  may find the new rules as to default and rent more elusive and  difficult to comprehend than the old ones.

Fairness ULSIA regrades the playing field for several important  parties.  As a result, we are likely to hear complaints from  homowner groups over "arbitariness" in giving purchasers of 4  unit residential properties complete deficiency protection while  denying any and all protection to single family homeowners who  encumbered their properties in order to send their children to  college before the recession cost them their jobs.  We are  especially likely to hear such complaints when houses are sold at  a private nonauction sales for much less than they were worth (as  well as for less than the balance of the mortgages) because there  were no statutory protections against such harsh results.  The  ULSIA tradeoff of complete deficiency protection in some  situations for no protection whatsoever in other situations is not  a compromise for those who own only one kind of property.* * *

Foreclosure sales The universal acceptance of a power of sale foreclosure process  would be a great achievement for ULSIA - significant enough by  itself to outweigh all other improvements ULSIA might offer.  However the Act may include too few details as to the conduct of  such sales for those inexperienced with them, and by demanding  reasonableness instead of offering specificity, it may frighten  mortgagees away from utilizing this new device.  By virtue of  going beyond nonjudicial public auction sales into private  negotiated sales as a method of foreclosure, the Act may invite  the resistance of consumer protection groups for creating a  procedure too capable of abuse.  Reformers may also complain that  nonjudicial foreclosure sales as proposed contain few innovations  likely to eliminate the underbidding which so frequently forced  distress sales.  So long as the rules of law effectively limit   foreclosure bidding to the creditor and a few sophisticated, risk taking insiders, sale prices are not likely to approach market values or preserve  mortgagors' and junior creditors' equities in their properties.

Uniformity or Reform? There may be a need for more national uniformity than is now  achieved by the Fannie Mae/Freddie Mac Uniform Covenants, but the  greater need, with regard to state foreclosure laws, is probably  for reform rather than for uniformity.  Eastern lenders do not  need to have foreclosure rules the same in other states as they  are in the lenders' home states so much as they need to have a  workable foreclosure process available in those states where they  place their funds, even if the process differs from that in their  own state.  Most significantly, lenders probably want a power of  sale foreclosure alternative available everywhere, whether or not  the steps to be followed vary from state to state.  The earlier  political motivation which led to the break up of ULTA into  smaller pieces might effectively be carried on even further, down  perhaps to a model power of sale foreclosure act, creating a  uniform structure, comprehensible to all, even though such  particulars as dates could vary from jurisdiction to jurisdiction.  Complementing the omissions already noted is the fact that ULSIA  does attempt to cover an enormous range of issues; a narrower but  more thorough Act might be easier for all to accept at this time.

Architecture Working with ULSIA is often a frustrating process.  Rules  dealing with one issue often appear in a section ostensibly  relating to another issue, sending the user on searches back and  forth across the Act for the appropriate provisions.  Rules  governing the same topic often switch vocabulary, forcing readers  to guess whether real differences are intended or whether it was  merely that no staff person ever sought to impose into a single  form the varying texts and revisions submitted by different  proponants.  The commentary is often at odds with the text,  permitting rival and conflicting interpretations.  And too often  there are gaps, ambiguities and inconsistencies among and between  the provisions themselves.  This is not an attractively presented  act generating any emotional inclination to support it.  Too often, I fear that the slogan will become "ULSIA? NIMBY!"

[1] E.g., "Once a mortgage always a mortgage", "No clogging the  equity of redemption", "Necessitous debtors are not truly  freemen...".

[2] A point candidly acknowledged by the Commissioners.  "This Act is based on a major policy decision - to reduce the 'cost' of foreclosure."  Section 503, Note 1.

[3] Most of ULSIA was copied from the ill-fated Uniform Land Transactions Act, promulgated ten years earlier in 1975, of which Article 3 covered mortgages.  On the assumption that ULTA failed because it was too comprehensive, the section on mortgages was then pulled out and recast as ULSIA.

However, even ULTA did not receive much critical consideration in the literature.  A few summaries of that Act were written.  (E.g., Murray, The Proposed Uniform Land Transactions Act, 7 Real Estate Review 64, 1977; and Pedowitz, Mortgage Foreclosures Under the Uniform Land Transactions Act (As Amended), 6 Real Estate Law Journal 179, 1978.  See also Kratovil, The Uniform Land Transactions Act:  A First Look, 49 St.  John's Law Rev.  460, 1975 (not covering Article 3 on mortgages, however.) There were also some articles comparing ULTA to existing state mortgage law.  (E.g., Symposium, The Uniform Land Transactions Act and the Uniform Simplification of Land Transfers Act:  Potential Impact on Florida Law, X Stetson Law Rev.  21, 1980; Rant, ULTA and NonJudicial Mortgage Foreclosure in Texas, 12 St.  Mary's Law J.  1091, 19__.) But none of these undertook to appraise how the Act functioned.  The closest there was to general critical commentary on ULTA was Bruce, Mortgage Law Reform Under the Uniform Land Transactions Act, 64 Georgetown Law Rev.  1245, 1976. (There was also specific criticism of ULTA's rents and profits rules in Randolph, The Mortgagee's Interest in Rents:  Some Policy Considerations and Proposals, 29 Kansas Law Rev.  1, 1980, which is covered later in this article.)