Banc of America Leasing & Capital, LLC (BALCAP) obtained a judgment against its borrower and recorded its judgment in Orange County, CA. In California, unlike many other states, the only way a judgment can become a lien on real property is to record an abstract of judgment in the county where the real property is located (see California Code of Civil Procedure §697.310).

In some other states, judgments become a lien on property of a judgment debtor once the judgment is awarded and nothing else is needed to be done; in other states a judgment is recorded with the Secretary of State to become a lien on property of a judgment debtor; and in other states a judgment cannot even be a lien on certain types of real property such as a judgment debtor’s residence. But in California, once an abstract of judgment is recorded in a county, it becomes a lien on all real property in that county and only in that county. If a judgment debtor has real property in another county, an abstract of judgment must be recorded in the county where that real property is located.

Once BALCAP recorded its abstract of judgment, it now had a lien on the borrower’s judgment debtor’s real property. Meantime, the borrower had defaulted on a loan secured by a deed of trust on real property to another lender. The deed of trust was recorded long before the judgment lien became a lien on the real property. In fact, when the judgment lien was recorded, the real property was already in the midst of non-judicial foreclosure.

In California, prior to some recent amendments, the non-judicial foreclosure procedure allowed the lender, known as the beneficiary, through a foreclosure trustee to foreclose on real property by recording a Notice of Default on the real property stating that if the amount due on the loan is not cured within 90 days, then the real property would go to foreclosure sale. After the 90-day Notice of Default period ends, the foreclosure trustee then will declare the entire loan due and payable and will record and publish a Notice of Trustee’s Sale where the real property will be sold in no less than 21 days (see procedure set forth in California Civil Code §2924b, et. seq.).

Assuming the full amount due is not paid, then the real property is foreclosed on by the foreclosure trustee with the highest bidder becoming the owner. The distribution of any money from the foreclosure sale is based on a first-in-time-first-in-right basis and any surplus proceeds over all liens are returned to the owner of the real property.

The recent case of Banc of America Leasing & Capital vs. 3Arch Trustee Services, Inc. (Cal. App. 4th District), decided on January 5, 2010 and cited at 2009 Westlaw 47279904, describes what judgment lien creditors might say is an unfair result shutting BALCAP out of the money on its recorded judgment lien. When the senior lien foreclosed on its deed of trust on the real property, the proceeds of the sale brought substantially more money that was due to the foreclosing lien creditor but, rather than pay BALCAP on its recorded judgment lien, those proceeds went to the borrower/judgment debtor as surplus proceeds. BALCAP also had never received notice of the foreclosure sale. Of course, the borrower never paid those proceeds to BALCAP and BALCAP sued the foreclosure trustee for its negligence in not distributing the surplus proceeds to BALCAP.

The Court of Appeal reversed a summary judgment in favor of BALCAP and against the foreclosure trustee, and held that the foreclosure trustee was not negligent in distributing the proceeds to the judgment debtor rather than BALCAP despite its lien on the real property.

The court held that the duties of the foreclosure trustee were set forth in Civil Code §2924b(c)(1) and (2). Under paragraph (c)(1), “the trustee is obligated to give notice of a sale to “each person set forth in paragraph (2).” Paragraph (c)(2) lists a variety of creditors such as beneficiaries of trust deeds, vendees under contracts of sale or lessees, but does not list judgment lien creditors among those entitled to receive notice of the foreclosure sale. Therefore, since the trustee is not obligated to give notice of sale to the judgment lien creditor, the trustee was not obligated to find the judgment lien creditor in the real property records and distribute surplus proceeds to that creditor under the Civil Code §2924j governing distribution of excess proceeds.

On the other hand, BALCAP contended that under Civil Code §2924k(a)(2), the trustee had a duty to distribute the surplus proceeds to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority. That section of the Civil Code states that the foreclosure trustee must distribute proceeds of a foreclosure sale first to pay the trustee’s costs and expenses in exercising the power of sale under the deed of trust and conducting the sale; next to satisfy the debt to the beneficiary (lender); next for the payment of junior lien creditors in the order of their priority; and last, the balance, if any, to the trustor (borrower/judgment debtor) or its successor in interest.

Notwithstanding this provision of the Civil Code, the court reasoned that since the trustee is not required to give notice to judgment lien creditors that did not request special notice under §2924b of the Civil Code, a foreclosure trustee is not obligated to search the records of the County Recorder to locate lien creditors and determine the priority of their interests prior to distributing foreclosure sale proceeds. The court also noted that to impose a post-foreclosure search obligation on foreclosure trustees would be burdensome and expensive and the legislature had not seen fit to put that burden on the foreclosure trustee. The court also stated that the judgment lien creditor could have recorded a Request for Special Notice in the real property records alerting the trustee that notice needed to be given to BALCAP but failed to do so.

BALCAP argued that since California has 58 counties where the borrower might have acquired real property, it would be an overly burdensome task to record 58 Requests for Special Notice where, on the other hand, all the foreclosure trustee had to do was search one county where the real property is located to locate BALCAP’s judgment lien. Although the court seemed to sympathize with that argument and stated that these considerations were for the legislature to consider, nevertheless the court held in favor of the foreclosure trustee and, even though BALCAP had a properly recorded judgment lien on the property and proceeds should have been delivered to BALCAP, the court held the foreclosure trustee was not negligent.

Here is another case where conflicting statutes make for bad law. On the one hand, BALCAP was entitled to the surplus proceeds because it properly recorded its judgment lien. On the other hand, the foreclosure trustee had no duty to pay these proceeds. It seems that the cost of a post-foreclosure search should be borne by the beneficiary to make certain that the foreclosure trustee gets it right when it distributes proceeds. It is now up to the legislature to respond.

In the meantime, the quick fix is for any judgment lien creditor that knows a judgment debtor has real property in a county, to record a Request for Special Notice under Civil Code §2924b(a) to protect its interests even though that after the foreclosure trustee records the Notice of Default, it is not required to do any further search. Therefore, in this case, since the judgment lien was recorded after the Notice of Default was recorded, it would not have helped BALCAP in its lawsuit against the foreclosure trustee.

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Andrew K. Alper is a partner with the law firm of Frandzel Robins Bloom & Csato, LC in Los Angeles. Alper has been representing equipment lessors, funding sources and other financial institutions since 1978. Alper obtained his Bachelor of Arts degree in Political Science, magna cum laude, from the University of California at Santa Barbara, and received his J.D. from Loyola Marymount University School of Law making the Dean’s List. Alper’s practice emphasizes the representation of equipment lessors and funding sources in all aspects of equipment leasing including litigation, documentation, bankruptcy and transactional matters. Alper also represents banks and other financial institutions in the area of commercial litigation, insolvency, secured transactions, banking law, real estate and business litigation.