Judge H. Jay Ford, III, Case Number: 22SMCV00462, Date: 2023-11-28 Tentative Ruling

Plaintiffs Rosamond 5 Properties, LLC, et al.’s Motion for Summary Judgement is DENIED. Although there are no triable issues of material fact pertaining to the Deed in Lieu Agreement, the law does not support Plaintiffs Rosamond 5 Properties LLC, et al.’s theory of liability. The language of the DIL agreement is not reasonably susceptible to the interpretation urged by Plaintiffs Rosamond 5 Properties, LLC, et al.

“To qualify for declaratory relief under section 1060, plaintiffs [are] required to show their action (as refined on appeal) presented two essential elements: “(1) a proper subject of declaratory relief, and (2) an actual controversy involving justiciable questions relating to the rights or obligations of a party.” (Lee v. Silveira (2016) 6 Cal.App.5th 527, 546.) “The actual controversy language in ... section 1060 encompasses a probable future controversy relating to the legal rights and duties of the parties.” (Environmental Defense Project of Sierra County v. County of Sierra (2008) 158 Cal.App.4th 877, 885.) “It does not embrace controversies that are “conjectural, anticipated to occur in the future, or an attempt to obtain an advisory opinion from the court.” (Lee, supra, 6 Cal.App.5th at p. 546.)

“Summary judgment is appropriate in a declaratory relief action when only legal issues are presented for the court's determination. The defendant's burden in a declaratory relief action is to establish the plaintiff is not entitled to a declaration in its favor. It may do this by establishing (1) the sought-after declaration is legally incorrect; (2) undisputed facts do not support the premise for the sought-after declaration; or (3) the issue is otherwise not one that is appropriate for declaratory relief.” (California Public Records Research, Inc. v. County of Yolo (2016) 4 Cal.App.5th 150, 185.)

(a) Plaintiffs' indebtedness under the Subject Note has now been deemed satisfied, (b) Defendant's security interests in the Rosamond Property and Borrego Property on account of the Rosamond Deed of Trust and Borrego Deed of Trust, respectively, have now been extinguished, and (c) Plaintiffs have the right to demand Defendant's release of any liens that it purports to hold against the Rosamond Property and Borrego Property.

Plaintiffs have satisfied the first two prongs for declaratory relief: (1) the claim involves a determination with respect to Rosamond’s property rights, namely Rosamond’s rights in the first note, Rosamond Deed of Trust, and Borrego Deed of Trust, in addition to the interests in the Rosamond and Borrego Properties (see CCP § 1060 [allowing those "interested under a written instrument" or "who desires a declaration of his or her rights … in respect to, in, over or upon property" to seek declaratory relief]); and (2) there is an actual controversy relating to Rosamond’s rights and obligations regarding said property rights after Defendant Grimm Investments, LLC’s (“Grimm”) deed in lieu of foreclosure recordation. (SUF, ¶¶ 174–184.) Rosamond argues the Court is thus left with the legal question of whether an extension of the full credit bid rule deems Grimm whole on the first and second loan following the acquisition of the Mulholland Property by deed in lieu of foreclosure recordation. (Motion, p. 23.) The Court finds that the full credit bid rule does not extend to a deed in lieu of foreclosure recordation under the undisputed material facts of this case.

“At a nonjudicial foreclosure sale, if the lender chooses to bid, it does so in the capacity of a purchaser. The only distinction between the lender and any other bidder is that the lender is not required to pay cash, but is entitled to make a credit bid up to the amount of the outstanding indebtedness. The purpose of this entitlement is to avoid the inefficiency of requiring the lender to tender cash which would only be immediately returned to it. A full credit bid is a bid in an amount equal to the unpaid principal and interest of the mortgage debt, together with the costs, fees and other expenses of the foreclosure. If the full credit bid is successful, i.e., results in the acquisition of the property, the lender pays the full outstanding balance of the debt and costs of foreclosure to itself and takes title to the security property, releasing the borrower from further obligations under the defaulted note. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1238, internal cites omitted; see Passanisi v. Merit–McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1503; Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 607, 125; Smith v. Allen (1968) 68 Cal.2d 93, 96, 65 [“[I]t is clear that the Legislature intended that a properly conducted [nonjudicial] foreclosure sale should constitute a final adjudication of the rights of the borrower and the lender.”].) Under the “full credit bid rule,” when a lender makes such a bid, it is precluded for purposes of collecting its debt from later claiming that the property was actually worth less than the bid. (Alliance Mortgage Co, supra, 10 Cal.4th at p. 1238.)

A deed in lieu of foreclosure (“DIL”) is a “deed given by the trustor to the beneficiary to avoid the inconveniences suffered on both sides by a formal foreclosure.” (Decon Group, Inc. v. Prudential Mortgage Capital Co., LLC (2014) 227 Cal.App.4th 665, 670.) A DIL “may carry potential risks, however, if there are junior encumbrances against the property,” because “[a] conveyance by a trustor through a deed in lieu of foreclosure (as opposed to a foreclosure deed) passes title to the transferee subject to all existing liens.” (Id., at pp 670–71.) “[T]he courts have generally held that when a senior lienholder accepts a deed in lieu of foreclosure, the senior lien and title do not merge, so the senior lienholder retains the power to foreclose and thereby eliminate the junior liens.” (Id., at p. 671.)

A full credit bid and deed in lieu are two different legal mechanisms, and each have a different purpose. [Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 606 [“a deed in lieu of foreclosure is not equivalent to full credit bid. A full credit bid represents the entire amount of principal and interest due on the underlying debt, plus the other costs, fees and expenses of foreclosure. In other words, the lender is receiving the entire consideration it would have received had there been no default, and it thus suffers no impairment or harm. In contrast, a deed-in-lieu is an agreement between the homeowner and lender intended to avoid a foreclosure. Put differently, it is a settlement agreement where the homeowner turns over the keys to the property in exchange for forgiveness of the debt.”].) Thus, with a DIL agreement being a creature of contract the Court must look to the four corners of the DIL agreement to determine the intended outcome agreed to by the parties. “[T]he intention of the [contracting] parties is to be ascertained from the writing alone, if possible.” (Civ. Code, § 1639.) “In construing a contract, we ascertain the objective intent of the contracting parties at the time of the agreement.

When a dispute arises over interpretation of a contract, “the first question to be decided is whether the language is ‘reasonably susceptible’ to the interpretation urged by the party. If it is not, the case is over. (citations) If the court decides the language is reasonably susceptible to the interpretation urged, the court moves to the second question: what did the parties intend the language to mean. (citations).” (Southern Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th 839, 847-848.)

The Original DIL agreement states “Borrower and Guarantor acknowledge and agree that the obligations under each Note and the other Loan Documents remain in full force and effect, to enable Lender to foreclose each Deed of Trust if Lender elects to do so in Lender's sole and absolute discretion.” (Evidence Compendium Ex. 20, p. 180, Deed in Lieu Agreement (“DIL”), Art. III, § 3.04.) Nowhere within the Original DIL agreement does it state that there is a full cancelation of debts, or the deed in lieu will be deemed to act as a full credit bid. In fact the DIL states the opposite and keeps all other Notes, plus other loan documents, “in full force and effect.” (DIL, Art. III, § 3.04.) It appears clear and unambiguous that the reference to “each Note and the other loan documents,” refers to the first and second loans at issue. Thus, the DIL contract did not extinguish the first and second loan upon recordation.

Furthermore, Rosamond provides no authority to extend the DIL agreement into a Full Credit Bid scenario other than a bankruptcy case which hypothetically assumed a DIL was the same as a full credit bid, and also dealt with a situation involving fraudulent misrepresentation regarding the value of real property. (See Hardin v. Gianni (In re King Street Invs., Inc.) (B.A.P. 9th Cir. 1998) 219 B.R. 848, 855 [assuming that "the full credit bid rule is an appropriate analogy to acceptance of a deed in lieu of foreclosure" for purposes of deciding whether fraud claims were barred by full credit bid rule or fell within exception to rule].) The issue at hand does not involve any claims of fraud, and thus In Re King Street Invs, Inc. is not applicable.