A Mechanic’s Lien Can Be Extinguished Following A Transfer By Deed In Lieu of Foreclosure

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By Bruce D. Rudman
Abdulaziz, Grossbart & Rudman

This case highlights the crafty actions of a lender which successfully thwarted a Mechanic’s Lien claimant from collecting. 

 

AZWellesley Plaza, LLC (“Wellesley”) purchased property and secured a loan with Prudential Mortgage Capital Company, LLC (“Prudential”) in February of 2008.  In August 2008, Wellesley contracted with Decon Group, Inc. (“Decon”) to perform renovations.  Decon completed its work but was unpaid by just over $400,000, for which it recorded a Mechanic’s Lien against the property in April 2009.  In July 2009, Decon filed suit against Wellesley, Prudential, and others for breach of contract, quiet title, and most important to this article, for foreclosure of Mechanic’s Lien.

 

Since Wellesley was also in default on the loan, Prudential recorded a notice of default and decided to sell the default on the loan.  Prudential transferred the loan, which was in default, to an entity known as PMCF Properties, LLC (“PMCF”).  In November 2009, Wellesley transferred the property to PMCF with a grant deed in lieu of foreclosure.  Thereafter, even though PMCF owned the property, it proceeded with the trustee’s sale of the property and apparently there were no other bidders because PMCF purchased the property at the trustee’s sale from itself, and later sold the property to a third-party, 12304 Santa Monica Blvd., LLC (“Santa Monica”) by grant deed.  Since the litigation over the Mechanic’s Lien was still ongoing, when Decon discovered that Santa Monica was the new owner, Santa Monica was brought in as a Doe defendant.

 

This matter went to trial in December 2012.  The trial court determined that, “the mechanic’s lien has priority and was not extinguished by the sale of the property to PMCF.”  So, judgment was entered in favor of Decon against all defendants for foreclosure of the Mechanic’s Lien, quiet title, and declaratory relief.  The judgment stated that Decon’s Mechanic’s Lien should come before all other liens and that the property should be sold by public auction.  The defendants appealed the trial court’s decision, becoming the appellants in this matter.

 

In the Court of Appeal, the appellants argued the PMCF’s foreclosure terminated Decon’s Mechanic’s Lien when the property was purchased at the foreclosure sale – in effect, the foreclosure was argued to clear title to the subject Mechanic’s Lien and any other junior liens, thereby leaving Santa Monica to purchase a property free of any encumbrances.  The plaintiff had argued that the interest in the loan merged with the ownership interest in the property, so that there no longer was a loan which could be foreclosed sufficient to wipe out junior liens.  However, the Court of Appeal agreed with the appellants and held that long-standing legal principles hold that when a senior lien holder accepts a deed in lieu of foreclosure, the senior lien and title do not merge, so the senior lien holder retains the power to foreclose, thereby eliminating any junior liens. 

 

A foreclosure of a trust deed by a mortgage holder will wipe out all inferior liens unless the property sells for more than the outstanding senior indebtedness, in which case, any excess will be paid to the junior lien holder up to the amount of the junior lien.  The lender was able to manipulate this rule to wipe out the Mechanic’s Lien and any junior liens.  Of course, any junior lien holder could have bought the property itself, but in this case the loan was in excess of $13 million.

 

This case highlights the problems with claiming a Mechanic’s Lien in a bad economy.  If there is equity, properties rarely go to foreclosure.  Where there is little equity, the Mechanic’s Line does not secure a viable recovery.  If you are in this position, you should seek the aid and advice of a construction attorney.

Bruce Rudman has been practicing construction law for 18 years.  He has garnered a great reputation in the construction field not only as a litigator but on licensing issues with the CSLB, particularly disciplinary proceedings.  Abdulaziz, Grossbart & Rudman provides this information as a service to its friends & clients and it does not establish an attorney-client relationship with the reader. This document is of a general nature and is not a substitute for legal advice.  Since laws change frequently, contact an attorney before using this information.  Bruce Rudman can be reached at Abdulaziz, Grossbart & Rudman: (818) 760-2000 or by E-Mail at bdr@agrlaw.com, or at www.agrlaw.com 

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