The issue before the Second District Court of Appeal ("Appellate Court") in this published opinion was whether a senior trust deed holder loses its priority lien position after accepting a deed in lieu of foreclosure from its borrower. (Decon Group, Inc. v. Prudential Mortgage Capital Co., LLC (June 30, 2014, NO. B248491) --- Cal.App.4th ----, [2014 Daily Journal D.A.R. 8678]).
Prudential Capital Company ("Prudential") held a purchase money first deed of trust on real property owned by AZ Wellesley Plaza, LLC ("Wellesley"). Wellesley contracted with Decon Group, Inc. ("Decon") to renovate the real property. After completion of its work, Decon recorded a junior mechanic's lien on the real property. After default on the purchase money loan, Prudential commenced nonjudicial foreclosure proceedings against the real property. Before completion of the foreclosure sale, Prudential assigned its loan documents to PMCF Properties ("PMCF"). Also, before completion of the foreclosure sale, Wellesley transferred title to the real property to PMCF by grant deed in lieu of foreclosure.
Nevertheless, PMCF proceeded with the nonjudicial foreclosure sale and acquired title to the real property at the foreclosure sale. PMCF then sold the real property to a third party. PMCF took the legal position that the foreclosure sale extinguished Decon's mechanic's lien. Decon filed a lawsuit to foreclose its mechanic's lien arguing that its mechanic's lien had not been extinguished by the foreclosure sale because pursuant to the merger doctrine, PMCF's acceptance of the grant deed in lieu of foreclosure destroyed its senior purchase money lien on the real property. The trial court agreed with Decon and ordered foreclosure of the mechanic's lien. The Appellate Court reversed.
The Appellate Court stated the rule that merger is always a question of intent when the question is as to whether a mortgage lien is merged in the fee, upon both being united in the same person. The Appellate Court found that PMCF had no intent to merge its title to the real property with its lien on the real property. Here, the grant deed in lieu of foreclosure stated that there would be no merger and that the liens on the real property would remain valid. The Appellate Court held that there was no merger of PMCF's title to the real property with PMCF's lien on the real property and that Decon's mechanic's lien was extinguished by the foreclosure sale.