The California Court of Appeal (Second District) recently determined that the lien priority of multiple loans secured by a single deed of trust must be determined separately for each individual loan. As a result, secured lenders should analyze the priority position of their loans on an individual basis when multiple loans are secured by a single deed of trust.

In R.E. Loans, LLC v. Investors Warranty of America, Inc. et al,, R.E. Loans agreed to subordinate its existing deed of trust to a new deed of trust securing a $4,006,600 loan from the predecessor in interest to Investors Warranty of America (Investors). R.E. Loans did not know that the deed of trust held by Investors also secured more than $17 million in additional loans and all of the loans were cross-defaulted. When the borrower defaulted on Investors’ loans, notice of default was recorded with a stated cure amount of approximately $26 million. Investors acquired the property at foreclosure sale for $4,625,000. R.E. Loans sued Investors seeking a declaration that the R.E. Loans’ deed of trust remained a first lien on the property now owned by Investors.

Relying on an 1861 decision by the California Supreme Court, the Appellate Court determined that where multiple loans are secured by a single deed of trust, they are treated as separate secured loans for purposes of priority. Applying this concept, the court decided that, to the extent Investors’ deed of trust secured a note in the amount of $4,006,600 (the loan amount to which R.E. Loans agreed to subordinate), Investors’ deed of trust was senior to R.E. Loans’ deed of trust. In addition, to the extent Investors’ deed of trust secured other loans, Investors’ deed of trust was junior to R.E. Loans’ deed of trust. The court analyzed the situation as though each loan had been secured by its own deed of trust and saw no reason why a different result should occur where multiple loans are secured by a single deed of trust. Additionally, the court determined that the cross-default and cross-collateralization of Investors’ loans under its loan agreement were not binding on R.E. Loans and did not affect the lien priority of R.E. Loans’ deed of trust relative to Investors’ junior secured loans.

Unfortunately for R.E. Loans, it had not attempted to cure the default under the senior Investors loan and ended up in the position of a sold-out junior. The facts of the case do not clearly indicate that it would have made economic sense for R.E. Loans to cure the default under the $4,006,600 Investors senior loan to preserve R.E. Loans’ security interest in the property for its $3,500,000 loan. Further, if the borrower has other assets, R.E. Loans may be able to sue the borrower on its loan as a sold-out junior lienholder. 

For further information on the R.E. Loans decision or any other real estate finance matters, please contact Delmar Williams, another attorney in our Real Estate group, or your BB&K attorney.