Case of the Month–Mechanic’s Lien and the lender’s rights

By Jennifer Felten 

The case resulted from the total default of a borrower on a real property in Los Angeles County. At the time of the default, the property was subject to a deed of trust and a mechanic’s lien, the mechanic’s lien being in lower priority than the deed of trust. Faced with foreclosure, the borrower gave the trust deed beneficiary title to the property via a deed-in-lieu of foreclosure. Despite obtaining title to the property via this deed, the beneficiary proceeded with a non-judicial foreclosure on the property. This action was taken on the part of the beneficiary to eliminate all junior liens on the property, including the mechanic’s lien. The beneficiary was the highest bidder at the foreclosure sale, thus obtaining title to the property for a second time.

The holder of the mechanic’s lien filed suit to foreclose its lien, arguing that their lien was not eliminated by the beneficiary’s foreclosure. The holder of the mechanic’s lien contended that when the trust deed beneficiary accepted the deed-in-lieu of foreclosure, those two interests (as beneficiary under the trust deed and as grantee under the deed-in-lieu) merged: The merger destroyed the senior lien, so the purported foreclosure on that lien was a sham. The superior court agreed and ordered foreclosure on the mechanic’s lien. The trust deed beneficiary appealed.

The appellate court reversed, finding that no such merger occurred in this circumstance. Following a 100 year old precedent, the appellate court held that “[m]erger 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. Equity will keep the legal title and the mortgagee’s interest separate, although held by the same person, whenever necessary for the full protection of the person’s just rights.”

________________________________________________________________

Jennifer Felten, Esq., Partner, , LLP, www.hhlawgroup.com, 699 Hampshire Road, Suite 105, Westlake Village, CA 91361, (805) 265-1031, [email protected].  Ms. Felten specializes in representing both individuals and legal entities, providing representation and guidance on a variety of real estate related matters.

Get free Citizensjournal.us BULLETINS. Please patronize our advertisers (including below) to keep us publishing