Law Offices of Graden R. Tapley

How to Recover for Destruction to Property that is damaged by the borrower before foreclosure

When the foreclosures began in 2007 the initial reaction by borrowers and tenants was anger.  Sometimes this resulted in damage to the property that was being lost in foreclosure.  Now that foreclosures are more common they have become more accepted and destruction happens less frequently.    

If a lender suspects there will be damage to the property there are some steps that must be taken to protect rights or else the right to be compensated for the destruction or “waste” is lost. 

Waste is any action that impairs the lenders’ interest in the property.

A person that borrows money secured by property has a legal duty not to do anything that will substantially impair the lender’s security for the loan.  Anything that makes the property less valuable than when the loan was given is called “waste” and is prohibited.  The duty to prevent waste is part of the California Civil Code.  It is also usually a promise or “covenant” written into the deed of trust.  The trust deed will say something like “trustor has a duty to maintain and care for the property.”  A failure to maintain the property alone is grounds for foreclosing on the loan. 

Where the borrower is in default on a promise to make monthly payments the lender’s primary concern is whether it will be able to get its money back at the foreclosure sale.  Thus, the condition of the property at the sale is a paramount concern.   If the sale of the property does not pay off the loan entirely the lender wants to know if she can go after the borrower’s other assets to make up the difference.  This is especially the case if the property sold for less because the borrower, or the tenants, intentionally destroyed the property. 

If the borrower has no assets then the issue is moot

If the borrower has no job and no other assets then there is probably no point in worrying about it.   If the property being foreclosed on is a second “income” property that the borrower is losing the borrower may have other assets to attach.    

The Single Action Rule and CCP §580d prohibit deficiency judgments after a trustee sale

There are prohibitions that prevent a lender from taking certain actions against a borrower after a trustee sale (foreclosure).  The most important one to consider for the purposes of this article is Code of Civil Procedure section 508d.  This section prohibits a lender from suing the borrower for what is still owed if the trustee sale does not entirely pay off the loan.   The second rule to keep in mind is the “Single Action Rule” of Code of Civil Procedure section 726.  This says the lender can take only one action against the borrower.  A trustee sale is an action. 

The result of these two laws is that a lender is generally not able to go after a borrower for failing to maintain the property after a foreclosure.  The right to sue for damage or neglct gets lost after the foreclosure because the trustee sale is an action.  However, there is an exception. 

 There is an exception to the rule for “bad faith” destruction of property

The courts have made an exception to the rule for damage to the property that was done in “bad faith.”  This exception allows the lender to sue the borrower for destruction to the property.  But, it is important to understand the exception. 

 The initial analysis is whether the destruction made the property worth less than the security that was given by the borrower for the loan.  In other words, if the amount owed on the loan was $100,000 and the property sold at the trustee sale for $100,000 then it does not matter if the borrower destroyed the property.    The value of the security (the property) was equal to the amount of the debt and there was no harm to the lender- even if the lender ended up with the property.   If there was a loss then it must be determined whether it was caused intentionally, such as the occupant taking out all of the electrical fixtures and breaking holes in the walls.  If the loss was merely caused by the lender’s neglect then the exception will not apply. 

 What the lender should do at the foreclosure sale

If the analysis shows a loss in value caused by intentional destruction steps must be taken at the foreclosure.   At the sale what happens in most cases is the lender will take the property back because nobody is willing to bid as much as the lender.  The lender can bid for up to the full amount of the debt still owed without having to put down any additional cash.  But if there is intentionally caused damage to the property, instead of making a “full credit bid” for the amount of the debt, the lender should make a bid that reflects the anticipated loss in property value because of the destruction.   The problem is that the lender is usually unable to inspect the property before the sale.   It does not know if damage has been done. 

 A bid for less than the debt owed by the borrower protects the lender in case of intentional destruction of the value of the real estate at the time of the loan. 

If a lender bids less than the full amount due on the loan this will be reflected in the facts stated in the trustee’s deed.  The deed will reflect the outstanding debt and also the amount that was bid.   If the lender finds out after the sale that the property was destroyed it can come after the borrower for damages- up to the amount of the difference between the bid and the amount that was still owing on the loan at the time of the sale.    On the other hand bidding for less than the amount of the debt owed increases the risk of being outbid. 

The court will require that a lender who takes the property back at a foreclosure sale to prove that the destruction was in “bad faith” and that the property value at the sale was lower than the value at the time of the loan because of intentional destruction and not merely the result of overall market conditions.    If this can be proven a legal action should be filed in the court promptly.  Remember, there are statutes of limitations that act as deadlines to prohibit any court action.   See an attorney to determine what your limitation is for your particular circumstances.