9/30/14: The court of appeal held that a lender’s full credit bid precluded them from making an insurance claim for pre-foreclosure damage to the property.
Basic case facts: The Appellants sold a commercial property, taking back as partial payment a promissory note secured by a second deed of trust. When the borrower fell into default and the holder of the first deed of trust commenced foreclosure proceedings, appellants purchased from the senior lender the promissory note secured by the first deed of trust and took assignment of that trust deed. Appellants then instituted foreclosure proceedings on the second trust deed and reacquired the property by making a bid equal to the unpaid debt securing the second, including interest, costs, fees, and other expenses of foreclosure.
The primary issue on appeal is whether appellants can pursue a claim for pre-foreclosure damage to the property. The court held no, based on the credit bid rule, which provides that: when the lienholder obtains a property at a foreclosure sale by making a full credit bid — bidding an amount equal to the unpaid debt, including interest, costs, fees, and other expenses of foreclosure – ‘it is precluded for purposes of collecting its debt from later claiming that the property was actually worth less than the bid.’” Najah v. Scottsdale Insurance Company – filed September 30, 2014, Second District.
The bottom line: lenders should inspect the property before foreclosure for damage and potential insurance claim. Make the claim before foreclosing; ask insurer to waive the credit bid; and consider reducing the amount of the credit bid at foreclosure by the amount of loss.
Also, lenders should also carefully consider whether there is any title insurance claim before any credit bid. The title industry has used the full credit bid defense for many years. If the lender can calculate the title loss the way to foreclose is to discount the credit bid to take into account the loss anticipated by the title defect. It might be warranted to announce at the foreclosure sale that there exists a title impediment or title claim pending in order to avoid a problem later.
Please contact us if you have further questions about this case. (Thanks to Ken Dzien and Paul O’Rourk, Esq. for their thoughts.)