Karl v. Commonwealth - 70 Cal. Report. 2nd 374(1997)

Lender made claim under their mortgagee policy for a missed federal tax lien. There was no question that the federal tax lien was in first position. The claim was denied because the market value of the property equaled or exceeded the loan indebtedness plus the amount of the missed federal tax lien.

Lender foreclosed and resold the property. The sale price was high enough to (1) recover its indebtedness and (2) satisfy the missed IRS lien. After the sale, Lender made a claim which was comprised of all the selling costs and property carrying costs. The claim was denied because these costs were the ordinary costs a lender incurs when it resells property after foreclosure. Karl claimed that the reasonable costs of selling the property had to be deducted from the market value.

The decision in Karl2 is quoted as follows:

"We affirm our holding in Karl 1 that when an insured lender claims injury from an undisclosed senior lien and has foreclosed upon and acquired title to the security by means of a credit bid, the lender's loss (if any) occurs on the date of the foreclosure sale, and for purposes of determining whether the lender has sustained a loss under a standard lender's title policy the relevant value of the security is the fair market value as of the date of foreclosure. (Karl 1, supra, 20 Cal.App.4th at p. 983, 24 Cal.Reptr. 2nd 912.).

We hold that for purposes of determining whether an acquiring secured lender in possession of the security has sustained a loss under a standard lender's policy following discovery of a senior lien not excepted from coverage, the relevant value of the acquired security is the fair market value as of the date of foreclosure, not the fair market value on the date less the reasonable potential cost of selling the security.

We reject the Karl's contention that investors who purchase notes secured by junior deeds of trust bargain exclusively for repayment of the loan in cash. We agree with Commonwealth that a secured lender typically bargains for repayment of the loan in cash and, in the event of default in breach of the loan agreement, satisfaction through the remedy afforded by the foreclosure process. If foreclosure on the security leads to acquisition of the property by a third party bidder, there is no guarantee the lender will receive consideration equivalent in value to what the lender would have received had the outstanding principal balance and accrued interest owing on the note been paid in full in cash."

Once a lender becomes the owner of the property by successful bid at the foreclosure sale, said lender is burdened with the ordinary costs of selling the property. This lender believed that the seller's costs of sale, which included a hefty real estate commission, should be deducted from their sale price. The California court’s position is that under a standard ALTA loan policy, the market value or re-sale price of the collateral should not be reduced by the seller's closing costs.