By: STEVEN B. HALEY, ESQ.
ADLESON, HESS & KELLY

An issue that arises from time to time pertains to the practice of some trustees to limit the payment from surplus funds to the beneficiary of a junior deed of trust to the principal and interest outstanding on the junior deed of trust, to the exclusion of additional amounts due for late charges, attorney's fees, foreclosure costs, etc. The question presented is whether or not this practice is consistent with the provisions of Civil Code § 2924j & 2924k.

Civil Code Section 2924k(a)(3) requires that surplus funds be paid to "to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority."

The quoted language from Civil Code Section 2924k(a)(3) does not contain any limitation as to the nature of the balances due on a junior lien. In particular, 2924k(a)(3) does not limit payment of surplus funds to principal and interest due on a junior lien. The language of 2924k(a)(3) refers solely to the "outstanding balance" of the obligation secured by the junior lien. The absence of language of limitation leads supports the conclusion that a claim of a junior lien holder for surplus funds may properly include a claim for not only principal and interest, but also for late charges, attorney's fees, foreclosure costs, advances to the senior lien holder, etc.

Civil Code § 2924j(a)(4)(A) requires that the claimant provide the trustee with a statement under the penalty of perjury setting forth the amount of the claim to the date of the trustee's sale, and § 2924j(a)(4)(B) requires that the claimant provide the trustee with an itemized statement of the principal, interest, and other charges. (Emphasis supplied.)

A trustee that limits its distribution of surplus funds to a junior claimant to principal and interest, and excludes late charges, attorney's fees, advances to the senior lien holder, and foreclosure costs, is ignoring both Civil Code Section 2924k(a)(3), which requires that surplus funds be paid to "to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority," and Civil Code § 2924j(a)(4)(B), which requires that the claimant provide the trustee with an itemized statement of the principal, interest, and other charges.

This does not mean that a trustee holding surplus funds must automatically pay any claims submitted by a purported junior lien holder. The trustee holding the surplus funds must exercise due diligence in performing its required duty of disbursing the surplus funds. This includes requiring the claimants to verify that they are entitled to make the claim for the surplus funds, and requiring the claimants to prove that they are entitled to the amount that they assert is due to them.

For example, in the case of a junior deed of trust, the beneficiary of the junior deed of trust is required to provide the trustee with a statement under penalty of perjury of its right to receive the funds. (Civil Code § 2924j(a)(4).) The trustee can request that the beneficiary of the junior deed of trust verify his status as beneficiary by providing the original promissory note. Regarding the amount claimed due on the junior deed of trust, including "other charges", in most cases this can be verified simply by reference to the promissory note and deed of trust which form the basis for the junior beneficiary's claim, in order to determine whether the note and deed of trust permit the beneficiary to collect amounts in addition to the principal and interest, such as foreclosure fees, late charges, attorneys fees, or advances to senior lienholders.

Is the claimant limited to the amount due as of the date of the trustee's sale? If the answer were in the affirmative, then there would be an anomalous situation where the junior claimant would be denied collection of interest which had accrued after the trustee's sale while the trustee was processing the surplus funds claims. In such a situation, the trustor would collect the funds due to the junior claimant and the junior claimant would have an unsecured claim against the trustor. This result is not consistent with the dictate of Civil Code Section 2924k(a)(3), which requires that surplus funds be paid to "to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority." The more reasoned interpretation is that the junior claimant is entitled to amounts due that have accrued post-trustee's sale, so long as those post-trustee's sale amounts are provided for in the note and deed of trust or the judgment which form the basis for the claim.

A trustee that maintains a blanket policy of paying only principal and interest due on junior liens, to the exclusion of additional charges provided for under the promissory note and deed of trust, does so at its own peril.