Wednesday, May 13, 2020

Zieve, Brodnax & Steele LLP v. Dhindsa (Cal. Ct. App. - May 13, 2020)

On one level, of course Justice Franson is right in this opinion.  You've got a property owned by multiple people on which there's a first mortgage (taken by all the owners) and then you've got a second mortgage that was taken out on the property by only 75% of the owners.  You can do that -- the 75% owners can (obviously) only encumber their share of the property, the encumber it they have.

Eventually the property goes into foreclosure and gets sold, and the proceeds are enough to pay off the first mortgage entirely (so that lender gets its money) but aren't enough to pay off the second.  So which of the following do you do:

(1) Give all the remaining money to the lender on the second mortgage.  Or
(2) Give 75% of the remaining money to that lender and 25% to the remaining owners who aren't liable for the second mortgage.

The answer, to me, is obviously (2).  My co-owners can't encumber my share.  So I don't care how much my idiot co-owners (or their lender) decided to encumber their portion of the property.  I'm still entitled to my 25 percent.  So if the property's worth $100,000, my share's worth $25,000, and that's how much I'm going to get once it's sold.  If my co-owners took out a $500,000 loan (or whatever) on their share, that's between them and their lender.  I get my $25,000, and the lender gets $75,000.  That is clearly the right result.  It's the lender's bad -- not my bad -- for loaning out more than the relevant share of the property was worth.

And that's got to be the law.  Otherwise, a 1% owner of a piece of property worth $1 million (so his share's only worth $10,000) could take out a $1 million loan all for himself and, boom, suddenly my 99 percent is worthless because in foreclosure the lender gets all $1 million and I get nothing.  Not equitable, and not the law.  As the Court of Appeal entirely correctly holds here.

All of this seems so obvious to me that I wondered how the trial court could possibly have gotten it wrong.  But then I read the facts, and understand (I think) why the trial court held the way it did, notwithstanding the fact that its approach remains wrong.

The slight complexity arises because the 25 percent "owner" here came to his share in an unusual (and arguably inequitable) way.  It's not that the 75% owners took out a loan totally unrelated to the 25% owner.  It's that the 75% owner (and the lender) thought they were 100% owners.  Here, the property was originally purchased by Father and Brother, 50/50.  But, later, Brother gave his 50% of the property to Father and Son equally -- which means Father then owned 75% and Son owned 25%. Son's at that point two years old.  Then, eight years later, Father and Son give back the whole of the property (all 100%) to Brother.  And, six years later, Brother -- who now owns 100% of the property -- takes out the second mortgage.

Except for one thing.  Son was only ten years old when he transferred the property back to Brother (his uncle).  But minors can't do that.  Not without jumping through some hoops that didn't transpire here.

Which is why Son owns 25% of the property.  Which, in turn, means that -- pursuant to the general rule -- Son gets his 25% of the remaining proceeds.  Even though that screws the lender a bit, who thought that Brother owned the whole thing (pursuant to the transfer).  And serves to benefit Son (and, perhaps derivatively, Father and Uncle) inequitably.

And that's why I think the trial court wasn't so keen on giving the 25% "owner" his share here.  Admittedly, I'm reading between the lines.  But I think accurately.

The Court of Appeal nonetheless correctly applies the actual law.  Son's a 25% owner.  So he gets his 25% of the remaining money.  That's hoses the lender a little bit, sure.  But next time it'll presumably pay a bit more attention to the preceding transactions involving the property to make sure that they don't involve a minor.

Right rule.