California Appellate Court Holds Mortgage Recorded Simultaneously with HELOC Had Priority and Was Not Entitled to Surplus Funds

The California Court of Appeals recently held that a mortgage (the “Mortgage”) recorded simultaneously with a home equity line of credit (the “HELOC”) had priority and was not entitled to any surplus proceedings from the foreclosure of the HELOC, despite the fact that the HELOC’s instrument number was prior to that of the Mortgage.  See MTC Fin., Inc. v. Nationstar Mortg., 19 Cal. App. 5th 811 (Ct. App. 2018).  There, the borrower obtained two loans from Countrywide, each of which was secured by a deed of trust on the borrower’s property:  the Mortgage, in the amount of $205,080, and the HELOC, in the amount of $15,000.  Both were recorded on the same date and at the same time; however, the recorder’s office indexed them sequentially and assigned the HELOC the first instrument number.  Eventually, the Mortgage was assigned to the defendant in this action, with the HELOC being assigned to the plaintiff.  After the borrower defaulted, plaintiff foreclosed on the HELOC and sold the property, resulting in a $75,000 surplus.  Defendant, among others, claimed entitlement to the surplus based on the fact that the Mortgage’s recorded instrument number came after the HELOC’s.  However, the trial court held that defendant was a senior lienholder whose lien remained on the property but who was not eligible for surplus funds.  It then distributed about $13,000 of the surplus to another lienholder and the remainder to the borrower. 

On appeal, the Court affirmed.  First, it held that “[w]hen a junior lienholder forecloses on a second deed of trust at a nonjudicial trustee’s sale, the senior lienholder is not entitled to any proceeds from the sale because the property is purchased at the sale subject to the first deed of trust.”  Then, it held that if two deeds of trust are executed at the same time and recorded simultaneously, “the order in which they are indexed is not determinative of priority.”  Accordingly, the Court held that it should rely on the apparent intent of the parties to determine priority.  Because Countrywide was the lender on both loans, “the reasonable expectation is that it would secure the much larger mortgage loan in the primary position. . . . This understanding is further supported by reference to the usual understanding of the relationship between a mortgage and an equity line of credit.”  Finally, the Court held that defendant will not be injured by the ruling because there was no evidence that the purchaser of the property is a bona fide purchaser for value and, as such, the Mortgage remained on the property.  However, “[t]he purchaser is not a party to these proceedings so . . . the trial court could not and we do not make a ruling regarding the status of his title or any claims or defenses he may have vis-à-vis [defendant]. Had [defendant] feared inconsistent rulings, it could have joined the purchaser in these proceedings but it failed to do so.”

For a copy of the decision, please contact Michael O’Donnell at, Michael Crowley at, or Dylan Goetsch at