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After the Foreclosure, Lender Recovers Against Borrower on Court’s Expanded Definition of “Bad Faith” Waste

Foreclosure and Legal Update by Peter N. Brewer, Esq.

On June 27, 2012, the Third District Appellate created a new way for lenders to recover on loans after a nonjudicial foreclosure. In Fait v. New Faze Development, the court found that while the antideficiency statutes normally prohibit a lender from recovering on a loan after a nonjudicial foreclosure, the lender could recover if “bad faith” waste was committed by the borrower. While this had always been the law, the Court took the bad faith exception further by deciding that bad faith waste meant any waste that was not a result of economic pressures from a market downturn. This means that even if the borrower is demolishing the building to build a new building, that could be considered bad faith liability for the borrower.

While non-judicial foreclosure sales normally leave lenders without any further recourse against borrowers, California law has allowed post-foreclosure recovery against a borrower in some limited circumstances. Notably, if the borrower commits bad faith waste, the lender can recover from the damages suffered from that waste. For example, if a borrower intentionally damaged the property, that would be considered bad faith waste.

In Fait, the borrower purchased a piece of property to redevelop into a mixed commercial use property. The borrower evicted the two tenants and demolished the buildings. After demolishing the buildings, the borrower defaulted and the lender foreclosed on the property. Fait, the lender, then sued the borrower alleging that New Faze committed bad faith waste by evicting the tenants and demolishing the building. New Faze argued that it had acted in good
faith in an attempt to improve the property.

The trial court in Fait agreed with the borrower and found that bad faith waste required a showing of bad faith by the borrower. Here, the borrower had demonstrated that it had acted in good faith on a plan to redevelop the property. However, on appeal, the court held that even if the borrower acted on good faith and was attempting to improve the property, it could still be found liable for bad faith waste because the borrower’s action was not a result of the bad economy.

Takeaway – If you are a developer, get lender approval for your plans first. This decision may open you up to substantial liability for waste, regardless of your good faith attempts to develop the land. If you are a lender, an expanded definition of “bad faith” may give lenders a remedy against the borrower even post foreclosure.

If you have questions regarding such matters, or if you have any other questions about real estate legal issues, contact the Law Offices of Peter N. Brewer at (650) 327-2900, or visit us on the web at www.BrewerFirm.com.

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