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Federal Court Holds That There Is Still a Difference Between a Note and a Mortgage

Construction & Contractor Disputes, Creditor-Side Bankruptcy, Foreclosure Litigation, and Mortgage & Lending Law by Peter N. Brewer, Esq.

Although most people in California refer to a loan secured by a house as a mortgage, the legally accurate terminology is a promissory note secured by a deed of trust.  There are two different theories for these loans.  Some states, such as Massachusetts, subscribe to a lien theory where the loan is actually known as a mortgage and acts as a lien against the property.  Under this theory, there are only two parties involved, the lender and the borrower, and the borrower retains title to the property.

In other states, such as California, the prevailing theory is the title theory where the borrower gives a deed of trust to a third party.  Under this theory, there is a lender, a borrower, and someone known as the trustee.  The trustee holds conditional title to the property and is the party that either forecloses on the property if there is a default, or re-conveys the property back to the borrower if the loan is paid in full.

The reason behind these differences is based on a long line of cases and laws where lenders in title states would have an easier time foreclosing and taking possession of the property.  However, as the legal theories evolved, the distinctions between the two have faded whereby almost all of the rights under title theory were granted to lenders in lien theory states.

Recently though, the Southern District Court of California held that there is still a distinction between the two.  In U.S. Bank v. Salazar, the court held that a California law stating that the only party who can foreclose on a mortgage is the beneficiary or its assignees only applies to a mortgage and not a deed of trust.  A beneficiary is a party who is entitled to receive payments on the loan and an assignee is an entity of the beneficiary’s choosing that is vested with the right to foreclose on the property.

In that case, U.S. Bank foreclosed on the property owned by Mr. Salazar.  After foreclosing, U.S. Bank moved to evict Mr. Salazar from the property.  During the eviction proceedings Mr. Salazar filed for bankruptcy protection.  To continue with the eviction U.S. Bank petitioned the bankruptcy court for relief from stay.  At that hearing the bankruptcy court denied the motion for relief from stay finding that Mr. Salazar had made a case that the foreclosure sale was void.  U.S. Bank appealed the decision and the appellate court reversed the bankruptcy court’s decision and found that the law the bankruptcy court relied on did not apply.  In holding that the law did not apply, the court determined that the lender and Mortgage Electronic Registration Systems (“MERS”) have the power to foreclose on the Property regardless of whether an assignment of the deed of trust was recorded.  The court reversed the bankruptcy court’s ruling that the foreclosure sale was void due to the failure of the lender to comply with California law.

While most legal professionals will understand that when people say mortgage in California, they really mean deed of trust, there are still important differences between the two that create different rights and obligations.  If you have any questions or have any issues related to your deed of trust, please do not hesitate to set up an appointment with us.  Contact Brewer Offord & Pedersen LLP at (650) 327-2900, or send one of our attorneys an e-mail by visiting our website at


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