The recent decision in Fait v. New Faze Development, Inc. gives holders of real estate notes a green light to pursue claims for ‘waste’ if an owner devalues the property, even if such conduct does not meet traditional notions of ‘bad faith’.
In this case, the purchaser demolished a building on the property in advance of a new development. The owner was then unable to complete the new development and defaulted on the note secured by a deed of trust on the real estate. The holder of the note and deed of trust bought the property at the foreclosure sale for less than was owed on the property.
In many situations, due to the anti-deficiency statutes (Code Civ. Proc.,1 §§ 580b, 580d), the note holder would be prohibited from suing the borrower for more than the holder recovered from foreclosure, even if the property was sold for less than the amount due on the note.
Nonetheless, Fait (the note holder) sued New Faze Development under a ‘waste’ theory based on New Faze’s demolition of the building, seeking as damages the loss of value in the property that resulted from the destruction of the building.
The trial court sided with New Faze, granting summary judgment, holding that New Faze was not liable for waste because the demolition was not carried out in bad faith, but was done to make way for new development.
On appeal, the Court reversed the trial court’s decision, following the precedent set by Cornelison v. Kornbluth, 15 Cal.3d 590 (1975), reasoning that while the Supreme Court in Cornelison limited actions for waste following a foreclosure sale under a deed of trust securing a purchase money note to “bad faith” waste, the court defined “bad faith” waste as any waste that is not committed as a result of the economic pressures of a market downturn.
In other words, the Court found that it is no defense to an action for waste based on the demolition of a building to simply claim that the demolition was part of a good faith attempt to improve the property. The impairment of security that results from the destruction of a building is actionable waste, notwithstanding the anti-deficiency statutes, unless the destruction itself was somehow caused by the economic pressures of a depressed market.
Since the Court found no evidence in the record that the demolition was somehow caused by the economic pressures of a depressed market, then the trial court erred in granting summary judgment to New Faze on a lack of bad faith theory. The appellate court remanded the case to the trial court for further actions consistent with its opinion.
Note holders who find themselves in similar situations should consider pursuing deficiencies unless the decline in property value was solely or primarily caused by the economic pressures of a depressed market.
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 Fait v. New Faze Development, Inc., C067630 (California Court of Appeals, Third District, Sacramento June 27, 2012).