California Supreme Court Post Foreclosure Ruling May Encourage Bankruptcy Filings

Recent California Supreme Court Case Creates Questions Regarding Bankruptcy After Foreclosure

In a case of local interest, the California Supreme Court has held that a foreclosure purchaser cannot serve a three-day notice to quit on a commercial tenant until the foreclosure Trustee’s Deed is recorded, despite a statute providing that the sale is “deemed perfected” on the sale date if the deed is recorded within 15 days. Dr. Leevil, LLC, vs. Westlake Health Care Center, 2018 Cal. LEXIS 9546(Cal. Dec. 17, 2018).

This case started with a local nursing home operated by a small corporation, Westlake Heath Care Center, which leased space from a corporate landlord which was controlled by the same shareholders. The landlord borrowed money against the property which was secured by a Deed of Trust. The landlord defaulted on the payments and the lender assigned the Deed of Trust to Dr. Leevil, LLC which foreclosed.  Dr. Leevil was also the successful bidder at the Trustee’s sale.

Dr. Leevil served a 3 day notice the day after the sale, relying on Civil Code section 2924h(c) which provides that a Trustee’s sale is deemed final on the actual date of the sale as long as the Trustee’s Deed is recorded within 15 days.

Westlake Health did not move and forty days later, Dr. Leevil brought an unlawful detainer action in Ventura Superior Court.  Judge O’Neil overruled the tenant’s objection and ruled that the Notice to Quit was valid.  

Westlake Heath appealed arguing that the three-day notice was premature and the Court of Appeal upheld the Trial court in an opinion by Justice Tangerang with concurrence of Justices Yegan and Perren. Dr. Leevil, LLC v. Westlake Health Care Center (2017) 9 Cal. App. 5th 450.

Westlake appealed to the California Supreme Court which in December reversed the Court of Appeal holding that a landlord cannot serve a notice to quit until it has perfected title by actually recording the Trustee’s Deed. The Supreme Court held that deemed perfection is not sufficient, the landlord must wait until actual perfection of title before commencing a foreclosure. 

This ruling provides tenants an ability to prolong an eviction after foreclosure by filing for bankruptcy relief during the gap period between the trustee’s sale date and recordation of the Trustee’s Deed.  This could give Debtor’s a longer period of time to occupy the property while the new owner seeks relief from stay. This leverage could help tenants have greater leverage to negotiate terms to stay or simply have more time to move.

One author has suggested that this is the kind of delay and uncertainty was intended to be avoided by the language of Civil Code Section 2914h adopted by the legislature in 1992. See, Schecter, Dan, CLA Business Law Section, Insolvency Law Committee bulletin, March 5, 2019.

This ruling nullifies any retroactive perfection provided by “deemed perfection”. Until the legislature again acts to provide clarification, this ruling will create a gap period of certainty which can be exploited for further delay through bankruptcy filings.