I'm no expert on foreclosure sales but some research indicates that if a junior lienholder initiates foreclosure, the proceeds of that sale goes to the senior lien holder first and the property goes to whomever was the highest bidder on the sale. And if the bid was not high enough to satisfied both liens and it was a non judicial foreclosure (as most are in CA) there can be no deficiency judgment attached to the foreclosure. The high bidder on the second DOT gets the property for what was bid and the senior lienholder is SOL.
So while llworking is correct that the senior lienholder should have been the high bidder to protect their interest, the first DOT does not survive.
There are plenty of articles on the internet about a second lienholder foreclosing. I won't link to them because they are mostly lawyers and pay for service sites. But for it to make financial sense for a junior lienholder to foreclose there has to be enough equity in the property to satisfy both liens or to pay off the senior lienholder and money left over for the junior lienholder to recover all or part of there money.
From what I read, I say that OP gets the property for what he bid and the first DOT is gone.
In this case if there were a balance of $150,000 on senior and 50,000 on junior the bid was for $100,000, then senior gets the $100,000 and is out $50,000 and junior gets zero.
Simply put, if the sale price is not enough to cover the senior lien then the senior lienholder gets only a portion of what is owed and the junior gets nothing. The senior lien is paid off first even though it was the junior that foreclosed.
From the website of a California attorney’s speaking of California law
the buyer at the foreclosure sale buys “subject to” senior deeds of trust. For that reason, junior lien holders seldom foreclose.
per California law, (cal civil code 2924k) payment received from a sale is paid in order to:
costs and government liens
creditor that filed suit
junior lien holders in order of their priority
and finally if there is any excess: the borrower.
the law does not address senior liens because they are not affected. They simply remain in place.
(a) The trustee, or the clerk of the court upon order to the clerk pursuant to subdivision (d) of Section 2924j, shall distribute the proceeds, or a portion of the proceeds, as the case may be, of the trustee’s sale conducted pursuant to Section 2924h in the following order of priority:
(1) To the costs and expenses of exercising the power of sale and of sale, including the payment of the trustee’s fees and attorney’s fees permitted pursuant to subdivision (b) of Section 2924d and subdivision (b) of this section.
(2) To the payment of the obligations secured by the deed of trust or mortgage which is the subject of the trustee’s sale.
(3) To satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority.
(4) To the trustor or the trustor’s successor in interest. In the event the property is sold or transferred to another, to the vested owner of record at the time of the trustee’s sale.
(b) A trustee may charge costs and expenses incurred for such items as mailing and a reasonable fee for services rendered in connection with the distribution of the proceeds from a trustee’s sale, including, but not limited to, the investigation of priority and validity of claims and the disbursement of funds. If the fee charged for services rendered pursuant to this subdivision does not exceed one hundred dollars ($100), or one hundred twenty-five dollars ($125) where there are obligations specified in paragraph (3) of subdivision (a), the fee is conclusively presumed to be reasonable.
Here is a little story that that touches on your situation
a first lien holder cannot foreclose until there is a legal basis to do so. If the first mortgage is current, until the seconds foreclose and there is a transfer of ownership, unless there is a specific clause in the first lien holders contract the mere delinquency of a junior lien holder triggers a due on call clause, the first simply cannot act until the foreclosure of the junior lien holder. Then due to California law requiring a first lien holder to provide a longer notice than than a junior lien holder, it is quite possible a junior lien holder can sell their paper before a first lien holder can legally do anything. The story linked touches on that point as well.
As stated in that story, the first lien simply remains in place. It does not receive funds from the foreclosure by a junior lien holder nor is the lien stripped from the property. When you purchase property through a junior lien, you buy it subject to the senior liens.
Excellent info llworking, jk and budwad.
I came across similar info myself. The info was mostly on non-reputable/non-technical sites though and it was contrary to my understanding of how trustee's sales functioned in California. This is one of the reasons I started this thread.
After reading what everyone wrote, especially jk and pg, I don't think this is the way it works. In most situations a senior lien holder would be ludicrous to bid on a junior lien foreclosure because if they won they would literally be tossing that money over to the other lien holder for no reason.The senior lien holder should have bid on the property themselves (and been the highest bidder) in order to ensure that their loan was covered
This is essentially what I was told by a friend and retired real estate attorney as well. Thanks for the article. It sounds like the bank ended up working out a deal with them probably selling it for close to market value.
A few people have said you aren't "bidding on the second DOT" at a trustee's sale of a junior lien. What is it you are bidding on then?
Here's a quote from the notice:
Quoting Notice of Trustee's Sale