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PAYKAR CONSTRUCTION, INC. v. BEDROSIAN:

 By: Steven B. Haley, Esq.

 In the case of Paykar Construction, Inc. v. Bedrosian (4/27/99, No. B119427), the California Court of Appeal (2nd Dist., Div. 4) has ruled that, following a sheriff's sale in judicial foreclosure, the three-month period within which to file the motion to determine the fair market value of the property for deficiency judgment purposes begins on the date of the sheriff's sale.

In 1991 G. David Bedrosian and Mardiros Mihranian executed a $190,000 promissory note in favor of Paykar Construction, Inc. ("Paykar"), secured by trust deeds on homes they owned with their wives. The properties which were security were located in La Canada and in Glendale. The Glendale property belonged to the Mihranians. Bedrosian and Mihranian later defaulted on the note. After Paykar elected to declare the entire balance due, Bedrosian and Mihranian executed an amendment to the promissory note providing that they would pay $25,000 (the opinion is unclear as to whether this was for reinstatement purposes or forbearance). The check they gave Paykar bounced.

In 1992 Paykar filed a complaint for judicial foreclosure against the Bedrosians and the Mihranians, and Paykar recorded a lis pendens. The trial court entered a judgment decreeing that the Glendale property securing the promissory note be sold and the proceeds applied to satisfy the amounts due under the note.

The property was sold for $200 on May 21, 1997 (to a third party). The sheriff executed a certificate of sale of the Glendale property on June 2, 1997, and it was recorded in the Los Angeles County Recorderís Office on June 5, 1997.

On September 5, 1997, Paykar filed a motion to determine the fair value of the sold property and for a deficiency judgment. In a series of hearings, Paykar argued that the sale of the Glendale property was not complete until the certificate of sale was recorded, and hence that his motion was filed within the three-month period of § 726(b).

The court denied Paykarís motion, finding that the three-month rule of ß 726(b) runs from the date of sale. Paykar appealed.

The sole issue on appeal was whether the three-month period to file the motion pursuant to Code of Civil Procedure § 726(b) begins when the foreclosure sale occurs or when the certificate of sale is recorded.

The court of appeal concluded that the three-month period begins when the highest bid is made at the sheriffís sale, and affirmed the trial court order.

A judicial foreclosure differs from a nonjudicial foreclosure (i.e., foreclosure by trustee's sale) in that it carries the potential for a deficiency judgment against the trustors. The procedures for judicial foreclosures are set forth in Code of Civil Procedure § 726, and the statute must be strictly complied with in order to properly effect the judicial foreclosure and in order to obtain a deficiency judgment.

In a judicial foreclosure, the trial court determines whether there has been a breach of the underlying obligation and, if so, declares the amount due, determines the personal liability of the trustor(s), and orders the sale of the property at a sheriff's sale. However, the court does not at that time determine the amount of the personal liability of the trustors; that determination is to be made following the sheriff's sale.

Whether a deficiency award will be made against the trustor will not be determined solely by reference to the sales price of the property at the sheriff's sale. Section 726(b) requires that, following the sheriff's sale, a hearing be held to determine the fair value of the property. The difference, if any, between the fair value of the property as of the date of the sheriff's sale (Sao Paolo U.S. Holding Co. v. 816 South Figueroa Co. (1998) 62 Cal.App.4th 1010) and the amount that the court has previously determined to be due on the underlying obligation is the amount of the deficiency.

Section 726(b) provides that the beneficiary must file a motion to determine the fair value of the property, and that this motion must be filed "within three months of the date of the foreclosure sale."

In this case, Paykar filed its motion more than three months after the date of the sheriff's sale, but within three months of the date that the sheriff's sale certificate was recorded. The beneficiary argued that the phrase "within three months of the date of the foreclosure sale" could be interpreted to refer to the date that the sheriff's sale certificate was recorded.

The court of appeal rejected this argument. Section 726(b) makes reference to the "foreclosure sale"; the court interpreted "sale" to mean the formation of a binding contract to sell the property, i.e., "when the hammer falls". The court found one analogy when it noted that the fair market value of the property must be determined as of the date of the sheriff's sale. (Sao Paolo U.S. Holding Co. v. 816 South Figueroa, supra.)

The court found a second analogy in the nonjudicial foreclosure process. The example the court referred to was the relation-back language contained in Civil Code § 2924h(c), which deems a trustee's sale be perfected as of 8 a.m. on the "actual date of sale". The court found that the intent of the legislature was that the nonjudicial foreclosure sale was to be effected at the time of the auction sale to the highest bidder, and that it was reasonable to conclude that the legislature intended that a judicial foreclosure sale, like its cousin, be considered final at the time of the actual sale.

Paykar also argued that the strict interpretation of the term "sale" would result in a windfall to the trustors and create a forfeiture against Paykar. The court of appeal rejected this argument; the policy of the law is to strictly construe the right to a deficiency judgment, and requiring the trustor to file the motion within three months of the sheriff's sale was consistent with that policy.

This case illustrates pointedly that pursuing a judicial foreclosure can be a path through a minefield and that a trustor must proceed diligently and with extreme caution in complying with requirements of Code of Civil Procedure § 726. In this case, in connection with the Glendale property, the beneficiary recovered $200 on a $190,000 promissory note, and lost its right to obtain a deficiency judgment against the Mihranians (they were evidently the deeper financial pocket). All may not be lost for Paykar, however. It may yet retain the right to proceed against Bedrosian and the La Canada property, either through a trustee's sale or through a sheriff's sale pursuant to the judicial foreclosure process. These issues were not addressed by the court of appeal, and remain to be resolved in the event that Paykar pursues Bedrosian.