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Not All Deed of Trust Attorney Fee Clauses are Created Equal

Lenders who prevail on claims arising from a deed of trust can always recover their attorney fees from the losing party as long as the deed of trust says something about fee recovery, right?

It’s not that simple.

The “American Rule”

When it comes to attorney fee recovery, California follows the “American Rule,” under which parties to litigation must pay their own attorney fees unless a contract or statute says otherwise.

Many contracts, including deeds of trust, contain some form of attorney fee clause.

Not All Attorney Fee Clauses are the Same

A typical “prevailing party” attorney fee clause will say something like: “The parties agree that in the event of any litigation arising from this agreement, or to enforce or interpret the terms of this agreement, the prevailing party shall be entitled to recover their attorney fees.”

Those clauses are routinely enforced by the courts.  If there is litigation between a lender and borrower under a deed of trust containing that type of clause, the court will normally order the losing party to pay the prevailing party’s attorney fees.  This is accomplished by a motion for attorney fees, which is filed after entry of judgment.  An order granting an award of attorney fees is generally enforceable as a separate obligation.

However, deeds of trust sometimes include a different type of attorney fee clause, which entitles the lender to take action to “protect” its lien or the property, and to recover the fees expended as part of the debt.

As illustrated by two recent Court of Appeal opinions from California’s Second District — Chacker v. JPMorgan Chase Bank, N.A. and Hart v. Clear Recon Corp. — the language used in an attorney fee clause can make a big difference.

The clause at issue in Chacker and Hart

In both the Chacker and Hart cases, the deed of trust at issue did not contain a typical, broad attorney fee clause.  Instead, the deed of trust only contained a “protection of lender’s interest in the property” type of clause.

The clause in the deed of trust (identical in each case) provided that if the borrower failed to perform or abandoned the property, or if there was a legal proceeding (such as bankruptcy, condemnation, or competing lien claim) that could affect the lender’s lien, then the lender “may do and pay for whatever is reasonable and appropriate to protect Lender’s interest in the Property….”  The clause went on to state that any amounts expended by the lender to protect its interests in the property “shall become additional debt of Borrower secured by this Security Instrument.”

In both cases, the lender prevailed on claims that involved the deed of trust.  In Chacker, the lender prevailed on its demurrer to the borrower’s lawsuit seeking to halt an impending foreclosure.  In Hart, the lender prevailed on its motion for summary judgment against a wrongful foreclosure claim filed by parties claiming an interest in the property, but who were not signatories on the deed of trust.

In both cases, after prevailing in court the lender filed a motion for an award of attorney fees against the losing party.

The Court of Appeal’s Opinions

In both the Chacker and Hart opinions, the Court of Appeal rejected the lender’s entitlement to an award of fees against the losing party.

The courts held that the clause on which the lenders relied were not the typical “prevailing party” type of clause, but rather a “protection of lender’s interest” clause.  Under the language of the clause, the lender could add the fees expended to the secured debt, but could not obtain an independently enforceable award of fees against the losing party.

As stated by the Hart opinion:

The paragraph allows the lender to take numerous actions, including incurring attorney’s fees, to protect its interest.  It then provides … that ‘any amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument.’  This is not a provision that attorney’s fees ‘shall be awarded’; it is, instead, a provision that attorney’s fees, like any other expenses the lender may incur to protect its interest, will be added to the secured debt.

Lesson

Deeds of trust usually contain an attorney fee provision of one type or another, but the specific language used can have a substantial impact on the lender’s ability to recover fees.

With a typical “prevailing party” attorney fee clause, a court will usually not hesitate to enter an independently enforceable order requiring the losing party to pay the prevailing party’s attorney fees.

But with a more limited “protection of lender’s interest” clause, any attorney fees expended by the lender in litigation will merely get tacked onto the secured debt — meaning collection efforts are subject to California’s borrower-friendly anti-deficiency restrictions.

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