Court Clarifies Value of “Performance Deed of Trust” in Foreclosure
This post was primarily authored by Daniel Zarchy, a “Rising Star” for seven of the past eight years who is a litigation attorney at Patton Sullivan Brodehl LLP.
The California Court of Appeal recently clarified how courts should value a Performance Deed of Trust (PDOT) in foreclosure, and affirmed that the performance obligations included in the deed of trust survive beyond foreclosure.
Background
In Majestic Asset Management LLC v. The Colony at California Oaks Homeowners Association, decided December 16, 2024, the company Majestic Asset Management, LLC (Majestic) purchased a golf course connected to a gated community in Murrieta, California. When Majestic purchased the golf course, it assumed an obligation to maintain the golf course in good condition, including watering portions of the course adjacent to the gated community. These obligations were spelled out in a PDOT that Majestic executed in favor of the homeowners association (HOA) for the community after it purchased the golf course.
However, Majestic failed to maintain the course according to its maintenance obligations. In the following years, Majestic and the HOA engaged in substantial litigation, resulting in a court-ordered foreclosure sale of the golf course based on Majestic’s failure to perform its duties under the PDOT.
Foreclosure Proceedings
The difficulty came in determining the value of the PDOT during foreclosure proceedings. The HOA argued that the PDOT should be valued over $2.7 million, which represented the estimated cost to bring the golf course back into its proper condition plus the present value cost of three years of professional management fees to make the golf course profitable.
Majestic argued that the PDOT should be valued at zero, because it was impossible based on market conditions for any operator to perform the maintenance obligations and turn a profit. Majestic also argued that after the foreclosure sale, the purchaser of the golf course would not be subject to the maintenance obligations, because the PDOT would be extinguished by the foreclosure. The trial court agreed with the HOA and set the value of the PDOT at $2,748,434.37, and held that the maintenance obligations would survive the foreclosure.
Appeal
On appeal, Majestic argued that the trial court erred in valuing the PDOT according to the “cost of repair,” which is a tort law remedy, given that foreclosure was based on the failure to perform a contractual duty. The Court of Appeal agreed that the trial court erred in applying tort law rather than contract law, but held that the trial court reached the correct result nonetheless because what it referred to as “cost of repair” also constituted the reasonable value of performance of the maintenance obligations that Majestic failed to perform, and such a valuation would be the correct measure under a breach of contract analysis.
However, the Court of Appeal held that the trial court should not have included the present value of three years’ worth of professional management of the golf course because Majestic was not obligated under the PDOT to make the golf course profitable, self-sustaining, or professionally managed. Rather, the HOA was only entitled to performance of the maintenance obligations in the PDOT, and therefore the value of the security interest was limited to the value of those obligations. As a result, the Court reduced the value of the PDOT to $2,503,500.
In addition, the Court held that even if Majestic paid the HOA the value of the PDOT, Majestic would remain bound by the maintenance obligations. The Court held that even if Majestic paid the $2.5 million, that would only constitute partial performance of its duties – up until the date of valuation – and that future duties would remain, making it inappropriate to extinguish the PDOT.
Takeaway
If you are facing a foreclosure proceeding for a performance deed of trust, expect the court to value the lien based on ordinary contract principles. In addition, to the extent the deed requires future action, the obligations might survive foreclosure.