Client is 72 and appears to be a widow. She previously operated a business, which closed down in 2006. She borrowed $50K from her friend in 2004 secured by a 2nd mortgage on her residence for the business. Unfortunately, business failed in 2006 and it stopped operating. Client did not pay the monthly payment of $500 monthly plus interest on the $50K. Friend did not collect the monthly installments for several years. This month, client received a recorded notice of default to foreclose her residence, if the $50K was not paid in full in the next 90 days. The notice of default (NOD) is the first step to foreclose the house. It gives homeowners 90 days to pay the default before the foreclosure sale date can be set. The foreclosure sale date cannot be set earlier than 21 days from the expiration of the 90 days from date of recording of the NOD.

Client shows me the NOD and I verify that there is a recording date. The recording date means that this notice has been recorded with the recorder of deeds, and thus the 90 days pre-foreclosure has commenced. Without this date of recording, the foreclosure does not begin. So any other document that you receive that says you are in default on your mortgage and giving you a computation of what you owe is not the formal recorded document required to start the foreclosure process. For instance, you are 3 months in arrears on your mortgage. You receive a letter from the bank entitled default with intent to foreclose. The letter does not have a recording date. Four months from your date of receipt of that letter, can bank foreclose your house? NO, because the official recorded NOD does not exist.

Client says she wants to save her house from foreclosure by the 2nd trust deed holder, her friend who is no longer her friend. Or, let’s just say, her friend wants her house because she did not pay her back the $50K. The problem is that her house is worth $600K. It doesn’t seem fair. Further, client says that there is also a judgment lien of $60K on her house. I ask her, which came first, the $50K second, or the $60K judgment lien. According to her, the judgment lien came later. Therefore the judgment lien is the third lien on her house. She wants to prevent the foreclosure by the 2nd trust deed, and she wants to get rid of and invalidate the judgment lien of $60K. Can she do this?

My first impression was that paying off the $50K while at the same time avoiding the judgment lien of $60K was going to be impossible given the fact that residential values today are sky high. But lo and behold, after determining the current fair market value of the house and what is owed by client on the first mortgage even though she was on loan modified mortgage where $200K was deferred but nevertheless owed, plus the 2nd mortgage of $50K, there was zero equity left to support the judgment lien, meaning on a Chapter 13, a motion to avoid the third lien of $60K while paying off the second of $50K through the chapter 13 plan would be successful indeed. She would not have to pay any part of the $60K judgment lien that would just be invalidated because her plan would be a zero percent plan to unsecured creditors. Upon granting of the motion to avoid the judgment lien, the $60K becomes unsecured, thus it does not have to be paid a single cent.

The only problem is that client’s social security is only $1K a month. However, she says that her son is a doctor and he will help her pay the first mortgage and the plan. So that takes care of the shortage of funds because son can participate as a family contributor to make the plan feasible. Her son takes care of her. That’s good. 

The next client is a California company doing business out of state. It was in the import distribution business, which was good until last year. The company leased a large warehouse out of state. Business became so bad that it could not pay the lease of the warehouse. Company closed its doors recently and stopped doing business. However, it still owed the landlord two years of future lease at $100K a year. So it owed the landlord $200K for next two years lease. Is this correct? Company still owes the future rent of $200K even though it has stopped operating and has moved out of the leased premises. Yes, it is correct because client-company signed a lease contract that is still valid for two more years. Landlord has the right to demand that the future lease of $200K be paid. Nonpayment of the lease is a breach of the lease contract; therefore, landlord can sue client-company for $200K of future lease payments.

Client just received an out of state lawsuit for $200K for unpaid commercial lease. It decides to file for Chapter 7. What happens to the lawsuit for $200K? The lawsuit stops and plaintiff can file a claim in the Chapter 7 case. The Chapter 7 trustee administers the case. If there are assets, the trustee liquidates those assets into cash and the cash is distributed to all creditors of the bankrupt company pro rata. If there are no assets, creditors collect nothing and an order of NO ASSET is entered. With the bankruptcy filing, the out of state lawsuit stops and the landlord is required to file its claim in the bankruptcy. The company bankruptcy does not affect the officers or stockholders in any way. 

Fortunately for the president of the company, he only signed the commercial lease as an officer of the company. He did not execute any personal guaranty of the lease. Best news for him. Landlord cannot sue the president for the $200K as an individual guarantor, therefore, he has no liability whatsoever for the lease. As I said many times before, do not personally guarantee commercial leases or promissory notes of the company, just sign as an officer of the company. This is very important for your financial well being in the future in case your company fails. Your company’s business failure should not affect your personal assets in any way. Follow this principle and never forget it. Otherwise, you will have to see me twice, once for the company bankruptcy and a second time, for the personal bankruptcy.

If you need debt relief, set an appointment to see me. I will analyze your case personally.

“HUMBLE YOURSELVES, THEREFORE, UNDER GOD’S MIGHTY HAND, THAT HE MAY LIFT YOU UP IN DUE TIME.” 1 PETER 5:6

Lawrence B. Yang is a graduate of Georgetown University with a Master’s Degree in Law and specializes in Bankruptcy, Business, Real Estate and Civil Litigation.  He speaks English, Mandarin and Fujian and has successfully represented thousands of clients in California, including companies overseas.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., MAILSTOP 58 BUILDING A-1 SUITE 1125, Alhambra, CA OR at 20274 Carrey Road, Walnut, CA 91789.

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