SMN Lo, Inc. v. M & A Enterprises CA4/2

Filed 11/1/21 SMN Lo, Inc. v. M & A Enterprises CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

SMN LO, INC.,

Plaintiff and Respondent, E075136

v. (Super.Ct.No. CIVDS1704874)

M & A ENTERPRISES, LLC, OPINION

Defendant, Cross-complainant and
Appellant;

HANH THI TRAN,

Cross-defendant and Respondent.

APPEAL from the Superior Court of San Bernardino County. Wilfred J.

Schneider, Jr., Judge. Affirmed.

Law Offices of Russell J. Thomulka and Russell J. Thomulka for Defendant,

Cross-complainant and Appellant M & A Enterprises, LLC.

Law Offices of Hector C. Perez and Hector C. Perez for Plaintiff and Respondent

SMN Lo Inc.

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 Law Office of Nam T. Tran and John J. Mendoza for Cross-defendant and

Respondent Hahn Thi Tran.

I. INTRODUCTION

This case involves competing claims of priority among the beneficiaries of several

deeds of trust on a 12-unit apartment building in Ontario (the Ontario property).

Defendant, cross-complainant, and appellant M & A Enterprises, Inc. (M & A) held a

second-position deed of trust, securing a $160,000 note. 1 Plaintiff and respondent SMN

LO, Inc. (SMN), and cross-defendant and respondent, Hanh Thi Tran (Tran),

respectively, held third- and fourth-position deeds of trust, securing notes for $110,000

and $200,000. FCI Lender Services, Inc. (FCI), which is not a party to this action, held

an undisputed first-position deed of trust, securing $725,000.

After Tran’s deed of trust was recorded, M & A recorded a modification of its

second-position deed of trust, increasing the secured debt from $160,000 to $410,000,

making the entire $410,000 debt immediately due and payable and advancing the

maturity date of the $160,000 debt. M & A then commenced nonjudicial foreclosure

proceedings on its original second-position deed of trust, securing $160,000. M & A

paid FCI over $825,000 to pay off the amount secured by FCI’s first-position deed of

trust. M & A also collected rents on the property and paid real property taxes, insurance

premiums, and other expenses associated with the property.

1The stated amounts secured by identified deeds of trust are the original principal
sums and do not include interest or other charges.

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 SMN filed this action shortly after M & A commenced a nonjudicial foreclosure

on its original second-position deed of trust. Pending trial, the court allowed M & A to

proceed with its foreclosure sale but required any sales proceeds above $160,000 to be

held in escrow. Following a bench trial, the court issued a statement of decision and

judgment, placing SMN’s and Tran’s deeds of trust in first and second position,

respectively, senior to all other liens. This made M & A’s deed of trust, and the monies

that M & A paid FCI to pay off FCI’s first deed of trust, junior to SMN’s and Tran’s

deeds of trust. SMN and Tran were also awarded their attorney fees and costs incurred in

this action, if they could show their entitlement to attorney fees based on statute or

contract.

M & A claims that its original second-position deed of trust, securing the

$160,000 sum, plus the amounts M & A paid to FCI to pay off FCI’s first-position deed

of trust (Civ. Code, § 2876), should be deemed senior to SMN’s and Tran’s deeds of

trust. We disagree and affirm the judgment. M & A’s original second-position deed of

trust securing the $160,000 sum, together with the amounts that M & A paid to satisfy the

first-position deed of trust, was equitably placed junior to SMN’s and Tran’s deeds of

trust. As the trial court found and substantial evidence shows, M & A did not show that it

had a “valid lien” against the Ontario property for any amount.

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 II. FACTS AND PROCEDURE

A. The Four Trust Deeds on the Ontario Property

In 2015, Neram Group, Inc. (Neram), owned the Ontario property, then worth

around $1.1 million. In 2015 and 2016, Neram executed four deeds of trust against the

Ontario property, securing notes or debts as follows:

1. FCI’s first-position deed of trust (the First DOT), recorded on August 3, 2015,

securing a $725,000 note to FCI.

2. M & A’s second position deed of trust (the Second DOT), recorded on

September 18, 2015, securing a $160,000 note to M & A. M & A’s note accrued interest

at 12 percent per annum, and required monthly interest-only payments of $1,600,

beginning on October 1, 2015. The note did not state when the unpaid principal was due

and payable. The Second DOT also did not contain a future advance clause; it did not

allow M & A to make additional loans to Neram, which would be secured by the Second

DOT in addition to the $160,000 note. (Oaks v. Weingartner (1951) 105 Cal.App.2d 598,

601-602; Civ. Code, § 2884.)

3. SMN’s third-position deed of trust (the Third DOT), recorded on

September 24, 2015, securing a $110,000 note to SMN. SMN’s note accrued interest at

10 percent per annum and required monthly interest and principal payments of $916.67,

with unpaid principal and interest due in full on March 24, 2016.

4. Tran’s fourth-position deed of trust (the Fourth DOT), recorded on

May 31, 2016, securing a $200,00 note to Tran. Tran’s note accrued interest at

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10 percent per annum, required interest-only monthly payments of $1,666.66, and was

due in full on November 30, 2016.

5. A modification of the Second DOT in favor of M & A, recorded on

October 19, 2016, securing a modified $410,000 debt to M & A, due in full on

November 15, 2015, around 11 months before the modification was recorded (the

modified Second DOT). The modification included a “loan modification agreement” (the

LMA), signed and notarized on November 15, 2015, by and between Neram and M & A.

The LMA stated that it “amend[ed] and supplement[ed]” the Second DOT by

increasing the $160,000 note secured by the Second DOT to $410,000—an increase of

$250,000. The modified $410,000 note accrued interest at 12 percent per annum, and

required monthly principal and interest payments of $4,100.00, but the entire $410,000

balance was due on November 15, 2015, the same date that the $160,000 note was

modified and increased to $410,000.

The LMA further stated that if the $410,000 modified note was not paid in full on

November 15, 2015, interest would accrue on the $410,000 principal balance at

18 percent interest per annum. Thus, the LMA advanced the maturity date of the

$160,000 debt from September 17, 2016, to November 15, 2015, and made the entire

$410,000 modified note immediately due and in default on November 15, 2015.

B. M & A’s Nonjudicial Foreclosure Proceedings Under the Second DOT

On October 20, 2016—the day after the modification of the Second DOT and the

LMA were recorded—M & A caused to be recorded a notice of default and election to

sell under its original Second DOT (the NOD). According to the NOD, $119,491.18 was

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owed to M & A on the original Second DOT as of October 19, 2016. A notice of

trustee’s sale, recorded on February 1, 2017, set a trustee’s sale on March 7, 2017, and

stated that $296,744.07 was the estimated amount then due under the original Second

DOT. The trustee’s sale was postponed to March 28.

C. The Pleadings

1. SMN’s Complaint

On March 20, 2017, SMN filed a verified complaint against M & A and Neram,

alleging a cause of action for fraud and seeking declaratory and injunctive relief.2 SMN

later filed first and second amended verified complaints, naming a third defendant,

County Records Research, Inc. (CRR), the trustee who was to conduct the nonjudicial

foreclosure sale under M & A’s original Second DOT.

SMN’s second amended complaint (the SAC) alleged the following: Around

September 2015, Neram approached SMN for the purpose of obtaining a loan secured by

the Ontario property. At the time, the Ontario property was worth $1.1 million, and

Neram falsely represented to SMN that the Ontario property was encumbered only by the

First DOT for $725,000, recorded on August 3, 2015. Thus, SMN believed that Neram

had $375,000 in “net equity” in the Ontario property.

2 On March 28, 2017, the court granted SMN’s application for a temporary
restraining order, stopping M & A’s foreclosure sale. On April 18, the court denied
SMN’s request for a preliminary injunction restraining the sale and, instead, allowed the
sale to proceed but required any sales proceeds in excess of $160,000 to be held in
escrow. SMN was ordered to post a $25,667.43 bond, representing two years’ interest on
$250,000 at 10 percent per annum.

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 “Unbeknownst” to SMN, when Neram falsely represented that the First DOT was

the only encumbrance on the Ontario property, Neram had already obtained a $160,000

loan from M & A, secured by the Second DOT, recorded on September 18, 2015, with a

maturity date of September 17, 2016. As a result, SMN’s Third DOT, securing its

$110,000 loan, which was recorded on September 24, 2015, was junior to M & A’s

Second DOT.

On November 15, 2015, Neram and M & A entered into the LMA, materially

modifying the terms of the Second DOT by increasing the amount secured by the Second

DOT from $160,000 to $410,000, and advancing the maturity date of the $160,000 debt,

together with the additional $250,000 debt, to November 15, 2015. The LMA was made

without SMN’s knowledge or consent and was not recorded until after SMN “sought to

foreclose” on its Third DOT.

Based on information and belief, the SAC further alleged that Neram and M & A

conspired with each other to defraud SMN of its $110,000 loan by increasing the secured

debt on the Ontario property in positions senior to SMN’s Third DOT to amounts in

excess of the value of the property, thus “destroying” SMN’s security interest in the

property and depriving SMN of its $110,000 loan. The SAC sought a judicial declaration

of the parties’ rights to the Ontario property, including that SMN’s Third DOT was senior

to M & A’s Second DOT. The SAC sought injunctive relief, prohibiting M & A from

foreclosing on the Ontario property, whether by a nonjudicial foreclosure sale or a

judicial foreclosure action.

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 2. Tran’s Complaint in Intervention

In June 2017, Tran moved to intervene in this action by filing her own complaint

for declaratory and injunctive relief against M & A, Neram, and CRR. The motion was

granted.

3. M & A’s Cross-complaint for Judicial Foreclosure

In July 2017, M & A filed a verified cross-complaint for judicial foreclosure,

naming Neram, SMN, and Tran as cross-defendants, alleging that M & A was entitled to

foreclose on the Ontario property, and further alleging that SMN’s Third DOT and Tran’s

Fourth DOT were junior to M & A’s Second DOT. M & A claimed it was owed

$119,491.18 as of October 19, 2016, when the NOD was recorded. But in April 2017,

M & A paid off the entire $725,000 loan secured by the First DOT, by paying FCI

$738,605.02. M & A also claimed it was entitled to recover taxes and insurance

premiums it paid to protect its Second DOT security interest.

D. The Bench Trial

The matter proceeded to a bench trial on November 12 and 13, 2019. SMN, Tran,

and M & A presented evidence.3

1. SMN’s and Tran’s Evidence

In September 2015, Neram’s president, N.A., through a real estate broker, K.N.,

approached SMN for a $110,000 loan, to be secured by the Ontario property. SMN made

3 Before trial, Neram’s and CRR’s defaults were entered on SMN’s complaint,
and Neram’s default was entered on M & A’s cross-complaint.

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the $110,000 loan after SMN’s research showed that the Ontario property was worth

$1.1 million, and there was only one recorded lien on the property for $725,000.

When SMN made the $110,000 loan around September 24, 2015, N.A., through

the real estate broker, K.N., represented to SMN that SMN’s $110,000 deed of trust

would be in second position, behind the $725,000 First DOT. K.N. also told SMN that

the First DOT was not in arrears. N.A. did not tell SMN about M & A’s second DOT,

securing $160,000, which was recorded on September 18. SMN did not obtain title

insurance for its $110,000 loan. Neram did not pay any part of the $110,000 loan and

was in default after it failed to pay the first monthly installment.

Around July 2016, SMN began to foreclose on its $110,000 Third DOT, but SMN

“paused” the foreclosure after it discovered the existence of M & A’s original $160,000

Second DOT. SMN later discovered the modified Second DOT and the LMA shortly

after they were recorded in October 2016. The modified Second DOT “wipe[d] out”

SMN’s Third DOT. That is, after the modification to the Second DOT was recorded,

Neram had insufficient equity in the Ontario property to pay SMN’s $110,000 loan.

SMN did not consent to M & A’s recordation of the modified Second DOT or to the

LMA. M & A also did not ask for SMN’s consent to enter into the LMA or to record the

modified Second DOT. SMN later discovered that M & A had paid off the First DOT.

M & A’s sole member and manager, M.A., testified for SMN, pursuant to

Evidence Code section 776, that M & A made more than five loans to N.A. totaling over

$2 million, for properties other than the Ontario property, between January 2014 and

February 2015. M & A did not transfer any funds to Neram at any time. Instead, the

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$160,000 and $250,000 debts represented part of the over $2 million that M.A. had

previously loaned N.A. “for other properties.”4

M.A. did not understand that the original or the modified Second DOT would

affect the rights of junior lienholders. N.A. “came up with” the $410,000 amount “out of

the blue” because N.A. told M.A. that he wanted to pay M.A. “more.” M.A. also did not

know about the First DOT or how much the Ontario property was worth when he caused

the original and modified Second DOTs to be recorded. Between June 2017 and

November 1, 2019, M.A. received between $8,000 to $9,000 a month in rents from the

Ontario property, pursuant to an assignment of rents from Neram.

Tran testified that she knew N.A. and that he was Neram’s president. Through

K.N., Tran loaned N.A. $200,000 on May 30, 2016, at 10 percent annual interest, secured

by the Fourth DOT on Neram’s Ontario property. The entire $200,000 loan, plus interest,

was due on November 30, 2016, but the loan was never repaid. When she made the loan,

Tran knew about the First, Second, and Third DOTs securing $725,00, $160,000, and

$110,000, respectively.

2. M & A’s Evidence

M.A. testified that he was 84 years old at the time of trial, and he could not recall

some of the details concerning his real estate-related loans and transactions with N.A. and

Neram. M.A. first loaned money to N.A. in 2015. N.A. was supposed to be recording

4 At this point, the court noted, “[I]t’s clear there was never any money
transferred to [Neram]” In response, M & A’s counsel noted, “They’re all [N.A.]
They’re all him”; and the court responded, “These are all corporations, they’re not
[N.A.]”

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deeds of trust securing M.A.’s loans., but M.A. later discovered that N.A. did not record

the deeds of trust.

On September 1, 2015, N.A. acknowledged in writing that he owed M.A.

$2,092,500, and that he, N.A., would secure the debt by giving M.A. or his company,

M & A, deeds of trust on seven real properties that either he, N.A., or his corporate

entities owned, including Neram’s Ontario property. The $160,000 note secured by the

original Second DOT was given to M & A pursuant to N.A.’s agreement to repay M.A.

the $2,092,500 sum.

Between October 2016 and April 2017, M.A. paid off the First DOT. On October

14, 2016, M.A. paid FCI $57,992.90, the amount by which the $725,000 loan secured by

the First DOT was then in arrears. Then, between November 2016 and February 2017,

M.A. paid FCI three monthly payments of $6,639.79 and one payment of $13,946.43 to

keep the $725,000 loan current. Finally, in April 2017, M.A. paid FCI the entire

$733,765.74 balance due on the $725,000 loan, First DOT, pursuant to FCI’s payoff

demand. Thus, between October 2016 and April 2017, M.A. paid FCI a total of

$825,624.44 to pay off the $725,000 loan secured by the First DOT.

In August 2017, M.A. began collecting rents on the Ontario property pursuant to

Neram’s assignment of rents. At the same time, M.A. began paying all of the expenses

associated with the Ontario property, including trash, water, electricity, taxes, building

maintenance and repairs, the rental permit, and evictions. At the time of trial, M.A. was

unsure how much of N.A.’s over $2 million debt to M.A. had been paid. On

November 12, 2019, M & A claimed it was owed a total of $1,576,645.97 on the Ontario

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property, including amounts due on its Second DOT and the amounts it paid on the First

DOT.

E. The Statement of Decision and Judgment

In its statement of decision, the court ruled that M & A’s Second DOT, both as

originally recorded and as modified, lost its priority to SMN’s Second DOT and to Tran’s

Third DOT. Thus, the court ruled that SMN’s “lien of $110,000 and Tran’s lien of

$200,000 are senior to all other liens and shall be considered [first] and [second],

respectively, in order of priority to all other liens,” and it entered judgment in favor of

SMN and Tran on the complaint and cross-complaint.

Relying on Citizens Business Bank v. Gevorgian (2013) 218 Cal.App.4th 602

(Gevorgian) and Gluskin v. Atlantic Savings & Loan Assn. (1973) 32 Cal.App.3d 307

(Gluskin) the court reasoned: “Any modification to a senior mortgage that shortens the

maturity date of the loan or increases the debt is considered a material modification, such

that the senior mortgage will lose its priority to the junior mortgage.”

The court found that the LMA materially modified the $160,000 note and the

original Second DOT by shortening the maturity date of the $160,000 debt and increasing

the debt to $410,000, thus exhausting Neram’s equity in the Ontario property and

rendering SMN’s Third DOT and Tran’s Fourth DOT “worthless.”

The court noted Neram never made any payments on the $160,000 debt, and that

N.A. was already in default on his debts to M.A. at the time of the November 15, 2015

LMA between Neram and M & A. Thus, the LMA “ensure[d]” that Neram would default

on the modified Second DOT. The court found that the LMA was made without SMN’s

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consent, and that SMN would not have consented to the LMA had it known about it. The

original Second DOT did not have a future advance clause, which would have notified

subsequent lien holders, including SMN and Tran, that additional advances to Neram,

made after the original Second DOT was recorded, would be secured by the original

Second DOT. (Oaks v. Weingartner, supra, 105 Cal.App.3d at pp. 601-602.) Thus, any

advances by M & A to Neram after the Second DOT was recorded were not secured by

the Second DOT.

“Moreover,” the court ruled, it “appear[ed]” that M & A had already received its

lien amount on the Ontario property through collecting rents on the Ontario property.

M & A admitted to receiving an assignment of rents for the Ontario property, beginning

in August 2017 and, since that time, M & A had received “$8,000 to $12,000” a month in

rents, but “no other accounting” of rents was offered into evidence. M & A was required

to apply the rents it received to the debt it was owed. (Strutt v. Ontario Sav. & Loan

Assn. (1972) 28 Cal.App.3d 866.)

Thus, the court ruled that M & A failed to meet its burden of showing that it had a

valid lien on the Ontario property—a prerequisite to its claim for judicial foreclosure and

any subsequent deficiency judgment. M & A did not show that it gave “valid

consideration” for its original or modified Second DOT. M & A “was unclear as to how

much money it [was] owed, produced no meaningful accounting records, [did] not offer[]

any accounting records for [its loans]; and, apparently, . . . maintained no records

concerning the collection of rents and the cost associated with maintaining the property.”

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 III. DISCUSSION

M & A does not claim that its modified Second DOT, securing $410,000, should

be deemed senior to SMN’s and Tran’s Third and Fourth DOTs. Rather, M & A claims,

as it did in its cross-complaint and at trial, that its original Second DOT, securing

$160,000 of M.A.’s over $2 million in loans to N.A., together with the over $825,000 that

M & A paid to pay off the First DOT, should be deemed senior to SMN’s Third DOT and

Tran’s Fourth DOT. For reasons we explain, we disagree.

A. Standard of Review

In reviewing a judgment based on a statement of decision following a bench trial,

we resolve any conflicts in the evidence in favor of the trial court’s express and implied

factual findings. (Gevorgian, supra, 218 Cal.App.4th at p. 613.) Questions of law are

reviewed de novo. (Cuillette v. City of Los Angeles (2011) 194 Cal.App.4th 757, 765.)

This case, however, involves mixed questions of law and fact.

“ ‘Mixed questions of law and fact concern the application of the rule to the facts

and the consequent determination whether the rule is satisfied.’ ” (General Mills, Inc. v.

Franchise Tax Bd. (2012) 208 Cal.App.4th 1290, 1302.) “Our standard of review on a

mixed question of fact and law depends on the type of inquiry involved. ‘If the pertinent

inquiry requires application of experience with human affairs, the question is

predominantly factual and its determination is reviewed under the substantial-evidence

test. If, by contrast, the inquiry requires a critical consideration, in a factual context, of

legal principles and their underlying values, the question is predominantly legal and its

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determination is reviewed independently.’ ” (Id. at pp. 1302-1303, quoting Crocker

National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888.)

Here, whether M & A’s original Second DOT securing the $160,000 sum, and the

over $825,000 that M & A paid FCI to pay off the First DOT, should be senior to SMN’s

and Tran’s Third and Fourth DOTs, presents mixed questions of law and fact. We agree

with the trial court’s conclusion that SMN’s and Tran’s DOTs must be senior to M & A’s

unmodified Second DOT, securing the $160,000 sum, together with the monies that

M & A paid FCI to satisfy the First DOT and any overdue taxes that M & A paid on the

Ontario property—even though M & A’s unmodified Second DOT was recorded before

SMN’s and Tran’s DOTs.

B. Applicable Legal Principles

We begin with the principles articulated in Gevorgian and Gluskin, the cases the

trial court relied on in ruling that SMN’s and Tran’s Third and Fourth DOTs were senior

to M & A’s second DOT and the monies M & A paid FCI to pay off the First DOT. The

trial court interpreted Gevorgian and Gluskin as standing for the following proposition:

“Any modification to a senior mortgage that shortens the maturity date of the loan or

increases the debt is considered a material modification, such that the senior mortgage

will lose its priority to the junior mortgage.” As we explain, this proposition overstates

the rule articulated in Gevorgian and Gluskin.

Moreover, in some circumstances, equity requires only that the modified portion

of a senior lien, and not the unmodified portion, will lose priority to junior liens. (Lennar

Northeast Partners v. Buice (1996) 49 Cal.App.4th 1576, 1587-1588 (Lennar).) Here,

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however, we agree with the trial court’s ultimate conclusion that M & A’s entire Second

DOT, including its unmodified portion securing the $160,000 sum, must lose its priority

to SMN’s and Tran’s Third and Fourth DOTs—even though the unmodified Second DOT

securing the $160,000 sum was recorded before SMN’s Third DOT and Tran’s Fourth

DOT.

1. Gevorgian and Gluskin

Gevorgian involved competing claims of lien priority between (1) the seller of real

property, which took back a deed of trust in selling the property to a developer, and

(2) the bank that agreed to finance the development of the property through a

construction loan. (Gevorgian, supra, 218 Cal.App.4th at pp. 605-606.) Pursuant to a

subordination agreement, the seller agreed to subordinate its purchase money deed of

trust to the bank’s deed of trust securing the construction loan—a common practice when

a property is to be developed with a construction loan and is encumbered by a prior,

purchase money deed of trust. (Id. at pp. 607-608, 614; see Civ. Code, § 2898 [A

purchase money deed of trust has priority over other liens on the property, subject to the

operation of the recording laws.].) Unbeknownst to the seller, the bank and the developer

entered into a “side agreement” or letter of understanding (the LOU), which was

materially inconsistent with the terms of the construction loan agreement (the CLA) and

increased the risk that the developer would default in paying the seller’s subordinated

purchase money loan. (Gevorgian, supra, 218 Cal.App.4th at pp. 607-608, 611.)

The CLA placed 21 conditions precedent to each advance of loan funds to the

developer, based on the developer’s submission to the bank of plans, specifications,

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permits, and other requisite approvals for the project. (Gevorgian, supra,

218 Cal.App.4th at p. 608.) The LOU, in contrast, provided for an immediate

disbursement of $2.2 million to the developer, which could be used to pay “existing

liens” on the property. (Id. at pp. 608, 611, 620.) Most significantly, the LOU

“signified” that the developer lacked sufficient capital to develop the property, apart from

the construction loan, and contrary to the seller’s understanding. (Id. at pp. 611, 620-

621.) The seller understood that the developer had been funded with $4.4 million in

capital contributions from its principals, and that none of the construction loan funds

would be used to pay any part of the purchase price or other “existing liens” on the

property. (Id. at pp. 620-621.) But based on the LOU, “the deal was changed” so that

none of the developer’s principals contributed significant capital to the project; two of the

principals financed the purchase of part of the property with loans paid off with the

construction loan; and the third principal contributed no capital. (Id. at p. 620.) Thus, the

LOU increased the risk that the developer would not complete the project and,

accordingly, increased the risk that the developer would default in paying the seller’s

loan. (Id. at pp. 620-621.)

Gevorgian concluded that substantial evidence supported the trial court’s finding

that the LOU made material modifications to the CLA, without the knowledge of the

seller, and that these modifications materially impaired the seller’s security. (Gevorgian,

supra, 218 Cal.App.4th at p. 618.) As a result, the bank’s deed of trust lost its priority

over the seller’s subordinated deed of trust. (Ibid.) In reaching this conclusion,

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Gevorgian relied on principles articulated in several cases, including Gluskin, supra,

32 Cal.App.3d 307. (Gevorgian, at pp. 614-617.)

Gluskin involved a property seller who subordinated its deed of trust to two deeds

of trust in favor of a construction loan lender and expressly waived its right to require the

lender to supervise or control the buyer’s use of the construction loan funds. (Gluskin,

supra, 32 Cal.App.3d at pp. 311-314.) The seller claimed that its subordinated lien was

senior to the lender’s liens because the lender and buyer modified the terms of the

construction loans and, in doing so, materially undermined the value of the seller’s

subordinated lien. (Id. at pp. 311-312.) The buyer defaulted on the construction loans,

and the lender purchased the property at a foreclosure sale. (Id. at p. 312.)

The trial court in Gluskin entered judgment in favor of the lender, and Gluskin

reversed. (Gluskin, supra, 32 Cal.App.3d at pp. 309, 318.) Although Gluskin recognized

that a lender has no general obligation to protect a subordinating seller from the risk of

the buyer’s default, the court pointed out: “[T]his is not to say that a lender and a buyer

can enter into an agreement or a course of conduct between themselves whose result is to

destroy a seller’s interest.” (Id. at p. 315.) Absent the seller’s consent to the agreement

or course of conduct between the lender and the buyer, public policy principles protect

the seller from such agreements or conduct that materially affects the value of the seller’s

lien. (Id. at pp. 314-315.) That is, “a lender and a borrower may not bilaterally make a

material modification in the loan to which the seller has subordinated, without the

knowledge and consent of the seller to that modification, if the modification materially

affects the seller’s rights.” (Id. at p. 314.)

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 Gluskin elaborated: “The absence of malevolent purpose does not itself immunize

the buyer and the lender. If, however innocently, their bilateral agreement or conduct so

modifies the terms of the senior loan that the risk that it will become a subject of default

is materially increased, then the buyer and the lender may subject themselves to liability

to the seller if they proceed without the latter’s consent, and if the seller’s otherwise

junior loan is to be adversely affected.” (Gluskin, supra, 32 Cal.App.3d at p. 315, italics

added.) “If dispute results from an unconsented to modification it is of course a question

of fact whether the modification materially affected the rights of the subordinated seller.”

(Ibid.)

Unlike Gevorgian and Gluskin, this case does not involve a property seller who

took back a purchase money deed of trust from a buyer, and who agreed to subordinate

its purchase money deed of trust to a construction lender’s deed of trust. Moreover,

neither Gevorgian nor Gluskin stands for the general proposition, articulated by the trial

court in its statement of decision, that “[a]ny modification to a senior mortgage that

shortens the maturity date of the loan or increases the debt is considered a material

modification, such that the [entire] senior mortgage will lose its priority to the junior

mortgage.” Lennar is more closely on point and illustrates that, when the modification to

a senior lien does not affect the value of the underlying security, the equities require only

that the modified portion of the senior lien lose its priority.

2. Lennar

Lennar involved competing claims of lien priority between two “hard money

lenders.” (Lennar, supra, 49 Cal.App.4th at pp. 1587-1588.) The principal issue in

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Lennar was whether material modifications to a senior lien, which significantly increased

the amount of the secured debt and the interest rate on the debt, meant that the entire

senior lien had to be equitably subordinated to a junior lien. (Lennar, supra,

49 Cal.App.4th at pp. 1584-1585.) The trial court in Lennar relied on Gluskin in ruling

that the modifications to the senior lien resulted in the loss of priority of the entire senior

lien to the junior lien. (Id. at p. 1585.) But as the Lennar court pointed out, “the Gluskin

court did not specify the liability the buyer and the lender face in making a modification

without consent of the subordinating seller, [although] the case has been interpreted to

permit the loss of the lender’s [entire] lien priority.” (Id. at pp. 1586-1587.)

The Lennar court ultimately concluded that the equities in the case before it did

not require the loss of priority of the entire senior lien; rather, the impairment of the

junior lienholder’s rights could be “fully eliminated” by denying priority only to the

modified portion of the senior lien. (Lennar, supra, 49 Cal.App.4th at p. 1588.) Lennar

noted that, in contrast to Gluskin, the modification to the senior lien “had no effect on the

value of the underlying security.” (Lennar, supra, 49 Cal.App.4th at p. 1588.)

Lennar distinguished cases involving a subordinating seller, including Gluskin:

“When the junior lienholder is a subordinating seller, equity may require a different

result. As the Gluskin court noted, a subordinating seller is in a particularly vulnerable

position. By subordinating the purchase money deed of trust to that of the construction

lender, the seller must rely that proceeds from the construction loan will properly be used

to enhance the value of the property, for only then can the seller be assured the property

will be adequate security for the purchase loan and the construction loan.” (Lennar,

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supra, 49 Cal.App.4th at 1588.) In addition, the subordinating seller in Gluskin was left

with “worthless security,” following the material modifications to the construction loans.

(Lennar, at pp. 1588-1589.) Thus, in Gluskin, “subordinating the entire lien of the

construction lender to those of the existing juniors [was] fair and reasonable.” (Lennar,

at p. 1589.)

Lennar quoted from a New York case, which articulated “[t]he rationale for

deciding when to subordinate only the modification and when the entire lien loses [its]

priority”: “ ‘ It is well established that while a senior mortgagee can enter into an

agreement with the mortgagor modifying the terms of the underlying note or mortgage

without first having to notify any junior lienors or to obtain their consent, if the

modification is such that it prejudices the rights of the junior lienors or impairs the

security, their consent is required [citations]. Failure to obtain the consent in these cases

results in the modification being ineffective as to the junior lienors [citation] and the

senior lienor relinquishing to the junior lienors its priority with respect to the modified

terms [citations]. While this sanction ordinarily creates only the partial loss of priority

noted above, in situations where the senior lienor’s actions in modifying the note or

mortgage have substantially impaired the junior lienors’ security interest or effectively

destroyed their equity, courts have indicated an inclination to wholly divest the senior

lien of its priority and to elevate the junior liens to a position of superiority [citation].’ ”

(Lennar, supra, 49 Cal.App.4th at p. 1589, quoting Shultis v. Woodstock Land Dev.

Assoc. (1993) 188 A.D. 2d 234, 236-237.)

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C. Analysis

With these governing legal principles in mind, we turn to M & A’s claim that only

the modified portion of its Second DOT—the portion securing the additional $250,000

sum, but not the original Second DOT securing the original $160,000 sum—should have

been subordinated to SMN’s and Tran’s DOTs. We conclude M & A’s modified Second

DOT, securing the $160,000 sum, was properly subordinated to SMN’s and Tran’s

DOTs, along with the over $825,000 that M & A paid to satisfy FCI’s First DOT, and any

overdue taxes that M & A paid on the Ontario property. 5

Our conclusion is based on the trial court’s factual findings concerning the origins

of the $160,000 debt secured by the original Second DOT, and the substantial evidence

supporting these findings. Most significantly, the court found that M & A failed to show

that it had a “valid lien” on the Ontario property. As the court pointed out, M & A was

“unclear as to how much money it was owed, produced no meaningful accounting

records, has not offered any accounting records for the amounts it lent to the borrower;

and, apparently, has maintained no records concerning the collection of rents and the cost

associated with maintaining the property.”

5 Civil Code section 2876 provides: Where the holder of a junior deed of trust is
compelled to satisfy a prior deed of trust to protect the junior deed of trust, the amount so
paid becomes part of the indebtedness secured by the junior deed of trust. (Civ. Code,
§ 2876; United Sav. & Loan Assn. v. Hoffman (1973) 30 Cal.App.3d 306, 313.) The
statute allows a junior lienholder, who is compelled to satisfy a prior lien in order to
protect the junior lien, to add the amount so paid to the amount secured by the junior lien
and “to enforce both together.” (Windt v. Covert (1907) 152 Cal. 350, 352-353.) The
statute also allows a mortgagee or a beneficiary under a deed of trust to pay taxes due on
a property, if the mortgagor or trustor has failed to pay them, and to add the taxes paid to
the secured debt. (Security-First Nat’l Bank v. Lamb (1931) 212 Cal. 64, 68-69.)

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 To be sure, on September 1, 2015, Neram’s principal, N.A., confirmed in writing

to M.A. that he, N.A., owed M.A. $2,092,500, and M.A. testified that M & A was given

the original Second DOT, securing the $160,000 sum, to secure part of the $2,902,500

debt.

But M.A. did not know how much of the $2,092,500 debt had been repaid to him,

or to M & A, at the time of trial. M.A. also testified that he was given other deeds of

trust on other properties to secure other portions of the $2,092,500 sum, that N.A. paid

“several of the smaller” secured portions of the $2,092,500 sum, and that M.A. foreclosed

on and later sold some of the other properties. But M & A offered no accounting of the

$2,092,500 debt, including how much of it had been repaid to M.A. or to M & A. M & A

also offered no accounting of the rents it received from the Ontario property. As the

court noted, any rents M & A received from the Ontario property were required to be

credited against M & A’s Second DOT. (See Strutt v. Ontario Sav. & Loan Assn., supra,

28 Cal.App.3d at p. 880.)

The court found it “appear[ed]” that M & A had received its “lien amount,”

through its collection of rents on the Ontario property. Substantial evidence shows that

M & A received at least the $160,000 sum through its rent collections. M.A. testified

that, between June 2017 and November 1, 2019, a period of around 29 months, M & A

received $8,000 to $9,000 a month in rents from the Ontario property. 6 If M & A

received $8,000 in rents for 29 months, then M & A received $232,000 in rents from the

6The court’s statement of decision erroneously states that M & A received $8,000
to $12,000 a month in rents.

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Ontario property ($8,000 x 29 = $232,000). And, although M.A. testified that M & A

paid all of the expenses associated with the Ontario property, including overdue taxes,

M & A offered no accounting of the expenses it paid or the net rental income it received,

on the Ontario property.

In other circumstances, we might agree with M & A that only the modified portion

of its Second DOT, securing the $250,000 sum, should be subordinated to SMN’s and

Tran’s later-recorded DOTs. (Cf. Lennar, supra, 49 Cal.App.4th at p. 1588.) There is no

evidence that M & A’s original Second DOT did anything that adversely affected the

value of the Ontario property or the value of SMN’s and Tran’s DOTs. (Ibid.) In

addition, SMN and Tran had constructive notice of M & A’s original Second DOT,

securing the $160,000 sum, because the original Second DOT was recorded before

SMN’s and Tran’s DOTs were recorded. (See Thaler v. Household Finance Corp.

(2000) 80 Cal.App.4th 1093, 1099.) Tran admitted that she knew about the First, the

original Second, and the Third DOTs when she loaned Neram the $200,000 pursuant to

the Fourth DOT. The trial court’s reliance on Gevorgian and Gluskin was also

misplaced. (See Lennar, at pp. 1588-1589.)

But as we have explained, the court found, and substantial evidence shows, that

M & A failed to show that its original Second DOT secured a “valid lien” on the property

for $160,000. This was a failure of proof on M & A’s part. It means that M & A did not

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prove that it had a valid DOT, securing the $160,000 sum, to place senior to SMN’s and

Tran’s DOTs. 7

IV. DISPOSITION

The judgment is affirmed. SMN and Tran shall recover their costs on appeal.

(Cal. Rules of Court, rule 8.278.)

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

FIELDS
J.
We concur:

RAMIREZ
P. J.

MENETREZ
J.

7 We observe that the judgment placing SMN’s and Tran’s DOTs senior to
M & A’s Second DOT, as originally recorded and as modified, does not necessarily leave
M & A without recourse against the Ontario property for the recovery of the amounts
secured by its original or its modified Second DOT, the over $825,000 that M & A paid
to satisfy the First DOT, and for any overdue taxes that M & A paid on the Ontario
property. The judgment only means that M & A may collect these sums only to the
extent that the value of the Ontario property exceeds the amounts due under SMN’s and
Tran’s DOTs.

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