Weird California loan enforcement issues

When a lender needs to enforce a loan secured by California real property, there are several issues that may need to be addressed.  Some of them come up as a result of the California one-action and antideficiency rules which I’ve been blogging about for a while.  Some are just created by state law.  Some arise from the types of deals done here.  Here is a non-exhaustive list of some odd issues that sometimes need to be considered by lenders and their counsel:Letters of credit:  It’s pretty clear that letters of credit are not generally subject to the antideficiency issues described earlier in this blog.  Generally, an issuer of a letter of credit that supports a real-estate-secured loan may honor the secured lender’s demand to draw on that letter of credit, and then compel reimbursement from the borrower (or guarantor), without triggering that  borrower’s (or guarantor’s) one-action and antideficiency defenses. Multi-state collateral:  Borrowers facing foreclosure of loans secured by property in several states including California will often seek the antideficiency and one-action protections of California law.  For this reason, it is important to carefully consider the structure of any such loan and how to enforce it — ideally before making such a loan, but at a minimum before taking steps to enforce it.  The law in this area is complex and far beyond the scope of this blog, but requires careful consideration by competent California counsel prior to enforcement.Indian land:  An active local market is that of financing casino developments on Indian lands (lands held by the Bureau of Indian Affairs in trust for certain Native American tribes).  Many of these developments are on land that has little or no innate value.  Typically, these loans are collateralized by a combination of revenues from the tribes’ casinos and leasehold mortgages secured by long term leases of tribal lands to tribal development companies (because the tribes cannot directly mortgage their interests in their lands).   Transactions involving tribal lands tend to be complex because the tribes have sovereign immunity and are often reluctant to waive it when doing such deals.  For this reason, many traditional real estate remedies are not available, and enforcement of such loans can be challenging. Coastal land/Tidelands trust lands:  An extra layer of regulation is imposed upon coastal land in California.  As a practical matter, this means extra time must be allowed to make or enforce a loan secured by coastal lands.  Lender’s counsel needs to make sure the development securing the loan has been or will be approved by the Coastal Commission or other applicable agency, and that enforcement of the loan will not trigger adverse consequences to the development.Limitations on lenders’ ability to use insurance and condemnation awards:   If a building burns down, many states allow a lender to require that insurance proceeds be used to pay off the loan.  However, even if the deed of trust provides this right to the lender, certain California laws limit a lender’s use of insurance and condemnation awards to pay down principal under a deed of trust if the borrower is not in default under the terms of the loan or if the lender’s security is not impaired. Limitations on late fees:  California law generally provides that liquidated damages provisions in commercial contracts are valid unless the party seeking to invalidate the provisions establishes that they are (were) unreasonable under the circumstances existing at the time the contract was made.  A California court may limit the right of a lender to impose prepayment penalties, late charges and a default rate of interest for defaults by a borrower under certain circumstances, if the court determines that such penalties bear no reasonable relation to the damage suffered by a lender as a result of such delinquencies or defaults.Commercial Code provisions:  If the collateral for a loan consists of both personal property and real property, compliance with the California Commercial Code is required.  Although a discussion of these issues is beyond the scope of this blog posting, a secured party under Division 9 of the Commercial Code must comply with numerous requirements regarding the sale of personal property collateral.Qualification to do business in California:  Regularly lending to California borrowers constitutes doing business in California, although California Corporations Code Section 191(d) states that certain loan servicing activities do not constitute “doing business”.  However, this exclusion does not extend to making the loan itself.  Therefore, a non-California based lender (other than a national bank) needs to qualify to do business in California (which is not terribly hard to do, but requires some filings and payment of fees).  In addition, under some circumstances, a non-California based lender may need to become licensed as a “finance lender” under the California Finance Lenders Law in order to make loans in California or to California borrowers.Attorneys’ fees provisions:  In any action on a contract where such contract specifically provides that attorneys’ fees and costs incurred to enforce the provisions of such contract shall be awarded to one of the parties, a California statute provides that the prevailing party, whether it is the party specified in the contract or not, shall be entitled to reasonable attorneys’ fees in addition to costs and necessary disbursements.  This sometimes gives borrowers leverage in a workout situation.