With many properties being valued lower than the balance amount of the loans which they secure, it is critical that every viable avenue of recovery be investigated. Managing Partner Jim Fedalen’s Law360 article, “Don’t Waste ‘Bad Faith Waste’ Claims in Foreclosure Recovery,” addresses why a claim for bad faith waste may be an avenue for recovering losses on property value.
Waste began as a construct of property law, created to ensure that life tenants did not deplete a property of its benefits before the remaindermen were able to exercise their interest in that same property. Through the years, waste came to include either acts of commission or acts of omission. Eventually, the concept of waste incorporated the idea that waste occurs when neglect or overt acts impair the value of the property such that the lender’s security interest is also injured. In 1975, the California Supreme Court created the concept of bad faith waste, defined as waste that was reckless, intentional or malicious.
Milking a property financially for all it is worth by using the revenues from the property for purposes other than those associated with the property and then failing to maintain the property, pay property taxes or otherwise fulfill the obligations of an owner, to the detriment of the lender, will incur costly liability. Anti-deficiency statutes and/or nonrecourse loans will not serve as protections from bad faith waste claims.
However, viable defenses to these claims include: a decline in the real estate market, financial necessity, an act of God, a full-credit bid in a nonjudicial foreclosure sale even if later the property was sold by the lender for less than the debt.