INTRODUCTION

Defendant and appellant U.S. Bank National Association (U.S. Bank) appeals

from an order granting a preliminary injunction (Code Civ. Proc., § 904.1, subd. (a)(6))

against U.S. Bank’s foreclosure on deeds of trust securing about $40 million in

construction loans made by a predecessor bank, PFF Loan & Trust (PFF), and assumed

by U.S. Bank. Plaintiffs and respondents, La Paz Investments (La Paz) and the Maurer

Development Co. Money Purchase Pension Plan (the Maurer Plan), are junior lienholders

who contend U.S. Bank adversely modified their subordination agreements, causing U.S.

Bank to lose its senior priority.

In an action for declaratory relief, La Paz and the Maurer Plan (collectively

Maurer) seek permanently to enjoin U.S. Bank from foreclosing on real property in

Riverside County and for a declaration that U.S. Bank’s senior deeds of trust on the

properties should not maintain priority over Maurer’s junior deeds. In a separate action,

U.S. Bank seeks to quiet title and declaratory relief.

After a thorough review of the record, we do not find any material modifications

to the subordination agreements which increased the risk of default by Osborne

Development Corporation (Osborne), the obligor under U.S. Bank’s construction loans.

Based on the record before us, U.S. Bank is entitled to maintain its senior priority over

any subordinated junior lienors. Because respondents have not established the likelihood

of success in prevailing in the underlying proceedings, the trial court abused its discretion

in granting the motion for preliminary injunction. We reverse and remand.

2 II

FACTUAL AND PROCEDURAL BACKGROUND

The facts, as alleged in the complaint and set forth in the declarations concerning

the preliminary injunction, are essentially undisputed, except as noted, in the following

summary.

A. 2000 Sale from La Paz to Osborne

In 2000, La Paz sold undeveloped property in Hemet to Osborne Development

Corporation (Osborne). The purchase price included $1.6 million in cash, a note for

another $1.6 million, and a profit participation agreement for 35 percent of the total net

profits in a subsequent sale. As part of the transaction, Osborne and the Maurer Plan

entered into a second profit participation agreement for 15 percent of the total net profits.

B. 2005 Sale from Osborne to Winchester

In 2005, Osborne transferred the property to Osborne Development-Winchester

Ranch, L.P. (Winchester). Winchester assumed all Osborne’s obligations to La Paz and

gave La Paz a note and deed of trust for $7.262 million (the La Paz Note) as a substitute

for the remaining purchase price on the Hemet property. Additionally, Winchester gave

the Maurer Plan a note and deed of trust for $3,112,286 (the Plan Note) as a substitute for

the profit participation agreement.

C. 2006 Sale for Winchester to Osborne

In January 2006, Osborne purchased the Hemet property and assumed the La Paz

note and the Plan Note. The La Paz note and the Plan Note were amended four times.

As of January 1, 2011, the combined amount owing from Osborne to Maurer under the

3 La Paz note and the Plan note was nearly $9 million, with interest continuing to accrue

from that date.

D. The Construction Loans

In February 2006, to facilitate residential development of the Hemet property,

Osborne executed a note and deed of trust for a construction loan from PFF in the amount

of $29.422 million. The Maurer Plan and La Paz executed subordination agreements,

making their liens junior in interest to the construction loan from PFF. A second

construction loan in the amount of $10,589,400, and related subordination agreements,

were executed and recorded in June and July 2007.1

The notes and deeds of trust held by PFF contained provisions for payment to PFF

of the loan principal and interest of 8.5 percent and 9.25 percent, expenditure

advancements or protective advancements, and cross-defaults of any other agreements

between Osborne and PFF. The term “indebtedness,” as used to describe the construction

loans, was defined to include “all renewals of, extensions of, modifications of,

consolidations of, and substitutions” for the subject notes and trust deeds and related

documents.

The express language of the subordination agreements executed by Maurer was as

follows: “. . . in order to induce Lender [PFF] to make the loan above referred to [the

construction loans], it is hereby declared, understood, and agreed as follows:

1 Another construction loan in the amount of $11.488 million, and related subordination agreements, were executed and recorded in November 2006. This loan has been repaid.

4 “(1) That said deed of trust securing said note in favor of Lender [PFF], and any

renewals or extensions thereof, shall unconditionally be and remain at all times a lien or

charge on the property . . . prior and superior to [Maurer’s] lien or charge.” Additionally,

“Beneficiary [Maurer] declares, agrees, and acknowledges that [¶] (a) He consents to and

approves (i) all provisions of the note and deed of trust in favor of Lender [PFF] . . . .”

Thus, according to U.S. Bank and disputed by Maurer, the subordination

agreements provided that Maurer consented to all provisions in PFF’s deeds of trust and

the underlying notes, including the rights (1) to assert “cross-defaults” such that a breach

by Osborne of any of its obligations to PFF could result in the declaration of a default

under the PFF deeds; (2) to recover from Osborne the loan principal plus interest at a

minimum of 8 percent per year or more based on the prime rate; and (3) to make

expenditure advancements to protect the properties, which could be added to the

indebtedness. Maurer further agreed that Osborne’s failure to perform could justify

foreclosure either under existing or later deeds securing the indebtedness.

E. Modifications by U.S. Bank and Nonjudicial Foreclosure

Osborne eventually defaulted on its monthly loan payments. In November 2008,

PFF became defunct and U.S. Bank became its successor in interest on the construction

loans.

In March 2009, in lieu of foreclosure, U.S. Bank and Osborne agreed to

forbearance agreements with various modifications of the construction loans, including

extending the loans’ maturity dates, suspending monthly payments of principal and

interest until maturity, lowering interest rates, and waiving accrued interest and late fees

5 if the principal was timely paid. Additionally, Osborne (1) agreed that five other loans

could cross-default with the loans at issue; (2) provided additional collateral to protect

U.S. Bank in the event of default; and (3) agreed that the deferred lower interest would be

due at maturity at the lower interest rate unless the principal was repaid. Osborne

reiterated U.S. Bank’s right to make protective advances. According to Osborne, Maurer

was informed about the modifications and did not object to them. Maurer disputes this

point.2

In January 2010, U.S. Bank agreed to another one-year extension. As of January

1, 2011, Osborne had failed to repay under the forbearance agreements and related

extensions. U.S. Bank declared a default, based on the failure to repay the construction

loans, not on any other default. U.S. Bank began nonjudicial foreclosure proceedings in

March 2011. Maurer’s legal counsel wrote U.S. Bank objecting to the foreclosure

proceedings. Maurer contends the value of the property is less than the amount owed to

U.S. Bank and a foreclosure by U.S. Bank will wipe out Maurer’s interest.

The parties filed their separate complaints in August 2011. Maurer alleges the

modifications of the construction loans increased the risk of Osborne’s default, causing

U.S. Bank to lose its senior position. U.S. Bank asserts its priority interest is unaffected

by the modifications.

2 The supporting supplemental declaration of Robert Maurer does not appear in the record.

6 F. Preliminary Injunction

On September 20, 2011, Maurer filed a motion for a preliminary injunction.

Maurer claimed the cross-default provisions of the forbearance agreements made

Osborne’s “likelihood of default more probable.” In particular, Maurer complained that

Osborne’s various obligations to PFF were cross-defaulted with one another and that the

obligations of borrowers other than Osborne were also cross-defaulted with the loans

secured by the PFF trust deeds. Maurer next asserted that it was harmed by adding

collateral to secure the bank’s under-secured debt and that Maurer suffered impairment

from deferring interest payments to the end of the extended maturity and by an increase

in the principal balances of the indebtedness.

In its opposition, U.S. Bank argued none of the modifications increased the risk of

Osborne’s default because the risks were consented to in the original PFF deeds. U.S.

Bank also argued that full loss of priority is a limited remedy which is unjustified in this

case.

On October 13, 2011, the court filed its one-sentence written ruling: “Upon

review of the [subordination] agreement, and the timeline of events (based on Plaintiff’s

argument that U.S. Bank took actions that adversely affected Plaintiff’s position and

value of security), the Court finds a basis for the preliminary injunction request.”

III

DISCUSSION

The parties ask this court to decide whether the forbearance agreements and

modifications between PFF and Osborne materially increased the risk of default by

7 Osborne and whether the trial court abused its discretion by issuing a preliminary

injunction against foreclosure. (Gluskin v. Atlantic Savings & Loan

Assn. (1973) 32 Cal.App.3d 307 (Gluskin).) If the loan modifications increased the risk

of default, an alternative question is whether the trial court abused its discretion by

enjoining foreclosure instead of limiting its injunction to foreclosure based upon the

modifications. (Lennar Northeast Partners v. Buice (1996) 49 Cal.App.4th 1576.)

Gluskin held that modifications of senior liens can result in priority loss if they

materially affect the junior’s rights and materially increase the risk of default. (Gluskin,

supra, 32 Cal.App.3d at p. 314.) U.S. Bank asserts a loan modification cannot present an

increased risk of default when it is based on conditions that existed before modification.

U.S. Bank contends that, under the subordination agreements, Maurer consented and

agreed to the terms in PFF’s loans, allowing the lender to declare cross-defaults, to make

protective advances and add them to the indebtedness, and to earn interest. Having

agreed in advance to these rights, Maurer cannot now claim it was impaired by

modifications asserting these rights. In opposition, Maurer strenuously objects to U.S.

Bank’s characterization of the risks posed by the modifications.

A. Standards of Review

In reviewing the trial court’s ruling granting a motion for preliminary injunction

for abuse of discretion, we consider the likelihood of success by the party seeking the

injunction and balance the relative interim harm to the parties. (Butt v. State of

California (1992) 4 Cal.4th 668, 677-678; People ex rel. Gallon v. Acuna (1997) 14

Cal.4th 1090, 1109; Teachers Ins. & Annuity Assn. v. Furlotti (1999) 70 Cal.App.4th

8 1487, 1493.) Factual determinations supported by substantial evidence are resolved in

favor of the trial court’s ruling but an abuse of discretion occurs when, as a matter of law,

the trial court’s ruling contravenes the uncontradicted evidence. (Smith v. Adventist

Health System/West (2010) 182 Cal.App.4th 729, 739; Pro-Family Advocates v. Gomez

(1996) 46 Cal.App.4th 1674, 1680; People v. Mobile Magic Sales, Inc. (1979) 96

Cal.App.3d 1, 8.)

In considering the issue of likelihood of success by Maurer, we must analyze the

impact of the modifications of the construction loans on the subordination agreements.

Whether a modification has a material adverse effect on a junior lienor is usually a

question of fact. (Gluskin, supra, 32 Cal.App.3d at p. 315.) When reasonable minds

cannot differ, the conclusion that the modification resulted in a material adverse effect

can be decided as a matter of law. (Lennar Northeast Partners v. Buice, supra, 49

Cal.App.4th at pp. 1586-1588.)

There is no contradictory evidence about the objective facts that the various parties

executed the subject construction loans and the subordination agreements in 2006 and the

forbearance agreements in 2009. It is not disputed that Osborne’s default was not caused

by the 2009 modifications but, rather, by the economic conditions afflicting the United

States between the end of 2008 and the present time. The parties disagree, however,

about whether the 2009 modifications of the construction loans increased the risk of

default by Osborne. In other words, Maurer contends that a hypothetical risk caused by

the 2009 loan modifications caused U.S. Bank to lose its priority position. The only

evidence offered by Maurer was a declaration in which Robert Maurer stated: “I believe

9 such modifications materially increased the risk that [Osborne] would default on its

obligations under the PFF Trust Deeds and jeopardized the security represented by the La

Paz and the Plan Trust Deeds.” In the absence of any other evidence in the record of a

material risk caused by modification, we conduct an independent legal review of the

issue.

B. Modifications of the Construction Loans

If modifications in the senior lien have a material adverse effect on the junior lien

either by increasing the risk of default or making protection of the junior lienor’s position

potentially more burdensome, then the senior lien may lose priority to the junior lien.

(Lennar Northeast Partners v. Buice, supra, 49 Cal.App.4th at pp. 1586-1587; Gluskin,

supra, 32 Cal.App.3d at p. 315.) Where a seller’s lien is subordinated to a construction

loan, the law generally protects the subordinating seller and a breach of the terms of the

subordination, including a modification of terms of the senior loan that materially

increases the risk of default and makes it more expensive or urgent for the junior lien to

protect its position, can result in a complete loss of priority by the senior lien. (Gluskin,

at pp. 316-318.) The construction lender has a particular duty not to “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.) However, under some circumstances a material modification of a

senior lien may not result in loss of priority absent a “special relationship” or contractual

subordination. (Friery v. Sutter Buttes Sav. Bank (1998) 61 Cal.App.4th 869, 877-879.)

10 The kind of modifications deemed material are like those discussed in Gluskin and

Lennar. In Gluskin, the modifications were “substantial and drastic.” (Gluskin, supra, 32

Cal.App.3d at p. 312.) The bank in Gluskin changed the basic financial structure of the

original agreement, causing a default because it accelerated maturity from 30 years to 10

months, doubled the interest rate, and halted the flow of construction funds. As Lennar

recognized: “The effect of these modifications . . . was to allow the construction lender

‘to escape its obligation to disburse construction funds. . . .’ The very short term with a

large balloon payment clearly enhanced the likelihood of default. . . . [And] the default

occurred before construction had enhanced the value of the property, . . .” (Lennar

Northeast Partners v. Buice, supra, 49 Cal.App.4th at p. 1589.) In Lennar, the lender

and borrower increased the interest rate and principal beyond the originally approved

levels. (Id. at pp. 1583-1584.)

By contrast in this case, U.S. Bank here funded the entire loan promised; the

modifications extended maturity by two and a half years and decreased the interest rate

by half. As we discuss below, the five modifications identified by Maurer do not qualify

as increasing Osborne’s risk of default.

1. Modification to Allow Default Based on Five Other Deeds of Trust

According to Maurer, the first material modification which increased the risk of

Osborne’s default under the PFF construction loans was the addition of five “Other

Deeds of Trust” as an amendment to the original provisions for cross-default and cross-

collateralization. The five other trust deeds were held by four trustors who are affiliated

11 with Osborne.3 The risk of the “Other Deeds of Trust” modification, as described by

Maurer, was that “if the obligations . . . under any of the five foregoing deeds of trust

went into default, the Bank was entitled to declare a default under the PFF Loans and

foreclose on the Hemet property even if [Osborne] was faithfully performing all of its

obligations under the notes secured by the PFF Trust Deeds. The conclusion that such

an expansion of the circumstances under which the Bank was entitled to foreclose is a

material modification of the PFF Trust Deeds is not subject to serious dispute.”

We disagree with Maurer’s position for two reasons. First, Osborne was not

faithfully performing its obligations and there is no evidence whatsoever that the “Other

Deeds of Trust” modification had any bearing on the risk of Osborne defaulting on the

construction loans from PFF. Osborne’s default was not related to the five other deeds of

trust.

Secondly, as U.S. Bank explains, it is Osborne–not the four affiliated trustors–who

is the obligor on the five other deeds of trust. Contrary to Maurer’s assertion, the PFF

trust deeds were not amended to permit U.S. Bank to foreclose if the four affiliated

trustors defaulted on their obligations to U.S. Bank. Instead, the PFF trust deeds in their

original form permitted U.S. Bank to foreclose if Osborne defaulted on its other

obligations to PFF. If Osborne, not the four trustors, had defaulted under the other deeds

of trust, then U.S. Bank could reasonably have declared a default by Osborne on the

3 The Robert E. Osborne and Patricia A. Osborne Trust 2/3/04; REO Investments, LLC; Osborne Development-Calimesa Ranch LP; and Robert E. Osborne and Patricia A. Osborne.

12 construction loans. The modification did not increase the risk of Osborne’s default on the

construction loans held by U.S. Bank.

2. Modification to Allow Default If Osborne Defaulted on Its Obligations to Third Party

Creditors

Maurer next contends the risk of Osborne’s default was increased because of a

change in the treatment of defaults involving third parties. Maurer contends that,

although Osborne’s default to third parties had to be material under the original

construction loans, the modification agreements permitted any default to third parties,

even one that was not material, to be treated as a default under the construction loans. As

framed by Maurer, “[f]ollowing modification . . . [Osborne] was in default on the PFF

Loans immediately upon [Osborne’s] default on a third-party obligation, irrespective of

whether there was any effect whatsoever on the Bank’s position. The . . . Modification

Agreements undeniably effected a material change to the PFF Trust Deeds.”

Again, we note the subject modification had no bearing on the actual reason

Osborne defaulted on the construction loans. U.S. Bank also argues this is a new

argument that was not made in the lower court. Nevertheless, in the interests of judicial

efficiency, we will address this and Osborne’s other “new” arguments to the extent they

are based on legal issues that may be fairly said to have been encompassed by the

arguments below.

On the merits, we conclude the subject modification for third-party defaults caused

no increase in the risk of Osborne’s default to U.S. Bank. Under California law, a

lender’s right to declare a default is always subject to a requirement of materiality.

13 (Tucker v. Lassen Savings and Loan Assn. (1974) 12 Cal.3d 629, 639; Superior Motels,

Inc. v. Rinn Motor Hotels, Inc. (1987) 195 Cal.App.3d 1032, 1051-1052.) Nothing about

the modification allowed Osborne’s nonmaterial default to third parties to be treated as a

material default under the construction loans. If Osborne had defaulted under the

forbearance agreement, U.S. Bank could still have exercised its rights under the original

PFF trust deeds. The subject modification, however, did not increase the risk of

Osborne’s default.

3. Modification of Notice of Default

In another new argument, Maurer contends the forbearance agreements eliminated

the grace period and notice of default requirements–especially for lines of credit–to

which Osborne was entitled under the original PFF trust deeds, thus increasing the risk of

Osborne’s default to U.S. Bank. We disregard this argument as it pertains to lines of

credit because it was not raised below. Nor was U.S. Bank’s failure to give notice about

default in lines of credit the reason for Osborne’s default.

Furthermore, this argument is unsupported by the record because the forbearance

agreements require the same notice as required under the PFF trust deeds and the deeds

require notice be given allowing 15 days or more to cure a default. Maurer does not

assert there was any lack of notice. The subject modification cannot be said to have

increased the risk of Osborne’s default to U.S. Bank.

4. Modification Regarding Protective Advances

At the time of modification in March 2009, U.S. Bank had made protective

advances of about $522,000, which were added to the principal balance. Maurer argues

14 there is no evidence that this was a permissible advance under the original PFF trust

deeds, again an argument not made below, limiting our review to the legal issue.

The right to make such advances is included in the PFF trust deeds and is

recognized by California law. (Manning v. Queen (1968) 263 Cal.App.2d 672, 674.)

Maurer agreed to protective advances in the subordination agreements. The protective

advances were not related to the foreclosure and did not materially increase the risk of

Osborne’s default beyond the risk already anticipated in the PFF trust deeds and the

subordination agreements.

5. Modification Regarding Interest

Finally, Maurer claims that U.S. Bank and Osborne increased the risk of

Osborne’s default by suspending Osborne’s obligation to pay any interest until the

extended maturity date and by lowering the interest rate from a floor of 8 percent to about

4 percent. The obligation to pay monthly interest was also waived if the principal was

paid on time.

A senior lender is not liable for modifying its loan unless the modification

increased the risk of default and impaired the value of the junior lien. An extension of

time to repay a debt does not increase the risk of default, even though interest accrues in

the meantime. Such a modification does not adversely affect the junior lienholders rights

or the value of their security. (Swiss Property Management Co. v. Southern Cal. IBEW-

NECA Pension Plan (1997) 60 Cal.App.4th 839, 843.) The courts do not want to punish

lenders for trying to help a borrower escape default. Accordingly, the deferral of interest

15 payments until maturity cannot be considered to cause an increased material risk of

default.

IV

DISPOSITION

The uncontroverted evidence shows that the five modifications of the construction

loans did not materially increase the risk of Osborne’s default. Because Maurer did not

establish a likelihood of success in the underlying action, the issuance of the preliminary

injunction was an abuse of discretion. In light of our conclusion there were no material

modifications, we do not need to engage in balancing of interim harm or address the issue

of an alternative remedy.

We reverse the order granting the motion for preliminary injunction and remand to

the trial court with directions to enter an order denying the motion. In the interests of

justice, we order the parties to bear their own costs on appeal.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

CODRINGTON

J.

We concur:

McKINSTER Acting P. J.

KING

J.

16