Decon Group, Inc. v. Prudential Mortgage Capital Co.

AZ Wellesley Plaza, LLC (Wellesley), owned real property in Los Angeles (the Property) subject to a first deed of trust and a junior mechanic’s lien. Wellesley defaulted on the loan secured by the trust deed. Faced with foreclosure on that senior debt, Wellesley gave the trust deed beneficiary title to the Property by means of a grant deed in lieu of foreclosure. The grantee/beneficiary then foreclosed, thereby eliminating all junior liens. The grantee/beneficiary also bought the Property at the foreclosure sale and later sold it to a third party.

The holder of the mechanic’s lien filed suit to foreclose its lien, arguing that the lien was not eliminated by the foreclosure. The holder of the mechanic’s lien contended that when the trust deed beneficiary accepted the deed in lieu of foreclosure, those two interests (as beneficiary under the trust deed and as grantee under the deed in lieu) merged—the merger destroyed the senior lien, so the purported foreclosure on that lien was a sham. The superior court agreed and ordered foreclosure on the mechanic’s lien. The trust deed beneficiary, the third party buyer, and another related party timely appealed.

We reverse. Under…