United States: Securing Your Security -A Lender’s Right to Litigation Proceeds

Last Updated: June 28 2004
Article by Carol Honigberg

A 2003 case decided by the United States Circuit Court for the Ninth Circuit… should cause all lenders and their counsel to review and perhaps revise their standard forms of mortgages and deeds of trust to be sure all proceeds are properly assigned and payable to the lender.

Lenders making loans secured by real estate typically expect their security to include not only an interest in the property and improvements, but also all income and proceeds related to the property. For example, insurance proceeds recovered in connection with a casualty loss to the property are often paid to or controlled by the lender, not the owner. Similar provisions also are common for condemnation proceeds and for proceeds of any cause of action or litigation related to the property. A 2003 case decided by the United States Circuit Court for the Ninth Circuit, however, should cause all lenders and their counsel to review and perhaps revise their standard forms of mortgages and deeds of trust to be sure all proceeds are properly assigned and payable to the lender.

In re Emery, 317 F.3d 364 (9th Cir. 2003) concerns the rights to proceeds of litigation arising from construction defects to property. James and Cheryl Emery refinanced their property with World Savings & Loan Association ("World Savings") in 1993. The loan was secured by a deed of trust on the property in favor of World Savings. Sometime thereafter, construction defects were discovered, and the Emerys retained Kasdan, Simonds, McIntyre, Epstein & Martin ("Kasdan") to pursue an action against the contractor. The construction litigation was successfully settled, and at the direction of the Emerys, Kasdan disbursed the settlement proceeds to certain of the Emerys’ creditors (not including World Savings), to the Emerys, and to itself for attorneys’ fees and costs.

Shortly thereafter, the Emerys defaulted on the loan and filed for bankruptcy protection. World Savings obtained relief from the automatic stay and foreclosed on the property, but did not recover the full amount of the loan. World Savings then filed suit in the bankruptcy court against Kasdan, claiming that it had exclusive rights to the cause of action and resulting settlement proceeds. The bankruptcy court ruled in favor of Kasdan, and World Savings appealed to the U.S. District Court for the Central District of California. The district court reversed the bankruptcy court’s decision and held that Kasdan converted World Savings’ property interest in the settlement funds and was liable to World Savings for damages.

On appeal, the Ninth Circuit reversed the district court. The Ninth Circuit reviewed the language contained in the World Savings deed of trust, which stated "I assign these rights [to bring legal action] and any proceeds arising from these rights…to Lender. Lender may, at its option, enforce these rights in its own name, and may apply any proceeds resulting from this assignment to any amount that I may owe to Lender under the Note…." The court determined that because the Emerys were current in their payments on the loan at the time Kasdan disbursed settlement proceeds, the amount owed to World Savings was zero and therefore World Savings had not suffered any damage for which proceeds should be assigned.

In support of its decision, the court emphasized the language in several other provisions in the deed of trust which provided for acceleration and application of proceeds to all sums secured in instances such as transfer of the property, condemnation and rights to insurance proceeds. The court noted that the reference to "sums owed," contrasted with the phrase "sums secured," was at best ambiguous. "Sums secured" clearly meant the outstanding balance and any other amounts owed. Did "sums owed" mean the same thing? Ambiguous language is construed against the drafter, leading the court to conclude that the phrase "owed to Lender" means amounts currently due and payable. The court also noted that while World Savings’ right to intervene in the litigation had been deprived because neither the Emerys nor the Kasdan firm notified the lender of the litigation, World Savings did not have exclusive rights to pursue the legal action. It perhaps had a breach of contract action against the nowbankrupt Emerys for failing to notify the lender of the litigation, but nothing more.

This decision should surprise and concern financial institutions and other institutional lenders. Common usage and understanding of the phrase "amounts owed" means the outstanding balance of the loan, not the amount due at that particular moment. The result reached in this case, however, can be avoided by assuring that mortgage and deed of trust language is clearly drafted. Different phrases in different provisions is an invitation to engage in the sort of analysis undertaken by the Ninth Circuit. Whether other circuits will follow the reasoning used in Emery is uncertain, but lenders can feel confident that if their "boilerplate" provisions are carefully worded and consistent, they should be able to avoid the Emery scenario.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions