Lona v. Citibank offers hope for California foreclosure homeowners steered into potentially unconscionable predatory stated income loans
California Foreclosure Case – Lona v. Citibank (scroll to the bottom) Okay, we have been talking about predatory lending for some time now. We have talked about California homeowners being steered into loans that virtually guaranteed their foreclosure sale. We have talked about lenders and real estate brokers that falsely stated income on loan applications, and we have talked about non-judicial foreclosure sales and the challenges involved in trying to set aside the foreclosure sale, including the lender “tender” rule (the rule that the banks argue in almost every foreclosure case basically arguing to the judge that you cannot challenge the foreclosure sale unless you tender the full balance of your loan). Of course very few people have the financial ability to pay the lender off on the loan, much less a borrower in default on a mortgage loan. At any rate, the Lona cases that recently came down from the California Court of Appeals (yes, the decision what thankfully cited for publication) takes an interesting view of stated income loans, the underwriting of these loans, and the tender rule in California (and its exceptions which the court was adept in pointing out). So here goes, here are the facts of Lona v. Citibank. The borrower was Mr. Lona, who apparently was of mexican decent and had an 8th grade education. He also apparently had two pieces of property, both in foreclosure. As to the foreclosure case at issue, Lona originally had a loan in the amount of 1.24 million dollars. In January of 2007 Lona claimed he was responding to an advertisement to refinance his loans. In response to the ads, Lona contacted the loan broker (First net mortgage) and applied for a loan. The loan application was for what we call a “stated income loan” (this is where the borrower states the amount his gross monthly income is and/or sometimes the unscrupulous loan broker will just fill this in themselves). At any rate, the loan application stated that Lona made $20,000 per month ($240,000 per year) when this in fact, apparently was not true (he was a mechanic at a mushroom farm). Lona claimed his annual income was only $40,000 ($3,333 per month). The loan was ultimately approved based on these figures, and both a first and second mortgage were originated. The first mortgage was for 1.125 million and was a 5/1 adjustable rate mortgage (loan was fixed for five years then would adjust). The CAP on the loan was 13.25% and the interest rate was 8.25%. The monthly payment on the first mortgage alone was $12,381.36. The second mortgage was a 15-year fixed mortgage in the amount of $350,000 and had a 12.25% interest rate and $327,000 Balloon Payment. In a nutshell, Lona claimed he could barely read english, did not read his loan documents, and that such were not adequately explained to him. Nevertheless, he signed the loan documents and 5 months later he was in default on the loans (keep in mind the monthly combined payment on the loans was $12,381.36 over 4x’s his monthly income). At some point after the loan was originated, the loan was sold to Citibank (probably part of a securitized loan scheme, but this is not confirmed) and EMC became the loan servicer of the loan. The lender thereafter initiated foreclosure proceedings (filed a notice of default and notice of sale etc.) and sold the house via non-judicial foreclosure sale in August of 2008. The house apparently went back to Citibank who recorded a trustees deed upon sale and thereafter moved to evict Lona from the property. Lona, however, did not go quietly into the foreclosure night. Instead, he filed a civil suit alleging a variety of causes of action, and basically sought to set aside the foreclosure sale (these were the two claims that survived demurrer and which were remaining against Citibank and EMC). The trial court found for Defendants in their motion for summary judgment, basically arguing that Defendant’s could not tender the loan balance, and must be held liable for his own actions in signing the loan. The court also noted that the borrower had been living in his house for free for some time. Further, the trial court ruled there was no evidence of any procedural irregularity or prejudice to the California homeowner Plaintiff. The Plaintiff appealed the grant of summary judgment arguing essentially that there was no requirement to tender the loan balance because the loan itself (and deed of trust) was illegal and unconscionable / unenforceable given that only his income was used to qualify him for the loan and that his credit did not warrant such a loan. He also argued that given this, he did not need to tender the loan balance to try to set aside the foreclosure sale. The unlawful detainer proceeding was consolidated with the Civil Action. The Courts holding in Lona v. Citibank The Court reversed the trial court and sent the case back for a trial on the merits. The court ruled there was no tender requirement because the Plaintiff was attacking the very validity of the debt (which is one of the exception to the tender rule) and that there was a question of material fact as to the unconscionable / illegal nature of the loan contract. In addition, there was a failure of Defendant to meet its burden for summary judgment on these issues, and the tender argument of Plaintiff was not addressed. Here is some key language pulled from the case:
I. Elements of a Cause of Action to Set Aside Trustee’s Sale
After a nonjudicial foreclosure sale has been completed, the traditional method by which the sale is challenged is a suit in equity to set aside the trustee’s sale. (Anderson v. Heart Federal Sav. & Loan Assn. (1989) 208 Cal.App.3d 202, 209-210.) Generally, a challenge to the validity of a trustee’s sale is an attempt to have the sale set aside and to have the title restored. (Onofrio v. Rice (1997) 55 Cal.App.4th 413, 424 (Onofrio), citing 4 Miller & Starr, Cal. Real Estate (2d ed. 1989) Deeds of Trusts & Mortgages, § 9.154, pp. 507-508.) On summary judgment, a “defendant . . . has met his or her burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to that cause of action.” (Code Civ. Proc., § 437c, subd. (p)(2).) Neither the parties’ briefs nor the papers they filed below on the motion for summary judgment discuss the elements of an equitable cause of action to set aside a foreclosure sale. The parties do not cite any cases that expressly set forth the elements. “ ‘It is the general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties.’ ” (Lo v. Jensen (2001) 88 Cal.App.4th 1093, 1097-1098 (Lo), quoting Bank of America etc. Assn. v. Reidy (1940) 15 Cal.2d 243, 248; see also Angell v. Superior Court (1999) 73 Cal.App.4th 691, 700.) Case law instructs that the elements of an equitable cause of action to set aside a foreclosure sale are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering. (Bank of America etc. Assn. v. Reidy, supra, 15 Cal.2d at p. 248; Saterstrom v. Glick Bros. Sash, Door & Mill Co. (1931) 118 Cal.App. 379, 383 (Saterstrom) [trustee’s sale set aside where deed of trust was void because it failed to adequately describe property]; Stockton v. Newman (1957) 148 Cal.App.2d 558, 564 (Stockton) [trustor sought rescission of the contract to purchase the property and the promissory note on grounds of fraud]; Sierra-Bay Fed. Land Bank Ass’n v. Superior Court (1991) 227 Cal.App.3d (1991) 227 Cal.App.3d 318, 337 (Sierra-Bay) [to set aside sale, “debtor must allege such unfairness or irregularity that, when coupled with the inadequacy of price obtained at the sale, it is appropriate to invalidate the sale”; “debtor must offer to do equity by making a tender or otherwise offering to pay his debt”]; Abadallah v. United Savings Bank (1996) 43 Cal.App.4th 1101, 1109 (Abadallah) [tender element]; Munger v. Moore (1970) 11 Cal.App.3d 1, 7 [damages action for wrongful foreclosure]; see also 1 Bernhardt, Mortgages, Deeds of Trust and Foreclosure Litigation (Cont.Ed.Bar 4th ed. 2011 supp.) § 7.67, pp. 580-581 and cases cited therein summarizing grounds for setting aside trustee sale.) Justifications for setting aside a trustee’s sale from the reported cases, which satisfy the first element, include the trustee’s or the beneficiary’s failure to comply with the statutory procedural requirements for the notice or conduct of the sale. (Knapp, supra, 123 Cal.App.4th at pp. 96-99 [alleged irregularity in default notice and sale notice]; Sierra-Bay Fed. Land Bank Ass’n v. Superior Court, supra, 227 Cal.App.3d (1991) 227 Cal.App.3d at p. 337 [to set aside sale, “debtor must allege such unfairness or irregularity that, when coupled with the inadequacy of price obtained at the sale, it is appropriate to invalidate the sale”]; 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc. (2001) 85 Cal.App.4th 1279, 1284 [“mere inadequacy of price, absent some procedural irregularity that contributed to the inadequacy of price or otherwise injured the trustor, is insufficient to set aside a nonjudicial foreclosure sale”].) Other grounds include proof that: (1) the trustee did not have the power to foreclose (Bank of America v. La Jolla Group II (2005) 129 Cal.App.4th 706 [trustee’s sale invalid because borrower and lender had entered into agreement to cure default; loan was therefore current and lender did not have right to foreclose]; Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868, 878 (Dimock) [where original trustee completed trustee’s sale after being replaced by new trustee, sale was void because original trustee no longer had power to convey property]); (2) the trustor was not in default, no breach had occurred, or the lender had waived the breach (System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 154 (System) [borrower was not in default because it was excused from performance by lender’s prior breach of contract; bank waived amount allegedly due]; Van Noy v. Goldberg (1929) 98 Cal.App.604 [debt had not matured]); or (3) the deed of trust was void (Saterstrom, supra, 118 Cal.App. at p. 383 [trustee’s sale set aside where deed of trust was void because it failed to adequately describe property]; Stockton, supra, 148 Cal.App.2d at p. 564 [trustor sought rescission of promissory note on grounds of fraud]; see also 1 Bernhardt, Mortgages, Deeds of Trust and Foreclosure Litigation, supra, § 7.67, pp. 580-581. We shall discuss this element further in section V. B. of this opinion.
A. Assertion That Loans Were Not Unconscionable
As a third ground for their motion, Citibank and EMC challenged the allegations of Lona’s second amended complaint that the trustee’s sale was “ ‘improperly held . . . due to the unconscionable and illegal nature of the loan agreement and deed of trust.’ ” The moving parties did not specify which element of the cause of action this part of their motion addressed. Arguably, it implicated both the first and third elements of the cause of action. Lona contends that the trustee’s sale should be set aside on the grounds that the loan was void ab initio because it was unconscionable and that he was excused from the tender requirement because the loan was unconscionable.First, Citibank and EMC argued that a trustee’s sale could not be set aside for unconscionability because the only basis for setting aside a trustee’s sale is irregularity in the foreclosure procedure. We have already rejected that contention. Second, Citibank and EMC argued that Lona failed to establish that the loans were unconscionable. In essence, they asked the court to find, as a matter of law, that the loans and deeds of trust were not unconscionable. Before proceeding further, we review general principles governing the “judicially created doctrine of unconscionability.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113 (Armendariz), abrogated in part on another ground in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __, __ [131 S.CT. 1740, 1746].) “Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. [Citation.] ‘The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ ” (Ibid.) The record here suggests that the deeds of trust and the notes were contracts of adhesion. They appear to be standard forms that were drafted by the lender or others and presented to Lona for signature. There was no evidence in the record that Lona had any role in negotiating the terms of the contracts. “If the contract is adhesive, the court must then determine whether ‘other factors are present which, under established legal rules—legislative or judicial—operate to render it [unenforceable].’ [Citation.] ‘Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him. [Citations.] The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or “unconscionable.” ’ [Citation.] Subsequent cases have referred to both the ‘reasonable expectations’ and the ‘oppressive’ limitations as being aspects of unconscionability.” (Armendariz, supra, 24 Cal.4th at p. 113.) “In 1979, the Legislature enacted Civil Code section 1670.5, which codified the principle that a court can refuse to enforce an unconscionable provision in a contract. [Citation.] As section 1670.5, subdivision (a) states: ‘If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.’ ” (Armendariz, supra, 24 Cal.4th at p. 114.) Subdivision (b) of the statue provides: “When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.” “ ‘[U]nconscionability has both a “procedural” and a “substantive” element,’ the former focusing on ‘ “oppression” ’ or ‘ “surprise” ’ due to unequal bargaining power, the latter on ‘ “overly harsh” ’ or ‘ “one-sided” ’ results. [Citation.] ‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’ [Citation.] But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.] In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz, supra, 24 Cal.4th at p. 114.) Absent unusual circumstances, evidence that one party has overwhelming bargaining power, drafts the contract, and presents it on a take-it-or-leave-it basis is sufficient to demonstrate procedural unconscionability and require the court to reach the question of substantive unconscionability, even if the other party has market alternatives. (Gatton v. T-Mobile USA (2007) 152 Cal.App.4th 571, 586.) In their motion, Citibank and EMC asserted that Lona voluntarily entered into the loans and received the benefits of the loan and that it was undisputed that he signed the loan documents, which set forth the terms of the loans. The defendants focused on Lona’s allegations that the loans were unconscionable because of the potential increase in the interest rate on the first loan from 8.25 to 13.25 percent and the balloon payment on the second loan. Citibank and EMC argued that these terms “had no impact whatsoever on [Lona’s] inability to make the monthly Loan payments,” because the interest rate on the first loan was fixed at 8.25 percent for the first five years and the balloon payment was not due for 15 years and Lona defaulted within the first year after entering into the loans. We are not persuaded that the increase in the interest rate on the first loan or the amount of the balloon payment on the second loan are sufficient in and of themselves to support the claim that the loans were unconscionable. However, Citibank and EMC’s assertion that these allegedly unconscionable terms of the loan did not cause the default does not necessarily dispose of Lona’s claim that the loans were void ab initio because they were unconscionable. In addition to alleging unconscionability based on the interest rates and balloon payment provision, the second amended complaint alleged that the loans were unconscionable and illegal because they “were made to [Lona] without reasonable consideration of his ability to repay the loans . . . given his income at the time” and that the interest rate “far exceeded what was reasonable given his credit rating at the time of application.” Citibank and EMC’s motion did not address these allegations. The moving parties presented no evidence regarding Lona’s income, credit rating, or credit worthiness. And when Lona raised these factual issues in response to the motion for summary judgment, the moving parties did not respond; they did not discuss Lona’s evidence or provide any legal argument regarding the impact of that evidence. They did not file anything in reply. In our view, the defendants failed to meet their burden on summary judgment because their motion failed to address all of the allegations of the Lona’s second amended complaint regarding the alleged illegality of the loan. On summary judgment, an alternative method by which a defendant may meet its burden of showing that an essential element of the plaintiff’s claim cannot be established is to present evidence that the plaintiff “does not possess and cannot reasonably obtain, needed evidence.” (Aguilar, supra, 25 Cal.4th at p. 854.) But unlike federal law, summary judgment law in California requires the defendant to present evidence, and not simply point out through argument, that the plaintiff does not possess and cannot reasonably obtain the needed evidence. (Aguilar, at p. 854.) Such evidence may consist of the deposition testimony of the plaintiff’s witnesses, the plaintiff’s factually devoid discovery responses, or admissions by the plaintiff in deposition or in response to requests for admission that he or she has not discovered anything that supports an essential element of the cause of action. (See Villa v. McFerren (1995) 35 Cal.App. 4th 733, 749; Leslie G. v. Perry & Associates (1996) 43 Cal.App.4th 472, 482; Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 590.) At the hearing on the summary judgment motion, Citibank and EMC argued that there was no evidence to support Lona’s allegations, that Lona had not alleged any facts that would create triable issues, and that Lona relied on conclusions and not facts, which was not enough to avoid summary judgment. Citibank and EMC’s evidence in support of their motion for summary judgment consisted of the loan documents and documents related to the trustee’s sale, as well as the declaration of an employee of EMC describing and authenticating the documents. They did not submit any discovery responses by Lona. To the extent that their summary judgment motion relied on the claim that Lona had no evidence to support the allegations of his complaint, Citibank and EMC relied solely on argument and did not present the type of evidence necessary to demonstrate that Lona did not possess and could not reasonably obtain, needed evidence. (Aguilar, supra, 25 Cal.4th at p. 854.) Thus, Citibank and EMC failed to meet their burden on summary judgment to show that Lona had no evidence that supported his claims. In addition, with regard to this ground, the record reveals triable issues of material fact. In opposition to the motion for summary judgment, Lona presented evidence that he had only an eighth grade education, his English was limited, no one explained the documents to him, and he did not understand what he was signing. He presented evidence that, while the loan brokers told him what the initial interest rate and monthly payments were, they did not tell him how high the interest rate could increase on the first loan and that no one explained the balloon payment to him. The loan documents appear to be on standard, pre-printed forms in English and there is no evidence Lona had any role in negotiating the terms of the loan. In our view, this was sufficient evidence of unequal bargaining power, oppression or surprise to raise a triable issue regarding procedural unconscionability. In addition, there was uncontradicted evidence that Lona earned only $40,000 per year at the time the loans were approved, that only his income was considered in qualifying for the loan, and that the monthly payments were approximately four times his monthly income.[2] Given the extreme disparity between the amount of the monthly loan payments and Lona’s income, this was sufficient to create a triable issue on the question of whether the loans were overly harsh and one-sided and thus substantivelyunconscionable. And while this evidence may not ultimately be persuasive at trial, in this case, it was sufficient to defeat the motion for summary judgment. Since Citibank and EMC failed to address all of the allegations of the complaint regarding the alleged unconscionability of the loans and failed in their burden to show that Lona did not have any evidence to support his claims, we cannot say that they have met their burden of demonstrating that the loans and deeds of trust were not unconscionable as a matter of law. In addition, Lona submitted sufficient evidence to raise a triable issue with regard to the alleged unconscionable nature of the transaction. Our holding does not mean that a borrower may defeat a motion for summary judgment in an action to set aside a trustee’s sale merely by alleging that he or she did not understand the terms of the loan documents signed or could not afford the loan. In this case, the primary reasons for reversing the summary judgment are the moving parties’ failure to address all of the allegations of the second amended complaint and their failure to properly demonstrate that Lona had no evidence to support his claims. In addition, after Lona’s opposition argued that the loan was void for illegality at the time of signing and submitted evidence that demonstrated an extreme disparity between Loan’s income and the amount of his monthly payments, Citibank and EMC made no effort to address this evidence, with argument or legal authority.
B. Tender Requirement
Because the action is in equity, a defaulted borrower who seeks to set aside a trustee’s sale is required to do equity before the court will exercise its equitable powers. (MCA, Inc. v. Universal Diversified Enterprises Corp. (1972) 27 Cal.App.3d 170, 177 (MCA).) Consequently, as a condition precedent to an action by the borrower to set aside the trustee’s sale on the ground that the sale is voidable because of irregularities in the sale notice or procedure, the borrower must offer to pay the full amount of the debt for which the property was security. (Abadallah, supra, 43 Cal.App.4th at p. 1109; Onofrio, supra, at p. 424 [the borrower must pay, or offer to pay, the secured debt, or at least all of the delinquencies and costs due for redemption, before commencing the action].) “The rationale behind the rule is that if [the borrower] could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the [borrower].” (FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1022.)
C. Exceptions to the Tender Requirement
There are, however, exceptions to the tender requirement. Our review of the case law discloses four exceptions. First, if the borrower’s action attacks the validity of the underlying debt, a tender is not required since it would constitute an affirmation of the debt. (Stockton, supra, (1957) 148 Cal.App.2d at p. 564) [trustor sought rescission of the contract to purchase the property and the promissory note on grounds of fraud]; Onofrio, supra, 55 Cal.App.4th at p. 424.) Second, a tender will not be required when the person who seeks to set aside the trustee’s sale has a counter-claim or set-off against the beneficiary. In such cases, it is deemed that the tender and the counter claim offset one another, and if the offset is equal to or greater than the amount due, a tender is not required. (Hauger, supra, (1954) 42 Cal.2d at p. 755.) Third, a tender may not be required where it would be inequitable to impose such a condition on the party challenging the sale. (Humboldt Savings Bank v. McCleverty (1911) 161 Cal. 285, 291 (Humboldt). In Humboldt, the defendant’s deceased husband borrowed $55,300 from the plaintiff bank secured by two pieces of property. The defendant had a $5,000 homestead on one of the properties. (Id. at p. 287.) When the defendant’s husband defaulted on the debt, the bank foreclosed on both properties. In response to the bank’s argument that the defendant had to tender the entire debt as a condition precedent to having the sale set aside, the court held that it would be inequitable to require the defendant to “pay, or offer to pay, a debt of $57,000, for which she is in no way liable” to attack the sale of her $5,000 homestead.[3] (Id. at p. 291.) Fourth, no tender will be required when the trustor is not required to rely on equity to attack the deed because the trustee’s deed is void on its face. (Dimock, supra, 81 Cal.App.4th at p. 878 [beneficiary substituted trustees; trustee’s sale void where original trustee completed trustee’s sale after being replaced by new trustee because original trustee no longer had power to convey property].) In their motion for summary judgment, Citibank and EMC asserted that Holland v. Pendleton Mtge. Co. (1943) 61 Cal.App.2d 570, 577-578 (Holland) establishes another exception to the tender requirement. Although one treatise interprets the case that way (see 4 Miller & Starr, Cal. Real Estate (3d ed. 2000) Deeds of Trust, § 10:212, p. 686), we do not agree that Holland establishes an exception to the tender rule, since the tender requirement was not at issue in Holland and the court did not discuss the tender requirement. We discuss Holland nonetheless because Citibank and EMC relied on it in their motion. In Holland, the trustee’s sale was continued four times and the property was sold to the beneficiary/lender. (Holland, supra, 61 Cal.App.2d at p. 573.) The court held the sale was void because the trustee had not complied with the statutory requirements for noticing the fifth and actual sale date. (Id. at pp. 575-577.) After the sale, the trustor remained in possession of the property and paid the lender $35 per month. (Id. at p. 577.) The parties disputed whether the payments were rent or were made pursuant to a new agreement with the lender to redeem the property. (Ibid.) In light of the irregularities in the notice of the sale, the appellate court held that the trustor should be allowed to set aside the sale. It also directed the trial court to determine whether the parties had entered into a new agreement and the nature of the monthly payments, and ordered that any amounts due be paid “after judgment.” (Id. at pp. 577-578.) Although the court did not discuss the tender requirement, the treatise authors have interpreted Holland as holding that a court “may permit the trustor to set aside the foreclosure sale on condition that payment be made after entry of judgment.” (4 Miller & Starr, Cal. Real Estate, supra, Deeds of Trust § 10:212, p. 686.) In our view, the appellate court in Hollandwas providing guidance to the trial court on remand regarding the monthly payments and did not establish a fifth exception to the tender requirement.
D. Analysis of Tender Requirement Element
We begin our analysis by reviewing the allegations of Lona’s second amended complaint (hereafter “complaint”). Lona alleged that the trustee’s “sale was improperly conducted due to fraudulent conduct of the foreclosing party and the unconscionable and illegal nature of the loan agreement and deed of trust . . . . The loan agreements were void for illegality from the inception and . . . voidable based on the unconscionable nature of the loans [and] violation of stated Public Policy.” The complaint also alleged that Lona was “excused from tendering the cure amount prior to seeking equitable relief, due to the fraudulent conduct of the foreclosing party, its failure and refusal to comply with statutory pre-requisites to the right to foreclose and the illegal and unconscionable nature of the contract.” Thus, the complaint alleged both irregularity in the foreclosure process and illegality of the underlying contract. In their summary judgment motion, Citibank and EMC attacked the tender requirement element of Lona’s cause of action and argued that his cause of action to set aside the trustee’s sale failed because he did not tender the amounts due on the first loan before filing suit and that none of the exceptions to the tender requirement applied. Citibank and EMC’s arguments regarding the exceptions to the tender requirement cited and distinguished Holland and Humboldt but failed to discuss the exception relating to the legality of the loan and the validity of the debt, which Lona relied on in his complaint. In opposition to the motion, Lona argued that there were other exceptions to the tender rule, including those set forth in Stockton and Hauger. He argued that he was not required to tender to seek equitable remedies or damages because: (1) the deed of trust “was illegal from the time of formation and therefore, unenforceable and non-assignable”; and (2) his “claims would offset any amounts claimed to be due under the void agreements.” Thus, Lona’s opposition relied on two exceptions to the tender requirement that Citibank and EMC had not addressed. Lona also argued that a tender was not required because his claim was based on the illegality of the loan contract, and not any irregularity in noticing or conducting the trustee’s sale. As noted, the issues on summary judgment are framed by the pleadings. (Varni, supra, 35 Cal.App.4th at pp. 866-867.) To prevail on their summary judgment motion, Citibank and EMC had to show that Lona could not establish the tender requirement element of his cause of action by showing both that Lona had not tendered and that the exceptions to the tender requirement that Lona relied on in his complaint did not apply. It was undisputed that Lona did not tender the amounts due before filing suit. Citibank and EMC failed to meet their initial burden on summary judgment because their motion was based on the exception in Humboldt and the holding in Holland, which Lona’s complaint did not rely on, and did not address the exception from Stockton (tender not required when borrower’s action attacks validity of debt), which was the exception that Lona had pleaded in his complaint.[4] We hold that Citibank and EMC did not meet their burden of showing that Lona could not state a cause of action to set aside the trustee’s sale on the ground that he could not establish the tender requirement because their motion did not address the exceptions to that element that Lona relied on in his complaint. A defendant that moves for summary judgment has the burden to show that it is entitled to judgment with respect to all theories of liability asserted by the plaintiff. (Lopez v. Superior Court(1996) 45 Cal.App.4th 705, 717.)
California Short Sale Realtor Allen Brodetsky talks about the sizzling Short Sale marketing in CA
Need to learn more about California Short Sale trends for 2012 – Listen in to our real estate radio show free?
We have a great show coming up on the VONDRAN LEGAL HOUR (out internet real estate radio show). Listen in as we invite California short sale realtor Allen Brodetsky of Boutique Realty onto the show to discuss the important foreclosure prevention topic of Short Sales and how they work. Many homes in California cannot be saved via foreclosure, modification , or bankruptcy, in these cases, it is wise to have a working knowledge of how a short sale works, and when you might want to consider going that route.
Here are some of the topics we hope to cover which I believe are the most frequently asked California short sale questions:
1. What are you seeing out there – trends in California short sales?
2. Are lender’s doing short sales?
3. Who is your favorite and least favorite lender/servicer in re to
short sales?
4. What happens when there is a first and second mortgage? (are
lenders still doing these)?
5. How long does it take to get a short sale approved on average?
6. Who pays for a short sale? Are there up front fees?
7. Some people want to hire their “uncle joe” (cousin realtor) to do
a short sale – are there any pitfalls in that approach?
8. Talk to me about “arms length transactions” (this is a problem we
run into from time to time as a law firm) – Do you see lender/
servicers allow family and friends to make short sale deals?
9. What are the benefits of a short sale vs foreclosure?
10. I hear now that there are refinances for underwater homes – do
you know about that program?
11. In your experience, are banks foreclosing faster now or not?
12. Are the servicer/lenders offering any cash incentives (“cash for keys”) to the homeowner in exchange for a short sale?
13. Do you negotiate HAFA short sales?
Allen Brodetsky is a CALIFORNIA SHORT SALE REALTOR with experience in the short sale trenches. There is no cost to listen in to the show. Simply click on the Vondran Legal Hour link above. We look forward to hearing from you.
California Attorney General not keen on foreclosure settlement
California Attorney General not real keen on talks of banks settling foreclosure cases. She does not want to allow banks to settle cases that have not been investigated. Read more here.
Here is more on the foreclosure settlements with the California Attorney General from the LA Times. Californian’s for a Fair Settlement are urging Harris to reject any offers that do not include principal reduction for troubled homeowners.
This group is demanding 5 key things before they would agree that settlement with 5 major banks is proper:
- imposing a fairly applied principle reduction;
- a narrow release of liability;
- an overhaul and reform of the system that would include banning banks from continuing to foreclose on families while they are undergoing loan modification;
- requiring banks to give homeowners a single point of contact;
- penalties for banks who fail to hold up their part of the agreement;
- assurance that homeowners who were kicked out of their homes without due process will receive fair and ample restitution.
TILA amendment requires that you get a disclosure when there is a new owner of your loan per Section 131(g) of TILA
We have said all along that notes are getting passed around like a whiskey bottle at a frat party. Fine, the banks are allowed to sell your loans to another party. But you are legally entitled to get notice of this transfer to a new assignee of a consumer loan. Yes, it is a legal right you have, even if you are in default, and even if you are in foreclosure. This is a law passed that amends TILA (reg Z) 15 U.S.C. 1641 – specifically section 131(g), and which states that you are entitled to get this notice. We have seen many a case where there simply is no notice and one day some new financial institution (including securitized loan trusts) literally appear out of thin air and demand payment at the threat of foreclosure. It is your right to ask them who they are and ask when they bought the loan and where the transfer disclosure statement is or where it was sent.
If they fail to provide this statement, you could be entitled to $4,000 statutory damages and can seek your attorney fees. This law is part of the “Helping Families Save their Homes Act” and became effective on 5/19/09 when President Obama signed the law. The law applies to “principal dwellings of a consumer” (won’t apply to commercial loans) whether the loan be a first mortgage or junior mortgage. The law requires the loan assignee (the seller has no obligation) to notify the consumer borrower of the sale or transfer of the loan within 30 days.
Contents of the notice must include:
- Identity, address and phone number of the assignee
- Date of the transfer of the loan
- Contact information of the agent with authority to act on behalf of the assignee
- The location of the place where the transfer of the ownership of the debt is recorded
- Any other relevant information regarding the assignee
NOTE: Section 130(a)- 15 U.S.C. 1640(a) lays out the civil penalties for a violation of the act, which include $4,000 and attorney fees may be sought.
The federal reserve board (which implements TILA) has not yet appeared willing to clarify any of the section 131 ambiguities, so some of this may shake out in litigation.
Another unbelievable Foreclosure Blues Song by the master Ryan Tracey!
Give this a watch and listen. Help spread the word by passing it on- the Foreclosure Blues!
Foreclosure Blues Song give it a listen and pass it on!
Give it a listen and pass it on if you like it!
http://www.youtube.com/watch?v=Rtxq_pGCrd0
Deficiency Judgments in California and the “sold out junior” can the second come back at you despite the one action rule?
Hello everyone. We almost made it to 2012, a year that promises more of the same in the foreclosure and short sale business. We should continue to see a trend with more foreclosures, more short sales, and more problems dealing with the major lenders and loan servicers. This article discusses the problem of liability following foreclosure or short sale in California. This is a very important topic and one that needs to be considered when you are creating a “loss mitigation plan” to deal with your distressed property. Please keep in mind the following is only general information, and is not legal advice, or a substitute for legal advice. We offer paid consultations that can evaluate your situation, every situation is unique and different.
We have talked about many of these issues before, and we have discussed the general rule in California (ccp 58od) which discusses there can be no deficiency liability to the first mortgagee when they foreclose non-judicially. And we have discussed ccp 580b which discussed how “purchase money” is protected from deficiency judgments in California, whether the lender seeks to foreclose judicially, or even non-judicially (the lender may elect their remedy), and we have also discussed ccp 726 the so called “one-action rule” which states that a secured lender must seek to foreclose on the “security first” before seeking to recover their debt in another manner.
But how do all these rules apply where you have a second mortgage that is secured by a deed of trust, but the second mortgage is underwater and technically does not secure any equity in your property (ex. you owe 500k on a first and 100k on a second mortgage. The second mortgage was taken out after the first and is not purchase money – and the property has a fair market value of $300k). In this scenario, if there is a foreclosure sale that sells the property to a third party, the first mortgagee would get 300k and the second mortgage holder (i.e. the junior lien holder) would get nothing. As we discussed, if the second mortgage is purchase money then the second is simply out of luck.
But if the second mortgage was a HELOC, and not purchase money (a topic for another blog) then the second mortgage holder may have options against you. As noted above, the “one action rule” in California (ccp 726) states that the secured lender must exercise on their security first, but what about the second. In the above scenario, the first foreclosed following the default on the loan, and the second stood silently by with no real options. Sure the second could have sought to foreclose using their power of sale, but the first mortgage holder still would have got the sale proceeds.
This is what we call the case of the “sold out junior” lien. After the foreclosure sale occurred, the second lien holder was left holding nothing but an unsecured debt (their lien is stripped following the foreclosure sale so clear title can pass to the purchaser, usually at the trustee sale). Thus, the debt became unsecured and the second lien holder has never had an opportunity to take an “action” for the purpose of the one action rule. So what options do they have? Well, they have the option to then “sue on the note” and come after you for the amount of the debt owed. Will they do this? Who knows. They might just want to sell your debt to a collection agency to let them try to collect from you. We do see this happening (even on protected purchase money loans).
As an example of how this might work is the case of Bank of America National Trust and Savings Association v. Charles Graves, California Court of Appeal, 4th District Court case. In this case, the above scenario basically happened (with the one small exception that the second lien holder started foreclosure proceedings, but then stopped because the first decided to foreclose). At issue was the one action rule and the second lien holders options – whether they could sue the borrower for the deficiency judgment. The Court held the second mortgagee could sue the borrower on the note (a non purchase money loan). Here is what the court said:
Here, the Bank contends it was entitled to proceed directly against the debtors because, through no fault of its own, it was a sold-out junior lienor. Accordingly, it argues that the defenses raised by the debtors, based on the ‘one form of action rule’ (§ 726) and the antideficiency statutes (§§ 580a, 580b, 580d) do not apply. The Graveses contend the Bank was not a sold-out junior lienor because its own action in postponing its trustee’s sale deprived it of that status.
“The term “sold-out junior lienor” refers to the situation in which a senior lienholder forecloses its lien, eliminating the junior lienor’s security interest. “A senior foreclosure sale conveys the property free of all junior [51 Cal. App. 4th 612] liens …. Thus, the junior no longer has a lien on the property, and the security has been entirely destroyed. A sold-out junior thus holds security that has ‘become valueless’ and is permitted to sue directly on the note.” (Bernhardt, Cal. Mortgage and Deed of Trust Practice (Cont.Ed.Bar 2d ed. 1990) § 4.8, pp. 193-194.)”
In the leading case of Roseleaf Corp. v. Chierighino, supra Chief Justice Traynor held, “The ‘one form of action’ rule of section 726 does not apply to a sold-out junior lienor [citations], nor does the three-months limitation of section 580a. [Citations.] There is no reason to compel a junior lienor to go through foreclosure and sale when there is nothing left to sell……….”The prohibition against a deficiency judgment does not apply to the beneficiary of a junior deed of trust whose security has been rendered valueless by a foreclosure sale of the property under a senior encumbrance. After the security has been lost by the foreclosure sale of the senior lien, the junior lienor can sue the debtor directly on the promissory note, which is then considered unsecured.” (4 Miller & Starr, Cal. Real Estate (2d ed. 1989) § 9:156, p. 531; see also 3 Witkin, Summary of Cal. Law (9th ed. 1987) Security Transactions in Real Property, § 159, pp. 658-659.).”
So as you can see, the non-purchase money unsecured lender may have rights to come back after you in California following a foreclosure sale by the first.
What if you short sale the property instead of letting it go to foreclosure? Well, this is where the new California laws come in (Sb 931 – which protects from deficiency judgments following the short sale of the first mortgage - and SB 458 which protects against deficiency judgments from a second lien holder that agrees/consents to a short sale). These are the subject of separate blog post. Many people think these laws may actually reduce the numbers of short sales the lenders will agree to. These code section added ccp 580e.
At any rate, what happens if the second sues you? Many people will then consider or at least review the potential for:
1. Working it out with the creditor or negotiating the debt down and paying off the second.
2. Some may consider filing bankruptcy. (ex. in a chapter 7 the unsecured debt can be potentially wiped out and discharged)
3. If sued on the note, some will raise the defense of recoupment (TILA), standing, FDCPA, or raise the 726 affirmative defense, etc.
These are just some options.
I hope you found this article helpful as far as understanding some of the basic principles at play. If you need a foreclosure or short sale lawyer to review your options contact us at (877) 276-5084. You can get video information through our Foreclosure Warrior website. This is an advertisement and communication.
Happy New Year.
Bank of America “Independent Foreclosure Review” only for the “financially inured”?
HO HO HO – Bank of America may be giving away cash TO THE FINANCIALLY INJURED under new INDEPENDENT FORECLOSURE REVIEW
Here is an interesting one. My friend brought over a mailer he just received from Bank of America which informs him that he may be entitled to money damages if he was in foreclosure between January 1, 2009 and December 31, 2010 and was “financially injured” by acts of the banks. Some examples they provide of what may constitute “FINANCIALLY INJURED” include:
- The mortgage balance at the time of foreclosure was more than you actually owed (they wouldn’t do that now would they)?
- You were doing everything the modification agreement required, but the foreclosure still happened (say it ain’t so Joe)
- The foreclosure action occurred while you were protected by bankruptcy (you mean a “stay violation”?)
- You requested assistance/modification, submitted complete documents on time, and were waiting for a decision when the foreclosure sale occurred (that’s real cool)
- Fees charged or mortgage payments were inaccurately calculated, processed, or applied
- The foreclosure action occurred on a mortgage that was obtained before active duty military service began and while on active duty, or within 9 months after the active duty ended.
- Foreclosing on your with bogus foreclosure documents
- Foreclosing on you while not following the California Foreclosure laws
- Foreclosing on you after you rescinded your loan under TILA (and had the clear ability to tender the loan balance)
- Foreclosing on elder homeowners who were trapped in an exploding option arm (negam loan)
Short sales becoming the rage with SB 931 and SB 458 says California short sale lawyer
CALIFORNIA SHORT SALE UPDATE – SB 931 and SB 458 prohibits deficiency judgments following short sales in California!
Well, many of the lenders and servicers were not great about doing loan modifications (even though they got their bailout), what about short sales? Will they do short sales without seeking deficiency judgments from California borrowers? In the past junior lien holders may have required cash contributions or required the borrower to carry a note of they wanted to do a short sale. However, recently California has passed two laws that help California homeowners facing foreclosure:
(1) SB 931 – This bill prohibited deficiency judgments by the first mortgage holder following a short sale transaction (a short sale is when you owe more than your house is worth and the bank allows you to sell it and the bank takes the loss). We will talk about mortgage debt forgiveness in another blog post and whether or not that may trigger any tax liability for forgiven debt. But the point is that SB 931 prevents the senior lien holder from pursuing a deficiency judgment where they agree to allow you to short sale your property. Note: we have seen situations where the defaulting borrower can afford their mortgage payment, but because they are upside down, the lender or loan servicer of the securitized loan refuses to short sale. Sometimes, where there is a second mortgage, the junior lien holder refuses to release the lien and the short sale never goes through. At any rate, SB 931 mererly states that where they DO AGREE to the short sale, they cannot come back after you for a deficiency judgment (which is the difference between what you owed the lender and what they actually got for the property in the short sale).
So, SB 931 was great where all you had was a first mortgage and no second mortgage (also called a junior lien). But what about when you had a first and second and the second wanted to come back at you for the deficiency judgment? SB 931 did not account for that scenario.
(2) SB 458 – This law came in and plugged the hole and basically states that the second or junior lien holder cannot come back at you for a deficiency judgment following a short sale. So this make a short sale a very attractive proposition right now (especially since a short sale is better on your credit score). The real question is whether or not the junior lienholder will still agree to the short sale, or whether they will be more inclined to NOT AGREE to the short sale where a borrower has assets that might be worth going after. There are also questions about whether or not the lender or loan servicer will seek contributions from the buyer of the property, or even commission reductions to the real estate agent. These are some things we will have to wait and see how lenders respond. In the meantime, this is hope for homeowners, and falls in line with HAFA which prohibits deficiency judgments.
So we may see a boom in short sale transactions in the year 2012 given these new laws, and where the mortgage debt forgiveness act may come into play to protect certain borrowers from having a taxable event when it comes to the shortsale. If you are not sure where you stand, or whether a short sale is in your best interest, give us a call. We can consult you in regard to liability in regard to the short sale. We may also be able to negotiate with your junior lien holder if they have sued you for a deficiency judgment arguing these laws and section 580 (e) of the code. A California short sale lawyer can help you look out for your best interest and avoid deficiency liability traps.
Is the Defense of TILA recoupment available as a Defense to Non judicial Foreclosure in California?
CALIFORNIA TRUSTEE SALE AND THE TILA RECOUPMENT DEFENSE
First off, what is recoupment under the Federal Truth in Lending Law?
We have talked on many other blog posts about the Federal Truth in Lending Act (“TILA”) and the one year right to statutory damages (which can be equitably tolled under some circumstances) and we have discussed TILA rescission which provides an “extended three year right to rescind the mortgage loan in a refinance transaction on a primary residence if certain “material violations” are present) – this right generally speaking cannot be extended and some courts require that the TILA lawsuit be FILED within three years. This blog post discusses a different legal right under TILA, which is the right to assert the defense of recoupment when a creditor initiates an action seeking to collect on a debt.
The goal of the defense is to reduce the amount you owe the creditor. In a successful action, the party raising the recoupment defense can seek reasonable attorney fees so there is also an economic incentive to raise the defense where applicable so that it may be easier to find an attorney willing to take the case.
As one California court discussed Recoupment is:
“A defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded.” TILA provides that the one-year statute of limitations on damages claims “does not bar a person from asserting a [TILA] violation in an action to collect the debt … as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law .” 15 U.S.C. § 1640(e) (emphasis added). See also 15 U.S.C. § 1635(i)(3) (“Nothing in this subsection affects a consumer’s right of rescission in recoupment under State law.”). Under California law, a claim for recoupment may be brought as a “defense” to an “action,” notwithstanding that the claim might otherwise be barred by the statute of limitations if brought as an independent action. CAL. CODE CIV. PRO. § 431.70. See the unreported case of Alakozai v. Valley Credit Union, No. C 10–02454 HRL, 2010 WL 5017173, (N.D.Cal. Dec.3, 2010) (quoting Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998)).
So essentially, where you have TILA violations (ex. under-disclosure of the APR, finance charge, total of payments, etc.) these violations must normally be brought within ONE YEAR in order to obtain actual and statutory damages. In limited circumstances, this can be tolled. However, when a debtor is responding to a creditor action (ex. a lawsuit, or a proof of claim in a bankruptcy court) to collect a debt, the one-year statute of limitations does NOT APPLY given the language contained in the underlined section above.
Can you argue the defense of recoupment in California when the lender seeks a non-judicial foreclosure – is that an action that allows the recoupment defense?
Short answer – probably not. Here is one California Federal Case which dismissed the TILA recoupment claim when raised in response to a non-judicial foreclosure action. Amaro v. Option One Mortgage, 2009 WL 103302, U.S. Dist. Ct. (CD Cal 2009):
“Plaintiff argues the doctrine of recoupment allows her to raise the claim, despite bringing it beyond the statute of limitations period. (See Opp’n at 8.) According to Plaintiff, “a party may assert recoupment as a defense after a statute of limitations period has lapsed.” (Id.) Plaintiff argues she may use this defense affirmatively in this case because she brings it in response to Defendant’s non-judicial foreclosure proceeding. (Id.) Plaintiff’s contention lacks merit. A party may bring a claim for recoupment after TILA’s one-year statute of limitations period has expired, but only as a defense in an action to collect a debt. 15 U.S.C. § 1640(a). Here, Plaintiff’s affirmative use of the claim is improper and exceeds the scope of the TILA exception, permitting recoupment as a defensive claim only. See id.; Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415-16, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998). Accordingly, the Court grants Defendant’s Motion with respect to Plaintiff’s first claim, without leave to amend.
Another California Court put it this way:
Recoupment is “a defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded.” Alakozai v. Valley Credit Union, No. C 10–02454 HRL, 2010 WL 5017173, (N.D.Cal. Dec.3, 2010) (quoting Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998)). TILA provides that the one-year statute of limitations on damages claims “does not bar a person from asserting a [TILA] violation in an action to collect the debt … as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.” 15 U.S.C. § 1640(e) (emphasis added). The Court must, therefore, determine if Defendant’s non-judicial foreclosure is an “action” and, relatedly, whether Plaintiff’s claim properly may be characterized as a “defense” to such “action.”
The general rule is that “[w]hen the debtor hales the creditor into court, the claim by the debtor is affirmative rather than defensive.” See Ortiz v. Accredited Home Lenders, Inc., 639 F.Supp.2d 1159, 1165 (S.D.Cal.2009). Specifically, in non-judicial foreclosure cases, federal district courts in California conclude that “non-judicial foreclosures are not ‘actions’ as contemplated by TILA.”4 Ortiz, 639 F.Supp.2d at 1165 (S.D.Cal.2009); Alakozai, 2010 WL 5017173; Lima v. Wachovia Mortg. Corp., No. C09–4798TEH, 2010 WL 1223234, (N.D.Cal. Mar.25, 2010). Indeed, TILA itself defines an “action” as a court proceeding. Ortiz, 639 F.Supp.2d at 1165 (citing 15 U.S.C. § 1640(e)). Thus, insofar as Plaintiff asserts recoupment in response to Defendant’s non-judicial foreclosure, her claim is not properly deemed a “defense” to an “action” for purposes of avoiding the applicable statute of limitations. (See Harris v. Wells Fargo, 2011 WL 1134216). For another example, see Lima v. Wachovia Mortgage Corp. (unreported). 2010 WL 1223234 (Cal. ND 2010).
NOTE: Keep in mind, in most cases in California, non-judicial foreclosure is the chosen foreclosure remedy (as opposed to judicial foreclosure which is also an option, but which is expensive and allows for these types of TILA recoupment claims) so raising a TILA recoupment claim will not likely save the home for foreclosure or provide any other meaningful remedy.
Are there any circumstances where the Defense of Recoupment may arise in California?
Sure, if any lender seeks to haul you into Court to collect on a mortgage debt, it may be wise to consult a predatory lending attorney and discuss a TILA audit of your loan file. In these circumstances, recoupment may be raised as a defense or to offset the creditors claims.
Another possibility is in a bankruptcy court. This is something your attorney should explore. For example, if you have filed Chapter 13 bankruptcy and the lender has filed a proof of claim (“an action”) you can file an adversary proceeding or take other appropriate measure to raise the defense of recoupment.
Here is one case that discussed recoupment in Chapter 13 bankruptcy (in re Coxson 43 F. 3d 189 (5th Circuit 1995):
“Commonwealth argues that the Coxsons’ TILA claim fails the second step of the test in Bull because the claim was not raised defensively. Commonwealth argues that the Coxsons “hauled” Commonwealth into court and initiated this lawsuit, and therefore the TILA claim is used offensively, rather than defensively. The district court disagreed, holding that the Coxsons filed this suit in response to Commonwealth’s filing of a proof of claim in the bankruptcy court and its foreclosure actions. The district court reasoned that filing a proof of claim is “an action to collect the debt,” and therefore the TILA claim was timely under 15 U.S.C. § 1640(e). We agree with the district court’s analysis. In this case, Commonwealth’s and the Coxsons’ claims arise from the same underlying transaction, the contract for financing the Coxsons’ home. See Plant v. Blazer Financial Services, Inc., 598 F.2d 1357, 1361 (5th Cir.1979); Maddox v. Kentucky Finance Co., 736 F.2d 380, 383 (6th Cir.1984). The mere fact that the Coxsons were the plaintiffs in the case below does not preclude the finding that their TILA claim was raised defensively. See, e.g., In re Jones, 122 B.R. 246 (plaintiff permitted to raise TILA recoupment claim defensively). Furthermore, Texas state courts have held that a TILA claim may be asserted defensively as a recoupment action against a lender attempting to enforce contractual obligations. Garza v. Allied Finance Co., 566 S.W.2d 57, 62-63 (Tex.Civ.App.-Corpus Christi 1978); Cooper v. RepublicBank Garland, 696 S.W.2d 629, 634 (Tex.Civ.App.-Dallas 1985) (holding that recoupment claim was raised defensively in response to creditor’s foreclosure efforts). We find that the TILA claim was not barred by the statute of limitations, and therefore remand the issue for consideration of the merits of the claim.
A similar outcome resulted in Davis v. Wells Fargo Financial, Chapter 13 case (case# 2:11-CV-02766-WMA – Aug. 2011) Northern District of Alabama. In that case, Wells Fargo filed the proof of claim against the debtor in chapter 13 bankruptcy case. The debtor filed an adversary proceeding for violations of TILA (failing to accurately disclose finance charge and APR). Wells Fargo moved to dismiss arguing the claim for damages was not brought within the one year statute of limitations under 1640 (e). The court held that 1640 (e) did not apply to recoupment claims asserted defensively. The Court held that the defense of recoupment DID APPLY as the proof of claim was the affirmative action that the debtor was responding to, and it was proper to seek damages, and attorney fees as permitted under TILA.
This might be important in some cases to help the debt reduce the amount of the debt owed which could make the chapter 13 plan viable (many chapter 13 plans fail and get converted to chapter 7’s). Recall as we have discussed in previous posts that in a chapter 13, you still have to bring your mortgage current and your arrears current over the life of the chapter 13 plan.
For example, if you have a HOEPA violation – which is an egregious form of TILA violation (high cost loans), you could seek actual and statutory damages and special enhanced damages (that might help offset the arrearages) as well as attorney fees.
A couple other notes:
(1) If you are in a chapter 13 consider having a TILA audit performed on your loan. You may have grounds to file an adversary proceeding raising the defense of recoupment following the proof of claim filed by the creditor. If for some reason the creditor does not file a proof of claim, there is some legal authority for filing a proof of claim on behalf of the creditor. See Federal Rules of Bankruptcy Procedure 3004. Note the time restrictions.
(2) In a chapter 7 there is some case law suggesting that a Motion for Relief from the Automatic stay in Bankruptcy is not an “action” to collect the debt and the defense of recoupment could not be raised. As one example, see Chabot v. Washington Mutual – 2007 WL 1412490 (Bankr. D. Mont. May 10, 2007) which held that such an action by the creditor is merely an action to “seek relief from the automatic stay” and not to collect a debt.
(3) Assignees of loans (ex. the securitized loan trust that is normally seeking to foreclose on you) are normally liable under TILA so be prepared to rebut that argument if you are a foreclosure defense attorney reading this.
(4) There is authority for raising a defense of recoupment in a chapter 13 even after the chapter 13 plan is confirmed. One such case is Elliot v. ITT, 150 B.R. 36 (N.D. Ill 1992).
(5) Talk to your bankruptcy attorney about whether you should list the debt as “disputed” on the bankruptcy petition and/or list the debt as “exempt.” Keep in mind, in a chapter 7 bankruptcy case, all pre-petition claims belong to the trustee so this is something you will need to keep it mind. If it is exempt claim, you may be able to bring the claim yourself. If not, the trustee can do what they want with the claim, including pursue it, or abandon it.
Hopefully this has been a helpful overview. To discuss TILA audits, predatory lending, adversary proceedings and the like, contact us at (877) 276-5084. This is an advertisement and communication. Article was written by Steve Vondran, Esq. All copyrights reserved. This is general legal information only and should not be relied on as legal advice.
California Quiet Title Lawsuit and Wrongfully initiation of foreclosure lawsuit shot down by Appellate court
PREEMPTIVE LAWSUIT TO ENJOIN THREATENED FORECLOSURE AND QUIET TITLE IN CALIFORNIA GETS THE BOOT
In a continuing series of defeats for California homeowners the Robinson case shot down another attempt at preventing a “pretender lender” from foreclosing. (Robinson v. Countrywide Home Loans,
Some homeowners in California continue to challenge MERS and their role in the foreclosure process and “wrongful initiation of foreclosure.” These types of suits may also seek to quiet title. Here is a recent case that denied the right to pursue that legal theory. Here are the facts of the case as discussed in the opinion
On or about June 1, 2010, plaintiffs filed a second amended complaint, alleging wrongful initiation of foreclosure (first cause of action), violation of Civil Code section 2943, subdivision (b)(1) (fourth cause of action) and unfair business practices (fifth cause of action). Plaintiffs also sought declaratory relief (second cause of action) and to quiet title (third cause of action).
The California court of Appeals disagreed with Plaintiff and in citing the Gomes case held:
California Ferguson Court holds you got to tender if you want to challenge the lender or alleged lender or the foreclosure sale
OH LENDER, PLEASE DON’T MAE ME TENDER. CHALLENGING WRONGFUL FORECLOSURE IN CALIFORNIA REMAINS DIFFICULT.
Citation: Ferguson v. Avelo Mortgage, LLC (Cal.App. 2 Dist. Jun. 1, 2011), Cal.Rptr.3d 2011, WL 2139143,
This case involves another challenge to a non-judicial foreclosure sale in California. The basic facts of this case are that a borrower initially took out a loan with New Century Mortgage which loan was accompanied by a MERS deed of Trust (MERS was the nominee of the lender and its successors and assigns under the deed of trust and also listed as the beneficiary). The Trustee under the Deed of Trust was First American Title Compamy.
After a default of the $600,000 purchase loan taken out by borrower HYUNH in 2006, the following sequence of recorded documents occurred:
(1) 8/3/07 a Notice of Default was recorded by Quality Loan Service Corporation (QLSC) – Note that the trustee under the Deed of Trust was First American Title;
(2) 8/30/07 Assignment of Deed of Trust was recorded (MERS assigned its beneficial interest to Avelo Mortgage) – Note the typical assignment of the Deed of Trust together with “notes therein” (The Fontenot case sees this as proper even though MERS does not, and has never held any note in its possession).
(3) 11/9/07 Notice of Sale by QLSC.
(4) 11/9/07 (same day but after the Notice of Sale was recorded) Substitution of Trustee was recorded substituting QLSC for First American Title (note, apparently this document was executed on 8/2/07 prior to the notice of default being recorded by QLSC);
Thereafter, the property was sold at non-judicial foreclosure trustee sale on 7/08. The purchaser at the foreclosure sale was Avelo Mortgage, allegedly paying 400k for the property. Avelo recorded the Trustees Deed upon sale.
After the sale, HYUNH (the original borrower), Quitclaimed his interest to Ferguson (the Plaintiff in this action) on 6/27/09. Ferguson recorded his Quitclaim deed on 7/1/09 and brought suit to Quiet Title against Avelo Mortgage arguing the foreclosure sale was illegal as Avelo received no valid interest from MERS in the Assignment of Deed of Trust since MERS had no note to assign, and thus Avelo had no authority to foreclose. Under this theory, Ferguson argued there was no requirement to tender the full amount of the loan balance to try to set aside the foreclosure sale and claim the property as his own since he was challenging the foreclosure “sale” and not the foreclosure “procedure”. In addition, Ferguson argued there can be no tender rule requirement where Avelo is not the true beneficiary (since they never got the note. Ferguson also sued HYUNH for fraud.
The Court disagreed with the Plaintiff Ferguson, and held that the tender rule applies whether or not Avelo had any note. Here is the relevant language of the case:
(3) The power of sale in a deed of trust allows a beneficiary recourse to the security without the necessity of a judicial action. (See Melendrez v. . . . Investment, Inc. (2005) 127 Cal.App.4th 1238, 1249 [26 Cal.Rptr.3d 413].) Absent any evidence to the contrary, a nonjudicial foreclosure sale is presumed to have been conducted regularly and fairly. (Civ. Code, § 2924.) However, irregularities in a nonjudicial trustee’s sale may be grounds for setting it aside if they are prejudicial to the party challenging the sale. (See Lo v. Jensen (2001) 88 Cal.App.4th 1093, 1097-1098 [106 Cal.Rptr.2d 443]; see also Angell v. Superior Court (1999) 73 Cal.App.4th 691, 700 [86 Cal.Rptr.2d 657] ["`In order to challenge the sale successfully there must be evidence of a failure to comply with the procedural requirements for the foreclosure sale that caused prejudice to the person attacking the sale.'"].) Setting aside a nonjudicial foreclosure sale is an equitable remedy. (Lo v. Jensen, supra, 88 Cal.App.4th at p. 1098 ["A debtor may apply to a court of equity to set aside a trust deed foreclosure on allegations of unfairness or irregularity that, coupled with the inadequacy of price obtained at the sale, mean that it is appropriate to invalidate the sale."].) A court will not grant equitable relief to a plaintiff unless the plaintiff does equity. (See Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575, 578-579 [205 Cal.Rptr. 15]; see also 13 Witkin, Summary of Cal. Law (10th ed. 2005) Equity, § 6, pp. 286-287.) Thus, “[i]t is settled that an action to set aside a trustee’s sale for irregularities in sale notice or procedure should be accompanied by an offer to pay the full amount of the debt for which the property was security.” (Arnolds Management Corp. v. Eischen, supra, 158 Cal.App.3d at p. 578; see also FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1022 [255 Cal.Rptr. 157] [rationale behind tender rule is that irregularities in foreclosure sale do not damage plaintiff where plaintiff could not redeem property had sale procedures been proper].)
However, a tender may not be required where it would be inequitable to do so. (See Onofrio v. Rice (1997) 55 Cal.App.4th 413, 424 [64 Cal.Rptr.2d 74]; see also Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868, 876-878 [97 Cal.Rptr.2d 255] [when new trustee has been substituted, subsequent sale by former trustee is void, not merely voidable, and no tender needed to set aside sale].) Specifically, “`if the [plaintiff's] action attacks the validity of the underlying debt, a tender is not required since it would constitute an affirmative of the debt.’” (Onofrio v. Rice, supra, 55 Cal.App.4th at p. 424.)
Appellants contend they are not challenging irregularities in the foreclosure proceeding. Rather, they argue that respondent is not the holder of the underlying promissory note and therefore cannot invoke the tender rule against them. In their complaint, appellants alleged that New Century remains in possession of the promissory note and that appellants owe no obligation to respondent. On appeal, appellants contend that whether respondent holds the promissory note is a factual dispute, and sustaining respondent’s demurrer presupposes that respondent has authority to enforce the loan obligation. They assert that while MERS had the authority to transfer its beneficial interest under the deed of trust, there is no evidence that MERS, which was acting as a nominee of New Century, held the promissory note and was authorized to assign the note itself to respondent.
The role of MERS is central to the issues in this appeal. “`MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members’ interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.’” (Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1151 [121 Cal.Rptr.3d 819] (Gomes v. Countrywide), quoting Mortgage Electronic Registration Systems, Inc. v. Nebraska Dept. of Banking & Finance (2005) 270 Neb. 529 [704 N.W.2d 784, 785].)
(4) Appellants cite two federal cases for the proposition that MERS, as the nominee of the lender under a deed of trust, does not possess the underlying promissory note and cannot assign it, absent evidence of an explicit authorization from the original lender. (See Saxon Mortgage Services, Inc. v. Hillery (N.D.Cal., Dec. 9, 2008, No. C-08-4357) 2008 U.S.Dist. Lexis 100056; see also In re Agard (Bankr. E.D.N.Y. 2011) 444 B.R. 231.) Not all courts agree on this issue and appellants do not distinguish nor address other cases that have upheld MERS’s ability to assign a mortgage. (See US Bank, N.A. v. Flynn(N.Y.Sup. 2010) 27 Misc.3d 802 [897 N.Y.S.2d 855, 859] [assignee of MERS has standing to initiate foreclosure proceeding because where "an entity such as MERS is identified in the mortgage indenture as the nominee of the lender and as the mortgagee of record and the mortgage indenture confers upon such nominee all of the powers of such lender, its successors and assigns, a written assignment of the note and mortgage by MERS, in its capacity as nominee, confers good title to the assignee and is not defective for lack of an ownership interest in the note at the time of the assignment"]; see also Crum v. LaSalle Bank, N.A. (Ala.Civ.App. 2009) 55 So.3d 266, 269.) We are not bound by federal district and bankruptcy court decisions, and the cases cited by appellants are in direct conflict with persuasive California case law.
In Gomes v. Countrywide, supra, 192 Cal.App.4th 1149, plaintiff Gomes obtained a loan from KB Home Mortgage Company (KB Home) to finance a real estate purchase. He executed a promissory note secured by a deed of trust naming KB Home as the lender and MERS as KB Home’s nominee and beneficiary under the deed of trust. (Gomes v. Countrywide, supra, 192 Cal.App.4th at p. 1151.) The deed of trust contained a provision granting MERS the power to foreclose and sell the property in the event of a default. (Ibid.) Gomes defaulted on his payments and was mailed a notice of default by ReconTrust, which identified itself as an agent for MERS. Attached was a declaration signed by Countrywide Home Loans, acting as the loan servicer. (Ibid.) Gomes filed suit against Countrywide Home Loans, ReconTrust and MERS for wrongful initiation of foreclosure, alleging MERS did not have authority to initiate the foreclosure because it did not possess the note and was not authorized by its current owner to proceed with foreclosure. (Id. at p. 1152.) Defendants demurred, arguing, among other things, that Gomes was required to plead tender to maintain a cause of action for wrongful foreclosure and that the terms of the deed of trust authorized MERS to initiate a foreclosure proceeding. The trial court sustained the demurrer without leave to amend. (Ibid.)
On appeal, the court affirmed the order, finding that Gomes could not seek judicial intervention in a nonjudicial foreclosure before the foreclosure has been completed. (Gomes v. Countrywide, supra, 192 Cal.App.4th at p. 1154.) Nonetheless, the appellate court reached the merits of Gomes’s claim as an independent ground for affirming the order sustaining the demurrer. The court rejected Gomes’s argument that MERS lacked authority to initiate the foreclosure procedure because the deed of trust explicitly provided MERS with the authority to do so. The court found that the “deed of trust contains no suggestion that the lender or its successors and assigns must provide Gomes with assurances that MERS is authorized to proceed with a foreclosure at the time it is initiated.” (Id. at p. 1157.) Thus, Gomes acknowledged MERS’s authority to foreclose by entering into the deed of trust. (Ibid.)
Just as in Gomes v. Countrywide, the deed of trust in this case specifically states: “Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.”
(5) Appellants concede that MERS had the authority to assign its beneficial interest to respondent.Accordingly, respondent had the same authority to initiate foreclosure proceedings. And while Gomes v. Countrywide did not address the tender issue, it does not follow that a beneficiary may initiate nonjudicial foreclosure proceedings under a deed of trust without the original promissory note, but cannot seek tender from a defaulting borrower attempting to set aside the foreclosure. Although California courts have not resolved this issue (see Miller & Starr, Cal. Real Estate (3d ed. 2010-2011 Supp.) Deeds of Trust and Mortgages, § 10:39:10, p. 4), several federal district courts in this state have upheld a beneficiary’s authority to initiate foreclosure proceedings and invoke the tender rule against a defaulting borrower, even when the beneficiary is not the holder of the original promissory note. Those courts have noted that “California law `does not require possession of the note as a precondition to [nonjudicial] foreclosure under a Deed of Trust.’” (Jensen v. Quality Loan Service Corp. (E.D.Cal. 2010) 702 F.Supp.2d 1183, 1189; see also Odinma v. Aurora Loan Services (N.D.Cal., Mar. 23, 2010, No. C-09-4674 EDL) 2010 U.S. Dist. Lexis 28347; see also Morgera v. Countrywide Home Loans, Inc.(E.D.Cal., Jan. 11, 2010, No. 2:09-cv-01476-MCE-GGH) 2010 U.S.Dist. Lexis 2037, p. *21 [MERS, as nominee of lender, has authority to initiate nonjudicial foreclosure without underlying promissory note].) Moreover, in cases involving an assignment of a deed of trust from MERS to a third party, courts have invoked the tender rule despite arguments that MERS did not have the authority to assign its interest under the deed of trust without the promissory note. (See Lai v. Quality Loan Service Corp.(C.D. Cal., Aug. 26, 2010, No. CV 10-2308 PSG (PLAx)) 2010 U.S. Dist. Lexis 97121.) Appellants offer no authority, state or federal, to support the legal loophole they claim for defaulting borrowers and their successors.
Appellants also argue that respondent was not authorized to substitute Quality as the trustee prior to becoming the beneficiary under the deed of trust. Quality initiated the foreclosure proceedings when it was not the trustee and therefore had no legal right to do so. Under a deed of trust, the trustee may be substituted by a “substitution executed and acknowledged by: (A) all of the beneficiaries under the trust deed, or their successors in interest. . .; or (B) the holders of more than 50 percent of the record beneficial interest of a series of notes secured by the same real property or of undivided interests in a note secured by real property equivalent to a series transaction, exclusive of any notes or interests of a licensed real estate broker that is the issuer or servicer of the notes or interests or of any affiliate of that licensed real estate broker.” (Civ. Code, § 2934a, subd. (a)(1).)
(6) We agree with appellants that respondent did not have the authority to execute a substitution of trustee until MERS assigned the deed of trust to it. Thus, Quality’s August 3, 2007 notice of default was defective. Nonetheless, Huynh had more than three months to satisfy his obligation before Quality executed a notice of sale. The substitution of trustee was effective when respondent became the beneficiary under the deed of trust and when the substitution was recorded on November 9, 2007. (Civ. Code, § 2934a, subd. (a)(4) ["From the time the substitution is filed for record, the new trustee shall succeed to all the powers, duties, authority, and title granted and delegated to the trustee named in the deed of trust."].) Thus, the notice of sale was valid.Quality then completed the foreclosure in July 2008, long after its substitution as trustee took effect. This situation is distinct from other cases that have voided a nonjudicial foreclosure sale when a party other than the trustee initiated the proceeding and completed the sale without having been substituted in as the trustee. (See Pro Value Properties, Inc. v. Quality Loan Service Corp. (2009) 170 Cal.App.4th 579, 583 [88 Cal.Rptr.3d 381]; see also Dimock v. Emerald Properties, supra, 81 Cal.App.4th at pp. 876-878 [foreclosure sale void where original trustee completed foreclosure sale after being replaced by new trustee].) Appellants offer no authority for the proposition that the defective nature of the initial notice of default corrupted all subsequent steps in the nonjudicial foreclosure proceeding such that the sale was void, not merely voidable.
Thus, this ruling seems to leave open a tiny door for situations where the wrong trustee sells the property at foreclosure sale. In those situations, the sale may be VOID with no obligation to tender. So, looking for grounds to challenge the Substitution of Trustee may be one of the few remaining challenges in California to either enjoin or set aside a wrongful foreclosure sale despite courts recognizing the the foreclosure procedure must be valid.
The Court cited Tender statute in California:
(8) A tender is an offer of performance made with the intent to extinguish the obligation. (Civ. Code, § 1485.) It must be unconditional (Civ. Code, § 1494) and offer full performance to be valid (Civ. Code, § 1486). Civil Code section 1512 provides: “If the performance of an obligation be prevented by the creditor, the debtor is entitled to all the benefits which he would have obtained if it had been performed by both parties.”
NOTE: I do not believe the “tender rule” is a hard and fast rule. You have to look at what your facts are. Some cases have held that a tender may not be required where it would be inequitable to do so. (See Onofrio v. Rice (1997) 55 Cal.App.4th 413, 424; see also Dimock v. Emerald Properties (which was actually cited by the Ferguson court) (2000) 81 Cal.App.4th 868, 876-878 [which held that there was no requirement to tender when the wrong trustee sells the property, in these instances, the sale is VOID, not merely VOIDABLE, and no tender was needed to challenge the VOID sale].) There are other cases that talk about VOID vs. VOIDABLE. However, you need to be aware of the rule, and there will be tender challenges raised in almost every case of wrongful foreclosure so there has to be a strategy, and cases to deal with that. Also, where the Plaintiff’s lawsuit challenges the validity of an alleged underlying debt, tender is not required since it would constitute an affirmation of the debt.” See Onofrio v. Rice, supra, 55 Cal.App.4th at p. 424.
NOTE2: This case also discussed the requirements of a Quiet Title lawsuit in California:
(2) Here, appellants sought to quiet title against respondents and set aside the trustee sale at which respondents purchased the property. In order to state a viable cause of action for quiet title, a complaint must include: “(a) A description of the property that is the subject of the action. . . . [¶] (b) The title of the plaintiff as to which a determination under this chapter is sought and the basis of the title. . . . [¶] (c) The adverse claims to the title of the plaintiff against which a determination is sought. [¶] (d) The date as of which the determination is sought. . . . [¶] (e) A prayer for the determination of the title of the plaintiff against the adverse claims.” (Code Civ. Proc., § 761.020.) To bring an action to quiet title a plaintiff must allege he or she has paid any debt owed on the property. Shimpones v. Stickney (1934) 219 Cal. 637, 649 ["[A] mortgagor cannot quiet his title against the mortgagee without paying the debt secured.”].) The complaint must also be verified (sworn under oath).
Gomes will help them sell Homes as Court rules in favor of MERS initiating foreclosure in California
GOMES V. COUNTRYWIDE – CALIFORNIA COURT HOLDS MERS HAS THE POWER TO FORECLOSE BECAUSE IT SAYS SO IN THE DEED OF TRUST
This is a second blog post dealing with various legal challenges to the MERS registration system and their ability to initiate a foreclosure in California. We previously discussed on our blog the holding in the Fontenot case, which also made it tougher to challenge a wrongful foreclosure sale. In this case, the borrower obtained a loan in 2004 through the “lender” KB Home Mortgage. In the Deed of Trust, MERS was identified as the “nominee for the lender, its successors and assisgns” and the Deed of Trust also stated “MERS is the beneficiary under this security instrument.” This is typical MERS language. When the borrower fell behind on mortgage payments a Notice of Default was recorded by Recontrust Co. on 3/10/09. Prior to the foreclosure sale, Gomes, the Plaintiff, initiated a legal action to try to prevent the sale. The Defendants do what they will normally do – file a demurrer and argue the tender rule. They also said the legal challenge was invalid because “produce the note” may not be used as a legal theory to defend against a non-judicial foreclosure sale. The Court agreed on all counts. The Plaintiff argued MERS had no proof it owned the note, and no proof it had authority from the noteholder to initiate the foreclosure sale. The Court disagreed. In so holding, the Court is basically saying it is not your right to know who is foreclosing on you because you gave MERS authority to do whatever the lender could do when you signed the Deed of Trust.
Here is some language from the case:
As we have talked about many times on various blog posts “produce the note” will not stop a civil foreclosure, but may rear its head as a standing and real party in interest issue in a bankruptcy setting. The Court continued:
The only real glimmer of hope from the Gomes case is that the Court discussed the Ohlendorf decision (backdating of the Assignment of Deed of Trust) which was not alleged by the Plaintiff:
For instance, in Ohlendorf, the plaintiff alleged wrongful foreclosure on the ground that assignments of the deed of trust had been improperly backdated, and thus the wrong party had initiated the foreclosure process. (Ohlendorf, supra, 2010 U.S.Dist. Lexis 31098 at pp. *22-*23.) No such infirmity is alleged here.
Taking this case, with the Ferguson case, Fontenot and others, it is still a difficult feat to try to stop or overturn a wrongful foreclosure sale in California. Some of the best legal challenges may well exist in a bankruptcy court.
Fontenot case from California Court of Appeals validates MERS role in the foreclosure process and makes it tougher to challenge wrongful foreclosure
Fontenot v. Wells Fargo Bank, N.A. Court of Appeals of California, First District, Division One (2011).
Well we have been talking about wrongful foreclosure, the role of MERS and irregularities in the foreclosure process for years now. The Fontenot case recently decided by the California Court of Appeals offers good language for lenders, servicers and MERS. This case can be seen as another case in the lender foreclosure toolbox, along with the Gomes case, and the Ferguson case.
Facts of Fotenot v. Wells Fargo (you can find the full set of facts here if you do not like my condensed version)
A homeowner who was in default, and who was promised a modification, (but ultimately was foreclosed on), brought a lawsuit alleging wrongful foreclosure based on irregularities in the chain of title and challenging MERS in various capacities. The trial court upheld the foreclosure, and so did the court of appeal.
Specifically, the Plaintiff was challenging the Assignment of Deed of Trust from MERS to HSBC (the trustee of the securitized loan trust). The Assignment of Deed of Trust states (as most do) that the Assignment of Deed of Trust is made together with “the notes therein.” Plaintiff argued that MERS had no promissory note to transfer and as such, there was no transfer of the note, and a transfer of the ADOT by itself (without the note) was a meaningless act. Case law was cited for this proposition. As such, Plaintiff argued that HSBC never got the note, and was thus not in the position to foreclose on the property. Also, Plaintiff argued this fact made the Substitution of Trustee (in favor of NDEX West, LLC), improper as only the beneficiary can substitute the trustee. If the substitution of trustee was not proper, it appears Plaintiff was arguing that would also invalidate the Notice of Default. At any rate, based upon this, Plaintiff asserted the eventual non-judicial foreclosure sale was invalid and must be set-aside.
California Court of Appeal Holding
The Court completely disagreed with Plaintiff and essentially stated that the borrower appoints MERS as beneficiary in a nominee capacity in the Deed of Trust. And since the Deed of Trust empowers MERS to take any action the lender can take (when law or custom requires it) that MERS can assign the deed of trust and the “notes therein” even though MERS itself may hold no note at all. This was based on the concept that MERS can transfer the note on behalf of the lender even if it does not have the note. Which is strange because the note was supposed to be in the HSBC early on in the securitization process. At any rate, the Court found nothing improper in this and said:
As you can see, part of the problem may have been insufficient allegations. In addition to this, the Court also discussed a few other potential obstacles to a Plaintiff succeeding in a wrongful foreclosure case in California. Specifically, the court cited to the Ferguson case which held that irregularities in the foreclosure process cannot be made unless the borrower pleads willingness and ability to “tender” the balance of the loan. We have talked about the “tender rule” in many other blog posts. To this point the Court stated:
We also note a plaintiff in a suit for wrongful foreclosure has generally been required to demonstrate the alleged imperfection in the foreclosure process was prejudicial to the plaintiff’s interests. (Melendrez v. D & I Investment, Inc., supra, 127 Cal.App.4th at p. 1258; Knapp v. Doherty, supra, 123 Cal.App.4th at p. 86, fn. 4 ["A nonjudicial foreclosure sale is presumed to have been conducted regularly and fairly; one attacking the sale must overcome this common law presumption `by pleading and proving an improper procedure and the resulting prejudice'"], italics added; Lo v. Jensen (2001), 1097-1098 [collusion resulted in inadequate sale price]; Angell v. Superior Court (1999), 700 [failure to comply with procedural requirements must cause prejudice to plaintiff].) Prejudice is not presumed from “mere irregularities” in the process. (Meux v. Trezevant (1901) 132 Cal. 487, 490.) Even if MERS lacked authority to transfer the note, it is difficult to conceive how plaintiff was prejudiced by MERS’s purported assignment, and there is no allegation to this effect. Because a promissory note is a negotiable instrument, a borrower must anticipate it can and might be transferred to another creditor. As to plaintiff, an assignment merely substituted one creditor for another, without changing her obligations under the note. Plaintiff effectively concedes she was in default, and she does not allege that the transfer to HSBC interfered in any manner with her payment of the note (see, e.g., Munger v. Moore (1970) 7-8 [failure by lender to accept timely tender]), nor that the original lender would have refrained from foreclosure under the circumstances presented. If MERS indeed lacked authority to make the assignment, the true victim was not plaintiff but the original lender, which would have suffered the unauthorized loss of a $1 million promissory note.
Again, there were no allegations to help the Plaintiff. Which sends a signal to Plaintiffs challenging a wrongful foreclosure – BE PREPARED TO EXPLAIN HOW YOU WERE PREJUDICED by irregularities in the process. The Court also went on to discuss what Plaintiff argued was an ambiguity in the Deed of Trust in regard to the function MERS assumes – THE COURT DISAGREED:
Finally, plaintiff contends the deed of trust was ambiguous because it designated MERS as both the “`nominee for the beneficiary’ “and as the “beneficiary.” An entity cannot be, plaintiff argues, both an agent and a principal. The record does not support the claimed ambiguity. Contrary to plaintiff’s assertion, the deed of trust did not designate MERS as both beneficiary of the deed of trust and nominee for the beneficiary; rather, it states that MERS is the beneficiary, acting as a nominee for the lender. There is nothing inconsistent in MERS’s being designated both as the beneficiary and as a nominee, i.e., agent, for the lender. The legal implication of the designation is that MERS may exercise the rights and obligations of a beneficiary of the deed of trust, a role ordinarily afforded the lender, but it will exercise those rights and obligations only as an agent for the lender, not for its own interests. Other statements in the deed of trust regarding the role of MERS are consistent with this interpretation, and there is nothing ambiguous or unusual about the legal arrangement. Plaintiff’s argument appears to be premised on the unstated assumption that only the owner of the promissory note can be designated as the beneficiary of a deed of trust, but she cites no legal authority to support that premise.
The Court also discussed how the beneficiary of a loan is normally the “owner of the loan” but that MERS could still use the “beneficiary” designation in the Deed of Trust and act as the beneficiary:
Ordinarily, the owner of a promissory note secured by a deed of trust is designated as the beneficiary of the deed of trust. (11 Thompson on Real Property (2d ed. 1998) § 94.02(b)(7)(i), p. 346.) Under the MERS System, however, MERS is designated as the beneficiary in deeds of trust, acting as “nominee” for the lender, and granted the authority to exercise legal rights of the lender. This aspect of the system has come under attack in a number of state and federal decisions across the country, under a variety of legal theories. The decisions have generally, although by no means universally, found that the use of MERS does not invalidate a foreclosure sale that is otherwise substantively and procedurally proper.
Interesting is the last section of this “sale that is otherwise substantively and procedurally proper.” But under what grounds can someone raise a challenge to the substantive or procedure taken? When you do, you face the “tender rule” which this Court also raised to firm up the opinion (citing the Ferguson case):
Taking these internal citations at face value, when can the substance or procedure of a foreclosure be challenged? Only if you can tender the full loan balance, and were prejudiced by the recorded documents appears to be this Court’s answer. If true, what incentive is there for any lender or loan servicer, or MERS to follow any of the non-judicial foreclosure laws if there is no way to challenge bona fide irregularities that may arise (or can we call it failure to strictly follow the California non-judicial foreclosure laws)? In other words, how does this holding square up with other holdings in California?
In Miller v. Cote, 179 Cal.Rptr. 753, (Ct of App. Fourth Dist. Div. 2 1982), the Court, in calling the notice of default fatally defective stated: “The procedure for foreclosing on security by a trustee’s sale pursuant to a deed of trust is set forth in Civil Code section 2924, et seq. The statutory requirements must be strictly complied with, and a trustee’s sale based on a statutorily deficient notice of default is invalid. (System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 152-153, 98 Cal.Rptr. 735; see California Mortgage and Deed of Trust Practice (Cont.Ed. Bar 1979) s 6.40, p. 295; see also Bisno v. Sax (1959) 175 Cal.App.2d 714, 720, 346 P.2d.
At any rate, I understand if you have a borrower in default, with no ability to ever repay the loan, bring it current, etc., and you can never count on a loan modification, but what about those California homeowners who DO have the ability to make their loan payments, but were told to miss their payments if they wanted help in a loan modification, and who were forced into default. If these people want to try to bring their loans current or challenge the foreclosure process they will have a tough time doing so. Of course they can just pay up and bring the loan current, but what happens alot of times is the house is sold when the homeowner is told they are in review. In this case, the house is sold and the tender rule cited in this case can be arguably used against the borrower. This is not far fetched. We get calls all the time from people who were told not to pay and then their house was sold. This case makes it tougher to set these sales aside where irregularities in the sale can be properly alleged. Here, it does not appear the Court was buying the irregularity arguments raised by Plaintiff which focused on the role of MERS. To provide extra emphasis, the Court cited tot he recently decided Gomes case which also validated the role of MERS in that case:
In Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App. 4th(Gomes), the plaintiff sought to prevent foreclosure on his home. He sued MERS, among others, alleging he was unaware of the identity of the owner of his promissory note, but believed the owner had not authorized MERS to proceed with the foreclosure. The plaintiff sought to enjoin foreclosure in the absence of proof that MERS was authorized by the note’s owner to proceed. (Id. at p. 1152.) The court rejected the claim on both procedural and substantive grounds. With respect to the former, the court concluded the “`comprehensive’” statutory framework regulating nonjudicial foreclosure, Civil Code sections 2924 through 2924k, did not require the agent of a beneficial owner, such as MERS, to demonstrate that it was authorized by the owner before proceeding with foreclosure, at least in the absence of a factual allegation suggesting the agent lacked authority. (Gomes, at pp. 1155-1156.) As the court reasoned, Civil Code section 2924, subdivision (a)(1), which states that a trustee, mortgagee or beneficiary, or an agent of any of them, may initiate foreclosure, does not include a requirement that an agent demonstrate authorization by its principal. (Gomes, at pp. 1155-1156.) The court also found no substantive basis for the challenge, noting, as here, the plaintiff had agreed in the deed of trust that MERS could proceed with foreclosure and nonjudicial sale in the event of a default. Because the deed of trust did not require MERS to provide further assurances of its authorization prior to proceeding with foreclosure, the plaintiff was not entitled to demand such assurances. (Id. at p. 1157.)
As you can see, the lender toolbox will have some cases ready for the California homeowner who wishes to challenge a trustee sale on wrongful foreclosure grounds. Fontenot, Gomes, and Ferguson.
For more information see our ForeclosureWarrior.com website.
California TRO injunction package available on Foreclosure Warrior!
California Foreclosure Lawyers Tools, Pleadings, Sample Letter and more to help you fight the good fight!
For those who have not heard, we have launched a foreclosure warrior website that aims to give consumers in California information on foreclosure, short sales, litigation and more. The information is general information and is in video format to make it easier to enjoy. The foreclosure warrior website also contains valuable documents for California foreclosure, bankruptcy and real estate lawyers.
One such document for bankruptcy lawyers is a motion to oppose the lifting of the automatic stay in bankruptcy court.
Here is another pleading for warrior lawyers:
Click here to purchase the bundled TRO and Injunction application package
Attorney Steve on Mark and Bryan Real Estate Radio Show 105.5 FM
Here is a link to a real estate radio show I was recently on (Mark and Bryan Real Estate Radio Show). You need to scroll down to the September 22, 2011 show.
California Foreclosure Case Law for Lawyers fighting predatory lending and wrongful foreclosure
CALIFORNIA WRONGFUL FORECLOSURE CASE LAW ON FORECLOSURE WARRIOR
For California real estate, bankruptcy and predatory lending lawyers we have sample foreclosure pleadings, TRO applications, lift stay motions and now we have added California case law to put in your homeowner defense toolbox.
You can visit our Foreclosure Defense website where you can access case law ready for you to cut an paste into your complaints, demurers, motions to dimiss and other legal pleadings.
Here is a short snippet of the case law you will get when you sign up:
OTHER GROUNDS TO SET ASIDE FORECLOSURE SALE
(5) In the case of Bank of America National Trust & Savings Association v. Reidy, 15 Cal. 2d. 243, 248 (1940), the Court held:
It is the general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties. Sham bidding and the restriction of competition are condemned, and inadequacy of price when coupled with other circumstances of fraud may also constitute ground for setting aside the sale. (Haley v. Bloomquist, 204 Cal. 253 [268 Pac. 365]; Dealey v. East San Mateo Land Co., 21 Cal. App. 39 [130 Pac. 1066]; Bernheim v. Cerf, 123 Cal. 170 [55 Pac. 759]; Packard v. Bird, 40 Cal. 378; Goodenow v. Ewer, 16 Cal. 461 [76 Am. Dec. 540].).
(6) In re Worcester, 811 F.2d 1224, 1228, (1987) the Court held:
Under California law, “gross inadequacy of price coupled with even slight unfairness or irregularity is a sufficient basis for setting the sale aside.” Whitman v. Transtate Title Co., 165 Cal.App.3d 312, 323, 211 Cal.Rptr. 582, 589 (1985); see also Sargent v. Shumaker, 193 Cal. 122, 129-30, 223 P.2d 464, 467 (1924).
The property here sold well below the published bid, and raises a presumption of irregularity.
REMEMBER, WHENEVER THERE IS A WRONGFUL FORECLOSURE, SEE IF YOU CAN ARGUE MUNGER V. MOORE AND SECTION 3333 DAMAGES (EX. MONEY THEY HAD TO PUT OUT FOR ATTORNEY IN UNLAWFUL DETAINER CASE, AND CURRENT CASE, AND ANY OTHER DAMAGES “WHETHER FORESEEABLE OR NOT”). California Civil Code Section 3333.
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