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Palo Alto real estate attorney Julia Wei providing commentary & insight into trends in California real estate law & lending law, mortgages & foreclosures.

What Happens to an Abstract of Judgment When the Debtor Files Bankruptcy?

August 7th, 2013 · California Judgment Enforcement/Collection, Creditor's Rights in Bankruptcy, Residential Real Estate

 By: Julia M. Wei, Esq.

Normally when a party wins at trial, all the prevailing party has is a judgment. It takes more than the issuance of a judgment to get paid on it if the debtor is being evasive.

In order to “perfect” the judgment, the judgment creditor can and should request the court clerk issue the Abstract of Judgment. A creditor can then record it in any county that the debtor owns property. If the debtor owns anything in that county, the abstract will attach to the property, even after acquired property and then the judgment becomes a lien against the property. California statutes in the Enforcement of Judgment section are pretty clear – the lien remains until the judgment is satisfied.

If the debtor then files bankruptcy, perfected judgment liens would NOT be extinguished through sections 550 and 551 of the Bankruptcy Code.

In the recent case of Daff v. Wallace (In re Cass), the debtor transferred her house to her daughter and reserved a life estate for herself. Debtor and daughter also had an agreement to transfer the house back to the Debtor later—clearly a fraudulent transfer, solely for the purpose of hinder or evading creditors. Creditors sued on the fraudulent transfer and obtained a judgment, and recorded the Abstract of Judgment.

Here is the first twist—the Debtor didn’t actually own any thing in the county where the abstract was recorded since she had fraudulently transferred it to her daughter.

Here’s the second twist – the Debtor filed for Chapter 7 bankruptcy and the Chapter 7 Trustee got involved in the litigation and entered into a stipulated judgment avoiding the fraudulent transfer—bringing the asset back into the bankruptcy estate.

Naturally, the creditors and the trustee’s disagreed as to how sale proceeds of the asset should be paid. Judgment creditors claimed the lien attached to the sale because the fraudulent transfer was voided. The trustee claimed that the lien was invalid because the transfer to the daughter took place before the abstract of judgment was recorded.

Victory for the Judgment Creditor:
Clearly, California law supports the creditors here and the bankruptcy court agreed. The trustee appealed and the Ninth Circuit BAP agreed with the creditors too. The transfer to the daughter was void as if it had never happened, therefore the creditor’s lien was properly attached and the creditor was entitled to the sales proceeds.

Pyrrhic Victory?
The creditors litigated this matter through two state court actions and one bankruptcy adversary proceeding and appeal. That is essentially four stages of litigation. The number of years and the amount of attorney’s fees to chase down this debtor must have been tremendous.
 

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Why Lenders, Loan Servicers and Trustees Need to Understand the Intengan Case

April 1st, 2013 · Foreclosure Defense Lawsuits, Foreclosures, Residential Real Estate, Trust Deeds

 Today my colleague Simon Offord published a short case update in our firm’s monthly newsletter* regarding the case of Intengan v. BAC Home Loans Servicing (March 22, 2013).

He writes: “… the 1st District Court of Appeal recently held that a homeowner may pursue a wrongful foreclosure claim against a loan servicer even though the lender provided a declaration of due diligence regarding its alleged attempts to contact the borrower. Specifically, the Court found that because the due diligence declaration entered with the Notice of Default did not provide any specific facts to support the conclusion that the lender tried to contact the borrower, what the lender actually did to comply with the statute was reasonably subject to dispute. Therefore, the borrower alleged sufficient facts to support a cause of action for wrongful foreclosure.”

I don’t have same space constraints that Simon had to discuss the issue so I wanted to elaborate on why this ruling is so significant for private lenders, mortgage loan servicers, mortgage brokers and trustees defending against wrongful foreclosure lawsuits.

1. Wrongful Foreclosure Cases Will Now Take Longer to Defend Because It Will be Difficult to Challenge Faulty Complaints by Demurrer.

California’s non-judicial foreclosures laws are in codified in the California Civil Code, beginning with the newly added sections of 2920.15 et seq. The Code requires that loan servicers comply with certain notice provisions. Here in Intengan, the Court noted:
“Civil Code section 2923.5 precludes a trustee (like respondent ReconTrust) or mortgage servicer (such as BAC/respondent Bank of America) from recording a notice of default until 30 days after the loan servicer has made initial contact with the borrower to assess the borrower's financial situation and explore options for avoiding foreclosure, or has satisfied the due diligence requirements of the statute. (Civ. Code, § 2923.5, subd. (a)(1).) Due diligence requires sending a letter by first class mail, making three attempts to contact the borrower by telephone, and sending a certified letter if no response is received within two weeks of the telephone attempts. (Civ. Code, § 2923.5, subd. (e).)”

Normally, when a defendant such as the loan servicer or trustee is faced with this type of complaint, their counsel will file a demurrer challenging the sufficiency of the allegations. Additionally, it is customary to seek judicial notice of documents such as the Trustee’s Deed, the Notice of Default and the Notice of Trustee’s Sale (usually publicly recorded documents). As is also customary in the industry, the Notice of Default contains a declaration that the Trustee has complied with the requirements of the Code.

Plaintiff-borrowers can prevail in an early demurrer to fight another day given that the evidence of whether a lender/trustee complied with the law is a factual dispute—not something that can disposed of with a demurrer.

In Integan, the plaintiff (rightfully) objected to the taking of judicial notice of the underlying facts in the trustee’s declaration because those were disputed facts and could not be judicially noticed as being true.

“While judicial notice could be properly taken of the existence of Jones' declaration, it could not be taken of the facts of compliance asserted in the declaration, at least where, as here, Intengan has alleged and argued that the declaration is false and the facts asserted in the declaration are reasonably subject to dispute.”

2. Tender Offer Rule Is Being Whittled Away
There is a disturbing chain of cases that seems to suggest that there are exceptions to the Tender Offer Rule. Plaintiff Intengan cites Pfeifer v. Countrywide Home Loans, Inc. for the premise that no tender is required if there is no sale to set aside and lenders had not complied with the condition precedent to foreclosure. The Intengan court declined to rule on the issue of whether tender was required in this case but did have some dicta that is troubling, saying:

“While the tender requirement may apply to causes of action to set aside a foreclosure sale, a number of California and federal courts have held or suggested that it does not apply to actions seeking to enjoin a foreclosure sale — at least where the lenders had allegedly not complied with a condition precedent to foreclosure. (See, e.g., Pfeifer v. Countrywide Home Loans, Inc. (2012) 211 Cal.App.4th 1250, 1280-1281 [failure to allege tender of full amount owed did not bar declaratory relief or injunctive relief based on wrongful foreclosure, where lenders had not yet foreclosed and borrowers alleged that lenders had not complied with servicing regulations that were a condition precedent to foreclosure]; Mabry v. Superior Court (2010) 185 Cal.App.4th 208, 225 [borrower not required to tender full amount of indebtedness in seeking to enjoin foreclosure sale based on alleged failure to comply with Civ. Code, § 2923.5] (Mabry); Barrionuevo v. Chase Bank, N.A. (N.D. Cal. Aug. 6, 2012) 885 F.Supp.2d 964, 2012 U.S. Dist. LEXIS 109935, at pp. *12-13 & fn. 4 [no tender requirement where foreclosure sale had not yet occurred, in case where noncompliance with Civ. Code, § 2923.5 was alleged] (Barrionuevo).)”


Ultimately, of all the laundry list of allegations that the borrower had against the lenders and servicer in this case, (quiet title, slander of title, unfair competition, fraud, intentional misrepresentation), the only cause of action that survived was wrongful foreclosure on the evidentiary grounds discussed above. As to quiet title, the Intengan court opined that the borrower had NOT complied with the tender offer rule:
“Here, Intengan has not alleged a tender of the outstanding indebtedness or even her willingness and ability to do so. As discussed ante, her allegation that she was willing to tender the reasonable mortgage payments is insufficient. A valid tender of performance must be of the full debt, in good faith, unconditional, and with the ability to perform. (Civ. Code, §§ 1486, 1493, 1494, 1495.)”

Conclusion
Wrongful foreclosure litigation was expensive and time consuming even before this ruling. If a borrower challenges that certain events occurred, the trustee/lender/servicer needs to be prepared to have admissible evidence that compliance has occurred. Furthermore, the expectation that these cases can be dealt with at the demurrer level has to be adjusted that this matter is going to be subject to a Motion for Summary Judgment, which is a much more involved motion.

*These types of case updates are not found anywhere on the firm’s website but if you subscribe (click here to subscribe) to the newsletter, the firm’s weekly blog articles and video blogs are compiled into one monthly update for the reader, and the newsletter includes additional free premium content such as the case update.

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What You Didn’t Hear About the Fiscal Cliff Vote – Mortgage Debt Relief

January 4th, 2013 · California Lending & Mortgage Law, Current Affairs, Foreclosures, Residential Real Estate, Trust Deeds

By Julia M. Wei, Esq.

Buried in the New Year’s Day bill was SEC. 202, which extended the Mortgage Debt Forgiveness Relief Act through 2013. Except, the section was cryptically called “EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.” That means for homeowners who were approved for short sales or were foreclosed upon through December 31, 2013, they are still eligible for the tax relief to avoid the tax on the debt forgiveness (which is ordinarily considered income).

If you recall, the original law was passed in 2007 and intended to provide relief through the end of 2009.  However, it became clear that lenders were still conducting foreclosure sales and approving short sales after 2009 and so the relief was extended by the Emergency Economic Stabilization Act of 2008 to continue through December 31, 2012. 

If you're interested in reading the bill, it's here and Section 202 starts on Page 25.

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New California Foreclosure Laws for 2013

November 6th, 2012 · California Lending & Mortgage Law, Foreclosures, Trust Deeds

 In July, I posted a snippet about the "Homeowner's Bill of Rights" ("HOBR" or "HOBoR"), also known as the California Foreclosure Reduction act.

At the firm's law blog, I later wrote with more specificity about HOBR explaining some of the requirements that have changed about notices to foreclosure sales -- such as:

  • Before a Notice of Default ("NOD") may be recorded, the borrower is entitled to a Pre-NOD notice advising of the borrower's right to documentation.
  • After an NOD is recorded, the servicer must send the borrower a notice within 5 business days advising of foreclosure prevention alternatives ('FPA")
  • The servicer must send the borrower a written acknowledgment letter 5 days after receipt of borrower's loan modification application.
  • Denial letters of loan mod applications must include information about the appeals process
  • Foreclosure notices must be personally served. 
  • If a trustee's sale is post-poned more than 10 days, the servicer must provide a written notice to the borrower within 5 business days.
  • Most importantly - the servicer must rescind the NOD or cancel the trustee's sale when the borrower executed a "permanent foreclosure prevention alternative.

In addition to HOBR, Governor Jerry Brown also signed into law SB1191 in late September, which requires landlords in foreclosure to disclose that fact to prospective tenants.  This law goes into effect January 1, 2013.  More details here on the firm's blog and here and Senator Simitian's site.

 

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Private Lender Fails to Tighten Up Promissory Note, Loses ~$200K of Interest

September 25th, 2012 · California Lending & Mortgage Law, Foreclosures

 By: Julia M. Wei, Esq.

Lenders may not be scrutinizing their loan documents as closely as borrowers are these days. Certainly, private lender Hyman Levy had a rude awakening when the appellate court concluded Levy was NOT entitled to default interest when the borrower did not make the balloon payment on a loan of $2.7M.

Mr. Levy, a philanthropist, made a $2.7M loan to the JCC at a rate of 5%. The loan was secured by the property where the JCC was operating its facilities. The note had language commonly seen in notes, such as an acceleration clause. For example, if the borrower defaulted, or had sold or otherwise transferred the property without lender approval, the entire amount of the loan would become due immediately. (The provision is also referred to sometimes as a “due on sale” or “due on encumbrance” clause.)

In that same paragraph as the acceleration clause, the note allowed for default interest at a rate of 11.25%, which would accrue AFTER the lender accelerated the loan.

Here’s how it would work:

Borrower misses 3 payments ==> Lender accelerates ==> from this point on, default rate applies

However, in Mr. Levy’s case, he did not accelerate the loan (possibly because he had no grounds to do so) and it matured after a year. The JCC did not pay it off. The parties had been negotiation for a long time, and finally, Mr. Levy recorded a Notice of Default since it had been a year since the loan matured (entitling him to 2 years of interest!).

Here’s where things went wrong for the lender:
• Lender asked for $455k of interest (2 years of interest at 5% is only $270k);
• Lender asked for $15k of attorney’s fees when only $4k was actually related to the foreclosure;
• Lender did not provide the borrower’s attorney with an explanation of the fees thereby violating California Civil Code § 2943, subd. (a)(5);
• Lender rejected borrower’s offer of the loan amount plus $270k of interest; and
• The borrower paid the full amount in protest and sued.

California Law Puts the Burden on the Lender to Expressly State When Default Interest Can Be Charged.

Mr. Levy’s note was boiler plate, possibly more than 10 years out of date, because a case had already come down a decade ago against the lender on the same issue. A lender cannot charge default interest if the loan has not been accelerated.

Levy tried to argue that the maturity was a missed payment and that the acceleration was AUTOMATIC. WRONG.  The contract did not say that default interest could apply after maturity.

In contrast, the compounding provision was very clear, “Should interest not be paid when due, it shall thereafter bear like interest as principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law.” The Court agreed with Levy that the compounding provision was automatic so the borrower lost that challenge.

The JCC was awarded the attorney’s fees on appeal and the matter was remanded back to the trial court to recalculate the interest at the lower rate, and to credit the JCC for 21 days of interest since Levy did not respond to the JCC’s request for an explanation of the interest calculation. [JCC Development Corp. vs. Levy, 2012 Westlaw 3776544 (Cal.App.).]


Better Drafting Next Time
Lenders can learn some lessons from Mr. Levy’s case:
1. Tighten up the language of your promissory notes.
2. Know the basis for accelerating a loan.
3. Respond to the borrower’s request in a timely fashion.

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California Passes “Homeowner Bill of Rights” Legislation

July 2nd, 2012 · California Lending & Mortgage Law, Current Affairs, Foreclosures, Residential Real Estate, Trust Deeds

 With much fanfare, the Attorney General's office announced today the passage of a collection of bills intended to protect homeowners who are attempting a loan modification.  

Among the key provisions, the statutes will:

-Require creditors to provide documentation to a borrower that establishes the creditor’s right to foreclose on real property prior to recording a notice of default.
-Require creditors to provide documentary evidence of ownership, the chain of title to real property, and the right to foreclose, at the time of the filing of a notice of default.
-Prohibit creditors from recording a notice of default when a timely-filed application for a loan modification or other loss mitigation measure is pending.
-Prohibit creditors from recording a notice of sale when a timely-filed application for a loan modification or other loss mitigation measure is pending.
-Prohibit creditors from recording a notice of sale while a borrower is in compliance with the terms of a trial loan modification or after another loss mitigation measure has been approved.
-Require creditors to disclose why an application for a loan modification or other loss mitigation measure has been denied.
-Require that notices of foreclosure sales be personally served, including notices of foreclosure sale postponement.
-Provide homeowners with a private right of action in instances in which the requirements set forth in the legislation are not followed.

These cluster of bills (Senate Bill 1470-74) will amend California Civil Code Section 2923.5 and 2924 (which is where the non-judicial foreclosure laws are located) and will add new sections: 2923.6, 2924.9, 2924.10, 2924.11, 2924.12, 2924.13, 2924.14, 2924.15, and 2924.16 to the Civil Code.

Perhaps the most important for consumers is that this legislation bars dual-tracking, which I have always considered to be a confusing and misleading process.

 The documentation required to "prove" that a lender has the right to foreclose seems a bit nebulous to me, but there is a list of suggested documents and the new process will require a statement setting forth the facts supporting why the beneficiary (or its agent or assignee) has the right to foreclose. These parts of the statute seem unduly burdensome. It would have been easier to default to what the bankruptcy court requires in the Proof of Claim process instead, which is pretty standardized at this point.

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Foreclosure Investors: Getting Relief When the Occupant Files for Bankruptcy

May 21st, 2012 · Co-Ownership of Real Property, Creditor's Rights in Bankruptcy, Foreclosures, Residential Real Estate

 By: Julia M. Wei, Esq.

What happens when you buy a property at a trustee's sale in California and the borrower files for bankruptcy?

Foreclosure Buying and Bankruptcy
by: dirtblawg

 FORECLOSURE INVESTMENT PROPERTY / BANKRUPTCY

Client: Do you remember that investment property I bought at a foreclosure sale?

Real Estate Attorney: I think so, was it the one you needed to fix up before you could rent it out or sell it?

Client: Yes. It was occupied and now the former borrowers have filed for bankruptcy.

Real Estate Attorney: Oh no! Are all your savings tied up in that property?

Client: Yes. Now my partner and I don't know what happens next in the bankruptcy.

Real Estate Attorney: You need to bring a motion for relief to get relief from the automatic stay. Then when you have your Order, you can go back to the state court and continue with your unlawful detainer action to get the Writ of Possession.

Client: How long does that take?

Real Estate Attorney: The motion for relief requires 14 days notice to the debtor, but some bankruptcy judges in the California Northern District have an expedited one for evictions. Until you have the order, you cannot take any acts against the debtor or it is a violation of the automatic stay.

Client: That's great! Much faster than I thought! What do I need to prove in a motion for relief?

Real Estate Attorney: You will need to give evidence that you are the new owner of record, and provide the Trustee's Deed. Ok?

Client: I can do that!

Real Estate Attorney: Wait, one thing to watch out for. The debtor may claim that it was a wrongful foreclosure sale. With all the attention in the media about "robo signing" borrowers believe the foreclosure sale was "void"

Client: Really? Does that mean that I can't get possession of the property?

Real Estate Attorney: No. But some bankruptcy judges may require a further hearing or further briefing. However, since you are the successful bidder at auction, you are the bona fide purchaser for value and California law is in your favor.

Client: Ok. So, if the debtor is not claiming any defect with the foreclosure sale, I will be able to get an order for relief to continue with the eviction, right?

Real Estate Attorney: Yes.

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The “For Sale By Owner” (FSBO) Transaction – the Duty of Disclosure

May 18th, 2012 · Residential Real Estate

 Sellers are usually better off when they work with a reputable listing agent.  However, in transaction where the seller has already found their own buyer and the parties have agreed upon the price, the parties usually do not have any brokers involved.  

The biggest thing to watch for in those FSBO deals is that the seller needs to understand their duty of disclosure under California law.  

I'm no Scorsese, but here is a little snippet to entertain you and educate you on what sellers should disclose in a residential real estate sale:

FOR SALE BY OWNER, Part 1 – DISCLOSURES


By Julia M. Wei, Esq.

CLIENT: I have found a buyer for my house without using a Realtor. Can you assist me with the transaction?

ATTORNEY: Yes. Have you all agreed on the material terms, such as price and close of escrow date?

CLIENT: Yes. However, we have not written anything up. What should we do next?

ATTORNEY: Normally the buyer's agent writes the offer, however, since neither of you have an agent, we should use the standard purchase offer form published by either the California Association of Realtors or the Peninsula Regional Data Services.

CLIENT: Ok. That's fine with me. Besides the contract, what do I need to provide the buyer?

ATTORNEY: California law requires you to fill out and provide the Transfer Disclosure Statement. In addition to the TDS, many buyers would like the Seller's Supplemental Checklist, however it is optional.I recommend that sellers use the supplemental disclosure to help them remember what repairs and property conditions that they should disclose to the buyer. After so many years of owning a home, it's easy to forget all the little repairs you have made. Remember, you must disclose anything that would be material to the buyers. For example, if the window leaked this past winter and you repaired it in the summer but it hasn't rained yet, you don't know if it still leaks. Sellers often forget to disclose things they "fixed" which can lead to problems later.

CLIENT: I've only lived there 2 and a half years so there haven't been very many changes beyond cosmetic changes.

ATTORNEY: Do you still have the original disclosures from when you bought the place?

CLIENT: I think so.

ATTORNEY: great! You should provide those as well to the buyers.Don't try to figure out what to leave out disclose more! Give the buyers every thing you can remember and then let them decide if they need to do more investigation. Also, I always recommend that sellers give the buyers any repair receipts for two reasons. The buyer knows what was repaired and when. Further, if the buyer is really worried about the repair, they can call that vendor and find out more information. and two, the buyer will be able to work with that vendor later when they own the house.

CLIENT: Are there any more disclosures I need to think about?

ATTORNEY: The contract will specify that you provide disclosures such as the Lead paint, whether the water heater is strapped down, the natural hazards report and more. In some cases these items can be ordered from a vendor for a "California" oriented disclosure package.

CLIENT: So when should we do all the disclosures?

ATTORNEY: As soon as possible! The contract requires you to do it five days after signing but each material disclosure gives the buyers a 3 day right of rescission. I'll get started on drafting the purchase agreement and I will provide you with a copy of the TDS and Supplemental to get started on your disclosures, ok?

CLIENT: Perfect. Thanks!
 

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Bank Buys Worthless Note, Borrower Awarded Attorney Fees Against Bank

April 18th, 2012 · California Lending & Mortgage Law, Foreclosures, Trust Deeds

Buying Notes and Deeds of Trusts:
Bank Buys Worthless Note, Borrower Awarded Attorney Fees
By: Julia M. Wei, Esq.

Investors, collection agencies, scavenger funds and institutional lenders buy promissory notes all the time. If the note is secured by a deed of trust against real property, the buyer takes the risk of collection of the debt, but hopes that the value of the collateral will be sufficient. Those notes are discounted because the buyer takes the note subject to all defects that occurred in the origination or underwriting and may not be able to foreclose in an expedient fashion.

The risk premium goes up (and correspondingly, the discount increases) when the collateral has already been foreclosed upon and the purchaser is just buying the debt instrument. In the recent case of Bank of America v. Mitchell, the bank bought a 2nd position note after the 1st position lienholder had already foreclosed on the borrower.

The case law in California is clear, if the same bank originates two loans, and non-judicially forecloses on the senior deed of trust, the borrower is protected from that lender suing for a deficiency judgment on the 2nd Note.

This has been true since the Simon v. Superior Court holding. [4 Cal.App.4th 63 (1992).] The reasoning is straightforward, the bank (holding the senior lien) controls whether to sue for a judicial foreclosure, or whether to non-judicially foreclose. Further, the bank determines whether to memorialize the debt with one note and deed of trust or ten notes and deed of trust. The Simon Court made it clear that manipulation by the lender could not circumvent the anti-deficiency protections available to the borrower (§580d) or the One Action Rule (§726).

The Mitchell case has a slight twist from Simon in that Mitchell involved a re-sold loan after the foreclosure. Dr. George Simon was the borrower on two loans from Bank of America where Bank of America (original lender) still held both notes. Mitchell actually addresses the secondary market for notes.

Facts: In 2006, Michael Mitchell borrowed $315k from GreenPoint Mortgage Funding to buy his house.*** The debt was memorialized by two promissory notes and secured by two deeds of trusts against one property ($262k and $63k respectively). GreenPoint foreclosed on the senior loan in 2009, and then sold the junior loan to Bank of America in 2010—more than a year later. BofA then sued Mitchell for the $63k.

BofA was obviously taking the position that it was the "sold out junior lienholder" as a result of the first lender's foreclosure. Mitchell brought a demurrer and won, the bank appealed.

Appeal: The appellate court affirmed, ruling in favor of the borrower, finding the case to be squarely in line with Simon vs. Superior Court. B of A argued that Mitchell had different facts from Simon, since the purchaser at the first foreclosure sale was a third party, rather than the foreclosing bank. The court did not find persuasive Bank's argument the presence of a bidders at the sale protected the borrower. The Court noted that the assignee bank bought the second note subject to all defenses that would have been available to the borrower against the original holder of the note. Since the borrower could have successfully asserted the Simon ruling against Greenpoint, it was still available to the borrower to assert against BofA. Caveat emptor (buyer, beware)!

The court also affirmed the award of attorney fees in favor of the borrower, $8,400. [Bank of America v. Mitchell, 2012 Westlaw 1177866, April 10, 2012]

Special thanks to Professor Dan Schechter of Loyola Law School for his Commercial Finance Newsletter article on this case. Professor Schechter noted that Mitchell is distinguishable from National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 115 Cal.Rptr.2d 37 (2001) based on the timing of the assignment (when the note was sold). In NEI, when the senior assignee foreclosed, the court held that the junior assignee was not affected by the senior's behavior. However, in Mitchell, the foreclosure on the senior deed of trust occurred prior to the assignment.

***The opinion states: “Appellant Bank of America’s (Bank) predecessor in interest loaned respondent Michael Mitchell (Mitchell) $315,000 to purchase a home, secured by two notes and first and second deeds of trust.” I find it puzzling that the case does not discuss the fact that the loans were purchase money loans and that there is no discussion of CCP §580b. The facts make it clear that the loan in dispute was a piggy back second, used to purchase the property. Since it was used to pay part of the purchase price, the statute should apply and there is no need to delve into the reasoning of Simon and 580(d).

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Mortgage Lender Bulletin – Recent Cases in Borrower Lawsuits Signal a Turning of the Tides

January 17th, 2012 · California Lending & Mortgage Law, Foreclosure Defense Lawsuits, Foreclosures, Trust Deeds

By: Julia M. Wei, Esq.

A series of cases have come down in the last few weeks that have some very serious ramifications for lenders.

The most dramatic case is that of Lona v. Citibank, based on a property right here in my back yard. The fact pattern in Lona is that the bank foreclosed and Lona sued the bank to void the sale on the absurd theory that the lender made him an unconscionable loan he couldn’t possibly afford therefore the loan was void. (Apparently, he’s a mushroom farmer in Hollister making $40k/yr)*.

Lona alleged that he agreed to refinance the home, on which he owed $1.24 million at the time, in response to an ad. The monthly payments were more than four times his income, so unsurprisingly, he defaulted within five months and the home was sold at a trustee’s sale in August 2008.

Lona obtained two re-financed loans: the first being $1.125 million, a 30-year term and an interest rate that was fixed at 8.25% for five years and adjustable annually after that, with a cap of 13.255 and the second loan being $375,000, with a term of 15 years, a fixed rate of 12.25%, monthly payments of nearly $4,000, and a balloon payment of $327,000 at the end of the 15 year term.

Lona testified that English was not his first language, he was 50 years old at the time of the loan and he that he did not understand the loan documents. Of course, he also did not read the loan documents.

After Citibank foreclosed, it filed an unlawful detainer action (“UD”) to evict Lona, but the UD was consolidated with Lona’s lawsuit to void and set aside the foreclosure sale. According to Citibank, Lona had been “living for free” in the house and had not posted bond or paid any “impound funds.” (since 2007!!!)

San Benito County Superior Court Judge Harry Tobias said Lona’s “bare allegations” were not enough to persuade him that the bank or the broker had engaged in misconduct and that it was “hard to believe” that the Lonas weren’t “responsible for their own conduct,” especially since they owned other property that had been foreclosed upon.

Despite the craziness of Plaintiff’s theory, the appellate court rendered a 32 page opinion that discussed in major detail that:
1) The borrower did not have to tender offer (which goes against almost a century of a legal precedent); and
2) The borrower’s allegations of the loan being unconscionable were not wholly disproven by the lenders.

The Court decision stated “Lona had received $1.5 million from the lenders and had not made any payments since June 2007. Meanwhile, he and his wife continued to live in the house for free, without paying rent or any impound funds…” and so it was quite aware of the inequities or injustice of the situation. However, the Court still concluded that the Lenders did not meet their burden of proof on summary judgment and so the case may continue at its snail pace until trial. [Lona v. Citibank No. H036140. Court of Appeals of California, Sixth District. (December 21, 2011.)]

The other case that came down a week before Lona (Dec. 21) was the Bardasian (Dec. 15) case, where the borrower sued because the lender’s trustee did not discuss loan mod options with her as required by Civil Code Section 2923.5. The court granted the borrower’s injunction and like Lona, the borrowers did not tender, nor put up an undertaking or surety for the bond. The lower court had ruled at the injunction hearing that the trustee had not complied with the code and that Bardasian must bond in the amount of $20k. When she failed to do so, the lower court dissolved the injunction.

On appeal, the appellate court concluded that since the injunction had been issued after the court had ruled on the merits stating:

“Plaintiff seeks postponement of the foreclosure sale until the defendants comply with Civil Code [section] 2923.5. Plaintiff has established that BAC Home Loan Servicing did not comply with Civil Code section 2923.5 prior to the issuance of the notice of default on September 15, 2010.” “Plaintiff states under penalty of perjury that no contact was ever made at least 30 days before the notice of default was issued…”

that the injunction was not actually “preliminary” at all, but that the plaintiffs had essentially won their argument showing that the defendants had not complied with Section 2923.5 and so no Notice of Default could successfully issue and the trustee’s sale could not take place until Section 2923.5 had been complied with. (Bardasian v. Santa Clara Partners Mortgage C068488. Court of Appeals of California, Third District. (December 15, 2011).

So in one month, two appellate cases came down where the borrower could either pursue voiding a trustee’s sale or enjoin one without tendering!

2012 will prove to be an interesting year as more decisions stemming from the subprime meltdown start coming down the pipeline.

* The decision contained a footnote that Lona’s loan application that apparently stated Lona made $20k/month, or $240k/yr. Clearly, as stated income loans go, that was a whopper!
 

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