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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.


January 6th, 2011 · 13 Comments · California Lending & Mortgage Law, Creditor's Rights in Bankruptcy, Current Affairs, Foreclosure Defense Lawsuits, Foreclosures, Mortgage Fraud, Trust Deeds

By: Julia M. Wei, Esq.

Dear Readers –

Happy New Year! This marks my 100th post.

I am still frequently getting calls from borrowers who say they have read my blog and have questions about challenging a foreclosure.

I am not totally convinced they read my blog because I often say that I work for private lenders and that I do creditor work and that I defend against “foreclosure defense” or “foreclosure delay” lawsuits. The only exception would be commercial borrowers, whom I do have as clients. However, I rarely do institutional lending work and most of these unfortunate borrowers are bravely taking on big banks and captive trustee servicers that have likely screwed up the loan documentation and/or trustee’s sale in one form or another.

So here is my first pro bono act of the new year, a lengthy explanation of setting aside a non-judicial foreclosure sale in California and why I usually win these for my clients and why borrowers usually lose.


1. Timing is Everything
It is always easier (but not necessarily easy) to delay, postpone, stay or enjoin a foreclosure sale than to undo one after the fact. The sale itself takes months and months and months before it can occur so the longer the borrower waits, the less successful the borrower will be in obtaining a Temporary Restraining Order (TRO) or Injunction to stop the sale (see this article for more on TRO’s .

After losing at the TRO or OSC re: preliminary injunction hearing, the only surefire way to halt the trustee’s sale is filing a bankruptcy petition which has the protection of the automatic stay. Once in bankruptcy, assuming a Chapter 13 or 11 (“reorganization”) filing, the debtor may have more ability to restructure the debt, seek a cramdown (reduced payments), loan workout, or other concession from the lender.

2. The Tender Rule
Setting aside the foreclosure sale after it has happened is nearly impossible due to the tender rule. Especially if the property did not revert to the lender REO but instead went to a bona fide purchaser (BFP) for value.

A. Why is tender required? “This rule, traditionally applied to trustors, is based upon the equitable maxim that a court of equity will not order a useless act performed. (Arnolds Management Corporation v. Eischen 158 Cal.App.3d 575. 578-579.) “A valid and viable tender of payment of the indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust.” (Karlsen v. American Savings & Loan (1971) 15 Cal.App.3d 112 at p. 117.) The court goes on to say… “The rationale behind the rule is that if plaintiffs could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the plaintiffs.” [FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1021.]

B. How much does a borrower have to do to actually tender? “ ‘The rules which govern tenders are strict and are strictly applied.... The tenderer must do and offer everything that is necessary on his part to complete the transaction, and must fairly make known his purpose without ambiguity, and the act oftender must be such that it needs only acceptance by the one to whom it is made to complete the transaction.’ (Gaffney v. Downey Savings & Loan Assn.) (1988) 200 Cal.App.3d 1154, 1165, , quoting 86 C.J.S., Tender, § 27, pp. 570-571; ‘it is a debtor's responsibility to make an unambiguous tender of the entire amount due or else suffer the consequence that the tender is of no effect.’ (Gaffney v. Downey Savings & Loan, supra, 200 Cal .App.3d at p. 1165.)” (Nguyen v. Calhoun (2003) 105 Cal.App.4th 428, 439.)

3. Why Does it Matter if the Property Goes to a BFP?
The winning bidder at sale receives a Trustee’s Deed which recites that everything was properly done and that law in California is that such sales are FINAL. “The purchaser at a foreclosure sale takes title by a trustee's deed. If the trustee's deed recites that all statutory notice requirements and procedures required by law for the conduct of the foreclosure have been satisfied, a rebuttable presumption arises that the sale has been conducted regularly and properly; this presumption is conclusive as to a bona fide purchaser. (Civ.Code, § 2924; Homestead Savings v. Darmiento, supra, 230 Cal.App.3d at p. 431.)” (Moeller v. Lien, supra, 25 Cal.App.4th 822, 830-831

4. What About the Lost Note?
I have written about producing the note many times (see this article*. The gist is that the purpose of having possession of the Note is simply to ensure that no one else can try to collect to protect the borrower from having to pay twice. In California, the lender does not need to have the original note to conduct a trustee’s sale. They can bond around a lost note. Judicial foreclosures may be different. Bankruptcy courts may be different – see this article

5. What if the Servicer Never Called Me?
Tough. All Civil Code Section 2923.5 gives the borrower is additional time. That means that if you catch the servicer messing up before the sale, you can delay the sale to buy additional time but if you wait too long and try to say they messed up after the sale is over, the point is moot and there is not remedy in that code section that will allow the borrower to set aside the sale. [“If a lender did not comply with section 2923.5 and a foreclosure sale has already been held, does that noncompliance affect the title to the foreclosed property obtained by the families or investors who may have bought the property at the foreclosure sale? No. The Legislature did nothing to affect the rule regarding foreclosure sales as final.”].) (Mabry v. Superior Court (June 10, 2010, G042911) 185 Cal.App.4th 208, ---- [2010 WL 2180530 at p. 1]

6. What About All This Mortgage Fraud I read About in the News?

Less relevant in California, since few lenders do a judicial foreclosure on a residential property (different story for apartments or commercial buildings where there is lease revenue and we need to get a receiver in to stop rent skimming).  I see it more in bankruptcy court, during the claims process or relief motions where the borrower can get extra time by challenging that the lender has standing to even conduct the foreclosure.  Again, this comes down to whether or not the lender's trustee/servicer actually recorded the Substitution of Trustee before the sale was conducted.  One judge in the Northern district is asking for production of the note.  The standing issue may be helpful in the context of obtaining a TRO or injunction to stop the sale if the lender cannot timely establish it has the right to conduct the sale.  Essentially, security follows the debt so the argument is that unless the lender can produce the note, assuming the loan was sold, then the "assignment of the deed of trust" is worthless unless the lender has the actual note (hopefully endorsed in blanc).  However, if the lender kept the loan as a portfolio loan, then it is likely that the lender can produce the note. 

For non-judicial foreclosure sales, and outside the context of bankruptcy, a case to set aside a foreclosure is highly unlikely to go anywhere. Within a bankruptcy courtroom, different factors will apply during the claims period and the bankruptcy judges have differing opinions on a lender’s standing to foreclose. Unless you have a seasoned bankruptcy practitioner, a borrower’s odds of vacating a trustee’s sale are low (slightly higher if it reverted REO instead of being sold to a BFP). Be wary of someone promising you (for an advance fee of course!) that they can save your home or help you avoid foreclosure.
*Excerpt –
The “Lost Promissory Note” lawsuit is reaching high levels of popularity, especially in the present backlash against mortgage-backed securities. The Foreclosure Defense gurus reason that the original note is long gone as it has been sold, or assigned or securitized in a stream of transactions. They further reason that without the original Note, the deed of trust is a “nullity” and there is no proof the borrower ever incurred the debt.

However, in California, the lender is not required to produce a Promissory Note to conduct a non-judicial foreclosure (also known as a “Trustee’s Sale”). The power of sale comes from the Deed of Trust, not the Promissory Note.

The Promissory Note is the debt instrument, just like an IOU. The person holding the original is the one the borrower has to pay. The lender can freely sell or trade that single note around and notify the borrower of who can collect on that note. The Deed of Trust is the collateral for the debt to secure the borrower’s performance.
This means, the real issue about a lost promissory note is “how likely is someone else to try to collect on the same note?”
Under the Uniform Commercial Code, adopted in California as Commercial Code Section 3-309, the lender can still enforce the lost instrument if three prerequisites are satisfied:
(1) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred;
(2) the loss of possession was not the result of a transfer by the person or a lawful seizure; and
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person who cannot be found or is not amenable to service of process

The most California recent case discussing this code section actually addresses lost checks, and in that circumstance, the Court found it could allow the recipient of the lost check to enforce it so long as the payor (or bank) was adequately protected against a 2nd party who finds the check also seeking to cash it. [Crystaplex Plastics, Ltd. v. Redevelopment Agency, (2000) 77 Cal. App. 4th 990.]
The case of Huckell v. Matranga is illustrative in a circumstance where the beneficiary has lost the original promissory note. In that case, the Court found that Bank of America as Trustee was entitled to request a surety bond before issuing the reconveyance of the Deed of Trust. [Huckell v. Matranga (1979) 99 Cal.App.3d 471.]
Accordingly, there is no requirement that the original promissory note is required in order to conduct a trustee’s sale in California, as the beneficiary can bond around the missing note. That said, a lawsuit on the lost promissory note can certainly slow things down and may be fairly effective in stalling institutional lenders. Private money lenders are less likely to have hypothecated the loans to such a degree as to cause confusion over the location of the note.



13 Comments so far ↓

  • fred fytr

    Thats an Interesting way of looking at it. But if issues pertaining to a lost note can be enforced by way of UCC 3-309 than lenders have room to lie wether or not they sold/separated the note. The Deed of Trust without the Note is a legal nullity as the Deed is merely a security instrument to the note. In a normal situation where a lender claims they lost the note, judicial/non judicial, is absurd and highly suspect in my opinion. But these are not normal situations, and fraud has become common practice in almost every case. It is no secret what has taken place and any court of law that does not take under consideration the possibilities of fraud in each and every case fails in its purpose. CCC 3-301 can not be over looked. The laws are not meant to protect lenders only. They are to protect the borrower from the very abuse CCC 3-309 would allow lenders.

    Not only is possession of the note required in California, POSSESSION and ENDORSEMENT are needed to even be considered a “Holder in Due Course” by way CCC 1-202 to satisfy 3-301

    For some reason laws are being ignored and or partially addressed but the law is still the law. A Deed of Trust has no effect without a Promissory Note no matter how you twist it, Period!

    It is legally impossible to foreclose on any real property without the note. Enforceability of a foreclosure only arises upon actual note possession and endorsement or 3-301(b) a non-holder with holder rights.

    Lenders assume assignment gives them the right to automatically foreclose with the Deed of Trust which is only an accessory security interest to be looked at once issues of the Note have been established first.

    simply complying with 2924without looking to 3301 to protect homeowners from wrongful loss of property just so lenders can have a right to a quick inexpensive remedy is blessing the felony of grand theft. The argument is the Entitled lender.

    A lender not in compliance with 3-301(a) or 3-301(b) is NOT entitled to a quick and inexpensive remedy.. End of Story.

  • Bendu

    I recently submitted documents for loan modification. The loss mitigation department has acknowledged receipt and sent out two appraisal to do a BPO on the property. One was done last week and the other is scheduled for this tuesday. Can the bank still proceed with sale of my property?

  • Kris

    to fred fytr: You present a GREAT ‘holder in due course’ rebuttal. Please provide an actual ‘case’ where this argument Prevailed with the Judge/Jury. I want to use these ‘case laws’ in MY case (CW->BAC loan transfer) as it moves forward…! Many Thanks….

  • fred fytr

    to Kris

    Hwang motion from relief of automatic stay in bankruptcy case in California:

    3301. “Person entitled to enforce” an instrument means

    (a) the holder of the instrument,
    (b) a nonholder in possession of the instrument who has the rights of a holder,


    (c) a person not in possession of the instrument who is entitled to enforce the
    instrument pursuant to Section 3309 or subdivision (d) of Section
    3418. A person may be a person entitled to enforce the instrument
    even though the person is not the owner of the instrument or is in
    wrongful possession of the instrument.

  • fred fytr

    A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.

  • fred fytr

    to kris

    A promissory note is person property and the deed of trust securing a note is a mere incident of the debt it secures, with no separable ascertainable market value. California Civil Code §§ 657, 663. Kirby v. Palos Verdes Escrow Co., 183 Cal. App. 3d 57, 62.

    The assignment of a mortgage without a transfer of the Indebtedness confers no right, since debt and security are inseparable and the mortgage alone is not a subject of transfer, ” Hyde v. Mangan (1891) 88 Cal. 319, 26 P 180, 1891 Cal LEXIS 693; Johnson v, Razy (1919)181 Cal 342, 184 P 657; 1919 Cal LEXIS 358; Bowman v. Sears (1923, Cal App) 63 Cal App 235, 218 P 489, 1923 Cal App LEXIS 199; Treat v. Burns (1932) 216 Cal 216, 13 P2d,724, 1932 Cal LEXIS 554.
    48. ”A mortgagee’s purported assignment of the mortgage without an assignment of the debt which is secured is a legal nullity.” Kelley V. Upshaw (1952) 39 Cal 2d 179, 246 P2d 23, 1952 Cal. LEXIS 248.

    A trust deed has no assignable quality independent of the debt; it may not be assigned or transferred apart from the debt; and an attempt to assign the trust deed without a transfer of the debt is without effect.” Domarad v. Fisher & Burke, Inc. (1969 Cal. App. 1st Dist) 270 Cal. App. 2d 543, 76 Cal. Rptr. 529, 1969 Cal. App. LEXIS 1556.

  • fred fytr

    Keep in mind when I said it was legally impossible to foreclose on any real property without note, that doesn’t mean it is impossible. It’s happening all the time. The point being was if the courts followed the rules and did not favor the banks.

    The whole Non Judicial system is legally absurd and unconstitutional where provisions of law within the same jurisdiction are contradicting. The sole purpose is to limit any due process of law and/or equal protection under the laws.

  • RJ

    Fred fytr

    I’m a homeowner facing a trustee sale in northern California. Can I contact you for a consultation?


  • Steve Vondran

    We had a foreclosure sale set aside by convincing the lender that they had promised not to foreclose (via a written email), and that the client was able to make a substantial contribution toward curing the default. That and we cited 4 or 5 good cases that stood for the proposition that some sales are VOID (requiring no tender) as opposed to having a VOIDABLE sale (where tender rule kicks in. From my research tender is a good way for the lender to win, but substantial defects, especially if coupled with inadequate sales price can help out. Also, look close at the substitution of trustee to make sure the substitution was proper. You can check out the Dimrock case. Last paragraph discusses no requirement to tender contrary to Defendant’s article. By and large I agree it is tough, but not a solid steel wall.

  • lorrie

    Can anyone tell me how the law works in a situation like mine. I have a lawsuit in california , a temporary stay has been issued by my state court. the bank wants to remove the injuction. How do I stop them. The lawsuit is because I never signed the Deed of Trust. I was out of the state and I can prove by the Notary Deposition that she never met me, the Notary Journal was asked for by the judge however has not turned up yet. The Notary testified that she could only notaries her page and not any addendum she testified in my favor. So Where foreclosure is concerned if I never signed the deed of trust does it make the whole thing legal. or does it make the bank have an unsecured debt that they can not foreclose on. Mers is the benificiary. is there any case laws of this kind of fraud I can use. Or anything else that would help. thanks

  • steve

    Question … we were 3rd party purchasers at a Trustee sale. We received and recorded the Trustees Deed. Now the Trustee is calling saying that the lender made an error and had agreed to a loan mod with the former Trustor and wants to rescind the sale. They say they have the power to unilaterally rescind the sale. I am not so sure they can do this so simply once the TDUS has been filed … they provided some case law, but I believe some of these refer to matters where the TDUS was never issued. Cases cited were:
    Residential Capital v CWR
    Bank of America v La Jolla Group
    Pro Value Properties v Quality Loan re interest rate

    Trustee wants to refund our money with 7% interest which is a joke …. we paid points on the funds as well as began a U.D. and have other hard costs … plus we have a buyer to purchase the property once we have possesion.

    We suggested a Global Resolution, that in light of the lenders error, that we sell the property to the former Trustor at Fair Market Value and the lender finance the Trustor. I do not believe the trustee did anything with this suggestion.

    What recommendations would you have?

    Thank you.

  • frdmfytr

    Interesting they would cite “Bank of America v La Jolla Group”.

    I am not an attorney so I could not give legal advice but Steve Vondran may have some insight for you.

    But personally I would question their business practices and think about suing for negligence.

    The reason being is there should have been no error made had they conducted themselves accordingly. It is no secret what has been going on and honest errors are far from the problem. The real problem!

    Most likely someone did not care and/or expect any issues with their usual business practice in screwing homeowners with the ol “stop paying for 3 months in order to qualify for a modification” bullcrap to force default and quickly foreclose. All while leading the homeowner to believe they are really working on modifications.

    This is what they have been doing for quiet sometime and works out for the most part. But when they come across homeowners who fight back is when problems arise and to cover their ass they will try to blame it on an error.

    Error meaning we tried to screw another homeowner who put up a fight and caused us problems. I bet if you talked to the homeowners and got their side of the story it would give you a whole different perspective and possibly some ammo.

    Just my opinion.

  • Dolley

    DIRT is a great name for this “Blawg” – how do you look yourself in the mirror everyday. No shame, no shame at all…

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