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.
SETTING ASIDE A FORECLOSURE SALE IN CALIFORNIA
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 http://bayarearealestatelawyers.com/foreclosure/what-lenders-should-know-about-temporary-restraining-orders-and-foreclosures-in-california/) .
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 http://www.foreclosures.com/foreclosure-newsletter/lost-your-promissory-note-2/)*. 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 http://dirtblawg.com/2010/07/you-have-to-produce-the-note-%E2%80%93-sometimes.html.
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.
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.