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!
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.
I do a lot of defense work, and readers of this blog know that I work primarily for private lenders (not institutional lenders). This means I defend against a lot of TILA rescission claims. The current state of TILA rescissions is somewhat murky with circuit courts across the nation having to fill in the logistical gaps that the TILA statute neglects to fill in.
For example, the law currently proposes no timeframe for the rescission itself, nor does it specify when the borrower must return the loan proceeds to the lender.
Rescission is a straight-forward legal concept but actually quite difficult in practice to execute. The concept is that it restores everybody to the position they were in before the transaction happened, the status quo.
In a normal transaction with no loan, restoring the status quo is easier:
Seller sells Los Gatos home to Buyer. Buyer realizes there is a huge problem with the house, that it has a severely damaged foundation not disclosed by the seller, Seller thought she had provided the foundation report but failed to do so so. Under the doctrine of mutual mistake or to simply to resolve the case, the transaction is unwound. Seller takes the house back, Buyer gets the purchase money back. Everyone is restored to the status quo ante.
As related to mortgages/home loans, here's how rescission plays out:
Borrower buys a house in San Jose for $1M in 2007, puts $200k down and borrows $800k from Bank of America. Bank of America screws up the TILA disclosure, fails to date it so instead of a 3 day right of rescission, the borrower has a 3 year right of rescission.
Fast forward to 2010. The house is now worth $700k, the property is underwater, the borrower wants a loan mod and can no longer afford to pay the mortgage payments. Borrower sees a "forensic loan consultant/auditor" and concludes there is a technical defect in the loan defects and the borrower sues BofA for rescission.
PROBLEMS WITH TILA RESCISSION LOGISTICS:
The way TILA is presently written, the mechanics of how the rescission would work are a little unclear. Also, the borrower is highly unlikely to have $800k to return to the lender and really, the seller does not want the house back or to give the borrower $200k back. Lastly, there is the matter of interest payments.
Just the plain language of the statute suggests that the bank needs to rescind the mortgage immediately and then it is left dangling out there as to how the borrower repays the loan.
As a result, courts have had to apply the normal legal principals of rescission in order for the law to make any sense. In the case of Yamamoto v. Bank of New York, The Ninth Circuit reiterated prior cases where it had concluded that "rescission should be conditioned on repayment of the amounts advanced by the lender..." and "and that the equities favored the creditor who would otherwise have been left in an unsecured position" and ultimately stated: "Thus, a court may impose conditions on rescission that assure that the borrower meets her obligations once the creditor has performed its obligations..."
Translated, even though TILA doesn't say how and in what order the rescission should happen, courts can impose an equitable remedy that requires the borrower to pay back the loan before the lender has to rescind the mortgage.
WHY BOTHER TO SUE FOR TILA?
I am not sure what is prompting the Fed to make this proposal right now. Although the proposal is helpful to clarify, we have not seen any surge in TILA rescission suits because the reality is that they don't pay plaintiffs' lawyers all that well. The logical conclusion of the TILA suit is usually a settlement that involves a loan modification for the borrower. This is a good outcome for the borrower, but rarely leaves any money on the table for the borrower's attorney--and the reality is that most borrowers can not afford to pay their attorney. This is why I support the recent Geithner comment that TARP bailout money could be allocated to homeowner legal aid. Borrowers should have access to competent counsel and those counsel should be paid for their labor.
HOW DOES TILA COMPARE TO PRODUCE THE NOTE?
In my opinion, an institutional lender is more likely to have messed up the arcane technicalities of note transfer than the TILA disclosures. Lenders defending either claim have an incentive to work with the borrower and are more likely to have a decision maker available to settle the case. As far as actual litigation, I think the produce the note claims are tougher to defend against. Either the lender has the note or it doesn't. A Promissory Note is pretty much like an "IOU" or a "voucher" which means that if you hold that IOU or voucher, you can collect the debt and once it's paid off, you return the IOU or voucher to the debtor or tear it up or "cancel" the debt. To transfer the Note is even more specific, it requires an endorsement, or if the back of the original Note is full, an allonge. Again, a very rarely followed requirement except in private money loans.
If the lender does NOT have the Note, then the real wrinkle for them is that their servicer has been collecting payments for the wrong party or there is a potential risk that the true holder of the note can come out of the woodwork and demand to be paid. Traditionally in the non-judicial foreclosure context, how California lenders got around this requirement is to buy a bond. Essentially the lender is paying they will pay a risk premium for the lost original promissory note and that they do not know of anyone else who will seek payment--this prevents the debtor/borrower from the risk that two parties can seek repayment of the debt.