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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.

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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Wrong Opening Bid? Tough. Bidder Gets Benefit of Trustee’s Error.

November 3rd, 2011 · Foreclosures, Trust Deeds

By Julia M. Wei, Esq.

In the recent case of Biancalana v. T.D. Service Company, California foreclosure bidder Biancalana came out the winner on appeal.

In September of 2008, Biancalana bid at the trustee’s sale of a property on Winchester Dr. in Watsonville (Santa Cruz County). Lucky for him, the trustee (and possibly the loan servicer), T.D. Service Company, erroneously stated that $22k was the opening bid. That amount was in fact, merely the delinquency and the lender was actually seeking an opening bid of $220k. Whoops!

There were no other bids so Biancalana’s bid of $22k was the high bid. Later TD realized their error and refused to issue the Trustee’s Deed. Accordingly, Biancalana sued for specific performance.

TD brought a motion for summary judgment on the grounds that there was an error in the foreclosure process, and the sale was voidable. They lost but brought a motion for reconsideration due to “new law” from the case of Millenium Rock v. TD (yes, same defendant!) which came down November of 2009, just two months after TD had lost on their motion for summary judgment.

A quick review of Millenium – the trustee had instructed TD to submit an opening bid of $382k, which they did but the auctioneer misread the script and announced the opening bid and legal description for a different property but attributing it to a different street address. The confusion resulted in the bidder’s high bid of $51k being accepted. Accordingly, the Court in Millenium concluded that the auctioneer’s error was a fatal ambiguity which created a defect in the foreclosure process, which rendered the sale voidable.

Biancalana appealed. On appeal, the Sixth District concluded that the Trustee was the beneficiary’s agent, that the error was caused by the Trustee’s own negligence and that this negligence was not a procedural irregularity in the foreclosure sale. This ruling was in line with the case of 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc. (2001). the lender/beneficiary intended to set the opening bid at $100,000.00, but the trustee mistakenly set the opening bid at $10,000.00.

Plaintiff, 6 Angels, was the successful bidder, paying a dollar more than the opening bid of $10k. The trustee refused to deliver the Trustee’s Deed, and 6 Angels sued. The Court held that a successful challenge to a sale requires evidence of a defect in the sale procedures, causing prejudice to the person attacking the sale. Mere inadequacy of the price without a procedural irregularity is insufficient to set aside the sale.

In 6 Angels, the mistake in the opening bid was the lender/beneficiary’s own negligence, and was totally outside of the foreclosure procedures (“dehors the sale proceedings”). The Trustee was ordered to deliver the Deed to 6 Angels.

Accordingly, TD’s motion for summary judgment was instructed to be vacated and Biancalana, the bona fide purchaser at sale was awarded the costs of this appeal. Ultimately, it looks like the lender will suffer the consequence for the trustee's error and the trustee will need to make the lender whole. [Biancalana v. T. D. Service Company, Oct. 31, 2011]


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Buying a condo or townhouse? 3 Things to Know about HOA’s

October 12th, 2011 · Neighbors and Boundary Law

By: Julia M. Wei, Esq.

Home prices being what they are here in the Palo Alto area, many first time homebuyers opt to purchase a townhouse or condominium.  When they do so, they receive a thick stack of documents, including the disclosures and the HOA docs.

Reviewing the HOA packet can be intimidating, and I have advised many purchasers who are too time-crunched to review the CC&Rs and offer some of the most frequent issues to watch for in the Codes, Covenants and Restrictions (CC&R's) in this article linked below:

Some CC&R's can really restrict your lifestye.  Avid bicyclist? Perhaps you have several bikes and were planning to park them with your car in the garage. Some CC&R’s restrict the amount and types of storage permitted in the garage.

Also, if you are trying to obtain financing for purchasing into an HOA, there may be loan requirements on owner-occupancy in the HOA.  Living in a group environments means relinquishing some rights, and buyers may be unaware to what degree.  One horror story involved a homeowner who replaced his lawn with eco-friendly, water saving synthetic grass but was forced to remove it after the HOA Board got involved.

Further, if you find yourself in the position where you must actually litigate an HOA dispute, my colleague Henry Chuang offers the following insights:

"As a matter of law, HOAs are required to have an internal dispute resolution procedure which a homeowner can initiate to resolve disputes that have arisen. This basically means that in the HOA handbook that homeowners receive when they purchase their house, there should be a section on managing disputes with the HOA. If the HOA has established a dispute resolution procedure, then the homeowner must utilize it before proceeding further. It is important to note that if the homeowner asks the HOA to participate under this process, the HOA must comply. However, if the HOA requests the homeowner to participate, the homeowner can choose not to attend."

From: HOA Litigation, a How To Guide.


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MERS – California shoots down the borrower lawsuits, again.

September 14th, 2011 · California Lending & Mortgage Law, Foreclosure Defense Lawsuits, Foreclosures, Trust Deeds


 In other parts of the country, and in bankruptcy court, borrowers have had some success with the argument that since MERS is a "nominee" and "nominee" is not defined in the loan documents, that it does not have standing to initiate foreclosure.

That argument has been far less successful in California, in large part because of these factors:

  1. Non-judicial foreclosures only require that the trustee on the deed of trust conduct the foreclosure. 
  2. The deed of trust is recorded and so are any substitutions and assignments (in other states, MERS had tried to circumvent the recording statutes by not recording this transfers with the County recorder).
  3. The borrower (or "Trustor") has signed the Deed of Trust and voluntarily consented to a 3rd party conducting the Trustee's sale, regardless of who the beneficiary is.

Recently, in the case of Robinson v. Countrywide and MERS, the California Court of Appeals again shot down the borrower's arguments for wrongful foreclosure and cited faithfully from the case of Gomes v. Countrywide.  The Gomes case is allegedly seeking cert to go to the California Supreme court so I will be following that trend with interest.

The Robinson court stated: "We agree with the Gomes court that the statutory scheme (§§ 2924-2924k) does not provide for a preemptive suit challenging standing. Consequently, plaintiffs‟ claims for damages for wrongful initiation of foreclosure and for declaratory relief based on plaintiffs‟ interpretation of section 2924, subdivision (a), do not state a cause of action as a matter of law.

(Robinson v. Countrywide; Case no. E052011, Sept. 12, 2011)

What's the bottom line?  Both the Robinson Court and the Gomes Court have made it pretty clear that in California, a borrower cannot challenge the foreclosure process solely on the grounds that the lender did not have authority to foreclose.  

I want to be clear though that this could have a different result under a judicial foreclosure because in that circumstance, the court clerk is required to hand cancel the debt instrument, which requires the original promissory note.

Lastly, my comment about these types of cases from borrowers is that the borrower is in default under the loan and judges know that the borrowers owe the money so there isn't much sympathy for these types of "technical" challenges to a foreclosure.

Instead, the lawsuits that have more traction are the ones where the borrowers have taken acts in reliance of promises of the lender, and have made efforts to make payments or sell other assets to pay the lender--but the lender foreclosed anyway or "dual tracked" them during this timeframe.  In those circumstances, the borrowers as plaintiffs have been able to survive the demurrer stage of the lawsuit.


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In California, a Foreclosure Sale is Final–Except when the Judge Says It Isn’t.

September 7th, 2011 · California Lending & Mortgage Law, Creditor's Rights in Bankruptcy, Foreclosure Defense Lawsuits, Foreclosures, Trust Deeds

The law in California on non-judicial foreclosures has been pretty firm for some time - the Trustee's Sale is FINAL as to a bona fide purchaser for sale if the Trustee's Deed is issued and recorded within 15 days of the sale.  At least until one bankruptcy judge in California's Central District disagreed.

The Relation Back Doctrine

Section 2924h of the California Civil Code governs bidding rules for the trustee’s sale at a nonjudicial foreclosure. The statute contains a provision – set forth in section 2924h(c) – that deems the trustee’s sale to be “final” upon the acceptance of the last and highest bid, and deemed perfected as of 8 a.m. on the actual date of the sale if the trustee’s deed is recorded within 15 calendar days of the sale.

One bankruptcy court has relied on this provision to hold that the postpetition issuance of a deed does NOT violate the automatic stay because the recordation of the deed within 15 days of the sale causes the sale to relates back to 8 a.m. on the sale date, thereby preceding the filing of a bankruptcy petition (and, as a corollary, the imposition of the automatic stay). In re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997)

In Re Gonzalez

On Aug. 1, 2011, Judge Wallace of the Central District went against the weight of established law in California and issued a lengthy memorandum concluding that the Trustee's Sale is not final if a bankruptcy petition is filed before the Trustee's Deed is issued.

He reasoned that the Trustee has the power to not issue the deed for a variety of reasons and since it is the deed itself that actually conveys title, that the BFP does NOT have title until the Trustee's Deed is actually issued.  

In the Gonzalez case, the lender conducted the foreclosure sale on Feb. 22, 2011. The trustee then issued the deed on Feb. 25, 2011.  In between that time, the borrower filed for bankruptcy protection and the automatic stay went into effect.

Judge Wallace concluded that the lender was not entitled to relief from the automatic stay, that the trustee's deed issuance was a violation of the automatic stay and the Deed was void.

This decision isn't binding in other courts, but the reasoning should folks pause as it suggests there may be some loopholes that should be taken care of by the legislature. [In re Gonzalez, No 6:11-BK-15665-mw]


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California Attorney General Sues “Mass Action” Lawyers

August 23rd, 2011 · California Lending & Mortgage Law, Current Affairs, Foreclosure Defense Lawsuits, Foreclosures

 It's bad enough when people are dealing with their underwater properties, but to then have attorneys tell them to join these "mass action" lawsuits like it's a silver bullet to stop the foreclosure sale is egregious.  Apparently, the Attorney General thought so too and she sued them and the law firms have been placed into receivership.  

The California State bar has seized the practices and attorney accounts of the attorney defendants:

The Law Offices of Kramer & Kaslow; Philip Kramer, Esq; Mitchell J. Stein & Associates; Mitchell Stein, Esq. (aka "the Doberman" or "Dobie"); Christopher Van Son, Esq.; Mesa Law Group Corp.; and Paul Petersen, Esq.

According to the AG's press release:

...defendants preyed on desperate homeowners facing foreclosure by selling them participation as plaintiffs in mass joinder lawsuits against mortgage lenders. Defendants deceptively led homeowners to believe that by joining these lawsuits, they would stop pending foreclosures, reduce their loan balances or interest rates, obtain money damages, and even receive title to their homes free and clear of their existing mortgage. Defendants charged homeowners retainer fees of up to $10,000 to join as plaintiffs to a mass joinder lawsuit against their lender or loan servicer.

What's illegal about what these lawyers were doing?  According to the Complaint and Temporary Restraining Order:

-False advertising, in violation of section 17500 of the Business and Professions Code
-Unfair, fraudulent and unlawful business practices, in violation of section 17200 of the Business and Professions Code
-Unlawful running and capping, in violation of section 6152, subdivision (a) of the Business and Professions Code (i.e., a lawyer unlawfully paying a non-lawyer to solicit or procure business)
-Improper fee splitting (defendants unlawfully splitting legal fees with non-attorneys)
-Failing to register with the Department of Justice as a telephonic seller.


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Getting Attorney’s Fees in a Bankruptcy Non-dischargeability Action

July 19th, 2011 · California Judgment Enforcement/Collection, Creditor's Rights in Bankruptcy

By: Julia M. Wei, Esq.

Generally, a prevailing party (the winner) will not recover attorneys’s fees and costs unless authorized by statute or by contract. In the bankruptcy context of non-dischargeability actions, the Supreme Court case of Cohen v. de la Cruz addresses the issue of attorney’s fees. In summary, the test under Cohen is whether the party would have been able to recover attorney’s fees under state or federal (non-bk) law.

Cohen interpreted USC 523(a)(2)(A), 523 (a)(1)(B)(a)(4), (a)(6), and (a)(9) as clear examples where damages including attorney’s fees would be non-dischargeable.

In the recent case of In Re: Dinan, creditor Fry had loaned the Dinans $165k that they later failed to repay. When the Dinans filed for bankruptcy, Fry sought non-dischargeability of the debt under 523 (a)(14) on the grounds that the money he lent the borrowers had been applied to pay their taxes.

After prevailing, his attorney then brought a motion seeking to recover $55k in attorney’s fees. The bankruptcy court rather whimsically granted $2k.

Up on appeal, the Ninth Circuit Bankruptcy Appellate Panel concluded that Fry was entitled to have the attorney’s fees also survive Dinans’ dischargeability and sent the matter back down to the lower court to more reasonably determine the amount of attorneys’ fees awarded. [In re: Dinan 9th Cir. Bap, May 12, 2011.]




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How the Deed of Reconveyance Works in California

June 28th, 2011 · California Lending & Mortgage Law, Trust Deeds

I have had a surprisingly number of clients run into the problem of an old Deed of Trust (old loan) that was paid off, but remains against title.  This can be fairly time consuming to clean up and I've written an article about this for my firm's blog here.

A brief excerpt:

California Civil Code section 2941 (b)(1) requires the beneficiary, upon payoff, to “execute and deliver to the trustee the original note, deed of trust, request for a full reconveyance....” The trustee then executes and records the full reconveyance within 21 days of receipt of the documents from the beneficiary, delivers a copy of the reconveyance to the beneficiary and, upon request, delivers the original note and deed of trust to the trustor. (Civ.Code § 2941, subd. (b)(1)(A)-(C).)

What happens if the Trustee or the Benficiary does NOT do this? The statute provides two backup methods to help the owner clear title to their property. First, upon request by the trustor, the beneficiary must substitute itself in as trustee and execute a full reconveyance. (Civ.Code § 2941, subd. (b)(2).) Second, if neither the trustee nor the beneficiary has executed the full reconveyance within 75 calendar days after the loan payoff, “a title insurance company may prepare and record a release of the obligation” after giving notice of its intent to do so to the trustor, trustee, and beneficiary. “The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.” (Civ.Code § 2941, subd. (b)(3)(B).)


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Buyer Beware in Tax Sales – Bidder Whacked with $2.7M in backtaxes!

June 14th, 2011 · California Lending & Mortgage Law, Foreclosures

By: Julia M. Wei, Esq.

Whenever I speak on pre-foreclosure and foreclosure purchasing, I always warn that it is a high risk undertaking and that REOs are a far safer way of buying distressed property. The main reason is that even reasonable research cannot reveal hidden liens that will eat up the buyer’s equity. Here’s a horrific example:

In the recent case of Ribeiro v. County of El Dorado, Ribeiro was a seasoned real estate investor who bid on a parcel at tax sale. The deal was subject to tax liens (known as 1915 bond assessments), the amount of which were unknown at the time of the sale. The buyer thought he was buying a property for about $830k, and estimated that he would owe another $500k in backtaxes based on his preliminary research.

Turns out the backtaxes totaled $2.7M! Ribeiro refused to pay, sued the County and won at trial. The jury rescinded the purchase contract and Ribeiro got back his deposit of $83k too. The County appealed.

On appeal, the appellate court reversed finding that Ribeiro bought the property knowing there were tax liens and subject to those liens. It didn’t matter that there was evidence he asked county officials for the amount of the liens before the sale and that they failed to provide him with that information. In bidding, he took the risk and the sale is final. The Court went on to sale that this sale was not a normal sale that would allow Ribeiro the normal avenue of getting out the contract (rescission based on mistake, or fraud), but that the only remedies he was entitled to were those under the tax code—the technicalities of which I won’t get into here.

Takeaway ==> bidders at tax sales and foreclosure sales are stuck with the property regardless of what they find out after the gavel falls. Buyer beware.

[Ribeiro v. County of El Dorado, Third Appellate District of California, May 10, 2011]



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Creditors and Debt Collectors Can Breathe a Sigh of Relief – Court Applies “common sense” to “tools of the trade” Levy Exemption.

June 8th, 2011 · California Judgment Enforcement/Collection

by Julia M. Wei, Esq.

As judgment creditors know, it is one thing to obtain a judgment, but the hard work begins to collect and enforce on that judgment after. In California, one of the more challenging methods of collection allowed by the California Code of Civil Procedure “Enforcement of Judgment Law” (affectionately referred to as the “EJL”) is the levy of personal property.

In the recent case of Kono v. Meeker, judgment creditor tried to levy against the Meekers, who owned an antiques business. As part of Kono’s collection efforts, she OEX’ed (debtor’s examination) them, and obtained a turnover order after examination which required the Meekers to turn over 11 pieces to be sold in satisfaction of Kono’s judgment.

The Meekers filed a claim of exemption pursuant to California Code Section 704.060, which states:

(a) Tools, implements, instruments, materials, uniforms,
furnishings, books, equipment, one commercial motor vehicle, one
vessel, and other personal property are exempt to the extent that the
aggregate equity therein does not exceed:
(1) Six thousand seventy-five dollars $6,075), if reasonably
necessary to and actually used by the judgment debtor in the exercise
of the trade, business, or profession by which the judgment debtor
earns a livelihood.
(2) Six thousand seventy-five dollars ($6,075), if reasonably
necessary to and actually used by the spouse of the judgment debtor
in the exercise of the trade, business, or profession by which the
spouse earns a livelihood.
(3) Twice the amount of the exemption provided in paragraph (1),
if reasonably necessary to and actually used by the judgment debtor
and by the spouse of the judgment debtor in the exercise of the same
trade, business, or profession by which both earn a livelihood. In
the case covered by this paragraph, the exemptions provided in
paragraphs (1) and (2) are not available.

And claimed that three of the antiques were exempt as “tools” and reasonably necessary to their business. The “tools” were an antique sewing machine, surveying unit and fluting iron—none of which were actually used in the business, but were more akin to inventory as the trial court concluded.

The trial court, going on to use its “common sense” application of the code section, gave the analogy of a store—where the computer, cash register, racks were actually used by the business would be exempt as tools of the trade even though those items were not actually for sale by the business.

The Meekers appealed and the California Third Appellate District concurred, finding that prior case law had exempted a car for a Realtor, a truck for a repairman, a locksafe for a jeweler, all of which were 1) actually used by the business and 2) reasonably necessary. The appellate court further concluded that even if the Meekers could show that the antiques were “actually used” by the business (they had argued the pieces were for advertising), that would fail the second prong of Section 704.060(a)(3), that the three antiques were actually necessary for the business.

COMMENT: The facts of this case seemed pretty obvious, making it seem an unlikely case for publication, however there is very little case law or legislative history on what “tools” or “materials” were actually exempt. However, both the lower court and the appellate court actually applied the “plain meaning” doctrine and common sense to arrive at the correct result. The public policy implications are clear – the law has already shifted the burden of collection onto the judgment creditor to have the creditor bear the cost and effort of collection to avoid society from having the burden of too many bankrupts or debtors. However, once collection efforts are undertaken, the exemptions allowed to a business must be reasonable, and not an abuse of the EJL.

(Kono v. Meeker, California Third Appellate District, June 3, 2011)




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