From the Dark side on Wrongful foreclosure

Defending Wrongful Foreclosure Actions in California

Nearly all foreclosure professionals and loan servicers are familiar with the process for a non-judicial foreclosure action in California. A notice of intent to foreclose is followed by a notice of default which is followed by a notice of trustee’s sale. The last step, the actual non-judicial foreclosure sale, usually occurs within approximately 120 days from the filing of the notice of default. For the vast majority of loans, the California non-judicial foreclosure process is an effective and relatively inexpensive method for a servicer to obtain its security. In most non-judicial foreclosures, the only court time and court costs involved are those for the usually uncontested municipal court unlawful detainer which is initiated by the servicer in order to obtain possession from former borrowers who refuse to vacate their former homes.

For a small but seemingly growing number of loans, the non-judicial foreclosure process has become rather judicial. To borrowers who choose to allocate their resources away from debt payment towards fighting a loan servicer’s right to its payments and its security, the nonjudicial foreclosure process is a war of attrition which ranges from the bankruptcy court, to superior court to municipal court. While serial bankruptcy filings are often a frustrating delay to a servicer obtaining possession of its security, the wrongful foreclosure action filed in superior court is potentially the most time consuming weapon in the arsenal of the litigious borrower.

What is a Wrongful Foreclosure Action?

A wrongful foreclosure action is an action filed in superior court by the borrower against the servicer, the holder of the note, and usually the foreclosing trustee. The complaint usually alleges that there was an “illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust.” Munger v. Moore (1970) 11 Cal.App.3d. 1. The wrongful foreclosure action is often brought prior to the non-judicial foreclosure sale in order to delay the sale, but the action may also be brought after the non-judicial foreclosure sale. In most cases, a wrongful foreclosure action alleges that the amount stated as due and owing in the notice of default is incorrect for one or more of the following reasons: an incorrect interest rate adjustment, incorrect tax impound accounts, misapplied payments, a forbearance agreement which was not adhered to by the servicer, unnecessary forced place insurance, improper accounting for a confirmed chapter 11 or chapter 13 bankruptcy plan. Wrongful foreclosure actions are also brought when the servicers accept partial payments after initiation of the wrongful foreclosure process, then continue with the foreclosure. Companion allegations for emotional distress and punitive damages usually accompany any wrongful foreclosure action.

The causes of action alleged in a wrongful foreclosure action filed in California may include the following: breach of contract, intentional infliction of emotional distress, negligent infliction of emotional distress, violation of Business and Professions Code Section 17200 (Unfair Business Practices), quiet title, wrongful foreclosure (violation of Civil Code Section 2924), accounting and/or promissory estoppel.

The reciprocal nature of attorney fees provisions in all real property notes and deeds of trust dictate that any wrongful foreclosure action be taken seriously. Damages available to a borrower in a wrongful foreclosure action are an amount sufficient to compensate for all detriment proximately caused by the servicer or trustee’s wrongful conduct. Civil Code Section 3333. Damages are usually measured by value of the property at the time of the sale in excess of the mortgage and lien against the property. Munger v. Moore (1970) 11 Cal.App.3d. 1. Additionally, the borrower may also obtain damages for emotional distress in a wrongful foreclosure action. Young v. Bank of America (1983) 141 Cal.App.3d 108; Anderson v. Heart Federal Savings & Loan Assn. (1989) 208 Cal.App.3d. 202. Further, if the borrower can prove by clear and convincing evidence that the servicer or trustee was guilty of fraud, oppression or malice in its wrongful conduct, punitive damages may be awarded.

How Can a Wrongful Foreclosure Action Delay Recovery of the Security?

A wrongful foreclosure suit filed in superior court will not necessarily delay a servicer’s recovery of its security. The companion filings to such a suit (notice of pending action, injunction and/or motion to consolidate) however can delay a servicer’s ultimate recovery. Delay caused by a wrongful foreclosure action can be anywhere from forty-five days to two years.

A notice of pending action (“lis pendens”) is the most common companion to a wrongful foreclosure action. A lis pendens is recorded in the county in which the real property security is located at the time the wrongful foreclosure action is filed. The only requirement for a lis pendens to be recorded is an attorney’s signature that the action which is being noticed actually involves a real property claim. The purpose of the lis pendens is to put all third parties on notice that the borrower and the servicer are litigating over the real property security. Once a lis pendens is recorded, no title insurance company will issue a title insurance policy unless and until the lis pendens is removed. Although the servicer may “bond around” the lis pendens without title insurance, the real property security is virtually inalienable.

A summary procedure for removing a lis pendens is provided in the California Code of Civil Procedure Section 405.3 et seq. This section allows a “mini trial” on the merits of the borrower’s claim. At the “mini trial”, the borrower must establish the probable validity of his/her claim by a preponderance of the evidence. California Code of Civil Procedure Section 405.32. If the borrower cannot establish his or her claim by a preponderance of evidence, the lis pendens is expunged. The penalty for the borrower who wrongfully records a notice of pending action is that, in most cases, the court directs such a borrower to pay the servicer’s attorneys’ fees. California Code of Civil Procedure Section 405.38.

While a lis pendens can be filed at any time in the foreclosure process, a borrower applies for an injunction prior to the foreclosure sale with the intent of keeping the foreclosure sale at bay until issues in the lawsuit are resolved. The lawsuit can take anywhere from ten to twenty-four months. Generally, an injunction will only be issued if it appears to the court that: (1) the borrower is entitled to the injunction; and (2) that if the injunction is not granted, the borrower will be subject to irreparable harm. Like an action to expunge a lis pendens, a borrower’s application for an injunction is essentially a “mini-trial” on the merits. California Civil Code of Civil Procedure Section 526 et seq.

The issue at stake in nearly all injunctive relief action applications is the amount due and owing on the note and deed of trust. For the injunction hearing, it is imperative that the servicer provide a detailed analysis of the amount it contends is due and owing on the note and deed of trust at issue. If for some reason the servicer is unable to provide a breakdown of the amounts due and owing on the note and deed of trust at issue, or at least provide sufficient information to refute the borrower’s allegations, it is likely the injunction will be issued. In most cases, the injunction will be conditioned upon the borrower’s filing a significant bond and making timely debt payments. Upon occasion, judges who are not particularly enamoured with servicers and who are provided a heart wrenching tale in the borrower’s injunction application will issue minimal bonds and little or no debt service requirements. This worst case scenario translates into a servicer being unable to sell the security and receiving no payments on the underlying debt during the life of the lawsuit. Technically, modifications of injunctions are allowed for a change in law, a change in circumstances, or to prevent injustice. California Civil Code § 533. In reality, judges are loath to modify an injunction after it is issued and prior to a decision on the merits. Once an injunction with little or no debt service or bond is in place, the wrongful foreclosure suit will be a long and expensive process because the borrower has lost all incentive for a quick resolution of the action.

Another way borrowers delay a servicer’s recovery of its security through a wrongful foreclosure action is by consolidating their wrongful foreclosure action with their unlawful detainer action. Asuncion v. Superior Court (1980) 108 Cal. App. 3d 141. The Asuncion case which is usually relied upon by borrowers for consolidation contains an egregious fact scenario including clear fraud in the inducement of the loan. Judges however, do not limit the application of Asuncion to cases where fraud is alleged by the borrower. In applying Asuncion, a court can allow the unlawful detainer suit to be consolidated with the wrongful foreclosure action if there is a mere similarity of issues in the cases.

If the superior court allows consolidation, a servicer’s right to possession of the real property security will be stayed until a verdict for the servicer is obtained in the wrongful foreclosure action. Courts generally will condition such consolidation on borrower debt service payments. Again, though, the real property security will not be recovered until a final decision on the merits in the wrongful foreclosure action is reached. As discussed above, this can be anywhere from ten months to two years.

SELF-EXAMINATION: What to do when sued for a wrongful foreclosure?

The most important words in defending a wrongful foreclosure action are “critical self-examination”. Before determining strategy for the upcoming (possibly lengthy) lawsuit, it is critical to know if any of the borrower’s allegations of the servicers breach of duty are correct. If the borrower’s allegations are correct and the borrower wins the lawsuit, the servicer will have to unwind (or be precluded from conducting) the foreclosure sale, and pay the borrowers legal bill. Accordingly, the self-examination must be critical and comprehensive.

The necessary self-examination is much more than: Did we apply the payments correctly?… Yes… next question. In addition to reviewing proper payment application, the servicer should review all facets of servicing the loan in question. If we imposed force place insurance, did we have a right to do so? Did we inadvertently charge the escrow account (for excessive amount of taxes, for example)? Did we improperly account for a debtor with a confirmed bankruptcy plan? Did we adjust the interest rate correctly? Did we enter into a forbearance agreement to which we did not adhere? These are the types of questions a servicer needs to ask itself in preparing for a defense of a wrongful foreclosure action.

If, after a careful analysis of the borrower’s complaint, the servicer determines that an error was made, and given that the servicer may be required to pay for the borrower’s attorney, the question then becomes, what is the quickest way out of this lawsuit? For example, can the servicer rescind the sale, clarify negative credit information and get the borrower to dismiss the action? If the borrower appears intransigent and trial is likely, the servicer’s first concern should be to counter the “shifting” of attorney’s fees under the note.

“Offers in compromise” can counteract the shifting of the claims provided for in the note and deed of trust. Cal Code Civ. Proc. Section 998. An offer in compromise is a procedure which allows a servicer to determine the borrower’s likely damages and offer that sum to a borrower to settle the action. If the borrower refuses to settle and ultimately is awarded less than the servicer’s offer in compromise, the borrower will not recover his/her post-offer attorney fees and will be required to pay the servicer’s post-offer attorney fees. California Code Civil Procedure Section 998.

An offer in compromise is only appropriate if the borrower is “in it for the long haul,” is represented by an attorney and is likely to obtain a judgment in its favor. If the borrower is self-represented, an aggressive defense of significant discovery and early dispositive motions may be appropriate. Other areas of weakness in a borrower’s case may be lack of damages and lack of standing. As Munson v. Moore, supra indicates if there is no equity at the time of the alleged wrongful foreclosure sale, the borrower may not have suffered recoverable damages. The borrower’s standing to bring the action may be successfully attacked if the borrower has filed for chapter 7 bankruptcy protection to delay eviction or if the borrower can be declared a vexatious litigant. If a review of the borrower’s origination file uncovers material misrepresentations of fact, a counter-suit for mortgage fraud may be appropriate. The best strategy for defending a wrongful foreclosure action is never delay for delay’s sake.

If the servicer, after an exhaustive self-examination, determines that the borrower’s lawsuit is not justified, the goal shifts from control of damages to obtaining possession and clean title as soon as possible. Usually, the best method for this is the motion to expunge lis pendens. This procedure, as discussed above, is usually a mini-trial on the merits. Oftentimes, after the lis pendens is expunged and the real property security is sold, the borrower’s motivation to litigate is lost. The strategies previously discussed are also available when the borrower’s suit is likely non-meritorious, but they are usually not necessary. If no lis pendens was recorded by the borrower, early aggressive discovery followed by an early summary judgment motion is often the best route available to the servicer for the early resolution of the action.

Conclusion: Can wrongful foreclosure actions be avoided?

All of the preventive actions that an army of lawyers could recommend will not dissuade the borrower who feels wronged by his bank and wants the bank “to pay” from filing a wrongful foreclosure action. Many marginal wrongful foreclosure actions can be avoided, however, if the servicer reviews every communication sent to a borrower, (note adjustment letter, bankruptcy coupon letter, partial payment acceptance letter, etc.); with the following critical question: can this communication be misunderstood by the borrower or can its meaning be twisted by a clever debtor’s lawyer? If the answer to this question is yes, can this letter be written in a manner which more completely protects the servicer’s interest? Additionally, the servicer must truly understand the numbers which comprise the amount due stated on the notice of default and be certain of their accuracy.

California law provides many unique procedural remedies which may be employed in battling a wrongful foreclosure action. Judicious use of these procedures by counsel and close coordination between counsel and client can lessen the pain of defending a wrongful foreclosure action