Reversing a foreclosure sale: Avoiding the “Tender Rule”
If you are considering suing to reverse a foreclosure sale, consider the LONA case for a better understanding on CA non-judicial sales and exceptions to the requirement that you must offer to pay off the loan to title to your home back in your name.
After a nonjudicial foreclosure sale has been completed, the traditional method by which the sale is challenged is a suit in equity to set aside the trustee’s sale. (Anderson v. Heart Federal Sav. & Loan Assn. (1989) 208 Cal.App.3d 202, 209-210.) Generally, a challenge to the validity of a trustee’s sale is an attempt to have the sale set aside and to have the title restored. (Onofrio v. Rice (1997) 55 Cal.App.4th 413, 424 (Onofrio), citing 4 Miller & Starr, Cal. Real Estate (2d ed. 1989) Deeds of Trusts & Mortgages, Â§ 9.154, pp. 507-508.)
The burden of proof is on the former owner:
A nonjudicial foreclosure sale is accompanied by a common law presumption that it â€—was conducted regularly and fairly. This presumption may only be rebutted by substantial evidence of prejudicial procedural irregularity. The mere inadequacy of price, absent some procedural irregularity that contributed to the inadequacy of price or otherwise injured the trustor, is insufficient to set aside a nonjudicial foreclosure sale.
It is the burden of the party challenging the trustee’s sale to prove such irregularity and thereby overcome the presumption of the sale’s regularity.â€– (Melendrez v. D & I Investment, Inc. (2005) 127 Cal. App.4th 1238, 1258 (Melendrez) In addition, under section 2924,6 there is a conclusive statutory presumption created in favor of a bona fide purchaser who receives a trustee’s deed that contains a recital that the trustee has fulfilled its statutory notice requirements. (Melendrez, supra, 127 Cal App.4th at p. 1250.)
Case law instructs that the elements of an equitable cause of action to set aside a foreclosure sale are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust;
(2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and
(3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering. (Bank of America etc. Assn. v. Reidy, supra, 15 Cal.2d at p. 248; Saterstrom v. Glick Bros. Sash, Door & Mill Co. (1931) 118 Cal.App. 379, 383 (Saterstrom) [trustee's sale set aside where deed of trust was void because it failed to adequately describe property]; Stockton v. Newman (1957) 148 Cal.App.2d 558, 564 (Stockton) [trustor sought rescission of the contract to purchase the property and the promissory note on grounds of fraud]; Sierra-Bay Fed. Land Bank Ass’n v. Superior Court (1991) 227 Cal.App.3d (1991) 227 Cal.App.3d 318, 337 (Sierra-Bay) [to set aside sale, â€•debtor must allege such unfairness or irregularity that, when coupled with the inadequacy of price obtained at the sale, it is appropriate to invalidate the saleâ€–; â€•debtor must offer to do equity by making a tender or otherwise offering to pay his debtâ€–]; Abadallah v. United Savings Bank (1996) 43 Cal.App.4th 1101, 1109 (Abadallah) [tender element]; Munger v. Moore (1970) 11 Cal.App.3d 1, 7 [damages action for wrongful foreclosure]; see also 1 Bernhardt, Mortgages, Deeds of Trust and Foreclosure Litigation (Cont.Ed.Bar 4th ed. 2011 supp.) § 7.67, pp. 580-581 and cases cited therein summarizing grounds for setting aside trustee sale.)
The Tender requirement
Because the action is in equity, a defaulted borrower who seeks to set aside a trustee’s sale is required to do equity before the court will exercise its equitable powers. (MCA, Inc. v. Universal Diversified Enterprises Corp. (1972) 27 Cal.App.3d 170, 177 (MCA).)
Consequently, as a condition precedent to an action by the borrower to set aside the trustee’s sale on the ground that the sale is voidable because of irregularities in the sale notice or procedure, the borrower must offer to pay the full amount of the debt for which the property was security. (Abadallah, supra, 43 Cal.App.4th at p. 1109; Onofrio, supra, at p. 424 [the borrower must pay, or offer to pay, the secured debt, or at least all of the delinquencies and costs due for redemption, before commencing the action].)
The rationale behind the rule is that if [the borrower] could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the [borrower].– (FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1022.)
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!
The Exceptions to the Tender requirement under LONA
First, if the borrower’s action attacks the validity of the underlying debt, a tender is not required since it would constitute an affirmation of the debt. (Stockton, supra, (1957) 148 Cal.App.2d at p. 564) [trustor sought rescission of the contract to purchase the property and the promissory note on grounds of fraud]; Onofrio, supra, 55 Cal.App.4th at p. 424.)
Second, a tender will not be required when the person who seeks to set aside the trustee’s sale has a counter-claim or set-off against the beneficiary. In such cases, it is deemed that the tender and the counter claim offset one another, and if the offset is equal to or greater than the amount due, a tender is not required. (Hauger, supra, (1954) 42 Cal.2d at p. 755.)
Third, a tender may not be required where it would be inequitable to impose such a condition on the party challenging the sale. (Humboldt Savings Bank v. McCleverty (1911) 161 Cal. 285, 291 (Humboldt). In Humboldt, the defendant’s deceased husband borrowed $55,300 from the plaintiff bank secured by two pieces of property. The defendant had a $5,000 homestead on one of the properties. (Id. at p. 287.) When the defendant’s husband defaulted on the debt, the bank foreclosed on both properties. In response to the bank’s argument that the defendant had to tender the entire debt as a condition precedent to having the sale set aside, the court held that it would be inequitable to require the defendant to•pay, or offer to pay, a debt of $57,000, for which she is in no way liable– to attack the sale of her $5,000 homestead.10 (Id. at p. 291.)
Fourth, no tender will be required when the trustor is not required to rely on equity to attack the deed because the trustee’s deed is void on its face. (Dimock, supra, 81 Cal.App.4th at p. 878 [beneficiary substituted trustees; trustee's sale void where original trustee completed trustee's sale after being replaced by new trustee because original trustee no longer had power to convey property].)
For a better understanding of how this new case affects your individual situation, contact the Firm and set up an appointment.
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