Archive | March, 2010

Trust Deeds the Rules

28 Mar

Background;  The Emergence of the Trust Deed

The deed of trust (often referred to as “trust deed”) is the most common instrument by which real property serves as security for the performance of an obligation. It is simply a contract to provide to the lender a remedy for non-payment. That is a contract by which the borrower agrees that if they fail to make the payments the lender may sell the property at a private sale. It is not considered an action but a private contract.

A brief historical.

A detour is helpful in understanding the modern legal consequences of the deed of trust which emerged as a device to circumvent various debtor protections to relieve the harsh consequences of mortgage defaults. (See generally Hetland, California Real Estate Secured Transactions 11; 1 Miller & Starr, California Real Estate 315.) In the 15th century, the security instrument commonly used in England was a mortgage, which took the form of a conveyance of real property by a debtor to a creditor. Although an absolute conveyance on its face, a mortgage was subject to a condition subsequent by which the debtor could retake or “redeem” title when the debtor performed the underlying obligation. If the debtor did not perform, by the specified deadline, the property was effectively forfeited to the creditor. Gradually, equity courts began to permit debtors to redeem the property although the secured obligation was performed long after the designated time for performance.  In response, creditors sought to

bar the debtors’ equity of redemption. The courts granted equitable decrees ordering debtors to redeem by a specified time or be forever foreclosed from redeeming. (See e.g., 3 Powell on Real Property 546-49; 1 Miller & Starr, California Real Estate 314-15.)

California recognizes the common law right of redemption. [Civ. Code § 2889; see e.g., Hamud v. Hawthorne (1959) 52 Cal.2d 78, 84; 338 P. 2d 387.] However, equitable redemption was effectively negated by the California Supreme Court’s sanction of the use of the deed of trust. Koch v. Briggs (1859) 14 Cal. 256; 73 Am.Dec. 65.] The court considered a transaction in which a debtor simultaneously executed a promissory note and a deed conveying the debtor’s property to a trustee with a power of sale. The power of sale gave the trustee the authority to sell the property at public auction if the debtor defaulted on the debt and to apply the proceeds of sale to satisfy the obligation. The court ruled that, although the deed of trust was a conveyance executed to secure a debt, it was not a mortgage, and consequently, there was no equity of redemption or necessity of foreclosure.

Although some cases followed the conveyance-of-title theory °f Koch, a series of Supreme Court cases culminating in Bank of Italy Nat. Trust & Sav. Assn. v. Bentlev (1933) 217 Cal. 644; 20 P.2d 940 emphasized that mortgages and trust deeds served identical purposes and functions and applied most mortgage rules and theoriesto trust deed problems.  Today,. . . in California there is little practical difference between mortgages and deeds of trust, . . . they perform the same basic function, and a deed of trust is practically and substantially only a mortgage with power of sale. . . [D]eeds of trust are analogized to mortgages and the same rules are generally applied to deeds of trust that are applied to mortgages. Domarad v. Fisher & Burke, Inc. (1969) 270 Cal.App.2d 543, 553; 76 Cal.Rptr. 529.

2.   Statute of Limitations

Although most of the distinctions between the deed of trust and mortgage have been abolished, one significant difference remains: the effect of the statute of limitations on the exercise of the power of sale. When recovery on the underlying obligation is barred by the statute of limitations, a creditor cannot judicially foreclose on either a mortgage or deed of trust. [Flack v. Boland (1938) 11 Cal.2d 103, 106; 77 P.2d 1090.] Likewise, the statute of limitations will bar the exercise of a power of sale in a mortgage. A lien is extinguished by the lapse of time within which an action can be brought on the underlying obligation [Civ. Code § 2911(1)]. The lien of the mortgage includes the power of sale to enforce the lien; therefore, when the statute of limitations runs on the obligation, the lien, including the power

of sale, expires.  Faxon v. All Persons (1913) 166 Cal. 707; 137 P. 919.

A different rule applies to the power of sale in a deed of trust. The anachronistic view that a deed of trust constitutes a transfer of title rather than a lien still governs judicial analysis of the operation of the statute of limitations. Since the deed of trust is not construed as a lien, Civil Code § 2911(1) does not apply, and the creditor may exercise the power of sale even after recovery on the underlying obligation is time barred. (E.g., Flack v. Boland,, 11 Cal.2d 103, 106; Napue v. Gor-Mev West, Inc. (1985) 175 Cal.App.3d 608, 616; 220 Cal.Rptr. 799.) As the Court of Appeal summarized,

. the running of the statute of limitations on the principal obligation did not extinguish the debt or operate as payment [citations omitted], it did not affect the title of the trustee under the deed of trust [citations omitted], nor did it operate to extinguish the power of sale conferred upon him. The power of sale under a deed of trust may be exercised after an action on the principal obligation is barred. Sipe v.’ McKenna (1948) 88 Cal.App.2d 1001, 1005-06; 200 P.2d 61.

Special rules, however, apply to bar ancient deeds of trust.  (See Civ. Code, §§ 882.020 et sea.)

3.   Form of Deed of Trust

While a deed of trust must contain certain information, no particular form is statutorily mandated. A permissive form of mortgage appears in Civil Code § 2948, and many of the rules and formalities applicable to mortgages apply to deeds of trust. A deed of trust must be in writing and be signed by the party to be charged. (Code of Civ. Proc. § 1971; see Civ. Code § 2922.) A deed of trust must describe the property and should also indicate the “conveyance” to the trustee with power of sale and the beneficial interest of the beneficiary. (Hetland, California Real Estate Secured Transactions 10.)

Today, most deeds of trust are on preprinted forms prepared by the lender or title company. Despite a great deal of similarity among these forms, there are variations. Some institutional lenders use uniform documents approved by the Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Special provisions may be contained if the loan is insured by the Department of Housing and Urban Development (HUD) or guaranteed by the Veterans Administration.

Such content variations aside, deeds of trust generally fall within two broad categories — “long form” or “short form.” The long form contains all of the lengthy, boilerplate provisions of the trust deed.  The short form is usually a one-page document

which omits many of the standardized clauses but incorporates these provisions by reference to a fictitious deed of trust which was earlier recorded in the county in which the actual deed of trust is to be recorded. Civil Code § 2952 provides for this practice of recordation of a fictitious deed of trust, and further, declares that the parties are bound by the terms of the incorporated fictitious deed of trust as though the incorporated terms were included in the executed deed of trust. Among the advantages of the short form are lower costs for printing and recordation. However, whether fictitious trust deed provisions will continue to be enforceable under developing views on adhesion contracts and unconscionability is unclear.

Both long and short preprinted trust deed forms are adhesion contracts, Wilson v. San Francisco Fed. Sav. & Loan Assn. (1976) 62 Cal.App.3d 1, 7; 132 Cal.Rptr. 903; Lomanto v. Bank of America (1972) 22 Cal.App.3d 663, 669; 99 Cal.Rptr. 442.]

Courts have held adhesion contracts unconscionable if they surprise the weaker, adhering party with terms outside of that party’s reasonable expectation. [See e.g., A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486; 186 Cal.Rptr. 114.] In Lomanto, the Court stated that while the lender was not required to call attention to a usual provision in a trust deed, the lender may have to accentuate an unusual provision by oral disclosure, “print of distinctive size,” or “placing it in a box with heavy

borders.” (22 Cal.App.3d at 669-70.) In the context of trust deeds, special adhesion questions arise with the short form trust deed. A borrower may be extremely surprised by a term incorporated from a fictitious document of which the borrower has no actual knowledge. Yet superficially, Civil Code § 2952 permits such surprise. However, the statute can be harmonized with the court’s view that borrowers should be relieved of the operation of unconscionable provisions as expressed in cases like Lomanto.

Section 2952 binds the borrower to the incorporated terms in the fictitious trust deed as though the terms were set forth in full. But, to the extent that Lomanto requires that the terms receive special emphasis if they actually were set forth, some special emphasis should be given in the short form to the incorporated terms. The special emphasis would need to apprise the borrower of the unusual provisions which have been incorporated by force of law.

The uncertainties surrounding the potentially unconscionable use of fictitious trust deeds have prompted some lending institutions to use only long form trust deeds. (See 1 Miller & Starr, California Real Estate 322 n. 9.) Many title companies have taken a different tack, using a short form deed of trust modified to include the remaining provisions from the fictitious trust deed on the reverse. To save recording charges, only the front side of the modified short form is recorded. Since the recorded front side

still refers to the fictitious trust deed, that reference incorporates the provisions on the unrecorded reverse side. In any case involving a short form deed of trust, it should be determined whether the trust deed actually executed contained more terms than revealed by the recorded copy on the front side of the short form.

4.   Parties to a Trust Deed

a.   Trustor

The trustor is an owner of any interest in real property (see Civ. Code § 2947) who gives a security interest in that real property.

Although the trustor is usually the debtor, the trustor can give a deed of trust to secure someone else’s debt [see e.g., Everlv Enterprises, Inc. v. Altman (1960) 54 Cal.2d 761; 8 Cal.Rptr. 455.] or to secure the trustor’s guarantee of someone else’s performance. [See e.g., Indusco Management Corp. v. Robertson (1974) 40 Cal. App.3d 456; 114 Cal.Rptr. 47.]

The trustor need not necessarily be the sole owner in order to encumber the property, but if there are multiple owners and not all execute the trust deed, the effect of an encumbrance depends on whether the property is held as community property, joint tenancy, or tenancy in common.

(1)  Issues Arising if Title is Held as Community Property

Civil Code § 5127 provides, in pertinent part, that “both spouses either personally or by duly authorized agent, must join in executing any instrument by which such community real property . . . is sold, conveyed, or encumbered. . .” (emphasis added). [See also O’Banion v. Paradiso (1964) 61 Cal.2d 559; 39 Cal.Rptr. 370; Italian American Bank v. Canepa (1921) 52 Cal.App. 619, 621; 199 P.55.] The purpose of this provision is to give each spouse veto power over disadvantageous dispositions of community property. [See Strong v. Strong (1943) 22 Cal.2d 540, 544; 140 P.2d 386.] However, a transfer or encumbrance made without the consent of one spouse is not void but merely voidable by the no consenting spouse, not by a creditor or other third party, and will be treated as valid until voided. [See, e.g., Clar v. Cacciola (1987) 193 Cal.App.3d 1032, 1033; 238 Cal.Rptr. 726; Jack v. Wong Shee (1939) 33 Cal.App.2d 402, 415; 92 P.2d 499.] The transaction may be set aside in its entirety during the life of the transferring or encumbering spouse, but after that person’s death, the no consenting spouse can only set aside the transfer or encumbrance as to one-half the property or interest. [See e.g., Britton v. Hammell (1935) 4 Cal.2d 690, 692; 52 P.2d 221; 1 Qgden’s Revised California Real Property Law 323.]

The law has been recently clouded by Mitchell v. American Reserve Ins. Co. (1980) 110 Cal.App.3d 220; 167 Cal.Rptr. 760 and

its progeny. In Mitchell, the husband executed a promissory note and deed of trust on the couple’s home without the wife’s knowledge, for the purpose of obtaining a bail bond from a third party. In the wife’s action to void the encumbrance, the court granted only limited relief from the lien and none from the underlying obligation. The court held that the nonconsenting wife could remove the lien only as it related to her interest. The encumbrance was held to be valid and enforceable as to the consenting husband’s interest. The court further ruled that the underlying obligation, as distinct from the security interest created by the trust deed, remained the obligation of both spouses since the property of the community is liable for the debts of either spouse incurred during marriage. (See Civil Code § 5116.) The holding in Mitchell preserving the lien against the consenting spouse has been followed and rejected. [See Wolfe v. Lipsev (1985) 163 Cal.App.3d 633, 642; 209 Cal.Rptr. 801 (“an encumbrance of community property by one spouse contrary to the provisions of Civil Code section 5127 is valid and binding as to the consenting spouse’ s one-half interest . . . but voidable as it relates to the non-consenting spouse’s one-half interest.”); Head v. Crawford (1984) 156 Cal.App.3d 11, 17-18; 202 Cal.Rptr. 534 (following Mitchell); Andrade Development Co. v. Martin (1982) 138 Cal.App.3d 330, 336 n. 3; 187 Cal.Rptr. 863 (rejecting Mitchell); see also Harper v. Rava (1984) 154 Cal.App.3d 908, 912; 201 Cal.Rptr. 563 and In re Jones (C.D.Cal. 1985) 51 B.R. 834 (following Andrade).] The court in Jones concluded that the non-consenting spouse could

set aside a trust deed before the death of the consenting spouse, the dissolution of the marriage, or a change in the community character of the property; after these events, the non-consenting spouse could set aside a conveyance only as to his or her one-half interest.

Even if the no consenting spouse can avoid the encumbrance, he or she has to overcome several additional obstacles. The no consenting spouse may be estopped to contest the transaction or be deemed to have waived the community property interest if he or she knew about the transaction and participated in the negotiations or failed to object. MacKav v. Darusmont (1941) 46 Cal.App.2d 21, 26-27; 115 P.2d 221; Bush v. Rogers (1941) 42 Cal.App. 2d 477, 480-81; 109 P.2d 379.] The no consenting spouse may also be estopped if he or she authorized the other spouse to make the encumbrance and accepted the benefits of the transaction. Pin re Nelson (9th Cir. 1985) 761 F.2d 1320, 1323.] Moreover, between a bona fide encumbrancer without knowledge of the marriage and a no consenting spouse, the latter has been required to satisfy the obligation as a condition of avoiding the encumbrance. [See Mark v. Title Guarantee & Trust Co. (1932) 122 Cal.App. 301, 310-13; 9 P.2d 839.] The court in Mark reasoned that although the husband sold the property without his wife’s consent and squandered the proceeds, the receipt of the sale price benefitted the community, and the community should not be able to void the conveyance without returning the consideration. In addition, if record title to the

property is held in the name of one spouse,  transfers or

encumbrances  by  that  spouse  are presumed  valid,  and  the

nonconsenting spouse can assail thetransfer or encumbrance for

only one year after its recordation. (Civ. Code § 5127.)

(2)  Joint Tenancy and Tenancy in Common

If the deed of trust and obligation are executed by all joint tenants or tenants in common, the entire property is subject to the encumbrance. See Caito v. United California Bank (1978) 20 Cal.3d 694, 701; 144 Cal.Rptr. 751.] All tenants need not consent for a valid encumbrance to be created. A tenant in common or joint tenant may encumber his or her interest without the consent of any other co-tenant. The encumbrance will not affect the interest of the no consenting co-tenant. [See Caito v. United California Bank,, 20 Cal.3d at 701; Schoenfeld v. Norbera (1970) 11 Cal.App.3d 755, 765; 90 Cal.Rptr. 47 (tenancy in common); Kane v. Huntley Financial (1983) 146 Cal.App.3d 1092, 1097; 194 Cal.Rptr. 880; Clark v. Carter (1968) 265 Cal.App.2d 291; 70 Cal.Rptr. 923 (joint tenancy).]

A couple of special issues arise with a joint tenancy. The encumbrance is limited to the joint tenancy interest held by the encumbering joint tenant. [See People ex rel. Dept. of Pub. Works v. Noaarr (1958) 164 Cal.App.2d 591, 593; 330 P.2d 858.] The creation of the lien is a nullity as against the right of

survivorship of the other joint tenant.” Hammond v. McArthur (1947) 30 Cal.2d 512, 515; 183 P. 2d 1.] At death, the encumbering joint tenant’s interest in the real property ceases, and the survivor’s interest expands to include the interest formally held by the decedent. Since the decedent’s interest “ceased to exist, the lien of the mortgage expired with it.” (People ex rel. Dept. of Pub. Works v. Noqarr,, 164 Cal.App.2d 591, 594.) Accordingly, “the mortgage or trust deed beneficiary may not enforce the security after the death of the joint tenant executing the security device.” Clark v. Carter,, 265 Cal.App.2d 291, 294 (emphasis in original); Hamel v. Gootkin (1962) 202 Cal.App.2d 27, 29; 20 Cal.Rptr. 372.]

Conversely, if the none cumbering joint tenant dies first, the interest of the survivor, the encumbering joint tenant, expands to the decedent’s interest, and the encumbrance covers the survivor’s broadened interest. [See generally Civ. Code § 2930; Parry v. Kellev (1877) 52 Cal. 334.]

The encumbrance of one joint tenant’s interest does not sever the joint tenancy. Clark v. Carter,, 265 Cal.App.2d 291, 294; Hamel v. Gootkin,, 202 Cal.App.2d 27.] However, a foreclosure sale on the encumbering joint tenant’s interest while both joint tenants are living will terminate the joint tenancy status of the debtor’s interest, and the buyer at the sale will become a tenant in common with the other owners.  [See Kane v.

Huntley Financial,, 146 Cal.App.3d 1092, 1098; see generally Zeialer v. Bonnell (1942) 52 Cal.App.2d 217, 219; 126 P.2d 118 (execution sale on judgment lien of joint tenant’s interest terminates joint tenancy with buyer becoming tenant in common) and People ex rel. Dept. of Pub. Works v. Noqarr,, 164 Cal.App.2d 591, 595 (judgment lien and mortgage lien have virtually identical effect on joint tenancy).]

(3)  Creditor Reliance on Record Title; A Special Problem with Spouses

Special problems arise where there is a question as to exactly how a husband and wife hold title to real property. As discussed above, the ability of a spouse to set aside an encumbrance may depend on whether the property is held as community property, joint tenancy, or tenancy in common. Each of these forms of ownership is unique (Civ. Code § 682), and a husband and wife may hold title in any of these forms (Civ. Code § 5104), although title cannot be held simultaneously in more than one form. [See e.g., Siberell v. Siberell (1932) 214 Cal. 767, 773; 7 P.2d 1003.]

All real property acquired during marriage (except for separate property defined in Civ. Code §§ 5107 and 5108) is declared to be community property if acquired after January 1, 1975, or is presumed to be community property if acquired before that date unless a contrary intention is expressed in the

instrument of conveyance. (Civ. Code § 5110.) A contrary intention would be, for example, that the property was acquired in joint tenancy. Siberell v. Siberell,, 214 Cal. 767, 773.] Although real property acquired during marriage is considered community property, the law before 1985 permitted spouses to convert community property into separate property and vice versa [see e.g., Estate of Furtsch (1941) 43 Cal.App.2d 1, 5; 110 P.2d 104] by agreement — whether express or implied, written or oral [e.g., Beam v. Bank of America (1971)

6 Cal.3d 12, 25; 98 Cal.Rptr. 137] — without any consideration other than mutual consent if the transaction is fair. Estate of Wilson (1976) 64 Cal.App.3d 786, 798; 134 Cal.Rptr. 749.] Beginning in 1985, a transmutation of property must be in writing and is ineffective against third parties without notice of it unless the document declaring the transmutation is recorded. [Civ. ‘Code § 5110.730.] A transmutation is also subject to the law governing fraudulent transfers.  [Civ. Code § 5110.720.]

The form of the transaction is not dispositive of the true state of title as between the spouses. Extrinsic evidence can be used to show that spouses intended property to remain in the community though property is held by one spouse as his or her separate property or is held by both spouses as tenants in common or joint tenants. Tomaier v. Tomaier (1944) 23 Cal.2d 754, 757; 146 P.2d 905; see e.g., Gudeli v. Gudeli (1953) 41 Cal.2d 202, 212; 259 P.2d 656.]  Extrinsic evidence can also show that property nominally held as community property was actually held as a tenancy in common, Tompkins v. Bishop (1949) 94 Cal.App.2d 546; 211 P.2d 14.] Property, however, cannot be held in joint tenancy, regardless of the parties’ intention, unless the existence of a joint tenancy is declared in the instrument of conveyance. [See e.g., Civ. Code § 683; Cordasco v. Scalero (1962) 203 Cal.App.2d 95, 103; 21 Cal.Rptr. 339.]

Although the form in which title is held does not necessarily determine the true state of the title between spouses, as between a no consenting spouse and a bona fide encumbrancer for value and without notice, the courts have tended to uphold the encumbrancer’s reliance on record title, notwithstanding how the spouses intended to retain title. In Kane v. Huntley Financial,, 146 Cal.App.3d 1092, the Court of Appeal held that the recording laws protected the lien obtained by a bona fide encumbrancer for value and without notice from a husband who appeared on the record as a joint tenant on a residence which he had orally agreed was his wife’s separate property. Although the trust deed purported to encumber the entire property, the trust deed was held to bind only the husband’s purported one-half interest. [See Caito v. United California Bank,, 20 Cal.3d 694 (recording laws protect bona fide encumbrancer from unrecorded liens, equities, and agreements between co-tenants); see generally Rilev v. Martinetti (1893) 97 Cal. 575; 32 P. 579; Pepin v. Stricklin (1931) 114 Cal.App. 32; 299 P. 557 (husband’s judgment creditor purchasing at execution sale

takes free of wife’s unrecorded equity).]

b.   Trustee

Under the terms of a deed of trust, the trustor nominally conveys title to the trustee with the power to sell the encumbered property to satisfy the terms of the secured obligation in the event of the trustor’s default. Despite the name “trustee,” a trustee under a deed of trust has not been held to the duties of a trustee under an express trust: “Just as a panda is not an ordinary bear, a trustee under a deed of trust is not an ordinary trustee.” Stephens, Partain & Cunningham v. Hollis (1987) 196 Cal.App.3d 948, 955; 242 Cal.Rptr. 251.] Rather, “[t]he rights and powers of trustees in nonjudicial foreclosure proceedings have long been regarded as strictly limited and defined by the contract of the parties and the statutes.” n. E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281, 287; 216 Cal.Rptr. 438.]

Although the trustee has been referred to as the common agent of the trustor and the beneficiary [see, e.g., Ainsa v. Mercantile Trust Co. (1917) 174 Cal. 504, 510; 163 P. 898], the trustee does not have the general common law duties of an agent. (See I. E. Associates., 39 Cal.3d at 285, 287-88.) For example, in the absence of any fraud, irregularity, or misconduct, the trustee can purchase property at the foreclosure which the trustee conducts. Stephens, Partain & Cunningham v. Hollis,, 196 Cal.App.3d

948, 955-56.] In addition, service of process on the trustee does not constitute service on the trustor or beneficiary and does not impose any obligation on the trustee to notify the beneficiary or trustor of the action.  (Civ. Code § 2937.7.)

Nevertheless, the trustee cannot enter a side agreement with one of the parties that impairs the rights of the other party. See Ballenaee v. Sadlier (1979) 179 Cal.App.3d 1, 5; 224 Cal.Rptr. 301.] In addition, the trustee’s breach of its duties to the trustor to conduct a fair sale may be imputed to the beneficiary who profits from the breach. [See Bank of Seoul & Trust Co. v. Marcione (1988) 198 Cal.App.3d 113, 120; 244 Cal.Rptr. 1.]

Since the trustee begins to play a significant role in the trust deed relation only upon the foreclosure or reconveyance of the trust deed, the nature of the trustee’s duties will be discussed in detail in later entries.

The trustee need not formally consent to be named as trustee in the deed of trust. [See Huntoon v. Southern Trust and Commerce Bank (1930) 107 Cal.App. 121, 128; 290 P. 86.] Frequently, organizations such as title companies make available to the public printed trust deed forms designating the organization as the trustee. A creditor and debtor can use such a deed of trust form, thereby appointing the designated organization as trustee, without notice to the trustee that it has been appointed and without obtaining the trustee’s consent.

A new trustee may be substituted pursuant to Civil Code § 2934a or the terms of the trust deed. The manner of substitution provided in the trust deed may be restricted by Civil Code § 2934a [see Civ. Code § 2934a(c)], but all of the provisions of the statutory method of substitution do not necessarily have to be followed. [See U.S. Hertz, Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 83-85; 116 Cal.Rptr. 44.]

A trustee has authority to sue to carry out the trustee’s statutory duties.  [Code Civ. Proc. § 369(b).]

c.   Beneficiary

The beneficiary is the secured party. If there is more than one beneficiary under a deed of trust, each beneficiary may protect the security without joining with the others, and each is empowered to initiate a foreclosure in the event of default. [See Perkins v. Chad Development Corp. (1979) 95 Cal.App.3d 645, 650-51; 157 Cal.Rptr. 201.]

The deed of trust is accessory to the primary obligation — it is a mere incident to the debt — and is not enforceable separate from the underlying debt. [See e.g., Civ. Code § 2909; Adler v. Sargent (1895) 109 Cal. 42; 41 P. 799.] The assignment of the underlying obligation carries with it the security of the

deed of trust. [See e.g., Civ. Code § 2936; Seidell v. Tuxedo Land Co. (1932) 216 Cal. 165, 170; 13 P.2d 686; Domarad v. Fisher & Burke, Inc.,, 270 Cal.App.2d 543, 554.] An assignment of the deed of trust without a transfer of the debt is, as the Supreme Court observed in Adler, without effect and gives the assignee of the trust deed no rights. Adler v. Sargent,, 109 Cal. 42, 48-49; see e.g., Kellev v. Upshaw (1952) 39 Cal.2d 179, 192; 246 P.2d 23.] Therefore, the beneficiary’s assignee must have also received an assignment of the underlying obligation in order to enforce the terms of the trust deed. But if the assignee of the beneficiary’s interest has also received an assignment of the debt, the assignee can enforce the trust deed even though the trust deed does not name the assignee.

The beneficiary may serve as trustee under the deed of trust [see e.g., Witter v. Bank of Milpitas (1928) 204 Cal. 570, 576; 269 P. 614; More v. Calkins (1892) 95 Cal. 435, 438; 30 P. 583] and, as trustee, may bid at the sale Bank of America Nat1 Trust & Sav. Ass’n. v. Century Land & Wat. Co. (1937) 19 Cal.App.2d 194, 196; 65 P. 2d 110] and collect a trustee’s fee California Trust Co. v. Smead Inv. Co. (1935) 6 Cal.App.2d 432, 435; 44 P.2d 624]. However, such a two-party trust deed under certain circumstances may be construed as a mortgage with power of sale [see Godfrey v. Monroe (1894) 101 Cal. 224; 35 P. 761], the enforcement of which may be barred by the statute of limitations.  [See First Federal

Trust Co. v. Sanders (1932) 192 Cal. 194; 219 P. 440; see also “Statute of Limitations”,. 1

In addition, if the beneficiary serves as trustee at the foreclosure sale and acquires the property, the sale is voidable by the trustor if the trustor offers to redeem the property from the beneficiary after the sale. Copsev v. Sacramento Bank (1901) 133 Cal. 659; 66 P. 7.] This right, often neglected, has very significant applicability to foreclosures conducted by a so-called “in-house” or “captive” trustee which is a subsidiary of the foreclosing creditor. [See Karlsen v. American Sav. & Loan Ass’n. (1971) 15 Cal.App.3d 112, 116; 92 Cal.Rptr. 851.]

5.   Execution, Acknowledgment and Delivery of the Trust Deed

A lien on real property is created by execution and delivery of a deed of trust. [See Livingston v. Rice (1955) 131 Cal.App.2d 1, 3-4; 280 P.2d 52.]

a.   Execution or Signing of the Trust Deed by the Trustor

The trustor must sign the trust deed. [Code of Civ. Proc. § 1971; see Civ. Code §§ 1091 and 2922.] If someone signs on behalf of the trustor, the trustor’s authorization for that person to sign

must be in writing. (See Civ. Code §§ 1091, 2309, 2922 and 2933.) The trust deed also may be executed by someone other than the trustor at the trustor’s request and in the trustor’s presence. [See Blaisdell v. Leach (1894) 101 Cal. 405, 409; 35 P. 1019; Rich v. Ervin (1948) 86 Cal.App.2d 386, 395; 194 P.2d 809.] The trustor may also be estopped to deny the signature if the trustor knows of the unauthorized signature, permits it to be used, and accepts the benefit of the transaction. (See Blaisdell v. Leach,, 101 Cal. 405, 409-10.)

b.   Acknowledgment of the Trust Deed by the Trustor

Acknowledgment of the trust deed before a notary is not necessary to create a binding lien between the parties. [See e.g., Civ. Code § 1217; Bank of Ukiah v. Petaluma Sav. Bank (1893) 100 Cal. 590; 35 P. 170.] However, acknowledgment is required to record the deed of trust (Civ. Code § 2952; Gov. Code § 27287) and preserve its priority from later bona fide purchasers or encumbrancers.  (Civ. Code § 1214.)

c.   Delivery of the Trust Deed

To be effective, a trust deed must be delivered. [See Civ. Code §§ 1054, 1091, 2922; Code of Civ. Proc. § 1933; Stirton v. Pastor (1960) 177 Cal.App.2d 232, 234; 2 Cal.Rptr. 135; see also Hahn v. Hahn (1954) 123 Cal.App.2d 97; 266 P.2d 519; Richardson v. Suiter (1946) 74 Cal.App.2d 682, 685-86; 169 P.2d 252.]

Whether delivery has occurred is a question of fact. Delivery requires that the trustor intended the trust deed to operate presently to create a security interest in favor of the beneficiary. How the intention is manifested does not matter, and actual physical delivery is not determinative. [E.g., Huth v. Katz (1947) 30 Cal.2d 605, 608-09; 184 P.2d 521; Hotalina v. Hotalina (1924) 193 Cal. 368, 382-85; 224 P. 455; Meyer v. Wall (1969) 270 Cal.App.2d 24, 27; 75 Cal.Rptr. 236.] Delivery cannot be conditional. (See Civ. Code § 1056.) While the cases in this area deal with deeds, the reasoning should fully apply to trust deeds viewed either as a grant of title to the trustee or a grant of a lien under the rules applicable to mortgages. (See Civ. Code § 2922.) If the trust deed has not been delivered, it is void— invalid not only against the beneficiary but also against any bona fide purchaser or encumbrancer of the beneficiary’s interest. [See Marlenee v. Brown, (1943) 21 Cal.2d 668, 679; 134 P.2d 770; Trout v. Tavlor (1934) 220 Cal. 652, 656; 32 P.2d 968; Gould v. Wise (1893) 97 Cal. 532, 535-36; 32 P. 576; see also Brvce v. O’Brien

(1936) 5 Cal.2d 615, 616; 55 P.2d 488.] However, even if the requisite element of delivery is not present, the trustor’s subsequent “ratification” can validate the deed of trust. [See Marlenee v. Brown,, 21 Cal.2d 668, 679.] Also, nondelivery may be overcome if the trustor’s conduct establishes negligence or an estoppel. [See Civ. Code § 3543; Trout v. Taylor,, 220 Cal. 652, 656-57; Shirley v. All Night & Day Bank (1913) 166 Cal. 50, 55; 134 P. 1001; Gould v. Wise,, 97 Cal. 532, 536-37.]

6. Trust Deeds on Encumbered Property

The trustor’s nominal transfer of title in creating the first trust deed does not preclude the trustor’s creation of other trust deeds. Davidow v. Corporation of America (1936) 16 Cal.App.2d 6; 60 P.2d 132.] Theoretically, there is no limit on the number of trust deeds which can be given on a parcel of real property.

7. All Inclusive Trust Deed

An all inclusive trust deed (“AITD”), also known as a “wrap around” or overriding trust deed, is a trust deed securing the trustor’s indebtedness to the beneficiary, but the amount of the indebtedness includes a debt owed by the beneficiary on a senior trust deed covering the same property. [See Armsev v. Channel Associates, Inc. (1986) 184 Cal.App.3d 833, 837; 229 Cal.Rptr. 509.]  For example, suppose A sells property to B for $50,000

subject to a first trust deed of $25,000. B makes a down payment of $10,000 and gives A a promissory note and deed of trust for $40,000. Since the $40,000 note includes the $25,000 first trust deed loan, the $40,000 note and trust deed are considered all inclusive; they “wrap around” the existing first trust deed loan. The trustor’s debt is for the full face amount of the note, including senior obligations, and the trust deed secures the entire indebtedness. (Id. at 838-39.) Thus, if a trustor fails to make payments on one of the obligations underlying the AITD, the beneficiary can accelerate the entire unpaid balance due under the AITD and set that amount, rather than the amount owed under the underlying obligation, as the minimum bid. [See FPCI Re-Hab 01 v. E&G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1023; 255 Cal.Rptr. 157.]

B.   The Obligations Secured by a Deed of Trust

1.   The Underlying Obligation

The validity of the trust deed depends on the validity and enforceability of the underlying obligation:

The mortgage must stand or fall with the note. It is well settled in California that a mortgage or mortgage lien is a mere incident of the debt or obligation which it is given to secure.   [Citations omitted.]   There

cannot be a mortgage if there is no debt or other obligation to be secured.   [Citations omitted.]   A mortgage in California has no existence independent of the thing secured by it.  Coon v. Shrv (1930) 209 Cal. 612, 615; 289 P. 815.

[See e.g., Adler v. Sargent., 109 Cal. 42; Turner v. Gosden (1932) 121 Cal. App. 20, 22; 8 P.2d 505.]

2.   Obligation to Pay Accelerated Balance

A note and/or a deed of trust invariably contain a provision permitting the secured party to accelerate the balance due on the obligation, including accrued interest, in the event the obligor/trustor defaults on making any installment payment or performing any additional obligation contained in the deed of trust. The trustor then is obligated to pay the full amount. (But see Civ. Code § 2924c discussed infra.) In any conflict between an acceleration provision in the note and deed of trust, the provision in the note governs. Pacific Fruit Exchange v. Duke (1930) 103 Cal.App. 340, 345; 284 P. 729.]

However, even without an acceleration clause, the secured party may be able to accelerate. The power of sale clause has the same effect as an acceleration clause because it provides for the sale of the property on any default to satisfy the entire debt.

(See also Code of Civ. Proc. § 728 involving judicial foreclosure.)

3.   Other Obligations Imposed by the Deed of Trust

The deed of trust invariably imposes several obligations on the trustor other than the payment of the obligation, such as payment of taxes, insurance and prior encumbrances. These obligations are discussed in the following sections. In the event the trustor breaches these obligations, the trust deed affords the beneficiary two options: (1) foreclosing without advancing money to perform the obligation, or (2) performing the obligation, demanding reimbursement, and foreclosing if reimbursement is not made. The amount advanced because of the trustor’s default is covered by the security of the trust deed under a provision generally securing future advances or specifically securing advances to perform the trustor’s obligations. [See also Civ. Code §§ 2876 and 2904 (2).] Thus, in addition to the failure to pay an obligation, the trustor’s failure to reimburse the amount advanced by the beneficiary is also a breach of the trust deed, authorizing foreclosure. [See Security-First Nat. Bank of Los Angeles v. Lamb (1931) 212 Cal. 64; 297 P. 550.] For any breach, the beneficiary can invoke the acceleration clause and foreclose on the entire amount due.

a.   Fire Insurance and Eminent Domain Proceeds

(1)  Obligation to Pay Premiums

One of the most standard obligations of the trustor is the maintenance of adequate fire insurance. The lender may require that the trustor maintain hazard insurance coverage in an amount up to the replacement value of the improvements on the property. (Civ. Code § 2955.5.) If the trustor fails to pay, the beneficiary may pay for the insurance and add the amount advanced to the principal. [See Freeman v. Lind (1986) 181 Cal.App.3d 791, 806; 226 Cal.Rptr. 515; see also Campbell v. Realty Title Co. (1942) 20 Cal.2d 195, 197-98; 124 P.2d 810; Covne v. Mason (1936) 13 Cal.App.2d 176, 178-79; 56 P.2d 541.] A beneficiary may accelerate and foreclose if the trustor fails to pay fire insurance premiums notwithstanding whether the failure to pay the premiums causes any impairment of the security interest in the real property. (Civ. Code § 2924.7; Fin. Code §§ 1227.2, 7461.) These statutes abrogate case authority which prevented the beneficiary from declaring a default if the beneficiary’s security interest in the property was not impaired by the trustor’s failure to maintain insurance. [See Freeman v. Lind,, 181 Cal.App.3d 791; see also Kreshek v. Sperling (1984) 157 Cal.App.3d 279; 204 Cal.Rptr. 30; Stats. 1987, ch. 397, § 5; Stats. 1988, ch. 179, § 3.]

The beneficiary will most likely advance money to purchase a fire insurance policy before foreclosing to avoid a potential fire loss (especially since the trustor’s liability may be limited to the missed premium or by the antideficiency statute if the fire loss is considered waste).

Issues that counsel representing a property owner in this situation should consider include: (1) whether the beneficiary placed the insurance with an insurer affiliated or related in some way with the beneficiary, (2) whether the beneficiary received a commission on the sale of the insurance, and (3) whether the insurance premium is higher than the trustor paid and higher than the rate available on alternative policies. The beneficiary is bound by the covenant of good faith and fair dealing implied in deeds of trust. [See generally Schoolcraft v. Ross (1978) 81 Cal.App.3d 75; 146 Cal.Rptr. 57; Milstein v. Security Pac. Nat. Bank (1972) 27 Cal.App.3d 482; 103 Cal.Rptr. 16.]

Moreover, to the extent that the beneficiary is acting as an insurance broker, the beneficiary is acting on behalf of the debtor as his or her agent [see Ins. Code § 33; Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 117; 132 Cal.Rptr. 796] and should procure insurance at a favorable premium. [See Colpe Investment Co. v. Seeley & Co. (1933) 132 Cal.App. 16; 22 P.2d 35; Anno., Inadequacy of Property Insurance Procured, 72 ALR 3d 747, 758.] In Colpe, the court held that if one undertakes to obtain insurance for another,

. . . it is the duty of an agent to exercise good faith and reasonable diligence to procure insurance on the best terms he can obtain; and if he is a professional agent he should be required to exercise the particular skill reasonably to be expected of such an agent, and to have knowledge as to the different companies and terms available with respect to the commission assured by him. Colpe Investment Co. v. Seeley & Co.,, 132 Cal. App. at 19.

A beneficiary’s excessive charge for insurance may be a breach of the beneficiary’s implied covenant of good faith and fair dealing and/or the beneficiary’s duties as an insurance broker. The foreclosure may be attacked if the premium is excessive. The amount owed to cure the default may be affected by the nature and extent of the beneficiary’s breach.

(2)  Beneficiary’s Control of Insurance and Eminent Domain Proceeds

The standard trust deed provides that the beneficiary controls the disposition of insurance and eminent domain proceeds and may apply the proceeds to reduce the unpaid balance of the obligation. Courts have held that this provision is tempered by the implied covenant of good faith and fair dealing which requires the

beneficiary to permit the trustor to use insurance proceeds for the rebuilding of damaged improvements if the value of the beneficiary’s security interest is not impaired. (Schoolcraft v. Ross,, 81 Cal.App.3d 75, 77; see Kreshek v. Sperling,, 157 Cal.App.3d 279, 283.) In Kreshel, the court held that the beneficiary was not entitled to insurance proceeds even though the trustor was not going to rebuild because the beneficiary’s security interest was not impaired. (157 Cal.App.3d at 283.) Kreshek and Schoolcraft rely on the reasoning of Milstein v. Security Pac. Nat. ,, 27 Cal.App.3d 482 which held that a beneficiary’s right to apply condemnation proceeds to reduce the trustor’s outstanding indebtedness had to be construed in light of the covenant of good faith and fair dealing; as a result, the beneficiary could not retain condemnation proceeds in excess of those necessary to prevent any impairment of its security interest.

However, if the trustor is in longstanding default and has no right of reinstatement and if allowing the trustor to rebuild would indefinitely postpone the beneficiary’s matured right to foreclose, the beneficiary may apply insurance proceeds to the reduction of the unpaid debt. Ford v. Manufacturers Hanover Mortgage Corp. (9th Cir. 1987) 831 F.2d 1520.]

Statutory changes after Schoolcraft and Kreshek recognize that the beneficiary’s right to dispose of insurance proceeds is enforceable notwithstanding whether the beneficiary’s security

interest in the property has become impaired by the loss that caused the insurance proceeds to become payable. [Civ. Code § 2924.7(b) (effective 1-1-89); Fin. Code §§ 1227.3, 7462.] Uncodified statements of legislative intent make clear that these statutes do not abrogate Schoolcraft;s holding that the lender may not prohibit the use of insurance proceeds for rebuilding absent a showing that the lender’s security interest in the property has been impaired. (See Stats. 1987, ch. 397, § 5; Stats. 1988, ch. 179, § 3.]

b.   Taxes

A lien resulting from unpaid property taxes or other assessments takes priority over all other liens, even those created before the property tax or assessment lien. (Rev. & Tax Code § 2192.1.) To preserve the property as security for the debt, trustors are charged generally with the duty of paying all taxes and assessments. [See Donkin v. Killefer (1939) 32 Cal. App.2d 729, 732; 90 P.2d 810.] Notwithstanding this general principal, trust deeds routinely specify that the trustor must pay taxes and assessment within some period, often ten days, before delinquency.

If a delinquency occurs, the deed of trust permits the beneficiary to pay the delinquent taxes, add the amount paid to the secured debt, and foreclose if not reimbursed even though there are no other defaults.  (See Security-First Nat. Bank of Los Angeles

v. Lamb,, 212 Cal. 64, 68-9.) The beneficiary has similar rights to advance money to pay taxes even in the absence of any express authority in the trust deed and is entitled to subrogation. [See Civ. Code §§ 2876, 2904 (2); Beeler v. American Trust Co. (1946) 28 Cal.2d 435, 440; 170 P.2d 439; Savings & Loan Society v. Burnett (1895) 106 Cal. 514, 536; 39 P. 922; Stafford v. Russell (1953) 117 Cal.App.2d 326, 333; 255 P.2d 872; Diehl v. Hanrahan (1945) 68 Cal.2d 32, 37; P.2d 853.]

The beneficiary, however, is not required to pay delinquent taxes and assessments. Dowd v. Glenn (1942) 54 Cal.App.2d 748, 756; 129 P.2d 964.] But, the trust deed usually provides that the trustor’s mere failure to pay taxes is grounds to accelerate the maturity of the debt and foreclose. (Civ. Code § 2924.7; Fin. Code §§ 1227.2, 7461.)

If a senior lienholder pays delinquent taxes and adds the amount advanced to the secured debt, the junior lienholder can declare a default and foreclose even though all payments due to the junior lienholder are current since the junior’s security has been reduced by the increased amount owed the senior, Manning v. Queen (1968) 263 Cal.App.2d 672, 674; 69 Cal.Rptr. 734.] Presumably, the borrower could relieve the default by reimbursing the senior encumbrancer even though the junior may demand an amount equivalent to what the senior advanced as a condition for reinstating the junior lien.

The failure to pay property taxes also constitutes waste, but the ability of the secured party to sue for damages and collect by means other than foreclosure is governed by the one form of action and anti-deficiency rules. Osuna v. Albertson (1982) 134 Cal.App.3d 71; 184 Cal.Rptr. 338; see Civ. Code § 2929; Code of Civ. Proc.

§§ 580b, 580d, 726; but see Krone v. Goff (1975) 53 Cal.App.3d 191, 195; 127 Cal.Rptr. 390.]

c.   Impound Accounts

Some secured obligations require the trustor to maintain an impound account for the payment of taxes and insurance (and perhaps other purposes) related to the property. The failure to make periodic impound account payments is deemed a default even though taxes and insurance premiums are not yet due.

An impound account may not be required under an obligation secured by a deed of trust covering a single-family, owner occupied dwelling unless an impound account is required by a state or federal regulatory authority; the loan is made, guaranteed, or insured by a state or federal agency; the trustor fails to pay timely two consecutive tax installments; the original amount of the loan is 90 percent or more of the sale price or appraised value; or the combined principal amount of all loans secured by the

property exceeds 80 percent of the appraised value of the property. [Civ. Code § 2954(a).] The parties may agree to an impound if the beneficiary furnishes the trustor with a written statement indicating that an impound account is not required and whether interest will be paid. (Id. ) The beneficiary may not require that the amount maintained in the account exceed the amount necessary to pay tax, insurance, and other covered obligations as they become due.  [Civ. Code § 2954.1(b).]

d.   Senior Encumbrances

Most trust deeds require that the trustor must pay all sums due to holders of senior encumbrances. A default on a senior encumbrance is often expressly made a default on a junior encumbrance. In addition, the deed of trust permits the junior lienholder to advance money to the senior lienholder to satisfy any delinquency, add the amount advanced to the security of the junior lien, declare a default on the junior lien, and foreclose. Similar authority is provided by statute. [See Civ. Code §§ 2876, 2903-05; Windt v. Covert (1907) 152 Cal. 350, 352-54; 93 P. 67; Little v. Harbor Pac. Mortgage Investors (1985) 175 Cal.App.3d 717, 720; 221 Cal.Rptr. 59; Stafford v. Russell,, 117 Cal.App.2d 326, 333.]

Junior lienholders may learn of delinquencies on senior encumbrances not subject to a notice of default through the notice

of delinquency request procedure. The beneficiary or mortgagee of any trust deed or mortgage on real property containing one to four residential units may, with the trustor’s or mortgagor’s consent, submit a request to a senior lienholder for written notice of all delinquencies of four months or more in principal or interest payments even though the requester’s lien is not in default. [Civ. Code § 2924e(a).] The trustor’s or mortgagor’s consent must be effected by a signed and dated agreement separate from the loan and security documents or disclosed in at least 10-point type.  (.Id.)

The request covers delinquencies until any of the following occurs: the date the request is withdrawn, the date the requester’s interest terminates as stated in the request, or five years from mailing except that it may be repeatedly renewed for five year periods within six months of expiration. [Civ. Code § 2924e(b).] The beneficiary must give notice of delinquency within 15 days following the end of four months from any delinquency; however, no delinquency notice is required if the senior lienholder files a notice of default. [Civ. Code § 2924e(c).] The senior lienholder is liable for damages and a $300 statutory penalty for failing to give the notice unless the failure was the product of a bona fide error notwithstanding the use of procedures reasonably adapted to avoid the failure.  [Civ. Code § 2924e(d).]

e.  Waste

(1) Foreclosure on Breach of Duty to Maintain

The standard trust deed requires the trustor to maintain the property in good condition and repair and also prohibits the trustor from removing or destroying buildings or committing acts of waste. The law provides that a person whose property is subject to a mortgage lien or deed of trust may not do anything to impair substantially the value of the property. [Civ. Code § 2929; Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 599; 125 Cal.Rptr. 557.] Waste can be committed by the mere failure to maintain the property; affirmative misconduct need not be shown to establish waste. In re Mills (9th Cir. 1988) 841 F.2d 902, 905; but see Krone v. Goff,, 53 Cal.App.3d 191, 195.] Failure to pay taxes can constitute waste since a tax lien becomes senior to all others, and a sale of the property to pay taxes will extinguish all deeds of trust.  (Osuna v. Albertson,, 134 Cal.App.3d 71.)

In addition to maintaining the property, most trust deeds require additional acts, such as keeping the property free of mechanics’ liens. Many of these acts have little or nothing to do with sufficiently preserving the value of the property as adequate security for the debt. Consequently, failure to perform these acts might not constitute a basis for foreclosure, since the gravamen of the anti-waste provision and Civil Code § 2929 is preventing

action which would impair the ability of the creditor to realize the debt from the value of the security [see Cornelison v. Kornbluth,, 15 Cal.3d 590, 606-08; Easton v. Ash (1941) 18 Cal.2d 530, 539; 116 P.2d 433; Buckout v. Swift (1865) 27 Cal. 433, 437; 87 Am.Dec. 90; Robinson v. Russell (1864) 24 Cal. 467, 473.] In order to be a breach permitting foreclosure, the acts or omissions of the trustor must threaten the creditor’s ability to satisfy the obligation out of the proceeds of the sale of the property. [See Bart v. Streuli (1935) 5 Cal.2d 67, 68; 52 P. 2d 922.] However, a beneficiary is permitted to accelerate the maturity of the debt and foreclose if the trustor does not make timely payments of taxes, rents, assessments, or insurance premiums notwithstanding whether the failure impairs the value of the security interest in the real property. (Civ. Code § 2924.7; Fin. Code § 1227.2, 7461.)

No case has dealt with the situation where a beneficiary’s loan relied on a certain loan-to-value ratio and the beneficiary later faces an act by the trustor diminishing the value of the property. Can the beneficiary foreclose based on the reduced loan-to-value ratio even though the reduced value is sufficient security for the debt?

(2) Damages for Breach of Duty to Maintain

The trustor who commits waste may be liable for damages.  In Comelison,, the Supreme Court held that if the obligation is purchase money, the trustor will not be liable for a deficiency judgment resulting from waste unless bad faith (i.e., reckless, intentional or malicious conduct) is proven. (15 Cal.3d at 603-04; see In re Mills,, 841 F.2d 902, 905.) If the obligation is not purchase money and the foreclosure is nonjudicial, the trustor will not be liable for a deficiency resulting from waste unless bad faith is proven. (15 Cal.3d at 604-05.) Even if the waste is committed in bad faith, no recovery can be had if the debt is satisfied at the foreclosure sale by the proceeds of a third party’s purchase or by the beneficiary’s full credit bid. [15 Cal.3d at 606-08; see Sumitomo Bank v. Taurus Developers, Inc. (1986) 185 Cal.App.3d 211, 217-222; 229 Cal.Rptr. 719.] Although the lienholder can avail himself of the injunctive remedy to prevent waste and the damage remedy for recompense [e.g., Lavenson v. Standard Soap Co. (1889) 80 Cal. 245, 247; 22 P. 184], it appears to be undecided whether an action for damages for waste is barred by the one form of action rule. [See Code of Civ. Proc. § 726; American Sav. & Loan Assn. v. Leeds (1968) 68 Cal.2d 611, 614; 68 Cal.Rptr. 453; cf. Krone v. Goff,, 53 Cal.App.3d 191, 193-95.]

Comelison is not followed in waste actions involving FHA insured trust deeds. [See United States v. Haddon Haciendas Co. (9th Cir. 1976) 541 F.2d 777 (case involving operator of a housing project).]

f.  Prepayment Penalties

Promissory notes secured by trust deeds routinely require that the trustor must pay a penalty if all or a portion of a loan is repaid earlier than scheduled. In home loan transactions, state law generally provides that the borrower can prepay 20 percent of the original principal amount in any one-year period, but the creditor may subject the borrower to a penalty of up to a maximum of six months’ advance interest on the amount prepaid in excess of 20 percent of the original principal amount. (Civ. Code § 2954.9.) A similar rule applies to loans obtained through mortgage brokers. (Bus. & Prof. Code § 10242.6.) Prepayment penalty clauses commonly provide for this type of penalty formula and have been commonly upheld. [See, e.g., Meyers v. Home Sav. & Loan Assn. (1974) 38 Cal.App.3d 544; 113 Cal.Rptr. 358; Lazzareschi Inv. Co. v. San Francisco Fed. Sav. & Loan Assn. (1971) 22 Cal.App.3d 303; 99 Cal.Rptr. 417.]

If the prepayment penalty clause imposes a payment for “involuntary prepayment,” the lender can demand a prepayment penalty if the lender accelerates the balance upon the trustor’s default. (See Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn. (1986) 184 Cal.App.3d 817, 824-25; 229 Cal.Rptr. 269.] The obligation to pay the prepayment penalty is secured by the deed of trust. [See Golden Forest Properties, Inc. v. Columbia Sav. & Loan Assn. (1988)  202  Cal.App.3d  193,  199;  248  Cal.Rptr.  316.]

Accordingly, the trustor and junior lienholders would have to pay the penalty to redeem the property. (See Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn.,, 184 Cal.App.3d 817, 825.) Moreover, the foreclosing creditor is entitled to recover the amount of the penalty from foreclosure sale proceeds. (See Golden Forest Properties, Inc. v. Columbia Sav. & Loan Assn.,, 202 Cal.App.3d at 199.)

However, if the prepayment penalty provision does not apply to involuntary prepayment, i.e. payment forced as the result of the lender’s acceleration of the debt, the lender is not entitled to collect the penalty. [See Tan v. California Fed. Sav. & Loan Assn. (1983) 140 Cal.App.3d 800, 809-11; 189 Cal.Rptr. 775.]

g.  Late Payments

Promissory notes secured by trust deeds routinely provide that the trustor must pay a late charge if an installment is not made by the due date or within a short period following the due date. The amount of the late charge and the length of a grace period, if any, following the due date within which a payment can be made without a late charge is subject to some statutory regulation. [See, e.g., Civ. Code § 2954.4 (6% late charge, 10-day grace period on certain loans secured by single family, owner occupied dwellings); Bus. & Prof. Code § 10242.5 (10% late charge, 10-day grace period on loans made or arranged by real estate brokers and

subject to the Necessitous Borrowers Act); Fin. Code § 15001 (6% late charge, no grace period on credit union loans secured by real property.]

If payment can be made after the due date before a late charge may be assessed, payments made after the so-called “due date” but before the payments are deemed “late” are considered to be timely. [See Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal.App.3d 818, 827; 214 Cal.Rptr. 531.] Foreclosure may not be used as a remedy for minor delays in paying installments.  (Id. at 827, 831.)

h.  Attorney’s Fees

Deeds of trust routinely provide that the trustor must pay attorney’s fees and costs incurred (1) in any action in which the trustee or beneficiary may appear, and (2) in connection with the protection of the security. Attorney’s fees are an issue in three contexts: fees incurred for processing a foreclosure, fees incurred for advising the beneficiary or trustee, and fees incurred in litigation.

(1) Processing the Foreclosure

Civil Code § 2924c permits a trustor to cure a default and reinstate the obligation, notwithstanding the acceleration of the

debt, by paying the arrearage, costs, and trustee’s or attorney’s fees as limited by Civil Code § 2924c(d). Trustee’s or attorney’s fees incurred after mailing of the notice of sale are limited by Civil Code § 2924d. Since the statutes use the disjunctive “or,” trustee’s or attorney’s fees, but not both, may be assessed. (See Hetland, California Real Estate Secured Transactions 172; 1 Miller & Starr, Current Law of California Real Estate 521.)

The limitation on attorney’s fees provided by these statutes, however, concerns fees incurred in the processing of the foreclosure. If the beneficiary incurs attorney’s fees for other purposes and if the trust deed authorizes the recovery of their fees, they may also be recovered. [See Passanisi v. Merit McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1512 n. 10; 236 Cal.Rptr. 59; Hetland, California Real Estate Secured Transactions 173; 1 Miller & Starr, Current Law of California Real Estate 520.]

(2) Fees for Advising the Beneficiary or Trustee

Most deeds of trust provide that the beneficiary may retain counsel at the trustor’s expense to take necessary steps to protect the security. These attorney services need not involve litigation; for example, the services of an attorney for an elderly widow which consisted of writing letters and making telephone calls to determine whether the property was covered by a fire insurance policy were held covered by this provision. Buck v. Barb (1983) 147 Cal.App.3d 920,  924-25;  195 Cal.Rptr.  461.]   Similarly, attorney’s fees for checking insurance, coverage; warning unpaid material providers not to remove fixtures; recovering fixtures already removed; and meeting with general creditors, unpaid subcontractors, and others interested in refinancing and completing the trustor’s project were all properly chargeable to the trustor. O’Connor v. Richmond Sav. & Loan Assn. (1968) 262 Cal.App.2d 523, 526-29, 68 Cal.Rptr. 882, disapproved on other grounds in Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 738; 1108 Cal.Rptr. 845; see also Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496, 1511-12.]

If these attorney’s fees expended for protection of the security pursuant to the terms of the deed of trust are set forth in the notice of default [see Bisno v. Sax (1959) 175 Cal.App.2d 714, 720; 364 P.2d 814], payment of these fees may be made a condition of reinstatement. (See Buck v. Barb,, 147 Cal.App.3d 920, 925.)

The provision of the trust deed allowing the beneficiary to claim reimbursement for legal expenses incurred to protect the security is potentially subject to abuse. A beneficiary interested in frustrating the trustor’s ability to reinstate could inflate the amount needed for reinstatement by incurring attorney’s fees. The Buck case suggests that attorney’s fees for essentially nonlawyer services, such as making a telephone call to inquire about fire insurance coverage, are permissible. As a result, an unscrupulous beneficiary could hire an attorney to accomplish routine tasks in order to pad the amount needed to cure the default.

The use of the trust deed provision permitting the recovery of expenses for preserving the security cannot be used to sanction the incurring of unnecessary legal expenses. The purpose of the trust deed provision is to allow the beneficiary to take needed steps and incur reasonable expense to protect the property securing the obligation to assure that the value of the security is not impaired. Whether the steps taken are necessary will depend on the facts of the case and the parties involved.

For example, a beneficiary has the clear right to insist on the maintenance of a fire insurance policy covering the real property securing the obligation.

The beneficiary may need to inquire whether this insurance is in force. In Buck, an inexperienced, elderly widow was the beneficiary under a trust deed representing part of the purchase price of the home which she sold. The trustor repeatedly defaulted on the obligation and failed to furnish proof of fire insurance on the property, and the elderly widow was obliged to seek the aid of an attorney. (See 147 Cal.App.3d at 923-24.) That this elderly widow was obliged to retain an attorney does not furnish justification for a financial institution, real estate broker, sophisticated investor, or other experienced beneficiary to retain an attorney to inquire about fire insurance.

A lawyer representing a homeowner should evaluate any charge for attorney’s fees purportedly incurred to protect the security. If the charge is unreasonable, unnecessary, or unrelated to the protection of the security, the charge is not allowed under the terms of the trust deed. If the amount is not properly due under the obligation, it need not be paid to effect reinstatement which requires payment only of the amount then due. [See Civ. Code § 2924c(a)(1).] Moreover, the beneficiary’s imposition of an unneeded charge which hampers the trustor’s ability to reinstate the obligation may constitute a breach of the covenant of good faith and fair dealing. [See section VA 7, “Duty of Good Faith and Fair Dealing Between Lenders and Borrowers”, The best procedure would be to obtain a judicial determination of the reasonableness of the charge. [See Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496, 1504, 1512; de la Cuesta v. Superior Court (1984) 152 Cal.App.3d 945, 950; 200 Cal.Rptr. 1.]

(3) Litigation Fees

(a)  Beneficiary’s Litigation Fees

Attorney’s fees may be awarded to the beneficiary in an action under the deed of trust if it so provides.  [E.g., Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cap.App.3d 36,46; 198 Cal.Rptr. 418; Melnvk v. Robledo (1976) 64 Cal.App.3d 618, 621; 134 Cal.Rptr. 602; Nevin v. Salk (1975) 45 Cal.App.3d 331, 339; 119 Cal.Rptr. 370; Johns v. Moore (1959) 168 Cal.App.2d 709, 715; 198 Cal.Rptr. 418.] These fees are secured by the deed of trust and take priority over junior liens. (See Wutzke v. Bill Reid Painting Service, Inc.,, 151 Cap.App.3d 36, 46-47.)

If the demand for attorney’s fees is set forth in the notice of default, the payment of the fees may be made a condition of reinstatement. (See Bisno v. Sax,, 175 Cal.App.2d 714, 720.) In Hunt v. Smyth (1972) 25 Cal.App.3d 807, 837; 101 Cal.Rptr. 4, the court authorized the imposition of attorney’s fees and costs at both the trial and appellate levels as a condition of reinstatement. The Hunt opinion does not discuss whether attorney’s fees were demanded in the notice of default, but since the notice of default pre-dated the litigation, the amount of attorney’s fees and costs could not have been specified.

If the beneficiary has obtained a judgment for attorney’s fees, for example by prevailing in an action to enjoin the foreclosure, the beneficiary may add the amount of the judgment to the balance owed under the obligation. (See Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496.) The beneficiary may enforce the judgment apart from the secured obligation and is not affected by the antideficiency and one form of action provisions.

(Id. at 1505-09.) However, the beneficiary is barred by res judicata from claiming entitlement under the trust deed to a greater amount of attorney’s fees in connection with the litigation than was awarded by the court. (Id. at 1510.) If the beneficiary’s bid exceeds the amount of the debt, costs and expenses, and the attorney’s fees to which the beneficiary is entitled, a surplus is created. (Id. at 1510-12.) If the trustor has a right to the surplus, the trustor can offset the surplus against the amount of the judgment the trustor owes for attorney’s fees and can compel acknowledgment of the offset through a motion for satisfaction or partial satisfaction of judgment. (Id. at 1513.)

In addition to attorney’s fees, the beneficiary may also be able to obtain sanctions against a trustor who engages in frivolous tactics to delay foreclosure. [See Code Civ. Pro. §§ 128.5, 907; Cal. Rules of Court, Rule 26(a); Kapelus v. Newport Equity Funds, Inc. (1983) 147 Cal.App.3d 1, 9; 194 Cal.Rptr. 893.] The trustor should likewise be able to recover sanctions against a beneficiary who engages in frivolous tactics.

(b)  Trustor’s Litigation Fees

The trustor, however, is not without an attorney fee remedy. Under Civil Code § 1717, the prevailing party in an action concerning the deed of trust is entitled to attorney’s fees. Thus,

if the trustor prevails in litigation, the trustor is entitled to reasonable attorney’s fees, and the same rule applies to the trustor’s successor in interest even if he or she did not expressly assume the obligation under the deed of trust. valley Bible Center v. Western Title Ins. Co. (1983) 138 Cal.App.3d 931; 188 Cal.Rptr. 335; Wilhite v. Callihan (1982) 135 Cal.App.3d 295, 301-02; 185 Cal.Rptr. 215; Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309; 168 Cal.Rptr. 552; see Buck v. Barb,, 147 Cal.App.3d 920.] In Valley Bible Center, the court clearly held that the trustor could recover attorney’s fees in an action brought by the trustor to challenge the beneficiary’s and trustee’s rights under the trust deed.  (138 Cal.App.3d at 932.)

(c)  Trustee’s Litigation Fees

An attorney’s fee provision in a trust deed also generally covers the trustee. The trustee may be entitled to attorney’s fees if the trustee’s participation is necessary to the resolution of the litigation. [See Title Guarantee and Trust Co. v. Griset (1922) 189 Cal. 382, 389-91; 208 P. 673; Mitau v. Roddan (1906) 149 Cal. 1, 15-17; 84 P. 145.] However, in Field v. Acres (1937) 9 Cal.2d 110; 69 P.2d 422, the Supreme Court held that the trustee was not involved in a judicial foreclosure, that the proceeding was between the beneficiary and the trustor, and that the trustee was not entitled to attorney’s fees although it had been named by the beneficiary in the action.  Since the cases view a trustee under

a deed of trust as “only a functionary of limited power, under a type of mortgage conferring upon him the power to convey under the prescribed conditions” (Carpenter v. Title Ins, & Trust Co., (1945) 71 Cal.App.2d 593, 597; 163 P.2d 73), the trustee serves essentially a technical function. Accordingly, Professor Hetland concludes that “when the dispute is solely between the beneficiary and the trustor, the trustee’s appearance is only technically necessary, and he cannot have attorney’s fees.” (Hetland, California Real Estate Secured Transactions 175.)

4.  The Obligations of Successors and Assigns

Deeds of trust routinely contain a clause binding the successors and assigns of all parties; however, many of a trust deed’s rights and obligations are transferred by operation of law.

a.  The Trustor’s Transferee

The grantee of property on which a trust deed has been placed is not personally liable on the underlying obligation unless the grantee assumes it. [E.g., Braun v. Crew (1920) 183 Cal. 728, 731; 192 P. 531; Andres v. Robertson (1918) 177 Cal. 434, 439; 170 P. 1129; Hibernia Sav. & Loan Soc. v. Dickinson (1914) 167 Cal. 616, 621; 140 P. 265.] Nevertheless, a grantee who does not assume the obligation takes the property subject to the trust deed, and the property becomes primarily liable for the payment of the debt

(Braun v. Crew,, 183 Cal. 728, 731). As a result, although not personally liable, a nonassuming grantee’s property can be sold to satisfy the secured debt. [See e.g., Rodgers v. Peckham (1898) 120 Cal. 238; 52 P. 483; Hohn v. Riverside County Flood Control & Wat. Conserv. Dist. (1964) 228 Cal.App.2d 605; 39 Cal.Rptr. 647.] A nonassuming grantee may, however, be liable for bad faith waste. (Cornelison v. Kornbluth,, 15 Cal.3d 590.)

b.  The Beneficiary’s Transferees

The assignee of the note and deed of trust may enforce them against the trustor in the same manner as the original beneficiary. See Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735, 744; 155 Cal.Rptr. 132, app. dis. 444 U.S. 948; section c, at p. 1-10,; see generally McCown v. Spencer (1970) 8 Cal.App.3d 216, 225) 87 Cal.Rptr. 213.] The assignee may actually have superior rights as a holder in due course taking free of personal defenses which could have been asserted against the original beneficiary. [See Comm. Code §§ 3302-3305; see e.g., Szczotka v. Idelson (1964) 228 Cal.App.2d 399; 39 Cal.Rptr. 466 (foreclosure by holder in due course of usurious note).] For example, the assignee is not under an obligation to make inquiry to discover the existence of defenses “unless the circumstances or suspicions are so cogent and obvious that to remain passive would amount to bad faith” or unless “the failure to make inquiry arose from a suspicion that inquiry would disclose a vice or defect in the

instrument or transaction. . . .” Cameron v. Security First Nat. Bank (1967) 251 Cal.App.2d 450, 458; 59 Cal.Rptr. 563; see e.g., Mann v. Leasko (1960) 179 Cal.App.2d 692, 697-98; 4 Cal.Rptr. 124.] A holder in due course of a promissory note likewise takes the deed of trust securing the note free of personal defenses. [See e.g., Gribble v. Mauerhan (1961) 188 Cal.App.2d 221, 225; 10 Cal.Rptr. 296; Mann v. Leasko,, 179 Cal.App.2d 692, 696-97.]

Moreover, recorded documents may not impart notice of any defense or claim to a person who otherwise meets the holder in due course criteria. [Comm. Code § 3304(5); see Ross v. Title Guarantee & Trust Co. (1934) 136 Cal.App. 393; 29 P.2d 236; cf. Haulman v. Crumal (1936) 13 Cal.App.2d 612, 621; 57 P.2d 179.] In Ross, the plaintiff sued to cancel a note and deed of trust on the grounds of no consideration and fraud and filed a lis pendens naming the payee. Subsequently, a person who met the standards of a holder in due course acquired the note and deed of trust from someone who had previously acquired them from the defendant named in the lis pendens. The court concluded that the lis pendens imparted no notice to negate the person’s status as holder in due course of the note and as bona fide purchaser of the trust deed since his immediate transferor was not named in the lis pendens.

The strict reading of the holder in due course rule has been substantially abrogated in several areas affecting consumers. The Unruh Act specifically declares that assignees of the seller under a retail installment sale are subject to all of the equities and defenses which the buyer could assert against the seller, but the assignee’s liability may not exceed the amount owing at the time of the assignment [Civ. Code § 1804.2(a)]. A seller of goods or services to be used for personal, family, or household purposes may not enter a credit sale contract or accept the proceeds of a purchase money loan unless the consumer’s obligation contains a prescribed clause subjecting the holder of the obligation to the claims and defenses which the consumer could assert against the seller, but the consumer’s recovery is limited to the amount which the consumer already paid. (16 C.F.R. Part 433.) In addition, if the seller and financer of the transaction are too closely connected or if the financer takes too active a part in the seller’s business or the particular sale at issue, the financer will not be able to take the sanctuary of the holder in due course doctrine. see Vasouez v. Superior Court (1971) 4 Cal.3d 800, 822-25; 94 Cal.Rptr. 796; Morgan v. Reasor Corp. (1968) 69 Cal.2d 881, 893-896; 73 Cal.Rptr. 398; Commercial Credit Corp. v. Orange County Machine Works (1950) 34 Cal.2d 766; 214 P.2d 819; see also Unico v. Owen (1967) 50 N.J. 101; 232 A.2d 405.]

5.  Servicing Agent

Frequently, the beneficiary may designate another to act as the beneficiary’s agent to collect payments due on the secured obligation.  A loan servicing agent must be licensed as a real estate broker unless exempt from disclosure. [See Bus. & Prof. Code §§ 10130/ 10131(d).] Most financial institutions are exempt from the licensing requirements. (See Bus. & Prof. Code § 10133.1.)

The beneficiary transferring the servicing of a loan secured by a single family residence to a different servicing agent and the new servicing agent must give the trustor written notice before the borrower becomes obligated to pay the new servicing agent. [Civ. Code § 2937(e).]

The servicing agent is also required to give the beneficiary a copy of a notice of default recorded in connection with the serviced obligation, notice of a notice of default recorded by a senior lien holder/ and notice of the time and place of a scheduled sale of the property unless the beneficiary has requested notice under Civil Code § 2924b.  (Civ. Code § 2924.3.)

6.  Beneficiary’s Obligation To Provide Beneficiary or Payoff Demand Statement

The trustor and junior lienholders, among others, may require the beneficiary to deliver a beneficiary statement or a payoff demand statement. [Civ. Code § 2943(b), (c).] A “beneficiary statement” contains a statement of the amount of the unpaid obligation,  the interest rate,  the total amount of overdue

installments of principal and interest, the amount of the periodic payments, the maturity date, the date on which taxes and assessments were paid, the amount of hazard insurance in effect and the term and premium of that insurance, the amount in any impound account for taxes and insurance, the nature and amounts of charges, costs or expenses which have become a lien on the property, and whether the obligation may be transferred. [Civ. Code § 2943(a)(1).] A “payoff demand statement’7 sets forth the amount required as of the date of its preparation to satisfy fully the entire indebtedness and information reasonably necessary to calculate the payoff amount on a per diem basis for the period of time, not exceeding 30 days, during which the per diem amount is not changed by the terms of the note.  [Civ. Code § 2943(a)(5).]

The beneficiary statement may be made before or within two months after the recordation of a notice of default, and the beneficiary must deliver the statement within 21 days of the receipt of a written demand for it. [Civ. Code § 2943(b).] The beneficiary must deliver a payoff demand statement if the beneficiary receives a written demand for it before the first publication of a notice of sale and must deliver the statement within 21 days of the receipt of the written demand. [Civ. Code § 2943(c).]

The trustor and junior lienholders may rely on the beneficiary and payoff demand statements, and any amendments made to them, to determine the amount necessary to satisfy fully the obligation until the foreclosure sale auction is concluded. [Civ. Code § 2943(d)(1), (d)(3)(B).] Any amount not included in the statements remains owing as an unsecured obligation. [Civ. Code § 2943(d)(3).]

If the beneficiary willfully fails to deliver a beneficiary or payoff demand statement within 21 days after receipt of a written demand, the beneficiary is liable for damages and a $300 statutory penalty.  [Civ. Code § 2943(e)(4).]

The beneficiary may charge $60 for each statement. [Civ. Code § 2943(e)(6).]

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what is “stayed” pretty much everything 11 USC 362

27 Mar

› TITLE 11 – US CODE – BANKRUPTCY › TITLE 11 – US CODE – CHAPTER 3 – CASE ADMINISTRATION › TITLE 11 – US CODE – SUBCHAPTER IV – ADMINISTRATIVE POWERS
11 USC 362 – Automatic stay
Mon, 12/21/2009 – 10:25 — caselaw
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a corporate debtors tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.
(b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay
(1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor;
(2) under subsection (a)
(A) of the commencement or continuation of a civil action or proceeding
(i) for the establishment of paternity;
(ii) for the establishment or modification of an order for domestic support obligations;
(iii) concerning child custody or visitation;
(iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or
(v) regarding domestic violence;
(B) of the collection of a domestic support obligation from property that is not property of the estate;
(C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute;
(D) of the withholding, suspension, or restriction of a drivers license, a professional or occupational license, or a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act;
(E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act;
(F) of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or under an analogous State law; or
(G) of the enforcement of a medical obligation, as specified under title IV of the Social Security Act;
(3) under subsection (a) of this section, of any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustees rights and powers are subject to such perfection under section 546 (b) of this title or to the extent that such act is accomplished within the period provided under section 547 (e)(2)(A) of this title;
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental units or organizations police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental units or organizations police or regulatory power;
[(5) Repealed. Pub. L. 105–277, div. I, title VI, 603(1), Oct. 21, 1998, 112 Stat. 2681–866;]
(6) under subsection (a) of this section, of the exercise by a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency of any contractual right (as defined in section 555 or 556) under any security agreement or arrangement or other credit enhancement forming a part of or related to any commodity contract, forward contract or securities contract, or of any contractual right (as defined in section 555 or 556) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such contracts, including any master agreement for such contracts;
(7) under subsection (a) of this section, of the exercise by a repo participant or financial participant of any contractual right (as defined in section 559) under any security agreement or arrangement or other credit enhancement forming a part of or related to any repurchase agreement, or of any contractual right (as defined in section 559) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such agreements, including any master agreement for such agreements;
(8) under subsection (a) of this section, of the commencement of any action by the Secretary of Housing and Urban Development to foreclose a mortgage or deed of trust in any case in which the mortgage or deed of trust held by the Secretary is insured or was formerly insured under the National Housing Act and covers property, or combinations of property, consisting of five or more living units;
(9) under subsection (a), of
(A) an audit by a governmental unit to determine tax liability;
(B) the issuance to the debtor by a governmental unit of a notice of tax deficiency;
(C) a demand for tax returns; or
(D) the making of an assessment for any tax and issuance of a notice and demand for payment of such an assessment (but any tax lien that would otherwise attach to property of the estate by reason of such an assessment shall not take effect unless such tax is a debt of the debtor that will not be discharged in the case and such property or its proceeds are transferred out of the estate to, or otherwise revested in, the debtor).
(10) under subsection (a) of this section, of any act by a lessor to the debtor under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease before the commencement of or during a case under this title to obtain possession of such property;
(11) under subsection (a) of this section, of the presentment of a negotiable instrument and the giving of notice of and protesting dishonor of such an instrument;
(12) under subsection (a) of this section, after the date which is 90 days after the filing of such petition, of the commencement or continuation, and conclusion to the entry of final judgment, of an action which involves a debtor subject to reorganization pursuant to chapter 11 of this title and which was brought by the Secretary of Transportation under section 31325 of title 46 (including distribution of any proceeds of sale) to foreclose a preferred ship or fleet mortgage, or a security interest in or relating to a vessel or vessel under construction, held by the Secretary of Transportation under chapter 537 of title 46 or section 109 (h) of title 49, or under applicable State law;
(13) under subsection (a) of this section, after the date which is 90 days after the filing of such petition, of the commencement or continuation, and conclusion to the entry of final judgment, of an action which involves a debtor subject to reorganization pursuant to chapter 11 of this title and which was brought by the Secretary of Commerce under section 31325 of title 46 (including distribution of any proceeds of sale) to foreclose a preferred ship or fleet mortgage in a vessel or a mortgage, deed of trust, or other security interest in a fishing facility held by the Secretary of Commerce under chapter 537 of title 46;
(14) under subsection (a) of this section, of any action by an accrediting agency regarding the accreditation status of the debtor as an educational institution;
(15) under subsection (a) of this section, of any action by a State licensing body regarding the licensure of the debtor as an educational institution;
(16) under subsection (a) of this section, of any action by a guaranty agency, as defined in section 435(j) of the Higher Education Act of 1965 or the Secretary of Education regarding the eligibility of the debtor to participate in programs authorized under such Act;
(17) under subsection (a) of this section, of the exercise by a swap participant or financial participant of any contractual right (as defined in section 560) under any security agreement or arrangement or other credit enhancement forming a part of or related to any swap agreement, or of any contractual right (as defined in section 560) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such agreements, including any master agreement for such agreements;
(18) under subsection (a) of the creation or perfection of a statutory lien for an ad valorem property tax, or a special tax or special assessment on real property whether or not ad valorem, imposed by a governmental unit, if such tax or assessment comes due after the date of the filing of the petition;
(19) under subsection (a), of withholding of income from a debtors wages and collection of amounts withheld, under the debtors agreement authorizing that withholding and collection for the benefit of a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code of 1986, that is sponsored by the employer of the debtor, or an affiliate, successor, or predecessor of such employer
(A) to the extent that the amounts withheld and collected are used solely for payments relating to a loan from a plan under section 408(b)(1) of the Employee Retirement Income Security Act of 1974 or is subject to section 72(p) of the Internal Revenue Code of 1986; or
(B) a loan from a thrift savings plan permitted under subchapter III of chapter 84 of title 5, that satisfies the requirements of section 8433(g) of such title;

but nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section 414 (d), or a contract or account under section 403(b), of the Internal Revenue Code of 1986 constitutes a claim or a debt under this title;
(20) under subsection (a), of any act to enforce any lien against or security interest in real property following entry of the order under subsection (d)(4) as to such real property in any prior case under this title, for a period of 2 years after the date of the entry of such an order, except that the debtor, in a subsequent case under this title, may move for relief from such order based upon changed circumstances or for other good cause shown, after notice and a hearing;
(21) under subsection (a), of any act to enforce any lien against or security interest in real property
(A) if the debtor is ineligible under section 109 (g) to be a debtor in a case under this title; or
(B) if the case under this title was filed in violation of a bankruptcy court order in a prior case under this title prohibiting the debtor from being a debtor in another case under this title;
(22) subject to subsection (l), under subsection (a)(3), of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor;
(23) subject to subsection (m), under subsection (a)(3), of an eviction action that seeks possession of the residential property in which the debtor resides as a tenant under a lease or rental agreement based on endangerment of such property or the illegal use of controlled substances on such property, but only if the lessor files with the court, and serves upon the debtor, a certification under penalty of perjury that such an eviction action has been filed, or that the debtor, during the 30-day period preceding the date of the filing of the certification, has endangered property or illegally used or allowed to be used a controlled substance on the property;
(24) under subsection (a), of any transfer that is not avoidable under section 544 and that is not avoidable under section 549;
(25) under subsection (a), of
(A) the commencement or continuation of an investigation or action by a securities self regulatory organization to enforce such organizations regulatory power;
(B) the enforcement of an order or decision, other than for monetary sanctions, obtained in an action by such securities self regulatory organization to enforce such organizations regulatory power; or
(C) any act taken by such securities self regulatory organization to delist, delete, or refuse to permit quotation of any stock that does not meet applicable regulatory requirements;
(26) under subsection (a), of the setoff under applicable nonbankruptcy law of an income tax refund, by a governmental unit, with respect to a taxable period that ended before the date of the order for relief against an income tax liability for a taxable period that also ended before the date of the order for relief, except that in any case in which the setoff of an income tax refund is not permitted under applicable nonbankruptcy law because of a pending action to determine the amount or legality of a tax liability, the governmental unit may hold the refund pending the resolution of the action, unless the court, on the motion of the trustee and after notice and a hearing, grants the taxing authority adequate protection (within the meaning of section 361) for the secured claim of such authority in the setoff under section 506 (a);
(27) under subsection (a) of this section, of the exercise by a master netting agreement participant of any contractual right (as defined in section 555, 556, 559, or 560) under any security agreement or arrangement or other credit enhancement forming a part of or related to any master netting agreement, or of any contractual right (as defined in section 555, 556, 559, or 560) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such master netting agreements to the extent that such participant is eligible to exercise such rights under paragraph (6), (7), or (17) for each individual contract covered by the master netting agreement in issue; and
(28) under subsection (a), of the exclusion by the Secretary of Health and Human Services of the debtor from participation in the medicare program or any other Federal health care program (as defined in section 1128B(f) of the Social Security Act pursuant to title XI or XVIII of such Act).

The provisions of paragraphs (12) and (13) of this subsection shall apply with respect to any such petition filed on or before December 31, 1989.
(c) Except as provided in subsections (d), (e), (f), and (h) of this section
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(2) the stay of any other act under subsection (a) of this section continues until the earliest of
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied;
(3) if a single or joint case is filed by or against debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707 (b)
(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case;
(B) on the motion of a party in interest for continuation of the automatic stay and upon notice and a hearing, the court may extend the stay in particular cases as to any or all creditors (subject to such conditions or limitations as the court may then impose) after notice and a hearing completed before the expiration of the 30-day period only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed; and
(C) for purposes of subparagraph (B), a case is presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing evidence to the contrary)
(i) as to all creditors, if
(I) more than 1 previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was pending within the preceding 1-year period;
(II) a previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was dismissed within such 1-year period, after the debtor failed to
(aa) file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be a substantial excuse unless the dismissal was caused by the negligence of the debtors attorney);
(bb) provide adequate protection as ordered by the court; or
(cc) perform the terms of a plan confirmed by the court; or
(III) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under chapter 7, 11, or 13 or any other reason to conclude that the later case will be concluded
(aa) if a case under chapter 7, with a discharge; or
(bb) if a case under chapter 11 or 13, with a confirmed plan that will be fully performed; and
(ii) as to any creditor that commenced an action under subsection (d) in a previous case in which the individual was a debtor if, as of the date of dismissal of such case, that action was still pending or had been resolved by terminating, conditioning, or limiting the stay as to actions of such creditor; and
(4)
(A)
(i) if a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under section 707 (b), the stay under subsection (a) shall not go into effect upon the filing of the later case; and
(ii) on request of a party in interest, the court shall promptly enter an order confirming that no stay is in effect;
(B) if, within 30 days after the filing of the later case, a party in interest requests the court may order the stay to take effect in the case as to any or all creditors (subject to such conditions or limitations as the court may impose), after notice and a hearing, only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed;
(C) a stay imposed under subparagraph (B) shall be effective on the date of the entry of the order allowing the stay to go into effect; and
(D) for purposes of subparagraph (B), a case is presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing evidence to the contrary)
(i) as to all creditors if
(I) 2 or more previous cases under this title in which the individual was a debtor were pending within the 1-year period;
(II) a previous case under this title in which the individual was a debtor was dismissed within the time period stated in this paragraph after the debtor failed to file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be substantial excuse unless the dismissal was caused by the negligence of the debtors attorney), failed to provide adequate protection as ordered by the court, or failed to perform the terms of a plan confirmed by the court; or
(III) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under this title, or any other reason to conclude that the later case will not be concluded, if a case under chapter 7, with a discharge, and if a case under chapter 11 or 13, with a confirmed plan that will be fully performed; or
(ii) as to any creditor that commenced an action under subsection (d) in a previous case in which the individual was a debtor if, as of the date of dismissal of such case, such action was still pending or had been resolved by terminating, conditioning, or limiting the stay as to such action of such creditor.
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that
(i) may, in the debtors sole discretion, notwithstanding section 363 (c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditors interest in the real estate; or
(4) with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved either
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property. If recorded in compliance with applicable State laws governing notices of interests or liens in real property, an order entered under paragraph (4) shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order by the court, except that a debtor in a subsequent case under this title may move for relief from such order based upon changed circumstances or for good cause shown, after notice and a hearing. Any Federal, State, or local governmental unit that accepts notices of interests or liens in real property shall accept any certified copy of an order described in this subsection for indexing and recording.
(e)
(1) Thirty days after a request under subsection (d) of this section for relief from the stay of any act against property of the estate under subsection (a) of this section, such stay is terminated with respect to the party in interest making such request, unless the court, after notice and a hearing, orders such stay continued in effect pending the conclusion of, or as a result of, a final hearing and determination under subsection (d) of this section. A hearing under this subsection may be a preliminary hearing, or may be consolidated with the final hearing under subsection (d) of this section. The court shall order such stay continued in effect pending the conclusion of the final hearing under subsection (d) of this section if there is a reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion of such final hearing. If the hearing under this subsection is a preliminary hearing, then such final hearing shall be concluded not later than thirty days after the conclusion of such preliminary hearing, unless the 30-day period is extended with the consent of the parties in interest or for a specific time which the court finds is required by compelling circumstances.
(2) Notwithstanding paragraph (1), in a case under chapter 7, 11, or 13 in which the debtor is an individual, the stay under subsection (a) shall terminate on the date that is 60 days after a request is made by a party in interest under subsection (d), unless
(A) a final decision is rendered by the court during the 60-day period beginning on the date of the request; or
(B) such 60-day period is extended
(i) by agreement of all parties in interest; or
(ii) by the court for such specific period of time as the court finds is required for good cause, as described in findings made by the court.
(f) Upon request of a party in interest, the court, with or without a hearing, shall grant such relief from the stay provided under subsection (a) of this section as is necessary to prevent irreparable damage to the interest of an entity in property, if such interest will suffer such damage before there is an opportunity for notice and a hearing under subsection (d) or (e) of this section.
(g) In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section
(1) the party requesting such relief has the burden of proof on the issue of the debtors equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.
(h)
(1) In a case in which the debtor is an individual, the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, or subject to an unexpired lease, and such personal property shall no longer be property of the estate if the debtor fails within the applicable time set by section 521 (a)(2)
(A) to file timely any statement of intention required under section 521 (a)(2) with respect to such personal property or to indicate in such statement that the debtor will either surrender such personal property or retain it and, if retaining such personal property, either redeem such personal property pursuant to section 722, enter into an agreement of the kind specified in section 524 (c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365 (p) if the trustee does not do so, as applicable; and
(B) to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action, unless such statement specifies the debtors intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.
(2) Paragraph (1) does not apply if the court determines, on the motion of the trustee filed before the expiration of the applicable time set by section 521 (a)(2), after notice and a hearing, that such personal property is of consequential value or benefit to the estate, and orders appropriate adequate protection of the creditors interest, and orders the debtor to deliver any collateral in the debtors possession to the trustee. If the court does not so determine, the stay provided by subsection (a) shall terminate upon the conclusion of the hearing on the motion.
(i) If a case commenced under chapter 7, 11, or 13 is dismissed due to the creation of a debt repayment plan, for purposes of subsection (c)(3), any subsequent case commenced by the debtor under any such chapter shall not be presumed to be filed not in good faith.
(j) On request of a party in interest, the court shall issue an order under subsection (c) confirming that the automatic stay has been terminated.
(k)
(1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys fees, and, in appropriate circumstances, may recover punitive damages.
(2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages.
(l)
(1) Except as otherwise provided in this subsection, subsection (b)(22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that
(A) under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and
(B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition.
(2) If, within the 30-day period after the filing of the bankruptcy petition, the debtor (or an adult dependent of the debtor) complies with paragraph (1) and files with the court and serves upon the lessor a further certification under penalty of perjury that the debtor (or an adult dependent of the debtor) has cured, under nonbankrupcty[1] law applicable in the jurisdiction, the entire monetary default that gave rise to the judgment under which possession is sought by the lessor, subsection (b)(22) shall not apply, unless ordered to apply by the court under paragraph (3).
(3)
(A) If the lessor files an objection to any certification filed by the debtor under paragraph (1) or (2), and serves such objection upon the debtor, the court shall hold a hearing within 10 days after the filing and service of such objection to determine if the certification filed by the debtor under paragraph (1) or (2) is true.
(B) If the court upholds the objection of the lessor filed under subparagraph (A)
(i) subsection (b)(22) shall apply immediately and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(ii) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the courts order upholding the lessors objection.
(4) If a debtor, in accordance with paragraph (5), indicates on the petition that there was a judgment for possession of the residential rental property in which the debtor resides and does not file a certification under paragraph (1) or (2)
(A) subsection (b)(22) shall apply immediately upon failure to file such certification, and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(B) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the docket indicating the absence of a filed certification and the applicability of the exception to the stay under subsection (b)(22).
(5)
(A) Where a judgment for possession of residential property in which the debtor resides as a tenant under a lease or rental agreement has been obtained by the lessor, the debtor shall so indicate on the bankruptcy petition and shall provide the name and address of the lessor that obtained that pre-petition judgment on the petition and on any certification filed under this subsection.
(B) The form of certification filed with the petition, as specified in this subsection, shall provide for the debtor to certify, and the debtor shall certify
(i) whether a judgment for possession of residential rental housing in which the debtor resides has been obtained against the debtor before the date of the filing of the petition; and
(ii) whether the debtor is claiming under paragraph (1) that under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment of possession was entered, and has made the appropriate deposit with the court.
(C) The standard forms (electronic and otherwise) used in a bankruptcy proceeding shall be amended to reflect the requirements of this subsection.
(D) The clerk of the court shall arrange for the prompt transmittal of the rent deposited in accordance with paragraph (1)(B) to the lessor.
(m)
(1) Except as otherwise provided in this subsection, subsection (b)(23) shall apply on the date that is 15 days after the date on which the lessor files and serves a certification described in subsection (b)(23).
(2)
(A) If the debtor files with the court an objection to the truth or legal sufficiency of the certification described in subsection (b)(23) and serves such objection upon the lessor, subsection (b)(23) shall not apply, unless ordered to apply by the court under this subsection.
(B) If the debtor files and serves the objection under subparagraph (A), the court shall hold a hearing within 10 days after the filing and service of such objection to determine if the situation giving rise to the lessors certification under paragraph (1) existed or has been remedied.
(C) If the debtor can demonstrate to the satisfaction of the court that the situation giving rise to the lessors certification under paragraph (1) did not exist or has been remedied, the stay provided under subsection (a)(3) shall remain in effect until the termination of the stay under this section.
(D) If the debtor cannot demonstrate to the satisfaction of the court that the situation giving rise to the lessors certification under paragraph (1) did not exist or has been remedied
(i) relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to proceed with the eviction; and
(ii) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the courts order upholding the lessors certification.
(3) If the debtor fails to file, within 15 days, an objection under paragraph (2)(A)
(A) subsection (b)(23) shall apply immediately upon such failure and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(B) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the docket indicating such failure.
(n)
(1) Except as provided in paragraph (2), subsection (a) does not apply in a case in which the debtor
(A) is a debtor in a small business case pending at the time the petition is filed;
(B) was a debtor in a small business case that was dismissed for any reason by an order that became final in the 2-year period ending on the date of the order for relief entered with respect to the petition;
(C) was a debtor in a small business case in which a plan was confirmed in the 2-year period ending on the date of the order for relief entered with respect to the petition; or
(D) is an entity that has acquired substantially all of the assets or business of a small business debtor described in subparagraph (A), (B), or (C), unless such entity establishes by a preponderance of the evidence that such entity acquired substantially all of the assets or business of such small business debtor in good faith and not for the purpose of evading this paragraph.
(2) Paragraph (1) does not apply
(A) to an involuntary case involving no collusion by the debtor with creditors; or
(B) to the filing of a petition if
(i) the debtor proves by a preponderance of the evidence that the filing of the petition resulted from circumstances beyond the control of the debtor not foreseeable at the time the case then pending was filed; and
(ii) it is more likely than not that the court will confirm a feasible plan, but not a liquidating plan, within a reasonable period of time.
(o) The exercise of rights not subject to the stay arising under subsection (a) pursuant to paragraph (6), (7), (17), or (27) of subsection (b) shall not be stayed by any order of a court or administrative agency in any proceeding under this title.
[1] So in original. Probably should be “nonbankruptcy”.

Automatic Stay Violations

27 Mar

11 U.S.C. Section 362 of the Bankruptcy Code, otherwise known as the “Automatic Stay” is perhaps the most well known section in the Code. The Stay comes into play in every bankruptcy case at the moment the bankruptcy petition is filed with the Court Clerk’s office. Section 362(a) delineates the types of matters which are “stayed”, and subsection 362(b) describes the matters which are not bound by the Stay. Subsection 362(c) explains the time period during which the stay operates in cases under various chapters in the Code, and subsections 362(d) – (g) provides the framework for motions filed with the Bankruptcy Court for “Relief from the Stay” to enable a creditor to take action which is otherwise prohibited under subsection 362(a).

Subsection 362(h) describes the penalties that can be assessed for violations of the Automatic Stay. It reads as follows:

(h) An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Note that subsection (h) only refers to individuals, Moratzka v. Visa U.S.A., 159 B.R. 247 (Bankr. D. Minn. 1993); corporations which find that they are victims of stay violations must resort to the general contempt powers of the Bankruptcy Court under 11 U.S.C. Section 105 to obtain relief. See In re Chateaugay Corp., 920 F. 2d 183 (2nd Cir. N.Y. 1990); Jove Eng’g v. I.R.S., 92 F. 3d 1539 (11th Cir. Ala. 1996). It is also important to recognize that subsection 362(h) is considered as an additional right for debtors and not foreclosing other remedies that might be available to debtors. 130 Cong. Record 6504 (House March 26, 1984).

This subsection has been interpreted to have a restriction built into the remedies available: the violation must be “willful” in order for damages and attorneys’ fees to be awarded. An example of how “willful” has been defined some courts is contained in Atkins v. Martinez, 176 B.R. 1008 (Bankr. D. Minn. 1994): “The element of deliberation that is contemplated here, of course, is the specific intent to proceed with an act, knowing that it is proscribed by a court order”. Recently, the First Circuit decided Fleet Mortgage Group, Inc. v. Kaneb, 1999 WL 1006329 (1st. Cir.) and described how “willful” will be defined in this circuit.

The Court concluded that a willful violation does not require a specific intent to violate the stay. The standard under Subsection 362(h) is met if there is knowledge of the stay and the defendant intended the actions which constituted the violation. Kaneb, supra. at 2. Further, where the creditor received actual notice of the automatic stay, courts must presume that the violation was deliberate. Kaneb, at 2. Finally, the First Circuit gave guidance as to the burden of proof in stay violation actions. “The debtor has the burden of providing the creditor with actual notice. Once the creditor receives actual notice, the burden shifts to the creditor to present violations of the automatic stay.” Kaneb, at 2.

Also of interest in the Kaneb case is that the debtor was awarded damages in the sum of $25,000 for emotional distress and $18,200.68 in attorneys’ fees and costs of appeal. The emotional distress damages were deemed appropriate, in part, due to the specificity with which the debtor was able to describe the harm he suffered as a result of the bank’s stay violations. Counsel should carefully read this decision to learn what to do (and not to do) in prosecuting and defending stay violation actions under subsection 362(h).

There are two types of proceedings that can be brought: a “motion for order to show cause” which requests the Court to issue an order requiring the offending creditor to appear before the Court and explain its conduct (reminiscent of Ricky Ricardo telling Lucy that she “has some esplainin’ to do”); or a formal adversary proceeding (summons and complaint). Either mechanism for bringing the mater to the Court’s attention appears to be equally effective, unless the creditor is an individual or business with few contacts with Maine – in that scenario, the summons and complaint process is best to catch the attention of the offending creditor.

The Kaneb decision should be well cited for years since it may spawn a new pursuit of stay violators. While debtors may have been willing to let creditors off the hook with minor sanctions for a stay violation in the past, more significant sanctions could be sought in these matters in the future. The prospect of stay violations by credit card companies can only increase as the card companies and/or their accounts are bought and sold. Currently, credit card accounts in bankruptcy are considered commodities to be exchanged. It is expected that the selling companies will not always adequately label the accounts they package for sale, or that the buying companies have procedures in place to address bankruptcy concerns. Automatic Stay violators beware!

Trustee could be liable to Borrower for 2924 violations

26 Mar

12. Damages for Improper Sale
The sale process must closely adhere to the procedure set forth in Civil Code §§ 2924 et sea.; “The statutory requirements must be strictly complied with, and a trustee’s sale based on a statutorily deficient notice of default is invalid.” (Miller v. Cote, supra. 127 Cal.App.3d 888, 894.) A trustee is liable to the trustor for damages sustained from an “illegal, fraudulent or willfully oppressive” foreclosure sale.Munaer v. Moore, supra, 11 Cal.App.3d 1, 7.] Normally, the trustor will attempt to stop or vacate a foreclosure sale based on an invalid notice of default. However, an action for damages may be the only avenue of redress if the property has been sold to a bona fide purchaser.
a. Liability for Deficient Notice
Although no case has held a trustee liable for damages for a deficient notice of default, a variety of theories depending on the nature of the trustee’s failings would support causes of action for damages. In any event, the trustor will likely have to show prejudice or an impairment of rights as a result of the deficiency in the notice of default. (See U.S. Hertz. Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 86; 116 Cal.Rptr. 44.) If the appropriate nexus between the notice and the loss is established, the trustor may be able to show that (1) the trustee intentionally failed to perform, or was negligent in performing, its duties under the trust deed and statute; (2) the trustee engaged in negligent or
intentional misrepresentation in setting forth the information contained in the notice of default; (3) the trustee breached the covenant of good faith and fair dealing which is implied in a trust deed (see Schoolcraft v. Ross (1978) 81 Cal.App.3d 75; 1146 Cal.Rptr. 57); and (4) the trustee may have the duty as agent of the trustor to inquire of the beneficiary to verify the accuracy of the information contained in the notice of default and the trustor’s entitlement to a Spanish translation (but see Civ. Code § 2924c(b)(1) providing that the trustee has no liability for failing to give a Spanish language explanation of the right of reinstatement unless Spanish is specified on a lien contract or unless the trustee has actual knowledge that the obligation was negotiated principally in Spanish).
b. Liability for Deficient Sale
If the property is sold without compliance with notice requirements the trustee may be liable for damages. The trustor must first establish that any damages were sustained. Since a sale held without proper notice may be void, the trustor may suffer no damages because no sale was actually effected. (Scott v. Security Title Ins. & Guar. Co.. supra. 9 Cal.2d 606, 613-14, 72 P.2d 143.) However, the trustor may be precluded from attacking the sale and recovering the property from the purchaser if the sale was made to a bona fide purchaser for value and without notice and the trustee’s deed recites that all notice requirements were met. (See Chapter III F, “The Status of Bona Fide Purchaser or Encumbrancer’1, section 4, at p. 111-32; F, at p. 111-40, infra.) As a result, the trustor will have incurred damage.
The trustee will be liable to the trustor for damages resulting from the trustee’s bad faith, fraud or deceit (Scott v. Security Title Ins. & Guar. Co., supra, 9 Cal.2d 606, 611.) In Scott, the trustee failed to post notice of the sale and then sold the property in satisfaction of the debt. The sale was set aside because of the improper notice, and the trustee thereafter properly sold the property but only for a nominal sum insufficient to pay the debt. The beneficiary obtained the deficiency from a former owner who had assumed the debt and who in turn sued the trustee for breach of contract and agency. The Supreme Court held that the only valid sale was regularly conducted, and that the trustee had no liability for breach of contract or agency for mistakenly performing the first sale which was declared a nullity. (9 Cal.2d at 612-14.) The court indicated that the only liability might be for negligence but that the plaintiff could not recover since that theory had not been alleged. (9 Cal.2d at 614.)
Munger indicates that a trustee can be held liable for its negligence in the conduct of an illegal sale. [See supra, 11 Cal.App.3d at 7 citing Civ. Code § 1708; Dillon v. Legg (1968) 68 Cal.2d 728; 69 Cal.Rptr. 72; Davenport v. Vaughn (1927) 137 S.E. 714, 716 (the trustee is “charged with the duty of fidelity, as well as impartiality; of good faith and every requisite degree of diligence; of making due advertisement; and giving due notice . . . . If, through haste, imprudence, or want of diligence, his conduct was such as to advance the interest of one person to the injury of another, he became personally liable to the injured party”).]
c. Beneficiary’s Liability For Trusteefs Misconduct
The trustee is the common agent of the parties, and, as a result, a party to whom the trustee owes a duty to conduct a fair and open sale may impute a breach of that duty to the beneficiary. (Bank of Seoul & Trust Co. v. Marcione, supra, 198 Cal.App.3d 113, 120.)

The Mass production of false documents

26 Mar

open pdf and see how they do it
Hall, Krysltal.Security Connection.FirstFranklintoBOA

One action rule

22 Mar

By Robert O. Barton
Edited by Barbara Kate Repa

Real Estate Law
Foreclosures: California’s One Action Rule
With interest rates on adjustable mortgages on the way up, the pundits suggest we are headed for another round of foreclosure activity the likes of which we have not seen since the S&L crisis in the 1980s. That makes now a good time to review the laws relating to foreclosure and deficiency judgments—and recent changes that have occurred in that area.
The Legislature enacted the One Form of Action rule—often simply called the One Action Rule—to eliminate multiple actions when a creditor elects to sue after a debtor’s real property has gone into default. It specifically provides: “There can be but one form of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property.” (Cal. Code of Civ. Proc. § 726(a).)
In jurisdictions without such a rule, property owners can be forced to simultaneously defend against both a personal action on the debt and a foreclosure action on the security, making it difficult, if not impossible, for the debtor to avoid a deficiency judgment. Not only is this unfair to property owners who reasonably relied on the value of the security for protection from personal liability, but it further strains limited judicial resources.
California’s deficiency-judgment statutes were intended to work in tandem with the One Action Rule to avoid such problems. Because the One Action Rule has the effect of inducing most creditors to foreclose on their security interests before seeking a personal judgment, these statutes protect debtors from a deficiency judgment if the property subject to foreclosure is a dwelling intended to be occupied by four or fewer families—one of which includes the purchaser—and if the loan secured by the deed of trust or mortgage was used to pay all or part of the purchase price of the property being foreclosed. (Cal. Code of Civ. Proc. Code § 580b.)
The purposes behind the One Action Rule and the deficiency-judgment statutes are to prevent multiple actions, compel exhaustion of all security before a deficiency judgment is entered, and ensure that debtors are credited with the fair market value of the secured property before they are subjected to personal liability. (See In re: Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, 234 F.3d 1108, 1115 (9th Cir. 2000).)

Deficiency-Judgment Protection
In the years leading up to the S&L crisis, many lenders had substantially relaxed their appraisal standards. Profits were high and the focus was on making loans, not on ensuring that the underlying security was adequate. When properties began to go into default at unprecedented rates, it became obvious that thousands of appraisals were inflated, and countless borrowers were unnecessarily exposed to debt far in excess of the value of their secured real property. In short order, this vicious cycle flooded the pool of Real Estate Owned (REO) properties in lender inventories and ultimately brought down a major industry.
A primary purpose of the antideficiency statutes is to place the risk of such overvaluation and inadequate security on the lenders who stand to profit directly from the loans they make. Taken together, sections 726, 580a, 580b, and 580d of the California Code of Civil Procedure constitute a comprehensive statutory scheme that specifically protects defaulting borrowers from being taken advantage of by overly aggressive lenders who may care more about making loans than protecting borrowers. (See Clayton Dev. Co. v. Falvey, 206 Cal. App. 3d 438, 445 (1988).)
Under this scheme, if the proceeds from the sale of the real property are insufficient to cover the debt, the lender’s right to a deficiency judgment may be limited or barred under one or more of these statutes. (See Prestige, 234 F.3d at 1115.) Thus, the One Action Rule works in concert with California’s deficiency-judgment statutes to give a borrower leverage against a creditor who wants the freedom to choose between either enforcing a security interest via a foreclosure proceeding, or circumventing the antideficiency statutes and suing on the underlying note-whichever better suits its needs. (See Clayton Dev. Co., 206 Cal. App. 3d at 445.)

Exceptions to the Rules
The antideficiency provisions, which primarily aim to protect against overvaluation by lenders, apply automatically only to standard purchase-money transactions. (See Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 41 (1963) and Sprangler v. Memel, 7 Cal. 3d 603, 610, and 612 (1972).) Thus, for example, section 580b does not apply when the purchaser intends to proceed with a different use of the property, such as commercial development, because the purchaser controls the success of the venture and should bear the risk of failure.
Section 580b also does not apply when the borrower has refinanced the real property, often to take out additional equity or obtain financing at better terms. (See Union Bank v. Wendland, 54 Cal. App. 3d 393, 400 (1976).) Conversely, when the borrower has never refinanced and the real property is still encumbered by the original purchase-money trust deed, the borrower retains the protection of the antideficiency-judgment statutes. (See Foothill Village Homeowners Ass’n v. Bishop, 68 Cal. App. 4th 1364, 1367 n.1 (1999).)

The Dual Role
For a borrower in default, the One Action Rule offers two important benefits. It may be used upfront as an affirmative defense, or it may be invoked later as a sanction.
If the borrower successfully asserts the One Action Rule as an affirmative defense, the lender will be forced to foreclose its security interest before pursuing a money judgment against the debtor for any deficiency—if that is even possible given the protections available to the borrower under the antideficiency statutes. (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991, 997 (1990).)
A borrower who wishes to rely on the antideficiency-judgment statutes to avoid personal liability must raise the One Action Rule as an affirmative defense in the answer or, at the latest, by the start of trial—that is, when the lender would still have a chance to comply with the rule-or he or she is “simply too late.” (See Scalese v. Wong, 84 Cal. App. 4th 863, 868 (2000) and Spector v. National Pictures Corp., 201 Cal. App. 2d 217, 225—26 (1962).)
However, a borrower who fails to assert the One Action Rule as an affirmative defense may still invoke it as a sanction against the lender, because by not foreclosing on its security interest in the action brought to enforce the debt, the lender has made an election of remedies and waived any right to subsequently foreclose on the security or sell the security under a power of sale. (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991 at 997 (1990) and Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, 234 F.3d 1108 at 1114 (2000).)
Beginning in 1990, the law changed in two important ways. First, the California Supreme Court held that a creditor cannot be subject to the double sanction of losing both the security interest and the underlying debt. Second, a court of appeal held that a creditor could not enforce an agreement with the debtor to waive application of the One Action Rule as a sanction. These decisions have significant ramifications for borrowers and lenders alike.

No Double Sanctions
The landmark case of Security Pacific Nat’l Bank v. Wozab places limits on using the One Action Rule as a sanction. In Wozab the California Supreme Court held that it would be inequitable to subject a lender to the double sanction of losing both the security and the underlying debt. Indeed, the court held that allowing the Wozabs to evade their debt almost in its entirety would be both a gross injustice to the bank and a corresponding windfall to the Wozabs, allowing them the benefit of their bargain without incurring the burden. (51 Cal. 3d at 1005—06.)
Later decisions by the Ninth Circuit Court of Appeals continue to apply the precedent set in Wozab.
In DiSalvo v. DiSalvo, the Bankruptcy Appellate Panel of the Ninth Circuit reversed, in part, a decision that double-sanctioned a creditor’s efforts to collect first on the debt, in violation of section 726, by extinguishing both the security interest in the real property and, indeed, the $100,000 debt itself. (221 B.R. 769, 775 (9th Cir. 1998), overruled in part as to other issues by In re DiSalvo v. DiSalvo, 219 F.3d 1035 (9th Cir. 2000).) Although, as the bankruptcy court observed, the creditor’s actions in attempting to collect the $100,000 debt netted only $83, the creditor controlled the security-first aspect of the One Action Rule and could have invoked it at any time to bar the collection efforts.
Because a bankruptcy court can provide sufficient protection for a debtor whose business is threatened by the actions of a creditor without requiring that the creditor forfeit both the security and the debt, the appellate court held that the bankruptcy court’s sanction of extinguishing the debt was an abuse of discretion “so severe as to be punitive and would result in a windfall to debtor.” (219 F.3d at 1037.)
In Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, decided later the same year, the Ninth Circuit was asked to address the issue again in a case in which the debtor sought to bar a creditor’s unsecured claim against his bankruptcy estate. (234 F.3d at 1111 (2000).)
Prestige, the debtor, purchased a car wash business from East Bay, the creditor, giving East Bay a promissory note secured by a deed of trust that included the personal guarantee of one of Prestige’s partners, Jerry Brassfield. After Prestige defaulted on the note, East Bay filed an action on the guaranty rather than foreclosing on its security interest in the car wash. Although Brassfield asserted the One Action Rule as an affirmative defense, East Bay obtained a writ of attachment against $75,000 in Brassfield’s personal bank accounts.
Shortly thereafter, Prestige filed a petition for bankruptcy. The bankruptcy court held that Brassfield was a primary obligor on the note, ” ‘such that the purported guaranty added no additional liability,’ and that East Bay had taken its action under § 726(a), resulting in waiver of its security interest in the real property.” (234 F.3d at 1112.) As a result, the superior court dissolved the writs, and East Bay released its attachment.
Unable to collect against the guaranty and having lost its security interest in the car wash, East Bay filed proof of its now unsecured claim in the bankruptcy action. The bankruptcy court decided in the creditor’s favor, holding that East Bay “lost its security only, not its debt, and was not subject to the provisions of § 580b.” The Ninth Circuit affirmed, citing Wozab and DiSalvo. In reaching its decision, the appellate court noted that Prestige had taken advantage of its right to invoke the sanction aspect of section 726 in the bankruptcy court, resulting in East Bay’s loss of its security interest.
Moreover, just as in Wozab—where the court observed that the debtors had accepted the bank’s reconveyance of the deed and thus acquiesced in, indeed demanded, the bank’s decision not to foreclose—Prestige was the one who sought to have East Bay’s security interest waived. Thus, under the holdings of both Wozab and DiSalvo, it would be inequitable to impose a double sanction that would deny East Bay both its security interest in the car wash and the underlying debt. (234 F.3d at 1115.)
The law is clear: Violating the One Action Rule extinguishes the creditor’s security interest, but not the debtor’s underlying obligations. Thus, after Wozab and its progeny, debtors who are protected by the deficiency-judgment statutes should take care not to waive the One Action Rule lest they lose its protection, yet remain liable “in total” for their debts.

No Waiver of Sanction
In O’Neil v. General Security Corp., the court held that a borrower’s agreement with his lender to waive application of the One Action Rule as a sanction and allow the lender, who had already brought a personal action against the borrower, to proceed with a foreclosure action against the secured property is not enforceable. (4 Cal. App. 4th 587, 598 (1992).)
First, the court held that the sanction aspect of the One Action Rule operates for the benefit of both the primary borrower and third parties claiming an interest in the property, whether as successors-in-interest or as third-party lienholders. As such, the court concluded that the security and priority rights in the secured property held by a third party have independent status, are entitled to independent protections, and cannot be defeated by unilateral waivers by the borrower in favor of the lender. Indeed, the court questioned whether such a waiver agreement would even be enforceable against the borrower who made it.
Second, the court held that all of the lender’s remedies, including foreclosure of the security, merge into and are extinguished by the judgment, limiting the lender’s subsequent remedies to those remedies available to it as a judgment creditor.
Third, the court held that if a borrower’s waiver agreement were enforceable, many of the policies and protections of the statutory scheme would be undermined.
Although the O’Neil decision might trap an unwary lender who pursues a personal judgment first in reliance on the borrower’s agreement to waive the sanction aspect of the One Action Rule, this is not its greatest danger. A bigger problem could arise if a lender secures a single promissory note with deeds of trust on properties located in multiple jurisdictions, one of which is California. If the note goes into default, the lender might want to commence foreclosure actions against its security interests in all jurisdictions simultaneously. However, under California’s One Action Rule, filing a foreclosure action in another jurisdiction before foreclosing the lender’s security in this state could result in the lender losing its security interest in the California property.
In addition, under the holding in O’Neil, an agreement with the borrower to waive the sanction aspect of the One Action Rule following a default would be of no help. Thus, before proceeding with such an arrangement, a prudent lender should carefully consider its exit strategy in the event that the loan goes into default.

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Renters in Foreclosure: What Are Their Rights?

14 Mar

Renters and tenants whose landlords have lost their properties through foreclosure now have important rights.

Renters and tenants are now being affected by foreclosures almost as often as homeowners. The mortgage industry crisis that started in 2006 has resulted in thousands — no, make that millions — of foreclosed homes. Most of the occupants are the homeowners themselves, who must scramble to find alternate housing with very little notice. They’re being joined by scores of renters who discover, often with no warning, that their rented house or apartment is now owned by a bank, which wants them out.

Who Are the Renters?

Renters who lose their homes to foreclosures don’t fit a single profile. Many of them live in smaller buildings, condos, and single-family homes. They’re located in cities and surrounding suburbs, in low-income and upscale neighborhoods. In short, foreclosed homes are everywhere, and they’re rented by people with widely varying incomes, including some with “Section 8” (federal housing assistance) vouchers.

Who Are the Defaulting Owners?

The typical foreclosed home may have originally been owner-occupied, but more often it’s owned by investors and speculators who were hoping to profit from the rents. Caught between the slump in housing values and the rise of mortgage interest rates, these owners could not feasibly sell or extract enough rent to cover their monthly costs. In droves, they lost their investments. For example, in Minneapolis and its surrounding suburbs, 38% of the 2006 foreclosures involved rental properties; in Minneapolis alone, 65% were rentals.

Who Are the New Landlords?

When an owner defaults on a mortgage, the mortgage holder, often a bank, either becomes the new owner or sells the property at a public sale. If the bank becomes the owner, it may pay a servicing company to handle the property. But don’t expect close attention — these companies are focused on financial matters, not mundane things like maintenance.

Some renters find themselves with a new owner even before the foreclosure. Lawyers in Massachusetts, for example, contend that many new rental property owners are investment trusts that specialize in purchasing troubled loans directly from banks, then foreclosing, evicting, and selling.

New Owners Means No Maintenance

Many tenants have no idea that their building has been taken at foreclosure. They continue to pay rent to the former owner, who often pockets the money but is hardly inclined to maintain the building it no longer owns. In the meantime, the new owners simply refuse to be landlords, never making repairs or even paying utility bills. Because the banks are stuck with increasing numbers of foreclosed properties that they can’t sell, they remain non-landlords for some time, making life impossible for their tenants until those tenants are evicted.

Renters in Foreclosed Properties No Longer Lose Their Leases

Before May 20, 2009, most renters lost their leases upon foreclosure. The rule in most states was that if the mortgage was recorded before the lease was signed, a foreclosure wiped out the lease (this rule is known as “first in time, first in right”). Because most leases last no longer than a year, it was all too common for the mortgage to predate the lease and destroy it upon foreclosure.

These rules changed dramatically on May 20, 2009, when President Obama signed the “Protecting Tenants at Foreclosure Act of 2009.” This legislation provided that leases would survive a foreclosure — meaning the tenant could stay at least until the end of the lease, and that month-to-month tenants would be entitled to 90 days’ notice before having to move out (this notice period is longer than any state’s non-foreclosure notice period, a real boon to tenants).

An exception was carved out for the buyer who intends to live on the property — this buyer may terminate a lease with 90 days’ notice. Importantly, the law provides that any state legislation that is more generous to tenants will not be preempted by the federal law. These protections apply to Section 8 tenants, too.

Importantly, tenants who live in cities with rent control “just cause” eviction protection are also protected from terminations at the hands of an acquiring bank or new owner. These tenants can rely on their ordinance’s list of allowable, or “just causes,” for termination. Because a change of ownership, without more, does not justify a termination, the fact that the change occurred through foreclosure will not justify a termination.

Does It Make Sense to Evict Tenants?

New owners may want to terminate existing tenants because they believe that vacant properties are easier to sell. Common sense suggests otherwise. In many situations a building full of stable, rent-paying tenants will be more valuable (and command a higher price) than an empty building. Emptied buildings are also prone to vandalism and other deterioration — after all, no one is on site to monitor their condition. When entire neighborhoods become a wasteland of empty foreclosed multifamily buildings, their value drops even further. It’s hard to understand why new owners choose to pay lawyers to start eviction procedures instead of paying a modest fee to a management company to collect rent and manage the property while they wait to sell.

“Cash for Keys”

To encourage tenants to leave quickly and save on the court costs associated with an eviction, banks offer tenants a cash payout in exchange for their rapid departure. Thinking that they have little choice, many tenants — even Section 8, protected tenants — take the deal. It doesn’t help them much as they join the swelling ranks of newly displaced tenants (and former homeowners) who are competing to find an affordable new rental.

What Can a Foreclosed-Upon Tenant Do?

Thanks to the 2009 federal legislation, most tenants with leases will keep their leases, and month-to-month tenants will have at least 90 days to relocate. Tenants with leases have no legal recourse against their former landlords, because they are in the same position vis a vis the new owner as they were with the old: The lease survives and ends as it would had there been no foreclosure. Similarly, month-to-month tenants always know that they can be terminated with proper notice, and 90 days is longer than any state’s termination period.

However, a lease-holding tenant whose rental has been bought by a buyer who want to move in to the property ends up less fortunate than before the new law — he may lose his lease with 90 days’ notice, a result that probably would not have happened had the owner simply sold the property to a buyer who intended to occupy the property. (Normally, the new owner has to wait until the lease ends, absent a lease clause providing for termination upon sale, though such clauses may not be legal in all situations.)

Suing in Small Claims Court

A lease-holding tenant who has to move out so that new owners may move in might consider suing their former landlord in small claims court. Here’s how it works.

After signing a lease, the landlord is legally bound to deliver the rental for the entire lease term. In legalese, this duty is known as the “covenant of quiet enjoyment.” A landlord who defaults on a mortgage, which sets in motion the loss of the lease, violates this covenant, and the tenant can sue for the damages it causes.

Small claims court is a perfect place to bring such a lawsuit. The tenant can sue the original landlord for moving and apartment-searching costs, application fees, and the difference, if any, between the new rent for a comparable rental and the rent under the old lease. Though the former owner is probably not flush with money, the awards in these cases won’t be very much, and the court judgment and award will stay on the books for many years. A persistent tenant can probably collect what’s owed eventually.

For more information on suing a landlord in small claims court, see Everybody’s Guide to Small Claims Court or Everybody’s Guide to Small Claims Court in California, by Ralph Warner (Nolo).

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