THE FORECLOSURE PROCESS AND THE TRUSTEE’S DUTIES
A. Context of Duties
Despite the name, a “trustee” under a deed of trust has not been held to the high fiduciary duties imposed on a trustee under an express trust.
The trustee has obligations to the trustor, and those obligations emerge in two contexts — the foreclosure process and reconveyance following discharge of the underlying obligation. Foreclosure may proceed either judicially or nonjudicially. [See Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1502-03.] Although judicial foreclosures still occur, most foreclosures involving residential property proceed non judicially. The following discussion focuses on the trustee’s duties toward the trustor during the nonjudicial foreclosure process.
B. Nonjudicial Foreclosure
1. The Notice of Default and Intent to Foreclose
Following the trustor’s default, the beneficiary or the trustee must comply with certain statutory requirements prior to exercising the power of sale under the deed of trust. (Civ. Code § 2924 et seq.) To initiate nonjudicial foreclosure, the beneficiary or trustee must file a notice of default with the county recorder in the county in which the property or some part thereof is situated. (Civ. Code § 2924.) Usually the trustee files the notice at the request of the beneficiary. If there is more than one beneficiary, any beneficiary can instruct the trustee to record the notice of default. [See Perkins v. Chad Development Corp. (1979) 95 Cal.App.3d 645; 157 Cal.Rptr. 201.] Although the statute does not specify who may sign the notice of default, the trustee is authorized to sign it. Williams v. Koenia (1934) 219 Cal. 656, 659; 28 P.2d 351; Hopkins v. J.D. Millar Realty Co. (1930) 106 Cal.App. 409, 414; 289 P. 221.]
Federal law does not require the beneficiary to follow any foreclosure avoidance guidelines suggested by the Federal Department of Housing and Urban Development (HUD) or the Veterans Administration (VA) before recording a notice of default on a government-backed loan. (See Rank v. Nimmo (9th Cir. 1982) 677 F.2d 692, 698-99.) Several courts, however, have concluded that a lender’s failure to follow federal regulations governing mortgage servicing creates a valid equitable defense under state law to a foreclosure. [See Federal Nat. Mto. Assn. v. Moore (N.D. 111. 1985) 609 F.Supp. 194; Cross v. Federal Nat. Mtq. Assn. (Fla. App. 1978) 359 So.2d 464; Bankers Life Co. v. Denton (111.App. 1983) 458 N.E.2d 203; Heritage Bank, N.A. v. Ruh (N.J. Super. 1983) 465 A.2d 547; Associated East Mtg. v. Young (N.J. Super. 1978) 394 A.2d 899; Federal Nat. Mtg. Assn. v. Ricks (N.Y. Sup. Ct. 1975) 372 N.Y.S.2d 485; Federal Land Bank of St. Paul v. Overboe (N.D. 1987) 404 N.W.2d 445; but see Manufacturers Hanover Mortgage Corp. v. Snell (Mich.App. 1985) 307 N.W.2d 401; Federal Nat. Mtg. Assn. v. Prior (Wis.App. 1985) 381 N.W.2d 558.]
a. Content of the Notice of Default
(1) Required Contents
The only requirements for the notice of default are set forth in the trust deed and the statute. (See Lupertino v. Carbahal (1973) 35 Cal.App.3d 742, 747-48; 111 Cal.Rptr. 112.) The notice of default must name the trustors, state either the book and page in which the deed of trust is recorded or a description of the secured property, contain a statement that a breach of the obligation has occurred, set forth the nature of the breach and the election to sell the property to satisfy the obligation, and provide the notice prescribed in Civil Code § 2924c(b)(1) of the right to cure the default and reinstate the obligation if reinstatement is possible. (Civ. Code § 2924.)
An additional requirement is imposed on the trustee if the trustor’s obligation arose for goods or services subject to the Unruh Act. The trustee is required to send an additional notice to the trustor if the default is not cured within 30 days of the recordation of the notice of default. [Civ. Code § 2924f(c).]
(2) Statement of Nature of Breach
One of the most crucial aspects of the notice of default is the statement of the nature of the breach. Soon after this requirement was adopted, the Supreme Court concluded that a general statement of the breach was satisfactory: “a substantial compliance in accord with the spirit and purpose of the statute is sufficient.” Williams v. Koenig. supra, 219 Cal. 656.] If an item of default is not included in the notice of default, payment of the excluded item cannot be demanded to cure the particular default declared, Anderson v. Heart Fed. Sav. & Loan Assn. (1989) 1989 Cal.App. LEXIS 141; Little v. Harbor Pac. Mortgage Investors (1985) 175 Cal.App.3d 717, 720; 221 Cal.Rptr. 59; Miller v. Cote (1982) 127 Cal.App.3d 888, 894; 179 Cal.Rptr. 753; System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 152-53; 98 Cal.Rptr. 725; Tomczak v. Ortega (1966) 240 Cal.App.2d 902, 904; 50 Cal.Rptr. 20; Bisno v. Sax (1959) 175 Cal.App.2d 714, 720; 364 P.2d 814; Hayward Lumber & Inv. Co. v. Corbertt (1934) 138 Cal.App. 644, 650; 33 P.2d 41.]
The question is how clear the statement of the nature of the default must be. In Enqelbertson v. Loan & Blda. Assn. (1936) 6 Cal.2d 477, 478-79; 58 P.2d 647, the court approved a statement of a breach indicating, in part, that a particular installment of interest was due together with subsequent installments and unspecified sums advanced or expended under the trust deed with interest thereon. The court held that, “There is nothing in this section which warrants the construction that a statement of the amount of the items is required.” (Id. at 479.) [See Middlebrook-Anderson v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1038; 96 Cal.Rptr. 338.]
In Birkhofer v. Krumm (1938) 27 Cal.App.2d 513, 522-24; 81 P.2d 609, the notice of default claimed more money than in fact was due. However, the Court of Appeal did not find the notice fatally deficient because the substantial nature of the breach authorized the acceleration of the entire balance due. The court did not consider the effect of the exaggerated size of the default on the trustor’s exercise of the right to reinstate, but the reinstatement right may not have existed since the trust deed predated the adoption of Civil Code § 2924c.
In Little v. Harbor Pac. Mortgage Investors, supra, 175 Cal.App.3d 717, 721 n.6, the court stated in dicta in a footnote that the purpose of the statement of the nature of the default “is to put the debtor on notice as to which breaches the lienholder wishes cured•” (Emphasis in original.) The court indicated that a notice of default containing “a reference to delinquent payments, if any, on the first” (id.) would be sufficient to cover the trustor’s default in paying a senior encumbrance even though the foreclosing junior lienholder was unaware of the default at the time the notice was recorded. Thus, under Little, a foreclosing creditor could demand that the trustor cure delinquent taxes, payments to senior lienholders, and other defaults discovered after the notice of default was recorded as long as every default, “if any,” was listed in the notice of default. The court did not consider the effect of the requirement in Civil Code § 2924c(b)(l), discussed below, that the notice of default state the amount which must be paid to effect reinstatement.
Recent cases and a change in Civil Code § 2924c militate for a more precise statement of the nature of default to enable the trustor to cure the default. Indeed, the dicta in the Little case has been specifically rejected. Anderson v. Heart Fed. Sav. & Loan Assn., supra, 1989 Cal.App. LEXIS 141.] The courts have recognized that:
A purpose of the required statement in the notice of default is to afford the debtor an opportunity to cure the default and obtain reinstatement of the obligation within three months after the notice of default as provided in § 2924c of the Civil Code. System Inv. Corp. v. Union Bank, supra, 21 Cal.App.3d 137, 153; 98 Cal.Rptr. 735.
(Accord, Miller v. Cote, supra, 127 Cal.App.3d 888, 894; 179 Cal.Rptr. 753; see Tomczak v. Ortega, supra, 240 Cal.App.2d 902, 904; 50 Cal.Rptr. 20.) The rationale that the disclosure of the nature of the default is designed to facilitate reinstatement is buttressed by Civil Code § 2924c(b)(1) which requires a statement in the notice of default of the amount due as of a specified date. (Civ. Code § 2924.) As a result, the modern view is that the notice of default will be strictly construed and must correctly set forth the amounts required to cure the default. Sweatt v. The Foreclosure Co. (1985) 166 Cal.App.3d 273, 278; 212 Cal.Rptr. 350.] The purpose of Civil Code § 2924c(b)(1) would be subverted if a beneficiary could set forth in the notice of default a litany of possible defaults, specify that payment of a particular dollar amount by a specified date would cure the default, and then refuse to accept a tender of that sum because the beneficiary learned of an additional delinquency, especially a delinquency that occurred before the notice of default was recorded. Accordingly, the Court of Appeal in Heart rejected predicating a foreclosure on an “if any” qualifier which states a potential ground of default: the notice may state only breaches that have occurred, and the power of sale cannot be exercised until the proper notice requirements have been satisfied.
(3) Spanish Language Considerations
In some situations, the notice of default or the statutorily prescribed statement of the right of reinstatement may have to be written in the Spanish language. Prior to 1989, Civil Code § 1632(a) required that a Spanish translation of certain contracts, loans and other agreements be provided upon the request of a party to the agreement if the transaction was negotiated primarily in Spanish. Under current law, the Spanish translation must be given. A sign advising the parties of their right to a translation must be conspicuously displayed on the business premises. [Civ. Code § 1632(c).]
Beginning in 1989, a Spanish language translation of the disclosures required under Regulation Z and, if applicable, under the industrial loan, consumer finance lender, or personal property brokers’ laws may be given in lieu of the translation of the original contract by supervised financial organizations. A “supervised financial organization” means a bank, savings association, credit union, real estate broker, industrial loan company, consumer finance lender, or personal property broker. [Civ. Code § 1632(b).]
A Spanish language translation does not have to be given to borrowers who negotiate through their own interpreter if the interpreter can read and speak English and Spanish fluently and is not employed or made available through the creditor. Beginning in 1989, the interpreter must be 18 years of age or older. [Civ. Code § 1632(e).]
In Reves v. Superior Court (1981) 118 Cal.App.3d 159; 173 Cal.Rptr. 267, the Court of Appeal held that a notice of repossession and deficiency used under the Rees-Levering Act was covered by Civil Code § 1632. The court further held that in the absence of evidence showing compliance with this section, a deficiency judgment based on an English language notice against a solely Spanish-speaking debtor could not stand. (Id. at 162.) Since Civil Code § 1632 applies to loans subject to the provisions regulating mortgage brokers, industrial loan companies, personal property makers and consumer finance lenders, Reves can perhaps be applied to require Spanish translations of the notice of default if the requirements for the invocation of Civil Code § 1632 are satisfied.
Moreover, the notice of the right to cure contained in the trust deed must be in Spanish if (1) the obligation is a retail installment contract governed by the Unruh Act or a loan for personal, family or household purposes made by a mortgage broker, industrial loan company, personal property broker or consumer finance lender, and (2) the trustor requested a Spanish language translation of the agreement pursuant to Civil Code § 1632. In addition, if the obligation is contained in a home improvement contract subject to the Unruh Act, the seller is required to specify on the contract whether or not the contract was principally negotiated in Spanish, and, if so, the prescribed notice advising of the right to cure the default must be in Spanish. However, the trustee has no liability for failing to provide a Spanish language notice of the right to cure unless Spanish is specified in the home improvement contract or the trustee has actual notice that the obligation was principally negotiated in Spanish.
2. Adequacy of Notice to Trustor
The notice of default must be recorded. (Civ. Code § 2924.) Within ten days of its recordation, the trustee or beneficiary must send the notice of default, by registered or certified mail, to the trustor at the trustor’s last known address. [Civ. Code § 924b(b)(l); see Lupertino v. Carbahal, supra, 35 Cal.App.3d 742, 749.] A notice must also be sent by first-class mail. [Civ. Code § 2924b(e).] Although notice by certified or registered mail is required, notice sent by regular mail and actually received is considered valid notice. [See Crummer v. Whitehead (1964) 230 Cal.App.2d 264, 268; 40 Cal.Rptr. 826.] Publication or personal service is not required. In the very rare instances in which the trust deed does not contain the trustor’s address and the trustor has not recorded a request for notice, the notice of default may be published or personally served in lieu of mailing [Civ. Code § 2924b(4)].
The trustee has no duty to assure that the trustor actually receives notice even though the trustee may know that the trustor actually does not receive notice. The rule developed that “[t]he only requirements of notice of sale essential to the validity of a sale under a power contained in a deed of trust are those expressly and specifically prescribed by the terms of the instrument and by the provisions of the applicable statutes.;/ Lancaster Security Inv. Corp. v. Kessler (1958) 159 Cal.App.2d 649, 652; 324 P.2d 634 (notice of sale); see e.g., I. E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281; 216 Cal.Rptr. 438 (notices of default and sale); Sargent v. Shumaker (1924) 193 Cal. 122, 130; 223 P. 464 (notice of sale); McClatchev v. Rudd (1966) 239 Cal.App.2d 605, 608; 223 P. 464 (notice of default); Lopez v. Bell (1962) 207 Cal.App.2d 394, 397-98; 24 Cal.Rptr. 626 (notices of default and sale).] In McClatchev, for example, the envelope containing the notice of default was returned to the trustee marked “Deceased,” and although the beneficiary and trustee allegedly knew of the trustor’s death and the identity of the administrator of the decedent’s estate, the failure to notify the administrator did not invalidate the sale. (See 239 Cal.App.2d at 607-08.) Since a trustee’s sale has been held valid if the statutory notice requirements were met even though no notice was actually received, the “named trustee in a deed of trust, by virtue of that position alone, is ordinarily under no duty to give different or more specific notices than those prescribed by statute in order to exercise a power of sale.” Lupertino v. Carbahal. supra, 35 Cal.App.3d 742 (notice of default).] However, if the trustee dealt with the trustor at an address other than the address specified in the trust deed, the trustee might be estopped to use the invalid address. [See Lupertino v. Carbahal, supra, 35 Cal.App.2d 742, 748-49.]
Current law requires that the notices of default and sale be sent to the trustor at the trustor’s “last known address.” [Civ. Code § 2924b(b)(l) and (2).] The “last known address” is the last business or residence address actually known by the trustee or beneficiary. [Civ. Code § 2924b(b)(3).] The beneficiary must inform the trustee of the trustor’s last address actually known by the beneficiary. (Id.) The trustee incurs no liability for failing to send any notice to the last address unless the trustee has actual notice of it. (Id.) Constructive knowledge of the correct address is irrelevant, and the trustee has no duty of inquiry. [See I. E. Associates v. Safeco Title Ins. Co. supra, 39 Cal.3d 281, 285.]
Although the trustee’s compliance with statutory notice requirements has been deemed sufficient, no appellate case has considered whether the statutory provision for registered or certified mail requires that the mailed notice be received. In Dept. of Forestry v. Terry (1981) 124 Cal.App.3d 140; 177 Cal.Rptr. 92, the California Department of Forestry brought an action to foreclose a statutory lien for costs incurred in correcting certain violations of law. The costs were incurred after the defendant failed to respond to a notice to take corrective action sent by the state by certified mail as required by statute. The statute did not expressly require that the defendant receive the notice, but the Court of Appeal held that the process of certified or registered mail requires that the receiver sign for the mail, and therefore service is complete when the mail is received, not when the notice is deposited for mail collection. (Id. at 147.) Civil Code § 2924b which requires certified or registered mail may be similarly interpreted.
A court, however, could conclude that receipt of the certified mailing was unnecessary because the notices must also be sent by first-class mail. [Civ. Code § 2924b(e).] In the absence of fraud, an affidavit of mailing is conclusive proof that the notice was mailed. (Id.) A properly addressed and mailed letter is presumed to have been received. [Evid. Code § 641.] Accordingly, compliance with the certified and first-class mailing requirements may be sufficient even if receipt of the certified mailing is not
In contrast to the procedure authorized for nonjudicial foreclosures, forced sales involving the government require scrupulous adherence to due process standards. [See Mennonite Board of Missions v. Adams (1983) 462 U.S. 791; 103 S.Ct 2706.] For example, in Barras v. Transamerica Title Ins. Co. (1982) 133 Cal.App.3d 845, 849-52; 184 Cal.Rptr. 262, the Court of Appeal required the government to go beyond the statutory notice requirements for tax sales which provide for publication, posting in a public place, and mailing notice to the last known address of the last assessee; to protect the rights of equitable owners in possession, the government was constitutionally compelled to post notice on the property. [See e.g., Atkins v. Kessler (1979) 97 Cal.App.3d 784; 159 Cal.Rptr. 231 holding the notice requirements of the Improvements Act of 1911 unconstitutional.] Since state action is not involved in nonjudicial foreclosure proceedings, the constitutional due process safeguards do not apply to the process. [See Garfinkle v. Superior Court (1978) 21 Cal.3d 268; 145 Cal.Rptr. 208.] Moreover, foreclosure by a private lender under a federally-guaranteed mortgage program does not constitute governmental action sufficient to invoke due process requirements even though the private parties are subject to extensive federal regulation. [See Rank v. Nimmo, supra, 677 F.2d 692, 702.]
3. The Right to Reinstatement
The trustor and junior lienholders have the right to cure the default and reinstate the obligation as though no default had occurred if a monetary default has occurred prior to the maturity date fixed in the obligation. [Civ. Code § 2924c(a)(1) . ] To reinstate, the trustor or junior lienholder must pay the beneficiary the amount of the default (i.e., arrearages, advances, taxes, etc.) plus allowable costs and expenses and trustee’s fees. (Id. ) The beneficiary may also be entitled to attorney’s fees. (See discussion in Chapter I B 3 h “Attorney’s Fees”, supra. ) The amount of the default plus attorney’s fees, if any, must be paid at any time within the period beginning on the date the notice of default was recorded until five business days before the date of sale stated in the initial recorded notice of sale. [Civ. Code § 2924c(e).] No right of reinstatement exists during the five business days preceding the sale. (JEd.; see Civ. Code § 9 for definition of “business day.”) However, if the sale is postponed or a new notice of sale is recorded, the right of reinstatement is revived until five business days before the newly scheduled date. (.Id. ) Again, no reinstatement right exists during the five business day period preceding the continued sale date. (Id.)
The filing of a bankruptcy petition does not toll or suspend the reinstatement period for the trustor or junior lienholders.
Napue v. Gor-Mev West, Inc. (1985) 175 Cal.App.3d 608; 220 Cal.Rptr. 799; In re Pridham (E.D. Cal. 1983) 31 B.R. 497; Triangle Management Services v. Allstate Savings & Loan Assn. (N.D.Cal. 1982) 21 B.R. 699.] However, if the trustor or junior lienholder’s right of reinstatement has not elapsed, the bankruptcy trustee may exercise the right before the later of the end of the reinstatement period or 60 days after the bankruptcy petition has been filed. [11 U.S.C. § 108(b); Napue v. Gor-Mev West, Inc., supra, 175 Cal.App.3d 608, 619.]
Notwithstanding the beneficiary’s demand that the entire balance be paid, the obligation is reinstated by the payment of the amount in default plus fees during the reinstatement period. [Civ. Code § 2924c(a)(1).] Thus, Civil Code § 2924c relieves the trustor and junior lienholder from the burden of the acceleration clause. After the reinstatement period, the beneficiary may still waive the acceleration of the balance, accept payment to cure the default, and reinstate the loan, but the beneficiary is not compelled to do so.
During the reinstatement period, payment or tender of payment of the default nullifies the right to proceed with the foreclosure. Any sale conducted after the entire amount necessary to cure the default was paid or properly tendered is invalid. Munger v. Moore (1970) 11 Cal.App.3d 1, 8; 89 Cal.Rptr. 323; Tomczak v. Ortega,supra, 240 Cal.App.2d 902, 906; 50 Cal.Rptr. 20; Bisno v. Sax, supra, 175 Cal.App.2d 714, 724; Macmus v. Morrison (1949) 93 Cal.App.2d 1, 3; 208 P.2d 407.]
Partial payments will not ordinarily cure the default. If the tender does not include all amounts needed to cure the default plus costs, the tender is ineffective. [See e.g., Enaelbertson v. Loan & Blda. Assn., supra, 6 Cal.2d 477, 479; Cassinella v. Allen (1914) 168 Cal. 677, 680-81; 144 P. 746.] Generally, the beneficiary may accept partial payments on the amount due after the notice of default is recorded without waiving the default, any rights under the acceleration clause, or the right to proceed with the foreclosure. [See Sellman v. Crosby (1937) 20 Cal.App.2d 562, 564-65; 67 P.2d 706; see also R. G. Hamilton Corp., Ltd. v. Corum (1933) 218 Cal. 92, 97; 21 P.2d 413; Bisno v. Sax, supra, 175 Cal.App.2d 714, 724; Birkhoffer v. Krurom, supra, 27 Cal.App.2d 513, 524; Harris v. Whittier Bldq. & Loan Assn. (1936) 18 Cal.App.2d 260, 268; 63 P.2d 840.] Nevertheless, the beneficiary’s conduct in conjunction with the acceptance of partial payments may be construed as a waiver or may estopped the beneficiary from claiming a default or invoking an acceleration clause. [See Altman v. McCollum (1951) 107 Cal.App.2d 847; 236 P.2d 914; see also R. G. Hamilton Corp., Ltd. v. Corum (1933) 218 Cal. 92, 97, 21 P.2d 413; Glas v. Glas (1896) 114 Cal. 566, 569, 46 P. 667; see discussion in Chapter III B(3)(c), “Waiver or Estoppel to Claim Payment or Default”, infra.]
The court may also suspend or toll the acceleration clause and thereby extend the right to cure the default and reinstate the loan. In Bisno v. Sax, supra, 175 Cal.App.2d 714, 724-30, the court relieved the trustors from the acceleration clause since they had cured the default during the seven-month pendency of a preliminary injunction. In Hunt v. Smyth (1972) 25 Cal.App.3d 807; 101 Cal.Rptr. 4, the trustor filed a complaint seeking a preliminary injunction 13 days before the expiration of the reinstatement period. The foreclosure was stayed through the lengthy appeal process. Nearly three years after the notice of default was originally filed, the Court of Appeal remanded the case to the trial court for a determination of the amount then owing and gave the trustors 13 days after that determination to make payment. (Id. at 837.)
If a junior lienholder cures the trustor’s default on the senior encumbrance, the junior lienholder may then foreclose based on the trustor’s failure to meet the obligation secured by the senior encumbrance or the failure to reimburse the junior lienholder for the amount of the advance to reinstate the senior lien. (See discussion in Chapter I B 3 d, “Senior Encumbrances,” supra.) The trustor or junior lienholder who cures a default may request that the beneficiary cause to be executed and recorded a notice of rescission of the notice of default. [Civ. Code § 2924c(a) (2). ] The notice of rescission must be recorded within 30 days of receipt of a written request. (Id.) No charge may be made except for recording fees. (Id.)
4. The Right of Redemption
The trustor has the right to redeem the real property securing the debt before the foreclosure sale (Civ. Code § 2903) by paying the entire secured obligation. [Civ. Code § 2905; see Winnett v. Roberts (1979) 179 Cal.App.3d 909, 922; 225 Cal.Rptr. 82; Kleeckner v. Bank of America (1950) 97 Cal.App.2d 30, 33; 217 P.2d 28; Lichtv v. Whitney (1947) 80 Cal.App.2d 696, 701; 182 P.2d 582.]
A tender of the proper amount due, even if rejected, extinguishes the lien and precludes foreclosure• [See, e.g., Winnett v. Roberts. supra, 179 Cal.App.3d 909, 902; Lichtv v. Whitney, supra, 80 Cal.App.2d 696, 701; see also Code Civ. Proc. § 2074.] In Winnett the court held that a tender of the principal amount without interest was sufficient because the note was usurious and the creditor was not entitled to receive interest.
Junior lienholders have a similar right of redemption. (Civ.Code § 2904.) If the junior lienholder redeems the property, the junior lienholder becomes subrogated to the rights of the satisfied senior lienholder and may add the amount paid to the senior lienholder to the amount secured by the junior lien. [See Civ. Code §§ 2876, 2904; Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn. (1986) 184 Cal.App.3d 817, 825; 229 Cal.Rptr. 269.] The deed of trust routinely provides the same remedies. (See discussion in Chapter I B 3 d, “Senior Encumbrances,” supra.)
As a practical matter, the trustor or junior lienholder will generally attempt to exercise the right of reinstatement. However, if that right lapses, the right of redemption may become critically important.
5. Giving the Notice of Sale
At least three months must elapse between the date the notice of default is recorded and the date the trustee may give notice setting the sale. [Civ. Code § 2924.] The period is three calendar months, not 90 days. [See Hayward Lumber & Inv. Co. v. Corbett, supra, 138 Cal.App. 644, 651; see generally Tomczak v. Ortega, supra, 240 Cal.App.2d 902, 906, but see Bennett v. Ukiah Fair Assn. (1936) 7 Cal.2d 43; 59 P.2d 805.] There is no requirement that the notice of sale be given within any prescribed time after the three-month period elapses. [See Arata v. Downer (1937) 21 Cal.App.2d 406; 69 P.2d 213 (three years between notice
of default and sale)•]
The notice of sale must contain, in pertinent part, the name of the original trustor, the time of sale, the street address and the specific place at that address where the sale will be held, the name, street address and telephone number of the trustee, a special notice if a single home is being sold, a description of the property to be sold, the property’s street address or other common designation, and a statement of the total amount of the unpaid balance of the obligation and reasonable estimated costs, expenses and advances. The trustee has no liability for any good faith error in stating the proper amount, and an error or omission in the street address will not affect the validity of the notice if the legal description is given. [Civ. Code § 2924f(b).]
The trustee must record the notice of sale at least 14 days prior to the date of the sale. The trustee must post the notice of sale in a public place at least 20 days before the sale date and must publish the notice of sale once per week for the same period in an appropriate newspaper of general circulation. [Civ. Code § 2924f(b).] The publication requirement has been interpreted to mean that three successive publications are required, even though the first and last would be separated by only 14 days, since there can only be three weekly publications in the 20-day period; and, the first publication must be at least 20 days prior to the sale
date. Hotchkiss v. Darling (1933) 130 Cal.App. 625, 626-27; 20 P.2d 343; McCabe v. Willard (1931) 119 Cal.App. 122, 125; 6 P.2d 258.]
The trustee must also post a copy of the notice of sale in some conspicuous place on the property at least 20 days before the date of sale where possible and not restricted for any reason. If possible, and if not restricted for any reason, the trustee must post the notice on the door of a single family residence, but the trustee’s failure to post the notice on the door does not affect a sale to a bona fide purchaser for value. In the absence of any contrary evidence, the notices which have been posted are presumed to have remained in place for the required period. Hotchkiss v. Darling, supra, 130 Cal.App. 625, 627.]
If the trustee cannot place the notice on the front door of the single family residence, the notice must be placed in some conspicuous place on the property. [Civ. Code § 2924f(b).] The trustee may face a problem with compliance if the single family residence is not readily accessible, such as a condominium unit in a locked building. In this circumstance, many trustees have attempted a practical resolution by posting the notice near the main entry to the condominium units. However, this practice may not strictly satisfy the statute and may conceivably be an unfair collection practice in certain circumstances. [See Civ. Code § 1788.12(d).] The trustee, though, is permitted to post the notice
of sale at a guard gate or similar impediment at a “development community” if access to the single family residence in the development is blocked by a gate or other impediment.
Moreover, the trustee must send a copy of the notice of sale to the trustor’s address last known to the trustee at least 20 days before the date of sale. [Civ. Code § 2924b(2) (b). ] The rules applicable to the last known address requirement for notices of default also apply to notices of sale. [See Civ. Code § 2924b(2)(c); Chapter II B 2, “Adequacy of Notice to Trustor/’ supra.]
The trustee’s duty to assure that the trustor receives the notice of the sale is similar to the trustee’s duty to assure that the trustor receives the notice of default. (See Chapter II B 2, “Adequacy of Notice to Trustor,” supra.) The general rule is that the trustee need only comply with the statutory notice requirements notwithstanding whether the trustor knows of the sale. [ See e.g., Civ. Code § 2924b(b)(2) and (c); I. E. Associates v. Safeco Title Ins. Co., supra, 39 Cal.3d 281; Witter v. Bank of Milpitas (1928) 204 Cal. 570, 572-73, 269 P. 614; Sargent v. Shumaker, supra, 193 Cal. 122; Lopez v. Bell, supra, 207 Cal.App.2d 394.]
Without proper notice, a foreclosure sale is void. [See Scott v. Security Title Ins. & Guar. Co. (1937) 9 Cal.2d 606, 613; 72 P.2d 143; United Bank & Trust Co. v. Brown (1928) 203 Cal. 359; 264 P. 482.] However, defects in notice, such as setting the sale date before the expiration of the 20-day notice period, can be corrected prior to the sale, and the sale date may be postponed to permit an adequate period for correction. [See Mack v. Golino (1950) 95 Cal.App.2d 731; 213. P.2d 760.]
6. Notice Regarding Balloon Payment
A special notice must be given before the final payment is due on a balloon payment loan. [Civ. Code § 2924i.] A balloon payment loan is a loan which provides for a final payment as originally scheduled which is more than twice the amount of any of the immediately preceding six regularly scheduled payments. [Civ. Code § 2924i(d) (1). ] A balloon payment loan is also defined as a loan in which the holder of the loan exercises a call provision whereby the holder calls the loan due and payable either after a specified period or date. [Civ. Code § 2924i(d)(l) and (2).]
The notice requirement applies only if the following conditions are met: (1) the loan has a maturity exceeding one year; (2) the note for the loan was executed after January 1, 1984; (3) the loan is secured by a trust deed or mortgage on real property containing one to four residential units one of which is or will be occupied by the borrower; (4) the loan is not open-end credit; (5) the loan is not part of a transaction subject to Civil Code § 2956 (sales involving purchase money liens on residential property); and (6) the loan is not made for the principal purpose of financing construction. [Civ. Code § 29241(a), (b), and (g).]
If the statute applies, the holder of the loan must deliver or send by first-class mail a written notice to the trustor or the trustor’s successor in interest between 90 and 150 days before the due date of the final payment. The notice must state the name and address of the person to whom the final payment must be made, the date by which the payment must be made, the amount or good faith estimate of the amount to be paid (assuming timely payment of all scheduled payments due between the date of the notice and the date when the final payment is due), and a statement that the borrower has the right to refinance the final payment if such is the case. [See Civ. Code § 29241(c).]
If the notice is not given, the due date of the balloon payment is then deemed to be the latest of the following: (a) the due date specified in the loan, (b) 90 days from the date of delivery or mailing of the required notice, or (c) the due date specified in the notice. [See Civ. Code § 29241(e).] If the due date is extended beyond the date specified in the loan, the loan continues to accrue interest at the contract rate, and payments continue to be due at any periodic interval and on any payment schedule specified in the note. (Id.) Payments must be credited as the note requires, and any default in making any extended periodic payment shall be considered a default under the loan. (Id.)
Any person who willfully violates the notice requirement is liable for the actual damages suffered by the borrower as the proximate result of the violation and for the prevailing borrower’s reasonable attorney’s fees. [See Civ. Code § 2924i(f)(1).] The validity of the credit or security document, however, is unaffected by the failure to give notice. (Id-) If the violation of the section was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid the error, there is no liability. [See Civ. Code § 2924i(f)(2).]
Civil Code § 2924i does not specify what effect failure to give the required notice has on the validity of any foreclosure sale predicated on the borrower’s nonpayment of the final balloon or call payment by the date specified in the note. Under the statute, the due date is extended; therefore, no default occurred when the balloon or call payment was not made by the date set forth in the note. Since no default occurred, the foreclosure sale should be held invalid subject to whatever rights may be held by a bona fide purchaser or encumbrancer. [See Chapter III B 3, “Dispute as to What, if any, Amount Owed”; III B 5, “Defective Procedure”; III D 4, “Conclusiveness of Deed Recitals”; III F, “The Status of Bona Fide Purchaser or Encumbrancer; infra. ] A sale could be predicated on a default in making any required extended periodic payments; however, the notice of default would have to state accurately the nature of the breach. [See Chapter III B 5 a, “Defective Notice of Default”, infra.1
7. Conduct of the Foreclosure Sale
The trustee must conduct the sale by public auction between 9 a.m. and 5 p.m. on any business day, Monday through Friday, in the county where all or some part of the property is located. [Civ. Code § 2924g(a).] Although the trustee usually conducts the sale, the sale may also be handled by anyone designated by the trustee. [See Civ. Code § 2924d(d); Central Sav. Bank of Oakland v. Lake (1927) 201 Cal. 438, 447; 257 P. 521.]
Ordinarily, the trustee or the trustee’s agent appears at the time and place designated in the notice of sale, announces the sale, identifies the property up for sale, and indicates the terms of sale, e.g., the amount of the minimum bid, whether the bids must be in cash or cashier’s check, etc. (See 1 Miller & Starr, Current Law of California Real Estate 534.) But this procedure is not mandated by statute. The trustee may require every bidder to show evidence of the bidder’s ability to deposit the full amount of the final bid in cash; a cashier’s check; a check drawn by a credit union, savings and loan association, savings association, or savings bank; or any equivalent specified as acceptable in the notice of sale. [Civ. Code § 2924h(b).] [See Witter v. Bank of Miloitas, supra, 204 Cal. 570, 580.] The trustee cannot refuse to accept a cashier’s check made payable to the bidder to be endorsed to the trustee. (Baron v. Colonial Mortgage Service Co. (1980) 111 Cal.App.3d 316; 168 Cal.Rptr. 450.) The selling beneficiary may bid a credit up to the amount owed without tendering that amount in cash. [Civ. Code § 2924h(b); Coraelison v. Kornbluth (1975) 15 Cal.3d 590, 607; 125 Cal.Rptr. 557; Passanisi v. Merit McBride Realtors, Inc.. supra, 190 Cal.App.3d 1496.] However, a junior lienholder cannot use the amount of the lien as a credit bid. [See Pacific Loan Management Corp. v. Superior Court (1987) 196 Cal.App.3d 1485, 1493; 242 Cal.Rptr. 547.]
The trustee has discretion to postpone the sale. The trustee, for example, may exercise that discretion by postponing the sale to protect the beneficiary’s or the trustor’s interests. [See Bank of Seoul & Trust Co. v. Marcione (1988) 198 Cal.App.3d 113, 118-19; 244 Cal.Rptr. 1; Pacific Readv-Cut Homes v. Title G. & T. Co. (1929) 103 Cal.App. 1, 5-6; 283 P. 963.] In addition, the trustee may postpone the sale at the instruction of the beneficiary or upon the written request of the trustor, if the trustor requests the postponement to obtain cash sufficient to satisfy the obligation or bid at the sale and the written request identifies the source from which the funds are being obtained. The trustee must grant at least one request by the trustor for a postponement not to exceed one day. [Civ. Code § 2924g(c)(l); Whitman v. Transtate Title Co. (1985) 165 Cal.App.3d 312, 320-21; 211 Cal.Rptr. 582.]
A sale also may be postponed by court order, operation of law, or mutual agreement between the trustor and beneficiary. If the sale has been stopped by an injunction, restraining order, stay effected by court order or operation of law, the sale may not be conducted sooner than seven days after the termination of the injunction, order, or stay unless a court expressly directs the conduct of the sale within that seven day period. [Civ. Code § 2924g(d).] If the sale was postponed to a time within that seven day period, a notice of postponement must be given. (.Id.)
While there is no limit to the number of postponements, if the trustee postpones the sale more than three times based on the exercise of its discretion or the instruction of the beneficiary, the trustee must give a new notice of sale. [Civ. Code § 2924g(c).] A postponement at the trustor’s request, by court order, or by operation of law, such as the automatic stay under the bankruptcy law [11 U.S.C. § 362(a)], is not included in counting the three postponements requiring a renoticing of the foreclosure sale. [See California Livestock Production Credit Assn. v. Sutfin (1985) 165 Cal.App.3d 136, 141; 211 Cal.Rptr. 152.]
The trustee must publicly declare the postponement and its reason at the time and place scheduled for sale, must declare the new date and time as well as place (which must be the same place), and must keep records of each postponement and the reason for it. The trustee does not have to give any further notice of a postponement. [Civ. Code § 2924g(d).] The trustee, for example, has no duty to give any special notice of a postponement to the trustor or the trustor’ s representative. (See California Livestock Production Credit Assn. v. Sutfin, supra, 165 Cal.App.3d 136, 141-42.)
The overriding duty of the trustee to the trustor is to conduct the sale fairly and properly to benefit the trustor:
A sale under a power in a mortgage or trust deed must be conducted in strict compliance with the terms of the power. The sale must be made fairly, openly, reasonably, and with due diligence and sound discretion to protect the rights of the mortgagor and others, using all reasonable efforts to secure the best possible or a reasonable price. Kleckner v. Bank of American Nat. Trust & Sav. Ass’n., supra, 97 Cal.App.2d 30, 33.[Accord, Bank of Seoul & Trust Co. v. Marcione, supra, (1988) 198 Cal.App.3d 113, 118-19; Baron v. Colonial Mortgage Service Co., supra. 111 Cal.App.3d 316, 323; Block v. Tobin (1975) 45 Cal.App.3d 214, 221; 119 Cal.Rptr. 288; Hill v. Gibraltar Sav. & Loan Assn. (1967) 254 Cal.App.2d 241, 243; 62 Cal. Rptr. 188; Brown v. Busch (1957) 152 Cal.App.2d 200, 204; 313 P.2d 19; see generally I.E. Associates v. Safeco Title Ins. Co., supra, 39 Cal.3d 281, 285 n.3.] But if the sale is openly and fairly conducted without any impropriety, the trustee can purchase the property for the trustee’s own benefit. (See Stephens, Partain & Cunningham v. Hollis, (1987) 196 Cal.App.3d 948, 955; 242 Cal.Rptr. 251.)
The trustee cannot fix or restrain bidding in any manner [Civ. Code § 2924h(g)] or “arbitrarily reduce the pool of available bidders.” (Bank of Seoul & Trust Co. v. Marcione, supra, 198 Cal.App.3d 118.) The trustee should exercise discretion to promote competitive bidding. (Id.; Baron v. Colonial Mortgage Service Co., supra, 111 Cal.App.3d 316, 323.) Accordingly, the trustee cannot use the device of repeated postponements to discourage and frustrate the participation of bidders so that the sale can be manipulated in favor of the beneficiary or anyone else. Such conduct constitutes a breach of the trustee’s duty to the trustor and is deceitful. (See Block v. Tobin (1975) 45 Cal.App.3d 214; 119 Cal.Rptr. 288.) Moreover, such conduct is a restraint on bidding. A trustee engaging in deceit or a restraint on bidding
is subject to criminal prosecution. [See Civ. Code § 2924h(f).]
The trustee is under no obligation to engage in improper or illegal conduct at the behest of the beneficiary. Indeed, the trustee is under an obligation to the trustor to conduct the sale fairly and reasonably. If the beneficiary insists on the trustee’s violating the law or its duty to the trustor in the conduct of the sale, the trustee should refuse. The beneficiary may substitute a new trustee pursuant to the trust deed or Civil Code § 2934a. As a practical matter, if the trustee refuses to act wrongfully, the beneficiary will either cease seeking improper trustee conduct or will substitute a new trustee. In the unlikely event the trustee needs judicial relief, the trustee can apply to the superior court for discharge as trustee [see generally Civ. Code § 2282(e)] and may be entitled to attorney’s fees depending on the terms of the trust deed.
The full parameters of the rule that the trustee must use all reasonable efforts to obtain a reasonable price have not been determined. Moreover, this rule cannot be easily reconciled with the oft-repeated rule that “mere inadequacy of price, however gross, is not itself a sufficient ground for setting aside a sale legally made” in the absence of fraud, unfairness, or irregularity in the trustee’s conduct of the sale. [E.g., Sargent v. Shumaker, supra, 193 Cal. 122, 129; Winbialer v. Sherman (1917) 175 Cal. 270, 275-76; 165 P. 943; Whitman v. Transtate Title Co., supra, 165 Cal.App.3d 312, 323; Crummer v. Whitehead, supra. (1964) 230 Cal.App.2d 264/ 266; Crofoot v. Tarman (1957) 147 Cal.App.2d 443f 446-47; 305 P.2d 56; see also Smith v. Allen (1908) 68 Cal.2d 93; 65 Cal.Rptr. 153.] The trustee must, for example, delay the sale and give the trustor at least one day to raise money to satisfy the debt. [Civ. Code § 2924g(c)(l); see Winbialer v. Sherman, supra, 175 Cal. 270; Whitman v. Transtate Title Co.. supra, 165 Cal.App.3d 312, 320-23; Foae v. Schmidt (1951) 101 Cal.App.2d 681.] The trustee may continue the sale and refuse to sell to the highest bidder if the bid is inadequate to satisfy the debt. [See Pacific Ready-Cut Homes, Inc. v. Title Guar. & Trust Co.. supra, 103 Cal.App. 1.]
The trustee, however, is under no obligation “to make other efforts to procure bidders than to advertise the sale . . . * Stockwell v. Barhum (1908) 7 Cal.App. 413, 420; 94 P. 400], or to delay the sale because of a decline in property values. (See Enqelbertson v. Loan & Blda. Assn., supra, 6 Cal.2d 477, 479.) The trustee is also not obligated to continue the sale even for a short time to allow bidders to obtain the necessary funds required to cover their bids: “[i]t is the duty of a trustee, once it has started, to continue with reasonable dispatch with a sale under a trust deed; the terms being cash, the trustee is not required to hold up the sale while sundry bidders leave the place to go to banks or elsewhere to get cash.” (Kleckner v. Bank of America Nat. Trust & Sav. Assoc, supra, 97 Cal.App.2d 30, 33-34.) Indeed, it might be a breach of duty to the beneficiary for the trustee to continue a sale and thereby risk losing a bid from a third party sufficient to satisfy the debt. [See Hill v. Gibraltar Sav. & Loan Assn., supra, 254 Cal.App.2d 241/ 244-45; Stockwell v. Barnum, supra, 7 Cal.App. 413, 420.) However, under Winbiqler, Foqe, Kleckner, Hill, supra, and Civil Code § 2924g(c)(l), the trustee may breach its obligation to the trustor if it fails to grant a reasonable continuance to the trustor to obtain funds when the only bidder is the beneficiary.
The sale is complete upon the delivery of the trustee’s deed although it is deemed complete at the conclusion of the public auction for the purpose of applying the antideficiency statutes. see Little v. CFS Service Corp. (1987) 188 Cal.App.3d 1354, 1362; 233 Cal.Rptr. 923; Ballencree v. Sadlier (1986) 179 Cal.App.3d 1, 5; 224 Cal.Rptr. 301.]
Since the trustee, beneficiary, and the bidders are the primary players at the foreclosure sale, the “trustor cannot be characterized as a ‘seller’ under a duty to disclose known defects as exists in the normal vendor-vendee relationship.” [Sumitomo Bank v. Taurus Developers, Inc., supra, 185 Cal.App.3d 211, 221.] Thus, when the beneficiary makes a full credit bid, the beneficiary is not entitled to rely on the representations or nondisclosures by the trustor during the negotiation of the loan transaction or on nondisclosures during the trustee’s sale. (Id. at 222.)
a. Foreclosure Sales on Lien Contracts
In addition to the general sale requirements discussed above, special rules apply to the foreclosure of deeds of trust contained in retail installment obligations for the purchase of goods or services subject to the provisions of the Unruh Act. [Civ. Code §§ 1801 et sec.1
If the default is not cured within 30 days following the recordation of the notice of default, the trustee must mail a statutorily prescribed notice to the trustor at the trustor’s last known address. [Civ. Code § 2924f(c)(3).]
The trustee is also required to accept offers for the purchase of the property during the ten days preceding the sale date. The offers are revocable until accepted. If an offer is accepted in writing by both the trustor and the beneficiary before the scheduled sale date, the sale must be postponed to a definite date before which the trustor may convey the property according to the terms of the offer. When the sale is consummated, the foreclosure proceedings are deemed canceled. [Civ. Code § 2924f(c)(4).]
b. Effect of Military Service
A foreclosure sale held during the trustor’s military service or within three months thereafter is invalid if the trustor incurred the debt and owned the property securing the debt before military service, and if the trustor still owned the property at the time of the foreclosure. The provision does not apply if the trustor waives the right or the court so orders. [50 App. U.S.C. SS 532(1), 532(3); see 50 App. U.S.C. S 517.]
8. Distribution of the Sale Proceeds
Once collected, the trustee must dispose of the sale proceeds. The distribution occurs in the following order: (1) payment of costs and expenses of sale (cf. Civ. Code § 2273); (2) reimbursement to the foreclosing beneficiary of any advances made to redeem a prior lien (Civ. Code §§ 2903, 2904); (3) payment of the foreclosed debt [see generally Windt v. Covert (1907) 152 Cal. 350, 355-56; 93 P. 67]; (4) payment of junior lienholders in order of their priority [see Caito v. United California Bank (1978) 20 Cal.3d 694, 701; 144 Cal.Rptr. 751; Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485, 1491; Strutt v. Ontario Sav. & Loan Assn. (1972) 28 Cal.App.3d 866, 876; 105 Cal.Rptr. 395; Dockrey v. Gray (1959) 172 Cal.App.2d 388, 391; 341 P.2d 746; Sohn v. California Pac. Title Ins. Co., supra, 124 Cal.App.2d 757, 766, 269 P.2d 223]. A junior lienholder retains its claim to surplus proceeds in the absence of any impropriety even if that junior lienholder purchased at the senior lienholder’s sale. [See Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485, 1492.] Any remaining surplus must be paid to the trustor. [See Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485/ 1491; Nomellini Constr. Co. v. Modesto Sav. & Loan Assn. (1969) 275 Cal.App.2d 114, 118, 79 Cal.Rptr. 717; Atkinson v. Foote (1919) 44 Cal.App. 149, 156-67, 186 P. 831; see also Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1504.] Since senior liens are unaffected by the foreclosure of junior liens [see Streiff v. Darlington (1937) 9 Cal.2d 42, 45, 68 P.2d 728], senior liens are not paid out of the proceeds of the sale on the junior lien. [See Sohn v. California Pac. Title Ins. go. (1954) 124 Cal.App.2d 757, 766; 269 P.2d 223.]
A number of disputes may arise concerning the amount owed on the obligation and amounts for costs, expenses, advances, preservation of the property, and attorney’s fees. For example, the beneficiary may claim a prepayment penalty as a result of accelerating the balance because of the default, but, depending on the wording of the prepayment provision, the beneficiary may not be entitled to any penalty. [See Chapter I B 3 f, “Prepayment Penalties”, supra. 1 Other amounts to which the beneficiary may not be entitled include usurious interest [see Arneill Ranch v. Petit(1976) 64 Cal.App.3d 277; 134 Cal.Rptr. 456] or advances on delinquent senior encumbrances made after the foreclosure sale [see Streiff v. Darlington, supra, 9 Cal.2d 42, 45-46]. [See also Eastland Sav. & Loan Assn. v. Thornhill & Bruce, Inc. (1968) 260 Cal.App.2d 259; 66 Cal.Rptr. 90.]
The trustor has the right to obtain a judicial determination of the amount due on the obligation and the costs of sale and may establish the existence of a surplus in this manner. [See Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1504; de la Cuesta v. Superior Court (1984) 152 Cal.App.3d 945, 950; 200 Cal.Rptr. 1.] The trustor can bring an action for an accounting (see Code of Civ. Proc. § 1050), declaratory relief and injunction, or money had and received and an accounting. (See Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.2d 1496, 1512. If the trustor owes a judgment to the beneficiary, the trustor can establish an offset of surplus proceeds against the judgment through a motion to compel satisfaction or partial satisfaction of judgment. (Id. at 1513.) The trustee is also obligated to account to the trustor for any excess bid over the amount properly required to satisfy the debt. [See Streiff v. Darlington, supra, 9 Cal.2d 42, 45-46; Arneill Ranch v. Petit, supra, 64 Cal.App.3d 277, 294. To the extent the excess is in the form of the beneficiary’s credit bid, the beneficiary will be liable to the trustor for the amount in cash. Arneill Ranch v.Petit, supra, 64 Cal.App.3d at 295 (see also Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1512 (offset)).
The beneficiary and, thus, the trustee are not liable to the trustor for any profit realized on the resale of the property, particularly if the profit represents the equity value formerly encumbered by sold out junior liens. [See Strutt v. Ontario Sav. & Loan Assn., supra, 28 Cal.App.3d 866, 876.]
Before filing an action against the trustee for an accounting and for the claimed share of the surplus, counsel for the trustor should consider the trustee’ s culpability and potential entitlement to attorney’s fees. If the trustee has not participated in any wrongdoing and is sued solely as a stakeholder, the trustee will be able to file a motion or action in interpleader and may be entitled to reasonable attorney’s fees and costs which the court could award from the disputed amount deposited in court. (Code of Civ. Proc. §§ 386, 386.5, 386.6; see Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485, 1488-90.) In certain circumstances such as where surplus money is being held by an institutional lender’s subsidiary trustee, the trustor may decide to claim directly against the beneficiary, rather than sue the trustee.
Quarrels about the distribution of the proceeds should not affect a bona fide purchaser at the foreclosure sale who takes free of the claims of the trustor and junior lienholders. [See generally Central Sav. Bank of Oakland v. Lake, supra, 201 Cal. 438, 448; Hohn v. Riverside County Flood Control & Wat. Conserv. Dist. (1964) 228 Cal.App.2d 605, 613; 39 Cal.Rptr. 647.]
9. Trustee Charges
The fees imposed on a trustor for trustee services are limited by statute. For the period from the recording of the notice of default until the notice of sale is mailed, the trustee’s fees assessed against a trustor cannot exceed $200 if the unpaid principal sum secured is $50,000 or less, plus one-half of one percent of the unpaid principal sum secured exceeding $50,000 up to and including $150,000, plus one-quarter of one percent of the unpaid principal sum secured exceeding $150,000 up to and including $500,000, plus one-eighth of one percent of the unpaid principal sum secured exceeding $500,000. [Civ. Code § 2924c(d).] If the foreclosure sale is on a trust deed contained in a retail installment obligation subject to the Unruh Act, the trustee may charge $50 in addition to the amount authorized by Civil Code § 2924c. [Civ. Code § 2924f (c) (5). ] From the date the notice of sale is mailed until the property is sold, the trustee’s fees, in lieu of the above fees, may not exceed $300 if the unpaid principal sum is $50,000 or less, plus one percent of any portion of the unpaid principal sum secured exceeding $50,000 up to $150,000, plus one-half of one percent of the unpaid principal sum secured exceeding $150,000 up to $500,000, plus one-quarter of one percent of any portion of the unpaid principal sum secured exceeding $500,000. [Civ. Code § 2924d(a).] Upon sale of the property, in lieu of other fees, $300 or one percent of the unpaid balance, whichever is greater, may be deducted by the trustee from the sale proceeds, but the trustor is not personally liable for the fee after the sale. [Civ. Code §§ 2924c(d), 2924d(b).] Fees within the statutory limits are conclusively presumed valid and lawful. [Civ. Code §§ 2924c(d), 2924d(a), 2924d(b).]
However, if the amount or nature of the default is disputed and litigation results, the court may set the trustee’s fees at a sum less than the maximum statutorily authorized amount. [Sweatt v. The Foreclosure Co., supra, 166 Cal.App.3d 273, 278.)
The only costs and expenses which may be charged are those which are reasonable and actually incurred for recording, mailing, publishing, and posting required notices, for a trustee’s sale guarantee and for the postponement of a sale pursuant to a trustor’s written request under Civil Code § 2924g provided the charge does not exceed $50. [Civ. Code §§ 2924c(c), 2924d(a), 2924d(b).]
Kickbacks for the referral of any business involving trustee services are forbidden. If an unlawful rebate occurs, the offenders are liable to the trustor for treble the amount of the kickback plus reasonable attorney’s fees and costs in addition to any other remedy. The payment of an unlawful rebate will not affect the validity of a foreclosure sale to a bona fide purchaser or the rights of an encumbrancer for value without notice. [Civ. Code § 2924d(c).] If an illegal kickback is paid and the amount is imposed on the trustor under the guise of trustee’s fees, the trustor could argue that an improper statement of the default was set forth in the notice of default and the notice of sale. In such a situation, the trustor may seek to halt or invalidate the sale because of the defective notice. However, if the sale is to a bona fide purchaser, the trustor may be able to argue that the trustee is liable for all the damages sustained by the loss of the property and not just for the kickback amount which is relatively small amount, even when trebled. The trustee’s illegal misstatement of the appropriate fees in the notices rendering the notices defective should sufficiently taint the sale to make the trustee liable beyond the kickback.
10. Effect of Nonjudicial Foreclosure
The trustor generally has no right of redemption after a nonjudicial foreclosure sale. [See e.g., Bank of Italy Nat’l. Trust & Sav. Ass’n. v. Bent lev (1933) 217 Cal. 644, 655; 20 P.2d 940; Ballenaee v. Sadlier, supra, 179 Cal.App.3d 1, 5; Pv v. Pleitner (1945) 70 Cal.App.2d 576, 579, 161 P.2d 393; City Lumber Co. v. Brown (1920) 46 Cal.App. 603, 608-09; 189 P. 830; see generally Roseleaf Corp. v. Chieriahino (1963) 59 Cal.2d 35, 43-44; 27 Cal.Rptr. 873.]
After a nonjudicial foreclosure sale for at least the full amount of the underlying debt, the trustor’s obligations under the promissory note and the trust deed are extinguished. (See, e.g., Cornelison v. Korabluth, supra, 15 Cal.3d 590, 606; Ballenaee v. Sadlier, supra, 179 Cal.App.3d 1, 5.)
A significant, but seldom employed, exception to this general rule permits the trustor to redeem the property from the beneficiary after the sale if the beneficiary both served as trustee and acquired the property. (Coosey v. Sacramento Bank (1901) 133 Cal. 659; 66 P. 7.) The right of the trustor to treat the sale as voidable and to redeem the property should be applicable to a beneficiary, such as an institutional lender, that purchases the property at a foreclosure sale conducted by an “in-house” or “captive” trustee [see Baron v. Colonial Mortgage Service Co., supra, 111 Cal.App.3d 316, 322-23], which is a subsidiary business entity of the beneficiary. [See Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 116; 92 Cal.Rptr. 851.]
The general rule allowing no redemption after a nonjudicial foreclosure differs from the redemption rules that apply after a judicial foreclosure. After a judicial foreclosure in which the beneficiary’s right to a deficiency judgment is waived or precluded by law, the notice of sale may not be given until 120 days after the date the notice of levy was served on the judgment debtor, but there are no post-sale redemption rights. (Code of Civ. Proc. § 701.545.) After a judicial foreclosure in which the court may order a deficiency, the notice of sale may be given upon entry of judgment, but the debtor or the debtor’s successor in interest may redeem the property (a) during a three-month period following the sale if the sale price is sufficient to satisfy the debt plus interest and costs, or (b) during a one-year period following the sale if the sale price is insufficient to satisfy the debt plus interest and costs. (Code of Civ. Proc. §§ 729.010, 729.020, 729.030.)
b. Junior Liens
The trustee’s deed relates back in time to the date the trust deed was originally executed. Carpenter v. Smallpacre (1934) 220 Cal. 129, 132; 29 P.2d 841.] Thus,
The trustee’s deed on the sale under the power of sale passed to the purchasers . . . the title to the property held by the maker of the security instrument on the date he executed the same, and any title afterwards acquired. [Citation omitted. ]
The purchaser at the trustee’s sale and the grantee in the trustee’s deed acquires title free of all rights of the trustor or anyone claiming under or through him, and his title is free of all claims subordinate to the encumbrance pursuant to which the sale was made. Hohn v. Riverside County Flood Control & Wat. Conserv. Dist., supra, 228 Cal.App.2d 605, 612-13.
[See Streiff v. Darlington, supra, 9 Cal.2d 42, 45; Weber v. McCleverty (1906) 149 Cal. 316, 320-23; 86 P. 706; FPCI Re-Hab 01 v. E&G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1023; 255 Cal.Rptr. 157; Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn., supra, 184 Cal.App.3d 817, 825; Bracey v. Gray (1942) 49 Cal.App.2d 274, 277-78; 121 P.2d 770; Duaand v. Magnus (1930) 107 Cal.App. 243, 247, 290 P. 309; see also Sain v. Silverstre (1978) 78 Cal.App.3d 461, 471; 144 Cal.Rptr. 478.] The foreclosure sale does not extinguish liens for real property taxes and assessments which have priority regardless of the date the liens attach [see Rev. & Tax Code § 2192.1] or mechanic’s liens recorded after the recordation of the deed of trust in foreclosure if the work commenced before the deed of trust was recorded. [See Civ. Code § 3134.] The effect of a foreclosure on other liens is beyond the scope of this handbook.
1. Deficiency Judgments
If a beneficiary forecloses by a power of sale, a judgment for any deficiency between the sale proceeds and the debt is prohibited. (Code of Civ. Proc. § 580d.) However, a junior lienholder whose security is extinguished by the foreclosure of a senior lien still can sue the obligor to collect the underlying debt. (See e.g., Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35, 39.)
A beneficiary may choose to pursue judicial foreclosure (see Code of Civ. Proc. §§ 725a and 726) which permits a deficiency judgment in some circumstances. (See Code of Civ. Proc. § 726.) However, the deficiency judgment cannot exceed the difference between the debt owed and the greater of the fair market value of the property or its sale price. (See Code of Civ. Proc. §§ 580a and 726.) In addition, a deficiency judgment is prohibited if the obligation is owed to the seller of the property or to a lender of all or a portion of the purchase price of an owner-occupied dwelling for not more than four families. (Code of Civ. Proc. § 580b.)
A full discussion of the anti-deficiency statutes and judicial foreclosure procedures is beyond the scope of this handbook.
2. Beneficiary1s Right to Insurance Proceeds After Foreclosure
The trust deed usually gives the beneficiary the right to the proceeds of a hazard insurance policy as additional security. The beneficiary would be entitled to those proceeds up to the amount of the indebtedness remaining after the foreclosure sale. (See Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 607; Armsev v. Channel Associates, Inc. (1986) 184 Cal.App.3d 833, 837-38; 229 Cal.Rptr. 509.) However, if the full amount of the indebtedness is satisfied through the foreclosure sale by the beneficiary’s full credit bid or by payment by a third party bidder, the beneficiary will not be entitled to any of the insurance proceeds. [See id.; Duarte v. Lake Gregory Land and Water Co. (1974) 39 Cal.App.3d 101/ 105; 113 Cal.Rptr. 893.]
d. Junior Lienholder as Bidder at Senior Lienholder’s Sale
A junior lienholder may bid at a sale conducted by a senior lienholder. If the junior lienholder purchases the real property security at the nonjudicial foreclosure sale, the junior lienholder is not precluded from obtaining a deficiency judgment by Code of Civil Procedure section 580d. Walter E. Heller Western, Inc. v. Bloxham (1985) 176 Cal.App.3d 266, 273; 221 Cal.Rptr. 425.] However, the fair value limitations of Code of Civil Procedure Section 580a apply. (Id.)
11. Right to Possession
After the foreclosure sale, the purchaser generally has the immediate right to possession. [See, e.g., Farris v. Pacific States Aux. Corp. (1935) 4 Cal.2d 103, 105, 48 P.2d 11; Central Sav. Bank of Oakland v. Lake, supra, 201 Cal. 438, 448.] The purchaser is accorded the right to use summary unlawful detainer proceedings to obtain possession. (See Code of Civ. Proc. § 1161a; see discussion in chapter III, section E, at p. 111-36, infra.) The foreclosed owner is subject to a three-day notice to quit; however, a tenant or subtenant of rental housing must be given a notice to quit at least as long as a rental period but not exceeding 30 days [See Code of Civ. Proc. § 1161a(b)(3) and (c).]
However, a local rental control or housing ordinance which limits the grounds for eviction may limit or preclude the purchaser at a trustee’s sale from obtaining possession. [See Gross v. Superior Court (1985) 171 Cal.App.3d 265, 274-76; 217 Cal.Rptr. 284.]
The foreclosure sale also extinguishes any leases made after the deed of trust. [See Sullivan v. Superior Court (1921) 185 Cal. 133, 138, 195 P. 1061; Dugand v. Magnus, supra, 107 Cal.App. 243, 247. ] The sale should extinguish any unrecorded lease exceeding one year made prior to the recordation of the trust deed. (See Civ. Code § 1214.) If a lease is recorded before a trust deed, the lease will survive the foreclosure of the trust deed, and the purchaser will be entitled to receive rent after the date of purchase. [See Fahrenbaker v. E. Clemens Horst Co. (1930) 209 Cal. 7, 9, 284 P. 905.]
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. (See Chapter III B 5 a, “Defective Notice of Default”, infra.) 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.)
13. Mobilehome and Manufactured Home Foreclosures
The foreclosure process for a “manufactured home” or a “mobilehome,” as those terms are respectively defined (see Health & Safety Code §§ 18007 and 18008), is the same as the foreclosure process for real property if any of the following conditions are met: (1) the manufactured home or mobilehome is affixed to a permanent foundation as provided by Health & Safety Code § 18551, (2) the security for the loan for these types of homes includes the real property on which the manufactured home or mobilehome is installed or affixed, or (3) the loan or credit sale was made under circumstances requiring disclosures under Regulation Z (Health & Safety Code §§ 18039.1, 18039.5). A lawyer representing an owner of one of these types of homes should ascertain whether either condition (1), (2), or (3) apply and should remember that, even though the home may be on a permanent foundation, the permanent foundation system may not comply with Health & Safety Code § 18551. If the manufactured home or mobilehome does not meet the description in Health & Safety Code § 18039.1 but is required to be registered pursuant to the Mobilehomes-Manufactured Housing Act of 1980, the default procedure is governed by special rules set forth in Health & Safety Code § 18037.5 which permit a sale generally pursuant to Commercial Code § 9504.
The mobilehome foreclosure procedures present a number of questions, and the statutes should be scrutinized by counsel. One of the questions concerns the right to cure a default provided in Health & Safety Code § 18037.5(a). The statute is silent on whether the default can be cured by paying only the arrearage and disregarding the accelerated balance or whether the right to cure the default is tantamount to a right of redemption. [Compare Health & Safety Code § 18037.5(a) with Civ. Code §§ 2924c,2983.3(b).] The language of the notice of default form suggests that a right of reinstatement is intended, and the statute should be liberally construed as a remedial statute protecting mobilehome owners from the loss of their residences.
A more detailed discussion of the foreclosure procedures and problems related to deficiency judgments is beyond the scope of this manual.
14. Condominium Assessment Lien Foreclosures
An assessment, including all charges, interest, costs, attorney’s fees, and penalties, levied on a condominium owner becomes a lien against the condominium upon the recordation of a notice of assessment containing certain statutorily required information. (See Civ. Code § 1367.) The lien expires one year after its recordation unless it is earlier satisfied and released or enforced or unless it is extended up to one additional year by the recordation of a written extension. (Id.) The lien may be enforced by a sale of the condominium as prescribed by Civil Code sections 2924, 2924b and 2924c “applicable to the exercise of powers of sale in mortgages and deeds of trust” or in any other manner permitted by law. (Id.) However, the nonjudicial foreclosure procedure cannot be used, with respect to subdivisions under the jurisdiction of the Department of Real Estate, against a person to enforce a lien for penalties imposed for any of the following reasons: (a) failure to comply with the governing instruments [Covenants, Conditions, and Restrictions, Articles of Incorporation, and Bylaws] or (b) as a means of reimbursing the association for costs incurred (1) in the repair of damage to common areas allegedly caused by the person or (2) in bringing the individual and the person’s subdivision interest into compliance with the governing instruments. [See 10 Cal.Adm. Code § 2792.26(c).]
The statutes authorizing a sale in accordance with nonjudicial foreclosure procedures conspicuously omit reference to Civil Code sections 2924d, 2924f, 2924g, and 2924h. (See Civ. Code § 1367.) Since the condominimum lien statutes suggest that the sale should be conducted in accord with law applicable to the exercise of the power of sale, an association enforcing its lien by the nonjudicial foreclosure method will not likely escape the protections and procedures required by the omitted Civil Code sections. Moreover, the condominium’s governing instruments may provide by contract that the enforcement procedure must follow Civil Code section 2924d, 2924f, 2924g, and 2924h.
A lawyer representing a condominium owner in foreclosure should consider the constitutionality of the foreclosure procedure. The constitutionality of the nonjudicial foreclosure process was upheld against attack on due process grounds because the contractually created private power of sale did not involve state action. (See Garfinkle v. Superior Court, supra, 21 Cal.3d 68.) The assessment lien foreclosure procedure, however, is established by statute and, thus, may involve State action. Nevertheless, the governing instruments, depending on their wording, may be construed to provide a contractual basis for the exercise of the power of sale.
15. Mixed Collateral – Real and Personal Property Security
A creditor may secure a single obligation with a security interest in real property and personal property. For example, a personal loan may be secured by a trust deed on the borrower’s house and a lien on both of the borrower’s automobiles. In the event of default, the creditor may foreclose in any sequence (1) under real property law (e.g., Civ. Code § 2924 et seg.) as to the real property and Article 9 of the Commercial Code as to the personal property; (2) under real property law as to the real property and some or all of the personal property; or (3) under real property law as to the real property and some of the personal property and under Article 9 as to other personal property. [Comm. Code § 9501(4).]
Commercial Code section 9501(4)(b) may be construed to abrogate substantially the operation of real property foreclosure and antideficiency protections in non-consumer transactions. [See Hetland and Hansen, ‘”Mixed Collateral’ Amendments to California’s Commercial Code – Court Repeal of California’s Real Property Foreclosure and Antideficiency Provisions Or Exercise in Futility?,” 75 Cal.L.Rev. 185 (1987).] However, Commercial Code section 9501(4)(b) does not apply to loans or credit sales made to individuals primarily for personal, family, or household purposes. [Comm. Code § 9501(4)(c)(v).] One commentator has indicated that the rules in existence before the 1986 amendment to Commercial Code section 9501(4) apply; thus, a foreclosure of mixed collateral would be governed by real property law. [See CEB, California Mortgage and Deed of Trust Practice Supp., § 44, p. 47 (1988).]
The exemption for consumer transactions casts doubt on the applicability of other provisions of the section which are predicated on the abrogation of real property foreclosure rules. For example, the disposition of personal property collateral and the application of the proceeds to the debt does not cure a monetary default so as to affect the secured party’s rights regarding other personal property collateral. [Comm. Code § 9501(4)(d)(ii).] This provision presupposes that the reinstatement rights afforded by Civil Code section 2924c do not apply. [Comm. Code § 9501(4)(b).] But, reinstatement rights continue to apply in consumer transactions. [Comm. Code § 9501(4)(c)(v).] As a result, if the sale proceeds from the disposition of personal property collateral are sufficient to cure the default under Civil Code section 2924c, the obligation will be reinstated, and the creditor should be precluded from enforcing any other security interest•
For example, suppose a loan is secured by a consumer’s house, car, and pickup truck. The consumer defaults, the creditor accelerates the $10,000 balance, and the amount needed to cure the default is $2,000. The creditor conducts a sale of the car and nets $2,000. A creditor might argue that the sale does not cure the default and that the creditor could proceed against the pickup. [See Coram. Code § 9501(4)(d)(ii).] Civil Code section 2924c, however, continues to apply to the obligation, and the $2,000 sale would be sufficient to reinstate the obligation. Because no default remains, the creditor could not proceed against the pickup.
A lawyer representing a homeowner who has given both real and personal property as security should evaluate whether the security interest is excessive. A court may conclude that a security interest which was disproportionate to the extension of credit and subjected a homeowner to the loss of significant personal property, such as cars and work related vehicles, as well as the homeowner’s home was unduly oppressive and unconscionable. As a result, the court might limit the enforcement of the creditor’s security interest. (See Civ. Code § 1670.5; )