1 Oct

These pretender lenders are not banks and are thereby subject to usury law when you add all the undisclosed profits and appraisal fraud is easy to see that the interest exceeds 10% and this could be offset as against the loan.The trustor also may offset against the amount claimed by the beneficiary any amount due the trustor from the beneficiary. [See Hauger v. Gates (1954) 42 Cal.2d 752, 755; 249 P.2d 609; Richmond v. Lattin (1883) 64 Cal. 273; 30 P. 818; Goodwin v. Alston (1955) 130 Cal.App.2d 664, 669; 280 P.2d 34; Cohen v. Bonnell (1936) 14 Cal.App.2d 38; 57 P.2d 1326; Zarillo v. Le Mesnacer (1921) 51 Cal.App. 442; 1196 P.902 (damages for conversion offset against debt secured by chattel mortgage); Williams v. Pratt (1909) 10 Cal.App. 625, 632; 103 P. 151.]  In Goodwin, supra, the mortgagor established that the mortgagee charged usurious interest, and the penalty of the trebled interest payments along with other amounts were setoff against the mortgage debt. As a result, the debt was effectively satisfied, the mortgage was thereby extinguished and no foreclosure was permitted, and the mortgagee was held liable to the mortgagor for damages.  (See 130 Cal.App.2d at 668-69.)

The Supreme Court made clear in Hauaer, supra, that the trustor, in the context of the nonjudicial foreclosure of a deed of trust, could use the right of setoff. [See 42 Cal.2d at 755.] Normally, setoff is employed defensively through an affirmative defense or cross-complaint (or formerly counterclaim) in response to an action for money. The court in Hauaer, however, saw no distinction between the right of setoff held by a trustor defending a foreclosure action or by a trustor affirmatively attacking a nonjudicial foreclosure proceeding. (Id. at 755-56.) Accordingly, the Supreme Court held that the trustor, as plaintiff, could establish the impropriety of a foreclosure by showing that the trustor was not in default on his obligation since the obligation was offset by an obligation which the beneficiary owed to him. (Id. at 753, 755.) The court further held that the trustor did not have to bring an independent action to establish the setoff. (Id. at 755.) Moreover, the court declared that unliquidated as well as liquidated amounts could be setoff; thus, the court allowed the trustor to setoff an unliquidated claim for damages for breach of contract.

Hauaer and the other cases cited above are based on former Code of Civ. Proc. § 440 which has been superseded by Code of Civ. Proc. § 431.70. The rule of these cases should not be altered because the new section appears broader than the old. Furthermore, the Legislative Committee Comment to section 431.70 not only states that the new section continues the substantive effect of section 440 but also approvingly cites Hauaer.

The right of setoff has substantial significance in contesting the validity of any foreclosure since the trustor may establish that no default occurred or, indeed, no indebtedness exists because of an offsetting amount owed by the beneficiary to the trustor. As discussed above, this offset may be a liquidated or an unliquidated claim. In addition, the claim which the trustor may wish to offset may be barred by the statute of limitations at the time of the foreclosure, but as long as the trustor’s claim and the beneficiary’s claim coexisted at any time when neither claim was barred, the claims are deemed to have been offset. [See Code of Civ. Proc. § 431.70.] The theory is that the competing claims which coexisted when both were enforceable were offset to the extent they equaled each other without the need to bring an action on the claims. Therefore, since the offsetting claim is deemed satisfied to the extent it equaled the other claim, there was no

existing claim against which the statute of limitation operates. See Jones v. Mortimer (1946) 28 Cal.2d 627, 632-33; 170 P.2d 893; Singer Co. v. County of Kings (1975) 46 Cal.App.3d 852, 869; 121 Cal.Rptr. 398; see also Hauger v. Gates, supra, 42 Cal.2d 752, 755.]

The right of setoff not only gives the trustor the ability to setoff liquidated and unliquidated claims for money paid or for damages, but also permits setoffs for statutory penalties to which the trustor may be entitled because of the beneficiary’s violation of the law. In Goodwin v. Alston, supra, 130 Cal.App.2d 664 the debtor in a foreclosure action offset his obligation against the treble damages awarded to him for the creditor’s usury violations. Similarly, the penalty for violating the federal Truth in Lending Act — twice the amount of the finance charge but not less than $100 or more than $1,000 [15 U.S.C. § 1640(a)(2)(A)(i)] — may be offset against the obligation owed the creditor.-‘ [See 15 U.S.C. § 1640(h); Reliable Credit Service, Inc. v. Bernard (La.App. 1976) 339 So.2d 952, 954, cert, den. 341 So.2d 1129, cert, den. 342 So.2d 215; Martin v. Body (Tex.Civ.App. 1976) 533 S.W.2d 461, 467-68].

Although Truth in Lending penalties may be offset against the creditor’s claim, the debtor may not unilaterally deduct the penalty; rather, the offset must be raised in a judicial proceeding, and the offset’s validity must be adjudicated.  [15 U.S.C. § 1640(h); see e.g., Pacific Concrete Fed. Credit Union v. Kauanoe (Haw. 1980) 614 P.2d 936, 942-43; Lincoln First Bank of Rochester v. Rupert (App.Div. 1977) 400 N.Y.S. 618, 621.]

Although no cases have authorized the trustor’s offset of punitive damages against the obligation owed, no reason appears to prevent the offset of punitive damages. Normally, if punitive damages were appropriate, sufficient fraud, oppression, or other misconduct would be established to vitiate the entire transaction. But even if the transaction were rescinded, the injured trustor likely would be required to return any consideration given by the offending beneficiary. The trustor almost always will have spent the money, usually to satisfy another creditor or to purchase goods or services which cannot be returned for near full value. A punitive damage offset may reduce or eliminate the trustor’s obligation to restore consideration paid in a fraudulent, oppressive, or similarly infirm transaction.

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