California Foreclosure Case – Lona v. Citibank (scroll to the bottom) Okay, we have been talking about predatory lending for some time now.  We have talked about California homeowners being steered into loans that virtually guaranteed their foreclosure sale.  We have talked about lenders and real estate brokers that falsely stated income on loan applications, and we have talked about non-judicial foreclosure sales and the challenges involved in trying to set aside the foreclosure sale, including the lender “tender” rule (the rule that the banks argue in almost every foreclosure case basically arguing to the judge that you cannot challenge the foreclosure sale unless you tender the full balance of your loan).  Of course very few people have the financial ability to pay the lender off on the loan, much less a borrower in default on a mortgage loan.  At any rate, the Lona cases that recently came down from the California Court of Appeals (yes, the decision what thankfully cited for publication) takes an interesting view of stated income loans, the underwriting of these loans, and the tender rule in California (and its exceptions which the court was adept in pointing out). So here goes, here are the facts of Lona v. Citibank. The borrower was Mr. Lona, who apparently was of mexican decent and had an 8th grade education.  He also apparently had two pieces of property, both in foreclosure.  As to the foreclosure case at issue, Lona originally had a loan in the amount of 1.24 million dollars.  In January of 2007 Lona claimed he was responding to an advertisement to refinance his loans.  In response to the ads, Lona contacted the loan broker (First net mortgage) and applied for a loan.  The loan application was for what we call a “stated income loan” (this is where the borrower states the amount his gross monthly income is and/or sometimes the unscrupulous loan broker will just fill this in themselves).  At any rate, the loan application stated that Lona made $20,000 per month ($240,000 per year) when this in fact, apparently was not true (he was a mechanic at a mushroom farm).  Lona claimed his annual income was only $40,000 ($3,333 per month).  The loan was ultimately approved based on these figures, and both a first and second mortgage were originated. The first mortgage was for 1.125 million and was a 5/1 adjustable rate mortgage (loan was fixed for five years then would adjust).  The CAP on the loan was 13.25% and the interest rate was 8.25%.  The monthly payment on the first mortgage alone was $12,381.36.  The second mortgage was a 15-year fixed mortgage in the amount of $350,000 and had a 12.25% interest rate and $327,000 Balloon Payment.  In a nutshell, Lona claimed he could barely read english, did not read his loan documents, and that such were not adequately explained to him.  Nevertheless, he signed the loan documents and 5 months later he was in default on the loans (keep in mind the monthly combined payment on the loans was $12,381.36 over 4x’s his monthly income).  At some point after the loan was originated, the loan was sold to Citibank (probably part of a securitized loan scheme, but this is not confirmed) and EMC became the loan servicer of the loan.   The lender thereafter initiated foreclosure proceedings (filed a notice of default and notice of sale etc.) and sold the house via non-judicial foreclosure sale in August of 2008.  The house apparently went back to Citibank who recorded a trustees deed upon sale and thereafter moved to evict Lona from the property. Lona, however, did not go quietly into the foreclosure night.  Instead, he filed a civil suit alleging a variety of causes of action, and basically sought to set aside the foreclosure sale (these were the two claims that survived demurrer and which were remaining against Citibank and EMC).  The trial court found for Defendants in their motion for summary judgment, basically arguing that Defendant’s could not tender the loan balance, and must be held liable for his own actions in signing the loan.  The court also noted that the borrower had been living in his house for free for some time.  Further, the trial court ruled there was no evidence of any procedural irregularity or prejudice to the California homeowner Plaintiff. The Plaintiff appealed the grant of summary judgment arguing essentially that there was no requirement to tender the loan balance because the loan itself (and deed of trust) was illegal and unconscionable / unenforceable given that only his income was used to qualify him for the loan and that his credit did not warrant such a loan.  He also argued that given this, he did not need to tender the loan balance to try to set aside the foreclosure sale.  The unlawful detainer proceeding was consolidated with the Civil Action. The Courts holding in Lona v. Citibank The Court reversed the trial court and sent the case back for a trial on the merits.  The court ruled there was no tender requirement because the Plaintiff was attacking the very validity of the debt (which is one of the exception to the tender rule) and that there was a question of material fact as to the unconscionable / illegal nature of the loan contract.   In addition, there was a failure of Defendant to meet its burden for summary judgment on these issues, and the tender argument of Plaintiff was not addressed. Here is some key language pulled from the case:

I.               Elements of a Cause of Action to Set Aside Trustee’s Sale

After a nonjudicial foreclosure sale has been completed, the traditional method by which the sale is challenged is a suit in equity to set aside the trustee’s sale.  (Anderson v. Heart Federal Sav. & Loan Assn. (1989) 208 Cal.App.3d 202, 209-210.)  Generally, a challenge to the validity of a trustee’s sale is an attempt to have the sale set aside and to have the title restored.  (Onofrio v. Rice (1997) 55 Cal.App.4th 413, 424 (Onofrio), citing 4 Miller & Starr, Cal. Real Estate (2d ed. 1989) Deeds of Trusts & Mortgages, § 9.154, pp. 507-508.) On summary judgment, a “defendant . . . has met his or her burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to that cause of action.”  (Code Civ. Proc., § 437c, subd. (p)(2).) Neither the parties’ briefs nor the papers they filed below on the motion for summary judgment discuss the elements of an equitable cause of action to set aside a foreclosure sale.  The parties do not cite any cases that expressly set forth the elements. “ ‘It is the general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties.’ ”  (Lo v. Jensen (2001) 88 Cal.App.4th 1093, 1097-1098 (Lo), quoting Bank of America etc. Assn. v. Reidy (1940) 15 Cal.2d 243, 248; see also Angell v. Superior Court (1999) 73 Cal.App.4th 691, 700.) Case law instructs that the elements of an equitable cause of action to set aside a foreclosure sale are:  (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.  (Bank of America etc. Assn. v. Reidy, supra, 15 Cal.2d at p. 248; Saterstrom v. Glick Bros. Sash, Door & Mill Co. (1931) 118 Cal.App. 379, 383 (Saterstrom) [trustee’s sale set aside where deed of trust was void because it failed to adequately describe property]; Stockton v. Newman (1957) 148 Cal.App.2d 558, 564 (Stockton) [trustor sought rescission of the contract to purchase the property and the promissory note on grounds of fraud]; Sierra-Bay Fed. Land Bank Ass’n v. Superior Court (1991) 227 Cal.App.3d (1991) 227 Cal.App.3d 318, 337 (Sierra-Bay) [to set aside sale, “debtor must allege such unfairness or irregularity that, when coupled with the inadequacy of price obtained at the sale, it is appropriate to invalidate the sale”; “debtor must offer to do equity by making a tender or otherwise offering to pay his debt”]; Abadallah v. United Savings Bank (1996) 43 Cal.App.4th 1101, 1109 (Abadallah) [tender element]; Munger v. Moore (1970) 11 Cal.App.3d 1, 7 [damages action for wrongful foreclosure]; see also 1 Bernhardt, Mortgages, Deeds of Trust and Foreclosure Litigation (Cont.Ed.Bar 4th ed. 2011 supp.) § 7.67, pp. 580-581 and cases cited therein summarizing grounds for setting aside trustee sale.) Justifications for setting aside a trustee’s sale from the reported cases, which satisfy the first element, include the trustee’s or the beneficiary’s failure to comply with the statutory procedural requirements for the notice or conduct of the sale.  (Knapp, supra, 123 Cal.App.4th at pp. 96-99 [alleged irregularity in default notice and sale notice]; Sierra-Bay Fed. Land Bank Ass’n v. Superior Court, supra, 227 Cal.App.3d (1991) 227 Cal.App.3d at p. 337 [to set aside sale, “debtor must allege such unfairness or irregularity that, when coupled with the inadequacy of price obtained at the sale, it is appropriate to invalidate the sale”]; 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc. (2001) 85 Cal.App.4th 1279, 1284 [“mere inadequacy of price, absent some procedural irregularity that contributed to the inadequacy of price or otherwise injured the trustor, is insufficient to set aside a nonjudicial foreclosure sale”].)  Other grounds include proof that:  (1) the trustee did not have the power to foreclose (Bank of America v. La Jolla Group II (2005) 129 Cal.App.4th 706 [trustee’s sale invalid because borrower and lender had entered into agreement to cure default; loan was therefore current and lender did not have right to foreclose]; Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868, 878 (Dimock) [where original trustee completed trustee’s sale after being replaced by new trustee, sale was void because original trustee no longer had power to convey property]); (2) the trustor was not in default, no breach had occurred, or the lender had waived the breach (System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 154 (System) [borrower was not in default because it was excused from performance by lender’s prior breach of contract; bank waived amount allegedly due]; Van Noy v. Goldberg (1929) 98 Cal.App.604 [debt had not matured]); or (3) the deed of trust was void (Saterstrom, supra, 118 Cal.App. at p. 383 [trustee’s sale set aside where deed of trust was void because it failed to adequately describe property]; Stockton, supra, 148 Cal.App.2d at p. 564 [trustor sought rescission of promissory note on grounds of fraud]; see also 1 Bernhardt, Mortgages, Deeds of Trust and Foreclosure Litigation, supra, § 7.67, pp. 580-581.  We shall discuss this element further in section V. B. of this opinion.

A.   Assertion That Loans Were Not Unconscionable

As a third ground for their motion, Citibank and EMC challenged the allegations of Lona’s second amended complaint that the trustee’s sale was “ ‘improperly held . . . due to the unconscionable and illegal nature of the loan agreement and deed of trust.’ ”  The moving parties did not specify which element of the cause of action this part of their motion addressed.  Arguably, it implicated both the first and third elements of the cause of action.  Lona contends that the trustee’s sale should be set aside on the grounds that the loan was void ab initio because it was unconscionable and that he was excused from the tender requirement because the loan was unconscionable.First, Citibank and EMC argued that a trustee’s sale could not be set aside for unconscionability because the only basis for setting aside a trustee’s sale is irregularity in the foreclosure procedure.  We have already rejected that contention. Second, Citibank and EMC argued that Lona failed to establish that the loans were unconscionable.  In essence, they asked the court to find, as a matter of law, that the loans and deeds of trust were not unconscionable. Before proceeding further, we review general principles governing the “judicially created doctrine of unconscionability.”  (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113 (Armendariz), abrogated in part on another ground in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __, __ [131 S.CT. 1740, 1746].)  “Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion.  [Citation.]  ‘The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ ”  (Ibid.)  The record here suggests that the deeds of trust and the notes were contracts of adhesion.  They appear to be standard forms that were drafted by the lender or others and presented to Lona for signature.  There was no evidence in the record that Lona had any role in negotiating the terms of the contracts. “If the contract is adhesive, the court must then determine whether ‘other factors are present which, under established legal rules—legislative or judicial—operate to render it [unenforceable].’  [Citation.]  ‘Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof.  The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him.  [Citations.]  The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or “unconscionable.” ’  [Citation.]  Subsequent cases have referred to both the ‘reasonable expectations’ and the ‘oppressive’ limitations as being aspects of unconscionability.”  (Armendariz, supra, 24 Cal.4th at p. 113.) “In 1979, the Legislature enacted Civil Code section 1670.5, which codified the principle that a court can refuse to enforce an unconscionable provision in a contract.  [Citation.]  As section 1670.5, subdivision (a) states:  ‘If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.’ ”  (Armendariz, supra, 24 Cal.4th at p. 114.)  Subdivision (b) of the statue provides:  “When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.” “ ‘[U]nconscionability has both a “procedural” and a “substantive” element,’ the former focusing on ‘ “oppression” ’ or ‘ “surprise” ’ due to unequal bargaining power, the latter on ‘ “overly harsh” ’ or ‘ “one-sided” ’ results.  [Citation.]  ‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’  [Citation.]  But they need not be present in the same degree.  ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’  [Citations.]  In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.”  (Armendariz, supra, 24 Cal.4th at p. 114.) Absent unusual circumstances, evidence that one party has overwhelming bargaining power, drafts the contract, and presents it on a take-it-or-leave-it basis is sufficient to demonstrate procedural unconscionability and require the court to reach the question of substantive unconscionability, even if the other party has market alternatives.  (Gatton v. T-Mobile USA (2007) 152 Cal.App.4th 571, 586.) In their motion, Citibank and EMC asserted that Lona voluntarily entered into the loans and received the benefits of the loan and that it was undisputed that he signed the loan documents, which set forth the terms of the loans.  The defendants focused on Lona’s allegations that the loans were unconscionable because of the potential increase in the interest rate on the first loan from 8.25 to 13.25 percent and the balloon payment on the second loan.  Citibank and EMC argued that these terms “had no impact whatsoever on [Lona’s] inability to make the monthly Loan payments,” because the interest rate on the first loan was fixed at 8.25 percent for the first five years and the balloon payment was not due for 15 years and Lona defaulted within the first year after entering into the loans.  We are not persuaded that the increase in the interest rate on the first loan or the amount of the balloon payment on the second loan are sufficient in and of themselves to support the claim that the loans were unconscionable.  However, Citibank and EMC’s assertion that these allegedly unconscionable terms of the loan did not cause the default does not necessarily dispose of Lona’s claim that the loans were void ab initio because they were unconscionable. In addition to alleging unconscionability based on the interest rates and balloon payment provision, the second amended complaint alleged that the loans were unconscionable and illegal because they “were made to [Lona] without reasonable consideration of his ability to repay the loans . . . given his income at the time” and that the interest rate “far exceeded what was reasonable given his credit rating at the time of application.”  Citibank and EMC’s motion did not address these allegations.  The moving parties presented no evidence regarding Lona’s income, credit rating, or credit worthiness.  And when Lona raised these factual issues in response to the motion for summary judgment, the moving parties did not respond; they did not discuss Lona’s evidence or provide any legal argument regarding the impact of that evidence.  They did not file anything in reply.  In our view, the defendants failed to meet their burden on summary judgment because their motion failed to address all of the allegations of the Lona’s second amended complaint regarding the alleged illegality of the loan. On summary judgment, an alternative method by which a defendant may meet its burden of showing that an essential element of the plaintiff’s claim cannot be established is to present evidence that the plaintiff “does not possess and cannot reasonably obtain, needed evidence.”  (Aguilar, supra, 25 Cal.4th at p. 854.)  But unlike federal law, summary judgment law in California requires the defendant to present evidence, and not simply point out through argument, that the plaintiff does not possess and cannot reasonably obtain the needed evidence.  (Aguilar, at p. 854.)  Such evidence may consist of the deposition testimony of the plaintiff’s witnesses, the plaintiff’s factually devoid discovery responses, or admissions by the plaintiff in deposition or in response to requests for admission that he or she has not discovered anything that supports an essential element of the cause of action.  (See Villa v. McFerren (1995) 35 Cal.App. 4th 733, 749; Leslie G. v. Perry & Associates (1996) 43 Cal.App.4th 472, 482; Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 590.) At the hearing on the summary judgment motion, Citibank and EMC argued that there was no evidence to support Lona’s allegations, that Lona had not alleged any facts that would create triable issues, and that Lona relied on conclusions and not facts, which was not enough to avoid summary judgment.  Citibank and EMC’s evidence in support of their motion for summary judgment consisted of the loan documents and documents related to the trustee’s sale, as well as the declaration of an employee of EMC describing and authenticating the documents.  They did not submit any discovery responses by Lona.  To the extent that their summary judgment motion relied on the claim that Lona had no evidence to support the allegations of his complaint, Citibank and EMC relied solely on argument and did not present the type of evidence necessary to demonstrate that Lona did not possess and could not reasonably obtain, needed evidence.  (Aguilar, supra, 25 Cal.4th at p. 854.)  Thus, Citibank and EMC failed to meet their burden on summary judgment to show that Lona had no evidence that supported his claims. In addition, with regard to this ground, the record reveals triable issues of material fact.  In opposition to the motion for summary judgment, Lona presented evidence that he had only an eighth grade education, his English was limited, no one explained the documents to him, and he did not understand what he was signing.  He presented evidence that, while the loan brokers told him what the initial interest rate and monthly payments were, they did not tell him how high the interest rate could increase on the first loan and that no one explained the balloon payment to him.  The loan documents appear to be on standard, pre-printed forms in English and there is no evidence Lona had any role in negotiating the terms of the loan.  In our view, this was sufficient evidence of unequal bargaining power, oppression or surprise to raise a triable issue regarding procedural unconscionability. In addition, there was uncontradicted evidence that Lona earned only $40,000 per year at the time the loans were approved, that only his income was considered in qualifying for the loan, and that the monthly payments were approximately four times his monthly income.[2]  Given the extreme disparity between the amount of the monthly loan payments and Lona’s income, this was sufficient to create a triable issue on the question of whether the loans were overly harsh and one-sided and thus substantivelyunconscionable.  And while this evidence may not ultimately be persuasive at trial, in this case, it was sufficient to defeat the motion for summary judgment. Since Citibank and EMC failed to address all of the allegations of the complaint regarding the alleged unconscionability of the loans and failed in their burden to show that Lona did not have any evidence to support his claims, we cannot say that they have met their burden of demonstrating that the loans and deeds of trust were not unconscionable as a matter of law.  In addition, Lona submitted sufficient evidence to raise a triable issue with regard to the alleged unconscionable nature of the transaction. Our holding does not mean that a borrower may defeat a motion for summary judgment in an action to set aside a trustee’s sale merely by alleging that he or she did not understand the terms of the loan documents signed or could not afford the loan.  In this case, the primary reasons for reversing the summary judgment are the moving parties’ failure to address all of the allegations of the second amended complaint and their failure to properly demonstrate that Lona had no evidence to support his claims.  In addition, after Lona’s opposition argued that the loan was void for illegality at the time of signing and submitted evidence that demonstrated an extreme disparity between Loan’s income and the amount of his monthly payments, Citibank and EMC made no effort to address this evidence, with argument or legal authority.

B.   Tender Requirement

Because the action is in equity, a defaulted borrower who seeks to set aside a trustee’s sale is required to do equity before the court will exercise its equitable powers.  (MCA, Inc. v. Universal Diversified Enterprises Corp. (1972) 27 Cal.App.3d 170, 177 (MCA).)  Consequently, as a condition precedent to an action by the borrower to set aside the trustee’s sale on the ground that the sale is voidable because of irregularities in the sale notice or procedure, the borrower must offer to pay the full amount of the debt for which the property was security.  (Abadallah, supra, 43 Cal.App.4th at p. 1109; Onofrio, supra, at p. 424 [the borrower must pay, or offer to pay, the secured debt, or at least all of the delinquencies and costs due for redemption, before commencing the action].)  “The rationale behind the rule is that if [the borrower] could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the [borrower].”  (FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1022.)

C.   Exceptions to the Tender Requirement

There are, however, exceptions to the tender requirement.  Our review of the case law discloses four exceptions. First, if the borrower’s action attacks the validity of the underlying debt, a tender is not required since it would constitute an affirmation of the debt.  (Stockton, supra, (1957) 148 Cal.App.2d at p. 564) [trustor sought rescission of the contract to purchase the property and the promissory note on grounds of fraud]; Onofrio, supra, 55 Cal.App.4th at p. 424.) Second, a tender will not be required when the person who seeks to set aside the trustee’s sale has a counter-claim or set-off against the beneficiary.  In such cases, it is deemed that the tender and the counter claim offset one another, and if the offset is equal to or greater than the amount due, a tender is not required.  (Hauger, supra, (1954) 42 Cal.2d at p. 755.) Third, a tender may not be required where it would be inequitable to impose such a condition on the party challenging the sale.  (Humboldt Savings Bank v. McCleverty (1911) 161 Cal. 285, 291 (Humboldt).  In Humboldt, the defendant’s deceased husband borrowed $55,300 from the plaintiff bank secured by two pieces of property.  The defendant had a $5,000 homestead on one of the properties.  (Id. at p. 287.)  When the defendant’s husband defaulted on the debt, the bank foreclosed on both properties.  In response to the bank’s argument that the defendant had to tender the entire debt as a condition precedent to having the sale set aside, the court held that it would be inequitable to require the defendant to “pay, or offer to pay, a debt of $57,000, for which she is in no way liable” to attack the sale of her $5,000 homestead.[3]  (Id. at p. 291.) Fourth, no tender will be required when the trustor is not required to rely on equity to attack the deed because the trustee’s deed is void on its face.  (Dimock, supra, 81 Cal.App.4th at p. 878 [beneficiary substituted trustees; trustee’s sale void where original trustee completed trustee’s sale after being replaced by new trustee because original trustee no longer had power to convey property].) In their motion for summary judgment, Citibank and EMC asserted that Holland v. Pendleton Mtge. Co. (1943) 61 Cal.App.2d 570, 577-578 (Holland) establishes another exception to the tender requirement.  Although one treatise interprets the case that way (see 4 Miller & Starr, Cal. Real Estate (3d ed. 2000) Deeds of Trust, § 10:212, p. 686), we do not agree that Holland establishes an exception to the tender rule, since the tender requirement was not at issue in Holland and the court did not discuss the tender requirement.  We discuss Holland nonetheless because Citibank and EMC relied on it in their motion. In Holland, the trustee’s sale was continued four times and the property was sold to the beneficiary/lender.  (Holland, supra, 61 Cal.App.2d at p. 573.)  The court held the sale was void because the trustee had not complied with the statutory requirements for noticing the fifth and actual sale date.  (Id. at pp. 575-577.)  After the sale, the trustor remained in possession of the property and paid the lender $35 per month.  (Id. at p. 577.)  The parties disputed whether the payments were rent or were made pursuant to a new agreement with the lender to redeem the property.  (Ibid.)  In light of the irregularities in the notice of the sale, the appellate court held that the trustor should be allowed to set aside the sale.  It also directed the trial court to determine whether the parties had entered into a new agreement and the nature of the monthly payments, and ordered that any amounts due be paid “after judgment.”  (Id. at pp. 577-578.)  Although the court did not discuss the tender requirement, the treatise authors have interpreted Holland as holding that a court “may permit the trustor to set aside the foreclosure sale on condition that payment be made after entry of judgment.”  (4 Miller & Starr, Cal. Real Estate, supra, Deeds of Trust § 10:212, p. 686.)  In our view, the appellate court in Hollandwas providing guidance to the trial court on remand regarding the monthly payments and did not establish a fifth exception to the tender requirement.

D.   Analysis of Tender Requirement Element

We begin our analysis by reviewing the allegations of Lona’s second amended complaint (hereafter “complaint”).  Lona alleged that the trustee’s “sale was improperly conducted due to fraudulent conduct of the foreclosing party and the unconscionable and illegal nature of the loan agreement and deed of trust . . . .  The loan agreements were void for illegality from the inception and . . . voidable based on the unconscionable nature of the loans [and] violation of stated Public Policy.”  The complaint also alleged that Lona was “excused from tendering the cure amount prior to seeking equitable relief, due to the fraudulent conduct of the foreclosing party, its failure and refusal to comply with statutory pre-requisites to the right to foreclose and the illegal and unconscionable nature of the contract.”  Thus, the complaint alleged both irregularity in the foreclosure process and illegality of the underlying contract. In their summary judgment motion, Citibank and EMC attacked the tender requirement element of Lona’s cause of action and argued that his cause of action to set aside the trustee’s sale failed because he did not tender the amounts due on the first loan before filing suit and that none of the exceptions to the tender requirement applied.  Citibank and EMC’s arguments regarding the exceptions to the tender requirement cited and distinguished Holland and Humboldt but failed to discuss the exception relating to the legality of the loan and the validity of the debt, which Lona relied on in his complaint. In opposition to the motion, Lona argued that there were other exceptions to the tender rule, including those set forth in Stockton and Hauger.  He argued that he was not required to tender to seek equitable remedies or damages because:  (1) the deed of trust “was illegal from the time of formation and therefore, unenforceable and non-assignable”; and (2) his “claims would offset any amounts claimed to be due under the void agreements.”  Thus, Lona’s opposition relied on two exceptions to the tender requirement that Citibank and EMC had not addressed.  Lona also argued that a tender was not required because his claim was based on the illegality of the loan contract, and not any irregularity in noticing or conducting the trustee’s sale. As noted, the issues on summary judgment are framed by the pleadings.  (Varni, supra, 35 Cal.App.4th at pp. 866-867.)  To prevail on their summary judgment motion, Citibank and EMC had to show that Lona could not establish the tender requirement element of his cause of action by showing both that Lona had not tendered and that the exceptions to the tender requirement that Lona relied on in his complaint did not apply.  It was undisputed that Lona did not tender the amounts due before filing suit.  Citibank and EMC failed to meet their initial burden on summary judgment because their motion was based on the exception in Humboldt and the holding in Holland, which Lona’s complaint did not rely on, and did not address the exception from Stockton (tender not required when borrower’s action attacks validity of debt), which was the exception that Lona had pleaded in his complaint.[4]  We hold that Citibank and EMC did not meet their burden of showing that Lona could not state a cause of action to set aside the trustee’s sale on the ground that he could not establish the tender requirement because their motion did not address the exceptions to that element that Lona relied on in his complaint.  A defendant that moves for summary judgment has the burden to show that it is entitled to judgment with respect to all theories of liability asserted by the plaintiff.  (Lopez v. Superior Court(1996) 45 Cal.App.4th 705, 717.)

Need to learn more about California Short Sale trends for 2012 – Listen in to our real estate radio show free?

We have a great show coming up on the VONDRAN LEGAL HOUR (out internet real estate radio show).  Listen in as we invite California short sale realtor Allen Brodetsky of Boutique Realty onto the show to discuss the important foreclosure prevention topic of Short Sales and how they work.  Many homes in California cannot be saved via foreclosure, modification , or bankruptcy, in these cases, it is wise to have a working knowledge of how a short sale works, and when you might want to consider going that route.

Here are some of the topics we hope to cover which I believe are the most frequently asked California short sale questions:

1.  What are you seeing out there – trends in California short sales?

2.  Are lender’s doing short sales?

3.   Who is your favorite and least favorite lender/servicer in re to
short sales?

4.  What happens when there is a first and second mortgage?  (are
lenders still doing these)?

5.  How long does it take to get a short sale approved on average?

6.  Who pays for a short sale?  Are there up front fees?

7.  Some people want to hire their “uncle joe” (cousin realtor) to do
a short sale – are there any pitfalls in that approach?

8.  Talk to me about “arms length transactions” (this is a problem we
run into from time to time as a law firm) – Do you see lender/
servicers allow family and friends to make short sale deals?

9.  What are the benefits of a short sale vs foreclosure?

10.  I hear now that there are refinances for underwater homes – do
you know about that program?

11.   In your experience, are banks foreclosing faster now or not?

12.  Are the servicer/lenders offering any cash incentives (“cash for keys”) to the homeowner in exchange for a short sale?

13.  Do you negotiate HAFA short sales?

Allen Brodetsky is a CALIFORNIA SHORT SALE REALTOR with experience in the short sale trenches.  There is no cost to listen in to the show.  Simply click on the Vondran Legal Hour link above.  We look forward to hearing from you.

California Attorney General not real keen on talks of banks settling foreclosure cases.  She does not want to allow banks to settle cases that have not been investigated.  Read more here.

Here is more on the foreclosure settlements with the California Attorney General from the LA Times.   Californian’s for a Fair Settlement are urging Harris to reject any offers that do not include principal reduction for troubled homeowners.

This group is demanding 5 key things before they would agree that settlement with 5 major banks is proper:

• imposing a fairly applied principle reduction;
• a narrow release of liability;
• an overhaul and reform of the system that would include banning banks from continuing to foreclose on families while they are undergoing loan modification;
• requiring banks to give homeowners a single point of contact;
• penalties for banks who fail to hold up their part of the agreement;
• assurance that homeowners who were kicked out of their homes without due process will receive fair and ample restitution.

We have said all along that notes are getting passed around like a whiskey bottle at a frat party.  Fine, the banks are allowed to sell your loans to another party.  But you are legally entitled to get notice of this transfer to a new assignee of a consumer loan.  Yes, it is a legal right you have, even if you are in default, and even if you are in foreclosure.  This is a law passed that amends TILA (reg Z) 15 U.S.C. 1641 – specifically section 131(g), and which states that you are entitled to get this notice.  We have seen many a case where there simply is no notice and one day some new financial institution (including securitized loan trusts) literally appear out of thin air and demand payment at the threat of foreclosure.  It is your right to ask them who they are and ask when they bought the loan and where the transfer disclosure statement is or where it was sent.

If they fail to provide this statement, you could be entitled to $4,000 statutory damages and can seek your attorney fees. This law is part of the “Helping Families Save their Homes Act” and became effective on 5/19/09 when President Obama signed the law.  The law applies to “principal dwellings of a consumer” (won’t apply to commercial loans) whether the loan be a first mortgage or junior mortgage.  The law requires the loan assignee (the seller has no obligation) to notify the consumer borrower of the sale or transfer of the loan within 30 days.

Contents of the notice must include:

• Identity, address and phone number of the assignee
• Date of the transfer of the loan
• Contact information of the agent with authority to act on behalf of the assignee
• The location of the place where the transfer of the ownership of the debt is recorded
• Any other relevant information regarding the assignee

NOTE: Section 130(a)- 15 U.S.C. 1640(a) lays out the civil penalties for a violation of the act, which include $4,000 and attorney fees may be sought.

The federal reserve board (which implements TILA) has not yet appeared willing to clarify any of the section 131 ambiguities, so some of this may shake out in litigation.

Give this a watch and listen.  Help spread the word by passing it on- the Foreclosure Blues!

Give it a listen and pass it on if you like it!

http://www.youtube.com/watch?v=Rtxq_pGCrd0

Hello everyone.  We almost made it to 2012, a year that promises more of the same in the foreclosure and short sale business.  We should continue to see a trend with more foreclosures, more short sales, and more problems dealing with the major lenders and loan servicers.  This article discusses the problem of liability following foreclosure or short sale in California.  This is a very important topic and one that needs to be considered when you are creating a “loss mitigation plan” to deal with your distressed property.  Please keep in mind the following is only general information, and is not legal advice, or a substitute for legal advice.  We offer paid consultations that can evaluate your situation, every situation is unique and different.

We have talked about many of these issues before, and we have discussed the general rule in California (ccp 58od) which discusses there can be no deficiency liability to the first mortgagee when they foreclose non-judicially.  And we have discussed ccp 580b which discussed how “purchase money” is protected from deficiency judgments in California, whether the lender seeks to foreclose judicially, or even non-judicially (the lender may elect their remedy), and we have also discussed ccp 726 the so called “one-action rule” which states that a secured lender must seek to foreclose on the “security first” before seeking to recover their debt in another manner.

But how do all these rules apply where you have a second mortgage that is secured by a deed of trust, but the second mortgage is underwater and technically does not secure any equity in your property (ex. you owe 500k on a first and 100k on a second mortgage.  The second mortgage was taken out after the first and is not purchase money – and the property has a fair market value of $300k).  In this scenario, if there is a foreclosure sale that sells the property to a third party, the first mortgagee would get 300k and the second mortgage holder (i.e. the junior lien holder) would get nothing.  As we discussed, if the second mortgage is purchase money then the second is simply out of luck.

But if the second mortgage was a HELOC, and not purchase money (a topic for another blog) then the second mortgage holder may have options against you.  As noted above, the “one action rule” in California (ccp 726) states that the secured lender must exercise on their security first, but what about the second.  In the above scenario, the first foreclosed following the default on the loan, and the second stood silently by with no real options.  Sure the second could have sought to foreclose using their power of sale, but the first mortgage holder still would have got the sale proceeds.

This is what we call the case of the “sold out junior” lien.  After the foreclosure sale occurred, the second lien holder was left holding nothing but an unsecured debt (their lien is stripped following the foreclosure sale so clear title can pass to the purchaser, usually at the trustee sale).  Thus, the debt became unsecured and the second lien holder has never had an opportunity to take an “action” for the purpose of the one action rule.  So what options do they have?  Well, they have the option to then “sue on the note” and come after you for the amount of the debt owed.  Will they do this?  Who knows.  They might just want to sell your debt to a collection agency to let them try to collect from you.  We do see this happening (even on protected purchase money loans).

As an example of how this might work is the case of Bank of America National Trust and Savings Association v. Charles Graves, California Court of Appeal, 4th District Court case.  In this case, the above scenario basically happened (with the one small exception that the second lien holder started foreclosure proceedings, but then stopped because the first decided to foreclose).  At issue was the one action rule and the second lien holders options – whether they could sue the borrower for the deficiency judgment.  The Court held the second mortgagee could sue the borrower on the note (a non purchase money loan).  Here is what the court said:

Here, the Bank contends it was entitled to proceed directly against the debtors because, through no fault of its own, it was a sold-out junior lienor. Accordingly, it argues that the defenses raised by the debtors, based on the ‘one form of action rule’ (§ 726) and the antideficiency statutes (§§ 580a, 580b, 580d) do not apply. The Graveses contend the Bank was not a sold-out junior lienor because its own action in postponing its trustee’s sale deprived it of that status.

“The term “sold-out junior lienor” refers to the situation in which a senior lienholder forecloses its lien, eliminating the junior lienor’s security interest. “A senior foreclosure sale conveys the property free of all junior [51 Cal. App. 4th 612] liens …. Thus, the junior no longer has a lien on the property, and the security has been entirely destroyed. A sold-out junior thus holds security that has ‘become valueless’ and is permitted to sue directly on the note.” (Bernhardt, Cal. Mortgage and Deed of Trust Practice (Cont.Ed.Bar 2d ed. 1990) § 4.8, pp. 193-194.)”

In the leading case of Roseleaf Corp. v. Chierighino, supra Chief Justice Traynor held, “The ‘one form of action’ rule of section 726 does not apply to a sold-out junior lienor [citations], nor does the three-months limitation of section 580a. [Citations.] There is no reason to compel a junior lienor to go through foreclosure and sale when there is nothing left to sell……….”The prohibition against a deficiency judgment does not apply to the beneficiary of a junior deed of trust whose security has been rendered valueless by a foreclosure sale of the property under a senior encumbrance. After the security has been lost by the foreclosure sale of the senior lien, the junior lienor can sue the debtor directly on the promissory note, which is then considered unsecured.” (4 Miller & Starr, Cal. Real Estate (2d ed. 1989) § 9:156, p. 531; see also 3 Witkin, Summary of Cal. Law (9th ed. 1987) Security Transactions in Real Property, § 159, pp. 658-659.).”

So as you can see, the non-purchase money unsecured lender may have rights to come back after you in California following a foreclosure sale by the first.

What if you short sale the property instead of letting it go to foreclosure?  Well, this is where the new California laws come in (Sb 931 – which protects from deficiency judgments following the short sale of the first mortgage - and SB 458 which protects against deficiency judgments from a second lien holder that agrees/consents to a short sale).  These are the subject of separate blog post.  Many people think these laws may actually reduce the numbers of short sales the lenders will agree to.  These code section added ccp 580e.

At any rate, what happens if the second sues you?  Many people will then consider or at least review the potential for:

1. Working it out with the creditor or negotiating the debt down and paying off the second.

2.  Some may consider filing bankruptcy.  (ex. in a chapter 7 the unsecured debt can be potentially wiped out and discharged)

3.  If sued on the note, some will raise the defense of recoupment (TILA), standing, FDCPA, or raise the 726 affirmative defense, etc.

These are just some options.

I hope you found this article helpful as far as understanding some of the basic principles at play.  If you need a foreclosure or short sale lawyer to review your options contact us at (877) 276-5084.  You can get video information through our Foreclosure Warrior website.  This is an advertisement and communication.

Happy New Year.

                                                            HO HO HO – Bank of America may be giving away cash TO THE FINANCIALLY INJURED under new INDEPENDENT FORECLOSURE REVIEW

Here is an interesting one.  My friend brought over a mailer he just received from Bank of America which informs him that he may be entitled to money damages if he was in foreclosure between January 1, 2009 and December 31, 2010 and was “financially injured” by acts of the banks.  Some examples they provide of what may constitute “FINANCIALLY INJURED” include:

• The mortgage balance at the time of foreclosure was more than you actually owed (they wouldn’t do that now would they)?
• You were doing everything the modification agreement required, but the foreclosure still happened (say it ain’t so Joe)
• The foreclosure action occurred while you were protected by bankruptcy (you mean a “stay violation”?)
• You requested assistance/modification, submitted complete documents on time, and were waiting for a decision when the foreclosure sale occurred (that’s real cool)
• Fees charged or mortgage payments were inaccurately calculated, processed, or applied
• The foreclosure action occurred on a mortgage that was obtained before active duty military service began and while on active duty, or within 9 months after the active duty ended.