HOW RECENT COURT DECISIONS MAY EFFECT FORECLOSURES

Two recent court decisions may affect the way foreclosures, and loan modifications are conducted in the future. One case brings hope for California homeowners who are victims of predatory stated income loans. The other case clarifies that acceptance of trial period payments by homeowners does not create a loan modify agreement or prevent the lender from foreclosing.

The Lona v. Citibank, N.A. ruling was favorable to homeowners in distress. Mr. Lona was a mushroom farm mechanic, had limited English fluency, had an 8th grade education, and earned $3,333.00 a month. He responded to a “marketing enticement” by First Net Mortgage and refinanced his home in January 2007 with a “stated income loan” (the borrower states his gross monthly income, which is sometimes unscrupulously increased by the loan broker). The new loan raised his mortgage debt from $1.24 million to $1.5 million, and his new monthly payment was $12,381.36. The home was sold at a nonjudicial foreclosure sale in August 2008. The case did not discuss how Lona originally acquired the property.

Lona sued Citibank (the lender), EMC (the loan servicer) and the mortgage broker to set aside the trustee’s sale claiming that he was a victim of predatory lending. Lona alleged the transaction was invalid because the loan broker ignored his inability to repay the loan and he did not understand the transaction, which was entirely in English and he had limited English fluency, little education, and modest income. The Superior Court granted Citibank and EMC’s summary judgment motion which argued no triable issues of material fact existed for setting aside the trustee’s sale because (1) Lona failed to meet the tender requirements (offer to pay the full amount of the debt which would have postponed the trustee’s sale); (2) Lona voluntarily entered into the loan; and (3) Lona failed to demonstrate any irregularity in connection with the trustee’s sale. Lona appealed.

The Appellate Court found that Lona was exempt from the tender requirement, no irregularities existed in the foreclosure sale, and Lona had presented evidence that was not addressed by Citibank and EMC of unconscionability (unequal bargaining power, overly harsh, one-sided results). The loan documents were standard forms drafted by the lender and presented to Lona for signature and he had no role in negotiating the terms, which included potential increased interest rates and a balloon payment that were not explained to Lona and which he would not be able to pay. The extreme disparity between the monthly loan payment and Lona’s income created a triable issue whether the loans were overly harsh and one sided.

This ruling indicates that courts are taking a closer look at the way refinancing is was conducted, rather than merely at whether the lender and/or loan servicer conducted the foreclosure lawfully.

In Nungaray v. Litton Loan Servicing, LP, the ruling was not favorable to homeowners in distress. The Nungarays refinanced their home in Simi Valley in March 2006 through Bank of America (Bank). Litton Loan Servicing (Litton) serviced the loan. In January 2009, the Nungarays were delinquent and the Bank recorded a notice of default. The Notice of Trustee’s Sale was recorded and sale was set for April 29, 2009. In May 2009, the Nungarays employed a business entity to negotiate and obtain a loan modification. On July 3, 2009, the Nungarays executed a document titled “Loan Workout Plan (Step One of Two-Step Documentation Process)” for the Bank’s review. Although the Bank accepted reduced mortgage payments under the Plan, the Bank and Litton never executed the Plan.

The requirements of the Plan included the Nungarays make four “Trial Period Payments” and provide documentation of their income, financial information, and a hardship affidavit. If the Nungarays were in compliance with the Plan, the Bank would provide them a Loan Modification Agreement to sign and return two copies. If they qualified for the “Offer,” the Bank would send them a signed copy of the Plan. If they did not qualify for the Offer, the Bank would send them a written notice of disqualification. The Plan would not take effect until both the Nungarays and the Bank signed it and the Bank provided them with a copy signed by the Bank. The Bank would suspend, but not dismiss, the foreclosure action so long as the Nungarays continued to meet all the Plan obligations. If the Bank did not provide them the fully executed copy of the Plan and the Modification Agreement before the Modification Effective Date, the loan documents would not be modified; the Plan would terminate; and the foreclosure would immediately resume at the point it was suspended. The Plan included the following statements: “I understand that the Plan is not a modification of the Loan Documents …” and “I … agree that the Lender will not be obligated or bound to make any modification of the Loan Documents if I fail to meet any one of the requirements under this Plan.”

The Nungarays provided financial information through their attorney in response to three letters requesting specific documents and in a telephone call. The Nungarays made four payments; however, Litton returned two of them, the first for failure to include required financial information. The Nungarays failed to provide the Bank with all of the required financial information. The Nungarays claimed they did not receive notice that information was missing. On November 1, 2009, the Bank gave notice that the Plan was terminated. On November 10, 2009, the Bank purchased the home at a non-judicial foreclosure sale.

In January 2012, the Nungarays brought an action against Litton and the Bank alleging breach of contract, negligence and quiet title. They claimed that the foreclosure sale and eviction were improper, because they had entered into a loan modification agreement. The Court granted the defendants’ Motion for Summary Judgment stating, “[T]he Plan was not an enforceable agreement requiring defendants to enter into a loan modification because it ‘was expressly contingent upon a number of factors which never came to fruition.’”

On appeal, the Nungarays made two arguments: They contended the Plan was an enforceable loan modification, because the Bank and Litton partly performed by accepting the trial period payments and acknowledged the existence of the Plan in their court pleadings; therefore principles of equitable estoppel apply (a legal principle that bars a party from denying or alleging a certain fact due to that party’s conduct, allegation, or denial). The Court disagreed finding there was plain and clear language in the Plan that it was not a loan modification; the Plan was not executed by the Bank or Litton; and equitable estoppel does not apply because the Nungarays were not led to believe that a permanent loan modification was forthcoming.

The Nungarays also contended that Litton and the Bank violated the “one-form-of-action rule” by retaining and applying the Nungarays’ payments against the mortgage. California Code of Civil Procedure, Section 726, provides there can only be one form of action for the recovery of a debt or the enforcement of any right secured by a mortgage upon real property. Those seeking to collect a debt must select one collection method against a delinquent owner. If a creditor forecloses on an owner and discovers there is no equity in the property, the creditor cannot then bring a lawsuit to recover the deficiency. Again, the Court disagreed and found that the rule did not apply to the circumstances in the case, that the Bank did not pursue the Nungarays’ assets prior to the foreclosure. “We do not consider the payments a setoff manifesting an election to not foreclose pursuant to the one-form-of-action rule…” and that money paid as part of a forbearance agreement did not invoke the rule.

This ruling emphasizes the importance of reading a document and obtaining legal advice from a reputable attorney to ensure a clear understanding of the terms before you rely on it or sign it.

BY: SYLVIA J. SIMMONS, ATTORNEY
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.

January 18-21, 2012 the California Association of REALTORS® held its annual Winter Business Meetings in Indian Wells. During the Legal Affairs Forum, numerous new laws discussed, including some that have been discussed in past articles of the Courtside Newsletter. One Senate Bill that seemed particularly important is Senate Bill 53, which discusses, in detail, California Department of Real Estate and License Regulations.

It is important to recognize the implications behind the Real Estate Law that SB 53 addresses. The Real Estate Law provides for the regulation and licensure of real estate brokers and salespersons by the Real Estate Commissioner. Any person who willfully violates or knowingly participates in a violation of the Law’s provisions may be guilty of a crime.

As it currently stands, the law allows the Commissioner—either by his or her own motion or upon the submission of a verified Complaint—to investigate the actions of a licensee who has engaged in specified acts. Those acts are listed in Business and Professions Code Section 10176 (a-n) and include such things as making substantial concealment or misrepresentations of material facts; making false promises of a character that is likely to induce, influence or persuade; unlawful discrimination; acting for more than one party in a transaction without the knowledge or consent of all parties; and conduct that constitutes fraud or dishonest dealing. If the licensee is found to have committed the actions outlined in Business and Professions Code Section 10176, the Commissioner can revoke or suspend the licensee’s license or impose a monetary penalty.

The current language of Business and Professions Code Section 10177 will become inoperative as of July 1, 2012 and repealed as of January 1, 2013. Instead, new language will be added under Business and Professions Code Section 10177, effective July 1, 2012, to allow the Commissioner to suspend or revoke the license of a real estate licensee, delay the renewal of a license, or deny the issuance of a license to an applicant pursuant to the terms outlined in Business and Professions Code Section 10177 (a-q). Some of the conditions listed in Section 10177 include but are not limited to whether a licensee or applicant has entered a plea of guilty or nolo contendere (no contest) to, been found guilty of, or been convicted of a felony or a crime substantially related to the duties of a real estate licensee; whether the licensee willfully used the term “realtor” or a trade name or insignia of a membership in a real estate organization of which the licensee is not a member; whether a licensee has demonstrated negligence or incompetence in performing an act for which he or she is required to have a license; and whether the licensee engaged in any conduct that constitutes fraud or dishonest dealing. If a corporation’s officer, director, or person owning or controlling 10 percent of the corporation’s stock has violated any of the aforementioned conditions, the Real Estate Commissioner may suspend or revoke the license of the corporation, delay the renewal of a license of the corporation, or deny the issuance of a license to the corporation. These conditions will become effective on July 1, 2012.

SB 53 will also amend Business and Professions Code Section 10080.9. The amended Code will allow the Commissioner to issue citations to unlicensed persons that he or she believes to be performing acts for which a license would be required, as well as against licensees who are in violation of the Real Estate Law or any of its rules. The citations would include an order to correct the violation and could impose an administrative fine of up to $2,500. Any money collected from the citations would be placed into the Recovery Account of the Real Estate Fund. If the licensee or unlicensed person wants to contest the citation, they must inform the Commissioner within thirty days of the date of the citation. After that time has passed, the citation or citation and fine becomes final.

Additionally, should a licensee fail to obey a subpoena issued for the production of documents, SB 53, through changes to Business and Professions Code Section 10079, will allow the Real Estate Commissioner to apply to the Superior Court, (through a noticed motion), for an Order requiring the licensee or a designated representative of the licensee to appear at Court with the requested documents. Failure to obey this Order would be considered contempt of Court.

Effective July 1, 2012, the current Business and Professions Code Section 10156.2 will become inoperative. A “new” Section 10156.2 will be added in its stead, which will be effective beginning July 1, 2012. Currently, the Code Section addresses a licensee’s application for renewal of his or her license. If the application is filed before midnight of the last day of the period for which the license was issued, along with the fee and good faith evidence of compliance with Article 2.5, then the applicant can continue to operate under his or her existing license (so long as it wasn’t previously suspended or revoked). The language of this portion of Section 10156.2 does not change, nor does the language with regards to the Commissioner’s ability to advise or reprimand those licensees who are not in compliance with the education requirements. The only language that does change, in fact, is that the Section now states “nothing in this section shall prevent the Commissioner from delaying the renewal of the license of a licensee pursuant to Section 10177.”

Currently, real estate brokers are required to indicate in their transaction files the provisions of law pertaining to securities qualifications or exemption from securities qualifications under which their transactions are being conducted. Real estate brokers are also required to file certain information with the Real Estate Commissioner relative to conducting those transactions that are exempt from qualification. Through changes to Business and Professions Code Sections 10236.7, 10237, and 10238, real estate brokers will now be required to submit a copy of the information in their transaction files to any investors from whom the brokers obtain funds in connection with the transaction within 10 days of receipt of those funds. Further, a form notice will need to be filed with the Real Estate Commissioner within 30 days after the first transaction and within 30 days of any material change in any information that is required in the notice. That form can be found in Section 10238. Any willful violation of the provisions in these Code Sections will be considered a crime.

Lastly, Senate Bill 53 provides the Real Estate Commissioner with access to a person’s records and the Department of Motor Vehicles for the purpose of enforcing specific provisions of the Real Estate Law or Subdivided Lands Law (Vehicle Code Section 1808.51).

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