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NEW COURT RULING MAY AFFECT HOW YOU PROCEED

WITH CALIFORNIA NON-JUDICIAL FORECLOSURE

In June 2010, California’s Fourth Appellate District issued an important decision which should put to rest some of the often-litigated issues concerning California’s Perata Mortgage Relief Act (”the Act”). Passed into law in 2008, the Act includes a mandatory notification, meeting and consultation process that must be made available to the borrower by the foreclosing lender prior to filing a notice of default under Civil Code § 2924. The recent decision, Mabry v. Superior Court (June 2, 2010) 158 Cal.App.4th 208, primarily focuses on that portion of the Act codified as California Civil Code section 2923.5.

Civil Code section 2923.5 applies to mortgages or deeds of trust recorded from January 1, 2003 to December 31, 2007, secured by owner-occupied residential property containing no more than four dwellings, and requires that before a notice of default may be filed, the lender or its authorized agent contact the borrower in person or by phone to “assess” the borrower’s financial situation and “explore” options to prevent foreclosure. Alleged violations of Section 2923.5 have been frequently pled in the tidal wave of borrowers’ Complaints filed against lenders and loan servicers.

The Mabry decision is the first California appellate court case defining of scope of Civil Code section 2923.5, and the decision provides a number of important answers for all parties litigating claims based section 2923.5. In the Mabry decision, California’s Fourth Appellate District held that plaintiff-borrowers have a limited private right of action under Civil Code §2923.5; however, the decision also makes it clear that the remedy for a section 2923.5 violation is a postponement of the foreclosure to enable the defendants to comply with the requirements of the statute - not a claim for damages. Furthermore, other holdings set forth in the Mabry decision should prevent plaintiff-borrowers from using section 2923.5 to unwind foreclosure sales, and clarify when plaintiffs may not use Civil Code §2923.5 as a means to halt foreclosure sales. Also important is the fact that in Mabry, the appellate court held that “[t]here is nothing in section 2923.5 that requires the lender to rewrite or modify the loan.” Mabry v. Superior Court, supra, 158 Cal.App.4th at p. 214.

The following is a summary of the laundry list of questions and answers provided by the Court, which are each more fully explained in the Mabry decision.

1. Question: May section 2923.5 be enforced by a private right of action?

Answer: Yes; however, that private right of action is limited to a postponement of an impending foreclosure to permit the lender to comply with section 2923.5.

2. Question: Must a borrower tender the full amount of the mortgage indebtedness due as a prerequisite to bringing an action under section 2923.5?

Answer: No.

3. Question: Is section 2923.5 preempted by federal law?

Answer: No, because section 2923.5 is, or can be, construed very narrowly. The remedy for non-compliance with section 2923.5 is simply a postponement of the foreclosure sale and nothing more. There is no right, for example, under section 2923.5 to a loan modification.

4. Question: What is the extent of a private right of action under section 2923.5?

Answer: The right of action is limited to obtaining a postponement of an impending foreclosure to permit the lender to comply with section 2923.5.

5. Question: Must the declaration required of the lender by section 2923.5, subdivision (b) be under penalty of perjury?

Answer: No.

6. Question: Does a declaration in a notice of default that tracks the language of section 2923.5, subdivision (b) comply with the statute, even though such language does not on its face delineate precisely which one of three categories applies to the particular case at hand?

Answer: Yes.

7. Question: If a lender forecloses without complying with Civil Code § 2923.5, does that noncompliance affect the title acquired by a third party purchaser at the foreclosure sale?

Answer: No.

8. Question: In the Mabry case, did the lender comply with section 2923.5?

Answer: The Court of Appeal remanded the case to the trial court to determine which of the two sides is telling the truth - the lender or the borrowers.

9. Question: Can section 2923.5 be enforced in a class action in this case?

Answer: Not under these facts. The operation of section 2923.5 is highly fact-specific, and details as to what might, or might not, constitute compliance with it can readily vary from lender to lender and borrower to borrower.

As a result, although a borrower may enforce rights under California Civil Code §2923.5, the Mabry decision holds that: (a) those rights are very narrow and exist only prior to foreclosure; and (b) if successful, the plaintiff-borrower’s remedy is limited to delaying foreclosure until the lender has complied with section 2923.5.

Lastly, in contrast to section 2923.5 (which requires a specified course of action by lenders or their authorized agents), the Mabry decision noted that Civil Code §2923.6 - which is also part of California’s Perata Mortgage Relief Act - “merely expresses the hope that lenders will offer loan modifications on certain terms.” The Court confirmed that, unlike section 2923.5, section 2923.6 “conspicuously does not require lenders to take any action.” See, Mabry v. Superior Court, supra, 158 Cal.App.4th at pp. 222-223, and fn. 9.

Please note: Although this Article is intended to provide current and accurate information about the subjects covered, this information is of a general nature and may not be sufficient for dealing with an individual legal issue and is not to be considered legal advice.

BORROWERS’ CLAIMS BASED ON THE “HOLDER OF THE NOTE” THEORY — IF PROPERLY CHALLENGED — ARE SUBJECT TO EARLY DISMISSAL

In many borrowers’ lawsuits seeking to avoid or stall foreclosure of their homes, borrowers allege that the original promissory note must be in the possession of the foreclosing party or else the foreclosure proceedings are invalid. However, this assertion is contradicts controlling California law, and if properly challenged, causes of action based on such allegations are subject to early dismissal. As a result, despite the fact that this “Holder of the Note” theory is often alleged by borrowers in lawsuits against lenders, lender’s assignees, foreclosure trustees and others involved with the foreclosure process, California’s state and federal courts now regularly reject this frequently alleged, but improper, “Holder of the Note” theory.

Recently, the deluge of cases alleging the “Holder of the Note” theory have caused United States District Courts in California to confirm that under California Civil Code §2924, no party needs to physically possess the promissory note to validly foreclosure on the real property which is the subject of the deed of trust securing the promissory note. Specifically, in the District Court case, Sicairos v. NDEX West, LLC, the court held that:

Under Civil Code section 2924, no party needs to physically possess the promissory note. Rather, “the foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee.”

(Sicairos v. NDEX West, LLC, 2009 U.S. Dist. LEXIS 11223, 2009 WL 385855, *3 (S.D. Cal. 2009).)

Similarly, in another recent case, Farner v. Countrywide Home Loans¸ the Court held that there is no requirement under California law that the original note be produced in order to render the foreclosure proceedings valid. Farner v. Countrywide Home Loans, 2009 WL 189025 (S.D. Cal. 2009).

As a consequence, having possession of the original promissory note is not a requirement for a beneficiary under a deed of trust to commence foreclosure proceedings in California. Under California’s comprehensive statutory framework for non-judicial foreclosure proceedings, the foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee.

Claims filed against lenders and others involved in the foreclosure process based on this “Holder of the Note” theory, as a general rule, lack validity and should be subject to early dismissal through pre-trial motion procedure, rather than through expensive and time consuming trial proceedings. Retaining a law firm, such as the Nassie Law, whose attorneys are experienced in defending borrowers’ claims, is likely the most important step lenders and others can take in seeking to obtain an efficient and effective resolution of this type of claim.

EFFECTIVE USE OF THE “TENDER RULE” AS A DEFENSE CAN HALT BORROWERS’ CLAIMS AGAINST LENDERS AND BROKERS

The large number of lawsuits filed by borrowers against lenders and mortgage brokers has resulted in the increasing application of the “tender rule” by California’s state and federal courts. This rule can often halt, shortly after the commencement of a lawsuit, borrowers’ claims arising out of their loans and related foreclosure proceedings. If used effectively, the tender rule can prevent borrowers from obtaining injunctive relief to stop a foreclosure sale, and can result in the dismissal of many, if not all, of the borrowers’ claims. Here’s how it works.

The Tender Rule as a Requirement to Maintain a Claim Based on an Irregularity in Foreclosure Proceedings

Under California law, the “tender rule” requires that as a precondition to challenging a foreclosure sale, or any cause of action “implicitly integrated” with the sale, the borrower must make a valid and viable tender to the lender of the amount due on the loan. This rule is most typically applied to causes of action to set aside a foreclosure sale, cancellation of a trustee’s deed and quiet title; however, it can also be applied to causes of action such as negligence, wrongful foreclosure and even fraud relating to a foreclosure sale. Arnolds Management Corp. v. Eischen, 158 Cal.App.3d 575,579-580 (1984).

The tender rule is based upon the equitable maxim that a court of equity will not order a useless act performed. Specifically, 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.

In litigation brought by borrowers to set aside a foreclosure sale or to otherwise challenge the foreclosure proceedings, where the tender rule is properly raised as a defense, California state and federal courts frequently apply it to bar borrowers from litigating these types of claims where the complaint fails to allege that the borrower tendered the amount due on the loan.

The Tender Rule as a Requirement to Seek Rescission of Certain Loans Secured by Real Property, Including Rescission Under the Federal Truth-In-Lending Act

For claims asserted under California law in which rescission of a mortgage loan is sought as a remedy, including claims based on the Foreign Language Credit Act (Cal. Civil Code §1632, et seq.), the mechanics of contract rescission are governed by statute. California Civil Code §1691 requires a borrower to give notice of rescission to the other party and to return, or offer to return, all proceeds the borrower received from the loan transaction. Where borrowers fail to do so, and they fail to allege these required steps to obtain rescission, dismissal of their claim seeking rescission should be, and often is, ordered by the Court when properly raised as a defense.

For borrowers’ claims for violations of the federal Truth-in-Lending Act (TILA), California District Courts also require the borrower return to the lender the “recession balance” of the loan in order to seek rescission of the loan based on TILA. The rescission balance is the amount of the mortgage loan’s principal, less all interest and fees paid to the lender and third parties at closing and fees paid to the lender after the closing of the loan.

Currently faced with record numbers of TILA claims brought by borrowers, federal District Courts in California are ruling that borrower’s rescission claims should be dismissed where the borrower has failed to allege in the complaint that he or she tendered the loan funds back to the lender, or intends to tender the borrowed funds back to the lender and has the ability to do so.

As a result, whether the borrower’s claim for rescission is based on California law or federal law under TILA, in litigation in which a foreclosure sale is challenged or rescission of the loan transaction is sought, tender must be alleged to have been made or offered to the lender. Furthermore, where only an offer to tender the amount due is alleged, the borrower must also be able to truthfully allege he or she has the ability to do so in order to state a claim for rescission. Retaining a law firm, such as the Nassie Law, whose attorneys are experienced in handling these types of cases for lenders, mortgage brokers, loan servicers and foreclosure trustees can be the most important step taken toward obtaining an efficient and effective resolution of these issues.