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California Mortgages, Deeds of Trust, and Foreclosure Litigation

Foreclosures, loan modifications and workouts, and borrower bankruptcies—all in one book. Avoid costly mistakes with clear and concise direction from the late Roger Bernhardt, Chuck Hansen, and other experts; negotiate the best workouts with the commercial forms.

 

“ . . . quite simply, the leading treatise on the complexities of how to enforce loans secured by California real estate. It is a formidable tool; its organization makes it easy to use, and my colleagues and I use it many times each week.”
Maura O’Connor, O'Connor Cochran LLP, Los Angeles

Foreclosures, loan modifications, and consumer protections—all in one book. Avoid costly mistakes with the most up-to-date guidance, covering both federal and state mortgage law, from the late Roger Bernhardt, Chuck Hansen, and other experts.

  • Conduct trustee sales (nonjudicial foreclosure)
  • Challenge sales under HBOR; new complaint forms
  • Apply Dodd-Frank Act & CFPB regulations
  • Use benefits of one-action and antideficiency rules
  • Negotiate short sales and receivership sales
  • Underwater property; commercial loan-workout forms
  • Enforce loans against debtors in bankruptcy; lien-stripping
  • Debtor strategies; defending foreclosures & stay relief motions
  • Judicial foreclosure, deficiency judgment, and redemption
  • Rents and leases; priorities; guarantors
OnLAW RE94920

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Print RE33920

4th edition, 2 looseleaf volumes, updated February 2022

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Add Forms CD to Print RE23923
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“ . . . quite simply, the leading treatise on the complexities of how to enforce loans secured by California real estate. It is a formidable tool; its organization makes it easy to use, and my colleagues and I use it many times each week.”
Maura O’Connor, O'Connor Cochran LLP, Los Angeles

Foreclosures, loan modifications, and consumer protections—all in one book. Avoid costly mistakes with the most up-to-date guidance, covering both federal and state mortgage law, from the late Roger Bernhardt, Chuck Hansen, and other experts.

  • Conduct trustee sales (nonjudicial foreclosure)
  • Challenge sales under HBOR; new complaint forms
  • Apply Dodd-Frank Act & CFPB regulations
  • Use benefits of one-action and antideficiency rules
  • Negotiate short sales and receivership sales
  • Underwater property; commercial loan-workout forms
  • Enforce loans against debtors in bankruptcy; lien-stripping
  • Debtor strategies; defending foreclosures & stay relief motions
  • Judicial foreclosure, deficiency judgment, and redemption
  • Rents and leases; priorities; guarantors

1

Basics of Real Property Secured Transactions

  • I.  SCOPE OF BOOK  1.1
    • A.  Unsecured Versus Secured Loans
      • 1.  Unsecured Loans  1.2
      • 2.  Secured Loans  1.3
      • 3.  Nonconsensual Secured Obligation  1.4
      • 4.  Advantages and Disadvantages to Lender of Secured Loan  1.5
    • B.  Terminology
      • 1.  “Parties”  1.6
      • 2.  “Instruments”  1.7
      • 3.  “Financing Parties”  1.8
      • 4.  “Obligation”  1.9
  • II.  THE OBLIGATION  1.10
    • A.  Relationship of Obligation to Security  1.11
      • 1.  Consideration  1.12
      • 2.  Destruction  1.13
      • 3.  Type of Obligation  1.14
      • 4.  Personal Liability and “Nonrecourse” Loans  1.15
        • a.  “Trustor” Versus “Debtor”  1.16
        • b.  The “Nonassuming Grantee”  1.17
    • B.  Payment Provisions  1.18
    • C.  Interest Rates
      • 1.  Fixed and Variable Rates  1.19
      • 2.  Shared Appreciation Loans  1.20
      • 3.  Usury Law and Exemptions  1.21
      • 4.  Tax Treatment of Interest
        • a.  To Lender  1.22
        • b.  To Borrower  1.23
    • D.  Transfers of Note and Deed of Trust  1.24
      • 1.  Transferring Note and Deed of Trust Separately  1.25
      • 2.  Recordation Requirements  1.25A
      • 3.  MERS; Nominee of Beneficiary  1.25B
      • 4.  Physical Delivery Required  1.26
      • 5.  Escrow Holder’s Role  1.27
    • E.  Negotiability  1.28
      • 1.  Requirements  1.29
      • 2.  Holder in Due Course  1.30
    • F.  Arbitration Clauses and Unconscionability  1.31
  • III.  THE SECURITY INSTRUMENT
    • A.  Historical Perspectives
      • 1.  Real Property Conveyances  1.32
      • 2.  Equity of Redemption  1.33
    • B.  Mortgage; Lien Theory of Mortgages  1.34
    • C.  Deed of Trust; Applicability of Rules Governing Mortgages  1.35
      • 1.  Forms of Deeds of Trust
        • a.  Title Company Forms  1.36
        • b.  Institutional Lender Forms  1.37
      • 2.  Formal Requirements  1.38
      • 3.  Parties
        • a.  Trustor  1.39
        • b.  Trustee  1.40
          • (1)  Substitution of Trustee  1.41
          • (2)  Involvement in Litigation  1.42
        • c.  Beneficiary
          • (1)  Must Be Obligee  1.43
          • (2)  Relationship to Trustee  1.44
          • (3)  Relationship to Trustor  1.45
          • (4)  Multiple Beneficiaries and Trustees  1.46
      • 4.  Security  1.47
        • a.  Fractional Interests
          • (1)  Tenancies in Common  1.48
          • (2)  Joint Tenancies  1.49
          • (3)  Community Property  1.50
        • b.  Estates Less Than Fee Simple
          • (1)  Life Estates or Terms of Years  1.51
          • (2)  Leasehold Mortgages  1.52
          • (3)  Reversions  1.53
          • (4)  Seller and Buyer Interests  1.54
        • c.  Property Already Encumbered
          • (1)  Monetary Liens  1.55
          • (2)  Nonmonetary Interests  1.56
        • d.  Personal Property; Fixtures  1.57
      • 5.  Choice of Law  1.57A
    • D.  Convertible Mortgages  1.58
    • E.  Installment Land Contracts  1.59
      • 1.  Documentation  1.60
      • 2.  Vendor’s Remedies  1.61
        • a.  Reinstatement  1.62
        • b.  Restitution  1.63
        • c.  Protecting Title  1.64
        • d.  Damages  1.65
      • 3.  Liquidated Damages  1.66

2

Trustee Sales

  • I.  CHOOSING THE REMEDY FOR LOANS IN DEFAULT
    • A.  Role of Trustee Sale Compared With Other Remedies  2.1
      • 1.  Judicial Foreclosure  2.2
      • 2.  Sale Under Receivership  2.2A
      • 3.  Passive Collection Strategy  2.3
    • B.  Attorney’s Role
      • 1.  Representing Beneficiary-Lender  2.4
      • 2.  Representing Junior Secured Creditors
        • a.  Reinstatement Rights  2.5
        • b.  Right to Notice of Default or Delinquency  2.6
      • 3.  Representing Trustor-Borrower
        • a.  Trustee Sale Process; Strategies; Credit Scores  2.7
        • b.  Home Equity (Distress) Sales  2.8
        • c.  Mortgage Foreclosure Consultants  2.9
        • d.  Enjoining or Attacking Trustee Sale; Bankruptcy  2.9A
        • e.  Lender Liability; Loan Rescission  2.9B
      • 4.  Homeowner Bill of Rights  2.9C
      • 5.  Fair Debt Collection Laws  2.9D
    • C.  Trustee Sale and Judicial Foreclosure
      • 1.  Advantages and Disadvantages to Creditor of Trustee Sale  2.10
      • 2.  Reasons to Use Judicial Foreclosure  2.11
    • D.  Receivership Pending Foreclosure  2.12
    • E.  Election of Remedies  2.13
    • F.  Power of Sale Clause
      • 1.  Prerequisite to Sale  2.14
      • 2.  Language of Power of Sale Clause  2.15
      • 3.  Instruments That Include Power of Sale Clause  2.16
      • 4.  Cumulative Remedy  2.17
    • G.  Constitutionality of Trustee Sales
      • 1.  Nonjudicial Foreclosure Not Protected State Action  2.18
      • 2.  Impact of Personal Property Due Process Cases  2.19
      • 3.  Compliance With CC §2924b Does Not Violate Due Process  2.20
  • II.  SPECIAL PROBLEMS IN TRUSTEE SALES
    • A.  Substitution of Trustee  2.21
      • 1.  Substitution Procedures  2.22
      • 2.  Effect of Substitution on Validity of Notices  2.23
      • 3.  Substitution Under Multiple Deeds of Trust  2.24
      • 4.  Effect of Trustee Substitution or Note Assignment on Trustee’s Authority  2.25
      • 5.  Trustee Liability  2.26
    • B.  Federally Insured or Guaranteed Loans
      • 1.  Private Lender Foreclosures  2.27
      • 2.  Federal Agency Foreclosures  2.28
    • C.  FDIC Interests Protected by Federal Law  2.29
    • D.  Servicemembers Civil Relief Act  2.30
    • E.  Federal Tax Liens  2.31
    • F.  Property Tax Postponement  2.32
  • III.  NOTICE OF DEFAULT
    • A.  First Steps
      • 1.  Selecting Foreclosing Trustee  2.33
      • 2.  Authority to Foreclose; Gathering Necessary Information; Multiple Beneficiaries  2.34
      • 3.  Foreclosing on Property in Probate  2.35
      • 4.  Foreclosure by Association of a Common Interest Development  2.36
      • 5.   Consumer Loans: Timing Notice of Default  2.36A
    • B.  Preparing Notice of Default  2.37
      • 1.  Contents of Notice
        • a.  California Civil Code Requirements  2.38
        • b.  Bankruptcy Restrictions  2.38A
        • c.  Federal Law: Accuracy, Timing, and FDCPA Requirements   2.38B
        • d.  Contractual Requirements  2.39
        • e.  Attachment to Notice: Summary of Key Information  2.39A
      • 2.  Unknown or Omitted Defaults  2.40
      • 3.  Responding to Requests for Notice; CC §2924b(a)  2.41
    • C.  Recording, Mailing, and Publishing Notice
      • 1.  Recording Notice of Default; Timing and Loss Mitigation  2.42
      • 2.  Serving Notice of Default
        • a.  Persons Required to Be Served; Methods  2.43
        • b.  Persons Not Required to Be Served  2.44
        • c.  Address Changes  2.45
        • d.  Last Known Address; Due Diligence  2.46
      • 3.  Default Notice Is Privileged  2.47
    • D.  Special Notice for Unruh Act Deeds of Trust  2.48
    • E.  HBOR’s Special Notices and Other Requirements in Residential Foreclosures  2.49
      • 1.  Prerequisites to Notice of Default; CC §2923.5  2.49A
      • 2.  Prerequisites to Notice of Default; All Lending Entities; CC §2923.55  2.49B
      • 3.  Encouraging Loan Modifications; Notice to Borrower; CC §§2923.6, 2924.9  2.49C
      • 4.  Postponement of Foreclosure Pending HBOR Procedures; CC §§2920.7, 2923.6, 2924.11, 2924.18  2.49D
      • 5.  Borrowers’ Remedies; CC §§2924.12, 2924.19  2.49E
      • 6.  Attachment to Notice of Default: Summary of Key Information  2.49F
      • 7.  Tables: Applicability of HBOR and 2018 Amendments
        • a.  Tables: Determining Applicability of HBOR to Borrowers and Lenders Before January 1, 2018, and After January 1, 2019  2.49G
        • b.  Tables: Determining Applicability of HBOR to Borrowers and Lenders Between January 1, 2018, and January 1, 2019  2.49H
    • F.  Effect of Failure to Serve Notice of Default  2.50
    • G.  Ban on Robosigning of Foreclosure Documents; CC §2924.17  2.50A
  • IV.  LOAN REINSTATEMENT RIGHTS
    • A.  “Reinstatement” Defined  2.51
    • B.  Persons Entitled to Reinstate Loan  2.52
    • C.  Time Period for Reinstatement
      • 1.  Up to 5 Business Days Before Sale  2.53
      • 2.  Extension or Revival of Reinstatement Period
        • a.  Sale Postponed  2.54
        • b.  Sale Enjoined or Challenged  2.55
        • c.  Extension by Agreement  2.56
    • D.  Reinstatement Procedure; Payments  2.57
      • 1.  Recurring Obligations  2.58
      • 2.  Reinstatement of Trustee’s and Attorney’s Expenses  2.59
      • 3.  Rejection of Tendered Reinstatement  2.60
      • 4.  Rents and Profits  2.61
      • 5.  Partial Payments by Trustor  2.61A
  • V.  NOTICE OF SALE
    • A.  Timing Notice of Sale Under CC §2924  2.62
    • B.  Notice of Sale; Contents and Attachments
      • 1.  Contents of Notice; CC §§2924, 2924f(b)  2.63
      • 2.  Attachment to Notice; CC §2923.3  2.63A
      • 3.  Notice of Sale to Residential Tenants; CC §2924.8; Repealed  2.63B
    • C.  Recording, Publishing, and Mailing Notice  2.64
      • 1.  Serving Notice of Sale  2.65
      • 2.  Recording Notice of Sale  2.66
      • 3.  Publishing Notice of Sale  2.67
      • 4.  Posting Notice of Sale  2.68
    • D.  Effect of Noncompliance With Notice Statute  2.69
      • 1.  Lack of Adequate Time  2.70
      • 2.  Lack of Actual Receipt of Notice  2.71
    • E.  Reinstatement After Notice of Sale  2.72
  • VI.  REDEMPTION BY TRUSTOR OR THIRD PARTY  2.73
  • VII.  TRUSTEE SALE PROCEDURES
    • A.  Conducting Sale
      • 1.  Public Auction  2.74
      • 2.  Order of Sale; Multiple Securities and Securitized Notes  2.75
      • 3.  Who May Bid  2.76
      • 4.  Disclosure to Bidders  2.77
      • 5.  Bidding Procedures; Credit Bids, Cash, or Checks  2.78
      • 6.  Sale to Highest Bidder; Finality; Delivery of Deed  2.79
    • B.  Bidding
      • 1.  Illegal and Collusive Conduct
        • a.  Chilling or Rigging the Bidding  2.80
        • b.  Inflating the Bidding  2.80A
      • 2.  Calculating Bid Amount  2.81
        • a.  Foreclosing Creditor  2.82
        • b.  Junior Secured Creditors  2.83
        • c.  Third Party Bidders  2.83A
      • 3.  Making Full Credit Bids
        • a.  Definition of “Full Credit Bid”  2.84
        • b.  Reasons to Make Full Credit Bid  2.85
        • c.  Disadvantages of Full Credit Bids  2.86
        • d.  Underbidding and Other Lender Strategies  2.87
    • C.  Postponing Sale
      • 1.  Allowable Reasons for Postponement  2.88
      • 2.  Effect on Reinstatement Right  2.89
      • 3.  Announcing Postponement  2.90
      • 4.  Renoticing Sale  2.91
        • a.  When New Notice Required  2.92
        • b.  When New Notice Not Required  2.93
        • c.  When New Notice May Be Required  2.94
      • 5.  Notice of Delay to Taxing Entities  2.95
      • 6.  Effect of Postponement  2.96
    • D.  Unruh Act Mortgages and Deeds of Trust  2.97
    • E.  Trustee’s Deed
      • 1.  Authority to Convey Title  2.98
      • 2.  Priority and Nature of Title  2.99
      • 3.  Delivery, Recordation, and Notice of Deed  2.99A
  • VIII.  AFTER SALE: POSSESSION, PROCEEDS, AND MAINTENANCE
    • A.  Possession Following Sale  2.100
    • B.  Rescinding Sale  2.101
    • C.  Distributing Sale Proceeds
      • 1.  Obligations Paid  2.102
        • a.  Notice to Juniors of Surplus Proceeds  2.103
        • b.  Junior Advances  2.104
      • 2.  Obligations Not Covered  2.105
      • 3.  Resolving Disputes Over Proceeds  2.106
      • 4.  Effect of Rent Funds Held by Receiver  2.107
    • D.  Effect of Homestead on Surplus Proceeds
      • 1.  Types of Homestead Exemptions  2.107A
      • 2.  Effect of Homestead on Mortgages  2.107B
      • 3.  Distribution of Surplus Proceeds in Nonbankruptcy Sales  2.108
      • 4.  Distribution of Proceeds From Sale in Pending Bankruptcy  2.109
    • E.   Postforeclosure Blight Prevention; CC §2929.3  2.109A
  • IX.  INCOME TAX CONSEQUENCES OF FORECLOSURE
    • A.  For Borrower
      • 1.  Overview of Treatments   2.110
      • 2.  Foreclosure   2.111
        • a.  Gain or Loss or Income  2.111A
        • b.  Character of Gain or Loss  2.111B
        • c.  Timing of Income or Loss   2.111C
      • 3.  Deeds in Lieu  2.112
      • 4.  Short Sales   2.112A
      • 5.  Cancellation of Debt Income  2.112B
    • B.  For Lender
      • 1.  Overview of Treatments  2.113
      • 2.  Basis; Settlement  2.114
      • 3.  Foreclosure Sale to a Third Party  2.115
      • 4.  Foreclosure Sale to Mortgagee  2.116
      • 5.  Deed in Lieu  2.117
      • 6.  Basis of Property Acquired / Future Sale  2.117A
      • 7.  Purchase Money Mortgages  2.117B
    • C.  Lenders’ Information Returns  2.117C
  • X.  LENDER POSTSALE DAMAGES ACTIONS
    • A.  Deficiency Barred After Trustee Sale  2.118
    • B.  Actions for Waste
      • 1.  Bad Faith Claims Not Barred by Antideficiency Laws  2.119
      • 2.  Bad Faith Waste Claims Precluded by Full Credit Bid  2.120
      • 3.  Criminal Actions for Intentional Waste  2.120A
    • C.  Actions for Fraud After Full Credit Bid
      • 1.  Against Borrowers  2.121
      • 2.  Against Third Parties
        • a.  Pre-Alliance Cases  2.122
        • b.  The Alliance Decision  2.123
          • (1)  Policy Underlying Alliance  2.124
          • (2)  Measure of Damages  2.125
      • 3.  Proximate Cause; Burden of Proof; Damages  2.126
    • D.  Negligence Actions After Full Credit Bid  2.127
    • E.  Rationale of Full Credit Bid Rule  2.127A
    • F.  Intentional Interference and Conspiracy  2.128
    • G.  Insurance and Bond Claims After Full Credit Bid  2.129
  • XI.  POSTSALE ACTIONS FOR BENEFIT OF LENDER OR OTHER INTERESTED PARTY  2.129A
    • A.  Voiding False or Forged Recorded Document  2.129B
    • B.  Criminal Prosecution and Restitution  2.129C
    • C.  Lender or Purchaser Actions to Quiet Title  2.129D
  • XII.  BORROWER POSTSALE ACTIONS TO SET ASIDE SALE OR FOR DAMAGES  2.129E
  • XIII.  TRUSTEE SALE FORMS
    • A.  Notice of Default
      • 1.  Form: Recordable Notice of Default  2.130
      • 2.  Form: Summary of Key Information (Attachment to Notice)  2.130A
    • B.  Form: Request for Notice of Default  2.131
    • C.  Form: Unruh Act Special Notice  2.132
    • D.  Notice of Sale
      • 1.  Form: Recordable Notice of Sale for Trustor  2.133
      • 2.  Form: Summary of Key Information (Attachment to Notice)  2.133A
      • 3.  Form: Notice of Sale for Residential Tenant [Repealed]  2.133B
    • E.  Form: Trustee’s Deed  2.134
    • F.  Form: Petition and Declaration Regarding Unresolved Claims and Deposit of Undistributed Surplus Proceeds of Trustee’s Sale (Judicial Council Form CIV–170)  2.135

3

Judicial Foreclosure

  • I.  CHOOSING THE REMEDY
    • A.  “Judicial Foreclosure” Defined  3.1
    • B.  Considerations in Choosing Judicial Foreclosure
      • 1.  Effect on Junior Tax Liens  3.2
      • 2.  Lack of Power of Sale Clause  3.3
      • 3.  Advantages of Judicial Foreclosure
        • a.  Availability of Deficiency Judgment  3.4
        • b.  Supporting Appointment of Receiver  3.5
        • c.  Resolving Disputes  3.6
        • d.  Liquidating Debt  3.7
      • 4.  Disadvantages of Judicial Action
        • a.  Redemption and Possession  3.8
        • b.  Delays, Control, and Costs  3.9
        • c.  Effect of Statute of Limitations  3.10
    • C.  When to Choose Remedy  3.11
  • II.  PREPARING THE ACTION
    • A.  Nature of Action  3.12
    • B.  Jurisdiction  3.13
    • C.  Venue  3.14
    • D.  Personal Jurisdiction; Service of Process  3.15
    • E.  Statutes of Limitations  3.16
      • 1.  Underlying Obligation Governs Time Frame  3.17
        • a.  Mortgages  3.18
        • b.  Deeds of Trust  3.19
      • 2.  Effect of Marketable Record Title Act  3.20
    • F.  Title Company Services  3.21
    • G.  Federally Insured or Guaranteed Loans  3.22
    • H.  Parties
      • 1.  Plaintiffs  3.23
      • 2.  Defendants
        • a.  Owners: Past, Present, and Future  3.24
        • b.  Holders of Other Interests in Encumbered Property
          • (1)  Tenants  3.25
          • (2)  Easement Holders  3.26
          • (3)  Vendees Under Land Sale Contracts  3.27
          • (4)  Unrecorded Interests  3.28
          • (5)  Adverse Owners  3.29
          • (6)  Other Lienholders
            • (a)  Senior Lienholders  3.30
            • (b)  Government Agency as Lien Claimant  3.31
            • (c)  Junior Lienholders  3.32
            • (d)  Effect of Omitting Junior Lienholder  3.33
        • c.  Persons Acquiring Interests After Complaint Filed  3.34
        • d.  Persons Liable for Deficiency Judgment  3.35
        • e.  Trustee as Defendant  3.36
      • 3.  Death or Incapacity of Beneficiary or Trustor
        • a.  Beneficiary  3.37
        • b.  Trustor  3.38
  • III.  DRAFTING FORECLOSURE COMPLAINT
    • A.  Checklist: Essential Allegations  3.39
    • B.  Foreclosure: Pleading Ultimate Facts
      • 1.  Introductory Allegations; Parties  3.40
      • 2.  Underlying Note or Other Obligation  3.41
      • 3.  Deed of Trust or Other Security Device  3.42
      • 4.  Property Descriptions  3.43
      • 5.  Hidden Security Devices  3.44
      • 6.  Plaintiff’s Ownership of Note and Deed of Trust  3.45
      • 7.  Interest of Guarantors, Endorsers, or Assuming Grantees  3.46
      • 8.  Interest of Other Defendants  3.47
      • 9.  Right to Accelerate on Default  3.48
      • 10.  Default in Loan Payments  3.49
      • 11.  Default in Tax Payments  3.50
      • 12.  Default in Insurance Payments  3.51
      • 13.  Future Advances; Monetizing Default  3.52
      • 14.  Entitlement to Attorney Fees and Costs  3.53
      • 15.  Demand for Judgment (Prayer)  3.54
    • C.  Application for Receivership  3.55
    • D.  Lis Pendens
      • 1.  Purpose  3.56
      • 2.  Service Requirements  3.57
    • E.  Order of Reference  3.58
  • IV.  DEFENSES; DEFENDANTS’ RIGHTS
    • A.  Trustor  3.59
    • B.  Junior Lienholders  3.60
    • C.  Trustee  3.61
    • D.  Defenses to Claims for Deficiency  3.62
    • E.  Reinstatement and Presale Redemption Rights  3.63
    • F.  Stay of Action Under Servicemembers Civil Relief Act  3.63A
  • V.  OBTAINING FORECLOSURE JUDGMENT
    • A.  Default, Summary Judgment, and Trial Setting  3.64
    • B.  Checklist: Evidence Required for Foreclosure Judgment  3.65
    • C.  Defenses; Statement of Decision  3.66
    • D.  Judgment (Decree) of Foreclosure
      • 1.  Required Elements  3.67
      • 2.  Decree Entered as Judgment  3.68
      • 3.  Appealability of Decree  3.69
      • 4.  Binding Election of Remedies  3.70
  • VI.  FORECLOSURE SALE
    • A.  Summary of Applicable Procedures  3.71
    • B.  Presale Procedures
      • 1.  Obtaining Writ of Sale  3.72
      • 2.  Preparing Notice of Levy and Notice of Sale  3.73
      • 3.  Serving Writ and Notices of Levy and Sale
        • a.  Methods of Service; Persons Served  3.74
        • b.  Time of Service
          • (1)  If No Deficiency Judgment  3.75
          • (2)  If Deficiency Judgment Allowed  3.76
    • C.  Sale Procedures
      • 1.  Location and Order of Sale  3.77
      • 2.  Postponement  3.78
      • 3.  Eligible Bidders  3.79
      • 4.  Bidding Methods and Strategies
        • a.  Foreclosing Creditor
          • (1)  Credit Bids and Cash Supplements  3.80
          • (2)  Disadvantages of Underbidding  3.81
        • b.  Other Parties; Cash Bids  3.82
    • D.  Setting Aside Sale
      • 1.  Statutory Remedy  3.82A
      • 2.  Equitable Remedy  3.82B
    • E.  Steps Following Sale
      • 1.  Disposition of Proceeds  3.83
      • 2.  If No Deficiency Allowed; Deed of Sale; Finality  3.84
      • 3.  If Deficiency Allowed; Certificate of Sale; Redemption Notice  3.85
  • VII.  OBTAINING DEFICIENCY JUDGMENT  3.86
    • A.  Application for Deficiency Judgment
      • 1.  Procedures; Lender Qualifications  3.87
      • 2.  Fair Debt Collection Practices Act  3.87A
      • 3.  Sold-Out Junior Creditors  3.87B
    • B.  Hearing on Fair Value and Deficiency Amount  3.88
    • C.  Entry of Deficiency Judgment  3.89
  • VIII.  POSTSALE REDEMPTION
    • A.  Legal Basis; Distinguishing Other Rights  3.90
    • B.  Who May Redeem  3.91
    • C.  Redemption Time Period  3.92
    • D.  Amount Needed to Redeem
      • 1.  Foreclosure Sale Purchase Price  3.93
      • 2.  Unpaid Junior Liens  3.94
    • E.  Initiating Redemption  3.95
    • F.  Effect of Redemption
      • 1.  Statutory Redemption  3.96
      • 2.  Nonstatutory Redemption by Agreement  3.97
      • 3.  Debtor Protections; CCP §729.080(e)  3.98
      • 4.  Equitable Redemption  3.98A
    • G.  Possession, Rents, and Profits
      • 1.  During Redemption Period  3.99
      • 2.  After Debtor Redeems Property  3.100
    • H.  If Debtor Does Not Timely Redeem  3.101
  • IX.  FORMS
    • A.  Form: Complaint for Foreclosure of Deed of Trust  3.102
    • B.  Form: Judgment of Foreclosure and Order of Sale  3.103
    • C.  Presale Forms
      • 1.  Form: Writ of Sale (Judicial Council Form EJ-130)  3.104
      • 2.  Form: Notice of Levy (Judicial Council Form EJ-150)  3.105
      • 3.  Form: Notice of Sale  3.106
    • D.  Postsale Forms
      • 1.  Form: Certificate of Sale  3.107
      • 2.  Form: Notice of Right of Redemption  3.108
      • 3.  Form: Report of Sheriff/Receiver and Account of Sale  3.109
      • 4.  Form: Deed of Sale  3.110
    • E.  Deficiency Judgment Forms
      • 1.  Form: Notice of Motion for Deficiency Judgment  3.111
      • 2.  Form: Application for Order and Order Appointing Referee to Appraise Property  3.112
      • 3.  Form: Deficiency Judgment Following Foreclosure  3.113

4

Code of Civil Procedure §726(a): The One-Action Rule

  • I.  DEVELOPMENT OF CCP §726(a)
    • A.  Common Law Background  4.1
    • B.  Enactment of CCP §726(a)  4.2
  • II.  APPLICATION AND PURPOSES OF CCP §726(a)
    • A.  Application to Both Mortgages and Deeds of Trust  4.3
    • B.  Purposes of CCP §726(a)
      • 1.  Antimultiplicity  4.4
      • 2.  Consolidated Foreclosure and Deficiency Judgment  4.5
  • III.  EFFECTS OF CCP §726(a)
    • A.  Security-First Rule
      • 1.  Creditor May Be Required to Proceed Against Security First  4.6
      • 2.  Makes Obligation Conditional  4.7
    • B.  One-Action Rule
      • 1.  Prohibits Multiplicity of Actions  4.8
      • 2.  Not Applicable to Trustee Sales  4.9
      • 3.  Combined Effect of One-Action and Antideficiency Rules  4.10
    • C.  Affirmative Defense and Sanction Aspect of CCP §726(a)  4.11
  • IV.  VIOLATIONS OF CCP §726(a)  4.12
    • A.  Judicial Foreclosure Actions  4.13
    • B.  Cross-Complaints  4.14
    • C.  Prejudgment Attachments on Nonpledged Assets  4.15
    • D.  Money Actions  4.16
    • E.  Proceedings Not Constituting Action
      • 1.  Trustee Sale  4.17
      • 2.  Interlocutory Proceedings  4.18
      • 3.  Self-Help Remedies (Bankers’ Liens and Offsets)  4.19
      • 4.  Statutory Exception for Pursuing Attachment  4.20
      • 5.  Attachment of Guarantor’s Property  4.20A
    • F.  Other Creditor Activity Not Constituting Action  4.21
    • G.  Distinguishing Monetary and Nonmonetary Judgments  4.22
  • V.  INVOKING CCP §726(a)  4.23
    • A.  As Affirmative Defense  4.24
    • B.  As Sanction  4.25
      • 1.  Triggering the Sanction  4.26
      • 2.  Extent of Sanction: What Rights Are Forfeited?  4.27
      • 3.  Wozab Letters  4.28
  • VI.  ADDITIONAL EFFECTS OR CONSEQUENCES OF CCP §726(a)
    • A.  Parties
      • 1.  Guarantors  4.29
      • 2.  Codebtors  4.30
      • 3.  Junior Secured Creditors  4.31
    • B.  Transactions
      • 1.  Installment Land Sale Contracts  4.32
      • 2.  Hidden Security Instruments  4.33
      • 3.  Unsecured and Partially Secured Notes: Fractionalizing Debt  4.34
      • 4.  Deeds of Trust Securing Option-to-Purchase Agreements  4.34A
    • C.  Secured Money Judgments  4.35
  • VII.  WORTHLESS SECURITY EXCEPTION
    • A.  Legally Worthless Security  4.36
    • B.  Economically Worthless Security  4.37
    • C.  Partially Worthless Security  4.38
    • D.  Subsequently Worthless Security
      • 1.  Destruction of Security  4.39
      • 2.  Decline in Value of Security  4.40
      • 3.  Without Act or Fault of Creditor  4.41
    • E.  Sold-Out Junior Creditor  4.42
      • 1.  Participation in Senior Sale  4.43
      • 2.  Junior Also Senior Lienholder  4.44
      • 3.  Complaint  4.45
      • 4.  Form Provision: Allegation of Worthless Security  4.46
  • VIII.  PROCEEDINGS NOT BARRED BY CCP §726(a)  4.47
    • A.  Fraud  4.48
    • B.  Rent Skimming  4.49
    • C.  Mistake  4.50
    • D.  Waste
      • 1.  Waste by Trustor
        • a.  Impairment of Security  4.51
        • b.  Timing of Waste Action  4.52
      • 2.  Third Party Waste  4.53
    • E.  Environmentally Impaired Property  4.54
      • 1.  Election to Waive  4.55
      • 2.  Environmental Indemnities  4.56
      • 3.  Right to Enter and Inspect; Appointment of Receiver  4.57
  • IX.  CHOICE OF LAW
    • A.  Location of Secured Property  4.58
    • B.  Application of Federal Law  4.59
  • X.  WAIVERS  4.60
    • A.  Disguised Waivers  4.61
    • B.  Unilateral Waivers by Creditor  4.62
    • C.  Waivers Contemporaneous With Making of Loan  4.63
    • D.  Subsequent Waivers  4.64
    • E.  Executory Waivers  4.65
    • F.  Sanction Effect of CCP §726(a)  4.66

5

The Antideficiency Rules

  • I.  BACKGROUND AND HISTORY OF ANTIDEFICIENCY LEGISLATION  5.1
    • A.  Antideficiency Rules  5.2
    • B.  “Deficiency Judgment” Defined  5.3
  • II.  PRIVATE SALE DEFICIENCY PROHIBITION (CCP §580d)  5.4
    • A.  Purpose of CCP §580d: Equalize Judicial and Nonjudicial Foreclosures  5.5
    • B.  Deterrence to Underbidding  5.6
      • 1.  Judicial Foreclosures and Postsale Redemption  5.7
      • 2.  Nonjudicial Foreclosures and the Ban on Deficiency Judgments  5.8
      • 3.  Effectiveness of Protection of Redemption Statutes  5.9
    • C.  Sold-Out Juniors  5.10
      • 1.  High-Bidding Sold-Out Junior  5.11
      • 2.  When Senior and Junior Lienholders Are the Same  5.12
  • III.  TIME LIMIT ON SEEKING DEFICIENCY JUDGMENT
    • A.  General Rule (CCP §726(b))  5.13
    • B.  Sold-Out Juniors
      • 1.  When 3-Month Period Does Not Apply  5.14
      • 2.  When 3-Month Period Does Apply  5.15
  • IV.  FAIR VALUE LIMITATIONS (CCP §§726(b), 580a)  5.16
    • A.  Rationale  5.17
    • B.  Definition of “Fair Value”  5.18
    • C.  Limits Deficiency Judgments Only  5.19
    • D.  Continuing Viability of CCP §580a  5.20
    • E.  Fair Value and CCP §726(a)  5.21
      • 1.  Not Binding on Nonselling Junior Creditors  5.22
      • 2.  Binding on Junior Creditor Who Purchases at Senior Sale  5.23
  • V.  PURCHASE MONEY PROHIBITION (CCP §580b)
    • A.  Basic Rule and Exceptions  5.24
    • B.  Comparison of CCP §580b With Other Antideficiency Rules  5.25
    • C.  Scope of CCP §580b
      • 1.  Applicable to Standard Transactions  5.26
        • a.  Seller Financing  5.27
        • b.  Third Party Financing  5.28
      • 2.  Effect of Short Sale  5.28A
      • 3.  Nonstandard Transactions That Meet Purposes of CCP §580b  5.29
      • 4.  Nonstandard Transactions Not Subject to CCP §580b  5.30
    • D.  Purposes of CCP §580b  5.31
      • 1.  Overvaluation of Property  5.32
        • a.  Residential Construction  5.33
        • b.  Commercial Construction  5.34
      • 2.  Stabilization of Economy  5.35
      • 3.  Application of CCP §580b to Third Party Loans  5.36
    • E.  Structuring Transactions to Avoid CCP §580b  5.37
    • F.  Effect of Attachment Statute  5.38
    • G.  Sold-Out Junior Creditors
      • 1.  Standard Transaction: Loan Secured by Property Purchased  5.39
      • 2.  Nonstandard Transactions
        • a.  Roseleaf: Loan Secured by “Other” Security  5.40
        • b.  Spangler: Subordination to Construction Loan  5.41
        • c.  Application of Spangler Rationale  5.42
        • d.  DeBerard and Lawler: Limitation on Spangler Rationale  5.43
      • 3.  High-Bidding Purchase Money Sold-Out Junior  5.44
  • VI.  SHORT SALE PROHIBITION (CCP §580e)  5.44A
  • VII.  APPLICATION OF ANTIDEFICIENCY RULES TO OTHER INSTRUMENTS
    • A.  Installment Land Sale Contracts
      • 1.  Under CCP §580b  5.45
        • a.  Applicable Only to Mortgage Substitutes  5.46
        • b.  Installment Land Sale Contracts Distinguished From Purchase and Sale Agreements  5.47
          • (1)  Functional Differences  5.48
          • (2)  Statutory Differences  5.49
      • 2.  Under Other Antideficiency Rules  5.50
    • B.  Other Devices That May Be Mortgage Substitutes  5.51
    • C.  Unsecured Notes  5.52
    • D.  Partially Secured Loans  5.53
  • VIII.  SITUATIONS TREATED AS EXCEPTIONS TO ANTIDEFICIENCY RULES
    • A.  Mistake  5.54
    • B.  Fraud  5.55
    • C.  Intentional Interference, Squeeze Outs, and Sham Foreclosures  5.56
    • D.  Waste  5.57
      • 1.  Bad Faith Waste  5.58
      • 2.  Federal Court Treatment of Waste  5.59
    • E.  Environmentally Impaired Property  5.60
  • IX.  CHOICE OF LAW
    • A.  Security Located Out of State  5.61
    • B.  Debtor Resides Out of State  5.62
    • C.  Application of Federal Law  5.63
  • X.  WAIVERS  5.64
    • A.  Disguised Waivers  5.65
    • B.  Only Debtor Can Waive  5.66
    • C.  Contemporaneous Waivers  5.67
    • D.  Subsequent and Noncontractual Waivers  5.68
    • E.  Distinguishing Contemporaneous From Subsequent Waivers  5.69
    • F.  Executory Waivers  5.70
  • XI.  REFINANCING; CCP §580b  5.71
    • A.  Before January 1, 2013  5.71A
    • B.  After January 1, 2013  5.71B
  • XII.  ANTIDEFICIENCY LAWS AND BANKRUPTCY  5.72

6

Receiverships, Rents, and Leases

  • I.  INTRODUCTION
    • A.  Creditor’s Limited Right to Possession and Rents  6.1
    • B.  Effect of Assignment of Rents Clause  6.2
    • C.  Alternative Use of Receivership in Workout of Defaulted Commercial Loan  6.2A
      • 1.  Traditional Uses of Receivership: Managing Property  6.2B
      • 2.  Alternative Use of Receivership: Selling Property  6.2C
      • 3.  Unresolved Issues on Alternative Receivership  6.2D
      • 4.  Procedures for Alternative Receivership  6.2E
  • II.  POSSESSION AND RENTS BEFORE FORECLOSURE
    • A.  Mortgagee in Possession  6.3
      • 1.  Rights  6.4
      • 2.  Liabilities  6.5
      • 3.  Debtor’s Consent Required  6.6
      • 4.  Entry After Invalid Foreclosure Sale  6.7
      • 5.  Acts Not Triggering Mortgagee-in-Possession Status  6.8
    • B.  Remedies Absent Assignment of Rents  6.9
      • 1.  Damages for Waste
        • a.  Legal Basis  6.10
        • b.  Effect of Antideficiency and Full Credit Bid Rules  6.11
        • c.  Bad Faith and Other Forms of Waste  6.12
      • 2.  Liability for Rent Skimming  6.13
      • 3.  Injunctive Relief  6.14
      • 4.  Receivership—No Assignment of Rents Clause
        • a.  CCP §564(b)(2): Waste or Default; Insufficient Security  6.15
        • b.  Limited Ability to Collect Rents  6.16
        • c.  Other Grounds for Receivership  6.17
        • d.  Beneficiary Liability and Priorities  6.18
  • III.  STATUTORY REGULATION OF ASSIGNMENT OF RENTS
    • A.  Current and Former Rules  6.19
    • B.  Assignment Needed to Collect Presale Rents  6.20
    • C.  Traditional Types of Clauses  6.21
      • 1.  Absolute Assignment  6.22
      • 2.  Assignment as Additional Security  6.23
      • 3.  Absolute Assignment Conditional on Default  6.24
    • D.  Current Law Abolishes Formal Distinctions Between Types of Clauses  6.25
      • 1.  Effect on Absolute Assignments  6.26
      • 2.  Effect on Assignments as Security  6.27
      • 3.  Effect on Conditional Absolute Assignments  6.28
    • E.  Perfection of Assignment of Rents
      • 1.  Current Statute; Recording  6.29
      • 2.  Former Law  6.30
    • F.  Scope of Assignment of Rents  6.31
  • IV.  ENFORCING ASSIGNMENT OF RENTS DURING FORECLOSURE
    • A.  Former Law  6.32
    • B.  Four Enforcement Options Under Current Law  6.33
    • C.  Obtaining Appointment of Receiver  6.34
      • 1.  Functions of Receiver  6.35
      • 2.  Additional Considerations for Appointment of Receiver  6.36
      • 3.  Specific Performance of Assignment  6.37
      • 4.  Procedures for Obtaining Order Appointing Receiver  6.38
      • 5.  Nomination of Property Manager  6.39
      • 6.  Powers of Receiver Limited by Order; Appealing Order  6.40
      • 7.  Effects of CCP §726  6.41
      • 8.  Effects of Antideficiency Laws  6.42
      • 9.  Mortgagee in Possession Avoided  6.43
      • 10.  Receiver’s Duties; Neutrality  6.44
      • 11.  Disposition of Rents Collected Before Foreclosure
        • a.  Presale  6.45
        • b.  Postsale  6.46
      • 12.  Attorney Fees; Receiver Fees and Costs  6.47
      • 13.  Terminating Receivership on Completion of Foreclosure  6.48
    • D.  Obtaining Possession of Rents  6.49
    • E.  Making Demand on Tenant
      • 1.  Serving Demand  6.50
      • 2.  Form of Demand; CC §2938(k)  6.51
      • 3.  Tenant’s Obligations  6.52
    • F.  Making Demand on Trustor  6.53
    • G.  Rents Collectible Under CC §2938
      • 1.  Accrued, Unpaid Rents  6.54
      • 2.  Proceeds; Improper Payments  6.55
      • 3.  Gross or Net Rents  6.56
    • H.  Priorities of Competing Assignees  6.57
      • 1.  Establishing Priority Under CC §2938
        • a.  Under Current Law  6.58
        • b.  Under Prior Law  6.59
      • 2.  If Junior Enforces Earlier
        • a.  Current Law; Notice Required  6.60
        • b.  Prior Law  6.61
      • 3.  If Senior Enforces Earlier  6.62
      • 4.  If Junior Reinstates Senior Debt  6.63
      • 5.  Priorities in Cash Proceeds  6.64
    • I.  Effect on Leases
      • 1.  If Lease Has Priority Over Deed of Trust  6.65
      • 2.  If Deed of Trust Has Priority Over Lease  6.66
      • 3.  If Deed of Trust Lacks Assignment Clause  6.67
    • J.  Effect on Tenants
      • 1.  Payment of Rent  6.68
      • 2.  Termination by Tenants  6.69
      • 3.  Termination or Modification by Creditor  6.70
    • K.  Charging Trustor Rent  6.71
    • L.  When Trustor Files Bankruptcy  6.71A
  • V.  RENTS AND POSSESSION AFTER SALE  6.72
    • A.  Effect of Judicial Foreclosure Sale
      • 1.  Trustor’s Right to Possession  6.73
      • 2.  Duration of Right to Possession  6.74
      • 3.  Rents During Redemption Period  6.75
      • 4.  Trustor in Possession  6.76
      • 5.  Rights and Duties of Tenants During Redemption Period
        • a.  Rent and Security Deposits  6.77
        • b.  Eviction  6.78
        • c.  Rent Increases  6.79
        • d.  Prepaid Rents  6.80
        • e.  Postsale Payment of Rents  6.81
        • f.  Effect of Expiration of Redemption Period  6.82
    • B.  Effect of Trustee Sale
      • 1.  Effect on Trustor’s Rights  6.83
      • 2.  Effect on Leases
        • a.  If Lease Has Priority Over Deed of Trust
          • (1)  Only Lessor’s Interest Foreclosed  6.84
          • (2)  If Lease Subsequently Modified  6.85
        • b.  If Deed of Trust Has Priority Over Lease  6.86
          • (1)  In Judicial Foreclosure Actions  6.87
          • (2)  If Junior Tenant Not a Party in Senior Foreclosure Action  6.88
          • (3)  If Senior Foreclosure Is by Trustee Sale  6.89
    • C.  Provisions Affecting Priority of Leases and Loans  6.90
      • 1.  Subordination Agreements  6.91
        • a.  Types of Subordination Clauses
          • (1)  Automatic Subordination  6.92
          • (2)  Executory Subordination  6.93
        • b.  Validity of Subordination Clauses  6.94
        • c.  Optional Unsubordination  6.95
        • d.  Combined Subordination and Unsubordination  6.96
      • 2.  Nondisturbance Agreements  6.97
      • 3.  Attornment Agreements  6.98
  • VI.  FORMS
    • A.  Form: Complaint for Specific Performance of Assignment of Rents  6.99
    • B.  Form: Notice of Motion for Appointment of Receiver  6.100
    • C.  Form: Declaration in Support of Application for Receivership  6.101
    • D.  Form: Order Appointing Receiver  6.102
    • E.  Optional Judicial Council Forms
      • 1.  Form: Ex Parte Order Appointing Receiver and Order to Show Cause and Temporary Restraining Order—Rents, Issues, and Profits (Receivership) (Judicial Council Form RC-200)  6.103
      • 2.  Form: Order Confirming Appointment of Receiver and Preliminary Injunction—Rents, Issues, and Profits (Receivership) (Judicial Council Form RC-210)  6.104
      • 3.  Form: Order to Show Cause and Temporary Restraining Order—Rents, Issues, and Profits (Receivership) (Judicial Council Form RC-300)  6.105
      • 4.  Form: Order Appointing Receiver After Hearing and Preliminary Injunction—Rents, Issues, and Profits (Receivership) (Judicial Council Form RC-310)  6.106
    • F.  Form: Notice to Tenant of Demand to Pay Rent  6.107
    • G.  Forms for Terminating Receivership
      • 1.  Form: Application for Order Directing Receiver to Transfer Possession of Real Property and File Final Accounting  6.108
      • 2.  Form: Declaration in Support of Application for Order Directing Receiver to Transfer Possession of Real Property  6.109
      • 3.  Form: Order Directing Receiver to Transfer Possession of Real Property and File Final Accounting  6.110

7

Debtor Strategies

  • I.  INTRODUCTION
    • A.  Chapter Summary  7.1
    • B.  Checklist: Debtor’s Legal Alternatives When Facing Foreclosure  7.1A
  • II.  DEEDS IN LIEU OF FORECLOSURE  7.2
    • A.  Benefits and Risks  7.3
    • B.  Tax Effects  7.4
    • C.  Form and Contents  7.5
    • D.  Actions Accompanying Deeds in Lieu  7.6
    • E.  Challenges by Trustor  7.7
      • 1.  Instrument as Deed or Mortgage  7.8
      • 2.  Immediate or Executory Deed  7.9
      • 3.  Deed Executed When Making Loan  7.10
      • 4.  Deed Executed After Loan Origination  7.11
      • 5.  Validity as a Deed  7.12
    • F.  Third Parties
      • 1.  Nominee of Beneficiary  7.13
      • 2.  Former Beneficiary  7.14
      • 3.  Bona Fide Purchaser  7.14A
      • 4.  Secondary Market Assignments; Mortgage Electronic Registration Systems (MERS)  7.15
      • 5.  Deed From Nontrustor  7.16
    • G.  Deeds in Lieu and Junior Creditors
      • 1.  Effect on Juniors; Merger Doctrine  7.17
      • 2.  Drafting Considerations; Title Insurance  7.18
      • 3.  Avoiding Application of Merger Doctrine  7.19
    • H.  Effect of Deed in Lieu Being Declared Mortgage  7.20
    • I.  Rejecting Deed in Lieu  7.21
  • III.  SHORT SALES
    • A.  Short Sale Defined  7.21A
    • B.  Listing Agreement; Broker Obligations; Indemnity  7.21B
    • C.  Senior Lienholders; Antideficiency Laws  7.21C
    • D.  Junior Lienholders  7.21D
    • E.  Federal Assistance  7.21E
    • F.  Short Sale Fraud  7.21F
    • G.  Tax Consequences  7.21G
    • H.  Escrow; Payoff Demands; Title Insurance; Bankruptcy  7.21H
  • IV.  OPTIONS FOR ATTACKING FORECLOSURE SALE
    • A.  Judicial Versus Nonjudicial Foreclosure  7.22
    • B.  Enjoining or Setting Aside Trustee Sale
      • 1.  Requires Court Action  7.23
      • 2.  Bringing Action Before or After Sale  7.24
      • 3.  Tendering Payment of Debt Owed  7.24A
  • V.  ENJOINING TRUSTEE SALE
    • A.  Legal and Factual Bases for Enjoining Sale  7.25
      • 1.  General Statutory Grounds  7.26
      • 2.  Provisional or Temporary Relief  7.27
      • 3.  Factual or Procedural Grounds  7.28
      • 4.  Contractual Defenses; Payment; Waiver  7.29
      • 5.  Form: Demand Letter Requesting Lender or Loan Servicer to Provide Documentation of Loan Claim  7.30
      • 6.  Passage of Time  7.31
        • a.  Mortgages  7.32
        • b.  Deeds of Trust  7.33
        • c.  Marketable Record Title Act  7.34
      • 7.  Disputed Obligations; Invalid Deeds of Trust  7.35
      • 8.  Truth in Lending Act Violations  7.36
      • 9.  Improper Procedures
        • a.  Procedures Under CC §§2924–2924i  7.37
        • b.  Procedures Under SB 1137 and Homeowner Bill of Rights  7.38
        • c.  Procedures Under Federal Regulations  7.38A
    • B.  Parties to Injunction Action
      • 1.  Plaintiffs: Borrowers or Tenants  7.39
      • 2.  Defendants  7.40
      • 3.  When Tender Is Required in Action for Injunctive Relief  7.41
    • C.  Jurisdiction and Venue; Removal to Federal Court  7.42
    • D.  Procedures for Obtaining Temporary Restraining Orders and Preliminary Injunctions
      • 1.  Complaint to Enjoin Foreclosure  7.43
      • 2.  Form: Complaint to Enjoin Foreclosure, and for Declaratory Relief and an Accounting  7.44
      • 3.  Distinctions Among Types of Injunctive Relief  7.45
      • 4.  TRO or Preliminary Injunction  7.46
        • a.  Temporary Restraining Order
          • (1)  Checklist: Procedure for Obtaining TRO and OSC  7.47
          • (2)  Form: Order to Show Cause and Temporary Restraining Order  7.48
        • b.  When Preliminary Injunction Alone Is Sought by Noticed Motion or OSC
          • (1)  Checklist: Obtaining Hearing on Preliminary Injunction  7.49
          • (2)  Form: Notice of Motion for Preliminary Injunction  7.50
        • c.  Bond or Undertaking  7.51
        • d.  Amount  7.52
      • 5.  Lis Pendens  7.53
    • E.  Appealing Temporary Restraining Orders  7.54
    • F.  Improper Attempts to Enjoin  7.55
  • VI.  SETTING ASIDE TRUSTEE SALE
    • A.  Parties to Set-Aside Action
      • 1.  Plaintiffs  7.56
      • 2.  Junior Creditors  7.57
      • 3.  Guarantors  7.58
      • 4.  Defendants  7.59
    • B.  Factors That Limit Postsale Attacks  7.60
      • 1.  Presumption of Validity  7.61
        • a.  Trustee’s Recitals  7.62
        • b.  Statutory Recitals  7.63
        • c.  If No Trustee’s Deed Issued or If Issued Late  7.64
      • 2.  Bona Fide Purchaser (BFP)  7.65
      • 3.  Value Versus Sale Price  7.66
      • 4.  Inability to Tender Payment of Debt Owed  7.66A
    • C.  Grounds for Setting Aside Sale
      • 1.  Compared With Grounds for Enjoining Sale  7.67
      • 2.  Cases Granting Relief or Allowing Action to Proceed to Set Aside Sale  7.67A
      • 3.  Alleging Tender in Action to Set Aside Sale  7.67B
      • 4.  Cases Denying Relief to Set Aside Sale  7.67C
      • 5.  Commercial Reasonableness  7.68
    • D.  Ancillary Relief  7.69
    • E.  Alternative Relief; Damages  7.70
    • F.  Burden of Proof; Nonjury Trial  7.71
    • G.  Jurisdiction and Venue  7.72
    • H.  Form: Complaint to Set Aside Trustee Sale and for Damages  7.73
    • I.  Lis Pendens  7.74
  • VII.  UNLAWFUL DETAINER AND OTHER POSTSALE ACTIONS
    • A.  Defending Unlawful Detainer and Related Actions  7.75
    • B.  Effect of Federal Law on Evictions  7.75A
    • C.  Effect of Eviction Action on Suit to Set Aside Sale  7.76
      • 1.  Removal of Consolidated Unlawful Detainer and Wrongful Foreclosure Action  7.76A
    • D.  Drawbacks of Challenging Sale During Eviction  7.77
  • VIII.  LENDER LIABILITY  7.78
    • A.  Agreements to Lend  7.79
    • B.  Ongoing Duties; Negotiations  7.80
    • C.  Calling Loans  7.81
    • D.  California Decisions; Risk Analysis  7.82
    • E.  Filing Lender Liability Complaint With CFPB  7.82A
    • F.  Loan Versus Joint Venture  7.83
    • G.  Lender Liability to Third Parties
      • 1.  Liability to Bidders or Purchasers in Foreclosure Sales  7.83A
      • 2.  Liability to Purchasers in REO Sales  7.83B
    • H.  Disclosing Lender Liability Claims in Bankruptcy  7.84
  • IX.  PROTECTION IN BANKRUPTCY  7.85
    • A.  Deciding Whether to File Bankruptcy Petition  7.86
      • 1.  Disadvantages of Bankruptcy Filing  7.87
      • 2.  Advantages of Bankruptcy Filing
        • a.  Lien Reduction or Stripping
          • (1)  Lien-Stripping Under BAPCPA  7.88
          • (2)  Property Valuation Strategies  7.88A
          • (3)  Effect of Lien-Stripping on Debtor Eligibility for Bankruptcy  7.88B
          • (4)  Lien-Stripping in Chapter 7 Cases  7.88C
        • b.  Debtor’s Homestead and Other Exemptions  7.88D
        • c.  Postsale Redemption of Property  7.88E
    • B.  Bankruptcy Estate  7.89
    • C.  Filing Triggers Automatic Stay  7.90
      • 1.  Scope and Effect of Automatic Stay
        • a.  Effect on Creditors  7.91
        • b.  Statutory Exceptions to Stay  7.92
        • c.  Remedies for Violation of Stay  7.93
        • d.  Transfers by Debtor  7.94
        • e.  Who Else Is Protected by Stay?  7.95
        • f.  Income Tax and Short Sale Issues for Debtor  7.96
        • g.  Effect on Redemption and Reinstatement Rights  7.97
      • 2.  Duration of Stay  7.98
      • 3.  Relief From Stay  7.99
        • a.  Grounds for Relief; Burden of Proof  7.100
        • b.  Bad Faith or Fraud  7.101
        • c.  Lack of Adequate Protection  7.102
        • d.  When Debtor Has No Equity  7.103
        • e.  Single Asset Real Estate Case  7.104
      • 4.  Defending Stay Relief Motions on Securitized Loans
        • a.  Recurring Issues; Preserving Claims  7.105
        • b.  Checklist: Defenses to Stay Relief  7.106
      • 5.  Effect of Dismissal or Lifting Stay
        • a.  Foreclosure Process Resumed  7.107
        • b.  Renoticing or Rescheduling Foreclosure Sale  7.108
    • D.  Treatment of Creditor’s Claim
      • 1.  Invalid Secured Claims  7.109
      • 2.  Unrecorded Claims  7.110
      • 3.  Fraudulent Transfers  7.111
      • 4.  Preferences  7.112
      • 5.  Undersecured Claims  7.113
      • 6.  Completed Sales  7.114
      • 7.  Truth in Lending Act Violations  7.115
      • 8.  No Claim or False Claim  7.115A
    • E.  Reinstatement and Modification Rights  7.116
      • 1.  Reinstatement  7.117
      • 2.  Modification
        • a.  Home Mortgages  7.118
        • b.  “Cramdown” Powers; Absolute Priority Rule  7.119
        • c.  Acceptable Modifications  7.120
    • F.  Treatment of Real Property Security During Bankruptcy  7.121
    • G.  Postpetition Attorney Fees, Interest, and Charges  7.122
    • H.  Default Interest Provisions  7.123
    • I.  Postpetition Rents
      • 1.  Lender’s Entitlement to Rents  7.124
      • 2.  Commercial Lodging Property  7.125

8

Payment and Related Disputes

  • I.  CHAPTER SUMMARY AND SCOPE  8.1
  • II.  LOAN ACCELERATION PROVISIONS
    • A.  Acceleration-on-Default Clause  8.2
      • 1.  Effect of Absence of Acceleration Clause
        • a.  Judicial Foreclosures  8.3
        • b.  Power of Sale Clause  8.4
      • 2.  Validity of Acceleration Clause  8.5
      • 3.  Income Tax Effects of Acceleration  8.6
      • 4.  Disclosure of Acceleration Provisions  8.7
    • B.  “Due-on” Provisions
      • 1.  Types of Clauses
        • a.  Acceleration on Transfer of Property  8.8
        • b.  Covenant Not to Convey  8.9
      • 2.  Historical Development and Validity
        • a.  Covenants Not to Convey: Coast Bank and Tahoe Bank  8.10
        • b.  Due-on-Encumbrance Clause: La Sala  8.11
        • c.  Balancing Quantum of Restraint Against Justification
          • (1)  Installment Land Sale Contracts: Tucker  8.12
          • (2)  Outright Sales: Wellenkamp and Dawn  8.13
      • 3.  Legislative and Industry Responses to Wellenkamp and Dawn
        • a.  Federally Chartered Banks and Adjustable Rate Loans  8.14
        • b.  Preemption Under Garn Act and Federal Regulations  8.15
          • (1)  Loans Secured by Residential Property  8.16
          • (2)  Loans Secured by Nonresidential Property  8.17
        • c.  California Residential Exemptions  8.18
      • 4.  Effect of “Due-on” Clauses
        • a.  Enforcement  8.19
        • b.  Effect on Reinstatement Rights  8.20
        • c.  Covered Transactions; Federal Exemptions  8.21
      • 5.  Purchase Option and “Due-on” Clause  8.22
      • 6.  Waiver of “Due-on” Clause  8.23
    • C.  Discretionary Loan Balance Acceleration  8.24
  • III.  LATE CHARGES, DEFAULT INTEREST, AND PREPAYMENT PROVISIONS
    • A.  Late Charges
      • 1.  Invalidity as Unreasonable Liquidated Damages  8.25
      • 2.  Liquidated Damages Statute: Presumption of Validity  8.26
      • 3.  Judicial Interpretation: Ridgley v Topa Thrift
        • a.  Garrett Rule on Excessive Late Charges Preserved  8.27
        • b.  Indirect Late Charges Invalidated  8.28
      • 4.  Late Charges as Interest  8.29
      • 5.  Form Provision: Late-Charge Clause  8.30
      • 6.  Restrictions on Late Charges for Residential Loans
        • a.  Monetary Limitations  8.31
        • b.  Pyramiding Prohibited  8.32
        • c.  Notice and Disclosure Obligations  8.33
    • B.  Default Interest
      • 1.  Restrictions on Default Interest for Commercial Loans  8.34
      • 2.  Impact of Chapter 11 Bankruptcy Plan  8.35
    • C.  Prepayment and “Yield Maintenance” Charges
      • 1.  No Automatic Right to Prepay  8.36
      • 2.  Justification for Charges  8.37
      • 3.  Validity  8.38
      • 4.  Waiver of Right to Collect  8.39
      • 5.  Types of Prepayment Provisions
        • a.  Phrases Construed to Permit Prepayment  8.40
        • b.  Prepayment Charge Clause  8.41
      • 6.  Lock-In Provisions
        • a.  Prohibition on Prepayment for Specified Time  8.42
        • b.  Validity of Lock-In Provisions  8.43
      • 7.  Yield Maintenance Provisions  8.44
      • 8.  Regulation of Prepayment Charges
        • a.  Statutory Limitations on Consumer Loans  8.45
        • b.  Federal Regulation and Preemption  8.46
      • 9.  Prepayment Charges on Accelerated Loans
        • a.  After Acceleration on Default  8.47
        • b.  Under “Due-on” Clause  8.48
      • 10.  Involuntary Prepayment
        • a.  Clause Allowing Charges  8.49
        • b.  Exceptions: Property Destruction, Condemnation  8.50
      • 11.  Tax Considerations
        • a.  For Lender  8.51
        • b.  For Borrower  8.52
        • c.  For Seller  8.53
  • IV.  OTHER MONETARY ISSUES
    • A.  Payment of Interest on Residential Lender’s Funds in Escrow  8.54
    • B.  Payment of Multiple Notes  8.55
    • C.  Private Mortgage Insurance (PMI)
      • 1.  California Law Governing PMI  8.56
      • 2.  Federal Law Governing PMI; Preemption  8.56A
    • D.  Casualty Insurance  8.57
      • 1.  Trustor’s Failure to Insure; Force-Placed Insurance  8.58
      • 2.  Beneficiary’s Failure to Require Loss-Payable Clause  8.59
      • 3.  Beneficiary’s Failure to Require Insurance  8.60
      • 4.  Loss After Foreclosure  8.61
      • 5.  Right to Insurance Proceeds
        • a.  Lender’s Option  8.62
        • b.  Using Proceeds to Restore Property  8.63
        • c.  Multiple Beneficiaries and Judgment Creditors  8.64
      • 6.  Tax Considerations
        • a.  For Trustor  8.65
        • b.  For Lender or Seller  8.66
    • E.  Condemnation and Damage Provisions  8.67
      • 1.  Condemnation Awards
        • a.  As Substitute Security  8.68
        • b.  Impairment of Security Requirement  8.69
          • (1)  Standards of Impairment  8.70
          • (2)  Application of Impairment Standards  8.71
        • c.  Taxation of Condemnation Awards  8.72
      • 2.  Damages Awards  8.73
    • F.  Taxes, Senior Liens, Impound Accounts  8.74
      • 1.  Beneficiary’s Right to Advance Funds to Protect Security  8.75
      • 2.  Trustor’s Failure to Pay Taxes; Advances  8.76
      • 3.  Impound Accounts  8.77
      • 4.  Failure to Keep Senior Liens Current
        • a.  Effect of Senior Lien Foreclosure on Junior Lien  8.78
        • b.  Junior Curing Senior Default; Advances  8.79
        • c.  Priority of Payments to Cure Tax Default  8.80
      • 5.  Interest Rate on Advances  8.81
      • 6.  Beneficiary’s Right to Cure  8.82
    • G.  Shared Appreciation Loans  8.82A
    • H.  Attorney Fees  8.83
      • 1.  Loan Reinstatement  8.84
      • 2.  Redemption and Foreclosure  8.85
      • 3.  Accounting and Interpleader Actions  8.86
      • 4.  Other Actions
        • a.  Multiple Issues; Noncontract Judgments  8.87
        • b.  Third Party Claims Against Security  8.88
        • c.  Subsequent Owners  8.89
        • d.  Actions Involving Trustees  8.90
  • V.  PREDATORY LENDING: LOAN PURPOSE AND REPAYMENT ISSUES  8.91
  • VI.  RECONVEYANCE  8.92
    • A.  Reconveyance and Statement Fees  8.93
    • B.  Return of Loan Documents  8.94
    • C.  Recitals in Reconveyance  8.95
    • D.  Damages to Borrower  8.96
    • E.  Substitute Procedures  8.97
    • F.  Liabilities and Rights of Party Reconveying  8.98
    • G.  Forged Payoff Demand, Request to Reconvey, or Reconveyance  8.99

9

Multiple Security, Obligations, and Parties

  • I.  INTRODUCTION  9.1
  • II.  FORECLOSING ON MULTIPLE SECURITY FOR ONE OBLIGATION  9.2
    • A.  Preliminary Caution: Full Credit Bidding  9.3
    • B.  Multiple Parcels of Real Property  9.4
      • 1.  One-Action Rule
        • a.  General Application  9.5
        • b.  Consequences of One-Action Violation  9.6
      • 2.  Antideficiency and Fair Value Rules
        • a.  Code of Civil Procedure §§580d and 580a  9.7
        • b.  Code of Civil Procedure §580b  9.8
      • 3.  Single Deed of Trust Versus Separate Deeds of Trust
        • a.  One-Action, Antideficiency, and Fair Value Rules  9.9
        • b.  Foreclosure Trustees  9.10
    • C.  Real Property Rents  9.11
    • D.  Real Property and Personal Property  9.12
      • 1.  Foreclosure Choices Under Com C §9604(a)  9.13
        • a.  Separate Foreclosure  9.14
        • b.  Unified Foreclosure  9.15
      • 2.  Timing of Election  9.16
      • 3.  Application of Real Property Law Protections in Mixed-Collateral Foreclosures  9.17
        • a.  Purchase Money Antideficiency Rule  9.18
        • b.  One-Action Rule and Security-First Rule  9.19
        • c.  Trustee Sale Antideficiency Rule  9.20
        • d.  Fair Value Rules and Deadlines  9.21
        • e.  Acceleration and Reinstatement Rights  9.22
        • f.  Consumer Mixed Collateral  9.23
    • E.  Real Property and Insurance  9.24
    • F.  Real Property Security Given for Judgments  9.25
  • III.  ENFORCING MULTIPLE OBLIGATIONS SECURED BY SAME SECURITY  9.26
    • A.  One Creditor, Multiple Notes, Multiple Deeds of Trust on Same Property  9.27
      • 1.  When Merger Occurs  9.28
      • 2.  Enforcement Issues for Unmerged Obligations  9.29
      • 3.  Foreclosure of Junior Deed of Trust
        • a.  California Cases  9.30
        • b.  Doctrine of Extinguishment (Merger of Rights)  9.31
    • B.  One Creditor, Multiple Notes, One Deed of Trust  9.32
    • C.  One Creditor, One Note, Multiple Obligors, One Deed of Trust  9.32A
    • D.  Multiple Creditors, Multiple Notes, One Deed of Trust  9.33
      • 1.  Priority of Rights in Security  9.34
      • 2.  Foreclosure  9.35
    • E.  Wraparound Loan  9.36
      • 1.  Advantages
        • a.  Interest Rates  9.37
        • b.  Tax Considerations  9.38
        • c.  Alters Payment Schedules  9.39
      • 2.  Disadvantages
        • a.  Usury Risks  9.40
        • b.  Foreclosure  9.41
  • IV.  PRIORITIES
    • A.  Significance of Lien Priority  9.42
    • B.  Basic Determinants of Priority
      • 1.  First-in-Time Rule  9.43
      • 2.  Race-Notice Recordation Statute  9.44
      • 3.  Other Requirements for Priority by Recordation
        • a.  Instrument Properly Recorded  9.45
        • b.  Without Notice of Other Interest  9.46
        • c.  Value  9.47
      • 4.  Purchase Money Mortgage Priority  9.48
        • a.  Subject to Operation of Recordation Laws  9.49
        • b.  Liens Against Purchaser  9.50
      • 5.  Fixtures
        • a.  Priority Rules  9.51
        • b.  Right to Remove Fixtures  9.52
    • C.  Special Lien Priorities
      • 1.  Vendor’s Liens  9.53
      • 2.  Mechanics Liens  9.54
      • 3.  Tax and Assessment Liens  9.55
      • 4.  Receiver’s Certificate  9.55A
    • D.  Priorities in Bankruptcy  9.56
    • E.  Junior Rights to Reinstate, Redeem, Foreclose, and Assert One-Action Rule Violations  9.57
    • F.  Priority of Liens Versus Other Real Property Interests  9.58
    • G.  Future-Advance and Dragnet Clauses  9.59
      • 1.  Validity  9.60
      • 2.  Disputes Over Security  9.61
        • a.  Preexisting Debts  9.62
        • b.  Future Advances  9.63
          • (1)  Relationship Between Loans  9.64
          • (2)  Reliance on Security  9.65
        • c.  Contemporaneous Obligations  9.66
        • d.  Undesirable Effects of Dragnet Clause  9.67
      • 3.  Lender Disputes Over Priorities  9.68
        • a.  Optional Versus Obligatory Advances  9.69
        • b.  Revolving Line of Credit Problems  9.70
        • c.  Construction Loan Problems  9.71
        • d.  Wraparound Loan Problems  9.72
        • e.  Actual Versus Constructive Notice  9.73
    • H.  Subordination and Release Provisions
      • 1.  Definitions  9.74
      • 2.  Creating Subordination and Release Provisions
        • a.  Recordation Versus Express Contract; Automatic Subordination  9.75
        • b.  Role of Subordination and Release Provisions in Land Development  9.76
        • c.  Express Subordination and Release Clauses in Purchase Contract  9.77
        • d.  Timing Concerns  9.78
        • e.  Collateral Agreement for Subordination and Release in Security Instrument  9.79
      • 3.  Enforcing Subordination Clauses  9.80
        • a.  Relief Against Subordinating Lender  9.81
        • b.  Relief Against Other Parties  9.82
      • 4.  Subsequent Subordination Agreement  9.83
      • 5.  Enforcing Release Clauses  9.84
      • 6.  Release Without Express Release Clause; Effect of Marshaling  9.85
    • I.  Effect of Loan Modifications on Priority  9.86
    • J.  Equitable Subrogation
      • 1.  Effect on Priority  9.87
      • 2.  Requirements  9.88
      • 3.  Exceptions: Knowledge of Intervening Interest; Inexcusable Neglect  9.89
      • 4.  Asserting Equitable Subrogation  9.90
    • K.  Marshaling of Assets  9.91
      • 1.  Two Funds Rule
        • a.  Basic Doctrine  9.92
        • b.  Common Debtor Rule  9.93
      • 2.  Inverse Order of Alienation Rule
        • a.  Rule and Limitation  9.94
        • b.  Application  9.95
      • 3.  Multiple Junior Lienors  9.96
      • 4.  Release of Property by Senior Creditor  9.97
  • V.  MULTIPLE PARTIES  9.98
    • A.  Guarantors and Sureties
      • 1.  Definitions and Terminology  9.99
      • 2.  Surety Distinguished From Principal Obligor  9.100
      • 3.  Prior Distinction Between Guarantors and Sureties Abolished  9.101
      • 4.  Examples of Suretyship  9.102
        • a.  Explicit Guaranty  9.103
        • b.  Co-Obligor  9.104
        • c.  Third Party Security  9.105
        • d.  Loan Purchase Agreement; Indemnity Agreement  9.106
        • e.  Master Lease  9.107
        • f.  Unreleased Seller of Encumbered Property  9.108
        • g.  Caution: Substance Controls Over Form or Language  9.109
      • 5.  Suretyship Formation Issues
        • a.  Consideration  9.110
        • b.  Statute of Frauds  9.111
        • c.  Notice of Acceptance; Knowledge of Principal  9.112
      • 6.  Rights and Defenses Arising From Suretyship Status  9.113
        • a.  Recourse Against Principal
          • (1)  Equity of Exoneration; Reimbursement and Subrogation  9.114
          • (2)  Scope of Reimbursement Right  9.115
          • (3)  Scope of Subrogation Right  9.116
        • b.  Contribution Right Against Cosureties  9.117
        • c.  Rights and Defenses Against Creditor
          • (1)  Defenses of Principal  9.118
          • (2)  Effect of Discharge of Principal  9.119
          • (3)  Alteration of Principal Obligation or Impairment of Remedies  9.120
          • (4)  First Pursuit of Principal and Principal’s Collateral  9.121
          • (5)  Defense Based on Duty to Disclose  9.122
      • 7.  Applying One-Action and Antideficiency Rules: Overview  9.123
      • 8.  One-Action and Antideficiency Rules When Principal’s Real Property Secures Principal Obligation
        • a.  No Direct Protection of Guarantors
          • (1)  Case Law  9.124
          • (2)  Rationales in Case Law  9.125
        • b.  Arguments for Direct Protection of Guarantors  9.126
          • (1)  Effect of 1939 Statutory Change  9.127
          • (2)  Policy Arguments  9.128
        • c.  Indirect Protection of Guarantors  9.129
          • (1)  Civil Code §§2809 and 2810  9.130
          • (2)  Union Bank v Gradsky: Estoppel Defense Exonerates Guarantor  9.131
          • (3)  Union Bank v Gradsky: Limitations on Estoppel Defense  9.132
      • 9.  One-Action and Antideficiency Rules When Guarantor’s Real Property Secures Guaranty  9.133
      • 10.  One-Action and Antideficiency Rules When Guarantor’s Real Property Secures Principal Obligation  9.134
      • 11.  Waiver of Rights and Defenses  9.135
        • a.  Waivable Rights and Defenses; Effect of Waiver  9.136
          • (1)  Suretyship Rights and Defenses  9.137
          • (2)  Election of Remedies Rights and Defenses  9.138
          • (3)  One-Action and Antideficiency Rights and Defenses  9.139
        • b.  Interpretation of Contractual Waivers
          • (1)  Case Law Before CC §2856  9.140
          • (2)  Civil Code §2856  9.141
        • c.  Limitations on Waiver
          • (1)  Beyond CC §2856  9.142
          • (2)  Within CC §2856  9.143
      • 12.  Purported “Guaranty” by Principal Obligor  9.144
        • a.  “Debt of Another”  9.145
        • b.  Examples: Sham Guaranties  9.146
        • c.  Issues Raised by Particular Entity Types
          • (1)  Partnerships, Corporations, and LLCs  9.147
          • (2)  Revocable Trusts  9.148
          • (3)  Spouses  9.149
      • 13.  Types of Guaranties
        • a.  Guaranties of Payment Versus Guaranties of Collection  9.150
        • b.  Continuing Guaranties  9.151
        • c.  Limited or Partial Guaranties  9.152
        • d.  Completion Guaranties  9.153
        • e.  Nonrecourse Carve-Out Guaranties and Springing Recourse Guaranties  9.154
        • f.  “Exploding” Guaranties  9.155
      • 14.  Transfer of Guaranties  9.156
      • 15.  Attachment Against Guarantor When Underlying Debt Is Secured by Real Property  9.157
    • B.  Letter of Credit Issuers
      • 1.  Definitions and Terminology  9.158
      • 2.  Governing Law; Customs and Practice  9.159
      • 3.  Legal Relationships Among Parties  9.160
      • 4.  Documentary Presentation  9.161
      • 5.  Fundamental Principles: “Strict Compliance” and “Independence”  9.162
      • 6.  Effect of One-Action and Antideficiency Rules  9.163
      • 7.  Unenforceability in Certain Residential Mortgage Loan Transactions  9.164
    • C.  Negotiable Instrument Endorsers and Accommodation Parties
      • 1.  Liability of Parties to Negotiable Instruments  9.165
      • 2.  One-Action and Antideficiency Rules  9.166
      • 3.  Division 3 Discharge Defenses of Endorsers and Accommodation Parties  9.167
      • 4.  Relationship to Civil Code Suretyship Provisions  9.168
    • D.  Subsequent Owners of Property  9.169
      • 1.  Effect of Transfers of Encumbered Property: Status of Transferee Generally  9.170
      • 2.  Status of Original Trustor  9.171
      • 3.  Requirement of a Writing  9.172
      • 4.  Effect of Assumption
        • a.  Status of Acquiring Grantee  9.173
        • b.  Nonassuming Grantee  9.174
        • c.  Creditor Status Under Assumption Agreement  9.175
        • d.  Third Party Beneficiary Versus Equitable Subrogation Differences  9.176
        • e.  Liability of Trustor  9.177
        • f.  Liability of Assuming Grantee  9.178
      • 5.  Purchase Money Considerations
        • a.  When Original Loan Was Not Purchase Money  9.179
        • b.  When Loan Was Originally for Purchase Money  9.180
          • (1)  Sales by Original Seller  9.181
          • (2)  Third Party Lenders  9.182
      • 6.  Grantee as Guarantor  9.183

10

Workouts of Problem Loans

  • I.  INTRODUCTION
    • A.  “Workout” Broadly Defined  10.1
    • B.  Rules of Professional Conduct and Laws Governing Workouts  10.1A
    • C.  Basic Tools of Workouts
      • 1.  Checklist: Loan Contract Documents  10.2
      • 2.  Default Notices; Demand Letters
        • a.  Distinguish Between Absolute and Conditional Defaults  10.2A
        • b.  Form: Default Notice  10.2B
      • 3.  Pre-Negotiation Letter
        • a.  Purpose and Scope of Pre-Negotiation Letter  10.3
        • b.  Form: Pre-Negotiation Letter  10.3A
      • 4.  Rights and Liabilities of Lender, Borrower, and Third Parties  10.4
      • 5.  Assessing Property Value and Client’s Financial Situation  10.5
      • 6.  Decision-Making Procedure for Multiple Lenders  10.6
      • 7.  Decision-Making Procedure for Multiple Borrowers  10.6A
    • D.  Requirements for Lenders Under SB 1137
      • 1.  Meet-and-Confer Prerequisites Not Applicable to Nonresidential Trustee Sales  10.7
      • 2.  Workouts of Securitized Loans
        • a.  Structure; Parties; Servicing  10.7A
        • b.  Income Tax Issues for Investors  10.7B
        • c.  Lender Obligations Under CC §§2923.6, 2924.9, 2924.10, 2924.11, 2924.18  10.8
    • E.  Residential Loan Workouts and Modifications
      • 1.  Lender Obligations Under SB 1137 and HBOR; CC §2923.5  10.8A
      • 2.  Federal and Private Loan Modification and Refinancing Incentives  10.8B
      • 3.  Residential Loan Modification Process  10.8C
      • 4.  Residential Modifications Under ABX2 7  10.8D
      • 5.  Lender Obligations Under Homeowner Bill of Rights (HBOR)  10.8E
      • 6.  Lender Obligation to Provide Single Point of Contact; CC §2923.7  10.8F
      • 7.  Short Sale Alternative  10.8G
    • F.  Loss Mitigation Procedures Under Dodd-Frank Regulations  10.8H
  • II.  LENDER’S INITIAL STRATEGY
    • A.  Deciding Whether to Foreclose
      • 1.  Determining Causes for Problem Loans  10.9
      • 2.  Relationship of Foreclosure Process to Workout Negotiations  10.10
      • 3.  Drafting Notice of Default
        • a.  Including All Defaults  10.11
        • b.  Late Fees and Default Interest  10.12
        • c.  Prerequisites to Declaring Defaults  10.13
        • d.  Protective Advances  10.14
        • e.  Unapplied Funds or Credits of Borrower  10.15
    • B.  Deciding Whether to Take Possession of Security
      • 1.  Lender’s Possession Rights  10.16
      • 2.  Relevant Factors  10.17
      • 3.  Lender as “Mortgagee in Possession”  10.18
      • 4.  Taking Possession Through Court-Appointed Receiver  10.19
  • III.  WORKOUT AGREEMENTS
    • A.  Workouts Contemplating Avoidance of Foreclosure  10.20
      • 1.  Statute of Frauds  10.21
      • 2.  Forbearance Agreement
        • a.  Purposes of Forbearance Agreement  10.22
        • b.  Form: Forbearance Agreement  10.22A
      • 3.  Deed in Lieu Escrow Pending Workout Negotiations
        • a.  Purpose of Escrow Agreement  10.22B
        • b.  Form: Escrow Agreement for Deed in Lieu of Foreclosure  10.22C
      • 4.  Loan Modification Agreement
        • a.  Purpose and Scope of Loan Modification Agreement  10.23
        • b.  Form: Loan Modification Agreement  10.23A
        • c.  Usury Considerations  10.23B
        • d.  Income Tax Considerations  10.24
        • e.  Avoiding Loss of Lender’s Lien Priority  10.25
        • f.  Future Advances  10.26
        • g.  Avoiding Exoneration of Guarantors and Others  10.27
    • B.  Workouts Contemplating Lender’s Taking Title to Security  10.28
      • 1.  Deed in Lieu of Foreclosure  10.29
        • a.  Insurance Considerations  10.29A
        • b.  When Lease Is Collateral for Loan
          • (1)  Ground Leases  10.29B
          • (2)  Lender’s Considerations  10.29C
        • c.  Income Tax Considerations  10.30
        • d.  Deed in Lieu of Foreclosure Agreement  10.31
          • (1)  Form: Deed in Lieu Agreement  10.31A
          • (2)  Form: Deed in Lieu of Foreclosure (Recordable)  10.32
          • (3)  Form: Covenant Not to Sue  10.32A
      • 2.  Construction Loan Workouts
        • a.  When Lender Takes Title During Construction
          • (1)  Borrower Assists Lender in Completion  10.33
          • (2)  Liability and Insurance Considerations  10.34
          • (3)  Completion by Single-Purpose Entity  10.35
        • b.  When Receiver Takes Possession and Completes Project  10.36
        • c.  Checklist: Issues to Consider in Drafting Workout  10.37
        • d.  Construction Workout Agreement: Selected Clauses
          • (1)  Form: Provision for Lender to Bid at Foreclosure Sale  10.38
          • (2)  Form: Provision for Handling Unpaid Construction Bills  10.39
          • (3)  Form: Provision Defining Borrower’s Role in Workout  10.40
          • (4)  Form: Provision for Determining Proceeds and Profits of Workout  10.41
          • (5)  Form: Provision Regarding Effect of Future Litigation on Workout  10.42
  • IV.  REMEDIES: LENDER’S CONSIDERATIONS
    • A.  Enforcement of Assignment of Rents Through Receivership  10.43
    • B.  Necessity for Lender’s Underbid at Foreclosure Sale  10.44
    • C.  Enforcement of Construction Lender’s Right to Complete Construction by Taking Possession Through Receiver  10.45
      • 1.  Right to Obtain Court-Appointed Receiver to Complete Improvements  10.46
      • 2.  Form: Clause in Construction (Building) Loan Agreement Authorizing Lender or Receiver to Complete Improvements  10.47
      • 3.  Form: Provision in Order Appointing Receiver Authorizing Completion of Improvements  10.48
      • 4.  Form: Receiver’s Certificate for a Borrowing From Lender  10.49
      • 5.  Responsibilities for Payment of Net Deficit Operations of Receiver  10.50
    • D.  Legal Actions by Construction Lender Against Borrower and Third Parties  10.51
      • 1.  Actions on Personal Guaranties of Payment  10.52
      • 2.  Actions on Personal Guaranties of Completion  10.53
      • 3.  Actions in Tort  10.54
        • a.  Fraud  10.55
        • b.  Waste  10.56
        • c.  Dischargeability in Bankruptcy  10.57
      • 4.  Third Persons’ Tortious Impairment of Security  10.58
      • 5.  Contract Actions By or Against Issuers of Take-Out or Standby Commitments
        • a.  Standing to Sue  10.59
        • b.  Remedies for Lender’s Breach  10.60
      • 6.  Actions on Performance Bonds  10.61
      • 7.  Lender’s Actions Against Title Insurer  10.62
    • E.  Underbidding by Lender at Foreclosure Sale
      • 1.  Potential Importance  10.63
      • 2.  Underbidding and Injunction Bonds  10.64
  • V.  REMEDIES: BORROWER’S CONSIDERATIONS
    • A.  Reinstatement of Accelerated Loan
      • 1.  Requirements of CC §2924c  10.65
      • 2.  Reinstatement Rights and Nonmonetary Defaults  10.66
      • 3.  Borrower Excused From Tendering Reinstatement  10.67
    • B.  Partial Releases While in Default
      • 1.  Release Not Conditioned on Absence of Default  10.68
      • 2.  Release Conditioned on Absence of Default  10.69
      • 3.  Borrower’s Remedies for Wrongful Refusal to Allow a Partial Reconveyance  10.70
    • C.  Borrower’s Action to Enjoin Trustee Sale  10.71
      • 1.  Obtaining Injunction  10.72
      • 2.  Lis Pendens  10.73
    • D.  Borrower’s Pre-Trustee Sale Strategy With Multiple Parcels  10.74
    • E.  Actions Against Lender After Trustee Sale
      • 1.  Action to Set Aside Trustee Sale  10.75
      • 2.  Action for Damages for Wrongful Sale  10.76
      • 3.  Third Party Claims Against Lender After Trustee Sale  10.77

11

Enforcing Secured Loans Against Debtors in Bankruptcy

  • I.  INTRODUCTION
    • A.  Scope of Chapter  11.1
    • B.  Types of Bankruptcy Relief  11.2
    • C.  Commencement, Dismissal, Conversion, and Closure  11.3
    • D.  Distinctions Among Debtors, Debtors in Possession, Trustees, and Committees  11.4
  • II.  AUTOMATIC STAY
    • A.  Overview of Automatic Stay
      • 1.  Before and After BAPCPA (2005 Amendments)  11.5
      • 2.  After BAPCPA (2005 Amendments)  11.6
    • B.  Scope of Automatic Stay
      • 1.  Acts to Create, Perfect, or Enforce Lien  11.7
        • a.  Exceptions to Stay Relating to Foreclosure Sales
          • (1)  Postponing Sale  11.8
          • (2)  Recordation of Trustee’s Deed to Effect Prepetition Sale  11.9
        • b.  Other Exceptions  11.10
        • c.  Exceptions Under BAPCPA  11.11
      • 2.  Tolling of Redemption and Reinstatement Periods
        • a.  Redemption  11.12
        • b.  Reinstatement  11.13
      • 3.  Foreclosure by Senior Lienholder When Debtor’s Only Interest Is Junior Lien  11.14
      • 4.  Postforeclosure Eviction  11.15
      • 5.  Acts to Recover Claim Against Debtor or Debtor’s Property  11.16
    • C.  Violation of Automatic Stay
      • 1.  Acts Violating Stay Are Void  11.17
      • 2.  Rights of Third Party Purchaser at Void Sale  11.18
      • 3.  Statutory Damages and Contempt Sanctions  11.19
  • III.  RELIEF FROM AUTOMATIC STAY
    • A.  Relief Available to Creditors  11.20
    • B.  Enforceability of Prepetition Stay Waivers  11.21
    • C.  Grounds for Relief
      • 1.  Overview  11.22
      • 2.  Cause for Stay Relief
        • a.  Lack of Adequate Protection  11.23
        • b.  Bad Faith  11.24
          • (1)  Successive Filings and Chapter 20s  11.25
          • (2)  New Debtor Syndrome  11.26
          • (3)  Other Relief Based on Bad Faith  11.27
        • c.  Other Cause for Stay Relief  11.28
      • 3.  Lack of Equity and Property Not Necessary for Effective Reorganization  11.29
        • a.  Determining Whether Equity Exists  11.30
        • b.  Necessity of Property for Effective Reorganization  11.31
      • 4.  Single Asset Real Estate  11.32
    • D.  Procedure for Obtaining Relief From Automatic Stay
      • 1.  Motion for Relief From Stay
        • a.  Creditor’s Pleadings  11.33
        • b.  Responsive Pleadings  11.34
        • c.  Preliminary Hearing  11.35
        • d.  Final Hearing  11.36
        • e.  Ex Parte Relief  11.37
        • f.  Discovery  11.38
        • g.  Evidence
          • (1)  Burden of Proof  11.39
          • (2)  Encumbrances  11.40
          • (3)  Value of Property  11.41
      • 2.  Agreement for Relief From Stay
        • a.  Overview and Approval  11.42
        • b.  “Drop Dead” Agreement  11.43
        • c.  Periodic Payment Agreement  11.44
        • d.  Protection of Junior Lienholder  11.45
    • E.  Practical Considerations and Planning
      • 1.  Debtor Considerations
        • a.  Client Interview; Anticipating Requests for Relief From Stay  11.46
        • b.  Checklist: Preliminary Hearing  11.47
        • c.  Final Hearing  11.48
      • 2.  Secured Creditor’s Considerations
        • a.  Gathering Information From Creditor  11.49
        • b.  Checklist: Preliminary Hearing  11.50
    • F.  Enforcing and Challenging Stay Relief Orders and Agreements
      • 1.  Enforcing Orders and Agreements  11.51
      • 2.  Vacating Order on Changed Circumstances  11.52
      • 3.  Modifying Stay Relief Agreement in Plan  11.53
      • 4.  Preclusive Effect of Findings in Stay Relief Litigation  11.54
      • 5.  Appeals  11.55
  • IV.  ENFORCING LIEN ON RENTS
    • A.  Perfection of Lien on Rents  11.56
    • B.  Impact of Bankruptcy on Perfection  11.57
    • C.  Impact of Bankruptcy on Existing Receivership  11.58
    • D.  Application of Rents  11.59
  • V.  OBTAINING CREDIT SECURED BY ESTATE ASSETS
    • A.  Overview  11.60
    • B.  Unsecured Administrative Priority Debt  11.61
    • C.  Unsecured Superpriority Debt and Debt Secured by Unencumbered Property or Junior Liens  11.62
    • D.  Debt Secured by Equal or Senior Liens  11.63
    • E.  Postpetition Advances on Secured Guaranty  11.64
    • F.  Appeals From Borrowing Orders  11.65
  • VI.  USE, SALE, LEASE, OR ABANDONMENT OF PROPERTY
    • A.  Overview of Debtor in Possession or Trustee Authority  11.66
    • B.  Use of Cash Collateral  11.67
      • 1.  Stipulated Authority  11.68
      • 2.  Court Approval  11.69
    • C.  Adequate Protection of Secured Lender’s Interest in Noncash Collateral  11.70
    • D.  Superpriority Claim for Insufficient Adequate Protection  11.71
    • E.  Bankruptcy Sales of Collateral
      • 1.  Overview; Employment of Real Estate Broker  11.72
      • 2.  Sales Free and Clear of Liens  11.73
      • 3.  Procedure Governing Sales  11.74
      • 4.  Collusive and Other Improper Sales  11.75
      • 5.  Credit Bidding at Bankruptcy Sale  11.76
    • F.  Abandonment of Collateral  11.77
    • G.  Surcharge of Secured Creditor’s Collateral  11.78
    • H.  Appeals  11.79
  • VII.  AVOIDANCE POWERS
    • A.  Legal Basis; Limitations  11.80
    • B.  Unrecorded Real Property Interests: 11 USC §544  11.81
    • C.  Avoidable Preferences: 11 USC §547
      • 1.  Prima Facie Preference Action  11.82
      • 2.  Defenses to Preference Actions  11.83
      • 3.  Insider Preferences  11.84
      • 4.  Effect of Avoided Preferential Transfer  11.85
    • D.  Fraudulent Transfers: 11 USC §§544, 548  11.86
    • E.  Unauthorized Postpetition Transfers: 11 USC §549  11.87
    • F.  Judicial Liens Impairing Homestead Exemption: 11 USC §522  11.88
  • VIII.  TREATMENT OF SECURED CLAIMS IN BANKRUPTCY
    • A.  Overview of Claims Process  11.89
    • B.  Secured and Unsecured Claims
      • 1.  Allowance of Secured Claims: 11 USC §506
        • a.  Oversecured and Undersecured Lien Claims  11.90
        • b.  Valuation of Lien Claims  11.91
        • c.  Undersecured Claims; Lien-Stripping  11.92
      • 2.  Undersecured Claims in Chapter 11 Cases; Election Under 11 USC §1111(b)  11.93
      • 3.  Recovery of Interest and Reasonable Attorney Fees and Costs
        • a.  By Oversecured or Undersecured Creditor  11.94
        • b.  By Unsecured Creditor  11.95
  • IX.  REORGANIZATION PLANS: CHAPTERS 11, 12, AND 13
    • A.  Overview of Plans  11.96
    • B.  Chapter 11 Plans
      • 1.  Parties and Claims
        • a.  Who May Propose Plan  11.97
        • b.  Contents of Chapter 11 Plan  11.98
        • c.  Classification of Claims Under 11 USC §1122; Impact of §§1111(b) and 1129(b)  11.99
        • d.  Impaired Classes  11.100
        • e.  Modification of Secured Claims  11.101
        • f.  Modification of Claims Secured Only by Principal Residence  11.102
      • 2.  Voting on Plan; Disclosure Statement  11.103
      • 3.  Confirmation of Chapter 11 Plan  11.104
        • a.  Other Bankruptcy Code Requirements  11.105
        • b.  Plan Proposed in Good Faith  11.106
        • c.  Plan Acceptance by Impaired Classes  11.107
        • d.  “Best Interests” of Impaired Creditors  11.108
        • e.  “Cram Down” of Impaired, Dissenting Classes; Absolute Priority Rule  11.109
          • (1)  Make Deferred Cash Payments  11.110
          • (2)  Sell Collateral Free and Clear of Lien  11.111
          • (3)  Provide Indubitable Equivalent  11.112
        • f.  “New Value” Exception to Absolute Priority Rule  11.113
        • g.  Feasibility Requirement  11.114
        • h.  Other Plan Confirmation Requirements  11.115
      • 4.  Preclusive Effect of Plan Confirmation  11.116
      • 5.  Interpretation and Modification of Plan  11.117
      • 6.  Appeals From Confirmation Orders  11.118
    • C.  Chapter 13 Plans
      • 1.  Individual Debt Adjustment; Qualifying Debtors  11.119
        • a.  Nondischargeability  11.119A
        • b.  Chapter 13 Versus Chapter 11  11.119B
      • 2.  Contents and Duration of Chapter 13 Plan  11.120
        • a.  Modification of Secured Debt  11.121
          • (1)  Due Process Issues  11.122
          • (2)  Home Mortgages  11.123
          • (3)  Multiunit Properties; Boarders  11.124
          • (4)  Personal Property  11.125
          • (5)  Junior Liens; Creditor Strategies  11.126
        • b.  Cure of Defaults and De-Acceleration  11.127
        • c.  Postsale Redemption  11.127A
      • 3.  Confirmation and Cramdown in Chapter 13
        • a.  Plan Confirmation Requirements  11.128
        • b.  Cramdown of Secured Creditors  11.129
        • c.  Payment of Claims to Unsecured Creditors  11.130
      • 4.  Preclusive Effect of Plan Confirmation  11.131
      • 5.  Modification of Chapter 13 Plan  11.132
    • D.  Chapter 12 Plans
      • 1.  Overview of Chapter 12  11.133
      • 2.  Special Definition of “Adequate Protection”  11.134
      • 3.  Power to Sell Property Free and Clear  11.135
      • 4.  Contents of Chapter 12 Plan  11.136
        • a.  Modification of Secured Debt  11.137
        • b.  Cure of Defaults and De-Acceleration  11.138
      • 5.  Confirmation and Cram Down in Chapter 12
        • a.  Plan Confirmation Requirements  11.139
        • b.  Cramdown of Secured Creditors  11.140
        • c.  Payment of Claims to Unsecured Creditors  11.141
      • 6.  Preclusive Effect of Plan Confirmation  11.142
      • 7.  Modification of Chapter 12 Plan  11.143
  • X.  EFFECT OF BANKRUPTCY DISCHARGE
    • A.  Effect of Discharge  11.144
    • B.  Exceptions to Discharge; Vacating Discharge  11.145
  • XI.  APPEALS FROM BANKRUPTCY COURT DECISIONS
    • A.  Overview; Stay Pending Appeal  11.146
    • B.  Expedited Timing for Notice of Appeal  11.147
    • C.  Appeal to Bankruptcy Appellate Panel or District Court  11.148
    • D.  Mootness as Grounds for Dismissal  11.149
      • 1.  Appeals From Asset Sale Orders  11.150
      • 2.  Appeals From Plan Confirmation Orders  11.151
      • 3.  Appeals From Borrowing Orders  11.152

12

Lender and Broker Liability

  • I.  THEORIES OF LIABILITY
    • A.  Introduction; Jury Instructions  12.1
    • B.  Primary Theories of Lender Liability
      • 1.  Breach of Contract  12.2
        • a.  Contract Claim Theories  12.3
        • b.  Oral Contracts; Promissory Estoppel  12.4
      • 2.  Fraud; Negligent Misrepresentation  12.5
        • a.  Income Documentation  12.6
        • b.  Aiding and Abetting Fraud; Conspiracy  12.7
        • c.  Promissory Fraud  12.8
        • d.  Causation Requirement  12.9
      • 3.  Duress  12.10
      • 4.  Negligence  12.11
        • a.  Construction Loans  12.11A
        • b.  Nonconstruction Loans  12.11B
          • (1)  Loan Underwriting  12.11C
          • (2)  Loan Modification, Servicing, and Collection  12.11D
        • c.  Breach of Contract Versus Negligence  12.11E
      • 5.  Conversion  12.12
      • 6.  Defamation  12.13
      • 7.  Infliction of Emotional Distress  12.14
      • 8.  Potential Statutory Liability: Summary of Federal and State Law  12.15
    • C.  Developing Theories of Lender Liability  12.16
      • 1.  Constructive Fraud on Basis of Fiduciary Duty  12.17
        • a.  When Loan Broker Acts as Fiduciary  12.18
        • b.  When Lender Acts as Fiduciary  12.19
        • c.  Barrett and Commercial Cotton  12.20
        • d.  Loan Assignments and Participation Contracts  12.21
      • 2.  Covenant of Good Faith and Fair Dealing
        • a.  Basis and Scope  12.22
        • b.  Damages: Tort Versus Contract
          • (1)  Tort: Special Relationship Required  12.23
          • (2)  Lending Cases Denying Tort Damages  12.24
          • (3)  Denial of Existence of Contract  12.25
        • c.  Lending Cases Denying Contract Damages  12.26
      • 3.  Unfair Business Practices  12.27
      • 4.  Improper Control Over Borrower  12.28
        • a.  Construction Lending  12.29
        • b.  Business Lending  12.30
      • 5.  Unconscionability  12.30A
    • D.  Loan Broker Liability
      • 1.  Licensing Required  12.31
      • 2.  Acts Prohibited by License Laws  12.32
      • 3.  Other Statutes Regulating Brokers
        • a.  Real Property Loan Law  12.33
        • b.  Other State and Federal Laws  12.34
      • 4.  Common Law Duties  12.35
      • 5.  Remedies Against Brokers; Limitations on Liability  12.36
  • II.  LIABILITY IN LOAN ORIGINATION  12.37
    • A.  Liability in Loan Application Phase
      • 1.  State Tort and Contract Law  12.38
      • 2.  Federal Law; Preemption  12.39
    • B.  Liability in Loan Commitment Phase  12.40
      • 1.  Loan Commitment as Contract  12.41
      • 2.  Option to Borrower Versus Opportunity to Borrow  12.42
      • 3.  Oral Commitments; Collateral Agreements
        • a.  Statute of Frauds  12.43
        • b.  Parol Evidence Rule  12.44
        • c.  D’Oench Doctrine and FIRREA  12.45
      • 4.  Unauthorized Commitments  12.46
      • 5.  Loan Assignment  12.47
        • a.  Holder in Due Course Doctrine  12.48
        • b.  Successor Under FDIC Receivership  12.49
      • 6.  Failure of Conditions Precedent; Waiver of Conditions  12.50
      • 7.  Checklist: Commitment Letter Procedures  12.51
    • C.  Liability in Loan Documentation and Closing  12.52
      • 1.  Variations From Terms of Commitment Letter; Unwarranted Delays in Closing  12.53
      • 2.  Conduct in Negotiations  12.54
      • 3.  Waiver of Jury Trials  12.55
      • 4.  Mandatory Arbitration Clauses  12.56
      • 5.  Checklist: Loan Documentation Procedures  12.57
    • D.  Disclosure of Material Adverse Information  12.58
      • 1.  Lender to Borrower  12.59
      • 2.  Broker to Borrower  12.60
      • 3.  To Guarantors and Insurers  12.61
  • III.  LIABILITY IN LOAN ADMINISTRATION  12.62
    • A.  Relationship Between Lender and Borrower
      • 1.  Communication Strategy and Policies  12.63
      • 2.  Effect on Loan Transaction and Liability
        • a.  Creating Fiduciary or Special Relationships  12.64
        • b.  Formalizing New Agreement or Changes to Loan  12.65
      • 3.  Effect of Assignment or Securitization  12.66
    • B.  Loan Documentation
      • 1.  Reviewing Initial Documentation  12.67
      • 2.  Relying on Loan Document Terms  12.68
      • 3.  Further Documentation and Notice  12.69
      • 4.  Waiving or Modifying Loan Terms  12.70
    • C.  Lender Control and Interference  12.71
    • D.  Loan Payoff; Reconveyance  12.72
    • E.  Checklist: Loan Administration Guidelines  12.73
  • IV.  LENDER LIABILITY IN WORKOUTS
    • A.  Analysis of Lender’s Position  12.74
      • 1.  Liability to Borrower  12.75
      • 2.  Liability to Third Parties  12.76
      • 3.  Exposure to Environmental Liability  12.77
    • B.  Staffing During Loan Workouts  12.78
    • C.  Duty to Negotiate  12.79
    • D.  Liability Arising From Workout or Refinancing Negotiations
      • 1.  Oral Representations; Parol Evidence Rule  12.80
      • 2.  Trial Period Plans and Permanent Loan Modifications  12.81
      • 3.  Promissory Estoppel  12.81A
    • E.  Liability for Precipitous Action  12.82
    • F.  Structuring Workout Agreement  12.83
    • G.  Checklist: Guidelines for Lenders During Workouts  12.84
  • V.  LENDER LIABILITY IN FORECLOSURE PROCESS  12.85
    • A.  Action for Wrongful Foreclosure  12.86
    • B.  Grounds for Wrongful Foreclosure Action  12.87
      • 1.  Existence of Default  12.88
      • 2.  Nonmonetary Defaults  12.89
      • 3.  Proper Notice  12.90
      • 4.  Manner of Sale  12.91
      • 5.  Conduct of Sale
        • a.  Statutory Formalities; Authority to Foreclose  12.92
        • b.  Bid-Chilling or Control  12.93
      • 6.  Adequacy of Price  12.94
    • C.  Measure of Damages for Wrongful Foreclosure  12.95
    • D.  “Bad Faith” Foreclosure and Other Sources of Liability  12.96
    • E.  Waiver of Lender Liability Claims in Bankruptcy  12.97
    • F.  Environmental Concerns  12.98
      • 1.  Federal Environmental Law Issues  12.99
      • 2.  State Environmental Law Issues  12.100
    • G.  Checklist: Guidelines for Lenders During Foreclosure Process  12.101
  • VI.  POSTFORECLOSURE LENDER LIABILITY CONCERNS
    • A.  Clearing Title to Property  12.102
      • 1.  Priority Concerns  12.103
      • 2.  Stop Payment Notice Claims  12.104
      • 3.  Other Claims by Suppliers and Laborers  12.105
      • 4.  Title Insurance for Foreclosed Properties  12.106
    • B.  Foreclosure Actions and Actions Against Guarantors  12.107
    • C.  Actions by Purchasers After Foreclosure Sales  12.108

13

Special Issues in Consumer Residential Mortgage Loans

  • I.  CHAPTER SCOPE
    • A.  Introduction  13.1
    • B.  Potential Statutory Liability Under Federal and State Law  13.2
  • II.  FEDERAL PREEMPTION
    • A.  Summary of Preemption Applicable to Mortgage Lending  13.3
    • B.  Preemption Under Dodd-Frank (CFPA)
      • 1.  Summary of CFPA Amendments  13.3A
      • 2.  Section 1041; Relationship to State Law; Conflicts
        • a.  CFPA Conflicts  13.3B
        • b.  Enumerated Consumer Law Conflicts  13.3C
      • 3.  Section 1042; Preservation of State Enforcement Powers  13.3D
      • 4.  Section 1043; Preservation of Existing Contracts  13.3E
      • 5.  Sections 1044 and 1045; Preemption of State Law Affecting National Banks and Subsidiaries
        • a.  State Consumer Financial Laws: Definition  13.3F
        • b.  Preemption Standards and Scope  13.3G
        • c.  Preemption Determination Procedures  13.3H
        • d.  Subsidiaries and Affiliates of National Banks  13.3I
      • 6.  Section 1046; Preemption of State Law Affecting Federal Savings Associations  13.3J
      • 7.  Section 1047; Exceptions to Visitorial Standards for National Banks and Federal Savings Associations  13.3K
  • III.  SUMMARY OF CALIFORNIA RESIDENTIAL LENDING STATUTES
    • A.  Consumer Protections in Financial Code  13.4
    • B.  SB 1137 and Homeowner Bill of Rights  13.5
    • C.  Foreclosure Rescue and Foreclosure Consultation Statutes  13.6
    • D.  Suspending or Closing HELOCs  13.6A
  • IV.  SUMMARY OF ELDER ABUSE LAWS
    • A.  Financial Elder Abuse  13.7
    • B.  Regulation of Reverse Mortgages  13.8
      • 1.  Repayment Due Date; Effect on Nonborrower Spouse  13.8A
      • 2.  Notice to Borrower Before Foreclosure  13.8B
  • V.  SUMMARY OF FEDERAL RESIDENTIAL LENDING STATUTES
    • A.  TILA and Regulation Z: Truth in Lending  13.9
      • 1.  History of TILA  13.10
      • 2.  Sources of TILA Law  13.11
      • 3.  Lenders and Loans Governed by TILA  13.12
        • a.  Loans Subject to TILA Disclosures  13.13
        • b.  Rescission Versus Damages  13.14
        • c.  Dodd-Frank Additions Affecting Loan Originating and Servicing  13.15
        • d.  Dodd-Frank and HFA Amendments: Identity of Noteholder; Notice of Note Transfer  13.16
    • B.  HOEPA: Home Ownership and Equity Protection Act of 1994  13.17
      • 1.  “Open-End Credit Loan” Defined  13.18
      • 2.  Required Disclosures  13.19
      • 3.  Limited or Prohibited Loan Practices  13.20
      • 4.  HOEPA Changes Effective October 1, 2009  13.21
      • 5.  HOEPA Changes After Dodd-Frank  13.22
    • C.  Real Estate Settlement Procedures Act of 1974  13.23
      • 1.  RESPA Disclosures; Settlement Statement (Before January 1, 2010)  13.24
      • 2.  RESPA Disclosures; Settlement Statement (Effective January 1, 2010)  13.25
      • 3.  RESPA Disclosures; Settlement Statement (Amendments Effective After Dodd-Frank)  13.25A
    • D.  CFPB Regulations Integrating TILA and RESPA Disclosures for Consumer Loans (Effective in 2015)  13.25B
      • 1.  Purpose of TRID; Effective Dates  13.25C
      • 2.  Applicability of TRID; CFPB Forms  13.25D
      • 3.  Content and Timing Requirements
        • a.  Loan Estimate  13.25E
        • b.  Closing Disclosure  13.25F
      • 4.  Lender Liability  13.25G
    • E.  Fair Housing Laws  13.26
      • 1.  Statute of Limitations  13.27
      • 2.  Actions Under 42 USC §3605; Lending Discrimination  13.28
      • 3.  Conduct Prohibited by FHA; Disparate Treatment or Impact  13.29
      • 4.  Discriminatory Rescue Services  13.30
      • 5.  Gender Discrimination Under FHA  13.31
    • F.  Federally Insured and National Bank Loans  13.32
    • G.  Racketeer Influenced and Corrupt Organizations Act (RICO)  13.33
    • H.  False Claims Act  13.34
  • VI.  RESIDENTIAL MORTGAGE LOANS UNDER DODD-FRANK ACT
    • A.  Dodd-Frank Overview and Effective Dates  13.35
    • B.  Table: Effective Dates for Dodd-Frank Act Title X (§§1001–1100H) (Bureau of Consumer Financial Protection)  13.35A
    • C.  Table: Effective Dates for Dodd-Frank Act Title XIV (§§1400–1498) (Mortgage Reform and Anti-Predatory Lending Act)  13.35B
    • D.  Dodd-Frank’s Lender Obligations During Loan Underwriting  13.36
      • 1.  Consumer’s Ability to Repay Loan  13.37
        • a.  Introduction  13.38
        • b.  Section 1411—Ability to Repay
          • (1)  General Requirements  13.39
          • (2)  Income Verification  13.40
          • (3)  “Nonstandard” Loans  13.41
          • (4)  Refinancing “Hybrid” Loans to “Standard” Loans  13.42
        • c.  Section 1412-Qualified Mortgages
          • (1)  Safe Harbor for Qualified Mortgages and Rebuttable Presumption for Higher-Priced Transactions  13.43
          • (2)  Criteria for Qualified Mortgages  13.44
          • (3)  Balloon-Payment Qualified Mortgages  13.45
      • 2.  Underwriting Standards for TILA Higher-Priced Mortgage Loans  13.45A
        • a.  Underwriting and Prepayment Penalties  13.45B
        • b.  Escrow Rule and Impound Accounts  13.45C
      • 3.  Appraisal Standards
        • a.  Introduction  13.46
        • b.  Appraisal Independence Provisions
          • (1)  Scope  13.47
          • (2)  Coercion to Affect Valuations Prohibited  13.48
          • (3)  Mischaracterization of Value  13.49
          • (4)  Prohibition on Conflicts of Interest  13.50
            • (a)  Employment by Creditor or Affiliate  13.51
            • (b)  Larger Creditor Safe Harbor  13.52
            • (c)  Smaller Creditor Safe Harbor  13.53
          • (5)  Prohibition on Extension of Credit if Creditor Has Knowledge of Violation of Independence or Conflict-of-Interest Rules  13.54
        • c.  Customary and Reasonable Compensation
          • (1)  Scope  13.55
          • (2)  Presumptions of Compliance With Duty to Pay Customary and Reasonable Compensation to Fee Appraisers  13.56
            • (a)  First Presumption of Compliance  13.57
            • (b)  Second Presumption of Compliance  13.58
        • d.  Appraisal Requirements for Higher-Risk/Higher-Priced Mortgages  13.59
        • e.  Minimum Requirements for Appraisal Management Companies  13.59A
      • 4.  Mandatory Arbitration Prohibited  13.60
  • VII.  PREDATORY LENDING LITIGATION
    • A.  Historical Background  13.61
    • B.  Summary of Predatory Lending Practices  13.62
    • C.  Preliminary Considerations
      • 1.  Tort Versus Contract Damages  13.63
      • 2.  Checklist: Predatory Lending Facts  13.64
    • D.  Summary of Predatory Lending Remedies (Former Parties; Sources and Theories of Liability)  13.65
    • E.  Statutory Remedies  13.66
      • 1.  Rescission Remedies Under Truth in Lending Act
        • a.  Rights to Rescind  13.67
          • (1)  Statute of Limitations; Statute of Repose  13.68
          • (2)  Scope of Remedy; Effect of Sale, Foreclosure, Transfer, Bankruptcy, or Refinancing  13.69
          • (3)  Assignee Liability  13.70
          • (4)  Right to Rescind May Be Used Defensively  13.71
        • b.  Inaccurate Disclosures Trigger Rescission Right  13.72
          • (1)  Annual Percentage Rate  13.73
          • (2)  Finance Charge; Amount Financed; Total Payments  13.74
          • (3)  Disclosure Requirements Under Dodd-Frank Amendment to TILA  13.75
        • c.  Rescission Procedure  13.76
        • d.  Tender Issues  13.77
      • 2.  Other Remedies Under TILA
        • a.  Injunctive Relief  13.78
        • b.  Damages Under TILA Before Dodd-Frank  13.79
        • c.  Damages Under TILA After Dodd-Frank  13.80
        • d.  Attorney Fees  13.81
        • e.  Lender’s Title Insurance for TILA Violations No Longer Available  13.82
      • 3.  Remedies Under RESPA
        • a.  Private Right of Action for Violations  13.83
          • (1)  Section 6: Disclosure of Loan Servicing Transfer  13.84
          • (2)  Disclosure of Noteholder’s Identity  13.85
          • (3)  Section 6: Notices of Error, Requests for Information, and Qualified Written Requests  13.86
          • (4)  Section 6: Private Right of Action; Class Actions  13.87
          • (5)  Section 8: Kickbacks, Fee-Splitting, Unearned Fees  13.88
          • (6)  Section 9: Title Companies  13.89
        • b.  Section 10: Impound Accounts  13.90
        • c.  RESPA’s Statute of Limitations  13.91
    • F.  Common Law Remedies
      • 1.  Fraud  13.92
      • 2.  Breach of Fiduciary Duty  13.93
      • 3.  Negligence  13.94
      • 4.  Breach of Contract and the Covenant of Good Faith and Fair Dealing  13.95
    • G.  Procedural Issues
      • 1.  Foreclosure Issues  13.96
      • 2.  Postforeclosure Issues  13.97
      • 3.  Preemption  13.98
    • H.  Comparing Potential Remedies
      • 1.  Rescission; Restitution; Modification  13.99
      • 2.  Damages
        • a.  General Measure of Damages
          • (1)  Breach of Contract  13.100
          • (2)  Tort  13.101
          • (3)  “Benefit of the Bargain” Rule in Fiduciary Breach Cases  13.102
        • b.  Treble Damages in Actions Involving Senior Citizens or Disabled Persons  13.103
        • c.  Punitive Damages; CC §§3294, 3345  13.104
      • 3.  Attorney Fees  13.105
    • I.  Special Problems
      • 1.  Holder in Due Course Sanitization  13.106
      • 2.  Antideficiency Rules  13.107
        • a.  Purchase Money Loans  13.108
        • b.  Nonjudicial Foreclosures  13.109
        • c.  Sold-Out Junior Issues  13.110
      • 3.  Workout Strategies on Residential Loans  13.111
      • 4.  Negligent Appraisals  13.112
      • 5.  Bankruptcy  13.113
        • a.  Of Borrower  13.114
        • b.  Of Lender or Its Officers  13.115
    • J.  Other Resources
      • 1.  Government Websites  13.116
      • 2.  Legal Aid Providers and Attorney or Consumer Resources  13.117

CALIFORNIA MORTGAGES, DEEDS OF TRUST, AND FORECLOSURE LITIGATION

(4th Edition)

February 2021

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH02

Chapter 2

Trustee Sales

02-130

§2.130

Recordable Notice of Default

02-130A

§2.130A

Summary of Key Information (Attachment to Notice)

02-131

§2.131

Request for Notice of Default

02-132

§2.132

Unruh Act Special Notice

02-133

§2.133

Recordable Notice of Sale for Trustor

02-133A

§2.133A

Summary of Key Information (Attachment to Notice)

02-133B

§2.133B

Notice of Sale for Residential Tenant [Repealed]

02-134

§2.134

Trustee’s Deed

CH03

Chapter 3

Judicial Foreclosure

03-039

§3.39

Checklist: Essential Allegations

03-065

§3.65

Checklist: Evidence Required for Foreclosure Judgment

03-102

§3.102

Complaint for Foreclosure of Deed of Trust

03-103

§3.103

Judgment of Foreclosure and Order of Sale

03-106

§3.106

Notice of Sale

03-107

§3.107

Certificate of Sale

03-108

§3.108

Notice of Right of Redemption

03-109

§3.109

Report of Sheriff/Receiver and Account of Sale

03-110

§3.110

Deed of Sale

03-111

§3.111

Notice of Motion for Deficiency Judgment

03-112

§3.112

Application for Order and Order Appointing Referee to Appraise Property

03-113

§3.113

Deficiency Judgment Following Foreclosure

CH04

Chapter 4

Code of Civil Procedure §726(a): The One-Action Rule

04-046

§4.46

Form Provision: Allegation of Worthless Security

CH06

Chapter 6

Receiverships, Rents, and Leases

06-099

§6.99

Complaint for Specific Performance of Assignment of Rents

06-100

§6.100

Notice of Motion for Appointment of Receiver

06-101

§6.101

Declaration in Support of Application for Receivership

06-102

§6.102

Order Appointing Receiver

06-107

§6.107

Notice to Tenant of Demand to Pay Rent

06-108

§6.108

Application for Order Directing Receiver to Transfer Possession of Real Property and File Final Accounting

06-109

§6.109

Declaration in Support of Application for Order Directing Receiver to Transfer Possession of Real Property

06-110

§6.110

Order Directing Receiver to Transfer Possession of Real Property and File Final Accounting

CH07

Chapter 7

Debtor Strategies

07-001A

§7.1A

Checklist: Debtor’s Legal Alternatives When Facing Foreclosure

07-030

§7.30

Demand Letter Requesting Lender or Loan Servicer to Provide Documentation of Loan Claim

07-044

§7.44

Complaint to Enjoin Foreclosure, and for Declaratory Relief and an Accounting

07-047

§7.47

Checklist: Procedure for Obtaining TRO and OSC

07-048

§7.48

Order to Show Cause and Temporary Restraining Order

07-049

§7.49

Checklist: Obtaining Hearing on Preliminary Injunction

07-050

§7.50

Notice of Motion for Preliminary Injunction

07-073

§7.73

Complaint to Set Aside Trustee Sale and for Damages

07-106

§7.106

Checklist: Defenses to Stay Relief

CH08

Chapter 8

Payment and Related Disputes

08-030

§8.30

Form Provision: Late-Charge Clause

CH10

Chapter 10

Workouts of Problem Loans

10-002

§10.2

Checklist: Loan Contract Documents

10-002B

§10.2B

Default Notice

10-003A

§10.3A

Pre-Negotiation Letter

10-022A

§10.22A

Forbearance Agreement

10-022C

§10.22C

Escrow Agreement for Deed in Lieu of Foreclosure

10-023A

§10.23A

Loan Modification Agreement

10-031A

§10.31A

Deed in Lieu Agreement

10-032

§10.32

Deed in Lieu of Foreclosure (Recordable)

10-032A

§10.32A

Covenant Not to Sue

10-037

§10.37

Checklist: Issues to Consider in Drafting Workout

10-038

§10.38

Provision for Lender to Bid at Foreclosure Sale

10-039

§10.39

Provision for Handling Unpaid Construction Bills

10-040

§10.40

Provision Defining Borrower’s Role in Workout

10-041

§10.41

Provision for Determining Proceeds and Profits of Workout

10-042

§10.42

Provision Regarding Effect of Future Litigation on Workout

10-047

§10.47

Clause in Construction (Building) Loan Agreement Authorizing Lender or Receiver to Complete Improvements

10-048

§10.48

Provision in Order Appointing Receiver Authorizing Completion of Improvements

10-049

§10.49

Receiver’s Certificate for a Borrowing From Lender

CH11

Chapter 11

Enforcing Secured Loans Against Debtors in Bankruptcy

11-047

§11.47

Checklist: Preliminary Hearing

11-050

§11.50

Checklist: Preliminary Hearing

CH12

Chapter 12

Lender and Broker Liability

12-051

§12.51

Checklist: Commitment Letter Procedures

12-057

§12.57

Checklist: Loan Documentation Procedures

12-073

§12.73

Checklist: Loan Administration Guidelines

12-084

§12.84

Checklist: Guidelines for Lenders During Workouts

12-101

§12.101

Checklist: Guidelines for Lenders During Foreclosure Process

CH13

Chapter 13

Special Issues in Consumer Residential Mortgage Loans

13-064

§13.64

Checklist: Predatory Lending Facts

 

Selected Developments

February 2022 Update

COVID-19 Pandemic. At the time of this writing, the COVID-19 pandemic continues to disrupt many aspects of daily life. To help alleviate the myriad economic and public health concerns caused by the pandemic, federal, state, and local governments have passed a number of significant responsive measures.

  • In 2020, the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020 expanded foreclosure protections under the California Homeowner Bill of Rights (HBOR) to first lien mortgages or deeds of trust secured by tenant-occupied residential real property that contains no more than four dwelling units and meets other criteria (e.g., tenant is unable to pay rent due to hardship arising from COVID-19). See CC §2924.15. These amendments had been scheduled to end January 1, 2023. See Stats 2020, ch 37 (AB 3088). However, the protections have been extended beyond January 1, 2023. See Stats 2021, ch 360 (AB 1584) and discussions in §§2.49B–2.49D, 2.49G, 7.38, 10.8, 10.8E–10.8F.

  • Until January 1, 2026, CC §2924m provides an eligible bidder 45 days after a foreclosure auction of a single-family home to purchase the property if they can match (in the case of tenants) or exceed (for all other eligible bidders) the last and highest bid made at the auction. Eligible bidders include tenants of the foreclosed property, prospective owner-occupants (as defined), local governments, and housing nonprofits. CC §2924m(a). This alternative process will be repealed on January 1, 2026, unless otherwise extended by statute. CC §2924m(g). See Stats 2020, ch 202 (SB 1079) (anticipating wave of foreclosures from pandemic and intending to prevent substantial decline in homeownership rates). See §§2.73, 2.76, 2.79, 2.133.

  • Until January 1, 2026, the period under CC §2924h(c), within which the recordation of the trustee’s deed after a nonjudicial foreclosure sale relates back to 8 a.m. on the date of the sale, has been extended to 21 calendar days. If a statute does not extend the repeal date, then effective January 1, 2026, the period will once again be 15 calendar days. In addition, the relation-back period in the case of an eligible bidder purchasing the property under the alternative procedure described in CC §2924m has been extended to 60 calendar days. This relation-back period will be repealed on January 1, 2026, unless otherwise extended by statute. See §§2.79, 2.99A, 7.87, 7.93, 11.9, 11.81, 11.87.

  • On August 3, 2021, the Centers for Disease Control and Prevention (CDC) invoked 42 USC §264 to issue an order prohibiting residential evictions in any county while the county is experiencing substantial or high levels of community transmission of COVID-19. The CDC’s order was effective until October 3, 2021. To avoid eviction, a covered tenant must submit a declaration stating that (1) the tenant has used best efforts to obtain government assistance for rent or housing; (2) the tenant either (a) earned no more than $99,000 ($198,000 for a married couple) in 2020 or expects to earn no more than $99,000 ($198,000 for a married couple) in 2022, (b) was not required to report income in 2020, or (c) received an Economic Impact Payment; (3) the tenant is unable to pay full rent due to substantial loss in income or extraordinary medical expenses; (4) the tenant is using best efforts to make timely partial payments of rent due; (5) the tenant would be unable to find suitable housing that does not require living in close quarters if evicted; and (6) the tenant resides in a U.S. county experiencing substantial or high rates of community transmission of COVID-19, as defined by the CDC. See 86 Fed Reg 43244 (Aug. 6, 2021). The United States Supreme Court invalidated the CDC’s order in Alabama Ass’n of Realtors v Department of Health & Human Servs. (2021) ___ US ___, 141 S Ct 2485, 2488. See §7.75A.

  • At the time of establishing live contact, and until October 1, 2022, the servicer must take certain additional actions related to the COVID-19 pandemic. See 12 CFR 1024.39(e)(2) (effective Aug. 31, 2021), discussed in §10.8H.

Trustee Sales (Nonjudicial Foreclosures)

  • Effective January 1, 2023, for HBOR protections to apply, the borrower must either (1) have been approved for a first lien loan modification or other foreclosure prevention alternative before January 1, 2023, or (2) submit a completed application for a first lien loan modification before January 1, 2023, and, as of January 1, 2023, either the mortgage servicer has not yet determined whether the applicant is eligible for a first lien loan modification or the appeal period for the mortgage servicer’s denial of the application has not yet expired. CC §2924.15(a)(2)(C), as amended by Stats 2021, ch 360 (AB 1584). See §2.49.

  • In Billesbach v Specialized Loan Servicing LLC (2021) 63 CA5th 830, 849, the court held that a borrower’s loan-modification application was no longer pending at time of the foreclosure sale when the mortgage servicer advised the borrower “in no uncertain terms” that if it did not receive payment by a particular date, the modification offer would end. See §2.49D. The court also noted that neither the HBOR nor California caselaw expressly defines “material,” but federal district courts applying California law have held that a violation is material if it affected the borrower’s loan obligations, disrupted the loan-modification process, or otherwise harmed the borrower in connection with the borrower’s efforts to avoid foreclosure. See §2.49E. Finally, the could held that a mortgage servicer cured its violations when it postponed the foreclosure sale, provided the borrower with a single point of contact, communicated with borrower about foreclosure alternatives, reviewed borrower’s loan-modification application, and offered borrower a trial-period modification plan; in addition, the servicer was not required to file a new notice of default after affording the borrower an opportunity to apply for a loan modification. See §2.49E.

Debtor Strategies

  • A judgment entered in violation of CCP §764.010 is void as being beyond the court’s fundamental powers to provide a final determination on title. See Paterra v Hansen (2021) 64 CA5th 507, 536, in §7.69.

  • To preserve the summary nature of unlawful detainer proceedings, courts narrowly construe whether a claim directly relates to the conduct of the sale and are thus precluded. Struiksma v Ocwen Loan Servicing, LLC (2021) 66 CA5th 546, 556 (plaintiffs’ non-TILA claims were not precluded by unlawful detainer proceeding when they focussed on activity predating initiation of trustee’s sale procedures and related to defendant’s failure to apply payments to their account). See §7.76.

  • The court in Guido v Strategic Funding Source, Inc. (In re Guido) (Bankr SD Cal, June 1, 2021, No. 19-02571-LT7) 2021 Bankr Lexis 1484, *13, construed Cal Rules of Ct 3.650, which requires the party that caused the stay to file a notice of the stay and attach a copy of the order or other document evidencing the stay, stating that “[t]he Court concludes that language of the Rule is clear; Ms. Guido, as the party that caused the stay, had the duty to file the [Rule 3.650] Notice.” The court also noted that the duty to file a Rule 3.650 notice extends to the party’s attorney of record. See §7.85.

  • The court in In re Confer (Bankr ED Cal, June 8, 2021, No. 21-20167-A-13 BHS-1) 2021 Bankr Lexis 1545 concluded that a prepetition executory contract was of no force and effect following the filing of a Chapter 13 petition and refused to grant the buyers’ motion for stay relief to prosecute the prepetition specific performance action for contract). See §§7.87, 7.91.

  • Determining eligibility based on the debtor’s schedules does not constitute an abuse of discretion unless a creditor (or the trustee) (1) objects on eligibility grounds, (2) alleges in good faith that the debtor’s schedules were filed in bad faith, and (3) points to or presents concrete, specific evidence indicating that the debtor manipulated the scheduled debt amounts to fall within the debt limits of 11 USC §109(e). EmCyte Corp. v Stahl (In re Stahl) (BAP 9th Cir, Apr. 7, 2021, No. CC-20-1254-SGF) 2021 Bankr Lexis 921. Further, the bankruptcy appellate panel in In re Stahl noted that determining eligibility based on proofs of claim filed is impermissible. See §7.88B.

  • The homestead exemption is interpreted liberally even if the debtor is guilty of egregious misconduct, such as falsely representing the existence of a lien to avoid a sale of the real property security by the bankruptcy trustee. See Tuxton China, Inc. v The Oneida Group Inc. (In re Gilman) (CD Cal, Oct. 28, 2020, No. 2:19-cv-10534-SVW) 2020 US Dist Lexis 229905, *9 (although debtor failed to indicate on his initial schedule that property for which he was claiming homestead exemption was in escrow at the time, district court ultimately allowed claim of exemption, finding that “[a]lthough Debtor’s conduct in this case surely raises credibility questions, Debtor’s testimony was not so internally inconsistent or implausible on its face that a reasonable factfinder would not credit it,” including his testimony that he planned to continue living in residence), in §7.88D.

  • The bankruptcy court in In re NSHE CA Bulls, LLC (SD Cal, Dec. 15, 2020, No. 19-07519-LT11) 2020 Bankr Lexis 3523, *10, held that CC §1717 was inapplicable in connection with a party’s objection to plan confirmation because the terms and enforceability of the operative contracts were not at issue, stating that the “objections to confirmation including the trial did not involve a determination of whether the Note or Deed of Trust were enforceable.” See §7.122.

Workouts of Problem Loans

  • The court in Billesbach v Specialized Loan Servicing LLC (2021) 63 CA5th 830, 849, held that the borrower’s loan-modification application was no longer pending at the time of foreclosure sale when the mortgage servicer advised the borrower “in no uncertain terms” that if it did not receive payment by a particular date, the modification offer would end. See §10.8.

Enforcing Secured Loans Against Debtors in Bankruptcy

  • The exclusive jurisdiction of the federal courts over bankruptcy under the Bankruptcy Code precludes any state law claims for abuse of process premised on the filing of a “bad faith” bankruptcy petition or other acts taken under the Bankruptcy Code. See Steward Fin., LLC v Bral (In re Bral) (BAP 9th Cir 2020) 622 BR 737, 744 (claim based on state court wrongful bankruptcy cause of action was properly disallowed; federal preemption barred state court suit), in §11.3.

  • The Rosson line of cases has now been expressly overruled in light of the Supreme Court’s decision in Law v Siegel (2014) 571 US 415, 134 S Ct 1188, which made clear that “a bankruptcy court may not use its equitable powers ... to contravene express provisions of the Bankruptcy Code.” Nichols v Marana Stockyard & Livestock Mkt., Inc. (In re Nichols) (9th Cir 2021) 10 F4th 956, 961 (Chapter 13 debtors have absolute right to voluntarily dismiss their case, provided case has not been previously converted). When an 11 USC §1307(b) motion to dismiss and a §1307(c) motion to convert are pending at the same time, the court must grant the dismissal under §1307(b). See discussion in §11.3.

  • The bankruptcy court in In re Confer (Bankr ED Cal, June 8, 2021, No. 21-20167-A-13 BHS-1) 2021 Bankr Lexis 1545 (unpublished opinion) held that the state court’s decree of specific performance was an order only compelling the seller of real estate to complete the transaction and did not extinguish the sellers’ legal or equitable rights and thus automatic stay applied to the property. See §11.5.

Special Issues in Consumer Residential Mortgage Loans

  • In City of Oakland v Wells Fargo & Co. (9th Cir 2021) 14 F4th 1030, 1039, the Ninth Circuit held that Oakland did not meet the Supreme Court’s “directness requirement of the proximate-cause standard” when the city claimed that the defendant’s discriminatory lending practices caused higher default rates, which in turn triggered higher foreclosure rates, driving down assessed values, which ultimately resulted in lost property tax revenue. The court concluded that “[t]hese downstream ‘ripples of harm’ are too attenuated and travel too ‘far beyond’ Wells Fargo’s alleged misconduct to establish proximate cause.” City of Oakland v Wells Fargo & Co., supra. See §13.26.

About the Authors

Roger Bernhardt, now deceased, received his B.A., M.A., and J.D. degrees from the University of Chicago and was Emeritus Professor of Law at Golden Gate University, San Francisco. He was also the editor of CEB’s California Real Property Law Reporter and the author of numerous real property titles. Admitted to practice law in both California and New York, Professor Bernhardt was a member of the American Law Institute, the American College of Real Estate Lawyers, and the American College of Mortgage Attorneys.

Charles A. Hansen, B.A., 1973, University of California, Los Angeles; J.D., 1977, University of California, Berkeley, School of Law, is a partner in Wendel, Rosen, Black & Dean, LLP, Oakland, with a focus on real estate, commercial, and secured transactions litigation. He is currently a consultant and expert witness in a variety of state and federal court litigation matters relating to commercial and real estate lending, title insurance, escrows, trust deeds and foreclosures, real estate sales transactions, commercial leasing, guarantees, attorney and broker standards of care and conduct, title searching and chain-of-title issues, priorities, real estate development, personal property secured transactions, and usury in the real estate context. From 1985 to 2016, he taught advanced real estate courses to law and MBA students at the University of California, Berkeley, School of Law. He is a frequent lecturer on mortgage remedies for CEB and is the Transactions & Litigation Editor of CEB’s Real Property Law Reporter.

Chapter 7

Louis J. Esbin, B.S., 1981, Albany State (SUNY); J.D., 1984, Golden Gate University, San Francisco, contributed to chapter 7. Mr. Esbin has practiced law as the owner of Esbin Law Offices in Stevenson Ranch since 1993, where he provides bankruptcy, corporate formation, transactional, and merger and acquisition services to clients throughout California. He represents both corporate and individual clients, including small emerging businesses, corporations, and individuals, as debtors and creditors. Mr. Esbin counsels his clients on approaching their matters with a practical cost-benefit analysis. He is a founding board member of the Santa Clarita Valley Bar Association, a founding member of the Central District Consumer Bankruptcy Attorneys Association, a California Certified Legal Specialist in Bankruptcy Law (State Bar of California), and a member of the Financial Lawyers Conference and California Bankruptcy Forum.

Chapter 9

Michael T. Andrew, B.S., 1974, Regis College, Denver; J.D., 1979, Stanford Law School, Palo Alto, contributed to chapter 9. Mr. Andrew is of counsel with Dentons US LLP, San Diego. Mr. Andrew practices and consults in the areas of real and personal property secured transactions, commercial law, and business bankruptcy. His primary practice is representing real property secured lenders in matters ranging from negotiation, structuring, and documentation of loan transactions to enforcement and bankruptcy. He is a frequent lecturer and writer on commercial and bankruptcy law, and he has taught at Stanford Law School, the University of Colorado School of Law, and the University of San Diego School of Law.

Chapter 10

Randy Sugarman, B.A., M.B.A., Stanford University, contributed to chapter 10. Mr. Sugarman, a certified public accountant, is the managing partner of Sugarman & Company LLP, San Francisco. He serves as a financial consultant on loan workouts and bankruptcies for a wide range of industries, including construction, financial institutions, professional service firms (including accounting, engineering, and law), and real estate investment. He provides litigation support to both defense and plaintiff legal counsel, prepares financial analyses, and provides expert witness testimony on management and financial issues. Mr. Sugarman has assumed management responsibilities, implemented cost controls, negotiated with creditors, and supervised the orderly liquidation of assets. He acts as a State Court Receiver, Federal Bankruptcy Trustee, Assignee for Benefit of Creditors, and Examiner. Substantial portions of chapter 10 were based on chapter 1 of 2 California Real Property Financing (Cal CEB 1989), written by Bernard Kolbor, Aaron M. Peck, and Stephen E. Traverse and updated in 2003 by Joan M. Cambray, Martin M. Fleisher, and Timothy S. Williams.

Chapter 11

Richard M. Adler, B.A., 1981, University of California, Santa Barbara; J.D., 1984, University of California, Davis, School of Law, was the original author of chapter 11 and an update author for several years on the third edition. An attorney in Berkeley, Mr. Adler specializes in bankruptcy, including business restructuring and creditors’ rights. He represents financially distressed public and private companies, creditors, and other interested parties including lessors, purchasers of assets, and creditors’ committees in connection with matters related to financial workouts and restructurings, bankruptcy cases, and assignments for the benefit of creditors.

Mark S. Bostick, B.A., 1978, University of California, Berkeley; J.D., 1983, University of San Francisco School of Law, has been an update author, contributing editor, or consultant for chapter 11 continuously since 2007. Mr. Bostick is a partner in Wendel, Rosen, Black & Dean, Oakland, and represents debtors, committees, trustees, creditors, and other interested parties in bankruptcy proceedings and workouts. He has served as lead counsel to debtors in possession or trustees in Chapter 11 bankruptcy cases for a wide range of companies. He also represents numerous official and informal creditors’ committees, trustees, and receivers. His practice emphasizes bankruptcy administration and litigation. He is a member of the California Bankruptcy Forum, the Alameda County Bar Association, the American Bankruptcy Institute, and the National Association of Bankruptcy Trustees.

Chapter 12

Kurt F. Eggert, B.A., Rice University, Houston; J.D., University of California, Berkeley, School of Law, contributed to chapters 12 and 13. Mr. Eggert is a professor of law at Chapman University School of Law, Orange. He has published several articles in legal journals on the holder in due course doctrine, the securitization of mortgages, mortgage servicing issues, and the subprime mortgage market. He is a former member of the Federal Reserve Board’s Consumer Advisory Council and has testified to Congress on mortgage issues. Previously, he litigated mortgage and other consumer finance issues at Bet Tzedek Legal Services, a legal aid organization.

Chapter 13

Pamela D. Simmons, J.D., Lincoln Law School of San Jose, contributed to chapter 13. Ms. Simmons is a partner with Simmons & Purdy, Soquel. She represents homeowners on mortgage loan and loan servicing issues. Before private practice, she was an assistant district attorney prosecuting real estate, mortgage, and other white-collar fraud in Santa Cruz County. Since 1995 she has represented borrowers in litigation on violations of federal and state lending laws, including the Truth in Lending Act (TILA) and the Homeowner Bill of Rights (HBOR). One of her specialized skills involves the “audit” of payment records provided by lenders. She has taught secured real estate transactions at Lincoln Law School in San Jose. Ms. Simmons regularly speaks on mortgage-related matters to real estate professionals, homeowners, elders, and investors and at the American Bar Association’s annual real estate symposia.

About the 2022 Update Authors

Richard L. Antognini, A.B., 1974, University of California Berkeley; J.D., 1977, University of California, Hastings College of the Law, is a civil appellate lawyer in private practice in Grass Valley, California. He represents consumers and borrowers in the California courts of appeal, the California Supreme Court, the Ninth Circuit, and the United States Supreme Court. His appellate practice focuses on consumer protection statutes, such as the Truth in Lending Act, the Consumer Legal Remedies Act, and borrower protection statutes, such as the Homeowners Bill of Rights. Mr. Antognini’s important appellate decisions include Yvanova v New Century Mortgage Corp. (2016) 62 C4th 919; Glaski v Bank of America (2013) 218 CA4th 1079; Demarest v HSBC Bank USA (9th Cir 2019) 920 F3d 1223; Hacker v Homeward Residential (2018) 26 CA5th 270; and Chacker v JPMorgan Chase Bank (2018) 27 CA5th 351. His notable bankruptcy decisions include Pham v Golden (9th Cir BAP 2015) 536 BR 428, a sanctions case. He also handles attorney fees disputes, both as appellate counsel and expert witness. Mr. Antognini is an update author for chapters 2, 7, 10, and 12.

Corrine Bielejeski, B.A., 2003, University of California, Santa Barbara; J.D., 2006, University of California, Davis, School of Law, joined as an annual update author for chapter 11 in 2018. She served as law clerk to the Hon. Edward D. Jellen in the United States Bankruptcy Court, Northern District of California for two years before entering private practice. A decade ago, she opened her own office, East Bay Bankruptcy Law & Financial Planning, now located in Brentwood. Ms. Bielejeski’s debtor work includes filing bankruptcy cases under Chapters 7 and 13, lien strips, cramdowns, and lien avoidance motions. Her creditor work includes representing individuals and small businesses in Chapters 7, 11, and 13, often involving employers, ex-spouses, or business partners. She regularly speaks on bankruptcy issues and is an active member of the Contra Costa County Bar Association and the American Bar Association.

Kevin Brodehl, B.A., with High Honors, 1995, University of California, Santa Barbara; J.D., 1998, University of California, Davis, School of Law, is a partner with Patton Sullivan Brodehl, LLP, with offices in the San Francisco Bay Area. He joined the update team for this book in 2013 and continued to assist in updating nearly all chapters through the 2020 update. He specializes in real property litigation involving secured transactions, deeds of trust, foreclosure and antideficiency, receivership, development agreements, joint ventures, LLCs, and commercial leases. He also handles civil appeals and writs in the California courts of appeal and federal courts of appeals. He has taught at the University of California, Berkeley, School of Law and presents MCLE classes for California attorneys on the subjects of real estate and mortgage law.

Louis J. Esbin updated the bankruptcy sections in chapter 7. See his biography in the About the Authors section of this book.

Glen L. Moss, B.S., 1965, University of California, Los Angeles; J.D., 1968, University of California, Berkeley, School of Law, is a contributing author for chapters 1–3, 7–8, and 13. Mr. Moss has represented consumers and small businesses for all types of real estate problems, in trial courts and upon appeal. Since the “Great Rescession,” he has concentrated in real estate finance as well as trust and probate issues related to protecting the real estate owned by estates and trusts. He also serves as co-counsel with bankruptcy lawyers to set aside trustee sales through adversary actions. Mr. Moss is a partner in the Hayward firm of Moss & Murphy.

Daniel J. Mulligan, B.A., 1975, and M.A., 1981, University of California, Berkeley; J.D., 1981, University of California, Berkeley, School of Law, is a partner with Jenkins Mulligan & Gabriel LLP, San Diego, and is an update author for chapter 13. He specializes in real property and lending litigation, as well as consumer rights law, including class litigation. He is a leading member of the plaintiffs’ bar on consumer lending issues and regularly speaks for meetings of the California State Bar Association, the American Bar Association, the American Conference Institute, the National Consumer Law Center, and the National Association of Consumer Advocates. Daniel also continues a practice in antitrust law, serving as co-counsel in a number of indirect purchaser claims for consumer goods.

Pamela D. Simmons assisted in updating chapter 13. See her biography in the About the Authors section of this book.

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