January 2019 Update
Book Enhancements and Alerts in This Update: The Homeowner Bill of Rights (HBOR) does not apply to every lender making a residential mortgage loan. For newly revised tables summarizing how to determine the applicability of the HBOR to both borrowers and lenders, as well as what provisions were repealed effective January 1, 2018, and then revived effective January 1, 2019, see §§2.49G–2.49H. See also discussions in §§2.9C, 2.49–2.49F, 7.38, 7.61, 10.7, 10.8–10.8A, 10.8D–10.8F.
Newly revised §7.1A contains an augmented “Checklist: Debtor’s Legal Alternatives When Facing Foreclosure,” with cross-references to book discussions, practice tips, and strategies for investigating and obtaining remedies for lender liability.
Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the Tax Cuts and Jobs Act (TCJA) (Pub L 115–97, 131 Stat 2054) materially changed many rules applicable to real property ownership; some rules applicable to foreclosures, short sales, and loan modifications did not change. Practitioners should read the amended, final legislation in conjunction with the IRC provisions in the tax sections of the book or consult a tax expert. See newly revised income tax discussions in §§1.14, 1.23, 2.110–2.117C, 7.21G, 8.52, 8.65, 10.24, 10.30.
Supreme Court Cases: Although a trustor or a commercial tenant is entitled to only 3 days’ written notice before the unlawful detainer action may be filed, a residential tenant of the trustor is currently entitled to 90 days’ written notice to quit. Whether a purchaser at a foreclosure sale need await recordation of the trustee’s deed before serving the notice to quit on a tenant whose lease has been extinguished is before the California Supreme Court; the issue turns on the meaning of how title must be “duly perfected” under the sale in the unlawful detainer statute, CCP §1161a(b)(3). See Dr. Leevil, LLC v Westlake Health Care Ctr. (review granted June 14, 2017, S241324; superseded opinion at 9 CA5th 450) (court of appeal held only that trustee’s deed need be recorded before unlawful detainer action is filed). See §§2.100, 7.75.
The California Supreme Court granted review in Black Sky Capital, LLC v Cobb (review granted Sept. 27, 2017, S243294; superseded opinion at 12 CA5th 887). Two courts of appeal had held that if the junior lienholder is also the holder of the senior lien, it will be treated as one lender for CCP §580d purposes. The court of appeal in Black Sky, however, disagreed. See §§5.12, 9.29, 9.65.
The Supreme Court accepted for review Obduskey v McCarthy & Holthus LLP (cert granted 2018) 2018 US Lexis 4051, 138 S Ct 2710, to resolve a split among the circuit courts of appeals about whether and the extent to which debt collection agencies and foreclosing trustees that prepare and serve notices of default on residential borrowers when conducting nonjudicial foreclosures need comply with the federal Fair Debt Collection Practices Act (FDCPA) (15 USC §§1692–1692p). See §2.38A.
Mortgage Contracts: When a lender forecloses on a leasehold interest and takes possession of the leased premises, questions may arise regarding the extent to which the lender must comply with the lease terms. In BRE DDR BR Whittwood CA LLC v Farmers & Merchants Bank of Long Beach (2017) 14 CA5th 992, the court held that in such circumstances the lender is considered an assignee and must comply with basic lease terms while remaining in possession. See §1.52.
Trustee Sales (Nonjudicial Foreclosures): Although Ninth Circuit cases hold that the federal Fair Debt Collection Practices Act (15 USC §§1692–1692p) does not apply to trustee sales, the applicability of the California Rosenthal Fair Debt Collection Practices Act (CC §§1788–1788.33) to lenders and their servicers (but not trustees) in nonjudicial foreclosure proceedings was recognized in both California and federal courts. See §§2.9D, 2.38A, 13.2.
In the wake of Yvanova v New Century Mortgage Corp. (2016) 62 C4th 919, additional Ninth Circuit court of appeal cases have consistently held under New York law, a secured loan assignment that fails to comply with the terms of a trust agreement is merely voidable and not void. See cases cited in §§7.15, 12.92, 13.61, 13.96, 13.105. But when an assignor of a deed of trust purports to make a second assignment after it no longer has any interest in the deed of trust, then that assignment is void; if the assignor then conducts a foreclosure, the borrower has a viable cause of action for wrongful foreclosure. See Hacker v Homeward Residential, Inc (2018) 26 CA5th 270, cited in §§13.61, 13.96.
Since 2008, the Servicemembers Civil Relief Act (SCRA) (50 USC §§3901–4043) has provided that foreclosure of a lien on real property for nonpayment of any secured loan is invalid if conducted while the debtor is in military service, or within 1 year after the debtor’s military service ends. Effective January 1, 2020, that 1-year period will revert back to the original 90-day period after the debtor’s military service ends. In addition to provisional relief, a lender‘s violation of the SCRA is actionable by a suit for damages, and a 4-year statute of limitations applies. McGreevey v PHH Mortgage Corp. (9th Cir 2018) 897 F3d 1037. See §§2.30, 3.63A, 7.27.
Although a borrower may obtain an injunction against foreclosure if there has been a “material violation” of specific rights under the HBOR, an enjoined defendant may file a motion to dissolve the injunction on a showing that the violations have been corrected and remedied. See Berman v HSBC Bank USA (2017) 11 CA5th 465, cited in §§2.49E, 10.8.
A court of appeal held that under CC §2924c(a)(1), reinstatement of a defaulted loan is a remedy available to not only the trustor but also any person directly authorized by the trustor to reinstate the loan on behalf of the trustor; when the correct amount to reinstate is properly tendered, the lender’s acceptance of the payment is mandatory. See Turner v Seterus (2018) 27 CA5th 516, cited in §§2.52, 2.57, 2.60, 7.67B, 12.11, 12.27, 12.86, 12.88.
For a period of 5 years (on or after January 1, 2013, and until January 1, 2018), when a trustee sale was postponed for a period of at least 10 business days, written notice must have been given to the borrower of the continued sale date and time, within 5 business days after the postponement. CC §2924(a)(5), in effect before January 1, 2018. This rule was revived in 2018 and continues to apply to both residential and commercial mortgage loans. Although a failure to give this notice would not invalidate any trustee sale that would otherwise be valid, the failure is actionable under judicial authority allowing remedies for violations of CC §2924. See §§2.92, 7.37–7.38, 12.90.
When a junior lienholder forecloses, the senior lienholder is not entitled to any of the sale proceeds because the property is purchased at the sale “subject to” the senior deed of trust; thus, although the senior lienholder receives no proceeds from the sale, the senior lien remains fully intact and becomes the purchasing owner’s problem. See MTC Financial, Inc. v Nationstar Mortgage (2018) 19 CA5th 811 (also held order in which simultaneously recorded deeds of trust are indexed does not determine their priority; larger mortgage loan was reasonably deemed to be senior to smaller home equity line of credit). See §§2.102, 9.44.
It is improper for a trustee to interplead surplus sale proceeds from a foreclosure sale when there are no competing recorded claims before the sale, and when CC §2924k clearly requires the surplus proceeds to be given to the trustor. Placer Foreclosure, Inc. v Aflalo (2018) 23 CA5th 1109. See §2.106.
Debtor Strategies: A bankruptcy court held that a sold-out junior lienholder did not have a right under CC §2930 to reimpose its deed of trust on the residence when the debtor obtained a bankruptcy discharge of the junior’s underlying loan and then reacquired title to the property postbankruptcy. See Wagabaza v Beveridge (In re Wagabaza) (Bankr CD Cal 2018) 582 BR 486, cited in §§3.97, 11.144.
Creditor efforts to use the anti-SLAPP statute, CCP §425.16, to thwart attacks on allegedly wrongful foreclosures are not always successful. But the anti-SLAPP statute will apply when the creditor’s activity is protected. See, e.g., Crossroads Investors, L.P. v Federal Nat’l Mortgage Ass’n (2017) 13 CA5th 757 (reversed trial court’s denial of anti-SLAPP motion when thrust of plaintiff’s claim involved lender’s activity in failing to provide payoff information as required by law and in failing to accept tenders of payoff or reinstatement during nonjudicial foreclosure; lender’s activity was protected because borrower’s request and tender were made during its bankruptcy proceedings). See §7.23.
The tender rule requires a borrower seeking to either enjoin or set aside a trustee sale to tender in its complaint (and demonstrate the ability to pay) the amount owing, but it does not apply in every kind of cause of action. On requirement of tender in claims arising from various causes of action, see more recent federal and state cases, such as Kalnoki v First Am. Trustee Servicing Solutions (2017) 8 CA5th 23, cited in §§7.24A, 7.41, 7.67B, 12.27.
Before initiating causes of action under the HBOR, borrower’s counsel should review attorney fee clauses in the loan documents. Even if liability is based on a violation of the HBOR, the documents may permit a prevailing lender to recover attorney fees. See, e.g., Chacker v JPMorgan Chase Bank (2018) 27 CA5th 351, cited in §§7.38, 12.5.
A residential mortgage loan servicer attempting to remove a case to federal district court failed to satisfy the $75,000 jurisdictional threshold, because the property value or amount of indebtedness is not the amount in controversy when the borrowers’ complaint seeks only a temporary stay of foreclosure pending review of the loan modification application. Corral v Select Portfolio Servicing, Inc. (9th Cir 2017) 878 F3d 770. See §§7.42, 13.98.
A purported BFP is not insulated from competing claims to title, when the BFP’s position relies on a void (not merely voidable) instrument. See, e.g., OC Interior Servs. v Nationstar Mortgage (2017) 7 CA5th 1318 (purchaser at voluntary sale could not rely on void default judgment—obtained fraudulently by seller before sale—to establish ownership as BFP free and clear of prior deed of trust). See §§7.65, 8.99, 9.46.
Effective June 23, 2018, federal law protects bona fide residential tenants holding possession under a month-to-month agreement or a lease from immediate eviction after a foreclosure sale by the purchaser or the foreclosing lender. See Economic Growth, Regulatory Relief, & Consumer Protection Act (Pub L 115–174, §304, 132 Stat 1296), which revived and restored the Protecting Tenants at Foreclosure Act of 2009 (PTFA). See §7.75A.
If the trustor files a suit to vacate or set aside the foreclosure sale, either before or after the purchaser has filed its unlawful detainer action, the court may issue an order that stays the unlawful detainer action or consolidates it with the trustor’s affirmative case. Kalnoki v First Am. Trustee Servicing Solutions (2017) 8 CA5th 23. See §7.77.
Bankruptcy Cases: Bankruptcy cases can be difficult for the debtor to terminate, because they involve the administration of an estate for the benefit of many other interests rather than being a two-sided civil dispute. See most recent cases that differ with each other on the standards governing a debtor’s right to voluntarily dismiss its bankruptcy case in §§7.87, 11.3.
A bankruptcy case filed in bad faith can be grounds for significant relief beyond the lifting or a modification of the automatic stay; for example, the court may issue equitably based orders under 11 USC §105 that limit the benefits of bankruptcy when a debtor is dishonest in the course of the proceedings. See In re DeRosa-Grund (Bankr SD Tex 2017) 567 BR 773, approving the trustee’s settlement, which provided that the debtor would receive no excess proceeds from the Chapter 7 case, even though the order approving the settlement contravened the express provisions of 11 USC §726(a)(6). See §§7.87, 11.3, 11.27.
Some bankruptcy courts have permitted a postdischarge Chapter 7 debtor to vacate the discharge order to convert a Chapter 7 case to a case under Chapter 13. See, e.g., In re Estrada (Bankr CD CA 2017) 568 BR 533, cited in §§7.88, 11.25.
Although under California law, a debtor need not hold title to the property to claim a homestead exemption, the debtor must establish physical occupancy on the filing date of the petition along with the requisite intent to continue to live there. See In re Gilman (9th Cir 2018) 887 F3d 956, 965. See §§7.88D, 11.88.
An attorney as well as a creditor can be sued for violating the automatic stay. Burton v Infinity Capital Mgmt. (9th Cir 2017) 862 F3d 740. See §§7.93, 11.19.
A willful stay violation is established if the creditor knew of the automatic stay and the actions violating the stay were intentional. When a foreclosing entity ignores the debtor’s bankruptcy filing and proceeds with a foreclosure, and afterward an eviction, the debtor may recover punitive damages in addition to attorney fees. See, e.g., Sundquist v Bank of America (In re Sundquist) (Bankr ED Cal 2017) 566 BR 563, vacated in part on other grounds (Bankr ED Cal 2018) 580 BR 536. See §§7.93, 11.19.
When a debtor sought remedies for contempt against parties who continued prosecuting a state action against the debtor after the discharge, the Ninth Circuit held that a good faith belief that one is not violating a discharge injunction is sufficient to show that there was no willful violation of the discharge injunction. See Lorenzen v Taggert (In re Taggert) (9th Cir 2018) 888 F3d 438, cited in §7.93, 11.19.
A debtor may strip a lien (see §7.88) even if a creditor has failed to file a proof of claim. Burkhart v Grigsby (4th Cir 2018) 886 F3d 434, 439. See §§7.115A, 11.92.
A bankruptcy court has discretionary power after dismissal of the underlying bankruptcy case to retain jurisdiction over avoidance actions brought as adversary proceedings while the bankruptcy case was pending. Brookview Apartments, LLC v Hoer (In re Weigh) (Bankr CD Cal 2017) 576 BR 189. See §§11.80.
The standard for determining when a prebankruptcy foreclosure sale can be set aside as a fraudulent transfer was established in BFP v Resolution Trust Corp. (1994) 511 US 531, 114 S Ct 1757, in which the Supreme Court held that the price received at a noncollusive real estate mortgage foreclosure sale constitutes reasonably equivalent value for the purposes of 11 USC §548(a)(2), provided that the foreclosure was conducted in full compliance with all requirements of applicable state law. For recent cases applying or rejecting the BFP rule, particularly in tax foreclosure cases, see §11.86.
In the event of a transfer by the debtor in the form of a check delivered to a creditor, the date of the transfer under 11 USC §549 (allowing avoidance of postpetition transfers) is the date the check is honored by the drawee (i.e., debtor’s) bank, even if the check was delivered prepetition. Lewis v Kaelin (In re Cresta Tech. Corp.) (BAP 9th Cir 2018) 583 BR 224. See §11.87.
A mortgage foreclosure judgment obtained in a judicial foreclosure action is not avoidable; in other words, 11 USC §522(f)(2)(C) clarifies that the entry of a foreclosure judgment (ordering a sale of the real property security as an equitable remedy) does not convert the underlying consensual mortgage into an avoidable judicial lien. In re Pace (BAP 6th Cir 2017) 569 BR 264. See §11.88.
Although filing a written or formal objection to the debtor’s claimed exemption is a better practice, a trustee’s action in filing an adversary complaint to attack the basis for the exemption and to recover the property for the estate sufficiently constituted an objection to the exemption. Lee v Field (In re Lee) (9th Cir 2018) 889 F3d 639. See §11.88.
Although the party objecting to a claimed exemption ordinarily has the burden of proof, applicable nonbankruptcy law may place the burden of proof elsewhere. See recent bankruptcy court reported cases cited in §11.88.
In Chapter 7, 12, and 13 cases, a creditor must file a proof of claim within 70 days after the case is filed unless, in a Chapter 7 case, a notice of insufficient assets to pay a dividend is given. Fed R Bankr P 3002(c) (effective Dec. 1, 2017). On a motion by a creditor, a court may extend the claim deadline by up to 60 days from entry of the order granting the motion if a debtor failed to comply with conditions specified in the rules. See §11.89.
The Bankruptcy Code allows debtors and their creditors to negotiate a Chapter 11 plan for dividing an estate’s value. But when the parties cannot agree on a plan, the bankruptcy court may dismiss the Chapter 11 case. For discussion of a structured dismissal in lieu of a Chapter 11 plan, see Czyzewski v Jevic Holding Corp. (2017) ___ US ___, 137 S Ct 973, cited in §11.96.
A recently adopted rule, Fed R Bankr P 3015.1(c)(2)–(3), attempts to eliminate the uncertainty caused when a reorganization plan does not indicate if the debtor intends to strip a lien, by requiring all Chapter 13 plans to indicate whether the plan attempts to value or avoid a lien in the initial paragraph. See §11.101.
A Chapter 11 plan cannot modify the terms of a claim secured only by a security interest in real property that is the debtor’s principal residence. But some courts recognize an exception for boarders and multiunit buildings in Chapter 11 and 13 cases. See reasoning in In re Berkland (Bankr D Mass 2018) 582 BR 571, cited in §11.102.
One most often disputed and recurring issue in a cram-down fight is valuing the lender’s collateral. The date of valuation of collateral for plan confirmation purposes in Chapter 11 depends on the proposed intended use of the collateral. In Houston Sportsnet Finance, LLC v Houston Astros, LLC (In re Houston Reg’l Sports Network, LP) (5th Cir 2018) 886 F3d 523, for example, the Fifth Circuit rejected a bright line rule in a Chapter 11 for collateral valuation on the petition date, as in a Chapter 7 or 13, and also rejected adopting the date of confirmation or the effective date of the plan as the valuation dates. See §11.110.
A postconfirmation modification of a Chapter 11 plan between the reorganized debtor and a creditor that materially impacts the creditors must be reviewed under standards in 11 USC §1127(b). In re Oakhurst Lodge, Inc. (Bankr ED Cal 2018) 582 BR 784. See §11.117.
It is not unusual for a Chapter 13 plan to provide that the debtor will make mortgage payments directly to a lender. See, e.g., In re Coughlin (Bankr ED NY 2017) 568 BR 461 (consolidated cases regarding mortgage payments made directly to creditor; debtor is not entitled to discharge when he or she does not make direct postpetition mortgage payments as provided in plan). See §11.119.
Effective December 1, 2017, there is a national Chapter 13 plan. But all of the California bankruptcy courts opted out of the national plan, with each district creating its own form plan that in some cases supersede case law. See details in §§11.120–11.122, 11.126, 11.129.
There has been substantial litigation about whether certain mortgages held by secured lenders against real property that is both the debtor’s principal residence and rental property can be modified in a Chapter 13 case. The majority view is that the prohibition against modification in 11 USC §1322(b)(2) does not apply if the debtor occupies one unit of a multiunit property, because the secured creditor has a secured interest in something more than the debtor’s residence. The issue is not settled in the Ninth Circuit; see most recent cases in §11.124.
For a recent example of a Chapter 13 plan found not to have been made in good faith, see In re Escarcega (BAP 9th Cir 2017) 573 BR 219 (Chapter 13 plans were inconsistent with statutory requirements of Bankruptcy Code; such plans were not proposed in good faith and result of Chapter 13 trustee’s collusion with debtors’ bar to avoid consequence that filing objection would have under controlling Ninth Circuit case law), cited in §11.128.
On recent cases affecting viability of Chapter 12 reorganization plans, see §§11.133, 11.140.
A series of recent cases within the Ninth Circuit examined the effect of a discharge order on a secured creditor’s activity to collect the underlying debt. See §11.144.
The time to appeal a bankruptcy court decision is short; failure to file a timely appeal is jurisdictional and grounds for dismissal of the appeal. Wilkins v Menchaca (In re Wilkins) (BAP 9th Cir 2018) 587 BR 97. See §11.147.
Servicing, Loss Mitigation, Lender Liability, and Consumer Claims: The Homeowners Protection Act (HPA) (12 USC §§4901–4910) requires cancellation of PMI when the principal balance is scheduled to reach 78 percent of the original value of the property. The HPA preempts all state laws related to requirements for obtaining or maintaining PMI, but only to the extent that the state laws are inconsistent with the HPA, and then only to the extent of the inconsistency. See, e.g., Dwoskin v Bank of America (4th Cir 2018) 888 F3d 117 (state law claims preempted by HPA to extent claims were rooted in bank’s failure to disclose information about lender-paid mortgage insurance). See §8.56A.
California’s impounded accounts interest law is not preempted by the National Bank Act (12 USC §§21–216d), and a mortgagor may state a state law unfair competition claim based on a bank’s failure to comply with California’s law. Lusnak v Bank of America (9th Cir 2018) 883 F3d 1185. See §§8.77, 13.3G.
If a title insurance company improperly records a CC §2941(b)(3) or (b)(4) release of obligation, it is liable for damages, including attorney fees, caused by the issuance and recordation of the release. See SMS Fin. XXIII, LLC v Cornerstone Title Co. (2018) 19 CA5th 1092 (assignee of note and deed of trust stated claim under §2941 based on title company’s alleged recordation of release). See §8.98.
Rules of Professional Conduct for California attorneys were amended in 2018. See new rules cited in §10.1A.
If a mortgage servicer denies a borrower’s application for a first lien loan modification, the borrower has at least 30 days from the date of the written denial to appeal and provide evidence that the denial was in error. Berman v HSBC Bank USA (2017) 11 CA5th 465 (lender materially violated CC §2923.6(d) by sending letter denying application and stating borrower had only 15 days to file appeal instead of required 30 days). See §10.8.
California courts of appeal do not agree on (1) whether the validity or reasonableness of a liquidated damages clause is a question of fact or question of law and (2) what standard of review applies. See Vitatech Int’l, Inc. v Sporn (2017) 16 CA5th 796; Krechuniak v Noorzoy (2017) 11 CA5th 713, cited in §10.12.
In Boyd v Freeman (2017) 18 CA5th 847, the court of appeal held that the dismissal of a suit following a successful demurrer (to the causes of action for breach of fiduciary duty and unfair business practices against a secured lender) does not operate as res judicata against a subsequent suit for wrongful foreclosure, because the prior order sustaining the demurrer was not a decision on the merits. See §§12.17, 12.27.
Loan servicers and lenders must be cautious in reporting loan defaults to credit reporting agencies while negotiating a loan modification or during the TTP period, not only because of primary liability but also because of secondary liability. See Pittman v Experian Info. Solutions, Inc. (6th Cir 2018) ___ F3d ___, 2018 US App Lexis 23775, cited in §§12.81, 13.2.
Loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA) require that specific disclosures be given to the borrower at least 3 days before the loan documents are signed. But effective May 24, 2018, if the lender gives the potential borrower a second credit offer with a lower annual percentage rate, that transaction may be completed without regard to the 3 business day disclosure rule. 15 USC §1639(b)(3). See §13.19.
For statutory and regulatory changes made in 2017 and 2018 to the TILA-RESPA Integrated Disclosures Rule (TRID), see §§13.25C–13.25F, 13.29.
The federal Fair Housing Act permits community groups, such as fair housing organizations, to file suits on behalf of private parties who are injured by discriminatory practices in lending related activities. See National Fair Hous. Alliance v Fannie Mae (ND Cal 2018) 294 F Supp 3d 940 (plaintiffs were allowed leave to amend to plead violation of Act arising from Fannie Mae’s alleged policy of failure to supervise and adequately maintain foreclosed properties in minority communities). See §§13.26, 13.29.
Effective May 24, 2018, additional qualified mortgage transactions and higher priced mortgage loans were made exempt from underwriting and escrow requirements for residential loans under the Dodd-Frank Act, and other amendments revised asset thresholds. See §§13.44–13.45, 13.45C.
The California Supreme Court held that a bank’s agreement for credit card accounts that waived the cardholder’s statutory right to seek public injunctive relief under California consumer protection statutes in any forum, whether in arbitration or in court, was contrary to California public policy and thus unenforceable. See McGill v Citibank (2017) 2 C5th 945. See §13.60.