Nearly all foreclosure professionals and loan servicers are familiar with the process
for a non-judicial foreclosure action in California. A notice of intent to foreclose is
followed by a notice of default which is followed by a notice of trustee’s sale.
The last step, the actual non-judicial foreclosure sale, usually occurs
within approximately 120 days from the filing of the notice of default. For the vast
majority of loans, the California non-judicial foreclosure process is an effective and relatively inexpensive
method for a servicer to obtain its security. In most non-judicial foreclosures, the only
court time and court costs involved are those for the usually uncontested municipal court
unlawful detainer which is initiated by the servicer in order to obtain possession from
former borrowers who refuse to vacate their former homes.
For a small but seemingly growing number of loans, the non-judicial foreclosure process
has become rather judicial. To borrowers who choose to allocate their resources away from
debt payment towards fighting a loan servicers right to its payments and its security, the nonjudicial foreclosure process is a war of attrition which ranges from the bankruptcy court, to superior court to municipal court. While serial bankruptcy filings are often a frustrating delay to a servicer obtaining possession of its security, the wrongful foreclosure action filed in superior court is potentially the most time consuming
weapon in the arsenal of the litigious borrower.
What is a Wrongful Foreclosure Action?
A wrongful foreclosure action is an action filed in superior court by the borrower against the servicer, the holder of the note, and usually the foreclosing trustee. The complaint usually alleges that there was an “illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust.” Munger v. Moore (1970) 11 Cal.App.3d.
1. The wrongful foreclosure
action is often brought prior to the non-judicial foreclosure sale in order to delay the sale, but the action may also be brought after the non-judicial foreclosure sale. In most cases, a wrongful foreclosure action alleges that the amount stated as due and owing in the notice of default is incorrect for one or more of the following reasons: an incorrect interest rate adjustment, incorrect tax impound accounts, misapplied payments, a forbearance agreement which was not adhered to by the servicer, unnecessary forced place
insurance, improper accounting for a confirmed chapter 11 or chapter 13 bankruptcy plan. Wrongful foreclosure actions are also brought when the servicers accept partial payments after initiation of the wrongful foreclosure process, then continue with the foreclosure. Companion allegations for emotional distress and punitive damages usually accompany any wrongful foreclosure action.
The causes of action alleged in a wrongful foreclosure action filed in California may include the following: breach of contract, intentional infliction of emotional distress, negligent infliction of emotional distress, violation of Business and Professions CodeSection 17200 (Unfair Business Practices), quiet title, wrongful foreclosure (violation of Civil Code Section 2924and violation of 2923.5), accounting and/or promissory estoppel.
The reciprocal nature of attorney fees provisions in all real property notes and deeds of trust dictate that any wrongful foreclosure action be taken seriously. Damages available to a borrower in a wrongful foreclosure action are an amount sufficient to compensate for all detriment proximately caused by the servicer or trustees wrongful conduct. Civil Code Section 3333. Damages are usually measured by value of the property at the time of the sale in excess of the mortgage and lien against the property. Munger v. Moore (1970) 11 Cal.App.3d. 1. Additionally, the borrower may also obtain damages for emotional distress in a wrongful foreclosure action. Young v. Bank of America (1983) 141 Cal.App.3d 108; Anderson v. Heart Federal Savings & Loan Assn.(1989) 208 Cal.App.3d. 202. Further, if the borrower can prove by clear and convincing
evidence that the servicer or trustee was guilty of fraud, oppression or malice in its wrongful conduct, punitive damages may be awarded.
How Can a Wrongful Foreclosure Action Delay Recovery of the Security?
A wrongful foreclosure suit filed in superior court will not necessarily delay a servicers recovery of its security. The companion filings to such a suit (notice of pending action, injunction and/or motion to consolidate) however can delay a servicers ultimate recovery. Delay caused by a wrongful foreclosure action can be anywhere from forty-five days to two years.
A notice of pending action (“lis pendens”) is the most common companion to a wrongful foreclosure action. A lis pendens is recorded in the county in which the real property security is located at the time the wrongful foreclosure action is filed. The only requirement for a lis pendens to be recorded is an attorneys signature that the action which is being noticed actually involves a real property claim. The purpose of the
lis pendens is to put all third parties on notice that the borrower and the servicer are litigating over the real property security. Once a lis pendens is recorded, no title insurance company will issue a title insurance policy unless and until the lis pendens is removed. Although the servicer may “bond around” the lis pendens without titleinsurance, the real property security is virtually inalienable.
A summary procedure for removing a lis pendens is provided in the California Code of Civil Procedure Section 405.3 et seq. This section allows a “mini trial” on the merits of the borrowers claim. At the “mini trial”, the borrower must establish the probable validity of his/her claim by a preponderance of the evidence. California Code of Civil Procedure Section 405.32. If the borrower cannot establish his or her claim by a preponderance of evidence, the lis pendens is expunged.
The penalty for the borrower who wrongfully records a notice of pending action is that, in most cases, the court directs such a borrower to pay the servicers attorneys fees. California Code of Civil Procedure Section 405.38.
While a lis pendens can be filed at any time in the foreclosure process, a borrower applies for an injunction prior to the foreclosure sale with the intent of keeping the foreclosure sale at bay until issues in the lawsuit are resolved. The lawsuit can take anywhere from ten to twenty-four months. Generally, an injunction will only be issued if it appears to the court that: (1) the borrower is entitled to the injunction; and (2) that
if the injunction is not granted, the borrower will be subject to irreparable harm. Like an action to expunge a lis pendens, a borrowers application for an injunction is essentially a “mini-trial” on the merits. California Civil Code of Civil Procedure Section 526 et seq. The issue at stake in nearly all injunctive relief action applications is the amount due and owing on the note and deed of trust. For the injunction hearing, it is imperative that the servicer provide a detailed analysis of the amount it contends is due and owing on the note and deed of trust at issue. If for some reason the servicer is unable to provide a breakdown of the amounts due and owing on the note and deed of trust at issue,or at least provide sufficient information to refute the borrower’s allegations, it is likely the injunction will be issued.
In most cases, the injunction will be conditioned upon the borrowers filing a significant bond and making timely debt payments. Upon occasion, judges who are not particularly enamored with servicers and who are provided a heart wrenching tale in the borrowers injunction application will issue minimal bonds and little or no debt service requirements. This worst case scenario translates into a servicer being unable to sell the security and receiving no payments on the underlying debt during the life of the lawsuit. Technically, modifications of injunctions are allowed for a change in law, a change in circumstances, or to prevent injustice. California Civil Code § 533. In reality, judges are loath to modify an injunction after it is issued and
prior to a decision on the merits.
Once an injunction with little or no debt service or bond is in place, the wrongful foreclosure suit will be a long and expensive process because the borrower has lost all incentive for a quick resolution of the action.
Another way borrowers delay a servicer’s recovery of its security through a wrongful foreclosure action is by consolidating their wrongful foreclosure action with their unlawful detainer action. Asuncion v. Superior Court (1980) 108 Cal. App. 3d 141.The Asuncion case which is usually relied upon by borrowers for consolidation
contains an egregious fact scenario including clear fraud in the inducement of the loan.Judges however, do not limit the application of Asuncion to cases where fraud is alleged by the borrower. In applying Asuncion, a court can allow the unlawful detainer suit to be consolidated with the wrongful foreclosure action if there is a mere similarity of issues in the cases. Additionally in the new federal law that servicers and lenders are subject to an existing lease if the property is leased the servicer cannot get the tenant out till the end of lets say a 5 year lease.
If the superior court allows consolidation, a servicer’s right to possession of the real property security will be stayed until a verdict for the servicer is obtained in the wrongful foreclosure action. Courts generally will condition such consolidation on borrower debt service payments. Again, though, the real property security will not berecovered until a final decision on the merits in the wrongful foreclosure action is reached. As discussed above, this can be anywhere from ten months to two years.