Defective Foreclosures Sales: What Are Your Rights?

Law Offices of

Peter N. Brewer

California Real Estate Law

DEFECTIVE FORECLOSURE SALES ~ What Are Your Rights?

Your property was in foreclosure but you had a plan to rescue it. You contacted the lender and reached an agreement to postpone the foreclosure sale to give you the time you needed to pull together your rescue plan. The lender agreed to postpone. A short time later you tendered the reinstatement amounts, but to your shock and dismay, the lender sold your property at the foreclosure in violation of the agreement they made with you.

Or you purchased a property at a foreclosure sale. You were the highest bidder and you paid the bid amount with proper funds. You were expecting a trustee’s deed to show up in the mail in a few days, but instead you get a refund check and a letter from the lender saying, “Oops, we made a mistake. We are rescinding the sale to you. Here’s your money back.”

What are your rights in either situation?

The case law in this area has been clear and consistent. The rule is that an erroneously conducted foreclosure will not be set aside because of a mistake that was “dehors”, or outside of, the statutory sale procedures. If the mistake was a procedural error within the four corners of the statutory foreclosure scheme and caused prejudice to the party seeking to set aside the sale, it can be set aside up to the time that the Trustee’s Deed is delivered. The delivery of the Trustee’s Deed creates a conclusive presumption that the foreclosure procedures were correctly observed.

Thus, in the 1988 case of Little vs. CFS Service Corp. (188 Cal.App.3d 1354), the required Notice of Trustee’s Sale was not given to the trustor, the junior lien holder, nor the judgment creditor. The Court held that the conclusive presumption that a sale had been properly conducted and was therefore valid did not arise because the Trustee’s Deed had not been prepared or delivered, and because of the “substantial and prejudicial defective notice” the sale was void.

In 1999 we saw the other side of the coin in the case of Moeller vs. Lien (25 Cal.App.4th 822), in which the Trial Court set aside a foreclosure sale where the borrower/trustor was arranging refinancing, was not aware of his statutory right to postpone the sale for one day to pay off the delinquent loan, where he tendered the payoff a few hours after the sale, and the property sold at a grossly inadequate price. The Court of Appeal reversed the Trial Court, holding that there were no irregularities in the sale, it was sold to a bonafide purchaser for value, and the delivery of the Trustee’s Deed was a conclusive presumption that the sale was valid.

Also in 1999, in Angell vs. Superior Court (73 Cal.App.4th 691), a defective Notice of Sale omitted an obligation against the property, which was discovered after the sale but before the delivery of the Trustee’s Deed. The Court held that the conclusive presumption of delivery of the Trustee’s Deed did not apply and the notice defect rendered the sale void.

Two years later, in 6 Angels, Inc. vs. Stuart-Wright Mortgage, Inc. (85 Cal.App.4th 1279), the lender/beneficiary intended to set the opening bid at $100,000.00, but the trustee mistakenly set the opening bid at $10,000.00. Plaintiff, 6 Angels, was the successful bidder with a bid of $10,001.00. The trustee refused to deliver the Trustee’s Deed, and 6 Angels sued. That Court held that a successful challenge to a sale requires evidence of a defect in the sale procedures, causing prejudice to the person attacking the sale. Mere inadequacy of the price without a procedural irregularity is insufficient to set aside the sale. Here the mistake was the lender/beneficiary’s own negligence, and was totally outside of the foreclosure procedures (“dehors the sale proceedings”). The Trustee was ordered to deliver the Deed to 6 Angels. The lender suffered the consequences of the $90,000 error.

In January of this year (2003) we had the decision in Nguyen vs. Calhoun (105 Cal.App.4th 428). In that case the Chavezes owned a house in San Jose, California (Santa Clara County) and were delinquent on their mortgage with Harbor Financial. Harbor Financial commenced foreclosure, recording a Notice of Default. While the Notice of Default was pending, the Chavezes listed the house for sale and entered into a contract to sell to Nguyen. The trustee’s sale was postponed to July 10, 1998. On July 9 the Chavezes’ realtor requested a further postponement from Harbor Financial’s employee, Linda Kubricht. Ms. Kubricht responded that Harbor would postpone if proof was provided that the loan to Nguyen had funded. Nguyen’s funds were received in escrow on July 9 at 1:30 p.m. The title company closed escrow the following morning, Friday, July 10, recorded a deed to Nguyen, and put a check for the payoff of Harbor’s loan in Federal Express directed to Harbor at its Texas headquarters.

The title company also faxed a certified copy of the final escrow settlement statement to Harbor at 8:23 a.m. on July 10. The fax was erroneously directed to a “Linda Cooper” (rather than Linda Kubricht) at Harbor. Kubricht did not receive the fax, nor did she learn of the close of escrow to Nguyen. The foreclosure took place as scheduled at noon on the 10th and Calhoun was the successful bidder. The following Monday, July 13, Kubricht received both the misdirected fax and the check from the Chavezes’ payoff. In due course a Trustee’s Deed was delivered to Calhoun and recorded. Nguyen then brought an action for quiet title and declaratory relief.

The Trial Court appeared to have little understanding of real estate law, and found that escrow had closed and therefore the Trustee’s Deed was null and void. Calhoun appealed. The Court of Appeal held that the deposit of a payment check in the mail does not constitute payment unless the creditor has directed the debtor to mail the payment. Where the lien was not extinguished by a payment and the debt remained in default, the lender could proceed with foreclosure. The Court concluded that a properly conducted foreclosure sale constitutes a final adjudication of the rights of the borrower and lender. It noted that in some circumstances a mistake can cause a sale to be set aside, but not where the mistake is dehors, or outside of, the sale proceeding. Absent defects in the foreclosure proceeding itself, the sale is valid and conclusive as to the bonafide purchaser who paid value for the property without notice of the irregularity. In this case the foreclosure sale was properly conducted. The mistake in communications between the title company and Harbor were outside of the sale procedures. There was no basis on which to set aside the sale. Judgment was entered in favor of Calhoun.

On May 14, 2003, another case in this subject area was decided by the Fourth Appellate District. In the case of Residential Capital, L.L.C. vs. Cal-Western Reconveyance Corp. [108 Cal.App.4th 807] homeowner and borrower, Arvizus, fell into default on his mortgage. Lender, Bank One, commenced a nonjudicial foreclosure, and eventually scheduled the foreclosure sale of the property through the foreclosure trustee, Cal-Western Reconveyance Corporation.

Plaintiff Residential Capital was the high bidder at the trustee’s sale. After the sale, but before Cal-Western Reconveyance had prepared and delivered the Trustee’s Deed for the property, it discovered that Bank One’s agent, and the borrower, Arvizus, had earlier agreed to a postponement of the sale. California Civil Code § 2924g(c)(2) provides that, “The trustee shall postpone the sale upon the order of any court . . . or by the mutual agreement, whether oral or in writing, of any trustor and any beneficiary or any mortgagor and any mortgagee.” Bank One’s agent instructed Cal-Western by e-mail to postpone, but Cal-Western did not read the e-mail in time and went forward with the sale. The next day Cal-Western learned of the agreement and returned Residential Capital’s purchase money with interest.

Residential Capital, as the frustrated purchaser, sued Cal-Western and Bank One (together, “the defendants”) for breach of the contract to sell it the property, and for negligence. The defendants brought a motion for summary judgment which was granted in their favor. Residential Capital appealed.

Residential Capital’s main argument was that there was no defect in the required foreclosure notices and the mandatory postponement resulting from the agreement between Arvizus and Bank One did not constitute an irregularity in the sale – that is, it was “dehors”, or outside of, the sale procedures.

The Court disagreed, stating that the ultimate question was whether there was a substantial defect in the statutory procedures that was prejudicial to the interests of the trustor and claimants. Only a properly conducted sale, free from internal defects, creates rights in the successful bidder at the sale. Defects in the notices have been held to void sales, and the statutory right of a trustor to postpone the sale is just as important of a protection. The Court said there was no meaningful distinction. Moreover if the defects are discovered before the bidder actually takes title and possession by receipt of the trustee’s deed, then the bidder is not prejudiced if it gets its money back with interest. Thus the inadvertent disregard of the postponement agreement was just as much an irregularity in the sale proceedings as a defect in the notice requirements.

The Court suggested that, “It might be a different case had the trustee’s deed been issued to Residential Capital” which would have entitled it to bona fide purchaser status, but such was not the case. The Court allowed that its conclusion was consistent with the two purposes of the statutory scheme for foreclosures, to protect the trustor from wrongful loss of the property, and to provide the beneficiary with a quick, inexpensive, and efficient remedy to collect from a defaulting debtor. Therefore Residential Capital was only entitled to the return of the purchase price paid plus interest.

What is new and different about the Residential Capital vs. Cal-Western Reconveyance case is that it is one of the first times that a court has set aside a trustee’s sale based on a mistake that did not involve any form of a defective notice. But the Court was faithful to the general rule that a mistake that is internal to the foreclosure rules and procedures will often cause the foreclosure to be set aside, while a mistake that is “dehors” or outside of the foreclosure rules and procedures will not constitute a basis to set aside the foreclosure sale. The pivotal point in this case was that the Court determined that an oral agreement to postpone was internal to the rules and procedures, and therefore the disregard of a postponement agreement constituted a procedural error sufficient to set aside the foreclosure.

What is the lesson to be learned? If you find yourself in the situation of a defective foreclosure sale, act quickly. You must take action before the trustee’s deed is issued and delivered. A matter of hours could make the difference. Contact your trusted real estate attorney immediately.