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Bankruptcy Courts Continue to Punish Negligent Lenders

Creditor-Side Bankruptcy by Peter N. Brewer, Esq.

Previously, I wrote about the diverging case law in state and bankruptcy court regarding foreclosure litigation.  In state courts, California has almost unilaterally upheld nonjudicial foreclosure sales and overlooked any deficiencies by the lender.  On the other hand, the bankruptcy courts have more and more regularly been denying lenders’ requests for relief from stay and proofs of claims.  This distinction was highlighted again in a recent bankruptcy case, In re: Salazar.

In Salazar, the lender, U.S. Bank, foreclosed on Eleazar Salazar’s home.  On the eve of the unlawful detainer trial, the debtor filed for bankruptcy protection.  Prior to filing for bankruptcy protection, Salazar filed a separate suit in state court to challenge the foreclosure sale based on U.S. Bank’s failure to file an assignment prior to the foreclosure sale.  Although Salazar’s litigation was ongoing, U.S. Bank moved for relief from stay to proceed with the unlawful detainer action.  The Court denied U.S. Bank’s request on the grounds that the foreclosure sale may be invalid.

The Court found that they key issue was U.S. Bank’s failure to properly record an assignment of the deed of trust.  Although MERS, the nominal beneficiary of the loan, had recorded a substitution of trustee, that was insufficient for U.S. Bank to demonstrate that it was the beneficiary of the deed of trust.  The Court noted that under California law, the trustee’s deed is evidence as to the identity of the foreclosing beneficiary.  The trustee’s deed named only U.S. Bank as the beneficiary and did not name MERS.  As US Bank was the beneficiary, it could not rely on any other parties for the power to foreclose.

While that alone would have been a win for debtors, the Court continued on to address two major roadblocks for wrongful foreclosures suits.  First, the Court distinguished this case from Gomes v. Countrywide.  (For a more complete analysis of Gomez click here.)  The Court determined that Gomes was not applicable because the wrong party initiated foreclosure.  While MERS may have had the ability to foreclose, without an assignment from MERS or the beneficiary, U.S. Bank did not have the authority to foreclose.  Second, the court found that tender was not required.  Under California law, in almost all circumstances, a borrower cannot challenge a foreclosure sale without a tender offer, or an offer to pay the full amount owed.  As few borrowers can afford to tender, that rule has been one of the largest roadblocks to successfully challenging foreclosure sales.  Here the Court found that the foreclosure could be void, and accordingly, no tender would be required in that situation.

Even though the Court denied U.S. Bank’s motion for relief from stay, the Court ordered the debtor to make adequate protection payments, or payments to the lender to protect the lender’s interest in the property.  If you are a lender or someone purchasing at a trustee’s sale or REO sale, a thorough investigation of the public record is necessary in order to minimize the chances of future litigation.  If you are a borrower, you may have a claim to void the foreclosure.  However, even if you void the foreclosure sale, you will still need to make payments to the owner or the bank.

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