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Caution to REO Investors

Foreclosure by Peter N. Brewer, Esq.

REO Investors – California Law Favors the Bidder in Foreclosure Defense Lawsuits

When foreclosure investors and REO purchasers in California attend a trustee’s sale and pay cash for the house, they want to know that the sale is final. That is indeed the law in California, that a foreclosure sale is final as to a bona fide purchaser for value. Under California law, there is a presumption that the trustee’s sale was regularly held and all statutory requirements have been satisfied.

The statutory scheme evidences intent that a properly conducted sale be a final adjudication of the rights of the creditor and debtor and that the sanctity of title of a purchaser be protected.

The bidder is a bona fide purchaser for value, “one who pays value for the property without notice of any adverse interest or of any irregularity in the sale proceedings.”

It is becoming common in our practice to see that after the gavel falls, and the trustee’s deed is recorded, the borrower suddenly wakes up and files for bankruptcy to halt the unlawful detainer action—or files a wrongful foreclosure lawsuit, or both.

In a recent case, the borrower did do both, and the wrongful foreclosure lawsuit sought to undo the foreclosure sale based on a technicality—the substitution of trustee.

Readers of this blog have no doubt read the news accounts of “robosigning” by lenders. Robosigning is not a problem in California for non-judicial foreclosures. What is the problem is the “power of sale” from the Trustee’s Deed. It is basically the MERS problem we have written about previously.

When the borrower signs the loan documents, they sign a Promissory Note and the Deed of Trust. (California is a Deed of Trust state, not a mortgage state.) The power to foreclose comes from the Deed of Trust.  A Trustee is designated in that document with the power of sale. When the borrower stops paying, the lender notifies the Trustee to sell the property by a Trustee’s Sale (of foreclosure sale as it is more commonly known).

In the case of a sold loan, the lender should assign the Deed of Trust when they sell the note. However, with sloppy paperwork or high volumes, there can be a lot of delay to recording the assignment of the Deed of Trust. The assignment also means there is a new Trustee who now has the power of sale. This is usually designated by a Substitution of Trustee.

Plaintiffs’ lawyers are now trying to capitalize on the “robosigning” frenzy by challenging whether or not the lender had the power of sale at the time of the foreclosure sale. However, in order to set aside the trustee’s sale by quiet title and declaratory relief, the borrower must tender.

What is tender? A tender is an offer of performance made with the intent to extinguish the obligation.  A tender must be one of full performance and must be unconditional to be valid. The tender rule, traditionally applied to trustors, is based upon the equitable maxim that a court of equity will not order a useless act performed. “A valid and viable tender of payment of the indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust.”

Debtors and borrowers filing these wrongful foreclosure lawsuits never comply with California Civil Code Section 1500 to effect tender, which states: “An obligation for the payment of money is extinguished by a due offer of payment, if the amount is immediately deposited in the name of the creditor, with some bank or savings and loan association within this state, of good repute, and notice thereof is given to the creditor.”

While many courts will generously grant a Temporary Restraining Order (TRO), without likelihood of success on the merits, courts will not grant a preliminary injunction, which means that while the bidder can be held up for a short amount of time, ultimately the law is on their side.

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