Law Office of
Lawrence M Scancarelli
sfrealestatelaw.com
Copyright ©1998 - present
Lawrence M Scancarelli
sfrealestatelaw.com
Copyright ©1998 - present
TRUST DEED BORROWER’S FAILURE TO PAY PROPERTY TAXES IS BAD FAITH WASTE
The state Court of Appeal held that a borrower’s failure to pay real estate taxes, a form of “milking” the property in a nonrecourse loan constitutes “bad faith waste,” justifying an award of punitive damages (about 4 _ time the taxes awarded at trial) against the borrower. Nippon Credit Bank, Ltd vs. 1133 N. California Blvd. (2001) 86 CA 4th 486
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NOTICE AND DISCLOSURE OF FIRPA SCORES
This bill, effective 7/1/01, requires a consumer credit reporting agency to disclose specified information, including the consumer’s credit score and the key factors under specified circumstances. A person using a credit score in connection with a loan secured by residential real property must provide the consumer with a copy of these disclosures, along with a specified notice to the loan applicant. The person is not obligated to explain the information provided. Additionally, any contractual provisions that prohibit the disclosure of a credit score by a person who makes or arranges loans or a consumer credit reporting agency are void. Also, lenders are not liable for disclosure of credit scores under any contractual provisions. Amendments to Civil Code Section 1785.10, 1785.15, 1785.16; Civil Code 1785.15.1, 1785.15.2, 1785.20.2.
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TRUSTEE’S RECONVEYANCE OF TRUST DEED BASED ON FORGED REQUEST FOR
RECONVEYANCE NOT BINDING ON BFP
Schiavon lent the Perlitches $150,000 in exchange for a note secured by a deed of trust on real property. The deed of trust was recorded and sent to the Perlitches, as they instructed. The Perlitches, after adding a request for a full reconveyance and Schiavon’s forged signature, delivered the deed of trust to Fidelity, the trustee, which reconveyed the deed of trust. The Perlitches then sold the property, free and clear of Schiavon’s deed of trust to Arnaudo, which had no knowledge of either the fraud involved in procuring the reconveyance or Schaivon’s interest in the property. Schiavon later sued Arnaudo to cancel the reconveyance and reinstate the deed of trust, claiming that the reconveyance was void because it was based on a forged instrument.
The Court of Appeal ruled in favor of Arnaudo. Whether Arnaudo’s status as a bona fide purchaser (bfp) defeats Schiavon’s claim under the deed of trust depends on whether Fidelity’s reconveyance of Schiavon’s deed of trust was void (thus not enforceable by a subsequent bfp) or voidable (subject to cancellation as against Fidelity, but enforceable by the subsequent ffp). A reconveyance is void if the signature of the trustee who executes the reconveyance is forged or if the trustee is unaware of the nature of what he or she is signing. The reconveyance is voidable if the trustee, although aware of what he or she is executing, has been induced to do so through fraudulent misrepresentation. Here, the fraudulent misrepresentation consisted of a forged request for reconveyance, and the trustee executed the reconveyance with full awareness of the effect of his act. The reconveyance was therefore voidable and the subsequent bfp of the property was entitled to rely on it. The case points out the dangers of the beneficiary allowing the trustor to retain possession of the original deed of trust, which made it easier for the trustor to deceive the trustee. Schiavon vs. Arnaudo Bros. (2000) 84 CA4th 374
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LENDERS MUST DISCLOSE TO BORROWERS THAT THE BORROWER IS NOT REQUIRED TO PROVIDE HAZARD INSURANCE COVERAGE AS A CONDITION TO RECEIVING OR MAINTAINING A LOAN
Eff. 7/1/00, Current law prohibits lenders from requiring borrowers to provide insurance in an amount exceeding the replacement value of the improvements as a condition to receiving a loan. Lenders must disclose to buyers this requirement, ie that lenders cannot require borrowers to provide hazard insurance coverage in an amount exceeding the replacement value of the improvements on the property as a condition of receiving or maintaining a loan secured by that property.
CC 2955.5
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IF BONA FIDE PRINCIPAL LOAN AMOUNT IS AT LEAST $5000, LENDERS CAN TAKE DEED OF TRUST, MORTGAGE, OR LIEN ON REAL PROPERTY AS SECURITY FOR CONSUMER LOAN
The changes specify that if a consumer loan is for a “bona fide principal amount” of $5000 or more, the licensed lender may take a deed of trust or lien on property.
Fin Code 22203, 22251, 22305, 22330, 22467, 22551
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IF BUYER OF A RETAIL INSTALLMENT CONTRACT FOR HOME IMPROVEMENTS IS 65 OR OLDER, THE SELLER MAY NOT TAKE A SECURITY INTEREST IN THE BUYER’S PRINCIPAL RESIDENCE
Taking a security interest in a buyer’s principal residence is prohibited in retail installment contracts for home improvements where the buyer is 65 or older. Violation of this law could result in liability for actual damages, and for intentional violations, three times the contract price for the home improvement.
B& P 7159.2, CC 1804.1
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JUNIOR LIENHOLDER WIPED OUT IN FORECLOSURE BY CONSPIRACY BETWEEN DEBTOR AND FORECLOSING SENIOR HAS REMEDY TO RESTORE LIEN OR DAMAGES
Hyatt Land Development sold 4 parcels to Forecast (controlled by Priviti), then took back a note secured by a deed of trust on one of the parcels. Plaintiff later purchased that note. Forecast obtained additional financing for the purchase from a bank, using all 4 parcels as security. The bank’s deed of trust was recorded before the Hyatt deed of trust and had seniority. Title was later transferred to a series of corporations controlled by Priviti. When the obligor (one of the corporations controlled by Priviti) on the Hyatt note defaulted, plaintiff initiated foreclosure. Priviti used another corporation he controlled to purchase the bank’s note and engineer a preemptive foreclosure on that note, thereby extinguishing plaintiff’s junior lien.
Plaintiff sued Priviti for the sum due on the note, conspiracy to intentionally interfere with a contractual relationship by eliminating plaintiff’s rights under his note by engaging in a sham foreclosure, and equitable relief declaring plaintiff’s lien valid. Plaintiff won and was ordered to elect between the lien or the jury award of damages for conspiracy, choosing the damages.
WHY THIS CASE IS IMPORTANT
Webber v. Inland Empire Invs., Inc (1999), 74 CA4th 884, 88 CR2d 594.
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LENDER NOT LIABLE FOR DAMAGES WHEN IT FAILS TO RECORD DEED OF RECONVEYANCE PROMPTLY
James Panagotacos paid off his loan to Bank of America in 1982. When he refinanced the property with First Interstate Bank, that Bank discovered that Bank of America failed to record its deed of reconveyance. After Bank of America was notified of its mistake, it prepared and recorded its deed of reconveyance, but not in time for Panagotacos to obtain the cash needed from refinancing to buy another property. Panagotacos sued Bank of America for damages, but the court rejected his claim, instead holding Bank of America liable for only the $300 statutory penalty for failure to promptly record a deed of reconveyance.
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LENDER HAS FIDUCIARY DUTY TO BORROWER WHEN IT HOLDS ESCROW FUNDS FOR TAX PAYMENTS
Jin Ok and Won Hye Choi obtained a mortgage from Chase Manhattan Mortgage Co. They paid property taxes through an escrow impound account. Chase delegated responsibility for the impound account to Bank of America, which delegated it to Transamerica Real Estate Tax Service, Inc. The Chois made all their mortgage payments on time, but the property taxes were not paid from the escrow impound account. The Chois notified Bank of America about the problem several times without success, until finally the county sold the house to a tax-deed purchaser. The Chois sued successfully, arguing that Chase, Bank of America, and Transamerica owed them a fiduciary duty, which they had breached. Choi v. Chase Manhattan Mortgage Co. (1999) 63 Fed.Supp.2d 874.
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AG SAYS MORTGAGE LENDER CAN’T CHARGE BORROWER INTEREST FROM DATE FUNDS PAID INTO ESCROW, BUT ONLY WHEN FUNDS DISBURSED FROM ESCROW
Attorney General Bill Lockyer issued an opinion stating that it would be an unfair business practice for a residential mortgage lender to charge the borrower interest from the date funds are paid into escrow. At that point, the funds are unavailable to borrowers, so they should not be obligated to pay interest on the money. In addition, it is the lender who controls when the funds are paid into escrow, so they can protect themselves accordingly. 89 OPS.CAL.ATTY.GEN. 233 (1999); 99-307
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ARBITRATION CLAUSE IN MORTGAGE DOCUMENT NOT ENFORCEABLE WHERE DEBTOR DEFRAUDED INTO SIGNING THE DOCUMENTS
Annie Jones, a 79 year old legally blind widow with dementia and hyperthyroidism, was tricked into signing papers that she was told were for her current mortgage when in fact, the papers were for a $50,000 loan. She could not read the papers and instead relied on the representations of the "lender," Adams Financial Services. When Mrs. Jones did not make any loan payments, Adams Financial Services threatened foreclosure. Mrs. Jones’ niece discovered the fraud and brought suit. Adams sought binding arbitration, based on the arbitration clause in the loan documents. Jones countered that the arbitration clause was not enforceable because she could not read the documents on account of her blindness, and was defrauded into signing them in the first place. The Court agreed with Jones, holding that the contract, obtained through fraud was void and unenforceable.
Jones v. Adams Financial Services, (1999) 71 Cal App. 4th 831.
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CREDITOR MUST APPLY FOR FAIR VALUE DETERMINATION WITHIN 3 MONTHS AFTER SALE IN ORDER TO OBTAIN DEFICIENCY JUDGMENT
Paykar Construction, holder of a $190,000 promissory note, filed a judicial foreclosure action. The court ordered the sale of property to satisfy the debt. On 5/21/97, the property was sold. On 6/5/97, the sheriff’s certificate of sale was recorded. On 9/5/97, Paykar moved for a deficiency judgment and a fair value determination. The court denied the motion, ruling that under CCP Section 726(b), a creditor may apply for a deficiency judgment but must do so within 3 months of the date of the foreclosure sale. The 3 month period starts on the date of sale, not when the certificate of sale was recorded. Paykar Construction Inc. v. Bedrosian (1999) 71 CA4th 803, 84 CR2d 135
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PMI REQUIREMENTS
Mortgage lenders and servicers are barred from charging or collecting future PMI payments on new loans originated after 1/1/98 if the loan is for personal, family, household, or purchase money purposes and the property is owner-occupied, 1-4 residential, and the loan is 75% or less of the lower of the sales price or appraisal at the time the loan was originated. CC 2954.12
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REVERSE MORTGAGE DISCLOSURES
This change requires a notice to reverse mortgage applicants regarding annuity requirements, if any, and establishes rules such as a prohibition on prepayment penalties, a penalty for the lender's failure to make payments when required, and temporary homeowner absences which shall not require loan repayment. CC 1923 et seq
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LENDER WHO LOANS MONEY TO BANKRUPT DEBTOR WITHOUT COURT PERMISSION IS UNSECURED
In this case, the 9th Circuit held that a loan to a debtor after a Chapter 11 had been filed, without permission of the Bankruptcy Court, was a violation of Bankruptcy Code 364, the remedy being cancellation of the debt. Here, the Court looked at the equities and allowed the lender to get back only its principal less what they have already been paid. This decision has created a problem with the title companies and lenders as it necessitates checking all Bankruptcy filings throughout the nation to be certain the borrower has not filed bankruptcy. Thompson vs. Margen 110 F 3d 47[back to top]
LENDER CAN FORECLOSE AND THEN COLLECT ON LETTER OF CREDIT FOR LOSS WITHOUT VIOLATING ANTI-DEFICIENCY STATUTE
The bank loaned Vista $ 3,250,000 to buy a shopping center. After defaulting, 3 Vista partners obtained letters of credit from Western Security for $ 375,000 which could be drawn upon if Vista defaulted again. When that happened, the bank foreclosed, and went to trustee sale. No bidders showed up and the bank took title, leaving an unpaid deficiency of over $ 500K. The same day, the bank demanded $ 375K payment on the letters of credit. Western refused to pay. The Vista partners notified Western that payment on the letters would violate the CCP 580d bar against deficiencies and they would not reimburse Western. The CA Supreme Court ruled that payment on a letter of credit after nonjudicial foreclosure does not violate 580d and applied new section 580.5, (an emergency measure clarifying that payment on a letter of credit is not a violation of 580d) retroactively to this case. This ruling clarifies that a standby letter of credit can be drawn upon by the lender as an additional security for a real estate loan, and that it applies for transactions before or after the enactment of the new law. Note that CCP 580.7 makes letters of credit unenforceable for defaults on purchase money mortgages on owner-occupied 1-4 unit residential property. Western Security Bank vs. Superior Court (1997) 15 C4th 232.
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ANTI DEFICIENCY PROTECTION APPLIES WHEN SUBSTANCE OF TRANSACTION IS PURCHASE MONEY
Matthes contracted to purchase 2 buildings from Conley, the offer stating that "[b]uyer will operate the two properties...as one business entity; therefore, acceptance of this offer is contingent upon the sale to buyer of both properties." Both buildings were bank-financed, with a 20% cash downpayment. The escrow on the first closed on schedule, but the escrow on the second was delayed because Matthes was $ 80,000 short on the downpayment. Conley lent Matthes the $ 80,000 and received a note secured by a 2nd on the first building. Due to a market downturn, Matthes was unable to make his payments and the bank foreclosed on both properties, wiping out Conley's interest. Conley sued to recover on the $ 80,000 note.
The Court of Appeal held that, under CCP 580b, a borrower who buys property with seller financing is protected from a deficiency judgment. Conley had argued that 580b did not apply because the note was secured by property other than that which the loan was used to purchase. The Court viewed the 2 sales as so closely related-the properties were marketed together, purchased as a package, sold at about the same time by the same seller to the same buyer, and the escrows referenced each other-that they were, in substance, one transaction and the transaction was purchase money in character. Note that other cases have ruled that non-"standard" purchase money transactions using other properties as security in less integrated deals lost purchase-money protection. Conley vs. Matthes (1997) 56 CA 4th 1453
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AFTER FULL CREDIT BID, LENDER CAN'T ENFORCE ADDITIONAL SECURITY
A secured lender who acquires property at a foreclosure sale of its deed of trust for a full credit bid cannot enforce bonds held as additional security. Note: A lender should not make a fullcredit bid at a trustee sale. Bank of America vs. Quackenbush (1997) 56 CA 4th 1167
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FULL CREDIT BID DOES NOT PRECLUDE ACTION FOR NEGLIGENT MISREPRESENTATION
A full credit bid by a foreclosing lender does not preclude an action for negligent misrepresentation (or other tort action) against an appraiser, or any other third party who induced the lender to make the loan. Arlington Investment vs. Tarcher (1997) 58 CA 4th 83.
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ESTOPPEL AGAINST FORECLOSING LENDER; NO ADDITIONAL NOTICE OF SALE REQUIRED AFTER RELIEF FROM BANKRUPTCY STAY
A lender may be estopped (prevented) from foreclosing based upon an oral agreement between the lender and borrower. Further, where notice of sale has been mailed and published prior to the borrower's bankruptcy petition, the lender is not required to give an additional notice of sale after relief from the automatic stay. Tully vs. World Savings (1997) 56 CA 4th 654.
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