Generally, in California to prove a claim for fraud and deceit based on concealment, the plaintiff must prove five elements:
(1) the defendant must have concealed or suppressed a material fact,
(2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff,
A deed of trust represents security for the loan. It has several parties- a) the trustor, who is the borrower and owner of record for the real property that is security for the loan; b) the beneficiary, who is the lender whose debt is secured by the deed of trust; and c) the trustee, who holds bare legal title only for the purpose of conveying it in the event of a foreclosure. The deed of trust contains a “power of sale,” giving the trustee the ability to foreclose. Once the deed of trust is created and recorded, if there is a default, the beneficiary routinely changes who the trustee is by recording a “substitution of trustee,” putting a new trustee in the job. Homeowners in this situation should consult with a Sacramento and Yolo real estate attorney to determine their rights. In a recent case, the borrower- homeowner who lost their property to foreclosure realized that the original deed of trust did not name a trustee, and sued to set aside the foreclosure sale. The court said no.
In Shuster vs. BAC Home Loans Servicing LP (formerly known as Countrywide Loan Servicing) Shuster borrowed $670,000 to buy a house in Simi Valley. Mortgage Electronic Registration Systems, Inc. (MERS) was named beneficiary; but there was no trustee named in the document. Shuster ended up in default, MERS recorded a Substitution of Trustee, and the new trustee foreclosed. Shuster brought this action.
Shuster argued that, with no trustee, there was no one to receive the conveyance of bare legal title. This transforms the deed of trust into a standard mortgage. Under California law, a mortgage that is not standard deed of trust (with a power of sale) may only be foreclosed by judicial foreclosure – filing a lawsuit for foreclosure and obtaining a court order.
An acceleration clause in a loan document or promissory note is a provision that requires the entire amount of the unpaid principal and interest to become due when the specified event occurs. There are two kinds. First, in a typical Promissory Note, the entire amount may become due in the event of default in payment of an installment, or any other violation of the terms of the loan documents. The other kind, typical in mortgages and real estate loans, may require the entire balance to become due on sale of the property that is security for the debt. Parties with concerns about an acceleration clause should consult with a Sacramento business or real estate attorney to understand how it applies in their own circumstances. It was the first type of acceleration clause that was the subject of a recent decision, in which a lender was surprised that his acceleration clause (and the higher rate of interest it included), could not be invoked.
In JCC Development v. Hyman Levy, Levy was a ‘philanthropist’ who was negotiating with JCC to purchase and operate a Jewish Community Center. He deposited $2.7 million into escrow. The negotiations took longer than expected, so the parties agreed that the $2.7 million would be converted to a loan to JCC, secured by a mortgage on the property. The promissory note provided for interest at the rate of 5%. The acceleration clause provided that, on acceleration, interest would increase to the legal maximum. It stated:
“If: (I) Maker shall default in the payment of any interest, principal, or any other sums due hereunder, or (ii) Maker shall default on performance of any of the covenants, agreements, terms or provisions of the deed of trust securing this Note… then, at Lender’s option, all sums owing hereunder shall, at once, become immediately due and payable. Thereafter, interest shall accrue at the maximum legal rate permitted to be charged by non-exempt lenders under the usury laws of the State of California.”
Last post I discussed the decision in Scott Call Jolley v. Chase Home Finance, Inc., where there were ongoing disputes between the borrower and lender, and the lender made many representations that they would likely agree to a loan modification. The court concluded a duty may have been created that could make the lender liable for its negligence. Another aspect of that decision was the Lenders efforts to get into evidence documents and websites which it could not show were authentic, and the Court refused to allow the evidence. Anyone who is concerned about presenting evidence to the court should consult an experienced Sacramento and El Dorado real estate lending attorney. In this decision, the attorney did not do so well.
The problem arose when Chase asked the bank to take “judicial notice” of facts. The doctrine of Judicial Notice is a substitute for formal proof. A party asks the court to take judicial notice of certain matters that are assumed to be indisputably true, and the introduction of evidence to prove them will not be required. In California it is allowed by provisions of the Evidence Code, sections 450 to 460.
This case involved disputes between a borrower and his lender Washington Mutual, which went into FDIC receivership and acquired by Chase. Chase bought the assets of WaMu through a purchase agreement between Chase and the FDIC. The Purchase Agreement required Chase to assume liability for WaMu’s accounts. However, it stated that Chase did NOT assume liability for any borrower claims arising out of WaMu’s lending activities. That is what Jolley’s lawsuit was about.
California law has had a persistent rule that, when it comes to real estate loans, a lender does not own a borrower any duties beyond those expressed in the loan agreement, except those imposed due to special circumstances. Courts rarely find those special circumstances, and hold lenders and buyers to routine, arms-length transactions. Last year I discussed a lender who told the borrower to skip a payment. In a recent decision in Northern California, where there were ongoing disputes between the borrower and lender, and the lender made numerous representations that they would likely agree to a loan modification, a duty may have been created that could make the lender liable for its negligence. The court referenced the recent changes in law at both the state and federal level to protect homeowners (even though these rules did not apply in this case) indicate a policy to protect real estate borrowers from their lender’s negligence. Lenders and borrowers concerned with the question of lender’s duties and negligence should consult with a Sacramento and Yolo real estate loan attorney.
In Scott Call Jolley v. Chase Home Finance, Inc., the loan was for over $2 million to renovate a property in Tiburon, and was essentially a construction loan. The loan was originally with Washington Mutual, which went into FDIC receivership and acquired by Chase. Jolley said that WaMu lost the loan documents, which held up construction financing for 8 months, and then they ad significant disputes with disbursements. WaMu agreed to a loan modification, and was later taken over by Chase. Jolley defaulted, claiming that it was due to WaMu’s breaches of contract and negligence.
Jolley claimed that Chase’s agent, on many occasions, encouraged him to complete construction because there was a “high probability” that Chase would modify the loan to avoid foreclosure. As a result, the plaintiff spent another $100,000 to complete construction. Chase denied the modification.
The California parole evidence rule generally prohibits evidence of oral statements that contradict the terms of a written contract. In the past several years Sacramento and El Dorado real estate attorneys often heard borrowers claim that their mortgage broker made promises about their loan regarding the interest rate, whether it was adjustable, when the rate would go up, and a myriad of other terms, that turned out to be true. These promises are in direct conflict with the terms of the written agreement, so the parole evidence rule keeps these statements out, and can result in a lawsuit being thrown out of court. However, a new California Supreme Court decision changes everything- now, the false promises may be admitted as evidence.
In Riverisland Cold Storage vs. Fresno-Madera Production, the borrowers owed the lender over $765 thousand, and were in default. They entered a work-out with the lender. The borrowers claim that two weeks before signing the workout they met with an officer for the lender. He told them that they would extend the loan for two years in exchange for additional collateral of two ranches. However, the agreement they signed (which the borrowers did not review closely) extended the loan for only three months, and, as additional collateral, added eight separate parcels.
The borrowers again defaulted and the lender took action before the three years the borrowers were counting on. The borrowers brought the loan current, and filed this lawsuit, claiming fraud and negligent misrepresentation. The lender raised the parole evidence rule, arguing that the borrower could not prove their claims because the rule barred any evidence of oral representations contradicting the actual terms of the written agreement.
California home buyers often get both a first loan and a second, usually a home equity line of credit, or “HELOC.” Generally, when a second loan is made by a different party, not as a part of the purchase, when the first forecloses, the value of the junior’s security has been wiped out (the 2nd becomes a “sold out junior”). The one form of action rule then does not prevent a lawsuit for the debt on the second. However, when the same lender makes both the 1st and 2nd loans, it is more complicated, and owners in this situation should consult with a Sacramento & Yolo real estate lawyer. There are three typical scenarios that cover possible personal liability for the second, if the first is foreclosed.
1. Original lender holds both first & second, forecloses on first.
➔There is no liability for the second, as it was a purchase money loan.
A California quiet title action can be brought to establish legal or equitable right, title, estate, lien, or interest in property or cloud upon title against adverse parties. Sacramento and Yolo real estate attorneys occasionally advise clients who, not being able to pursue an action, are interested in assigning their claims to another party. In a recent decision, a party who was assigned a claim for quiet title was not assigned an interest in the property. Surprising to everyone was how well that mistake worked out for the original owner.
In Chao Fu Inc. v. Chen, CFI corporation owned a 25% interest in real estate in Mountain View. CFI’s secretary, Mali, had been doing unrelated business with Chang and had borrowed money from him. Chang got nervous about getting paid, and wanted security for the debt. Mali, with approval of the other principals of CFI, gave Chan a deed of trust against the Mountain View property (owned by CFI) and Chang recorded it.
While the principals were overseas, Chang, the lender, successfully foreclosed the deed of trust and became owner of the 25% interest in the property. To further collect on the balance of the money owed by Mali, the Lender sued her. Mali had CFI assign to her “all of its right, title, interest, and standing to bring suit, to, in, and on, any and all claims and causes of action which it has against Chen…” Mali then filed a cross-complaint against the Lender for wrongful foreclosure & slander of title. However, Mali had to dismiss her claims just before trial, because CFI’s corporate status had been suspended, and thus had no power to pursue legal actions- as a result, the assignment of claims to Mali was void. Mali assigned the claims back to CFI.
Often in an escrow for sale or financing of California real estate, money will be held back in escrow to take care of unresolved issues. This is done on agreement of the parties in the real estate purchase and sale contract, or the loan documents and escrow instructions. For example, there may be a lien or tax due with uncertain amount which cannot be determined until after the scheduled close of escrow. Parties with concerns regardin escrow hold backs shcould always consult an experienced Sacramento real estate lawyer. In a decision this summer Citibank was the secured creditor on commercial property who was denied the funds in the escrow hold back.
In Oxford St. Properties v Rehabilitation Services, Citibank made a refinance loan to a partnership between Oxford & Rehab; Rehab was to buy out Oxford’s partnership interest with most of the money. The Citibank loan was secured by the partnership real property, plus some personal property. Construction loans were paid off, Oxford was partially paid, and over $200,000 was held back in escrow pending clarification of some insurance issues; this money was never paid to Oxford.
A dispute resulted, and Oxford sought arbitration. The first arbitration ruling was that Rehab had to convey the project to Oxford. A second arbitration was held because Rehab neither conveyed the property nor the $200,000, but let the Citibank loan go into default, resulting in a judicial foreclosure and a deficiency judgment. The arbitrator awarded Oxford damages of over $15 million, plus the $200,000 in escrow. Oxford obtained a writ of possession for the money.
Loan modifications have been getting a bit more predictable recently, but several years ago it was a crap shoot of false hopes and unreliable loan servicers. Issues I often saw surrounded what happened when the borrower signed the loan modification documents, and make the trial payments, but was told that they didn’t qualify. Borrowers in the loan modification process should consult with an experienced Sacramento real estate attorney, who can advise them as to the meaning of the documents they have been presented. A recent decision covers such an agreement proposed in 2009. This post covers the impact of the borrower signed and returning the documents. Part 2 will cover her claim for wrongful foreclosure.
In Barroso v. Ocwen, the borrower bought her house in 2005 for $372,000. She got behind on payments, and a notice of default was recorded in 2009. Ocwen told her that she qualified for the HAMP program, and sent her agreements for her signature. They were:
a. Trial Period Plan; payments for three months;
California Real Estate Lawyers Blog