Foreclosure Cases: MERS, Deutsche, and Other Usual Suspects

A new one from Massachusetts, a non-judicial foreclosure (like Arizona) case regarding paragraph 22 of the Deed of Trust contract, and the conditions precedent set forth therein:Pinti v Emigrant Mortg Co Inc Choice bits:

Insofar as the plaintiffs’ mortgage is concerned, paragraph 22 begins by requiring notice of default to be given prior to any acceleration of the sums secured by the mortgage; then specifically prescribes the contents of the notice of default; and then provides that, if the default is not cured before the date specified in the notice, the mortgagee may invoke the statutory power of sale (as well as pursue other remedies). As the paragraph is written, therefore, the sending of the prescribed notice of default is essentially a prerequisite to use of the mortgage’s power of sale, because the power of sale may be invoked only if the default is not cured within the time specified in the notice of default. In this regard, we agree with the plaintiffs that the “terms of the mortgage” with which strict compliance is required — both as a matter of common law under this court’s decisions and under § 2115 — include not only the provisions in paragraph 22 relating to the foreclosure sale itself, but also the provisions requiring and prescribing the preforeclosure notice of default. See Foster, Hall & Adams Co., 213 Mass. at 322-324.

Because the plaintiffs entered into their mortgage with Emigrant in Massachusetts, a nonjudicial foreclosure State, the default provision in paragraph 22 of their mortgage provided that Emigrant’s notice regarding the plaintiffs’ default and right to cure had to inform the plaintiffs of “the right to bring a court action to assert the non-existence of a default or any other defense of [the plaintiffs] to acceleration and sale” (emphasis added). See Beaton v. Land Court, 367 Mass. 385, 392- 393 (1975) (discussing mortgagor’s avenues of relief from foreclosure through court actions). The language that Emigrant used in the default notice that it actually sent to the plaintiffs — that the plaintiffs “have the right to assert in any lawsuit for foreclosure and sale the nonexistence of a default or any other defense [they] may have to acceleration and foreclosure and sale” (emphasis added) — presumably would comply with the requirements of paragraph 22 in a judicial foreclosure State, 17 but not in Massachusetts.

If, as the defendants argue, “substantial compliance” with paragraph 22 were sufficient, and if the erroneous information sent to the plaintiffs constituted substantial compliance, it is obvious that Massachusetts mortgagors, including the plaintiffs, could be misled into thinking that they had no need to initiate a preforeclosure action against the mortgagee but could wait to advance a challenge or defense to foreclosure as a response to a lawsuit initiated by the mortgagee — even though, as a practical matter, such a lawsuit would never be brought. 18,19

As previously discussed, in a nonjudicial foreclosure jurisdiction like Massachusetts, misstating this information in a way to suggest that a mortgagor with a defense does not need to initiate a lawsuit but may wait to respond to a foreclosure lawsuit filed by the mortgagee can have disastrous consequences for the mortgagor: if the mortgagor has a valid defense to the foreclosure sale going forward, but is not made aware that he or she must initiate an action in court against the mortgagee to raise that defense, the sale may well proceed and result in title passing to a bona fide purchaser without knowledge of the issue — at which point, and depending on the nature of the defense, the mortgagor’s right to redeem his or her home may well be lost. See Bevilacqua, 460 Mass. at 777- 778.24 Emigrant’s failure to provide the required and correct information on this point in the notice of default cannot fairly be described as a “mere irregularit[y] in executing a power of sale contained in a mortgage.” Rogers, supra. Contrast Chace, 189 Mass. at 562. The failure renders the subsequent foreclosure sale to Wilion void.

The position taken by the dissent is that strict compliance by Emigrant with the notice of default provisions in paragraph 22 was required, but that Emigrant’s failure to do so did not render the foreclosure sale void. See post at . In the dissent’s view, the result in this case is essentially controlled by our decision in Schumacher. See post at . The dissent reasons that § 35A, the subject of Schumacher, and the notice of default provisions in paragraph 22 are birds of a feather in terms of purpose and operation; that for the same reasons Schumacher concludes § 35A was not a statute relating to the foreclosure by sale, so paragraph 22 is not a term of the mortgage concerned with foreclosure by sale; and, consequently, as was the case in Schumacher, Emigrant’s defective notice of default rendered the foreclosure sale only voidable, not void. We disagree. The dissent fails to take into account the distinction –- reflected in our cases and in the language of § 21 — between the “terms of the mortgage” instrument relating to foreclosure by exercise of the power of sale, and “statutes” relating to foreclosure by the power of sale. But this distinction is a critical one. As discussed previously, that § 35A is not one of the statutes relating to foreclosure by the power of sale to which § 21 refers does not answer whether the provisions of paragraph 22 qualify as “terms of the mortgage” relating and integrally connected to the power of sale under§ 21. And as to that question, this court’s decisions about mortgage terms indicate that by structure and content, the notice of default required to be given under paragraph 22 is integrally connected, and operates as a prerequisite, to the proper exercise of the mortgage instrument’s power of sale. Emigrant’s strict compliance with the notice of default required by paragraph 22 was necessary in order for the foreclosure sale to be valid; Emigrant’s failure to strictly comply rendered the sale void.

And then tthere was this little gem against Deutsche Bank in the California Court of Appeals:

Miles v Deutsche Bank National Trust Company (00000002)

For this one, hat tip to my friend Ken McLeod:

This case involves allegations of a wrongful foreclosure and related causes of action. Plaintiff John Miles appeals from a judgment dismissing his breach of contract, fraud, and negligent misrepresentation causes of action pursuant to a sustained demurrer, and a summary judgment in favor of defendants on the wrongful foreclosure cause of action.

With respect to the demurred causes of action, we reverse. In the record before us, the court did not offer any explanation for its ruling. Based on our independent review of the complaint, we conclude plaintiff adequately stated his claims.

With respect to the wrongful foreclosure cause of action, we also reverse. The court granted summary judgment on the sole basis that plaintiff could not prove damages because he did not have any equity in the home when it was sold at a non-judicial foreclosure sale. Wrongful foreclosure is a tort, however, and thus plaintiff may recover any damages proximately caused by defendants’ wrongdoing.  Plaintiff offered evidence that he lost rental income and suffered emotional distress as a result of the foreclosure. This is disputed, of course, but it is sufficient to survive a summary judgment motion.

We begin by quickly dispensing with an argument that runs throughout respondents’ brief: “Plaintiff’s fraud, breach of contract and negligent misrepresentation causes of action were not sustained without leave to amend, they were sustained with 30 days leave to amend. Plaintiff chose to not file a timely amended complaint pursuant to the trial Court’s order and therefore voluntarily abandoned those causes of action. Plaintiff cannot appeal his decision not to pursue the other causes of action.” Defendants cite no authority for this remarkable proposition, and it would be an absurd rule indeed. If a plaintiff had already stated all available facts, but was given an opportunity to amend, how could forfeiture be avoided under defendants’ rule? By making up facts? That is not the law. Even if given an opportunity to amend, a plaintiff may stand on the sufficiency of the complaint. (County of Santa Clara v. Atlantic Richfield Co. (2006) 137 Cal.App.4th 292, 312 [“[w]hen a demurrer is sustained with leave to amend, and the plaintiff chooses not to amend but to stand on the complaint, an appeal from the ensuing dismissal order may challenge the validity of the intermediate ruling sustaining the demurrer”].) There was no forfeiture.

Next, defendants contend the demurrer to the breach of contract cause of action was properly sustained because the complaint “does not allege whether the contract was in writing, oral or implied.” (See Code Civ. Proc., § 430.10, subd. (g) [complaint demurrable if, “[i]n an action founded upon a contract, it cannot be ascertained from the pleading whether the contract is written, is oral, or is implied by conduct”].) This is a purely technical argument, as defendants’ summary judgment motion demonstrates they knew which contract was at issue, were in possession of it, and thus knew it was in writing. The problem with this purely technical argument is that defendants did not comply with their own technicalities.…

Aside from these arguments, it appears that plaintiff alleged the basic elements of a breach of contract claim. “A cause of action for breach of contract requires proof of the following elements: (1) existence of the contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach; and (4) damages to plaintiff as a result of the breach.” (CDF Firefighters v. Maldonado (2008) 158 Cal.App.4th 1226, 1239.) Plaintiff alleged an express contract to refinance his loan, including the loan balance, the interest rate, and the monthly payment. He alleged he performed by making payments under the agreement. He alleged defendants breached that contract by repudiating it and refusing to accept payments under it. And he alleged he was damaged by various fees he was charged and by being evicted from his home. Accordingly, we reverse the dismissal of plaintiff’s breach of contract claim.

Defendants offer two arguments in support of the dismissal of the fraud and negligent misrepresentation causes of action. First, they contend a misrepresentation cause of action does not lie where the misrepresentation pertains to future events: “The reason for this requirement is obvious: it is not possible to determine whether someone making a representation did so with knowledge, or reckless disregard, of the truth of the alleged representation if the representation was not made at a time in which it was known to be true or false. Therefore, the alleged promise to modify the Plaintiff’s loan cannot form the basis of a fraud or misrepresentation claim, because the Plaintiff cannot allege that the person making such a representation knew it to be true or false, as it concerned a future event.” Defendants later concede, however, “The only circumstances under which a future promise may form the basis of a fraud claim is where the plaintiff can allege facts that the promisor made a promise with no intent of performing.” Indeed, the nature of promissory fraud is that it is a promise of future performance with no present intent to actually perform. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) And this is precisely what plaintiff alleges: “42. Defendants induced Plaintiff into entering into making payments of more than $44,000.00 on the promise of providing Plaintiff with a reasonable modification of the loan on the Property. [¶] 43. At the time that Defendants made these representations, they knew them to be false as Defendants had no intention of honoring their promise to provide Plaintiff with a permanent loan modification but instead, intended to strip the Plaintiff of all of his liquid assets and then proceed with foreclosure on Plaintiff’s Property.” Accordingly, the misrepresentation causes of action are not demurrable on the ground they involved a future event.…

Finally, in an era of electronic signing, it is often unrealistic to expect plaintiffs to know the who-and-the-what authority when mortgage servicers themselves may not actually know the who-and-the-what authority. Accordingly, we do not consider that omission fatal. Thus we will reverse the dismissal of the misrepresentation causes of action.

The court granted summary judgment on the wrongful foreclosure cause of action on the sole ground that plaintiff could not prove damages. The court believed the only permissible damages in a wrongful foreclosure suit is the lost equity in the home, and where there is no equity, no cause of action will lie. We disagree.

We agree with this basic analysis of a tort of wrongful foreclosure. A tort of wrongful foreclosure satisfies the basic factors for finding a tort duty enunciated in Biakanja v. Irving (1958) 49 Cal.2d 647, 650-651. The transaction is intended to affect the plaintiff — it is intended to dispossess the plaintiff; it is easily foreseeable that doing so wrongfully will cause serious damage and disruption to the plaintiff’s life; the injuries are directly caused by the wrongful foreclosure; the moral blame of foreclosing on someone’s home without right supports finding a tort duty; and recognizing a duty will help prevent future harm by discouraging wrongful foreclosures. (See Ibid.) Such a tort bears some analogy to a wrongful eviction tort, which is well recognized and can exist in parallel with a breach of lease claim. (Nativi v. Deutsche Bank National Trust Co. (2014) 223 Cal.App.4th 261, 293 [“California recognizes the tort of wrongful eviction”];

Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1033, 1039 [permitting both a breach of lease and tortious wrongful eviction to proceed].)

The basic elements of a tort cause of action for wrongful foreclosure track the elements of an equitable cause of action to set aside a foreclosure sale. They are: “(1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.” (Lona v. Citibank, N.A. (2011) 202 Cal.App.4th 89, 104.) Federal District courts interpreting this cause of action have frequently cited the Nevada rule articulated in Collins v. Union Federal Sav. & Loan Ass’n (Nev. 1983) 662 P.2d 610, 623 that “[a]n action for the tort of wrongful foreclosure will lie if the trustor or mortgagor can establish that at the time the power of sale was exercised or the foreclosure occurred, no breach of condition or failure of performance existed on the mortgagor’s or trustor’s part which would have authorized the foreclosure or exercise of the power of sale.” (See, e.g., Das v. WMC Mortgage Corp. (N.D.Cal., Oct. 29, 2010, C10-0650 PVT) 2010 U.S.Dist. Lexis 122042; Roque v. Suntrust Mortgage, Inc. (N.D.Cal., Feb. 10, 2010, C-09-00040 RMW) 2010 U.S. Dist. Lexis 11546.) In other words, mere technical violations of the foreclosure process will not give rise to a tort claim; the foreclosure must have been entirely unauthorized on the facts of the case. This is a sound addition.

After describing the cause of action as a tort, the Munger court proceeded to describe the measure of damages as follows: “Civil Code section 3333 provides that the measure of damages for a wrong other than breach of contract will be an amount sufficient to compensate the plaintiff for all detriment, foreseeable or otherwise, proximately occasioned by the defendant’s wrong. In applying this measure it must be noted that the primary object of an award of damages in a civil action, and the fundamental theory or principle on which it is based[,] is just compensation or indemnity for the loss or injury sustained by the plaintiff and no more. [Citation.] Accordingly, where a mortgagee or trustee makes an unauthorized sale under a power of sale he and his principal are liable to the mortgagor for the value of the property at the time of the sale in excess of the mortgages and liens against said property.” (Munger, supra, 11 Cal.App.3d 1, 11.)

Both the trial court and defendants interpreted Munger narrowly, with defendants going so far as to say that “[t]he rule in Munger is an application of the benefit of the bargain rule.” It would be strange, however, to apply a contract measure of damages to a tort. We read Munger more broadly. It announced the rule that wrongful foreclosure is a tort (Munger, supra, 11 Cal.App.3d at p. 7), and the measure of damages is the familiar measure of tort damages: all proximately caused damages. In Munger, the only damages at issue were the lost equity in the property, and certainly that is a recoverable item of damages (id. at p. 11). It is not, however, the only recoverable item of damages. Wrongfully foreclosing on someone’s home is likely to cause other sorts of damages, such as moving expenses, lost rental income (which plaintiff claims here, and damage to credit. It may also result in emotional distress (which plaintiff also claims here). As is the case in a wrongful eviction cause of action, “‘The recovery includes all consequential damages occasioned by the wrongful eviction (personal injury, including infliction of emotional distress, and property damage) . . . and upon a proper showing . . . , punitive damages.’” (Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1039.)

The rule applied by the trial court and urged by defendants would create a significant moral hazard in that lenders could foreclose on underwater homes with impunity, even if the debtor was current on all debt obligations and there was no legal justification for the foreclosure whatsoever. So long as there was no equity, there would be no remedy for wrongful foreclosure. And since lenders can avoid the court system entirely through nonjudicial foreclosures, there would be no court oversight whatsoever. Surely that cannot be the law. The consequences of wrongfully evicting someone from their home are too severe to be left unchecked. For the reasons expressed above, a tort action lies for wrongful foreclosure, and all proximately caused damages may be recovered. Accordingly, the summary judgment is reversed.

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