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HOW RECENT COURT DECISIONS MAY EFFECT FORECLOSURES
Two recent court decisions may affect the way foreclosures, and loan modifications are conducted in the future. One case brings hope for California homeowners who are victims of predatory stated income loans. The other case clarifies that acceptance of trial period payments by homeowners does not create a loan modify agreement or prevent the lender from foreclosing.
The Lona v. Citibank, N.A. ruling was favorable to homeowners in distress. Mr. Lona was a mushroom farm mechanic, had limited English fluency, had an 8th grade education, and earned $3,333.00 a month. He responded to a “marketing enticement” by First Net Mortgage and refinanced his home in January 2007 with a “stated income loan” (the borrower states his gross monthly income, which is sometimes unscrupulously increased by the loan broker). The new loan raised his mortgage debt from $1.24 million to $1.5 million, and his new monthly payment was $12,381.36. The home was sold at a nonjudicial foreclosure sale in August 2008. The case did not discuss how Lona originally acquired the property.
Lona sued Citibank (the lender), EMC (the loan servicer) and the mortgage broker to set aside the trustee’s sale claiming that he was a victim of predatory lending. Lona alleged the transaction was invalid because the loan broker ignored his inability to repay the loan and he did not understand the transaction, which was entirely in English and he had limited English fluency, little education, and modest income. The Superior Court granted Citibank and EMC’s summary judgment motion which argued no triable issues of material fact existed for setting aside the trustee’s sale because (1) Lona failed to meet the tender requirements (offer to pay the full amount of the debt which would have postponed the trustee’s sale); (2) Lona voluntarily entered into the loan; and (3) Lona failed to demonstrate any irregularity in connection with the trustee’s sale. Lona appealed.
The Appellate Court found that Lona was exempt from the tender requirement, no irregularities existed in the foreclosure sale, and Lona had presented evidence that was not addressed by Citibank and EMC of unconscionability (unequal bargaining power, overly harsh, one-sided results). The loan documents were standard forms drafted by the lender and presented to Lona for signature and he had no role in negotiating the terms, which included potential increased interest rates and a balloon payment that were not explained to Lona and which he would not be able to pay. The extreme disparity between the monthly loan payment and Lona’s income created a triable issue whether the loans were overly harsh and one sided.
This ruling indicates that courts are taking a closer look at the way refinancing is was conducted, rather than merely at whether the lender and/or loan servicer conducted the foreclosure lawfully.
In Nungaray v. Litton Loan Servicing, LP, the ruling was not favorable to homeowners in distress. The Nungarays refinanced their home in Simi Valley in March 2006 through Bank of America (Bank). Litton Loan Servicing (Litton) serviced the loan. In January 2009, the Nungarays were delinquent and the Bank recorded a notice of default. The Notice of Trustee’s Sale was recorded and sale was set for April 29, 2009. In May 2009, the Nungarays employed a business entity to negotiate and obtain a loan modification. On July 3, 2009, the Nungarays executed a document titled “Loan Workout Plan (Step One of Two-Step Documentation Process)” for the Bank’s review. Although the Bank accepted reduced mortgage payments under the Plan, the Bank and Litton never executed the Plan.
The requirements of the Plan included the Nungarays make four “Trial Period Payments” and provide documentation of their income, financial information, and a hardship affidavit. If the Nungarays were in compliance with the Plan, the Bank would provide them a Loan Modification Agreement to sign and return two copies. If they qualified for the “Offer,” the Bank would send them a signed copy of the Plan. If they did not qualify for the Offer, the Bank would send them a written notice of disqualification. The Plan would not take effect until both the Nungarays and the Bank signed it and the Bank provided them with a copy signed by the Bank. The Bank would suspend, but not dismiss, the foreclosure action so long as the Nungarays continued to meet all the Plan obligations. If the Bank did not provide them the fully executed copy of the Plan and the Modification Agreement before the Modification Effective Date, the loan documents would not be modified; the Plan would terminate; and the foreclosure would immediately resume at the point it was suspended. The Plan included the following statements: “I understand that the Plan is not a modification of the Loan Documents …” and “I … agree that the Lender will not be obligated or bound to make any modification of the Loan Documents if I fail to meet any one of the requirements under this Plan.”
The Nungarays provided financial information through their attorney in response to three letters requesting specific documents and in a telephone call. The Nungarays made four payments; however, Litton returned two of them, the first for failure to include required financial information. The Nungarays failed to provide the Bank with all of the required financial information. The Nungarays claimed they did not receive notice that information was missing. On November 1, 2009, the Bank gave notice that the Plan was terminated. On November 10, 2009, the Bank purchased the home at a non-judicial foreclosure sale.
In January 2012, the Nungarays brought an action against Litton and the Bank alleging breach of contract, negligence and quiet title. They claimed that the foreclosure sale and eviction were improper, because they had entered into a loan modification agreement. The Court granted the defendants’ Motion for Summary Judgment stating, “[T]he Plan was not an enforceable agreement requiring defendants to enter into a loan modification because it ‘was expressly contingent upon a number of factors which never came to fruition.’”
On appeal, the Nungarays made two arguments: They contended the Plan was an enforceable loan modification, because the Bank and Litton partly performed by accepting the trial period payments and acknowledged the existence of the Plan in their court pleadings; therefore principles of equitable estoppel apply (a legal principle that bars a party from denying or alleging a certain fact due to that party’s conduct, allegation, or denial). The Court disagreed finding there was plain and clear language in the Plan that it was not a loan modification; the Plan was not executed by the Bank or Litton; and equitable estoppel does not apply because the Nungarays were not led to believe that a permanent loan modification was forthcoming.
The Nungarays also contended that Litton and the Bank violated the “one-form-of-action rule” by retaining and applying the Nungarays’ payments against the mortgage. California Code of Civil Procedure, Section 726, provides there can only be one form of action for the recovery of a debt or the enforcement of any right secured by a mortgage upon real property. Those seeking to collect a debt must select one collection method against a delinquent owner. If a creditor forecloses on an owner and discovers there is no equity in the property, the creditor cannot then bring a lawsuit to recover the deficiency. Again, the Court disagreed and found that the rule did not apply to the circumstances in the case, that the Bank did not pursue the Nungarays’ assets prior to the foreclosure. “We do not consider the payments a setoff manifesting an election to not foreclose pursuant to the one-form-of-action rule…” and that money paid as part of a forbearance agreement did not invoke the rule.
This ruling emphasizes the importance of reading a document and obtaining legal advice from a reputable attorney to ensure a clear understanding of the terms before you rely on it or sign it.
BY: SYLVIA J. SIMMONS, ATTORNEY
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.