Lenders Must Enforce Remedies "By the Book" or Suffer the Consequences

By Gary F. Torrell

Gary F. Torrell

In a new California appellate court decision published this week called Bank of New York Mellon v. Preciado, the bank foreclosed on the borrower's home pledged as security for the loan and then sought to evict the former owners.  According to the decision, the bank made several mistakes along the way, including: (1) failure to provide proof the trustee who conducted the foreclosure sale had been properly substituted in place of the trustee named in the deed of trust; (2) the unlawful detainer complaint and judgment for possession incorrectly described the property as being located in San Jose instead of Alviso, California; and (3) the three-day notice to quit required before filing an unlawful detainer action was not properly served.  As a result, the appellate court reversed the trial court's ruling in favor of the bank, which allowed the former owners to remain in the property (presumably rent free and mortgage free) since July 2011, when the bank acquired title to the property.

This case proves how lenders must comply "by the book" with California's non-judicial foreclosure and eviction statutes when dealing with a borrower who fails to repay the loan and attempts to retain possession of the residential property after foreclosure.  Many lenders leave the duties associated with loan defaults and remedies to lower level, non-attorney employees who may lack the knowledge or experience to ensure the title company conducting the foreclosure and third parties conducting an eviction strictly comply with California law.  California courts can be harsh on such lenders, as this case shows.

Contact: Gary F. Torrell

Los Angeles Lawyer Magazine Features “Bankruptcy Shelters” by John C. Keith

John Keith

Attorney John C. Keith, who recently joined the Editorial Board of Los Angeles Lawyer Magazine, the Los Angeles County Bar Association’s official publication, authored “Bankruptcy Shelters: Public policy continues to weigh against the absolute effectiveness of bankruptcy remote entities,” which was featured in the magazine's July/August 2013 edition.

Mr. Keith’s article examines the effectiveness of “bankruptcy remote” special purpose entity borrowers, a tool used by lenders in recent years to protect them against bankruptcy filings.  Typically, lenders will insert themselves or their designees into the borrower’s management as nominally “independent” directors or managers, with the expectation of wielding veto power over the borrower’s ability to file bankruptcy. 

Read Bankruptcy Shelters

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Lender Cannot Pursue Borrower For Deficiency Judgment After Short Sale

By Laurie Murphy 

Laurie Murphy

In a case decided on July 23, 2013, the court of appeal held that a lender cannot pursue a borrower for a deficiency judgment after a short sale.

When a borrower defaulted on her payment obligations under a purchase money note secured by a deed of trust on her residential property, the lender served a notice of default.  The borrower was able to negotiate a short sale with a third party prior to the foreclosure sale but the agreed to price was less than the amount outstanding on the loan.  The lender consented to the short sale with an agreement that they were only releasing the security, not any deficiency.  The borrower then sued the lender after it attempted to collect on the amount of the deficiency it claimed she still owed. 

The trial court sided with the lender.  On appeal by the borrower the court of appeal held that any lender who either forecloses or agrees to a short sale of residential property secured by a deed of trust cannot pursue the borrower for any deficiency after either a foreclosure sale or a short sale.  Coker v. JP Morgan Chase.

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