In California, the tort of wrongful foreclosure requires: (1) a legally owed duty to the Plaintiff by the foreclosing party (2) a breach of that duty (3) a causal connection between the breach of that duty and the injury the Plaintiff sustained, and (4) damages. California courts have further clarified this cause of action by stating: “We are inclined however, to believe that with respect to real property the Murphy case was articulating a rule that has been applied in other jurisdictions. That rule is that a trustee or mortgagee may be liable to the trustor or mortgagor for damages sustained where there has been an illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust. Munger v. Moore, 11 Cal. App. 3d 1, 7, 89 Cal. Rptr. 323, 326 (Cal. Ct. App. 1970)
The court in Munger appears to be saying that if the foreclosure was illegal, fraudulent or willfully oppressive then that foreclosure was wrongful and the party foreclosed on may be entitled to damages. According to California statutory and case law several types of damages are available to victims of wrongful foreclosures.
First, damages are measured by the value of the property at the time of the sale in excess of the mortgage lien against the property (i.e the equity in the property). Second, damages are available in the amount that is sufficient to compensate for all detriment proximately caused by the wrongful conduct. California Civil Code Section 3333. Third, the borrower may be able to obtain damages for emotional distress in a wrongful foreclosure action and if the borrower can prove by clear and convincing evidence that the servicer/trustee was guilty of fraud, oppression or malice punitive damages may be awarded. Where there is a wrongful foreclosure, the borrower may seek punitive damages. In Kachlon v. Markowitz (2008) 168 Cal.App.4th 316, 345 [85 Cal.Rptr.3d 532, 554] the Court in acknowledging the right to seek punitive damages said:
“The jury concluded that the nonjudicial foreclosures instituted by the Kachlons were wrongful, and that in pursuing the foreclosure proceedings Mordechai acted “intentionally, fraudulently and in conscious and callous disregard for the rights of the Markowitzes.” These findings are tantamount to the finding of malice….” (emphasis added).
As such, it is clear in California, if the borrower can prove by clear and convincing evidence that the servicer or trustee was guilty of fraud, oppression or malice in its wrongful conduct, punitive damages may be awarded.
However, an action for the tort of wrongful foreclosure will lie if the trustor or mortgagor (borrower) 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 Munger v. Moore, 11 Cal.App.3d 1, 89 Cal.Rptr. 323 (Cal.App.1970). This seems to be an obstacle for many homeowners during this financial crisis. Many borrowers are behind on their payments and have fallen victim to predatory lending schemes or have stopped paying based on instructions from their lenders trying to qualify for loan modifications. But does default always mean the mere fact that you have fallen behind on your payments? This is an interesting issue we have discussed in other blogs the so-called “presentment” defense under the UCC.
First, for a mortgage to be in default, the borrower, or maker of the promissory note, must have dishonored the note. Under UCC §3-502 a promissory note is not dishonored until the maker refuses to pay it when presentment thereof is made. “Presentment” is defined by the UCC as “a demand to pay the instrument made by a person entitled to enforce an instrument.” The UCC also requires that “Upon demand of the person to whom presentment is made, the person making presentment must 1) exhibit the instrument” [emphasis added] (UCC 3-501(B)(2)(a))
Until the proper presentment is made the UCC requires that the “obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply: …2) In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid.” (UCC 3-310(b) & A.R.S. 47-3310(b)) Therefore, the borrower is not in default until the lender can exhibit the instrument, proving dishonor. Default is not simply missing payments. It also includes refusal to pay after presentment has been made. Default must also include an exhibit of the instrument. Thus, the lender in a wrongful foreclosure suit cannot claim the borrower is in default unless they can produce the original note and deed of trust.
If true, this would produce additional problems for the lender/creditor. In fact, I recently reviewed one loan that has a UCC PRESENTMENT WAIVER (evidencing that this is an issue that at least one lender – in that case a reverse mortgage) has considered and apparently given credence to. According to California case law, the so-called lender would lose the right to foreclose on the security (real estate) if the obligation is unenforceable. Savings Bank v. Asbury (1897) 117 C 96, 48 P 1081; Trowbridge v. Love (1943) 58 CA 2d 746. As the theory goes, if the lender trying to foreclose on a property cannot prove default by producing the original note and deed of trust then they may not have the right to foreclose at all. IN FACT, IN SOME DEEDS OF TRUST (LIKE THIS ONE FOR A REVERSE MORTGAGE) THERE IS A SPECIFIC CLAUSE ASKING THAT THE BORROWER WAIVE THEIR “RIGHT” OF PRESENTMENT.
In fact, a recent Massachusetts court ruling invalidated two foreclosure sales based on a failure to prove proper documentation (unbroken chain of mortgage from the originator to the trust) proving the “lender” (the securitized loan trust) had the legal right to foreclose. See Ibanez v. U.S. Bank a recent landmark case from the Massachusetts Supreme Court.
DISCLAIMER: THIS IS ONLY A GENERAL LEGAL THEORY THAT WAS PRESENTED TO MY FIRM BY A 30 YEAR UCC LAW PROFESSOR FROM A MAJOR LAW SCHOOL. THE THEORY HAS NOT BEEN TESTED BY THIS AUTHOR AND YOU ARE ADVISED TO SEEK THE ADVISE OF COUNSEL BEFORE PURSUING THIS NOVEL THEORY.
In summary, where the Defendants fail to follow statutory law (ex. where you have notary fraud in the chain of title NOTICE OF DEFAULT, NOTICE OF SALE, ASSIGNMENT OF DEED OF TRUST, OR SUBSTITUTION OF TRUSTEE – and where the notary refuses to produce their notary transaction logs for a given transaction following a written request for such proof of valid signatures, etc.) this type of fraud can be argued to violate the duties set by the California foreclosure laws such as Civil Code Section 2924, 2934, and 2932.5 which require duly recorded documents be notarized and recorded with the County Recorder. Where you have false and forged signatures by robo-signers, and a notary that does not verify a signing parties credentials, or signatures, and cannot produce a notary log, there may be a legal argument to be made that the resulting foreclosure sale was “fruit of the poisonous tree” as I like to say, and argue the sale was tainted with fraud, oppression, and breach of duties.
Last if the beneficiary or their assignee recaptures title [buys back aka repossesses] at the foreclosure sale in California, you have 90 days to sue for “irregularities in the proceeding.” Call us at CRD for more information about your remedies. 818.453.3585.