FYI: Cal App Ct (4th Dist) Holds HOA Foreclosure Buyer is "Successor in Interest" Under § 2924c

The Court of Appeals of California, Fourth District, recently held that a party who purchased the collateral property through a homeowners association foreclosure sale is a "successor in interest" under California Civil Code § 2924c, and therefore has the right to cure any payment defaults and reinstate the loan, and has standing to bring a wrongful foreclosure action.

 

A copy of the opinion is available at:  Link to Opinion

 

A borrower obtained a loan secured by a deed of trust on his property. The beneficiary later assigned its interest.  The borrower's homeowners association subsequently foreclosed on the property.

 

A third party -- the plaintiff in this action -- purchased the property from the homeowners association's foreclosure, and obtained her interest via a grant deed that did not mention the deed of trust. Later, the trustee and mortgage servicer recorded a notice of trustee's sale, scheduled a foreclosure sale, and listed the unpaid balance due. Prior to the sale, Plaintiff attempted to bring the loan current but the servicer did not provide any information because the Plaintiff was not the borrower.

 

Plaintiff filed a lawsuit against the defendants asserting causes of action of wrongful foreclosure, and declaratory relief, and sought an accounting, and an injunction. The trustee and servicer defendants demurred to the complaint. The trial court sustained the defendants' demurrer and held that Plaintiff did not plead the elements of wrongful foreclosure because he did not allege tender and did not have standing under California Civil Code § 2924c ("Section 2924c") to reinstate the loan. Plaintiff appealed and argued that he did have standing and was entitled to reinstate the loan under Section 2924(c).

 

On appeal, the Fourth District examined Section 2924c which provides, in relevant part:

 

Whenever all or a portion of the principal sum of any obligation secured by deed of trust or mortgage on real property . . . has, prior to the maturity date fixed in that obligation, become due or been declared due by reason of default in payment of interest or of any installment of principal, . . . the trustor or mortgagor or their successor in interest in the mortgaged or trust property or any part thereof . . . may pay to the beneficiary or the mortgagee . . . the entire amount due, at the time payment is tendered, . . . other than the portion of principal as would not then be due had no default occurred, and thereby cure the default theretofore existing, and thereupon, all proceedings theretofore had or instituted shall be dismissed or discontinued and the obligation and deed of trust or mortgage shall be reinstated and shall be and remain in force and effect, the same as if the acceleration had not occurred.

 

The Court of Appeals noted that although "successor in interest" was not defined by the statute, the Plaintiff and other purchasers at foreclosure sales are considered successors in interest because their title can be traced back to the foreclosure sale through the chain of title. See Epps v. Lindsey (2017) 10 Cal.  App. 5th Supp. 1, 5.

 

Based on the foregoing the Fourth District held that Plaintiff, as the current owner of record, clearly was a successor in interest to the property. Supporting this position was the case of Munger v. Moore (1970) 11 Cal. App. 3d 1. In Munger, a mortgage loan went into default and the trustee exercised a power of sale.  Prior to the sale, plaintiff — at that point the title owner but not a party to the mortgage contract — tendered the amount necessary to cure the default, but the trustee refused to accept the tender and sold the property. Ultimately, the court in Munger held the plaintiff in that case had standing to assert a right of reinstatement under Section 2924c. 

 

Defendants argued that Plaintiff is a "stranger" to the loan, and that the right to reinstate the delinquent loan arose solely pursuant to the terms of the deed of trust. The Court of Appeals disagreed and noted that the right to reinstate claimed by Plaintiff arose directly from Section 2924c.

 

Notably, Plaintiff eventually paid off the entirety of the original balance due, and therefore agreed she no longer had a cause of action for wrongful foreclosure. However, the Court of Appeals agreed she could amend her complaint to allege a violation of Section 2924c.

 

Accordingly, the judgment of dismissal was reversed as to the defendants with instructions for the trial court to enter an order sustaining the demurrer with leave to amend.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 8th Cir BAP Holds Modification of BK Plan Requires At Least "Substantial Change in Circumstances"

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently held that, at a minimum, a substantial change in circumstances is required to justify modification of a bankruptcy plan under Section 1229.

 

The Eighth Circuit BAP also determined that the bankruptcy court's ruling that the debtors met their burden of showing an unanticipated, substantial change in circumstances was not clearly erroneous, despite multiple changes by the debtor, nor was the bankruptcy court's finding that the fourth modified plan was feasible and confirmable.

 

A copy of the opinion is available at:  Link to Opinion

 

After a bankruptcy court allowed Chapter 12 debtors – several years in a row – to modify their confirmed plan over the objection of their primary secured creditor, that creditor appealed. The issues on appeal were whether the bankruptcy court abused its discretion by confirming the debtors' fourth modified plan under 11 U.S.C. § 1229 without requiring the debtors to show an "unanticipated and substantial change in circumstances" and whether, under the standard applicable to plan modifications, the court's factual findings were clearly erroneous.

 

Section 1229(a)(2) provides that, "[a]t any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, on request of the debtor, the trustee, or the holder of an unsecured claim . . . to extend the time for payments," among other permitted modifications (such as increasing or reducing payments under Section 1229(a)(1)). Additionally, Section 1229(b) requires that modified plans comply with the requirements of Section 1225(a), which governs when a plan shall be confirmed.

 

Here, the Eighth Circuit pointed out that compliance with Section 1225(a) means that, among other requirements, the court must find that the debtor "will be able to make all payments under the plan and to comply with the plan" – the so-called feasibility requirement of Section 1225(a)(6). The Court also noted that the language in Section 1229 is nearly identical to that governing modifications of chapter 13 plans under Section 1329, and is also similar to modifications of chapter 11 plans in Section 1127(b). All three chapters contain a provision that makes the terms of any confirmed plan binding on the debtor, creditors, and other parties in interest.

 

Therefore, the Eighth Circuit cited its previous decision in In re Johnson, 458 B.R. 745 (B.A.P. 8th Cir. 2011), that modification of a confirmed chapter 13 plan should be limited to situations in which there has been "a substantial change in circumstances." Id. at 748. The Johnson court also held that when a confirmed plan is modified to reduce (as opposed to extending) payments under Section 1329(a)(1) due to a substantial change in circumstances, the modification must correlate to the change in circumstances. Id. at 749.

 

The Eight Circuit thus concluded that plan modifications under Section 1229(a) require a showing, at a minimum, of a "substantial change in circumstances," based on its previous holding in Johnson construing the identical language in Section 1329(a).

 

However, the Eighth Circuit did not take a position on whether it was required to find that the substantial change be "unanticipated," because it concluded that the bankruptcy court's alternate finding that the evidence showed an unanticipated substantial change in circumstances was not clearly erroneous.

 

Specifically, one of the debtors testified about complications caused by the COVID-19 pandemic and his earlier cancer treatment. Although the creditor argued that the bankruptcy court should not have taken judicial notice of the pandemic and that the evidence did not show clearly how the debtor's cancer or the pandemic impacted his ability to farm, the Eighth Circuit could not find a definite and firm conviction that the bankruptcy court clearly erred. Furthermore, the Court noted that the bankruptcy court had the benefit of exhibits that were not in the appellate record as well as years of experience with the debtors.

 

For the same reasons, the Eighth Circuit concluded that the bankruptcy court did not clearly err in finding that the debtors' fourth modified plan was feasible. To satisfy the feasibility requirement, there must be reasonable assurances from the debtor that the plan can be completed and that the plan will cash flow. In re Krause, 261 B.R. at 224.

 

Here, the record showed that, at the time of the hearing on the fourth modified plan, the debtors had made the payments required under the first modification, had paid 40% of the payments to the creditor required under the second modification, and had timely sold the first piece of their homestead as required by the fourth modified plan and that the second sale was in process. With this record, and given that the projections and other exhibits the bankruptcy court reviewed were not in the record on appeal, the Eight Circuit could not say that the bankruptcy court clearly erred in finding that the debtors would be able to make their payments and comply with the plan under Section 1225(a)(6) or that the fourth modified plan was confirmable under all the requirements of Section 1225(a), as incorporated by Section 1229.

 

Accordingly, the Eighth Circuit affirmed the decision of the bankruptcy court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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