FYI: Cal App Ct Reverses Ruling in Favor of Lender in Alleged Inability to Repay Lawsuit

The California Court of Appeal, Sixth Appellate District, recently reversed a trial court's order requiring tender in order to overturn a trustee's sale, as in the Court's view the borrower raised triable issues of material fact as to whether the deed of trust was allegedly illegal and unenforceable, and whether the borrower's claims would allegedly offset any amount due under the mortgage loan. 

 

A copy of the opinion is available at:

http://www.courtinfo.ca.gov/opinions/documents/H036140.PDF. 

 

Plaintiff-appellant borrower (the "borrower") obtained a mortgage loan providing for monthly payments of more than $12,000, although his monthly income was only $3,333.  The borrower fell behind on his payments, and the property was sold at a nonjudicial foreclosure sale.  The borrower sued his lender and loan servicer, among others (collectively, the "lender") asking for the sale to be set aside and claiming that the loan was invalid and unconscionable, on the grounds that he did not understand the nature of the transaction and that the lender did not consider his inability to repay the loan. 

 

The lender moved for summary judgment, arguing that the borrower was required to tender the amount due on the loan in order to move for the sale to be set aside, which he did not do.  The lender further argued that the borrower voluntarily entered into the loan transaction, and that the borrower was responsible for his failure to make payments.  The lower court granted summary judgment to the lender, and the borrower appealed. 

 

On appeal, the borrower argued that the sale of the subject property was void because the loan was unconscionable, illegal and void at inception.  The lender asserted that the borrower did not support his allegations with any evidence, and that the borrower improperly relied on conclusions rather than facts, among other arguments. 

 

The Appellate Court held that the loan contract between the borrower and the lender was one of adhesion, and that a contract of adhesion will be denied enforcement if it is unduly oppressive or unconscionable.  An unconscionability analysis includes both procedural and substantive elements; the former focuses on unequal bargaining power, and the latter considers whether the results were one-sided. 

 

Although the borrower alleged unconscionability with regard to whether the lender considered his inability to repay the loan, the lender did not address that issue in its filings.  Accordingly, the Court held that "the [lender] failed to meet [its] burden on summary judgment because their motion failed to address all of the allegations of [the borrower]..." 

 

The lender did argue that the borrower did not present any evidence supporting his unconscionability argument.  However, the Appellate Court noted that in California, a defendant is required to "present evidence, and not simply point out through argument, that the plaintiff does not possess and cannot reasonably obtain the needed evidence." 

 

Further, the Appellate Court held that the record "revealed triable issues of material fact."  Specifically, the Appellate Court pointed to the borrower's claims that his education and command of English were limited; that the loan documents were supposedly not explained to him; and that he supposedly did not understand what he was signing, indicated a triable issue of procedural unconscionability.  In addition, the borrower's allegations regarding the disparity between his income and monthly mortgage payment created a triable issue of fact with regard to substantive unconscionability. 

 

Finally, the Court noted that under several circumstances, a party seeking to overturn a trustee's sale is not required to offer to pay the full amount of the debt.  The Court found that two of these exceptions were relied upon by the borrower:  (1) that the deed of trust was allegedly illegal and unenforceable, and  (2) that the borrower's claims would allegedly offset any amount due under the mortgage loan. 

 

Consequently, the Court reversed the lower court's decision to grant summary judgment to the lender. 
 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

 

 

FYI: Illinois Requires Response to Short Sale Offers W/in 90 Days

Illinois Governor Pat Quinn signed SB 1259 into law, requiring that foreclosing plaintiffs respond to "bona fide" written short sale offers from third parties within 90 days of receipt.

 

The text of the new legislation is available at:

http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=097-0666&print=true&write=

 

The law amends the Illinois Mortgage Foreclosure Law, and applies to foreclosing "mortgagees," which are defined to include "(i) the holder of an indebtedness or obligee of a non-monetary obligation secured by a mortgage or any person designated or authorized to act on behalf of such holder and (ii) any person claiming through a mortgagee as successor."

 

Failure to accept the short sale offer will not impair or abrogate in any way the rights of the mortgagee, or affect the status of the foreclosure proceedings.

 

In addition, the 90-day period for responding to short sale offers does not operate as a stay of the foreclosure proceedings. 

 

The new law became effective on January 13, 2012.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

 

 

FYI: 6th Cir Upholds Objection to Proof of Claim by Innocent Assignee of Allegedly Forged Mortgage, Denies Equitable Mortgage

The U.S. Court of Appeals for the Sixth Circuit recently held that, under Michigan law, a mortgage on which the borrowers' signatures were allegedly forged was void ab initio including as to innocent assignees, and that an equitable mortgage could not be imposed under the facts at hand because of the unclean hands of the mortgage originator. 

 

A copy of the opinion is available at:

http://www.ca6.uscourts.gov/opinions.pdf/12a0001p-06.pdf. 

 

Two borrowers closed their mortgage loan refinancing transaction in California, as to real estate located in Michigan.  The borrowers executed a Note, among other documents, but allegedly did not execute the related security instrument.   

 

The originator of the loan sold and assigned the loan to the appellants in this matter (collectively, the "bank"). When the borrowers fell behind on their payments, the bank instituted foreclosure proceedings.  The borrowers subsequently filed Chapter 13 bankruptcy proceedings. 

 

The bank asserted a secured claim in the Chapter 13 matter.  Their related proof of claim included the mortgage instrument, which allegedly had been signed by the borrowers and notarized.  However, the notary who acknowledged the signatures was located in Michigan, but the borrowers were in California at the time the transaction closed.  

 

The borrowers objected to the proof of claim, on the grounds that their signatures were allegedly forged.  The bankruptcy court granted summary judgment to the borrowers, and disallowed the secured claim.  The bankruptcy court also imposed an equitable mortgage on the subject property. 

 

The borrowers appealed. The district court held that the mortgage was void ab initio.  The bank appealed the district court decision. 

 

On appeal, the Sixth Circuit considered, among other things, whether the mortgage was void ab initio, and whether an equitable mortgage might be imposed under the facts at issue here. 

 

First, the Sixth Circuit affirmed that the mortgage was void ab initio, noting that counsel for the bank at oral argument conceded that the mortgage was forged.  The Court stated that Michigan case law provided that "parties that take possession of interests granted by the forged instrument, even if they do so innocently, have no rights under the forged document."  Special Property VI v. Woodruff, 730 N.W.2d 753, 756 (Mich. Ct. App. 2007). 

 

Next, the Sixth Circuit surveyed the relevant case law pertaining to equitable mortgages.  It noted that equitable mortgages may be appropriate where a mortgage is void, but only if the party seeking the equitable mortgage has clean hands. 

 

The Sixth Circuit noted that when a party is assigned a mortgage, that party "stands in the shoes of the original party for equitable purposes."  Burkhardt v. Bailey, 680 N.W. 2d 453, 462 (Mich. Ct. App. 2004).  Because the district court found that the originator forged the borrowers' signatures, and even though the bank itself was not accused of any wrong doing, the Sixth Circuit held that neither the originator nor the bank could "seek an equitable remedy that would protect them from the consequences of their own improper conduct."

 

Therefore, the Sixth Circuit held that borrowers' property was not subject to any mortgage, equitable or otherwise, and affirmed the lower court's decision. 

 

Finally, the Sixth Circuit disagreed with the bank's contention that the Court's decision amounted to a windfall for the borrowers in the form of a free house.  The Sixth Circuit noted that borrowers remained liable on the now-unsecured note, and that it saw no obstacle to the bank accessing the remedies of a judgment lien creditor as to the borrowers' property to collect the debt.
       

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com