Daily Development for Tuesday, April 22, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

The Reporter for this item is Roger Bernhardt, writing in the California
CEB Real Property Reporter.  I didn't edit this one much - it's pretty
much straight Roger:

MORTGAGES; FORECLOSURE; FINALITY; PAYOFF: Purchaser
at foreclosure sale acquired title to property, regardless of defaulting
borrower's sale of property on same day as foreclosure sale, when lender
did not receive mortgage payoff until three days after foreclosure sale.

Nguyen v Calhoun 105 CA4th 428, 129 CR2d 436 (2003)

 In 1994, Chavez obtained a loan on a residence secured by a deed of
trust. When Chavez stopped making payments on the loan in March
1998, Chavez's lender recorded a notice of default and election to sell.
Attempting to sell the property before foreclosure, in late April, Chavez
contracted to sell the property to Nguyen, who was aware of the pending
foreclosure. In late June, the lender recorded a notice of trustee sale
scheduled for July 9. The escrow company (Financial Title) was aware of
the scheduled sale, and also knew that the sale had been postponed one
day and was set for July 10, at noon. The funds for Nguyen's new loan
were received in escrow by wire on July 9 at 1:30 p.m. On July 10,
Financial Title closed escrow on the sale, recorded the grant deed
transferring title to the property to Nguyen, and sent the lender (1) a
check by Federal Express and (2) a fax of the final escrow settlement
statement. The check and fax were not received until July 13.

Not having received notice of the funding of Nguyen's loan, the lender
proceeded with the foreclosure as scheduled, on July 10 at noon. The
foreclosure trustee complied with all statutory requirements and the crier
accepted Calhoun's bid, giving him a sworn declaration of trustee sale.
As is customary, the trustee deed was to be delivered later. On Monday,
July 13, the lender received the faxed escrow statement and check from
Financial Title, and three days later issued a refund check to Financial
Title and Chavez. On July 31, the trustee sent its trustee deed to Calhoun,
who recorded it on August 3. Nguyen sued to quiet title; the trial court
found that the conditions for a timely escrow were met and that title had
passed to Nguyen.

The court of appeal reversed. As grantee, Nguyen took title to the
property subject to the lender's preexisting deed of trust. To protect his
interest in the property from the pending foreclosure, Nguyen had to
ensure that the underlying obligation to the lender was satisfied. That did
not occur, because the debt was not paid before the foreclosure sale.
Depositing a check in the mail (or with a courier) does not constitute
payment. Although there is an exception to that general rule when the
lender has directed the borrower to mail the payment, that was not the
case here. Because the payment sent by the escrow holder via Federal
Express was not received until three days after the foreclosure sale, the
debt remained unsatisfied at the time of the foreclosure sale.

The court also concluded that the foreclosure sale could not be set aside
based on the lender's alleged breach of an oral agreement to postpone the
trustee sale, and there was no other basis for invalidating the trustee sale.

Reporter's Comment:  I felt very sorry for this plaintiff, who lost the
house he had just purchased to a trustee sale bid that was a mere five
cents higher than what he believed had been paid to extinguish that loan
the day before. On the other hand, I felt equally exasperated at the inept
and nonchalant way he went about trying to protect himself. Couldn't he
have called back the next morning to make sure his message had been
received? Couldn't he have at least double checked the fax number and
recipient's name?

To the above list of blunders, I was tempted to add: Couldn't he have
sued the lender for damages rather than suing the uninvolved purchasers
to set aside the sale. But, based on the court's recitation of facts, it doesn't
look like that theory would have gotten anywhere either. While the
opinion does hold that the defendants were BFPs protected by the
trustee's recitals, that does not really matter in light of the substantive
holding that it was proper for the lender to go to sale anyway.

But while neither the buyers nor the lender seem in jeopardy here, these
facts make further litigation among other parties likely. The loser here
was the innocent buyer of the property, not the defaulting trustor-seller.
Did their sales contract really permit title to be transferred subject to an
unpaid (and very delinquent) mortgage? Was cash actually paid to the
seller? If so, can it be recovered under either a breach of contract theory
or breach of the statutory covenant against encumbrances? Did the
escrow instructions really permit payment to the seller before the
mortgage was either extinguished or released of record? If so, who
drafted them? And, if not, why did the escrow agent let that happen?
Finally, what about the broker who had put the deal together? Did his
duty to protect the parties end once the contract was signed, even though
the escrow had to close in a timely fashion for the contract to be
meaningful?

Readers are encouraged to respond to or criticize this posting.

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