Daily Development for Tuesday, June 5, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; FORECLOSURE; PRIVATE FORECLOSURE; SALE; POSTPONEMENT: Foreclosure trustee may serially postpone sale for successive five day periods, thus preventing borrower from exercising statutory right of reinstatement at any time prior to five days before sale, and such tactic is valid even in the fact of a statute requiring that a sale cannot be held more than seven days following expiration of an injunction or bankruptcy stay, although use of the tactic may be prohibited by notions of good faith and fair dealing in some cases.

Hicks v. E.T. Legg and Associations, 2001 WL 564332 (Cal. App. 5/25/01)

After the trustee filed a notice of default preparatory to the foreclosure sale of a million dollar residential property, Borrowers, long time defaulters, continued to fight off foreclosure by filing two successive bankruptcies. Following dismissal of the first bankruptcy (because the trust that then owned the property lacked standing), the then owner of the lender's interest ordered the deed of trust trustee to schedule a sale.

The sale was scheduled for about three weeks from the notice date, but Borrowers then had their trust transfer the property to themselves and filed their second bankruptcy petition. The bankruptcy court granted relief from the stay of the foreclosure on June 27, but ordered that no foreclosure be held until July 28, specifically stating that the delay was to give Borrowers the opportunity to exercise their statutory right to reinstate.

Borrowers, however, did not ask the trustee or the lender for the reinstatement amount until July 10. Lender supplied the information to lender's counsel on July 18, but Lender's counsel, due to difficulties in his personal life, did not supply the information to Borrowers counsel until after 5 PM on Friday, July 21. As the following Monday was within five business days of the foreclosure sale, the Borrowers argued that this effectively prohibited them from exercising their reinstatement right, and sought declaratory relief and an injunction in state court, arguing that the lender had denied them the opportunity to reinstate by responding late to their request for a payoff amount. They obtained an ex parte temporary restraining order, apparently failing to give opposing counsel notice of the hearing. But lender did not directly attack this lack of notice.

Lender ordered the foreclosure sale postponed from July 28 to August

11. On July 30, Borrowers did offer in writing to pay the stated reinstatement amount. Under California law, however, such an offer must be accompanied by a deposit of the necessary funds. No such deposit was made, although the parties in any event continued to wrangle about the precise amount required to reinstate. Lender's lawyer wisely stated up front that Lender was not conceding that there was a right to reinstate, but was willing to talk hypothetically about the reinstatement amount.

When August 11, the next sale date, rolled around, the temporary restraining order was still in effect. Lender instructed the trustee to commencing postponing the sale by verbal declaration for successive five day periods. The use of the verbal declaration device in California apparently avoids any requirement for undertake new public notice procedures. By the end of this drama, there had been 25 successive five day postponements. California statute guarantees the right to reinstate until "five business days prior to the sale." Arguably, therefore, the Borrower never really obtained the right to reinstate during this series of five day postponements.

In October, in response to another offer to reinstate, Lender formally took the position that the reinstatement period had expired. The state court temporary restraining order was dissolved on November 14, but then, before the trustee could sell, a bankruptcy appeal panel reinstated the automatic stay. This stay lasted only about a week. The sale was completed seven days later at the end of the last five day postponement.

Another California statute provides that, in event of injunction or bankruptcy stay, the sale may not be held earlier than seven business days following expiration of the order. Lender finessed that by ordering the trustee to simply continue the five day postponements. Thus, although the sale was seven days after the lifting of the automatic sale, it was only five days from the time of the last prior postponement. The sale once during that seven day period.

The court held here that these two statutes, read together, do not guarantee that debtor will have right to reinstate following expiration of the state court or bankruptcy order. After expiration of an injunction or stay, a deed of trust beneficiary, as Lender did here, may order trustee to schedule the sale for five business days after the expiration of the order, and then order trustee to exercise its statutory right to postpone the sale for two more business days, thus precluding any reinstatement. The sale then is held no sooner than seven days after the expiration of the order, even though it is scheduled sooner than that before the postponement.

The court conceded that the duty of good faith and fair dealing may preclude use of this tactic in some instances, but not all. Here, noting the lengthy default period, the series of "blocking" bankruptcy filings that were basically groundless, and the good faith excuse for the delay in providing reinstatement information, the court concluded that overall there was no breach of the duty of good faith and fair dealing.

Borrower is SOL.

Comment 1: Other decisions elsewhere have held, somewhat unrealistically that the borrower must keep track of its own defaults, and cannot complain that the lender has failed to give it reinstatement information.

Comment 2: One would think that in most cases there would be a significant good faith and fair dealing issue here, assuming that a jurisdiction imposes such a duty on lenders. In the shadow of foreclosure, parties must act promptly, or be estopped from adverse consequences that would result from their failure to act promptly.

Notwithstanding the personal difficulties of Lender's attorney, his failure to supply reinstatement information at a time that made reinstatement possible is a significant problem. If Borrower still had a reinstatement right at the time of the first scheduled foreclosure sale, then it continued to have that right for five days following the lifting of the final stay months later.

Comment 3: On the other hand, if Borrower had invested in resolving this default instead of hiring lawyers, one would think that an agreement could have been reached with any rationale lender. Unfortunately, in this case, a speculator had acquired the foreclosure right from the original lender, and flipped it immediately to a third party, who had a fourth party waiting in the wings to acquire the property. This all should have made the good faith and fair dealing issue more acute.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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