Daily Development for Thursday, Marcy 24, 2005
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

MORTGAGES; DEFICIENCIES ANTI-DEFICIENCY LEGISLATION; ATTORNEY’S FEES: Award of attorney’s fees against borrower for defense of borrower’s lawsuit to set aside a private foreclosure, made pursuant to a provision in the mortgage agreement, is not inconsistent with the language and purpose of California’s anti-deficiency laws.

Jones v. Union Bank of California, 2005 Westlaw 361394 (Cal. App. 3/11/05)

This lengthy litigation stems from a failed workout of a loan on subdivision property in California.  As part of the workout plan, the Borrower had given additional security to the lender in exchange for revisions in the payment schedule.  In the end, lender had security interests in three separate properties.  It foreclosed on each of these properties seriatum, buying the properties for by partially bidding in its debt, and then seeking foreclosure of the next based upon the remaining balance owed.  In 1990, the borrowers sought to set aside the sale on the basis that California’s   “fair value” statute, 580a, required an appraisal of the value of a property sold at foreclosure and a credit for that value on the debt prior to foreclosing on additional security.  The California Supreme Court rejected that claim, holding that 580a applied only to cases in which deficiency judgments were sought (lender sought no deficiency judgment here).  The court also held that lenders had !

 no dut
y of good faith and fair dealing to bid any particular price at a foreclosure.   Dreyfuss v. Union Bank of California, 101 Cal. Rptr 2d 29, 11 P. 3d 383 (Cal. 2000) (the DIRT DD for 12/18/01).

Nothing daunted, the borrowers brought a second action alleging that the sale of the first property was invalid because the foreclosure trustee had been substituted out before the sale but conducted the sale anyway.  By that time, the lender had sold the property in question to another party, Heritage, which apparently had knowledge of the trustee problem.  A trial court set aside the foreclosure sale.  At that point, Borrowers reached a favorable accommodation with Heritage by which they were able to “squeeze out” the perceived excess value in that foreclosure by getting back some of the property that Heritage had purchased.  The parties also agreed to place into escrow the proceeds of the resale of one of the other properties, pending resolution of the dispute over the trustee.  But if the lender prevailed in the appeal, all the proceeds would go to the lender.  In fact, on appeal, the lender did prevail.  The appeals court found that the substitution of trustees had resul!

 ted fr
om a good faith error and applied the concept of equitable reformation to permit the foreclosure trustee to be recognized as the correct trustee.    Jones v. First American Title Insurance Co., 131 Cal. Rptr. 2d 859 (Cal. App. 2003) (This case warrants a quick and gleeful look for lender lawyers.)

The lender then geared up to collect its attorney’s fees.  In one of the workout agreements, the parties had agreed that fees could be collected  In any action between the parties seeking enforcement of this Forbearance Agreement, ... or in connection with the Peppertree property, ... the prevailing party in such action shall be awarded ... its reasonable attorneys' fees.”  (The Peppertree property was the first property sold and the subject of the trustee substitution dispute.)

By this time, the attorney’s fee demand was $1 million.  Borrowers argued that the California prohibition on deficiency judgments following a nonjudicial foreclosure applied here to bar the award of attorney’s fees as a form of deficiency judgment.  In addition, Borrowers argued tat a suit to set aside a foreclosure is not itself a foreclosure action and thus fees for that matter fell outside the scope of the fee provision.  In fact, the Borrower had identified some language in earlier decisions in this same litigation that it thought assisted its arguments.  Finally, Borrower argued that the $1 million fee claim was just too much.

 From the standpoint of analysis of precedent, the important discussion, of course, is the argument regarding the anti-deficiency statute.  The court found that the attorney’s fee award was wholly unrelated to any policies involved in prohibiting the collection of deficiency judgments, and that CC 580d - the California statute prohibiting deficiency judgments following a nonjudicial foreclosure - had no application to limit attorney’s fee awards.   The court also read the provision in the attorney’s fee clause to be very broad and to include the suit in question - defending an action to set aside the foreclosure.  It also noted that because this was not a foreclosure suit itself, the California statutory limit on fees awarded in foreclosure actions would not apply.

The question of whether the$1 million in fees was too much was summarily dismissed by the court as  one of trial court discretion.

Comment 1: Although it would seem obvious that an attorney’s fee award is not a deficiency judgment, nothing can be said to be wholly predictable in the judicial analysis of California’s complex anti-deficiency scheme.  It’s really a Mad Hatter’s Tea Party out there on this issue..  Even if this ruling holds on the interpretation of 580d, there still might be the question of application to 580b - the purchase money anti-deficiency statute.  The editor doesn’t see why there should be a different treatment, but he’s guessed wrong before in this area.

Comment 2: Peter Munoz, of the Reed Smith California office, writing in that firm’s client newsletter, argues that the discussion of the application of 580d in the case is “flawed” because the court stated that the attorney’s fee provision is not “interrelated” to the debt claim, and stands as a separate item.  Munoz notes that the note itself did provide for attorney’s fees, and a claim for that amount could have been bid as part of the lender’s claim at foreclosure, although it was not.  Still Munoz concludes the opinion is probably right because the attorney’s fee claim following the foreclosure is independent of the mortgage claim and, as the court notes, there was a separate promise to pay attorney’s fees in the independent workout agreement.

Comment 3: Munoz also criticizes the court’s analysis of the question of whether the fee should be capped under the California statutes providing for limits on foreclosure fees.  He suggests that, unlike the precedent case relied upon by the court, this was not a case of fees incurred “protecting the collateral,” since the foreclosure had already occurred before the attack on it was launched.  But he concedes that an alternative interpretation would have served the court - since the “fee cap” statute applies only to fees incurred pre foreclosure.

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