Daily Development for Wednesday, October 27, 2004
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

Note two case reports here on different issues in the same case.

MORTGAGES; FORECLOSURE; VALIDITY: Although only the mortgagor can set aside a foreclosure sale for inappropriate procedures in the conduct of the sale, a party whose liability to the mortgagee depends upon how much the foreclosure sale will bring can defend against the mortgagee’s monetary claim on the grounds that inappropriate conduct in the foreclosure sale was a failure to mitigate damages reasonably.

Royal Thrift and Loan Co. v. County Escrow, Inc., 2004 WL 2326366 (Cal. App. 10/15/04)

Jone's son conspired with others to forge mortgage loan papers on Jones home and to complete a loan with Royal. The loan was closed through County Escrow and Kramer was the notary. Star Insurance had given a $50,000 bond.

Royal did not learn of the forgery until after it had commenced a nonjudicial foreclosure, but it contended that Jones had known of it from even before the original loan closing, and thus had ratified the loan.

Jones sued to set aside the mortgage based upon the forgery. Royal counterclaimed against Star Insurance, Kramer and County Escrow for their role in the mess. A trial court found for Royal on all counts, and entered judgment against Kramer, County Escrow and Star Insurance (on the bound) for fraud. But the court held that final entry of judgment on the fraud damages should be stayed and it would retain jurisdiction until the completion of the nonjudicial foreclosure on Jones’ property, since if the foreclosure returned the full amount of the debt, then there would be no damages against the other parties (the court had ruled that Jones, as opposed to Royal, had no fraud claim against the escrow, notary or bonding company).

Jones appealed to the Court of Appeals, which affirmed a judgment for Royal, and Jones appealed to the Supreme Court, which eventually rejected the appeal petition. (The Court of Appeals dismissed the appeals of Kramer, County Escrow and Star Insurance as premature, since the trial court had not yet entered a final judgment against them.)

When the foreclosure sale finally was held, it did not return enough to cover the entire claim for damages, and Royal reported the court, which entered judgment against Kramer and County Escrow and against the bond. These parties objected, inter alia, that the foreclosure sale should be set aside because Royal, during the course of the several appeals, had scheduled and continually postponed the foreclosure sale, thus chilling the bidding and depressing the price. The trial court entered judgment notwithstanding this claim, and the three non-mortgagor parties appealed.

The appeals court in this part of the case held that a non-mortgagor has no standing under California law to set aside a nonjudicial foreclosure sale on grounds of procedural impropriety. Thus, the sale stood. But the court did acknowledge that these appellants did have the right to expect that Royal would take reasonable steps to mitigate damages, and their contention that Royal unreasonably postponed the sale and chilled away potential bidders was appropriate for them to raise.

The Court of Appeals discussion of the merits of these claims is set forth under the heading: “Mortgages; Foreclosure; Private Foreclosure; Sale Process.”

MORTGAGES; FORECLOSURE; PRIVATE FORECLOSURE; SALE; TIMING: Where mortgagor appeals a trial court’s refusal to set aside a deed of trust, and the note is in default, the “best practice” is to withhold conducting a foreclosure sale until the appeals process is complete, but the beneficiary’s action in first scheduling the sale and then repeatedly postponing it while the petition for appeal is pending is not such unreasonable conduct as to amount to a failure to mitigate damages against third parties whose liability depends on the returns from the sale.

Royal Thrift and Loan Co. v. County Escrow, Inc., 2004 WL 2326366 (Cal. App. 10/15/04)

The underlying facts of this case are set forth in the report of another element of the case reported under the heading: “Mortgages; Foreclosure; Validity.”

In this part of the case, three parties were held liable for damages for fraud based upon a forged mortgage (actually a deed of trust), but the court ruled that the mortgagor nevertheless was subject to the forged mortgage because the mortgagor ratified it. The trial court concluded that if the mortgagee carried out its nonjudicial foreclosure and successfully collected everything it was due, there would be no damages against the other three parties. (The court had dismissed the mortgagor’s claims against these parties.)

All parties found liable appealed. The appeals court dismissed the appeals of the non-mortgagor parties on the grounds that the appeals were premature as the trial court had retained jurisdiction to render a final judgment following the nonjudicial foreclosure. The appeals court, however, affirmed the trial court’s conclusion that the mortgagor had ratified the mortgage.

Upon receiving notice that the appeals court had upheld its mortgage, the mortgagee (beneficiary under the deed of trust) proceeded to schedule its nonjudicial foreclosure sale. Soon thereafter, however, it received word that the mortgagor had appealed to the California Supreme Court.

Rather than cancelling the sale completely, the beneficiary elected to instruct the trustee to postpone the sale for a brief period until the Supreme Court ruled on the petition for appeal. It notified those attending the sale (including several outside bidders) of the circumstances causing the postponement. Thereafter, it postponed the sale two more times based upon the pendency of the appeal, and once more after that upon agreement with the mortgagor. The process, in all, was continually postponed from November 13, 2001 until January 31, 2002. When the sale occurred, there still were two other bidders present, although there had been more at the initial sale. One of these bidders decided not to be because of all the procedural uncertainty, and the other eventually dropped out of the bidding, leaving the mortgagee to purchase the property at a price that left a $63,000 uncollected claim against the three non-mortgagor defendants (California has a bar on deficiency judg!
against mortgagors following nonjudicial foreclosures).

The non-mortgagor defendants argued that the mortgagee had unreasonably failed to mitigate damages properly when it manipulated the foreclosure sale process. First, it argued that the continual postponement had driven away potential bidders. It noted that California law permits the mortgagee only three postponements, and there was a total of four here. The court concluded, however, that in fact the mortgagee could not lawfully have conducted the sale because an automatic stay arose as a consequence of the appeal of the underlying order on the validity of the mortgage. It concluded, apparently as a matter of first impression, that the stay affected nonjudicial foreclosures even though no court proceeding was involved. An exception to the “three postponement rule” applies when the foreclosure is legally stayed.
The non-mortgagor defendants argued that a California statute required that the mortgagor post a bond to stay a foreclosure, but the court ruled that this rule applied only to mortgagors in possession of the property, and indicated that no adequate evidence had been adduced to demonstrate that the mortgagors had possession in this case. (Without possession, there was no risk of waste - which apparently was the reason for the bond requirement. Consequently there was no point to requiring a bond where there was no possession). Thus, since the stay was in effect, the postponements were not voluntary acts of the mortgagee (except the last one, which was by agreement with the mortgagor).

The non-mortgagor parties then decided to attack the mortgagee’s behavior from the other end. In light of the fact that a sale would be stayed in any event, they argued, the mortgagee should not have scheduled one in the first place, but should have waited until the end of the entire process and then scheduled a sale for the first time. The trial court had ruled that this, indeed, would have been the “best practice,” but concluded that the mortgagee’s decision to schedule the sale after hearing of the of the decision of the Court of Appeals affirming the trial court’s decision its favor, but before learning that the mortgagor would appeal to the Supreme Court, was not unreasonable under the circumstances. Further, its decision not to cancel the sale completely once learning of the appeal also was not so unreasonable as to exceed the “modest standard” of reasonableness applicable to the duty to mitigate.

Comment 1: From the standpoint of the California practitioner, the holding that an appeal of a ruling contesting the validity of a deed of trust automatically stays the conduct of the trustee’s sale, even without a bond, is a ruling of first impression and should be “duly noted.”

Comment 2: The rest of our readers don’t care much about California procedure, but the analysis of what constitutes proper mitigation of damages in a case like this should provide some food for thought. The court did, by the way, also address the question of whether the mortgagee’s juggling of the time of the sale in fact led to a lower price. The non-mortgagor parties had an observer at all the sales, but they could not muster much evidence that bidding was chilled, other than the testimony of their observer that in his view the sale should have been for a much higher price and his observation that there were more bidders at the originally scheduled sale than appeared later. Note that despite all the postponements, two potential outside bidders did find their way to the sale following four postponements. Note also that the total time of the postponements was less than two months (perhaps because of statutory limits on how long a postponement can take - extended here by !
the ho
liday season).
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