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!
ments
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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