In July 2012, California Governor Jerry Brown signed the Homeowner Bill
of Rights law (the “HBOR,” California Civil Code §§
2920.5 et al.). This landmark legislation was created to combat the foreclosure
crisis and hold lenders accountable. Currently, states that do not have
this law are looking to see whether the HBOR law is a model for them to
adopt. At a minimum, then, in those states that finally do adopt laws
similar to the HBOR, California’s cases would be persuasive authority.
Some concerning law has developed in California as it relates to the HBOR.
In 2 recent cases, California courts have interpreted the HBOR statutes
in the Borrower’s favor and may have a significant impact on how
you do business in California.
In short, California courts have held that the HBOR statutes (a) allow
borrowers to recover their attorneys’ fees upon the court granting
the preliminary injunction on the property and (b) remove the traditional
requirement of Borrowers showing that they have the ability to tender
the loan proceeds to Lender. A short discussion on these is below:
PRELIMINARY INJUNCTION EQUALS IMMEDIATE AWARD FOR ATTORNEYS’ FEES
In one case, the California court decided that if the borrowers obtain
a preliminary injunction against the lender regarding a property for a
HBOR violation, the borrowers are entitled to an interim award for attorneys’ fees.
In a case of first impression,
Monterossa v. Superior Court, 237 Cal. App. 4th 747 (3rd Dist. 2015), plaintiffs Michael Monterossa
and Cheranne Nobis (hereinafter, “borrowers”) sued PNC Mortgage,
a division of PNC Bank, N.A. (“PNC”) for violating, among
other things, the HBOR. In June 2013, borrowers had defaulted on their
loan. They stated in their complaint that they repeatedly requested from
PNC a loan modification package but never received one. Thereafter, PNC
recorded a Notice of Default on the property. In November of 2013, the
borrowers sent in a loan modification agreement to PNC and PNC appointed
a single point of contact per Dodd-Frank regulations. The point of contact
confirmed that PNC had received a complete loan modification package.
However, in January of 2014, PNC recorded a Notice of Trustee’s
Sale on the property. The borrowers immediately called PNC who informed
them their loan modification was denied due to missing documents.
The borrowers filed suit and obtained a preliminary injunction enjoining
PNC from selling the property. The Superior Court found (on undisputed
evidence) that PNC had engaged in “dual tracking” by recording
a Notice of Trustee’s Sale while engaged in the loan modification
process, which is prohibited by California Civil Code section 2924.6(c),
and granted the preliminary injunction. Thereafter, borrowers filed a
motion for attorneys’ fees under Civil Code section 2024.12(i).
The superior court denied the motion, stating borrowers did not obtain
a permanent injunction and borrowers’ attorneys’ fees are
awardable only at the end of the case. The Court of Appeal reviewed the
petition for writ of mandate and reversed the superior court, stating
that a borrower who obtains a preliminary injunction under California
Civil Code Section 2924.12 is a prevailing borrower within the meaning
of the HBOR statute. In short, trial courts may award attorney fees upon
issuance of injunctive relief, which includes the issuance of a preliminary
injunction, as well as a permanent injunction. The Court’s holding
was based on its analysis of the legislative history and purpose of the
statutory scheme behind the HBOR.
Based on the plain language of the statute, the Court found that in enacting
the statutory scheme, the Legislature mandated a process for fair consideration
of options other than foreclosure. The Court found that under the statutory
scheme behind the HBOR, in many cases the best a plaintiff can hope to
achieve is a preliminary injunction. The HBOR provides an opportunity
for a servicer, mortgagee, trustee, beneficiary or authorized agent to
correct and remedy a HBOR violation which gives rise to the action of
injunctive relief, and then move to dissolve the preliminary injunction
pursuant to Section 2924.12(i). This compliance with the statutory scheme
could potentially moot a borrower’s request for a permanent injunction.
Given that the borrowers have effectively prevailed in the action by obtaining
a preliminary injunction, thereby forcing compliance with the HBOR, the
Court opined that the Legislature must have intended to authorize attorneys’
fees and costs pursuant to Section 2924.12(i).
While the borrowers in
Monterossa prevailed and were awarded attorneys’ fees and costs by enjoining
the lender’s “dual tracking”, the borrowers did not
end the lender’s foreclosure process. This means that after the
lender corrects its mistakes, it can complete its foreclosure. However,
there are now cross-claims, with the borrowers owing the amount to the
lender, and the lender owing the borrowers fees and costs as prevailing
BORROWERS DO NOT HAVE TO SHOW THEY HAVE THE ABILITY TO TENDER THE LOAN
PROCEEDS TO LENDER
In the second case, the Court held that the HBOR did not require a defaulting
debtor to tender the loan balance as a condition of filing suit for violations
of the pre-foreclosure sale loan modification requirements contained in the HBOR.
Similar to the
Valbuena v. Ocwen Loan Servicing, LLC, 237 Cal.App.4th 1267 (2d Dist. 2015) was a “dual tracking” case. Borrowers
Amado and Myrna Valbuena sued the loan servicer, Ocwen Loan Servicing,
LLC (“Ocwen”) alleging that Ocwen violated the HBOR, specifically
Civil Code section 2923.6, when it conducted a foreclosure sale of their
property while their loan modification application was pending. The trial
court sustained Ocwen’s demurrer and dismissed the case based on
case law predating the HBOR that a defaulting borrower cannot bring suit
unless it first tenders the entire loan balance. However, the Court of
Appeal reversed, finding no such requirement with the HBOR’s consumer
protection purposes. The Court’s holding was, again, based on its
analysis of the language and purpose of the statutory scheme behind the HBOR.
The Court in
Valbuena focused on how the HBOR was enacted to ensure borrowers are considered
for, and have a meaningful opportunity to obtain, loss mitigation options
such as loan modifications or other alternatives to foreclosure. The opinion
started by examining the “dual tracking” prohibition in Civil
Code section 2923.6. Under that section, if a borrower submits a complete
application for a first lien loan modification, then a lender (or its
agent) cannot record a notice of default or notice of sale, or conduct
a trustee’s sale, while the application is pending. Those foreclosure
steps cannot be pursued until: (1) the lender or loan servicer determines
in writing that the borrower is not eligible for a modification, and any
period for appealing that decision has expired; (2) the borrower does
not accept an offered modification within 14 days of the offer; or (3)
the borrower accepts a modification but defaults. If a borrower’s
application for a modification is denied, the lender must wait to pursue
foreclosure until the later of 31 days after the borrower is notified
in writing of the denial, or 15 days after the denial of the borrower’s appeal.
Next, the Court specifically analyzed Section 2924.12, which provides a
series of remedies when lenders violate the HBOR by “dual tracking.”
For instance, under Section 2924.12 of the Civil Code, a borrower may
bring an action for injunctive relief if a trustee’s deed upon sale
has not been recorded. After a trustee’s deed upon sale has been
recorded, a borrower may sue for actual economic damages. In addition,
a material violation that is found by a court to be intentional or reckless
may result in a trebling of actual damages or statutory damages of $50,000.00.
Upon analyzing Section 2924.12 and the remedies provided therein, the
Court opined that nothing in the language of the HBOR suggests that a
borrower must tender the loan balance before filing suit based on a statutory
violation under the HBOR. The Court found that requiring a tender of the
loan balance would eviscerate the remedial provisions of the statute.
The Court further found that the rationale behind the tender rule has
no application because borrowers’ lawsuit was not based on the premise
of a defect in the giving of notice, but on the statutory grounds set
forth in the HBOR. Therefore, under the
Valbuena decision, borrowers no longer need to tender the loan balance to state
a claim for damages for violation of the dual tracking prohibition within the HBOR.
The Court’s ruling in
Valbuena leaves several questions unanswered. For instance, what kinds of claims
require a tender? While the Court distinguished between challenges based
on defective notice and those premised on violations of the HBOR, what
about other potential violations?
Valbuena are examples of how the HBOR is still working its way through the trial
and appellate courts, searching for clarification on many of its unclear
provisions. As such, there is some chance that the California Supreme
Court, when it renders a decision on some other cases currently before
it, will have more to say about the issues addressed in
Valbuena. While litigation over the meaning and purpose of the HBOR is still in
its infancy stages, these cases deliver a message to lenders and servicers
that courts take seriously the intent and the structure of the HBOR and
that courts stand ready to require compliance. Moreover, for those states
that are looking to adopt laws similar to the HBOR, cases such as
Valbuena that analyze the purpose of the statutory scheme behind the HBOR may help
pave the path for other state legislatures to draft and implement their
own version of the HBOR.