Trustee Rescinding Sale - California

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Trustee Rescinding Sale - California

Mark Hamilton
El Sobrante, CA · Member since 2013 · 8 posts · 1 vote

The facts are straight forward:

1. I bought a Home Equity Loan in foreclosure. It was in the first position because a subsequent 'first' loan did not have a subordination agreement recorded. I received and recorded the Trustee Deed.

Three weeks later I found out that one week before the foreclosure sale the beneficiary/trustee of the 'second' position filed a suit against the bene/trustee of the first (the Home Equity Loan) claiming that the order ought to be reversed because the 'second' bene paid the first off the home equity loan 7 years ago but that it was never recorded and the Home Equity Loan was maintained active when it should have been closed.

3. Although the suit was filed, the lawyers for the 'second' forgot to file a Lis Pendens SO I bought the 'first' Home Equity Loan being unaware their was a suit disputing the seniority.

4. The Trustee now wishes to rescind the sale - which is not something I am sure that I want. Here is my take:

First, it is my understanding that once a trustee deed is issued and recorded there creates a conclusive presumption of validity of the sale in favor of the bona fide purchaser.

Second, if there is a material procedural error in the foreclosure process and it is discovered before the issuance and recording of a trustee deed and it results in a price significantly less that what otherwise might be obtained, the trustee can abort the sale and return the funds (with interest) to the purchaser - but this is not the case. At this point there is no allegation or proof of any material error in the statutory foreclosure process, AND in any event the deed has been delivered and recorded. This sounds like an issue for the title company insurers to work out.

Third, it seems to me that the trustee and beneficiary of the 'first' home equity loan is attempting to create full immunity for foreclosure choices it made prior to the sale. If in 2005 it were negligent in its duties as alleged , and was fully aware the suit against them, and then they chose to go forward then that was their choice within the process (not a flaw in the process itself). A change of heart is not a sufficient reason to pretend the sale and recording did not occur.

Finally, the failure of lawyers of the 'second' trustee/bene to timely record a Lis Pendens prior to the foreclosure sale suggests that if there is a flaw it is that such was not posted in the record and bidders are the ones that should have the option to cancel the purchase. I am unclear if recordation of a Lis Pendens is a statutory foreclosure procedure.

I think I have a strong case for a very valuable property - thoughts? Should I fight it?

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Account Closed
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Originally posted by Steve Babiak:
Originally posted by K. Marie Poe:
...
There are a couple of threads here on BP that address CA trustee's sale rescissions and bona fide purchasers and some relevant case law. Unfortunately, I can never find anything with the BP search function. A better person may be able to figure out where those threads are.
...

K. Marie Poe - were you summoning me? :)

I said "better person" and then one appeared. Thank you Steve!

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    I agree with you, money will solve the problem. While notice may not have been filed notice should have been sent to junior liens. This was my biggest fear when I was trustee in foreclosures, ensuring notices were properly given to all concerned. They will be fighting over this one but I doubt the property will move, get your title insurance claim moving. There will probably be claims from errors and ommissions, professional liability polices kicking in as well.

    All the improvements you have done ;) will complicate thier issues. :)

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y

    Ahhh, the joys of foreclosure investing!

    Originally posted by Mark Hamilton:

    The facts are straight forward:

    1. I bought a Home Equity Loan in foreclosure. It was in the first position because a subsequent 'first' loan did not have a subordination agreement recorded. I received and recorded the Trustee Deed.

    I don't know CA law, but in NC the recording of a trustee deed is necessary but not sufficient for ownership. Until the foreclosure is finalized by the clerk of court filing a FINAL REPORT AND ACCOUNT OF FORECLOSURE SALE, the buyer doesn't own the property. I learned this first hand in my case, 07SP107.

    Originally posted by Mark Hamilton:

    Three weeks later I found out that one week before the foreclosure sale the beneficiary/trustee of the 'second' position filed a suit against the bene/trustee of the first (the Home Equity Loan) claiming that the order ought to be reversed because the 'second' bene paid the first off the home equity loan 7 years ago but that it was never recorded and the Home Equity Loan was maintained active when it should have been closed.

    In 07SP107, the trustee took back the property 29 days after we recorded the trustee deed. We had done repairs, a small improvement, secured a paying tenant and already collected rent. In my case, we used a lawyer to close the foreclosure sale, so we had recourse.

    It sounds like you bought title insurance. That's good. It's also good if you used a lawyer close the deal. You are in complicated legal territory and it would be wise to consult a lawyer... not your closing attorney since that firm will be a defendant in any litigation you may file to protect your interest.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    I agree with Chris, this certianly illustrates the differences in the process from state to state, he is correct too in seeing another attorney, not the one you used. Not to say you can't speak to your closing attorney about the matter, I'd suggest you not make it appear initially that you were seeking an action against the closing attorney, not even sure how you had a "closing attorney" in an FC. But they closer and closing, should have been covered in the title policy. I'd first make or give notice of the issue to the title company, if there is any defense that's where it will begin. Then, if the title attorney baulks at all this, make the decission about getting another attorney on your dime. :)

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  • Mark Hamilton
    OP
    El Sobrante, CA · Member since 2013 · 8 posts · 1 vote
    13y

    I can see there are big differences from State to State.

    In California judges and attorneys are not normally in the process. The property goes into foreclosure when the homeowner is 90 days or more in default. The trustee puts it up for auction at the Courthouse steps.

    I bid on it, and won the bid. About a week or two later a person gets the trustee deed in the mail. Once it is recorded at the recorders office it is usually a done deal.

    If there is a material irregularity in the foreclosure process and it results in a low price the trustee who foreclosed can revoke their sale (no time limit). But no irregularity is being claimed in my case.

    On the other hand, their is now a Lis Pendens (notice of suit) on the title record, which is not insured. So if I want to keep the property I am going to have to sue the trustee who sold it to me OR see if they back down.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Mark Hamilton:
    ... the beneficiary/trustee of the 'second' position filed a suit against the bene/trustee of the first (the Home Equity Loan) claiming that the order ought to be reversed because the 'second' bene paid the first off the home equity loan 7 years ago but that it was never recorded and the Home Equity Loan was maintained active when it should have been closed.

    ...

    I wonder if the lender's title policy for the "second" lender should be getting a claim here?

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y

    This got a little confusing following which loan is which. For the sake of conversation, let's assume the 'First Loan' is the loan which is the HELOC and which is the loan that the OP purchased. Let's also make sure that the OP purchased the actual note and security instrument. So then, the 'Second Loan' is the loan which is disputing the priority of the First.

    So this is a quiet title action. The Trustee sounds like they canceled or rescinded the sale after learning of the action. The Second Loan should go cure the defect of Lis Pendis if indeed it did not occur, but that is also a pretty novice mistake. Perhaps the OP simply missed the Lis Pendis during his purchase process and notice to the trustee of a new beneficiary or proper notice did not occur for the First Loan giving grounds to rescind the sale.

    I know a court can rescind a sale even after new deed is issued. I am not sure a Trustee has that power but if the deed is not issued post foreclosure sale, then a Trustee can rescind the sale. In this case, learning of the Quiet Title Dispute, would be grounds for such an event.

    I suppose one of the elephants in the room is did the First Loan give proper notice to the Second Loan as a function of its foreclosure process. If it did, then was quiet title disputed properly in line with the right of redemption? If the notice was given properly by the first then I don't see how the second can show up late. The purchaser acquires the legal title at the sale, but that this title, as evidenced by the certificate of sale, is subject to a condition subsequent-that there will be or was a valid redemption period.

    I am not sure that a quiet title action post foreclosure sale would be voided under the presumption and proof of redemption period elapsing. Is failure to act to protect the interest of the Second Loan in redemption grounds to deny the potential quiet title action? Not sure, question for a lawyer.

    One of the other concepts that comes to mind, did the quiet title suit call for the foreclosure process to become judicial? If it did, then the Trustee rescinding sale also make sense but still not sure if that pertains here.

    I understand the angle of the OP but I am not sure it is not flawed. At Sheriff sale a purchase takes the equitable interest of the lien holder's instrument and establishes a legal interest only in the portion of legal interest the lien had in the property. It does not guarantee full legal interest just the same as it does not grant possession. So ownership interest is validated but it is not superior or un-fractured.

    I would be interested in a recap clearing up the instrument and lien positions here to make sure the OP is understood. California Trust Deeds and Sheriff's deeds tend to mix terminology making conversation confusing. Noted by the confusion of why did the OP get title insurance? Insurance for what? The DOT lien priority or the the Deed to the real property? It certainly sounds like the intent of the OP is to end up with possession of the real property, which at the end of this road may still not happen if the OP purchased the Deed of Trust, which is what I think he purchased opposed to the Sheriff's Deed.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Dion, I didn't see any note purchase at all here, you don't purchase a deed of trust.

    The issue is proper notice being required to the second holder. I also don't buy that the second holder just sat there for years as an open account, thier failure to collect can constitute abandonment. Thier lender's title policy doesn't cover future events as to liens or any failed or successful FC.

    I'm I reading this right now that the OP doesn't have title insurance, didn't obtain a policy immediately after the FC? If not, it's on him to defend. He needs an attorney as mentioned above. :)

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Bill Gulley:
    ... Thier lender's title policy doesn't cover future events as to liens or any failed or successful FC.
    ...

    Bill Gulley - when I raised the point of lender title policy, I was approaching it from that second lender's perspective. The loan in first position was to be satisfied from the funds that this second lender provided, so that the second lender has first position in the end; that satisfaction piece being missing / unrecorded is where I was going, not the future foreclosure event ...

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Not a title issue as much as the title insurance covering the settlement and closing agent, any real lender will require an insured closing letter issued by the title insurance company covering the actions of that agent. So, yes, if that was the case, the title insurance company can be on the hook for the failure of the agent to properly payoff the other lender and set the right priority, however, they are not responsible for the other lender paid off to release the lien, that is covered by law for the release of liens. So,yes, Steve, it can be an issue in that light. :)

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y

    Bill Gulley Regarding "...not even sure how you had a "closing attorney" in an FC." Just to clarify, the attorney I employ isn't technically necessary but adds some value. I guess I didn't mean to overload the term "closing attorney", since the role of the attorney we use is to close the foreclosure sale.

    So Mark's process is this: "I bid on it, and won the bid. About a week or two later a person gets the trustee deed in the mail. Once it is recorded at the recorders office it is usually a done deal." In my process, the attorney does the preliminary title work (this is done before the sale), reviews the SP file (also before the sale), I attend the sale and fund 5% deposit, the attorney interfaces with the trustee, provides title opinion, orders title insurance (sometimes at reisssue rate), interfaces (if necessary) with the county/city. Once in a while the paralegal catches something I missed and that is very worth while. Yes, subtle differences: I open escrow with the 'closing attorney', not the trustee; I don't handle the deed, do the recording, etc. That's handled by the attorney/paralegal. BTW, the case I referenced in my first post was handled by a different attorney than I am using now. That botched case was the final straw.

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  • Mark Hamilton
    OP
    El Sobrante, CA · Member since 2013 · 8 posts · 1 vote
    13y

    Yes, this is the order of actions.

    1. Oldest outstanding loan was HELOC. HELOC was foreclosed on.
    2. Suit filed in court by the "second" junior loan protesting seniority of liens.
    3. Title check at time of sale showed NO legal action pending (no Lis Pendens).
    4. HELOC bought by me at foreclosure sale.
    5. Lis Pendens filed and recorded AFTER foreclosure sale. Now in title record.
    6. Trustee Deed Mailed to me and I recorded.
    7. Trustee has a change of heart and rescinds sale.

    In California, if and when I sell the property (or take a loan against the property) the escrow company changes the trustee deed to a Grant Deed for the owner (or new owner).

    In California the purchase of a foreclosure 'wipes off the record' all junior liens (mortgages etc.) 'off the record'.

    I am protesting the recsending of sale. I am also thinking of filing in court to wipe the "Lis Pendens" off the record because it was filed AFTER the foreclosure sale and clouds my title.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    That makes sence, I never know what might be done in the Republic of Cali, but I thought that would be strange for NC, now I get it. LOL :)

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  • Mark Hamilton
    OP
    El Sobrante, CA · Member since 2013 · 8 posts · 1 vote
    13y

    I guess NC is a judicial foreclosure state. California is a non JF state (we don't call the document 'mortgage' but the "deed of trust", not to be confused with 'trustee deed').

    Most western states were formed as new concepts in law were developing - one of them was non-judicial foreclosures. Much faster and less expensive than judicial foreclosues.

    Foreclosures are down to nothing in the Republic of California (although our Democratic legislature has done its best to keep it going by putting up delays in the process).

    How is it going in NC...I expect you all still have a backlog?

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Mark: I feel like I read a thread on this same case on another message board recently. Was that you?

    There are a couple of threads here on BP that address CA trustee's sale rescissions and bona fide purchasers and some relevant case law. Unfortunately, I can never find anything with the BP search function. A better person may be able to figure out where those threads are.

    Without a true irregularity of sale (and I can't tell from your posts if there was one or not), you are a bona fide purchaser. If it were me, and I was sure there was no irregularity, I'd be tempted to strong arm the trustee to make them pay me to go away. The sale can't be rescinded just because trustees or lenders erred when selling the property. However, lenders and trustees have full time legal departments and you do not.

    I'd offer to settle for cash. But that's me. You'll get all kinds of feedback that rescissions are just the cost of doing business. And that's true, for the legitimate rescissions. There's tons of trustee and lender error out there right now. I'd not take it lying down. That being said, I wouldn't be willing to spend that much to fight it either.

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  • Mark Hamilton
    OP
    El Sobrante, CA · Member since 2013 · 8 posts · 1 vote
    13y

    Yes I was on another board - a long time poster over there said I best post my question here because he prefers to answer questions at this website. (That other board has slowed a lot in the last year or two).

    And you and I are on the same page. I am toying with the idea of fighting this but if they make a reasonable offer it is likely I would take it. The question is, what is reasonable?

    But if not, I will likely pursue this further. IF they can show a procedural error that is different, but so far all I see is that the trustee may have screwed up seven years ago and wants to dodge it.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Tell the attorney you time is just as valuable as his! :)

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Dion DePaoli:

    So this is a quiet title action. The Trustee sounds like they canceled or rescinded the sale after learning of the action. The Second Loan should go cure the defect of Lis Pendis if indeed it did not occur, but that is also a pretty novice mistake. Perhaps the OP simply missed the Lis Pendis during his purchase process and notice to the trustee of a new beneficiary or proper notice did not occur for the First Loan giving grounds to rescind the sale.

    In CA, the trustee can overturn a sale.

    The OP didn't miss the lis pendens. A case was filed but not a lis pendens. So the OP made a purchase with no knowledge of the law suit. Which, IMO, supports his status as a bona fide purchaser. The trustee and lender made a mistake in holding the sale. But CA Civil Code doesn't allow for rescissions just because mistakes are made.

    If the OP holds out and doesn't allow the rescission, the lender would have to look to the trustee, and the attorney who failed to file a lis pendens, to make them whole.

    The OP really needs an attorney to look at the sale procedure to see if he really has a case.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by K. Marie Poe:
    ...
    There are a couple of threads here on BP that address CA trustee's sale rescissions and bona fide purchasers and some relevant case law. Unfortunately, I can never find anything with the BP search function. A better person may be able to figure out where those threads are.
    ...

    K. Marie Poe - were you summoning me? :)

    http://www.biggerpockets.com/forums/41/topics/81271-got-a-letter-saying-that-the-house-i-just-purchased-at-a-trustee-auction-is-cancelled

    http://www.biggerpockets.com/forums/16/topics/74345-b-of-a-title-issues-disclosed-after-233-000-deposited-in-escrow-to-close

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Mark Hamilton:
    Yes I was on another board - a long time poster over there said I best post my question here because he prefers to answer questions at this website. (That other board has slowed a lot in the last year or two).

    And you and I are on the same page. I am toying with the idea of fighting this but if they make a reasonable offer it is likely I would take it. The question is, what is reasonable?

    But if not, I will likely pursue this further. IF they can show a procedural error that is different, but so far all I see is that the trustee may have screwed up seven years ago and wants to dodge it.

    Are you the Mark from Judy's meeting? I was at that meeting a few months ago. I'm not sure I can make it tomorrow, but it sounds like there will be some good problem solving going on with this one.

    I'm not entirely sure that you're home free on the procedural front. We don't have all the facts that show that the lender in second position was noticed properly. It looks like they got the NOD, which I'm assuming made them wake up and file the LP. But we don't really know how and when they were noticed of the NOTS.

    Regardless I think the better play is to have your attorney contact the trustee and let them know you are secure in your position as a BFP, but that you are open to negotiating a settlement. I don't think you'll get an offer to settle without suggesting it to the trustee.

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y
    Originally posted by Mark Hamilton:
    I guess NC is a judicial foreclosure state. California is a non JF state (we don't call the document 'mortgage' but the "deed of trust", not to be confused with 'trustee deed').
    ...

    How is it going in NC...I expect you all still have a backlog?

    No, NC is non-judicial. Foreclosures are relatively quick in NC (about 45-60 days on average) and there is a 10 day recision period. No backlogs....

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Steve Babiak:
    Originally posted by K. Marie Poe:
    ...
    There are a couple of threads here on BP that address CA trustee's sale rescissions and bona fide purchasers and some relevant case law. Unfortunately, I can never find anything with the BP search function. A better person may be able to figure out where those threads are.
    ...

    K. Marie Poe - were you summoning me? :)

    I said "better person" and then one appeared. Thank you Steve!

    2Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y
    Originally posted by Mark Hamilton:
    Yes, this is the order of actions.

    1. Oldest outstanding loan was HELOC. HELOC was foreclosed on.
    2. Suit filed in court by the "second" junior loan protesting seniority of liens.
    3. Title check at time of sale showed NO legal action pending (no Lis Pendens).
    4. HELOC bought by me at foreclosure sale.
    5. Lis Pendens filed and recorded AFTER foreclosure sale. Now in title record.
    6. Trustee Deed Mailed to me and I recorded.
    7. Trustee has a change of heart and rescinds sale.

    I don't know CA laws and there are certainly state differences, hence my earlier post about getting a foreclosure attorney. I believe #3, the act of a trustee holding a sale while an open suit (per #2) has been filed against the power of sale, would be handled differently in NC. I dare say most other states... but I'm not a lawyer so don't take my word;)

    #6, perhaps, is another case where NC and CA are different. The act of buying "at foreclosure sale" doesn't mean the foreclosure is final. Even your recording of the deed doesn't finalize the foreclosure in my state, but looks like it does for CA per http://www.leginfo.ca.gov/cgi-bin/displaycode?section=civ&group=02001-03000&file=2920-2944.7 in 2924h (c). It would be interesting to see how BK filings are handled since it's addressed in NC law and appears to not be in CA code (but again I'm no lawyer).

    I'm thinking your question is answered in CA case law.

    Originally posted by Mark Hamilton:
    ...In California the purchase of a foreclosure 'wipes off the record' all junior liens (mortgages etc.) 'off the record'....

    If that's the case, keeping track of filings and indexing must be a nightmare for the clerk of court. This is another area where NC is different. No liens are removed and a foreclosure doesn't take anything 'off the record'. In NC the documents are still there, but if the proper notice was given and the foreclosure process was perfected (and a final report and account form completed by the clerk of court) and a FORE NOTICE filed, then these liens are not enforceable. Some liens, like HOA liens, are 'extinguished', or not enforceable, upon foreclosure of a first position deed of trust.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Chris Martin:
    Originally posted by Mark Hamilton:

    If that's the case, keeping track of filings and indexing must be a nightmare for the clerk of court. This is another area where NC is different. No liens are removed and a foreclosure doesn't take anything 'off the record'. In NC the documents are still there, but if the proper notice was given and the foreclosure process was perfected (and a final report and account form completed by the clerk of court) and a FORE NOTICE filed, then these liens are not enforceable. Some liens, like HOA liens, are 'extinguished', or not enforceable, upon foreclosure of a first position deed of trust.

    Chris: There's no court in a CA trustee's sale, so no clerk of the court to keep track of anything. "Wiped off title" means the debt is no longer against the property.

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y

    He said "off the record". I'm just going by his quoted words. In NC, foreclosures are handled as recorded documents vs. through the trustee's office. I had no idea CA didn't have a clerk of court to handle filings, etc.

    0Reply
  • Mark Hamilton
    OP
    El Sobrante, CA · Member since 2013 · 8 posts · 1 vote
    13y

    K Marie,

    No I am not that Mark and don't know Judy or her problem solving meetings. At 'the other site' I am Mark H. But if you make it tomorrow feel free to submit my problem.

    So far we do think the second was noticed properly - it the lawsuit it specifically asks the court to stop the foreclosure sale (in one week) and states that the second has asked repeatedly and the trustee has refused. The suit papers show the two were in contact and arguing about the seniority issue PRIOR to the sale.

    What happened (I suspect) is that the day of the sale I use the title company that underwrote the second (Fidelity). They researched the record and the escrow papers and confirmed no subordination agreement was recorded or gotten by the escrow officer for recording.

    They notified their corporate HQ THAT I just bought the first and that they (Fidelity) underwrote the second's title insurance.

    The next day the LIS Pendens was filed. While the sale was over, I had to wait till I got the trustee deed 10 days or so later. In Calif. if you record the trustee deed not more than two weeks after the sale the effective date of the sale is the day of the auction. So I made the deadline.

    My attorney is now contacting the stakeholders to find out if they have any other basis to cancel the sale.

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