What Happens When You Buy A House That Is About To Be Foreclosed Upon?
Recently the California Appellate Courts contemplated a situation where it appeared that there were two owners of a distressed property: one owner being the successful bidder at the foreclosure sale and the other owner having just closed escrow. See Nguyen v. Calhoun, 2003 DJDAR 599 (CA6th, Jan. 15, 2003).
The Chavezes owned a house in San Jose, Santa Clara County and were delinquent on their mortgage. The mortgage holder, Harbor Financial, in Houston, Texas, commenced foreclosure, recording a Notice of Default (NOD). While the NOD was pending, the Chavezes listed the house for sale with a real estate agent, Rivera. The Chavezes entered into a purchase and sale contract with Nguyen, and opened escrow with Financial Title Company.
Harbor Financial recorded its Notice of Sale, setting a trustee’s sale for July 9, 1998, later postponed one day to July 10, at noon. On July 9, Rivera requested a postponement from Harbor’s employee, Linda Kubricht. Kubricht responded that Harbor would postpone if proof was provided that buyer Nguyen’s loan had funded. Nguyen’s funds were received in escrow on July 9 at 1:30 p.m. Financial Title closed escrow the following morning, Friday, July 10, recorded a deed to Nguyen, and put a check for the payoff of Harbor’s loan in Fed-Ex to Harbor in Texas.
At Rivera’s request Financial Title also faxed a certified copy of the final escrow settlement statement to Harbor, sent at 8:23 a.m. on July 10. It was faxed to a number provided by Rivera and was erroneously directed to “Linda Cooper” at Harbor. Kubricht did not receive the fax nor did she learn of the sale that day. The foreclosure took place as scheduled at noon, and Richard Calhoun, a licensed broker and foreclosure investor, was the successful bidder.
The following Monday, July 13, Kubricht received both the misdirected fax and the check delivered by Fed-Ex for Chavezes’ payoff, which it cashed but later refunded. A trustee’s deed was later delivered to Calhoun and recorded. Nguyen then brought an action for quiet title and declaratory relief.
The Judge in a court trial framed the question as being a, “purely legal one of whether a sale to the plaintiff of the subject property occurred prior to the later trustee’s sale to the Defendants . . .”, and concluded that the case was “controlled by escrow law.” The Judge opined that the existence of a pending trustee’s sale was of no consequence to the determination, and found that escrow had closed and therefore the trustee’s deed was null and void. Calhoun appealed.
The Court of Appeal held that the deposit of a payment check in the mail does not constitute payment unless the creditor has directed the debtor to mail payment. Where a lien has not been extinguished by a payment and the debt remains in default, the lender can proceed with foreclosure. A properly conducted foreclosure sale constitutes a final adjudication of the rights of the borrower and lender. In some circumstances a mistake can cause a sale to be set aside, but not where the mistake is “dehors”, or outside of, the sale proceeding. Absent defects in the foreclosure proceeding itself, the sale is valid and conclusive as to the bona fide purchaser who paid value for the property without notice of irregularity.
Thus, Nguyen purchased the property, but subject to Harbor’s deed of trust and pending foreclosure. Payment of Harbor’s loan was not received until after the foreclosure sale and was rejected. The foreclosure sale was properly conducted. The mistaken communications between Financial or Rivera and Harbor were outside (“dehors”) the sale procedure. There was no basis on which to set aside the sale. Judgment is to be entered in favor of Calhoun.
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This article written and © Peter N. Brewer, Esq.
The Law Office of Peter N. Brewer (www.BrewerFirm.com) serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California.