Or When Is A Non-Judicial Foreclosure Sale Stayed By An Appeal
Recently the California Court of Appeal (Second Dist.- Los Angeles) made a determination of whether a sale trustee’s five postponements were excessive. Specifically, The Court examined whether the foreclosure trustee’s five sale postponements during an appeal were required “by operation of law” or were instead discretionary and violative of the Civil Code § 2924g limit of three postponements without a re-notice of the sale.
Under California Civil Code, 2924g(c)(1), a sale trustee has the discretion to postpone the sale three times, before the trustee is required to publish a new notice of sale. There are a few statutory exceptions laid out in CC§2924(c)(2) under which a trustee must postpone the sale: by order of the Court, or when stayed by operation of law or by mutual agreement of the parties.
Generally when citing “operation of law” for the reason to postpone a sale, it is almost always due to the automatic stay from a bankruptcy petition filing. In Royal Thrift and Loan Company vs. County Escrow, Inc. (2004 DJDAR 12668, Filed Oct. 15, 2004), the Court decided whether the operation of law exception also applied to the “automatic stay” of Code of Civil Procedure §916. That code section suspends enforcement of a judgment on appeal, but CCP §916 had not been evaluated before as to whether it applied to prevent a trustee from conducting a nonjudicial foreclosure sale during the appeal.
In the Royal Thrift case, property owners Arthur and Rosalie Jones sued lender Royal Thrift and Loan, County Escrow Inc., and notary public Michelle Kramer for negligence and fraud in connection with a fraudulent loan taken out by their son, Jeff Jones, and his two associates, Sam Favata and Ruben Sanchez. Jeff Jones, Favata, and Sanchez forged Jeff’s parents’ signatures on a promissory note and deed of trust securing a loan on Arthur and Rosalie’s residence. Kramer notarized the documents and County Escrow accepted the documents and distributed Royal Thrift’s loan proceeds to Jeff, Favata, and Sanchez. Later the loan went into default and Royal Thrift asserted that it was entitled to foreclose on the $192,039.74 obligation.
The trial court entered judgment in favor of Arthur and Rosalie against Jeff Jones, Favata, and Sanchez. The court also entered judgment for Royal Thrift, determining that Royal Thrift held a valid first deed of trust on the Joneses’ residence. The trial court found that the Joneses had had ratified the loan because they had been aware of the fraudulent loan for over two years but, to protect their son, did not challenge it. Royal Thrift was also awarded judgment against Kramer and County Escrow and against Star Insurance, issuer of Kramer’s fidelity bond. The judgment stated that if the future foreclosure sale failed to fully compensate Royal Thrift, Royal Thrift would be entitled to damages against Kramer, County Escrow, and Star for the difference between the loan balance and its credit bid at the sale.
In the first of two appeals in this case, the Joneses appealed from this judgment. Kramer, County Escrow and Star Insurance cross-appealed. Royal Thrift appealed the trial court’s denial of its request for attorney fees under the tort-of-another doctrine. Most of the appeals were dismissed as being premature, because the trial court had reserved jurisdiction to finally determine Royal Thrift’s damages when the foreclosure sale was completed.
Following the first appeal Royal Thrift conducted its foreclosure sale and bought the property for $139,000. It then made a motion for an additional sum and the Court modified the judgment to award Royal Thrift an additional $56,575.72. Kramer, County Escrow, and Star Insurance (hereafter, collectively “County Escrow”) then brought their second appeal from the modified judgment, contending that the trial court ignored major procedural defects in Royal Thrift’s non-judicial foreclosure sale. County Escrow contended that Royal Thrift postponed the sale more than the three times allowed by statute for discretionary postponements, as opposed to postponements required by operation of law.
Non-judicial foreclosures are governed by a comprehensive statutory scheme found in Civil Code §§ 2924 through 2924k, and a properly conducted sale “constitutes a final adjudication of the rights of the borrower and lender.” [6 Angels, Inc., v. Stuart-Wright Mortgage, Inc. (2001) 85 Cal.App.4th 1279, 1283-1284]. As a general rule there is a common law rebuttable presumption that a sale has been conducted regularly and fairly. [6 Angels at pg. 1284]. In addition there is a statutory presumption that the recital in the trustee’s deed that all statutory requirements for notice and sale have been satisfied that is prima facie evidence of compliance and conclusive evidence of compliance in favor of a bona fide purchaser or encumbrancer. [Civil Code 2924].
Even though Royal Thrift was determined to be a bona fide purchaser at the sale, and thus the recording of the trustee’s deed would generally create a conclusive presumption of its title notwithstanding any irregularities in the sale, the Court of Appeal determined that County Escrow had standing to assert alleged irregularities in the sale as part of its defense that Royal Thrift failed to mitigate its damages, but not as part of a general challenge to the sale seeking to set it aside.
County Escrow contended that Royal Thrift had improperly postponed the foreclosure sale more than the three times allowed by Civil Code 2924g(c)(1). That section allows a trustee to postpone a sale only three times before recording and publishing a new notice of trustee’s sale, unless the postponement(s) fit within one of the exceptions enumerated in Subdivision (c)(2). One such exception is where the sale is “stayed by operation of law.”
Royal Thrift had postponed the sale six times, but five of those postponements had been while the Joneses’ first appeal was pending. Thus Royal Thrift argued that the “automatic stay” imposed by the appeal required postponement “by operation of law.”
Code of Civil Procedure § 916(a) states that filing an appeal “stays proceedings in the trial court upon the judgment or order appealed from or upon matters embraced therein or affected thereby, including enforcement of the judgment or order,” unless the matter falls within one of the exceptions. The stay generally prevents any further proceedings to enforce the judgment or order appealed from. However, no case had previously examined whether the stay applies to nonjudicial foreclosure proceedings. The Court of Appeals concluded that automatic stay halts nonjudicial foreclosures because they are a statutorily authorized adjudication of rights under a trust deed.
County Escrow contended that there was no automatic stay in effect during the first appeal, arguing that the judgment fell within an exception set forth in C.C.P. § 917.4. The Court of Appeal rejected this argument. The Court said that because it was not deciding whether there were procedural irregularities that would set aside the sale, but instead was limiting its inquiry to whether Royal Thrift had failed to mitigate its damages, it was not critical whether there was an automatic stay. The Court’s inquiry was limited solely to whether Royal Thrift acted “reasonably and with due diligence, in good faith” under the doctrine of mitigation of damages.
The record before the Court supported the conclusion that Royal Thrift had indeed acted reasonably by postponing the sale to ensure that there was a final judgment that the deed of trust was valid. The case law in existence when Royal Thrift made its decisions to postpone supported the proposition that the Joneses’ appeal suspended the foreclosure sale.
The Court also rejected other of County Escrow’s arguments, including the argument that Royal Thrift violated the automatic stay imposed by the appeal by noticing the sale during the appeal. The Court said that while the better practice would have been to re-notice the sale after the conclusion of the first appeal, the trial court could have properly concluded that it would not have affected the sales price at the sale.
Foreclosure trustees should be cautious that a judgment determining the validity of title to property, such as a judgment for quiet title, may be automatically stayed while on appeal and that an attempt to foreclose, even nonjudicially, could be considered to be enforcement of the judgment in violation of that stay. Further, if it is necessary to postpone more than three times while awaiting the outcome of the appeal, the better practice is to re-notice following the appeal. But if that is not done, this case at least gives some authority for multiple postponements while an appeal is pending.