CALIFORNIA ATTORNEY'S FEES

Deeds Of Trust/Section 1717: Fee Denial Against Trustee Sale Third Party Purchaser Affirmed, But Fee Denial Against Purchaser Assuming Trustor Position On Senior Trust Deed With Fees Clause Reversed

 

Split Decision For Third Party Purchaser At Trustee’s Sale Involving Second Deed of Trust.

     Nonsignatory plaintiff purchased a property at a trustee’s sale of a junior lienholder, eventually bringing an action to sue certain defendants to determine amounts owed under the first (senior) deed of trust and set aside the trustee’s sale of the junior lien as being void. Plaintiff lost it suit, the two set of defendants were denied attorney’s fees requests aggregating over $497,000.

     Two sets of defendants appealed the fee denials in U.S. Financial, L.P. v. LnR Group, Inc., Case No. D065276 (4^th Dist., Div. 1 Jan. 23, 2015) (unpublished), with one set going home disappointed but with the second set happy given they were entitled to fees as the prevailing party under the fees clause in a senior trust deed pursuant to Civil Code section 1717.

     The first set of defendants known as the “Coast defendants”—seeking over $350,000 in fees--argued that plaintiff stepped into shoes of the trustor or was a third-party beneficiary of the junior deed of trust (complete with a fees clause). The appellate court did not buy the analogy, given plaintiff was a third party purchaser obtaining an interest free and clear of the trustor subject to the fees clause. No subrogation or third-party beneficiary theories applied.

     However, a second defendant, LnR, did much better. Its theory was that plaintiff stepped into the shoes of trustor with respect to the senior deed of trust so that fee recovery was possible. Yep, that was a winner given that plaintiff did assume the senior lien obligation after the trustee’s sale, so LnR got to get a second bite at fees after being denied them the first time around to the tune of $147,175.

Deeds Of Trust: Trustee Is Implicit Party Entitled To Civil Code Section 1717 Fees

 

Implicit Party Theory Prevailed.

     In Morf v. MTDS, Inc., Case No. A140010 (1^st Dist., Div. 5 Nov. 4, 2014) (unpublished), a trustee under a deed of trust (DOT) won a nonjudicial foreclosure challenge by a borrower, winning $9,825 in attorney’s fees based on a DOT fees clause under Civil Code section 1717. Borrower argued that the clause only focused on the lender, not the trustee, but the appellate court affirmed because the trustee is an implicit party under the DOT clauses—including the DOT fee clause. (Huckell v. Matranga, 99 Cal.App.3d 471, 481 (1979).)

     BLOG COMMENT—in order to avoid this result, a borrower should give consideration to notifying a foreclosure trustee that it will be naming the trustee only to avoid non-joinder challenges and obtain a stipulation that neither side will seek fees/costs upon trustee filing a declaration of nonmonetary status under Civil Code section 2924l.

Deeds of Trust/Section 1717: Fee Denial Reversed In Trust Deed Cancellation Case

 

Nonassuming Grantee Under Deed Of Trust “Steps Into Shoes” For Civil Code Section Purposes.

     Plaintiff prevailed on her cause of action to cancel a trust deed with an attorney’s fees clause, but the lower court—although sympathetic to her cause—denied a fee request of over $130,000 in Reynoso v. Patel, Case No. H039016 (6^th Dist. Sept. 22, 2014) (unpublished).

     Plaintiff’s appeal of the fee denial was reversed.

     Plaintiff did win a trust deed cancellation battle based on a forged instrument. Even though plaintiff won a judicial arbitration and got minimal fees, she did request a de novo trial after prevailing at the judicial arbitration (likely wanting another trial because the award of attorney’s fees was pretty small). The reviewing court determined that plaintiff’s de novo trial request did not preclude a subsequent fee award because the judicial arbitration statutes do not apply to equitable claims such as those brought by plaintiff, so there was no bar from prior judicial arbitration activities. Then, on to the merits. The appellate court found that plaintiff nonsignatory’s success was no different than nonassuming grantee’s situation in Saucedo v. Mercury Sav. & Loan Assn., 111 Cal.App.3d 209, 315, entitling her to a 1717 fee recovery. So, a remand was ordered to allow plaintiff to recoup 1717 fees in a yet-to-occur fee hearing. Plaintiff also obtained costs on appeal, which logically would mean more fees for winning on appeal.

Deeds Of Trust/Section 1717: Junior Lienholders Stepping Into Shoes Of Primary Residential Obligors Had Fee Exposure To Winning Senior Lienholders

 

Nonsignatory Junior Lienholders Effectively “Stepped Into Shoes” of Primary Obligors.

     Skordoulis v. Fidelity Nat’l Title Co., Case No. D065947 (4^th Dist., Div. 1 Sept. 9, 2014) (unpublished) is a nice example of “be careful of what you ask for/what you lose” when an attorney fee battle happens after you as a litigant do not prevail.

     In this one, residential property owner unsuccessfully attempted to stop a nonjudicial foreclosure of a Palm Springs residence based on later fractionalized sales to successor lenders (the senior lienholders). However, the junior lienholders also got involved in the suit, arguing that they needed to enjoin the foreclosure on similar grounds or else their liens were worthless. These parties did obtain injunctive relief all the way through a trial at which both primary obligors and junior lienholders did not prevail against senior lienholders.

     The lower court granted defense motion for fees against primary obligors to the tune of $130,662 based on note/trust deed fee clauses, but denied the fee motion as against the junior lienholders.

     The senior lienholders won a reversal of the junior lienholder fee denial on appeal.

     Even though junior lienholders were not signatories to the germane instruments, they fell within an exception allowing for fee recovery under Civil Code section 1717: they, in essence, “stepped into the shoes” of the primary obligors and obtained injunctive relief usually only allowed to those primary obligors. No California authority was located by the appellate court allowing a junior lienholder to enjoin a senior lienholder foreclosure, with the applicable remedies being a redemption of the senior debt or a deficiency judgment against the primary obligors. So, the matter was reversed so that senior lienholders could recoup some fees from junior lienholders.

Deeds Of Trust/Fee Clause Interpretation: Plaintiff Losing Tortious Wrongful Foreclosure Claim Against Foreclosing Trustee Gets Hit With $1.256 Million Fee Award

 

Deed of Trust Language Was Expansive Enough to Cover Prevailing Trustee.

     For any litigators practicing in the real estate area, we are aware of the extremely broad nature of deed of trust language, which is very pro-beneficiary (the lender usually) or pro-trustee (a title company imbued with authority to nonjudicially foreclose under certain conditions). The deed of trust language is also expansive as far as fee recovery in favor of both beneficiaries and trustees, as the next case shows with regard to trustees.

     In Signature Log Homes, LLC v. Fidelity Nat’l Title Co., Case No. E056683 (4^th Dist., Div. 2 Aug. 21, 2014) (unpublished), plaintiff—after a prior successful appeal resulting in a remand—eventually lost a wrongful foreclosure action against a trustee title company, eventually being on the wrong side of a summary judgment against plaintiff based on trustee immunity. The lower court then awarded trustee $1.256 million in attorney’s fees as against plaintiff based on a fee clause in the deed of trust by which trustee obtained its nonjudicial foreclosure powers.

     Plaintiff’s main argument was that a trustor’s tort action for wrongful foreclosure based on trustee negligence did not fall within the ambit of the deed of trust fees clause. However, the appellate court disagreed, because the fee clause did apply to challenges to the “rights and powers” of the trustee—sufficiently broad in scope. As to the challenge to the amount of the award as being excessive, plaintiff only made an argument to that effect, not providing any evidence, fee expert, or specific objections to show otherwise.

     Ouch!

Deeds of Trust/POOF!: Trial Court’s Judicial Imposition Of Lien On Future Third Party Tortfeasor Monetary Recovery, Including Fee And Costs Awards, Goes POOF! On Appeal

 

Judicial Lien Imposition Found to be the Equivalent of an Improper Deficiency Judgment.

     Borrower/former owner of San Diego property damaged by 2007 wildfires was nonjudicially foreclosed out of the property by a junior lienholder, which held the property for a couple of years before losing it to a foreclosing senior lienholder. Former owner then sued San Diego Gas & Electric and other third party tortfeasors for various claims relating to the wildfires, with the junior lienholder suing owner back to impose a judicial lien on any future recoveries from the third party tortfeasors or for equitable conversion recovery.

     The lower court did impose a judicial lien in the amount of $837,385, plus interest, attorney’s fees and costs.

     The appellate court, in Thoryk v. San Diego Gas & Elec. Co., Case No. D062680 (4^th Dist., Div. 1 Apr. 9, 2014) (published), reversed, examining the trust deed language and determining the judicial lien imposition was the equivalent of an impermissible deficiency judgment. That meant the fee/costs awards went POOF! The decision is interesting reading for real estate practitioners and title companies to show how trust deed language needs to be made specific to include these types of recoveries as personal property subject to more lender-friendly mixed collateral rules.

Deeds Of Trust: Borrowers Subject To Improper “Dual Tracking” Can Now Obtain Attorney’s Fees In Addition To Damages/Penalties Under Homeowner Bill Of Rights Effective January 1, 2013 Against Certain Foreclosing Lenders

 

     Co-contributor Marc noticed a somewhat chilling story about borrowers who successfully won a fraudulent “dual tracking” case against OneWest Bank. (“Dual tracking” is the nomenclature for the practice by which some lenders simultaneously pursued foreclosure remedies while attempting loan modification negotiations with borrowers.)

     According to an October 31, 2012 story in the San Francisco Chronicle, borrowers won a “dual tracking” dispute with OneWest in front of a jury in San Mateo County Superior Court, with the jury finding that the bank committed a wrongful foreclosure by dual tracking. However, borrowers only obtained $13,500 in damages for a remodeling project but would have to pony up the mortgage delinquency in order to get their home back. The real rub is that they received no attorney’s fees for this violation, with damages being very insufficient to cover borrowers’ legal expenses.

     However, thank to the Homeowner Bill of Rights that will become effective on January 1, 2013, borrowers now have the ability to recoup attorney’s fees in “dual tracking” disputes unless the violation is promptly cured by the lender of residential properties foreclosing on more than 175 properties on an annual basis.

     That takes us to the enhanced remedies, which are codified for many violations of the Homeowner Bill of Rights. However, unlike the limited remedy of staying the foreclosure found to govern the Perata Act predecessor provisions, the new legislative scheme codifies that material violations of its terms--including the failure to provide notice of foreclosure prevention alternatives to borrowers and failure to desist from “dual tracking”--gives rise to these additional remedies in addition to an injunction of a pending foreclosure sale until the enjoined entity has corrected or remedied the pertinent violations: (1) actual economic damages incurred by the borrower after completion of a trustee’s sale for material violations; (2) the greater of treble damages or $50,000 statutory damages if the material violations are judicially found to have been intentional, reckless, or the result of willful misconduct by the lender or mortgage servicer after completion of a trustee’s sale (new Civ. Code, §§ 2924.12(b), 2924.19(b), 2924.12(c), 2924.19(c)); and (c) an award of reasonable attorney’s fees and costs to the prevailing borrower if the borrower obtains injunctive relief or damages (new Civ. Code, §§ 2924.12(i), 2924.19(h).)

     The Legislature expressly made this a unilateral fee-shifting clause in favor of the prevailing borrower and even provided the judiciary with how to determine if a borrower “prevailed.” Any violation of specified provisions of the Homeowner Bill of Rights are also deemed violations of the corporate, financial institution, or real estate licensing laws. (Id. §§ 2924.12(d), 2924.19(d)).

     Nevertheless, keep in mind that these provisions only apply to first-priority lienholders on residential properties where the borrower is a natural person/trust deed trustor and where the lender forecloses on 175 or more residential properties on an annual basis.

     If you want more detail on the Homeowner Bill of Rights, co-contributor Mike has written an article that can be accessed under the Lexis Nexis Real Estate Commentary online service or in a relatively recent edition of Matthew Bender’s California Real Estate Reporter--September or October 2012. (No plug, because he doesn’t get any royalties on this.)

Deeds Of Trust/Fee Clause Interpretation/Section 1717: Prevailing Lender Either Did Make Sufficient Demand For Payment Of Fees/Costs Or Demand Requirement Excused

 

$101,380 Fee Award Affirmed in Case Where $220,978.34 Monetary Judgment Was Entered Earlier.

     Defendant borrowers lost a judicial foreclosure proceeding, an equitable claim that was bifurcated and heard first by the trial court, to the tune of $220,978.34, plus attorney’s fees and costs based on fee clauses in the operative loan documents. Later, the lower court awarded prevailing plaintiff $101,380 out of a requested $102,490 in fees.

Above:  A foreclosure tale in Iowa in the early 1930s when "the bottom fell out of everything." Military police were on hand to keep farmers from preventing the auction.  1930-1940.  Library of Congress.

     On appeal in Randle v. Defilippis, Case No. A131538 (1st Dist., Div. 2 May 14, 2012) (unpublished), defendants argued that the fee clause required plaintiff to make a pre-suit demand before suing for claims inclusive of fee recovery. The appellate court rejected this argument on two grounds. First, the filing of the judicial foreclosure complaint was a sufficient demand under the circumstances. And, just as important, equitable circumstances govern interpretation of fees clauses, with the record showing that defendants ran up litigation costs based on numerous thin/meritless oppositions or motion work such that any demand would have been an idle act by plaintiff.

     BLOG UNDERVIEW--The second ground also comes into play in the Civil Code section 1717 context, with the Second District, Division 6 in Peak-Las Positas Partners v. Bollag, 172 Cal.App.4th 101 (2009) [reviewed in our March 16, 2009 post] determining that aggressive/tenacious litigation is a proper factor to be weighed in this context.

Allocation/Deeds Of Trust/Prevailing Party: Real Estate Seller Lienholders Did Prevail Ultimately In Judicial Foreclosure/Accounting Actions

 

$332,697.80 Fee Award Resulted From Fee Clauses In Trust Deed/Promissory Note For 5 Year Old-Plus Litigation Over Sellers’ Carryback Loan.

     Goradia v. Vega, Case No. B228128 (2d Dist., Div. 2 Mar. 5, 2012) (unpublished) again demonstrates that the “prevailing party” determination under Civil Code section 1717 is a pragmatic one, with trial and appellate courts focusing on who really won and whether they won convincingly.

     In this particular case, real estate sellers carried back a loan secured by a trust deed given by the buyer, which spawned a judicial foreclosure action by sellers after buyer allegedly defaulted. In the first trial, buyer won when the trial court concluded sellers did not prove a delinquency, a determination reversed because of an evidentiary error later found prejudicial by the appellate court in a prior appeal. Sellers then apparently commenced a nonjudicial foreclosure action against buyer, which caused buyer to file her own complaint for various contractual, tortious, and equitable claims (including an injunction request). Both cases were consolidated together. Eventually, a bench trial was held, with the lower court concluding that a $253,292.73 shortfall was owed on the loans and buyer was liable for the note principal amount of $228,000. The lower court also found judicial foreclosure was proper, and found against buyer on all causes of action but accounting and injunctive relief (which were rendered moot by the findings in sellers’ case). Based on a trust deed and promissory note containing attorney’s fees clauses, the lower court awarded $332,697.80 (out of a requested $382,697.80) in attorney’s fees after reducing the request by $50,000 for buyer’s successful effort to stop the nonjudicial process, but denying buyer’s request for a fee award totaling $298,185. Buyer then appealed the fee award in favor of sellers.

Lender Trust Deeds And Beneficiary Payoff Demand Statute: Court Of Appeal Rules On Fee Recovery By Lender Against Nonassuming Debtor And By Debtor For Winning Payoff Beneficiary Demand Claim

 

Second District, Division 8 Affirms Fee Recovery Addition to Note/Trust Deed in Lender’s Favor, But Finds Debtor Shows No Fee Entitlement Authority for Winning Payoff Demand Count.

     Here is a case for all of you banking/creditor attorneys arising out of an interesting lawsuit that produced somewhat splintered results. However, it demonstrates that fee recovery may depend on your status as a lender and on whether you can show a contractual/statutory basis for fee award entitlement in the first place.

     In Tong v. Rone, Case No. B210280 (2d Dist., Div. 8 June 29, 2010) (unpublished), plaintiff was a nonassuming debtor who won some damages from jurors for not receiving a beneficiary payoff demand as an entitled person from the lender under Civil Code section 2943(c)(1). However, the trial court determined many equitable issues that had the effect of holding that nonassuming debtor had a substantial indebtedness to pay, including the addition of attorney’s fees for the lender’s efforts in defending the trust deed security in bankruptcy and other proceedings. Nonassuming debtor moved for attorney’s fees, but was denied them when the lower court concluded there was no statutory basis for debtor to recoup them in the section 2943 win.

Civil Code Section 1717: Plaintiff Losing Forbearance Agreement Breach Lawsuit Hit With $48,877.50 Fees/Costs Award

Fourth District, Division 3 Affirms Lower Court Fees/Costs Award.

     Here is a sign of the times. Delinquent borrower enters into a Forbearance Agreement with lender. There is a mistaken tax refund paid to lender as part of the forbearance that gets disgorged, with borrower indicating that lender took a risk with respect to paying past tax delinquencies. Borrower sues and loses. Borrower is assessed with attorney’s fees under the loan’s promissory note. Borrower appeals. Result? Read on.

     These facts arose in Gharib v. Novastar Mortgage, Inc., Case No. G039602 (4^th Dist., Div. 3 Mar. 3, 2009) (unpublished). The Fourth District, Division 3 affirmed the fee award, in a 3-0 decision authored by Acting Presiding Justice Moore (who recently participated as a panel member on the California Supreme Court’s Tobacco II argument in San Francisco).

     The case involved de novo review of unambiguous note language allowing the Note Holder to obtain recovery of “costs and expenses in enforcing [the] Note.” Because Lender prevailed, the procedural status of the case was inconsequential. “Because Gharib initiated this lawsuit, its defense became part and parcel of all ‘costs and expenses in enforcing this Note.'” There is no distinction in the law between offensive and defensive attorney fees. (Shadoan v. World Savings & Loan Assn. (1990) 219 Cal.App.3d 97, 107.”

     BLOG UNDERVIEW—Borrower did argue that no fee recovery was allowable because there was no fees clause in the Forbearance Agreement. However, the appellate panel rejected this argument because it was so poorly developed.

Wrongful Foreclosure And Home Improvement Case: Fees Are Sustained And Remanded For Calculation In Wild Decision Out Of The Second District

Section 1717 Fees Are Affirmed As to Husband, Reversed and Remanded As to Wife; Home Improvement Statutory Fees Are Affirmed As to Both Husband and Wife.

     Talk about a wild one. If any of you readers believe that legal cases do not mimic real life, you need to read and stay tuned for our synopsis of the next case. Although we only give you the highlights, it certainly has a flavor for all of what goes on in life and also reinforces some principles in the attorney’s fees area of practice as well.

     The case is Kachlon v. Markowitz, Case No. B182816 (2d Dist., Div. 4 Nov. 17, 2008) (certified for partial publication, although we summarize published and unpublished parts of the opinion). It is 72 pages long, but we will try to cut to the chase.

     The "thickets of appeal" arose from two lawsuits involving the Markowitzes (Donald and Debra, husband and wife) and Kachlons (Mordechai and Monica, also husband and wife). Markowitzes purchased a residence from the Kachlons, with the Markowitzes executing a $53,000 note to the Kachlons secured as a second trust deed against the residence, with Mordechai Kachlon providing contractor services to the Markowitzes for various home improvement projects, and with attorney Debra Markowitz agreeing to provide legal services to Mordechai Kachlon before Debra became romantically involved with Mordechai. If you haven't guessed it already, the parties' dealings soured (except for possibly Debra and Mordechai, until litigation began). Mordechai sued the Markowitzes for breaching the home improvement contract and failing to repay personal loans, while the Markowitzes sued the Kachlons and foreclosure trustee for wrongfully-initiated nonjudicial foreclosure proceedings on the residence. Mordechai cross-complained against Debra for legal malpractice and breach of fiduciary duty.

     After both a jury trial on legal issues and court trial on equitable issues, the following happened: (1) the jury assessed damages of $100,000 for Donald Markowitz and $40,000 for Debra on the wrongful foreclosure claims against the Kachlons, plus $150,000 in punitive damages; (2) the jury awarded damages of $30,000 each to Donald and Debra against trustee Best Alliance; and (3) the court cancelled the note, ordered reconveyance of the second trust deed, ordered rescission of the Kachlons’ pending foreclosure efforts, and set aside the punitive damage award in favor of the Markowitzes.

     With respect to attorney’s fees, the court did this: (1) as against the Kachlons and Best Alliance (jointly and severally) under Civil Code section 1717, awarded Donald Markowitz $166,207.50 (1,108.05 hours at $150 per hour; even though Donald requested $201,622.50), plus an additional $14,572.20 for later litigation efforts, totaling $180,779.70; (2) as against the Kachlons and Best Alliance (jointly and severally) under section 1717, awarded Debra Markowitz $16,000 based on a contingency agreement (which was 40% of the $40,000 monetary award), even though she initially requested fees of $206,160 based on 687.2 hours at a requested rate of $300/hour and later scaled down the request to $93,372 based on 40% of 778 hours at $300/hour; (3) as against Mordechai under the Business and Professions Code section 7168 (the home improvement contract fee-shifting statute), awarded Donald Markowitz $116,452; and (4) as against Mordechai under section 7168, awarded Debra Markowitz $37,200.

     Appeals ensued, with the Second District, Division Four affirming most of the rulings but for one: it reversed the $16,000 fee award to Debra Markowitz under Civil Code section 1717 and remanded to recalculate the fees using the lodestar method described in PLCM Group, Inc. v. Drexler, 22 Cal.4^th 1084, 1095-1096 (2000).

     Here are the highlights of the appellate decision of this litigation “soap opera” in the context of the fees proceedings:

· The trust deed provisions, when construed under cases and principles involving Civil Code section 1717, easily allowed fee recovery against the Kachlons with respect to the declaratory relief and injunctive claims for note cancellation and wrongful foreclosure. See, e.g., Texas Commerce Bank v. Garamendi, 28 Cal.App.4^th 1234, 1246 (1994); Star Pacific Investments, Inc. v. Oro Hills Ranch, Inc., 121 Cal.App.3d 447, 463 (1981); Valley Bible Center v. Western Title Ins. Co., 138 Cal.App.3d 931, 932-933 (1983); Wilhite v. Callihan, 135 Cal.App.3d 295 (1982); Saucedo v. Mercury Sav. & Loan Assn., 111 Cal.App.3d 309 (1980); Huckell v. Matranga, 99 Cal.App.3d 471, 482 (1979).

· Trustee Best Alliance faced fee exposure to the Markowitzes because it consistently allied itself with the Kachlons on essential issues relevant to the note and trust deed, opting to not file (only belatedly) a declaration of nonmonetary status pursuant to Civil Code section 2924l until after the lower court’s determination of equitable issues. [HINT TO FORECLOSURE TRUSTEES—A more timely filing of this declaration might have made a difference here—“But by filing a declaration, at least prior to the trial court’s bifurcated determination of the equitable claims based on the note and deed of trust, Best Alliance would have timely articulated the position that it considered itself merely a nominal defendant on those claims with no interest in the outcome.”]

· Best Alliance was not immune from a fee award based on the operation of the litigation privilege under Civil Code section 47, because “[a] motion for attorney fees is not analogous to a tort claim [protected under section 47].”

· The lower court’s award of 40% of fees to Debra under section 1717—based on her contingency fee arrangement with her attorney—was erroneous. Rather, PLCM mandated use of the lodestar method in calculating fees under section 1717. This was the one issue requiring reversal and remand for a fee recalculation.

· Business and Professions Code section 7168 contains a mandatory fee-shifting provision requiring a trial court to award reasonable attorney’s fees to the prevailing party in an action between parties to a swimming pool construction contract. The fee award to Donald was justified and did not require allocation, because Donald’s attorney showed why the issues regarding the swimming pool were “inextricably intertwined” with other issues involving home improvements. In such instances, allocation is a matter for the trial court’s discretion—with the lower court finding no allocation justified in the Markowitz-Kalchon dispute as far as Donald was concerned. See, e.g., Thompson Pacific Construction, Inc. v. City of Sunnyvale, 155 Cal.App.4^th 525, 555 (2007); Akins v. Enterprise Rent-A-Car Co., 79 Cal.App.4^th 1127, 1133 (2005). However, Debra did not make a sufficient showing to justify an unapportioned award. The trial court’s discretion in allocating fees is very broad in nature and was sustained in this case.

BLOG BONUS COVERAGE—The Second District in Kachlon disagreed with the Fourth District, Division Two’s conclusion in Garretson v. Post, 156 Cal.App.4^th 1508 (2007) that nonjudicial foreclosure proceedings are protected by the absolute Civil Code section 47 litigation privilege. Instead, Kachlon held that the protection granted nonjudicial foreclosures is the qualified, common interest privilege of Civil Code section 47(c)(1), one requiring malice before immunity is compromised.

Settlement Stipulation Calling For Deed Of Trust Implicitly Bound Defaulting Party To Fees Clause Even Though Stipulation Had No Such Clause

Second District, Division Four So Holds in Interesting Settlement Stipulation Default Dispute.

     In past posts, we have explored some cases that hold the absence of a fees clause in a settlement stipulation prevents a creditor from obtaining a fee recovery after the debtor defaults. See our October 29, 2008 post on Stansbury and Execute Sports. However, as the next case demonstrates, general principles in this area are hard to elucidate, because the specific structure of a settlement may dictate a different result. That is exactly what occurred in USA Aisiqi Shoes, Inc. v. Huang, Case No. B204798 (2d Dist., Div. 4 Nov. 12, 2008) (unpublished).

     Huang involved a settlement agreement reached between an Employer and Employee by which Employee agreed to pay Employer a specified amount and execute a third trust deed on his residence as security for the monetary obligation. After Employee defaulted under the settlement (which did not have a fees clause or specify that the trust deed would contain such a provision), the trial court entered a stipulated judgment, including an award of $16,250 in attorney's fees against Employee, and had a court-appointed elisor execute a trust deed on Employee's behalf (which trust deed did contain a fees clause). While a nonjudicial foreclosure was proceeding, Employee paid off the settlement except for the attorney's fees award. Employee then quitclaimed the residence to his wife. Employer then moved for an award of fees in the amount of $41,616 for having to enforce the settlement agreement, with the trial court awarding fees of $40,326 against Employee. Employee properly appealed the postjudgment fee award, but lost upon review by the Second District when it affirmed the fee award in Employer's favor.

     Justice Willhite, on behalf of a 3-0 panel, did acknowledge that the settlement agreement was silent as to whether the trust deed would contain an attorney's fees clause. However, he resorted to custom and practice in resolving the issue: "By agreeing to secure his monetary obligation to [Employer] by executing a deed of trust, [Employee] implicitly agreed to be contractually bound to pay attorney fees in 'any action or proceeding purporting to affect the security [of the deed of trust] or the rights or powers of Beneficiary'" under the trust deed fee clause. (Slip Opn., at p. 7.) Beyond that, Employee's failure to contest the award of initial fees in the first settlement enforcement proceeding waived his right to challenge the inclusion of a fees provision in the trust deed.

     In summarizing why the result was sound, the appellate panel observed: "Unlike the typical situation involving a deed of trust which contains an attorney fee provision and a nonjudicial foreclosure results, the matter now before us is unique in that it involves a settlement agreement by which the parties agreed to execution of a deed of trust as security for the monetary obligation created by the settlement. The obligation to pay attorney fees arose out of the contract, i.e., the deed of trust, but not in the context of nonjudicial foreclosure proceedings. Rather, it occurred as an outgrowth of the stipulated judgment, and was based upon the trial court's continuing jurisdiction to enforce the settlement agreement." (Slip Opn., at p. 9.)

     BLOG OBSERVATION—We were very intrigued over the use of "elisor." So, we consulted the web, which indicates that it goes back to English law practice where the court appointed a person to execute the duties of a sheriff when the sheriff was disqualified on account of conflicts of interest or prejudice. In modern practice, it seems that this means a person appointed by the court to execute an act if the person ordered to perform the act refuses to do so. Co-contributor Marc Alexander recently had a case in Orange County Superior Court where a defendant, much like the one in Huang, was ordered to execute, as part of a settlement on the court record, certain reconveyances under penalty of having the clerk or an elisor execute for the recalcitrant defendant.

Deeds of Trust: Post-Foreclosure Lender Entitled To Recovery of Attorney’s Fees Under Trust Deed Provision

Fourth District, Division Two Finds Borrower’s Post-Foreclosure Unsuccessful Challenge Required Award of Fees to Foreclosing Lender.

     The next case should be of interest to lenders in these days where borrowers are “pulling out” all the stops after a foreclosure to regain possession of the foreclosed property. The lender in the next case was denied full attorney’s fees under Civil Code section 1717; but, on appeal, lender obtained a reversal and an opportunity to recover a substantial fee award from the foreclosed-out borrowers.

     Chandra Family Trust 851 v. Countrywide Home Loans, Case Nos. E042200 & E043578 (4^th Dist., Div. 2 Nov. 10, 2008) (unpublished) involves a recurrent set of facts in these precarious financial times that Americans are now facing. Borrowers defaulted, and Countrywide began foreclosure proceedings that were suspended when borrowers entered into a “repayment agreement” whose terms had to be strictly followed under penalty of Countrywide foreclosing without further notice. Because borrowers tried to pay via third party checks rather than by other agreed-upon modes of payment, Countrywide foreclosed without further notice. Borrowers then filed an action against Countrywide sounding in contract, tort, and statutory violations. Countrywide successfully moved for summary judgment on the ground that the third party check tender breached the repayment agreement so that the foreclosure was justified—a merits determination affirmed on appeal. However, the lower court did not award Countrywide requested fees of $175,683 under Civil Code section 1717, even though a pertinent trust deed provision provided that the lender would be entitled to “reasonable counsel fees” in “any action … purporting to affect” either “the security hereof” or “the rights or the powers of Beneficiary ….”

     Lender appealed the failure to award fees under section 1717 and prevailed.

     The issue on appeal was one for independent contractual interpretation given the lack of conflicting extrinsic evidence.

     The Fourth District, Division Two, in a 3-0 opinion by Justice Richli, observed that similarly worded trust deed provisions had been held to authorize the recovery of attorney’s fees in an action to enjoin a foreclosure. (See, e.g., Buck v. Barb, 147 Cal.App.3d 920, 924-925 (1983); Valley Bible Center v. Western Title Ins. Co., 138 Cal.App.3d 931, 932-933 (1983); Gudel v. Ellis, 200 Cal.App.2d 849, 853, 855-857 (1962); Johns v. Moore, 168 Cal.App.2d 709, 712, 714-715 (1959); see also Smith v. Krueger, 150 Cal.App.3d 752, 755-758 (1983) [declaratory relief action concerning beneficiary’s right to foreclose].) Because borrowers’ core position was that the foreclosure constituted a breach of the repayment agreement, this certainly concerned Countrywide’s entitlement to the benefit of the security of the trust deed by foreclosing or called into question Countrywide’s rights and powers under the trust deed as being limited by the repayment agreement.

     The upshot is that the borrowers’ action was within the scope of the trust deed fee provision, meaning the trial court erred by refusing to grant Countrywide’s fees under section 1717. The appellate court remanded for fixing by the lower court.

     BLOG OBSERVATION NO. 1—In an interesting footnote, the appellate court did note that borrowers never argued that, because the attorney’s fees were to be secured by a trust deed, an award of attorney’s fees would be tantamount to a deficiency judgment and barred under Code of Civil Procedure section 580b and/or 580d.

     BLOG OBSERVATION NO. 2—Contrast the result here with the different ending reached in Lenett v. World Savings Bank, a Second District unpublished decision reviewed in our May 12, 2008 post. There, the Second District refused to award fees under a trust deed provision to a bona fide purchaser at a nonjudicial foreclosure sale, where the BFP defeated a borrower’s post-foreclosure challenges after the property had sold to the BFP. Here, unlike Lenett, the lender was not a BFP and much closer to the trust deed than the BFP simply purchasing at the trustee’s sale—with the BFP not having the benefit of security and trust deed beneficiary rights.

Deed of Trust Fee Clause: Successor Borrower Assuming Loan Without Lender Consent Held Subject To Fee Award Exposure

Fourth District, Division Two Holds Successor Bound By Fee Clause in Loan Documents.

            In this interesting time of economic woes, there are many persons who “assume” loans from borrowers without lender consent.  Not only can this practice likely trigger “due on sale” clauses, it also may expose the successor borrower to exposure for attorney’s fees award under the fee clauses in the trust deeds.  The next decision proves that this result does indeed happen.

            Haynes v. First Federal Bank of Cal., Case No. E044500 (4^th Dist., Div. 2 Sept. 17, 2008) (unpublished) involved a home purchaser who “took over” a borrower’s loan with First Federal, but without the lender’s consent.  Plaintiff filed a lawsuit seeking to enjoin a foreclosure of the home.  In the complaint, plaintiff claimed First Federal had allowed him to assume the loan, he was the borrower under the trust deed, he had the right to cure the default, and First Federal had breached contractual obligations to him.  First Federal won summary judgment.  After the trial court determined that First Federal was the prevailing party, First Federal moved for and obtained an award of $141,173 in attorney’s fees and $4,027.80 in costs.  Plaintiff appealed.

            On appeal, plaintiff argued that he was a nonsignatory to the trust deed containing the fees clause such that First Federal could not be a prevailing party.

            Justice McKinster—writing for a 3-0 panel of the Fourth District, Division Two—dispatched this contention on appeal.  Plaintiff’s own allegations in the complaint were damning, because he took the position that he “stood in the shoes of the rightful borrower, with all the rights attendant thereto.”  Given this stance, he would have claimed to be the prevailing party had he won, which means he faced exposure under the fee clause as a nonsignatory.  (See Real Property Services Corp. v. City of Pasadena, 25 Cal.App.4^th 375, 382 (1994), also discussed in our September 14, 2008 post on Aluisi v. Kolkka.) 

            Plaintiff tried to shift course on appeal, arguing that his claim was really based on First Federal’s breach of an “oral agreement” to assume the loan—with no fee exposure based on the absence of a fees clause.  Unavailing, said the appellate panel.  It observed that this new theory would not stop the foreclosure.  Justice McKinster concluded: “Such a suit would have been useless and impractical.  We decline to attribute such a futile and frivolous intention to plaintiff’s underlying suit.  Substantively, he sought to enforce the original loan agreement and deed of trust terms, which did contain the attorney fees clause.” 

End result:  the fee award was affirmed and First Federal was awarded costs on appeal (which likely means an additional fee award for the bank’s win at the appellate level).

Judicial Foreclosure Actions—Attorney’s Fees Are Added to the Loan Indebtedness for Purposes of Calculating Deficiency and Fee Exposure

Second District Rejects Borrower’s Argument That Contractual Fees Incurred by Lender Are Excluded from Deficiency Calculation.

            In this time of subprime lending fallout and rising foreclosures, judicial foreclosures are making a comeback, as they typically do when market values plunge.  Lenders on commercial and investment residential projects frequently opt to pursue a deficiency if the loan indebtedness is substantially higher than the market value of the underlying real estate collateral.  Are attorney’s fees awardable after a fair value hearing that results in a determination that the market value of the property was higher than the underlying loan indebtedness but where a deficiency existed when attorney’s fees were added to the loan debt total?  The next case we consider answers this question with a resounding “yes.”

            First, a short primer on judicial foreclosure actions.  Except where the lender opts for a nonjudicial foreclosure (trustee’s sale) or where a purchase money loan in involved, a creditor secured by California real estate can bring a judicial foreclosure action to have the court declare the loan in default, order the real estate sold at a sheriff’s sale to satisfy the loan balance, and then enter a deficiency judgment after sale (with the deficiency being the differential between the fair market value of the property and the loan indebtedness).  The focal point of this post is whether attorney’s fees are added to the loan indebtedness for purposes of calculating the ultimate “deficiency.”

            In First Federal Bank of California v. Blanchard, Case No. B136268 (2d Dist., Div. 7 Oct. 3, 2001) (unpublished), a Second District, Division Seven panel concluded that the fees are added to the loan indebtedness as part of the deficiency calculus. 

            Borrower defaulted on a refinance loan on an investment property located in Venice, California.  Both the note and trust deed had attorney’s fees clauses, with the trust deed expressly providing that attorney’s fees incurred would become additional secured indebtedness.  Lender obtained a foreclosure decree and purchased the property by a partial credit bid of $560,000 (even though the loan indebtedness was well over $705,000 about a year earlier).  At the fair value hearing, the judge accepted Borrower’s “high” market appraisal of $815,000, indicating that the Lenders’ attorney’s fees and costs would be added to the loan arrearage to determine if there was a deficiency.  After two more years of legal maneuvering and a redemption by Borrower, Lender was eventually awarded $151,296.90 in fees and Borrower was awarded a $12,791.11 offset.  The court then entered a final judgment in Lender’s favor of $81,477.51, consisting of the difference between the foreclosure sale loan arrearage ($757,971.72) plus attorney’s fees ($151,296.90) less the $12,791.11 offset and the $815,000 fair value credit. 

            Borrower appealed, and lost.

            The Blanchard panel rejected Borrower’s main argument that attorney’s fees and costs are excluded from the debt for purposes of calculating the deficiency.   Code of Civil Procedure section 726(b) provides that the deficiency is “the amount by which the amount of the indebtedness with interest and costs of levy and sale and of action exceeds the fair value of the real property …sold as of the date of sale.”  The Court of Appeal held that “[t]he statutory inclusion of “costs … of action” with the amount of the indebtedness, we conclude, necessarily refers to the costs of the lawsuit that is a requisite part of the judicial foreclosure process.”  The justices also found that this result was proper under Civil Code section 1717 and the trust deed “additional indebtedness” provision, with any other conclusion tantamount “to re-writing both the statute and the parties’ written agreements.”  The panel found no fault with the arithmetic of the lower court, finding that the loan indebtedness (inclusive of the fee award) outstripped the fair value determination.

            Borrower’s final argument was that the trial court failed to make into account “equitable considerations” that should have warranted a “no fee” award.  The appellate court did not find the pleas to equity persuasive in nature.  Even though Borrower argued that it was unconscionable to allow Lender a possible “double recovery” in the event the debtor did not contest a low appraisal at the fair value hearing stage, the Second District panel found that the judicial foreclosure protections—the fair value offset and redemption rights—more than compensate for any theoretical fairness.  (Also, this argument seemed somewhat misplaced given that Borrower won the fair value appraisal battle, showing the protections indeed work out in the debtor’s favor in the right circumstances.)  Borrower further argued that Lender’s failure to accept a deed in lieu of foreclosure at a much earlier junction of the litigation meant that the bank could have achieved its objectives without the expenditure of substantial attorney’s fees.  Maybe, said the appellate court, but Lender “had the statutory right to seek a deficiency, and it is only with the benefit of hindsight that its choice of remedies may appear debatable.”  Borrower finally contended that Lender could continue to add attorney’s fees indefinitely after the sale without penalty.  The appellate court nixed this potential harm by noting “[t]he debtor is fully protected by the requirement that fees must be reasonable, and are fixed by the court.”

            Although this unpublished decision is not citable, its reasoning may aid debtors and creditors in evaluating the risks and expenses in engaging in a protracted judicial foreclosure action.  We might add that Blanchard was authored by Justice Paul Boland, a fine jurist who unexpectedly passed away after a sudden illness in fall of last year.

POST-FORECLOSURE LENDERS BEWARE: TRUST DEED FEE PROVISIONS MAY NOT GET YOU ATTORNEYS FEES.

Unpublished Second District Decision Denies Attorney’s Fees to Successful Lender in Wrongful Foreclosure Suit Where Trust Deed Provisions Are Narrowly Crafted.

            Lenders beware!  Even in the wake of subprime fallout, do not count on your trust deed provisions regarding attorney’s fees to guarantee success even where you prevail in wrongful foreclosure actions against desperate borrowers.   An unpublished decision from the Second District Court of Appeal confirms this lesson with great clarity.

            In Lenett v. World Savings Bank, FSB, Case No. B199292 (2d Dist., Div. 4 May 12, 2008), a unanimous panel of the Second District Court of Appeal affirmed the denial of a fee motion to a lender where a borrower lost a wrongful foreclosure action after the sale to a bona fide purchaser in a nonjudicial foreclosure proceeding—a common occurrence in these days of subprime foreclosures.  Lender appealed, relying on several standard attorney’s fees provisions in the trust deed.

            Guess what?  On appeal, the borrower won; and, not surprisingly.

            The Court of Appeal relied on a literal interpretation of trust deed provisions, obviously drafted by lenders, which did not apply under the circumstances.  The trust deed provisions concerned fee allocations where the borrower impaired the lender’s rights in the property while actually secured or failed to pay property taxes/insurance premiums for the property before the loan was foreclosed out. 

            The appellate court would have none of it.  These provisions, it reasoned, were narrow and only concerned rights in the property before it was foreclosed and not owned by the successful foreclosure bidder (such as the bona fide purchaser in this case).  Because the fee provisions were much more tightly drawn that those encountered in other cases, lender lost—the trust deed provisions did not cover “[a]ttorney fees incurred in defending an action for wrongful foreclosure after the sale has been completed [that] do not fall within the parties’ agreement.”  (Slip Opn. at p. 7.)

            So, lenders, do not count on standard trust deed provisions allowing recoupment of fees in wrongful foreclosure actions. Better ask your counsel to review the deed fee provisions closely before getting your hopes up prematurely (even before addressing whether the borrower has the assets to make the fee chase worthwhile in the first place).