Timothy M. Ryan
of The Wolf Firm
Timothy M. Ryan
of The Wolf Firm (Printed in Summer of 1998 SCMBA Newsletter)
CONSIDER THE FOLLOWING SCENARIO:
The First Trust Deed Holder ("Lender")has just issued a Notice of Default, the borrowers are three payments of principal and interest behind and the Lender has advanced one tax payment for a total reinstatement balance of $3,200 (excluding legal and foreclosure fees of course)... then in the mail appears the dreaded $2,000 partial payment.
What to do? Does the lender simply accept the payment, apply it to the borrowers' account and continue with the foreclosure? Does the lender accept the payment and apply it to the famous (infamous) suspense account? Or instead, does the Lender return the $2,000 payment to the borrower cringing at the thought of the lost cash flow of returned payments.
Before the Lender makes its decision on accepting or rejecting the incomplete payment (referred to throughout as "partial payments"), a brief discussion of California law on accepting partial payments after initiation of the foreclosure process ("acceleration") is in order. There is no bright line test in California as to the impact of accepting partial payments after initiation of foreclosure; instead, the cases are fact driven. The most conservative conclusion about partial payments which can be drawn from relevant case law is that acceptance of a "small" partial payment without egregious actions on the part of the foreclosing party does not waive a party's right to foreclose.
Key California cases on accepting partial payments post-default, are listed below as well as how the Lender's decision in the above scenerio could be guided by those cases.
THE CASES:
An early and instructive case dealing with acceptance of payments after initiation of the foreclosure process is Harris v. Whittier Building and Loan Association (1936) 18 Cal.App.2d 260. In this case, $60.00 was paid two days after the notice of breach and election to sell was signed, but five days before said notice was recorded. The borrowers were in default for four months, but the opinion does not state amount of the default.
The borrower contended that the lender's acceptance of a $60 payment waived the right of the lender to declare the default. The court held that "this claim, under the facts of this case, is without merit, because it has been repeatedly held that the mere acceptance of interest or a small amount on the principal after the notice of forfeiture is given will not of itself revive the contract, because one may accept payment of part of his indebtedness without thereby waiving his right to receive the balance."
In Sellman v. Crosby, (1937) 20 Cal.App.2d 562, the next case of this genre, the borrower was in default for 11 monthly payments. He agreed to make the late payments from the proceeds to be received from a pending lawsuit, (creative reinstatement plans are by no means new), and made partial payments in the interim. He failed to remit the proceeds of any award to the lender. The court found that the lender, in crediting each post-acceleration payment to the installment longest past due, considered the loan to be in default at all times. The borrower contended that acceptance of installments after election to declare the whole sum due (notice of default in this case) constituted a waiver of default and of all resulting rights under the acceleration clause.
The court, relying on Harris v. Whittier Building & Loan Assn., supra, stated: "Upon principal, we are of the opinion that a creditor, at least in the absence of an express agreement to the contrary, may accept partial payments on the amount due without waiving the default as to the balance and without affecting his rights under the acceleration clause." In other words, no implied waiver results from the mere acceptance of partial payments.
In the first reported case to find that the lender could not foreclose due to acceptance of partial payments, Altman v. McCollum, 107 Cal.App.2d Supp. 847, the court was clearly punishing a lender whose conduct was "so shocking to the conscience that no court should permit [the lender] to achieve the goal that [it] seeks in this case." The borrowers of a home loan failed to pay an installment of taxes and the principal for the month of March. The lender never notified them of this delinquency, and the borrowers were not aware of the notice of default until after the reinstatement period expired. During the "secret" foreclosure process the borrowers continued to pay principal payments for three months. The lender accepted and credited these payments and even corresponded with the borrowers without mentioning the pending foreclosure.
The Altman court found an "equitable estoppel" in the lender's actions. Equitable estoppel is invoked when a party is silent in the face of a duty to speak. The court expressly found that there was no waiver, or "voluntary relinquishment of a known right," but that the lender was equitably estopped from continuing with the foreclosure sale.
The Altman court distinguished their scenario from case precedent because the lender was accepting the full monthly payments (not merely small payments) and because the amount of the default was minuscule in comparison to the equity that the lender was attempting to recover with the "undisclosed" foreclosure sale.
The next case to find a waiver by acceptance of a partial payment was Bisno v. Sax, (1959) 175 Cal.App.2d 714, 725. In Bisno, the court found that there was a waiver of the ability to accelerate the note, but as in Altman, supra, equity was heavily on the side of the borrower, and the Lender appeared to be hypertechnically attempting to invoke its acceleration clause in order to obtain $23,000 in equity at a firesale price, (or force an early complete payoff).
In Bisno, a default of over $2,500 was completely cured prior to the foreclosure sale, with two exceptions: (1) attorney's fees of $500, which were not listed or even alluded to in the Notice of Default; and (2) one post-acceleration monthly payment was made late.
As to the attorney's fees, the court found explicitly that the trustee did not insist upon payment of the attorney fees as a condition to reinstatement of the loan. As to the late payment, the court first found that time was not of the essence in the note and deed of trust, then relied on equity to find that (citing the New York case of Trowbridge v. Malex Realty Corp., [no date in cite] 198 App.Div. 656 191 N.Y.S. 97): "There can be no doubt but that the clause for the payment of such interest was 'for the benefit of the security and its complete preservation.' And where it so clearly appears, as it does in the case at bar, that the plaintiff has been fully indemnified, equity should relieve the defendant from a mere technical default in the payment of interest on the prior mortgage."
The court concluded that the facts of the case warranted and required that appellants
be relieved of the effect of the acceleration declared by the beneficiary and trustee. The
court did not conclude that the foreclosure sale amounted to a forfeiture, but the concept
of the law abhorring a forfeiture was weaved throughout the case.
GENERAL PRINCIPALS:
From the above discussed cases, there is enough equitable and conditional language for a court to rationalize finding a waiver or equitable estoppel in the face of aggressive or perceived bad faith tactics by a lender in accepting partial payments and continuing to foreclosure. The cases appear however, to provide ample guidance on how to accept partial payments without jeopardizing a lender's right to foreclose.
The rules derived from the relevant cases are:
(1) acceptance of a partial payment which is small in relation to the total amount due and owing will not by itself invoke waiver or equitable estoppel;
(2) if there is a clear, express agreement that the bank is waiving its acceleration rights, or its foreclosure sale remedy, by accepting a partial payment, then waiver will occur;
(3) if payments are accepted, they should be applied to the oldest payments due, thus internal records will indicate that the lender is not waiving its rights to a series of late payments;
(4) actions which appear to conceal a malevolent motive, or concealed attempts to "steal equity" may invoke the court's power to do equity;
(5) attempting to foreclose on "hypertechnical" defaults, (e.g. accepting a partial payment which is a significant portion of the default without a responding nonwaiver letter, foreclosing due to a late payment, or small late charges, etc.), may invoke the court's equitable jurisdiction.
THE DECISION:
While the rules derived from partial payment cases are clear, can a lender or servicer integrate them into its servicing procedures without (essentially) buying lawsuits which outweigh the benefits of additional partial payment cashflow?
After a decision has been made that the benefit of receiving additional cash flow of partial payments outweighs the possible increase in defense costs for wrongful foreclosure lawsuits, guidelines and staff training must be addressed on the following issues:
(1) How much can the lender accept without being in danger of waiving foreclosure remedies;
(2) What type of letter, or form agreement is sent to the borrower upon acceptance of a partial payment to indicate nonwaiver of foreclosure remedies;
(3) Who fields questions from and communicates with borrowers from whom partial payments have been accepted (agent, supervisor, manager, legal department) and how does the lender ensure that there are no perceived oral loan modifications, (standard follow up letters and form agreements);
(4) Accounting for partial payments, applying them to the oldest payment due, avoiding use of suspense accounts;
(5) At what level is the decision to accept or reject a partial payment made, (agent, supervisor, manager, legal department);
As to the decision, in the opening fictional scenario, only one thing is clear, accepting a partial payment and placing it in a "suspense account," does not protect the lender from anything, and actually may force the lender to refund the suspended funds after the foreclosure sale.
As to use of a suspense account for partial payments not providing any protection: In the cases cited above, one of the factors in determining whether the lender waived the acceleration clause was how the lender accounted for the payments. The court in Selman v. Cosby, supra, concluded that applying a late payment to the oldest payment due was consistent with the lender not waiving its right to accelerate and foreclose. An argument can be made that placing partial payments in a suspense account is the reverse, waiving the default from the older payments and starting fresh.
As to post-foreclosure refunds of payments placed in suspense:because "suspended" funds are likely not considered in determining the amount due and owing at the time of foreclosure sale, in light of California's anti-deficiency laws, an argument can be made that a lender has no right to retain the suspended funds after the foreclosure sale, (i.e. the lender has no existing debt which the suspensed funds may be set off against).
CONCLUSION
It is likely that a lender, after reviewing its internal structure, the training issues involved, and the potential for additional wrongful foreclosure litigation based on waiver and modification arguments, may decide that the best policy on post-acceleration partial payments is to reject them. On the other hand, the lender who cringes at the thought of returning yet another post-acceleration partial payment, (or the lender who mistakenly accepts a partial payment and continues to foreclosure), has a substantial body of California case law on its side.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
Copyright- All rights reserved
The Wolf Firm
A Professional Law Corporation
18 Corporate Plaza Drive
Newport Beach, California 92660
(949) 720-9200 Phone
(949) 720-9250 Fax
E-Mail us at Alan_Wolf@wolffirm.com
| Home | What's New | Firm Profile | Firm Resume | Firm Publications |
| Library | Bookstore | Missing Assignment Database | Mortgage Banking Training |
| Employment | Guestbook | Industry News | Industry Calendar | Search |
| Forms | Photo Albums | Miscellaneous | Disclaimer | Contact us! |
Last Revised On
© 1996-2001 The Wolf Firm. All rights reserved.
