By Steven K. Linkon of The Wolf Firm (Printed in USFNCOMMERCIAL/MULTI-FAMILY SERVICING BULLETIN April 27, 1998)
How Much Is Enough to Cure a "Notice of Default"
and Avoid the Foreclosure Sale?
By Steven K. Linkon of The Wolf Firm Under California law, the "Notice of Default (NOD)" commences a private sale
of real property securing a loan. Before a foreclosure sale is actually conducted, the
borrower may "cure" the default and thereby rescind the NOD. A dispute
concerning the amount necessary to cure the NOD can result in the borrower obtaining an
injunction against any foreclosure sale, potentially delaying such a sale for months or
years. It may also give rise to a claim for damages arising out of a wrongful refusal to
accept a tender of "cure" for the NOD, and possibly a wrongful foreclosure
lawsuit. This article will discuss a strategy to avoid the extra legal fees and costs
necessarily caused by this predicament (while your state may not utilize these exact
procedures, the issues presented will help you avoid disputes under a variety of
foreclosure scenarios).
California real property law provides an efficient process for extra-judicial foreclosure of a Deed of Trust (a Deed of Trust is in effect a mortgage with a power of sale), which takes approximately four months from start to finish. California Civil Code ("CC") §§2924-2924(k). This statute provides a comprehensive framework for the regulation of non-judicial foreclosure sales.
The statutory procedure may be summarized as follows:
Upon default by the borrower, the lender may declare a default to proceed with a non-judicial foreclosure sale. (CCC§2924). The foreclosure process is commenced by the recording of a Notice of Default and Election to Sell by the Trustee (the "NOD"). After the NOD, the Trustee must wait three calendar months before proceeding with the sale. After the three month period has elapsed, the Notice of Sale must be published and posted and mailed 20 days before the sale and recorded 14 days before the sale (CC §2924f).
During the foreclosure process, the borrower is given the opportunity to cure the default and avoid the loss of the property through reinstatement; by making the delinquent payments and thereby reinstating the terms of the loan. This right continues until five business days prior to the date of the sale, including any postponement. (CC§2924c).
Naturally, before the borrower can cure the default, he needs to have a precise amount for doing so. Earlier case law held that the Notice of Default must specifically state the default on which a beneficiary of a Deed of Trust is relying when initiating foreclosure. Anderson v. Heart Federal Savings ("Heart"), 208 Cal. App. 3d 202, 256 Cal. Rptr. 180, 186-187 (1989).
Even before Heart, lenders understood that CC §2924 required that Notice of Default to list all defaults for which the property might later be sold at foreclosure. To cover defaults that might occur after the recording of the Notice of Default (i.e., missed payments), lenders listed various possible ancillary defaults (such as the failure to pay taxes or failure to keep a senior lien current) and appended the word "if any" to them. Heart disapproved of this practice.
To illustrate the problem, assume the loan is delinquent by two months payments. A Notice of Default which specifies that the reinstatement amount is two months’ payments is filed. The borrower makes no further payments within the ensuing 120 days prior to the foreclosure sale. The borrower also skips four monthly payments to a senior lienholder and fails to pay real property taxes, and the lender advances these monies in order to protect its security interest. Six days prior to the foreclosure sale, the borrower tenders the two monthly payments referenced in the Notice of Default and insists that the NOD be rescinded, thereby forcing the lender to start the process from the beginning by recording the new NOD on account of the post-NOD delinquencies.
In 1990, the California legislature made important revisions to CC§2924 and §2924c, with the intent to supersede the holding in Heart and to address the issues it presented.
Under amended CC §2924, the Notice of Default is no longer required to (and no longer purports to) give the borrower/trustor a list of all specific defaults for which the property might later be sold at auction. Under the amended statute and the revised wording of the statutory form of the Notice of Default, the property may be sold for a default listed on the Notice of Default or for another obligation that is in default as of the date of the sale. The other obligation would include subsequent monthly note payments, a senior loan payment, hazard insurance or property taxes coming due after the Notice of Default is recorded.
The "liberation" of the NOD is specificity concerning the amount in default could lead to other problems. Take the example above and assume that the Note provides for the acceleration of the entire debt upon default. Then suppose that instead of listing a specific default (not recommended), the NOD recites the entire loan balance as the amount necessary to reinstate.
Listing the entire amount of the indebtedness, as opposed to a specific amount in default, does not invalidate the NOD for two reasons. First, the statute specifically states that the "failure to include an actually known default should not invalidate the Notice of Sale (by implication the Notice of Default)… ." Further, the statute provides that there is a rebuttable presumption that the beneficiary actually knew of all unpaid loan payments on the obligation. Thus, the statute allows the lender to collect the unstated delinquent monthly payments as a condition of reinstatement. However, other than missed loan payments, there is no presumption of the borrower’s knowledge of other defaults in existence prior to recordation of the NOD (i.e. pre-NOD defaults). Therefore, the failure to specifically include the other pre-NOD defaults n the NOD should prevent the lender from insisting upon their repayment as a condition to reinstate the loan.
If the precise defaults are not fully listed in the NOD, and post-NOD defaults have occurred, how does the borrower know the precise amount necessary to cure the NOD?
The required wording of the first six paragraphs of the Notice of Default is specified in CC §2924. Specifically, the statutory notice language provides that upon the borrower’s written request, the lender must provide a written itemization of the entire amount that the borrower must pay in order to reinstate the loan. With the itemization, the borrower is in a position to tender the amount necessary to cure the default and cause the NOD to be rescinded.
Concerning partial payments made during the reinstatement period, these ordinarily do not impair the ability to foreclose or extend the reinstatement period. However, it is not wise to accept partial payment unless the borrower is clearly advised by letter that partial payments do not waive the default. Otherwise, acceptance of partial payment leaves a creditor open to a lawsuit based on the borrower’s contention that he would not have paid the monies, but for the lender’s agreement to delay or stop the foreclosure sale.
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.
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