Reinstating A Loan Modification Agreement After Default

The recent decision of Taniguchi v. Restoration Homes LLC, is a case of first impression (meaning the issue has not been previously decided by a California court of appeal) regarding a very typical problem, i.e., what amount must a defaulting borrower of a loan modification agreement pay to reinstate the modification agreement?  

The amount of the missed loan modification payments (plus fees and expenses) as argued by the borrowers, or the missed loan modification payments (plus fees and expenses) and the amount of the earlier default on the original loan as argued by the lender?

The appellate court found in favor of the borrowers who missed four monthly payments on a mortgage loan that had been modified after an earlier default, and decided that the borrowers could reinstate the loan modification under California Civil Code §§ 2924c and 2953 by paying the four missed payments, plus fees and expenses.

If all or part of the principal secured by a mortgage or deed of trust becomes due as the result of the borrower’s default in paying interest or installments of principal, section 2924c allows the borrower to cure the default, reinstate the loan, and avoid foreclosure by paying the amount in default, plus specified fees and expenses. 

Under section 2953, the right of reinstatement cannot be waived in any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property.

The borrowers in the appeal missed four monthly payments on a mortgage loan that had been modified after an earlier default. The modification deferred certain amounts due on the original loan, including principal, and provided that any default would allow the lender to void the modification and enforce the original loan terms. 

The borrowers argued that under sections 2924c and 2953, they can reinstate the modified loan by paying the four missed payments, plus fees and expenses. 

The lender argued that section 2953 does not apply to the modified loan, and that under section 2924c the borrowers have the right to reinstate the original loan by paying the amount of the earlier default on the original loan, which had been deferred under the modification to the end of the loan term, as well as paying the missed modified monthly payments that caused the default on the modified loan. 

The appellate court concluded that the borrowers had the better argument.

In 2006, Charles and Marie Louise Taniguchi (the Taniguchis) obtained a 30-year home loan of $510,500, secured by a deed of trust. 

By early 2008, the Taniguchis were having difficulty making the required loan payments, and in 2009 they agreed to a “Balloon Loan Modification Agreement” (Modification) that adjusted the principal amount, eliminated an adjustable interest rate rider, reduced the interest rate and monthly payments, and deferred until the maturity of the loan approximately $116,000 of indebtedness, including accrued and unpaid interest and principal, fees, and foreclosure expenses. 

Under the Modification, the Taniguchis’ loan matured in 10 years, at which point the Taniguchis would need to refinance or make a balloon payment of about $531,000, plus any additional charges. 

The Modification provided that failure to make modified payments as scheduled would be an event of default, and that in the event of a default the Modification would be null and void at the lender’s option, and the lender would have the right to enforce the loan and associated agreements according to the original terms. 

The Modification left unchanged certain provisions of the original loan documents, including acceleration clauses authorizing the lender to require immediate payment by a defaulting borrower of the full amount of principal not yet paid and all interest owed on that amount, and to invoke the power of sale. 

The Taniguchis defaulted on the modified loan, which was eventually assigned to Restoration Homes, LLC (Restoration Homes). Restoration Homes caused a notice of default to be recorded in 2013. 

The Taniguchis were informed that to reinstate their account and avoid foreclosure, they would be required to pay their four missed monthly payments and the associated late charges specified in the modified loan (totaling about $11,000) and $4,500 in foreclosure fees and costs, plus all the sums that had previously been deferred under the Modification. By then, the deferred amount was over $120,000 in principal, interest and charges. 

The Taniguchis took exception to the amount Restoration Homes required for reinstatement and they filed suit in superior court.

Shortly after that, Restoration Homes caused a notice of trustee’s sale to be recorded, which led the Taniguchis to file a second suit and seek a temporary restraining order to prevent the foreclosure sale. 

In their complaint, the Taniguchis alleged four causes of action against Restoration Homes for: 

1.  violation of section 2924c by demanding excessive amounts to reinstate the loan, 

2.  unfair competition, 

3.  breach of contract, and 

4.  breach of the covenant of good faith and fair dealing. 

The trial court granted Restoration Homes’ motion for summary motion, and entered judgment for Restoration Homes.

Like the Taniguchis’ loan documents, the typical form promissory note and deed of trust provide that upon any default in the trustor’s obligations, the beneficiary may elect to accelerate the payment of all sums of principal and interest and commence foreclosure proceedings. 

The statutory right of reinstatement, set forth in section 2924c, effectively modifies the contract provision which permits acceleration upon default. 

Section 2924c, subdivision (a)(1) provides that when a mortgage loan is accelerated as a result of a borrower’s default, the borrower can reinstate the loan by paying all amounts due, other than the portion of principal as would not then be due had no default occurred. That is, the borrower can cure the default and reinstate the loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance. 

The mortgage lender must inform the borrower of the correct amount due to reinstate the loan.  

California courts have long recognized the public policy behind the right to reinstatement. A Court of Appeal in 1949 observed that Section 2924c of the Civil Code was first enacted in 1933, during a time of financial stress and depression throughout the United States. The purpose of the legislation was to save equities in homes, in many instances built up through years of monthly payments. 

Section 2953 limits the ability of a borrower to waive the right of reinstatement: Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privileges conferred upon him by Sections 2924, 2924b, 2924c of the Civil Code or by Sections 580a or 726 of the Code of Civil Procedure shall be void and of no effect. 

The Taniguchis contended that under section 2924c, they had the right to avoid foreclosure and reinstate their modified loan by making up the missed modified payments, plus costs and fees. They argued that the Modification is an agreement made at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, and therefore cannot include any waiver of the right of reinstatement.

The California Legislature did not define the phrase “at the time of or in connection with the making of or renewing of any loan secured by a deed of trust” for purposes of section 2953, and there is no clear definition in the case law. Whether a loan that has been modified by the parties as part of a workout agreement is considered ‘made’ or ‘renewed’ is unclear. 

The appellate court agreed with the Taniguchis that the Modification can be understood as being in connection with the making of a loan secured by a deed of trust, because amounts were added to the existing loan, specifically the accrued and unpaid interest. 

The lender argued that the Modification simply altered the terms under which the original loan was made. 

However, as a general matter, extensions of loans and renewals alike are contractual revisions of the terms of the obligation, the effect of which is to alter the time and terms of payments becoming due. After the extension or renewal, the debtor is not in breach or default so long as the amended or renewed terms of the indebtedness are performed. 

In sum, the appellate court concluded that for purposes of section 2953, the Taniguchis’ Modification is appropriately viewed as the making or renewal of a loan secured by a deed of trust. It is thus subject to the anti-waiver provisions of section 2953. 

Section 2924c gives the Taniguchis the opportunity to cure their precipitating default (that is, the missed modified monthly payments) by making up those missed payments and paying the associated late charges and fees, and in that way to avoid the consequences of default on the modified loan. 

LESSONS:

1.                 If there is a default in payment of a loan modification agreement, the modification can be reinstated by paying the missed payments, plus fees and expenses.

2.                 As a general matter, extensions of loans and renewals alike are contractual revisions of the terms of the obligation, the effect of which is to alter the time and terms of payments becoming due.

Deed of Trust Must Sufficiently Describe the Property

In the recent case of MTC Financial, Inc. v. California Department of Tax and Fee Administration, the California Appellate Court confirmed the need for accuracy and sufficiency of the legal description of the property in a deed of trust in order for it to be enforceable.

In the underlying case, proceeds remaining after a home foreclosure sale were deposited with the trial court due to competing claims to the proceeds. A primary dispute between the claimants was whether a first in time deed of trust sufficiently described the foreclosed property. Among other things, the trial court found the description was insufficient, and the trust deed was therefore void. It entered judgment in favor of the next in time state tax lien. Finding no error in the result of the judgment, the Appellate Court affirmed. 

In 2017, a foreclosure sale for the home (the property) of Kamini and Anand Chopra (collectively, the Chopras) was conducted by MTC Financial Inc. (the trustee). Following an initial distribution of the sale proceeds, the trustee determined there was a conflict between outstanding claims to the remaining proceeds (the surplus fund). The trustee deposited the surplus fund with the trial court so it could determine the claimants’ respective priorities pursuant to California Civil Code section 2924j, subdivisions (c) and (d).

Among the claimants was appellant Rajindar Mehta, the grantee of a 2004 deed of trust signed by the Chopras (the trust deed). Mehta claimed his trust deed was senior in priority because it was created first in time relative to the outstanding claims to the fund. 

Respondent, the California Department of Tax and Fee Administration (the Tax Department), disputed Metha’s claim and contended that its 2008 tax lien against Kamini Chopra had senior priority as next in time because, among other things, the trust 

deed was void and unenforceable based upon its insufficient legal description of the property.

The trust deed’s legal description of the property contained multiple points of inaccuracy or ambiguity: 

(1) the lot number of “68” was incorrect (it should have been “88”); 

(2) the book page number of “810-11” was incorrect (it should have been “1-11”); 

(3) the city of the property was not identified; and 

(4) regarding the county where the property is located, the description only reads “said county,” although a preceding information field does state the correct “Orange County.” 

At the same time, the trust deed referenced an assessor’s parcel number, which matched the number identified for the property according to attachments to the trustee’s petition which was filed with the deposit of the surplus fund.

The attachments included two copies of a purported assessor’s map denoting information that could correspond to the trust deed’s legal description of the property. For example, the map purports to depict a “Tract No. 9268,” which is the tract described in the trust deed. 

Ambiguously, however, both numbers “68” and “88” (respectively, the incorrect lot number listed in the trust deed and the true lot number that should have been listed) appear at different locations on the map. Neither Mehta nor the Tax Department discussed this map in their briefs, either at the trial court level or on the appeal. 

An assessor’s parcel number, also referred to as an APN, is a numerical identifier associated with a particular piece of property for property tax assessment purposes.

After conducting two hearings, the trial court found in favor of the Tax Department.  Among other things, the court determined the Tax Department’s tax lien claim to have priority over Mehta’s claim because the trust deed contained a fatally defective legal description of the property and Mehta had failed to produce evidence of actually lending money to the Chopras, as the trust deed purported.

The order also stated: As for the assessor’s parcel number appearing on the face of the trust deed, there is no evidence that such number is the correct assessor’s parcel number assigned by the Orange County Assessor to the subject real property, especially given the other erroneous information appearing in the deed of trust. 

A judgment for the Tax Department was entered and was timely appealed by Mehta.   On appeal, Mehta argued the trial court erred in finding the trust deed void. Mehta, as the appellant, had the burden of demonstrating the trial court erred. 

Well-established principles for determining the relative priorities of property interests were implicated. California observes a “first in time, first in right” system of lien priorities where, generally, competing enforceable interests have priority among themselves according to the time of their creation. (Civil Code § 2897.) 

As to determining the enforceability of such interests, a trust deed must sufficiently describe the property securing it to be enforceable.  To be sufficient, the description must be such that the land can be identified or located on the ground by use of the description. A description that is equally applicable to two different parcels is fatally defective.

Mehta contended his trust deed sufficiently described the property because of the parcel number, address, and trustor names contained in it. 

The Appellate Court disagreed. First, it noted that the trustor names (the Chopras) and address contained in the trust deed do not provide grounds for a sufficient property description in that case. The names have no logical relationship to whether the property is sufficiently described and the subject address is only listed as the address of the trustors (not the property). Accordingly, the only potentially valid basis for finding the property description to be sufficient, of the three offered by Mehta, is the parcel number contained in the trust deed. 

While the Appellate Court found no reason to disagree that a parcel number could theoretically satisfy the law’s requirement for sufficient legal description of a property, it also found that a parcel number, by itself, does not necessarily demonstrate the actual, physical location of a property. Generally, such a number corresponds to an assessor’s map which is a type of map that does not have to necessarily correspond with the actual physical location of a property.  Parcel numbers assigned pursuant to Revenue & Tax Code section 327 need not correspond with actual subdivisions, lots, tracts or other legal divisions or boundaries of land.

Additionally, the trust deed’s legal description of the property refers to a “recorded” map in its legal description. That revealed another potential issue with respect to locating the property by its parcel number because a “recorded” map could mean a certified parcel map filed in the Orange County Clerk Recorder’s Office. (See Gov. Code § 66499.55.) 

Given that a parcel map and assessor’s map need not necessarily correspond to each other, even if the trust deed’s parcel number correctly corresponds to a property depicted in a tax assessor’s map (a fact that had not been demonstrated by Mehta), this would not necessarily establish what property the trust deed is describing in a certified parcel map. In sum, the parcel number in the case, by itself, did not necessarily describe the property’s actual, physical location so that it could be identified or located on the ground. 

Mehta offered no demonstration of how the parcel number could have been used to locate the property. He instead argued—as he did to the trial court—that no parol evidence is needed to confirm the trust deed is a lien on this property. Mehta’s argument was incorrect. 

The inaccuracies of the trust deed’s legal description of the property created an ambiguity, which implicated a need for clarification by extrinsic evidence. Indeed, in the relevant cases cited by the parties, courts based their determinations regarding sufficient description of a property upon examinations of extrinsic evidence. 

A parcel map is used to sell, lease, or finance property.  The Subdivision Map Act generally prohibits the sale, lease, or financing of any parcel of a subdivision until the recordation of an approved map in full compliance with the law. 

In contrast, no such extrinsic evidence was offered to the court in this matter. This left the trust deed’s ambiguity unresolved with no demonstration that the property could be identified or located by the legal description of the trust deed. 

As a result, Mehta failed to carry his independent burden at the trial court level to prove that the trust deed’s legal description of the property was sufficient to be enforceable. On appeal, with respect to the trial court’s factual finding that there was no evidence demonstrating the sufficiency of the parcel number, Mehta failed to meet his burden under substantial evidence review to demonstrate that the evidence was (1) “uncontradicted and unimpeached” and (2) “of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding". 

Finally, the Appellate Court was not persuaded that Mehta’s assertions regarding notice of the trust deed should control the disposition of this appeal. Mehta asserted the indexing of the county recorder filing system provided effective notice of the trust deed to the Tax Department. However, Mehta did not say how this point, even if shown, would impact the dispositive issue of whether the trust deed sufficiently described the property. 

The absence of meaningful discussion existing within the context of case law supported a conclusion that if the trust deed was void, then notice of it achieved nothing for the purpose of determining the senior interest to the surplus fund.  The Appellate Court was not aware of any principle justifying it to hold that the recording of a deed, void as to any person, was notice to such person of anything, except, perhaps, of the existence of the void instrument.

A void thing is as no thing. In other words, Mehta did not persuade that any notice his trust deed may have imparted would outweigh the conclusion that the trust deed was void and unenforceable. 

In sum, Mehta failed to carry his independent burden at the trial court level to show the trust deed’s legal description of the property was sufficient to make it enforceable. (Evid. Code § 500.) 

On appeal, Mehta did not carry his burden to demonstrate the trial court committed reversible error. 

LESSONS:

1.         The legal description of the property is essential to have it enforced, and an insufficient legal description may render the trust deed void.

2.         Inaccuracies in a trust deed’s legal description of the property creates an ambiguity, which implicates a need for clarification by extrinsic evidence.

3.         The recording of a void instrument is only notice of a void and unenforceable instrument.