The recent California case of Shetty v. HSBC Bank USA involved an appeal from a demurrer sustained without leave to amend.
Plaintiff Niki-Alexander Shetty purchased a home that had been foreclosed upon by a homeowners association.
The home, however, was still subject to a defaulted mortgage and deed of trust between the bank and the original borrower.
The bank and mortgage servicer defendants recorded a notice of default and scheduled a foreclosure sale.
Shetty sought to cure the default and resume regular payments on the loan.
Defendants, however, refused, insisting that, as a stranger to the loan, he was not entitled to reinstate it.
Shetty sued for wrongful foreclosure, arguing he had the right to reinstate the loan pursuant to Civil Code section 2924c (section 2924c).
The trial court ruled that Shetty did not have standing under the statute.
The appellate court disagreed with the trial court's interpretation of the statute and reversed the judgment as to all defendants except Mortgage Electronic Registration Services, Inc. (MERS), whom Shetty conceded had no liability.
The lawsuit concerned a condominium in the City of La Habra.
The prior owner, S.L., took out a mortgage and deed of trust on the property. Defendant PHH Mortgage Corporation serviced the loan.
In May 2018, the homeowners association for the community where the condominium is located foreclosed on the property. Shetty obtained the property from the homeowners association by way of a grant deed. The grant deed made no mention of the mortgage or deed of trust.
In July 2020, defendants recorded a notice of default against the condominium, which listed an amount due of $11,537.25. In February 2021, defendants recorded a notice of trustee’s sale, setting a foreclosure sale date of April 21, 2021. The total unpaid balance was listed as $206,285.41. Appropriate notices were mailed to Shetty.
Prior to the scheduled sale, Shetty “made numerous attempts” to obtain from defendants information he needed to “bring the loan secured by the [d]eed of [t]rust current and continue to make payments thereon.” However, defendants refused to provide any information on the ground that Shetty was not the borrower under the note secured by the deed of trust.
The complaint asserted causes of action for wrongful foreclosure, declaratory relief, and an accounting. Shetty sought an injunction postponing the foreclosure sale for a minimum of two weeks after defendants provide to Shetty information as to the amounts currently due, and where and how to make such payments.
The trial court concluded that Shetty had not pleaded the essential elements of a wrongful foreclosure cause of action because he did not allege tender, and that he did not have standing under section 2924c to reinstate the loan. The court entered a judgment of dismissal, and Shetty timely appealed.
Shetty’s sole contention on appeal was that he was entitled to reinstate the loan pursuant to section 2924c. The issue came down to whether Shetty had standing under the statute. The trial court found he did not and sustained a demurrer without leave to amend.
The appellate court concluded that Shetty had standing to sue under section 2924c.
Section 2924c, subdivision (a)(1), provides, in relevant part, “Whenever all or a portion of the principal sum of any obligation secured by deed of trust or mortgage on real property . . . has, prior to the maturity date fixed in that obligation, become due or been declared due by reason of default in payment of interest or of any installment of principal, . . . the trustor or mortgagor or their successor in interest in the mortgaged or trust property or any part thereof . . . may pay to the beneficiary or the mortgagee . . . the entire amount due, at the time payment is tendered, . . . other than the portion of principal as would not then be due had no default occurred, and thereby cure the default theretofore existing, and thereupon, all proceedings theretofore had or instituted shall be dismissed or discontinued and the obligation and deed of trust or mortgage shall be reinstated and shall be and remain in force and effect, the same as if the acceleration had not occurred.”
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.
California courts have long recognized the public policy behind the right to reinstatement.
The question of whether Shetty had standing to reinstate the loan pursuant to section 2924c boiled down to whether he is, in the language of the statute, the mortgagor’s “successor in interest" in the mortgaged or trust property.
Under the plain language, Shetty had the right to reinstate the loan.
The term “successor in interest” is not specifically defined in the statutory scheme.
The general definition of “successor in interest” is: “Someone who follows another in ownership or control of property. A successor in interest retains the same rights as the original owner, with no change in substance.”
Under this definition, purchasers at a foreclosure sale have been deemed successors in interest: the plaintiffs fit the ordinary or general definition of successor in interest since their title can be traced back to the foreclosure through the chain of title.
Crucially, section 2924c extends the right of reinstatement to the successor in interest to the mortgaged or trust property.
It is not the successor in interest to the mortgage, but to the property subject to the mortgage. Shetty, as the current chain-of-title owner, clearly was the successor in interest to the property itself.
The particular right to reinstate claimed by Shetty arose pursuant to statute. Perhaps the deed of trust had its own reinstatement provisions, but those would be neither here nor there since Shetty was not relying on them.
One of the trial court’s other basis for sustaining the demurrer was that Shetty had failed to allege a wrongful foreclosure cause of action because he had not alleged that he had tendered the amount due under the defaulted mortgage.
One of the elements of a wrongful foreclosure cause of action is the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.
However, because Shetty paid off the entirety of the original mortgage, he acknowledged he does not have a cause of action for wrongful foreclosure, but instead claimed he can amend his complaint to allege a violation of section 2924c. He claimed damages in the form of the additional costs associated with the replacement mortgage he was forced to take out in order to retire the existing loan.
At first blush, this would seem to be a viable legal theory, and Shetty should be permitted an opportunity to amend his complaint to attempt to state a claim under section 2924c.
LESSONS:
1. 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.
2. California courts have long recognized the public policy behind the right to reinstatement.
3. Purchasers at a foreclosure sale have been deemed successors in interest, and the plaintiffs fit the ordinary or general definition of successor in interest since their title can be traced back to the foreclosure through the chain of title.
4. One of the elements of a wrongful foreclosure cause of action is the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.
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