By Richard E. Wagner, Ph.D.

We recently have been hearing a lot about the threat of deflation, doubtlessly inspired by recent falls in indexes of consumer and producer prices. The Great Depression of the 1930s comes to mind when people speak of deflation. No one wants another Great Depression. Nearly everyone would prefer the double-digit inflation of twenty years ago. This preference is reasonable, but it does not follow that deflation is bad. Whether deflation is bad or good depends on why prices fall.

The Great Depression of the 1930s is the prime example of the bad kind of deflation. The Federal Reserve allowed the supply of money to shrink by thirty-five percent between 1930 and 1933. This gigantic destruction in the supply of money sabotaged markets throughout the land. Consumers could not afford to buy products, businesses could not sell their output, and workers could not find jobs. All of this happened because the Federal Reserve failed in its fundamental task of keeping the stock of money intact. This kind of demand-side deflation is clearly an economic scourge of major proportions.

Deflation can also result for supply-side reasons. This type of deflation is a radically different type of animal, and is a good one to have around. It is the kind of deflation that occurred in our economy after the Civil War and existed pretty much continually until the creation of the Federal Reserve in 1913. As productivity increased, consumer prices fell. Workers did not receive the continual wage increases that they have received during our recent inflationary times. Their well-being increased nonetheless. Steady wages with falling prices is a fine recipe for progress. This is, moreover, a recipe that works to the advantage of retired people on fixed incomes. With moderate deflation, a fixed sum for retirement goes ever farther because deflation allows retirees to share in the gains from rising productivity.

There is all the reason in the world to avoid a demand-side deflation. There is no reason at all, however, to oppose a supply-side deflation. No reason, at least, for ordinary citizens to oppose a supply-side deflation. It may be different for politicians and government officials. They are in a different situation with respect to deflation than are ordinary citizens. Inflation allows for increases in government budgets that would never be possible under deflation. Sustained inflation entered the American economy only with the creation of the Federal Reserve in 1913. Until then, the federal government claimed less than ten percent of the output of the American economy. It was only after steady inflation became a way of life that government’s share in the economy grew and now approaches fifty percent.

There are many reasons why inflation promotes growth in government. One of them is that inflation increases the share of total income that is collected through ordinary taxes. A ten percent increase in income increases collections of income tax on the order of twelve percent. This ability of tax rates to rise with inflation is referred to as “bracket creep.” Inflation pushes people into higher rate brackets, where they pay larger shares of their income in taxes.

Besides bracket creep, inflation is also a type of tax in its own right. The inflation tax is a form of public counterfeiting that goes by the technical name “seigniorage.” Seigniorage is the difference between the value of the money the government creates and the cost of creating that money. It is the government’s profit from creating money, and it is of the same character as the profit that a private counterfeiter makes. It costs almost nothing for the government to print another $100 bill, but this new bill is as valuable as all other $100 bills.

To be sure, the collection of this seigniorage tax works differently in different nations. In some nations, the Treasury and the central bank are joined. In those places, the government can finance its activities directly by creating money. It is different in America because the Treasury and the central bank are distinct. The government can still finance its activities by creating money, only this happens indirectly in two stages. In the first stage the government runs a deficit; in the second stage the Federal Reserve buys government bonds. The end result is indistinguishable from the Treasury directly creating money to finance its activities.

Supply-side deflation would put an end to the government’s ability to finance its activities through monetary expansion as well as through bracket creep. It would also eliminate the need for all of the various forms of indexing that have arisen to deal with inflation. The only losers from deflation would be those who live off the tax revenues that inflation generates.

#####

(Richard E. Wagner is Holbert Harris Professor of Economics at George Mason University and a member of the Board of Scholars of the Virginia Institute for Public Policy, an education and research organization headquartered in Potomac Falls, Virginia. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.)

On April 30 a new class action was filed as against Bank of America they are not giving Mods even thought they took 25 Billion in Taxpayer money
California Complaint

To start with, Gaitan is an unreported case, and should not be cited, nor rely on by the court. But more to the point, Gaitan is the only case in California to so hold. It summarily states that there is no private cause of action without much discussion. No other court so held.

The cases dealing with the issue of private cause of action deal specifically with section 2923.6 dealing with the duty of the servicers to the investors in modifying loans, and very generally, in fact conclusionary, with section 2923.5. both statutes were enacted under the Perata Mortgage Relief Act. Almost all the cases, excluding Gaitan, which is unreported, dismissed section 2923.5 claim (the one in which the lender must give preforeclosure notice to the borrower) on the merits, while dismissing section 2923.6 for lack of private cause of action.

Here is the reasoning for no private cause of action in section 2923.6. It is easily distinguished from the other non judicial foreclosure statutes:
“[N]othing in Cal. Civ.Code § 2923.6 imposes a duty on servicers of loans to modify the terms of loans or creates a private right of action for borrowers. The Perata Mortgage Relief Act was enacted relatively recently, and thus California courts have had little chance to examine its provisions. Nevertheless, section 2923.6, passed along with section 2923.5, clearly does not create a private right of action. That section solely “creat[es] a duty between a loan servicer [*19] and a loan pool member. The statute in no way confers standing on a borrower to contest a breach of that duty.” Farner v. Countrywide Home Loans, No. 08cv2193 BTM (AJB), 2009 U.S. Dist. LEXIS 5303, 2009 WL 189025, at *2 (S.D. Cal. Jan. 26, 2009). Other courts to consider this question have agreed unanimously with the Farner court. See Tapia v. Aurora Loan Servs., LLC, No. 1:09-cv-01143 AWI (GSA), 2009 U.S. Dist. LEXIS 82063, 2009 WL 2705853, at *1 (E.D. Cal. Aug. 25, 2009); Anaya v. Advisors Lending Group, No. CV F 09-1191 LJO DLB, 2009 U.S. Dist. LEXIS 68373, 2009 WL 2424037, at *8 (E.D. Cal. Aug. 5, 2009); Pantoja v. Countrywide Home Loans, Inc., F. Supp. 2d , No. C 09-01615 JW, 2009 U.S. Dist. LEXIS 70856, 2009 WL 2423703, at *7 (N.D. Cal. July 9, 2009); Connors v. Home Loan Corp., No. 08cv1134-L(LSP), 2009 U.S. Dist. LEXIS 48638, 2009 WL 1615989, at *7 (S.D. Cal. June 9, 2009).
II compiled the cases in California dealing with the private cause of action as it relates to the statutory scheme for non judicial foreclosure and they clearly treat section 2923.6 differently from the other statutes and for a good reason.. I hope this will help.
Kuoha v. Equifirst Corp
., Slip Copy, 2009 WL 3248105, S.D.Cal.,2009
(Deciding section 2923.5 claim on the merits but citing Anaya v. Advisors Lending Group No. CV F 09-1191, 2009 WL 2424037, (E.D.Cal., Aug.5, 2009) for the proposition that there is no private right of action, although Anaya dealt only with Section 2923.6.)
Anaya v. Advisors Lending Group
No. CV F 09-1191, 2009 WL 2424037, (E.D.Cal., Aug.5, 2009) (No private cause of action to enforce section 2923.6)
Gaitan v. Mortgage Electronic Registration Systems
, not Reported in F.Supp.2d, 2009 WL 3244729
C.D.Cal.,2009. (Section 2923.5 contains no language that indicates intent to create a private right of action.)
Yulaeva v. Greenpoint Mortg. Funding, Inc
., Slip Copy, 2009 WL 2880393, E.D.Cal.,2009.
(In light of plaintiff’s concession that there was no private right of action to enforce 2923.5, the court declined to independently evaluate the legislature’s intent.)
Ortiz v. Accredited Home Lenders, Inc, 639 F.Supp.2d 1159, S.D.Cal.,2009
(the court rejected the bank’s argument that there was no private cause of action to enforce section 2923.5, and noted that while the Ninth Circuit has yet to address this issue, the court found no decision from this circuit where a § 2923.5 claim had been dismissed on the basis advanced by bank.)
Lee v. First Franklin Financial Corp
., Slip Copy, 2009 WL 1371740, E.D.Cal.,2009.
(Deciding a claim based on Section 2923.5 on the merits.)
Gentsch v. Ownit Mortgage Solutions Inc
., 2009 WL 1390843, (E.D.Cal., May 14, 2009)
(Ortiz’ court indicated that this case decided a claim based on section 2923.5 on the merits, but I could not open the case)
Permpoon v. Wells Fargo Bank Nat. Ass’n
, Slip Copy, 2009 WL 3214321, S.D.Cal.,2009.
(No private cause of action under section 2923.6, but deciding section 2923.5 on the merits)
Nool v. HomeQ Servicing
, 653 F.Supp.2d 1047, E.D.Cal.,2009.
(Granting leave to amend a claim under section 2923.6, but noting that there is no authority that supports a private right of action under this section. Mentioning that plaintiff sought leave to amend a claim under section 2923.5, without any further discussion.)
Paek v. Plaza Home Mortg., Inc
., Not Reported in F.Supp.2d, 2009 WL 1668576, C.D.Cal.,2009.
(Dismissing claim under 2923.5 on the merits, because plaintiff’s allegations were inadequate to “raise a right to relief above the speculative level.” And dismissing claim under 2923.6 on the merits, but quoting Farner v. Countrywide Home Loans, 2009 WL 189025 at *2 (S.D.Cal. Jan. 26, 2009) that “nothing in section 2923.6 imposes a duty on servicers of loans to modify the terms of loans or creates a private right of action for borrowers.”).
Farner v. Countrywide Home Loans
, Not Reported in F.Supp.2d, 2009 WL 189025, S.D.Cal.,2009 (nothing in section 2923.6 imposes a duty on servicers of loans to modify the terms of loans or creates a private right of action for borrowers.)
Collins v. Power Default Services, Inc
., Slip Copy, 2010 WL 234902, N.D.Cal.,2010.
(Citing In Connors v. Home Loan Corp., District Court for the Southern District of California determined that there was no private right of action under section 2923.6. but granting leave to amend claim for “Violation of Statutory Duties” alleging that Defendants “failed to give proper notice under California law,” and issued ” notice of trustee’s sale that was not compliant with California law” to identify the statutory duties were violated, noting specifically possible sections 2924(a)(1), and 2924f.)
Connors v. Home Loan Corp
., Slip Copy, 2009 WL 1615989, S.D.Cal.,2009
(no private right of action with respect to section 2923.6.)
Glover v. Fremont Inv. and Loan
, Slip Copy, 2009 WL 5114001, N.D.Cal.,2009.
(No private right of action with respect to section 2923.6, but granting leave to amend re claim under 2923.5, to include factual allegations to support the bare legal conclusions.)
Reynoso v. Chase Home Finance
, Slip Copy, 2009 WL 5069140, N.D.Cal.,2009
(Section 2923.6 does not create a private right of action for purported violations of its provisions)
Tapia v. Aurora Loan Services, LLC
, Slip Copy, 2009 WL 2705853, E.D.Cal.,2009.
(“California Civil Code section 2923.6 does not create a cause of action for Plaintiff. Subdivision (a) of the section applies only to servicers and parties in a loan pool.” )
Reynoso v.Paul Financial, LLC
, Slip Copy, 2009 WL 3833298, N.D.Cal.,2009.
(Plaintiff’s claim for specific performance to modify the loan terms pursuant to section 2923.6(a), dismissed with prejudice. “Nothing in Cal. Civ.Code § 2923.6 imposes a duty on servicers of loans to modify the terms of loans or creates a private right of action for borrowers.”)
Enders v. Countrywide, Home Loans, Inc
., Slip Copy, 2009 WL 4018512, N.D.Cal.,2009.
(No private cause of action for section 2923.6)
Biggins v. Wells Fargo & Co.
2009 WL 2246199 (N.D.Cal.,2009)
(dismissing a section 2923.6 claim for being a “stand-alone claim for relief” and informing parties that it could be brought under a § 17200 claim).
Dizon v. California Empire Bancorp, Inc
., Not Reported in F.Supp.2d, 2009 WL 3770695, C.D.Cal.,2009.
(No private right of action under section 2923.6)
Santos v. Countrywide Home Loans
, Slip Copy, 2009 WL 3756337, E.D.Cal.,2009.
(No private cause of action under 2923.6)
Maguca v. Aurora Loan Services
, Not Reported in F.Supp.2d, 2009 WL 3467750, C.D.Cal.,2009.
(No private right of action for 2923.6, and deciding section 2923.5 on the merits: cause of action for violation of section 2923.5 dismissed because the allegations in the complaint were conclusory, and were contradicted by the notice of default provided by Aurora.)
Butera v. Countrywide, Home Loans, Inc
., Slip Copy, 2009 WL 3489873, E.D.Cal.,2009.
(No private right of action under section 2923.6. But citing section 2924(a)(1), and quoting Munger v. Moore, 11 Cal.App.3d 1, 7, 89 Cal.Rptr. 323 (1970): ‘trustee or mortgagee may be liable to the trustor or mortgagor for damages sustained where there has been an illegal, fraudulent or wilfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust.”’, and finding that complaint lacks facts of foreclosure irregularities or facts to support wrongful foreclosure to warrant dismissal of the fourth claim.

Posted on May 19, 2010 by Neil Garfield
There’s more than one way to attack the prima facie case though—here’s a good example of a nice result from attacking the assignment…

This NY decision lays out the legal reasoning for dismissing cases for problematic assignments:

Decided on April 19, 2010
Supreme Court, Kings County
The Bank of New York, as trustee for the benefit of the
Certificateholders, CWABS, Inc., Asset Backed Certificates, Series 2007-2, Plaintiff,
against
Sameeh Alderazi, Bank of America, NA, New York City Environmental Control
Board, .
Plaintiff submits anet al

Upon reading the Affirmation of Linda P. Manfredi, Esq., counsel for the
Plaintiff, dated November 20, 2008, together with Plaintiff’s Memorandum of
Law, dated November 19th, 2008, together with the proposed Ex Parte Order
Appointing a Referee to Compute, and all exhibits annexed thereto, the
application is denied without prejudice, with leave to renew upon providing the
Court with proof of the grant of authority from the original mortgagee to
MERS specifically to act in its interest as related to the secured loan
which is the subject of this action.
Plaintiff seeks summary judgment to foreclose upon the property located at
639 East 91st Street, (Block 4751, Lot 31), in Kings County.
In order to establish prima facie entitlement to summary judgment in a
foreclosure action, a plaintiff must submit the mortgage and unpaid note,
along with evidence of default. Capstone Business Credit, LLC v. Imperial
Family Realty, LLC, 70 AD3d 882
, 895 NYS2d 199 (2nd Dept 2010). The Second
Department has also required a showing that the mortgage was valid. Washington Mut.
Bank, FA v. Peak Health Club, Inc., 48 AD3d 793
, 853 NYS2d 112 (2nd
Dept.2008).
In this case, Defendant Sameeh Alderazi borrowed $408,000.00 from
“America’s Wholesale Lender” on January 25, 2007. The mortgage was recorded in the
Office of the City Register, New York City Department of Finance on
February 14, 2007. MERS was referred to in the mortgage as nominee of the
mortgagee, America’s Wholesale Lender, for the purpose of recording the mortgage.
MERS purported to assign the mortgage to Plaintiff BANK OF NEW YORK on
July 23, 2008. The assignment was recorded on September 19, 2008. The
assignment was executed by “Keri Selman, Assistant Vice President of MERS, as
“authorized agent pursuant to Board of Resolutions and/or appointment”. However,
no resolution nor other proof of authority was recorded with the
assignment or submitted to the Court.
A party cannot foreclose on a mortgage without having title, giving it
standing to bring the action. (See Kluge v. Fugazy, 145 AD2d 537, 538 (2nd
Dept 1988 ), holding that a “foreclosure of a mortgage may not be brought by
one who has no title to it and absent transfer of the debt, the assignment of
the mortgage is a nullity”. Katz v. East-Ville Realty Co., 249 AD2d 243
(1st Dept 1998), holding that “[p]laintiff’s attempt to foreclose upon a
mortgage in which he had no legal or equitable interest was without foundation
in law or fact”.
“To have a proper assignment of a mortgage by an authorized agent, a power
of attorney is necessary to demonstrate how the agent is vested with the
authority to assign the mortgage.” [*2]HSBC BANK USA, NA v. Yeasmin, 19 Misc
3d 1127(A), 866 NYS2d 92 (Table) N.Y.Sup.,2008. “No special form or
language is necessary to effect an assignment as long as the language shows the
intention of the owner of a right to transfer it”. Emphasis added, Id.,
citing Tawil v. Finkelstein Bruckman Wohl Most & Rothman, 223 AD2d 52, 55 (1st
Dept 1996); Suraleb, Inc. v. International Trade Club, Inc., 13 AD3d 612
(2nd
Dept 2004).
The claim in this case is that the mortgage was assigned by MERS, as the
nominee, to the Plaintiff. However Plaintiff submits no evidence that
America’s Wholesale Lender authorized MERS to make the assignment. MERS submits
only its own statement that it is the nominee for America’s Wholesale
Lender, and that it has authority to effect an assignment on America’s Wholesale L
ender’s behalf.
The mortgage states that MERS is solely a nominee. The Plaintiff, in its
Memorandum of Law, admits that MERS is solely a nominee, acting in an
administrative capacity.
In its Memoranda, Plaintiff quotes the Court in Schuh Trading Co., v.
Commisioner of Internal Revenue, 95 F.2d 404, 411 (7th Cir. 1938), which
defined a nominee as follows:
The word nominee ordinarily indicates one designated to act for another as
his representative in a rather limited sense. It is used sometimes to
signify an agent or trustee. It has no connotation, however, other than that of
acting for another, or as the grantee of another.. Id. Emphasis added.
Black’s Law Dictionary defines a nominee as “[a] person designated to act
in place of another, usually in a very limited way”. Agency is a fiduciary
relationship which results from the manifestation of consent by one person
to another that the other shall act on his behalf and subject to his
control, and consent by the other so to act. Hatton v. Quad Realty Corp., 100
AD2d 609, 473 NYS2d 827, (2nd Dept 1984). “[A]n agent constituted for a
particular purpose, and under a limited and circumscribed power, cannot bind his
principal by an act beyond his authority.” Andrews v. Kneeland, 6 Cow. 354
N.Y.Sup. 1826.
MERS, as nominee, is an agent of the principal, for limited purposes, and
has only those powers which are conferred to it and authorized by its
principal.
In the mortgage in this case, MERS claims, as nominee, that it was granted
the right “(A) to exercise any or all of those rights, including, but not
limited to the right to foreclose and sell the Property, and (B) to take
any action required of the Lender including, but not limited to, releasing
and canceling this Security Instrument.” However, this language quoted by
MERS is found in the mortgage under the section “BORROWER’S TRANSFER TO LENDER
OF RIGHTS IN THE PROPERTY” and therefore is facially an acknowledgment by
the borrower. The fact that the borrower acknowledged and consented to MERS
acting as nominee of the lender has no bearing on what specific powers and
authority the lender granted MERS. The problem is not whether the borrower
can object to the assignees’ standing, but whether the original lender,
who is not before the Court, actually transferred its rights to the
Plaintiff. To allow a purported assignee to foreclosure in the absence of some proof
that the original lender authorized the assignment would throw into doubt
the validity of title of subsequent purchasers, should the original lender
challenge the assignment at some future date.
Furthermore, even accepting MERS’ position that the lender acknowledges
MERS’ authority exercise any or all of the lenders’ rights under the
mortgage, the mortgage does not convey the specific right to assign the mortgage.
The only specific rights enumerated in the [*3]mortgage is the right to
foreclose and sell the Property. The general language “to take any action
required of the Lender including, but not limited to, releasing and canceling
this Security Instrument” is not sufficient to give the nominee authority to
alienate or assign a mortgage without getting the mortgagee’s explicit
authority for the particular assignment. Alienating a mortgage absent specific
authorization is not an administrative act.
Plaintiff submitted no other documents which purport to authorize MERS to
assign or otherwise convey the right of the mortgagor to assign the
mortgage to another party.
A party who claims to be the agent of another bears the burden of proving
the agency relationship by a preponderance of the evidence, Lippincot v.
East River Mill & Lumber Co., 79 Misc. 559, 141 NYS 220 (1913), and “[t]he
declarations of an alleged agent may not be shown for the purpose of proving
the fact of agency”. Lexow & Jenkins, P.C. v. Hertz Commercial Leasing
Corp., 122 AD2d 25, 504 NYS2d 192 (2nd Dept 1986). See also Siegel v. Kentucky
Fried Chicken of Long Island, Inc., 108 AD2d 218, 488 NYS2d 744 (2nd Dept
1985), Moore v. Leaseway Transp. Corp., 65 AD2d 697, 409 NYS2d 746 (1st Dept
1978). “The acts of a person assuming to be the representative of another
are not competent to prove the agency in the absence of evidence tending to
show the principal’s knowledge of such acts or assent to them”. (2 NY Jur
2d, Agency and Independent Contractors, 26).
Plaintiff has submitted no evidence to demonstrate that the original
lender, the mortgagee America’s Wholesale Lender, authorized MERS to assign the
secured debt to Plaintiff.
Thus, Plaintiff has not made out a prima facie case that it is entitled to
foreclose on the mortgage in question.WHEREFORE, it is ORDERED that the
Plaintiff’s application for an Order appointing referee to compute amounts
due to the Plaintiff is denied with leave to renew upon proof of authority.
This shall constitute the decision and order of this Court.

Posted on May 19, 2010 by Neil Garfield
I’m probably partly to blame for this notion so I want to correct it. The goal is NOT to get your house for free, although that COULD be the result, as we have seen in a few hundred cases. The simple answer is “No Judge I am not trying to get my house for free, I’m trying to stop THEM from getting my house for free. They don’t have one dime invested in this deal and payments have been received by the real creditors for which they refuse to give an accounting.”

The obligation WAS created. The question is not who holds the note but to whom the note is payable, and what is the balance due on the note after a full accounting from the creditor.

So don’t leave your mouth hanging open when the Judge says something like that. Tell him or her that they have the wrong impression because they are getting misinformation from the other side which is trying to get a lawyer’s argument admitted as evidence. Tell him you want the deal you signed up for — including the appraised value that the lender represented to you at closing.

Don’t say you won’t pay anything. Offer to make a monthly payment into the court registry — not in the amount demanded, but for perhaps 25% of the amount demanded. Tell him you refuse to pay someone who never lent you the money, who is not on the closing documents and is relying on securitization documents which contain multiple conditions, many of which they have violated.

Tell the Judge you deny the default because you know they received third party payments and they refuse to allocate the payments to your loan, and they refuse to inform you or the Court as to whether these third party insurers and guarantors have equitable or legal rights of subrogation. Subrogation is taking the place of another person because you are the real party in interest.

“Why should I lose my house just because I didn’t pay them. The note isn’t payable to them. Even if they have an assignment, it violates the terms under which they are permitted to accept it, and even if they were permitted to accept it, it wold be on behalf of the true creditors who were the investors who advanced the funds and now could be anyone because of the transactions in which the investors were paid or settled.

“The question is not whether I made a payment, it is whether a payment is due after allocation of third party insurance, credit default swap and guarantee payments. Who are they to declare a default when they refuse to give a full accounting?”

By Kristina Horton Flaherty
http://www.thestopforeclosureplan.com/Contact.html
Staff Writer

One recent fall morning, nearly 80 attorneys, paralegals and housing counselors streamed into San Francisco’s Practising Law Institute — another 166 arrived via the Internet — to learn how to better help desperate homeowners facing foreclosure.

More than 79,000 Californians lost their homes in the third quarter of 2008. Another 94,240 new default notices went out during the same period. And with credit tight, housing counselors overwhelmed and loan modification scams on the rise, experts say, thousands of homeowners are sinking fast.

The free, day-long “Defending Subprime Mortgage Foreclosures” training, still available online, was just one of several initiatives jointly sponsored by the State Bar to provide information and rally more volunteer assistance for those caught in the foreclosure crisis.http://www.thestopforeclosureplan.com/Contact.html

Other efforts include a free training on how to defend unlawful detainers (co-sponsored by Housing and Economic Rights Advocates of Oakland and others), and a new Web site — Foreclosure InfoCA.org — launched by the Public Interest Clearinghouse and the bar for homeowners and tenants, as well as attorneys interested in volunteering their help.

“There aren’t enough people out there to help the borrowers,” said Tara Twomey, the National Consumer Law Center attorney who conducted the foreclosure defense training. “It’s a numbers problem, a sheer numbers problem, especially in areas like California.”

And attorney volunteers from all areas of practice can make a difference, she says. “Does that mean every borrower can be helped? Probably not. But I do think that with some persistence, a lot of borrowers can.”

That help might involve seeking a loan modification or simply developing an exit strategy — delaying an eviction or negotiating a payment from the lender to vacate the home. Freezing an interest rate for two years while the borrower’s child finishes high school, for example, might be one homeowner’s goal. “Not everybody needs a long-term solution,” Twomey said.

The training includes an overview of the subprime mortgage market, the foreclosure process, the current crisis and responses to it, available options and how to spot potential predatory lending, federal law violations and state claims in the origination and servicing of subprime mortgages.

A recent explosion in loan modification scams illustrates that borrowers are not finding the help they need, Twomey points out. Desperate borrowers pay fees in advance to someone who promises to renegotiate their loan but winds up doing little or nothing.http://www.thestopforeclosureplan.com/Contact.html

“People are willing to pay money because the system’s so broken that they can’t get anywhere,” Twomey said. “Really, this should be able to be done for free.”

But housing counselors and non-profit programs are stretched too thin, many say. And borrowers often cannot get through to anyone at their financial institutions who can help them. In turn, a spin-off loan modification industry — along with numerous scams — has sprung up in just months.

“It’s just exploded,” said Tom Pool of the Department of Real Estate.

But companies that promise to help consumers in foreclosure cannot legally collect advance fees (attorneys are exempt from this prohibition). If no default notice has been recorded, real estate brokers can collect advance fees for such work if they have special approval from the DRE. In early November, just 12 brokers had such approval; six weeks later, that number had jumped to 40, with another 400 applications pending.

Loan modification scams typically start with a flyer, phone call or knock at the door and an offer to renegotiate the homeowner’s loan — for an upfront fee. Participating homeowners often are told to avoid contacting their lenders. Then, while the company does little or nothing to renegotiate the loan, the unwitting homeowner loses precious time and falls deeper into foreclosure.

“Loan modification scams are becoming more and more prevalent across the country, particularly in California,” Attorney General Jerry Brown said in November, after announcing arrests in an alleged Southern California scam involving First Gov (also operating as Foreclosure Prevention Services).

Homeowners allegedly paid First Gov an advance fee of $1,500 to $5,000 and then, when delinquency or foreclosure notices continued to pile up, were told that they needed to make an additional “good faith” payment to secure new accounts for their renegotiated loans. According to the Attorney General’s Office, records suggest homeowners lost more than $700,000 in the scheme.

Prosecutors and nonprofit counselors alike stress that assistance is available for homeowners at little or no cost. But many swamped non-profits need help — particularly from attorneys in such areas as bankruptcy, probate, elder abuse and consumer law.http://www.thestopforeclosureplan.com/Contact.html

At the Sacramento-based Senior Legal Hotline, those manning the phone lines can only handle about half of the 80 to 100 calls that back up every day, says supervising attorney David Mandel. And the bulk of those calls now involve foreclosure-related cases that tend to be more time-consuming.

“The amount of time we’re spending on each case has shot way up,” Mandel said. In some instances, he turns to reverse mortgages to help seniors stay in their homes. And he could really use help, he says, from attorneys willing to handle predatory lending cases that might lead to litigation.

The Housing and Economic Rights Advocates in Oakland currently handles 100 to 200 foreclosure-related calls a week, sometimes as many as 65 calls a day. Executive Director Maeve Elise Brown says she’s hoping to build a list of vetted pro bono attorneys who could be tapped, with some guidance, to take on some of their cases.

Kellie Morgantini, one of two staff attorneys at Legal Services for Seniors in Monterey County, says she’s recently seen a huge jump in senior tenants on the verge of eviction. They live in homes purchased as investment properties during the boom. They pay their rent on time. And then one day, the sheriff shows up with an eviction notice.

All Morgantini can do in most cases is negotiate a delay in the move, she says. She works to keep the tenant’s name off of the unlawful detainer as well. And she’s met with the sheriff to try to find a way to ease the situation. In one recent case, Morgantini’s client moved out after a delay, but bank investigators later insisted the woman was still in the home. As it turned out, someone else in dire straits had settled into the vacant home and placed a post-it on the window: “Please don’t throw us out. We’re a family.”

Morgantini attended the recent foreclosure defense training via the Webcast, she said, to learn how to better assist the surge of seniors falling victim to foreclosure, predatory lending scams and potential homelessness.

“This has been something that has been getting bigger and bigger,” she said. “We needed to be able to see how to focus on what’s important.”http://www.thestopforeclosureplan.com/Contact.html

Dan Mulligan of Jenkins, Mulligan & Gabriel LLP, a presenter at the training, says very little can be done for borrowers in the current climate. But, he said, attorneys who want to help should take the training, get into an organized pro bono program and try to do something. “Dig in,” the La Quinta attorney said, “and see where you can go on the loan modification process. It’s still possible.”

To view the trainings at no charge and earn MCLE credit, go to ForeclosureInfoCA.org. The Web site also provides a link to a list of programs that are seeking pro bono help from attorneys statewide.(866)717-0415 in Northern California(916)361-6583 http://www.thestopforeclosureplan.com/Contact.html
Many a client call me when its toooooo late however sometimes something can be done it would envolve an appeal and this application for a stay. Most likely you will have to pay the reasonable rental value till the case is decided. And … Yes we have had this motion granted. ex-parte-application-for-stay-of-judgment-or-unlawful-detainer3
When title to the property is still in dispute ie. the foreclosure was bad. They (the lender)did not comply with California civil code 2923.5 or 2923.6 or 2924. Or the didn’t possess the documents to foreclose ie. the original note. Or they did not possess a proper assignment 2932.5. at trial you will be ignored by the learned judge but if you file a Motion for Summary Judgmentevans sum ud
template notice of Motion for SJ
TEMPLATE Points and A for SJ Motion
templateDeclaration for SJ
TEMPLATEProposed Order on Motion for SJ
TEMPLATEStatement of Undisputed Facts
you can force the issue and if there is a case filed in the Unlimited jurisdiction Court the judge may be forced to consider title and or consolidate the case with the Unlimited Jurisdiction Case

2nd amended complaint (e) manuel
BAKER original complaint (b)
Countrywide Complaint Form
FRAUDULENT OMISSIONS FORM FINAL
sample-bank-final-complaint1-2.docx
California stop foreclosure and get your own shortsale COMPLAINT
elderabusecomplaint
And in some cases an injunction is in order
Foreclosure injunction TRO
and a Lis Pendence

Submitted by a reader from an unknown source — might be Dr. Housing Bubble, which is another Blog

Housing never really improved – 10 charts showing the United States housing market is entering the second wave of problems. 1 out of 4 people with no mortgage payment in the last year are still not in the foreclosure process.

To put it bluntly, the U.S. housing market today is in deep water.  Nothing exemplifies the transfer of risk to the public from the private investment banks more than the deep losses at Fannie Mae and Freddie Mac.  Fannie Mae announced a stunning first quarter loss of $13.1 billion while Freddie Mac lost $8 billion.  At the same time, toxic mortgage superstar JP Morgan Chase announced a $3.3 billion profit for Q1.  This reversal of fortunes has been orchestrated perfectly by Wall Street.  Since the toxic assets were never marked to market, the big losses have been funneled to the big GSEs (and as we will show in this article, now makes up 96.5 percent of the entire mortgage market).  In other words, banks are making profits gambling on Wall Street while pushing out mortgages that are completely backed by the government.  We are letting the folks that clearly had no system of underwriting mortgages correctly or any financial prudence lend out government backed money and the losses are piling up but only in the nationalized Fannie Mae and Freddie Mac.  What a sweet deal.  Stick the junk in a taxpayer silo.

I wanted to go into the details on the current U.S. housing market and the data is not pleasant.  In fact, it is downright disturbing.  For background information, the U.S. has roughly 51 million active mortgages.  As we go through the next 10 charts, it is important to keep this in mind.  Whitney Tilson’s T2 Partners came out with some riveting charts regarding the current state of the housing market.  Let us go through 10 of the most crucial charts.

Chart 1 – Homes in foreclosure

The ultimate sign of housing distress is foreclosure.  This should be obvious.  So for all the talk of a housing recovery I point to the above chart.  Today, as in right now, we are in record territory for the number of homes in foreclosure.  14 percent of all U.S. mortgages are in some form of foreclosure.  If you do the rough math, this equates to:

51 million x .14   =   7,140,000 mortgages in default or 30+ days late

I always get this question about how folks arrive at the figure of 7 million.  The above equation should give you an idea.  This by the way is not a good situation.  And with many toxic loans including option ARMs and Alt-As still lingering in the market, we have a few more years of problems baked in unfortunately.

Chart 2 – Foreclosure filings

Building off chart one, foreclosure filings are still at record levels.  In fact we are heading to a 3.5 to 4 million foreclosure year in 2010!  This is somehow a positive thing for the market?  People forget that foreclosures happen because of underlying economic issues.  If everyone was making big bucks and homes were going up in value then we wouldn’t have this problem.  Just look at the number of foreclosure filings back in 2005.  Roughly 60,000 to 70,000 per month.  Last month we hit 367,000+ which was an all time record.  When foreclosure filings get back down to more normal levels, then we can say the housing market is improving.

What about strategic defaults?  At most, 1 out of 5 foreclosures is probably a strategic default.  But that means 4 out of 5 are losing their home because they can’t pay.  This is why we absolutely need bigger down payment requirements.  If you get a government backed loan (aka the 96.5 percent of the market) then you should at the very minimum put down 10 percent from actual cash sources (no using tax credit nonsense).

Chart 3 – Home prices dropping

I think some people have a hard time understanding why home prices have fallen lately.  Well, when a large part of home sales are distress properties prices usually shoot to the downside.  We had a nice little bump from the alphabet soup of government programs including HAMP, tax credits, and other gimmicks but the trend is back to lower prices.  Why?  Because the underlying economy is still not healthy.  Now that people have to at least show some proof of income, it turns out that many cannot afford high priced houses.  Is this a surprise to anyone?  What do you expect when your strategy involves kicking the can down the road?  The above chart basically shows one World Cup kick to the can.

Chart 4 – Nationalized housing market

Congratulations, you are the housing market.  96.5% of all originated loans are now government backed.  Remember Fannie Mae and Freddie Mac and their epic continuing losses?  Apparently banks have no problem originating loans as long as they can use the government money to gamble in the stock market.

Wall Street enjoys handing your money out.  They like to beat on their chest about the free market but have no intention of lending out their own money (i.e., your bailout funds).  In fact, Wall Street has convinced itself that your money is basically their hard earned cash.  For the risky housing market, they’ll be the middleman in lending out mortgages that are defaulting in mass.  What do they care if the economy is on stable footing?  They don’t care if you lose your job and can’t pay the mortgage in one or two years.  By then, the banks will be gambling in another bubble putting another sector of the economy at risk.

Chart 5 – Housing overhang

Remember that 7 million figure?  Well there it is.  Keep in mind that we keep adding to this pile because foreclosure filings are running at 300,000+ per month.  So the market is actually saturated with inventory.  You may not always see this in the actual data but we’ve gone through multiple case studies of shadow inventory.  This large amount of overhang will add additional pressure to housing prices in the next few years.  In fact, with this amount of housing we have anywhere from 7 to 9 years of inventory to clean out!

Chart 6 – Distress inventory as sales

The dip you see in 2009 was basically the failed efforts of HAMP and other bank stalling efforts.  Now that banks have basically nationalized the housing market and have made Fannie Mae and Freddie Mac their dumping ground, they really don’t care.  They can use the taxpayer money they get under the guise of helping homeowners to speculate on Wall Street while funneling GSE debt to the public.  An absolute win for them.  The biggest and most risky of debt gets pushed to taxpayers while the lion share of profits stays in house as bonuses.  The system couldn’t be more corrupt or broken.

Chart 7 – Not paying and living with no foreclosure

This is a stunning chart.  24% of those that have made no payment in the last year are still not in foreclosure!  In other words, you have tens of thousands of people living rent free while banks pretend everything is fine and claim billions of dollars in profits.  What a sham!  Just look at the 24 months with no payment column.  39,000 people have not made a payment in 2 years and no foreclosure has been filed!

Chart 8 – Home equity lines

With so many homes underwater, the second mortgage market has virtually disappeared.  But we still have $842 billion in loans made during the peak of the bubble outstanding.  Most of these are actually held by the big four banks and that is probably another reason why banks are moving aggressively against some while letting others stay in their home without payment.  In fact, if you look at the above chart it seems that if you leveraged yourself with multiple mortgages banks might wait to move on you while if you only had one mortgage backed by a GSE, you’re out.  Fannie Mae and Freddie Mac defaults on standard mortgages are spiking to record levels.

HELOC defaults are soaring:

This means further bank losses but can Wall Street gambling outpace the losses from the housing market?

Chart 9 – nonpayment savings

There is an upside to not paying on your mortgage.  More money to spend!  Ironically some of the recent increase in consumer spending hasn’t come from job gains or actual employment improvement.  It has come from people not paying their mortgage, downsizing (or getting a similar house for half off), and using the freed up income to spend.  The estimate is that $8 to $12 billion per month is freed up from people not paying on their mortgage.  You must have some uncanny self delusion to spin that as good news.

Chart 10 – REO vs distress

This chart pretty much sums it up.  Banks are moving on current REOs (the small batch that they have) and pumping this up as good news but the 90 days plus foreclosure number is still trending up.  How is this magic done?  We’ve talked about it above.  You simply don’t move on delinquent homeowners.  You ignore actual losses.  You mark your assets to fantasy valuations.

In total the housing market is in worse shape today than it was a few years ago.  If the stock market was tied to housing we probably have a Dow 20,000 with 14 million foreclosures.  The bailouts have been one large transfer of wealth to the banking sector.  Remember that the bailouts were brought about under the guise of helping the housing market and keeping people in their homes.  None of that has happened.  Ironically the only thing that seems to keep people in their home is when they stop paying their mortgage!  If that is the strategy we have arrived at after $13 trillion in bailouts and backstops to Wall Street we are in for a world of problems.

Fannie, Freddie, McConnell, Shelby and Gregg

Sens. Mitch McConnell (R-Ky.), Richard Shelby (R-Ala.) and Judd Gregg (R-N.H.) (EPA/ZUMApress.com)
For the past year, Republicans have insisted that Congress take up legislation to stop the losses at Fannie Mae and Freddie Mac — the government-sponsored enterprises that buy up and repackage mortgages, keeping loan prices stable. Fannie and Freddie have incurred more than $150 billion in losses since the burst of the housing bubble. “In my view, it’s simply not acceptable for some on the other side to suggest that we have to rush this [Wall Street] bill through Congress, but that it’s okay to wait another year to address the GSEs, which we all know played a central role in the financial crisis,” Sen. Mitch McConnell (R-Ky.), the minority leader, argued earlier this month, a contention often repeated.

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But the Republicans never said how they thought the GSEs should be reformed — until now. Last Wednesday, Sen. John McCain (R-Ariz), Sen. Judd Gregg (R-N.H.) and Sen. Richard Shelby (R-Ala.) proposed an amendment to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill, the GSE (Government Sponsored Enterprise) Bailout Elimination and Taxpayer Protection Amendment.
Releasing the proposal — with numbers, dates and directives aplenty — Gregg commented, “Fannie Mae and Freddie Mac are synonymous with mismanagement and waste and have become the face of ‘too big to fail.’ The time has come to end Fannie Mae and Freddie Mac’s taxpayer-backed slush fund and require them to operate on a level playing field.”
But housing market experts describe the Republicans’ proposal as disastrous. Analysts from both sides of the aisle contend that the proposal would unwind Fannie and Freddie so quickly and precipitously that it would destabilize the entire housing market: pushing mortgage prices up, pulling support from low and middle-income Americans and ending the nascent — if at all extant — housing recovery.
The GSE amendment would effectively shutter the mortgage giants, which together backstopped 97 out of 100 new mortgages in the first three months of the year, according to Inside Mortgage Finance. It would keep keep the current government conservatorship in place for 24 months (or 30 months, if the Federal Housing Finance Agency determines that market conditions are “adverse”). Then, it would begin begin the process of dissolution.
Were Fannie and Freddie to prove “viable” as private institutions (a term left ambiguous) after 24 or 30 months, they would become highly regulated institutions for three years, before the expiry of their charters. They would have no affordable housing goals, would have to reduce their mortgage assets yearly, could not purchase mortgages exceeding median-home values and could only buy mortgages with certain minimum down payments — among other provisions. Additionally, they would have to pay taxes. Were Fannie and Freddie not “viable” in two years — likely, given that Fannie reported yesterday that it does not see itself reporting a profit for the “indefinite future” — the amendment puts them into receivership.
Housing experts say that the bill would impact every participant in the housing economy, including builders, buyers, developers, lenders and banks. It would make vanilla mortgages — such as 30-year, fixed-rate mortgages — much more scarce, and would make all mortgages more expensive. It would remove a major source of liquidity in the mortgage market, causing credit problems at mortgage-reliant banks. It would also rapidly reduce the number of homebuyers.
Experts describe the McCain-Gregg-Shelby amendment’s transition as too much, too soon and too blunt. Kenneth Posner, who analyzed Fannie and Freddie for Morgan Stanley and is the author of Stalking the Black Swan, describes the plan as going “cold turkey” when it might be better to “use methadone.”
“The issue is that what Fannie and Freddie issue is considered close to government debt, and there is no limit on their ability to grow. That was fine a long time ago when they were small. But now, they’re big — we’re creating trillions of dollars of Treasury-like debt,” he explains. “We’re also dealing with the reality that too much stimulus for the housing market is a bad thing. That’s what the Republican [proposal] is getting at. But it does not answer the question of the transition [away from that support].”
Barry Zigas, the director of housing policy for the Consumer Federation of America, is blunter. He says that the Republican approach takes a “meat-axe” to an extremely fragile market. “It takes a very prescriptive and dangerous approach to a problem that at this point does not require it,” he says, noting that the Senate has not even held hearings on how to deal with Fannie and Freddie yet.
“It puts any housing recovery in jeopardy — the amendment is a huge gamble that forces the government to quickly and radically restructure these two companies without providing a clear path to a stable mortgage market in the future,” he says. “For one, it would raise down-payment requirements precipitously, which would be injurious to low-income communities and communities of color.
“This is a very heavy-handed and ultimately very unhelpful approach to a complex problem.”
“Some of it is serious. Some is trying to stir up trouble,” says Dean Baker, the co-director of the Center for Economic and Policy Research. “It doesn’t make sense to talk about dismantling Fannie and Freddie yet — and we’d really have to think this through more thoroughly. It does not, for instance, explain how it would sell off Fannie and Freddie’s assets, or in what form. Who would back them? What is the benefit to rushing this?” Baker says. “The risk is so obvious that the proposal seems strange.”
And with such obvious risks and despite Republican pressure, Democrats have punted on the question of how to reform Fannie and Freddie. This spring, the Treasury Department released a set of seven questions it said it was attempting to answer — stating that it was working on reform but needed more time. And yesterday, Sen. Mark Warner said the administration plans to release its Fannie and Freddie proposal next year.
“I think it’s a fair claim to make to say we haven’t done enough to address Fannie and Freddie,” Warner said. “It is the big elephant in the room that hasn’t been addressed.” But, “We’ll come back next year and take on Fannie and Freddie in a more thoughtful way.”

Q:
What damages are available through a wrongful foreclosure lawsuit?
A:
Banks are becoming more ruthless when it comes to seizing homes in a foreclosure situation-even when the foreclosure is unfounded. Doors are kicked in, locks broken, personal items damaged, not to mention the fear and stress of having strangers lurking around your property. No one should have to suffer this, and it may be possible for you to get compensation for damages in a wrongful foreclosure lawsuit. In California the Foreclosure Prevention Act of 2008 makes most foreclosure wrongful in that the lenders do not comply with the act.

What kind of damages can I receive compensation for?

Because of the forced and sudden nature of home seizure, many damages can result from the event, especially if you believe your property is being wrongfully foreclosed upon. The people hired by the bank to physically secure your property often do not take into consideration the harm they are causing your property and family. If your home is seized in error, you are entitled to wrongful foreclosure damage compensation for:

• Physical damage to the property
• Physical damage to your personal property
• Emotional damage resulting from the invasion

Recision of a Void Notice of Default, a Void Notice of Trustees Sale, Void Trustees Deed

This action recently files in Tennessee30872654-State-of-Tennessee-v-Mortgage-Electronic-Registration-Systems-Inc-et-al[1]

MEMORANDUM OF LAW – BANK FRAUD

I have, through research, learned the following to be true and most likely applies
to me, which is the reason I have requested and demanded “the bank” to validate their
claims and produce pursuant to applicable law. This MEMORANDUM serves to support
my suspicions and identify criminal facts. The “bank” allegedly “loaned me their money”
when in reality they deposited (credited) my promissory note and used that deposit to
“pay my seller”. Source and reasoning after reviewing the original file clearly shows this
fact, which is the reason for the “bank” refusing and failing to validate and to produce as
stipulated by law. However, the truth is out and there is plenty of law backing up the fact
that the bank is criminal.

FORECLOSURE ACTIONS AND CASES LAWFULLY DISMISSED (NOT
LETTING BANK FORECLOSE WITHOUT LAWFUL VALIDATION AND
PRODUCTION) BY THE COURTS DUE TO BANK’S FAILURE TO VALIDATE
& PRODUCE AS STIPULATED BY LAW AND COMMITTED “BANK FRAUD”
AGAINST THE BORROWER

FROM THE BAR ASSOCIATION’S OFFICIAL WEB SITE :… ”this Court has the
responsibility to assure itself that the foreclosure plaintiffs have standing and that subject
matter jurisdiction requirements are met at the time the complaint is filed. Even without
the concerns raised by the documents the plaintiffs have filed, there is reason to question
the existence of standing and the jurisdictional amount”. Over 30 cases are covered by
the BAR at: http://www.abanet.org/rpte/publications/ereport/2008/3/Ohioforeclosures.pdf

1. “A national bank has no power to lend its credit to any person or corporation . . .
Bowen v. Needles Nat. Bank, 94 F 925 36 CCA 553, certiorari denied in 20 S.Ct
1024, 176 US 682, 44 LED 637.

2. Countrywide Home Loans, Inc. v Taylor – Mayer, J., Supreme Court, Suffolk County
/ 9/07

3. American Brokers Conduit v. ZAMALLOA – Judge SCHACK 28Jan2008

Aurora Loan Services v. MACPHERSON – Judge FARNETI 1 1Mar2008

4. “A bank may not lend its credit to another even though such a transaction turns out
to have been of benefit to the bank, and in support of this a list of cases might be
cited, which-would look like a catalog of ships.” [Emphasis added] Norton Grocery
Co. v. Peoples Nat. Bank, 144 SE 505. 151 Va 195.

5. “In the federal courts, it is well established that a national bank has not power to lend
its credit to another by becoming surety, indorser, or guarantor for him.”’ Farmers
and Miners Bank v. Bluefield Nat ‘l Bank, 11 F 2d 83, 271 U.S. 669.

6. Bank of New York v. SINGH – Judge KURTZ 14Dec2007

7. Bank of New York v. TORRES – Judge COSTELLO 11Mar2008

8. Bank of New York v. OROSCO – Judge SCHACK 19Nov2007

Citi Mortgage Inc. v. BROWN – Judge FARNETI 13Mar2008

9. “The doctrine of ultra vires is a most powerful weapon to keep private corporations
within their legitimate spheres and to punish them for violations of their corporate
charters, and it probably is not invoked too often…. Zinc Carbonate Co. v. First
National Bank, 103 Wis 125, 79 NW 229. American Express Co. v. Citizens State
Bank, 194 NW 430.

“It has been settled beyond controversy that a national bank, under federal Law being
limited in its powers and capacity, cannot lend its credit by guaranteeing the debts of
another. All such contracts entered into by its officers are ultra vires . . .” Howard &
Foster Co. v. Citizens Nat’l Bank of Union, 133 SC 202, 130 SE 759(1926).

10. “. . . checks, drafts, money orders, and bank notes are not lawful money of the
United States …” State v. Neilon, 73 Pac 324, 43 Ore 168.

11. American Brokers Conduit v. ZAMALLOA – Judge SCHACK 11 Sep2007

Countrywide Mortgage v. BERLIUK – Judge COSTELLO 1 3Mar2008

12. Deutsche Bank v. Barnes-Judgment Entry

13. Deutsche Bank v. Barnes-Withdrawal of Objections and Motion to Dismiss

Deutsche Bank v. ALEMANY Judge COSTELLO 07Jan2008

Deutsche Bank v. Benjamin CRUZ – Judge KURTZ 21May2008

Deutsche Bank v. Yobanna CRUZ – Judge KURTZ 21May2008

Deutsche Bank v. CABAROY – Judge COSTELLO 02Apr2008

Deutsche Bank v. CASTELLANOS / 2007NYSlipOp50978U/- Judge SCHACK
11May2007

14. Deutsche Bank v. CASTELLANOS/ 2008NYSlipOp50033U/ – Judge SCHACK
14Jan 2008

15. HSBC v. Valentin – Judge SCHACK calls them liars and dismisses WITH prejudice
**

16. Deutsche Bank v. CLOUDEN / 2007NYSlipOp5 1 767U/ Judge SCHACK 1
8Sep2007

17. Deutsche Bank v. EZAGUI – Judge SCHACK 21Dec2007

Deutsche Bank v. GRANT – Judge SCHACK 25Apr2008

Deutsche Bank v. HARRIS – Judge SCHACK 05Feb2008

18. Deutsche Bank v. LaCrosse, Cede, DTC Complaint

19. Deutsche Bank v. NICHOLLS – Judge KURTZ 21May2008

Deutsche Bank v. RYAN – Judge KURTZ 29Jan2008

Deutsche Bank v. SAMPSON – Judge KURTZ 16Jan2008

20. Deutsche v. Marche – Order to Show Cause to VACATE Judgment of Foreclosure –
11 June2009

21. GMAC Mortgage LLC v. MATTHEWS – Judge KURTZ 10Jan2008

GMAC Mortgage LLC v. SERAFINE – Judge COSTELLO 08Jan2008

HSBC Bank USA NA v. CIPRIANI Judge COSTELLO 08Jan2008

HSBC Bank USA NA v. JACK – Judge COSTELLO 02Apr2008

IndyMac Bank FSB v. RODNEY-ROSS – Judge KURTZ 15Jan2008

LaSalleBank NA v. CHARLEUS – Judge KURTZ 03Jan2008

LaSalleBank NA v. SMALLS – Judge KURTZ 03Jan2008

PHH Mortgage Corp v. BARBER – Judge KURTZ 15Jan2008

Property Asset Management v. HUAYTA 05Dec2007

22. Rivera, In Re Services LLC v. SATTAR / 2007NYSlipOp5 1 895U/ – Judge
SCHACK 09Oct2007

23. USBank NA v. AUGUSTE – Judge KURTZ 27Nov2007

USBank NA v. GRANT – Judge KURTZ 14Dec2007

USBank NA v. ROUNDTREE – Judge BURKE 11Oct2007

USBank NA v. VILLARUEL – Judge KURTZ 01Feb2008

24. Wells Fargo Bank NA v. HAMPTON – Judge KURTZ 03 Jan2008

25. Wells Fargo, Litton Loan v. Farmer WITH PREJUDICE Judge Schack June2008

26. Wells Fargo v. Reyes WITH PREJUDICE, Fraud on Court & Sanctions Judge
Schack June2008

27. Deutsche Bank v. Peabody Judge Nolan (Regulation Z)

Indymac Bank,FSB v. Boyd – Schack J. January 2009

28. Indymac Bank, FSB v. Bethley – Schack, J. February 2009 ( The tale of many hats)

29. LaSalle Bank Natl. Assn. v Ahearn – Appellate Division, Third Department (Pro Se)

30. NEW JERSEY COURT DISMISSES FORECLOSURE FILED BY DEUTSCHE
BANK FOR FAILURE TO PRODUCE THE NOTE

31. Whittiker v. Deutsche (MEMORANDUM IN OPPOSITION TO DEFENDANTS’
MOTIONS TO DISMISS) Whittiker (PLAINTIFFS’ OBJECTIONS TO REPORT
AND RECOMMENDATION) Whittiker (DEFENDANT WELTMAN,
WEINBERG & REIS CO., LPA’S RESPONSE TO PLAINTIFFS’ OBJECTIONS
TO REPORT AND RECOMMENDATION) Whittiker (RESPONSE TO
PLAINTIFFS’ OBJECTIONS TO MAGISTRATE JUDGE PEARSON’S REPORT
AND RECOMMENDATION TO GRANT ITS MOTION TO DISMISS)

32. Novastar v. Snyder * (lack of standing) Snyder (motion to amend w/prejudice)
Snyder (response to amend)

33. Washington Mutual v. City of Cleveland (WAMU’s motion to dismiss)

34. 2008-Ohio-1177; DLJ Mtge. Capital, Inc. v. Parsons (SJ Reversed for lack of
standing)

35. Everhome v. Rowland

36. Deutsche – Class Action (RICO) Bank of New York v. TORRES – Judge

COSTELLO 1 1Mar2008

37. Deutsche Bank Answer Whittiker

38. Manley Answer Whittiker

39. Justice Arthur M. Schack

40. Judge Holschuh- Show cause

41. Judge Holschuh- Dismissals

42. Judge Boyko’s Deutsche Bank Foreclosures

43. Rose Complaint for Foreclosure | Rose Dismissals

44. O’Malley Dismissals

45. City Of Cleveland v. Banks

46. Dowd Dismissal

47. EMC can’t find the note

48. Ocwen can’t find the note

49. US Bank can’t find the Note

50. US Bank – No Note

51. Key Bank – No Note

52. Wells Fargo – Defective pleading

53. Complaint in Jack v. MERS, Citi, Deutsche

54. GMAC v. Marsh

55. Massachusetts : Robin Hayes v. Deutsche Bank

56. Florida: Deutsche Bank’s Summary Judgment Denied

57. Texas: MERS v. Young / 2nd Circuit Court of Appeals – PANEL: LIVINGSTON,
DAUPHINOT, and MCCOY, JJ.

58. Nevada: MERS crushed: In re Mitchell

59. “Neither, as included in its powers not incidental to them, is it a part of a bank’s
business to lend its credit. If a bank could lend its credit as well as its money, it
might, if it received compensation and was careful to put its name only to solid
paper, make a great deal more than any lawful interest on its money would amount
to. If not careful, the power would be the mother of panics, . . . Indeed, lending credit
is the exact opposite of lending money, which is the real business of a bank, for
while the latter creates a liability in favor of the bank, the former gives rise to a
liability of the bank to another. I Morse. Banks and Banking 5th Ed. Sec 65; Magee,
Banks and Banking, 3rd Ed. Sec 248.” American Express Co. v. Citizens State Bank,
194 NW 429.

60. “It is not within those statutory powers for a national bank, even though solvent, to
lend its credit to another in any of the various ways in which that might be done.”
Federal Intermediate Credit Bank v. L ‘Herrison, 33 F 2d 841, 842 (1929).

61. “There is no doubt but what the law is that a national bank cannot lend its credit or
become an accommodation endorser.” National Bank of Commerce v. Atkinson, 55
E 471.

62. “A bank can lend its money, but not its credit.” First Nat’l Bank of Tallapoosa v.
Monroe . 135 Ga 614, 69 SE 1124, 32 LRA (NS) 550.

63. “.. . the bank is allowed to hold money upon personal security; but it must be money
that it loans, not its credit.” Seligman v. Charlottesville Nat. Bank, 3 Hughes 647,
Fed Case No.12, 642, 1039.

64. “A loan may be defined as the delivery by one party to, and the receipt by another
party of, a sum of money upon an agreement, express or implied, to repay the sum
with or without interest.” Parsons v. Fox 179 Ga 605, 176 SE 644. Also see Kirkland
v. Bailey, 155 SE 2d 701 and United States v. Neifert White Co., 247 Fed Supp 878,
879.

65. “The word ‘money’ in its usual and ordinary acceptation means gold, silver, or paper
money used as a circulating medium of exchange . . .” Lane v. Railey 280 Ky 319,
133 SW 2d 75.

66. “A promise to pay cannot, by argument, however ingenious, be made the equivalent
of actual payment …” Christensen v. Beebe, 91 P 133, 32 Utah 406.

67. “A bank is not the holder in due course upon merely crediting the depositors
account.” Bankers Trust v. Nagler, 229 NYS 2d 142, 143.

68. “A check is merely an order on a bank to pay money.” Young v. Hembree, 73 P2d
393

69. “Any false representation of material facts made with knowledge of falsity and with
intent that it shall be acted on by another in entering into contract, and which is so
acted upon, constitutes ‘fraud,’ and entitles party deceived to avoid contract or
recover damages.” Barnsdall Refining Corn. v. Birnam Wood Oil Co. 92 F 26 817.

70. “Any conduct capable of being turned into a statement of fact is representation.
There is no distinction between misrepresentations effected by words and
misrepresentations effected by other acts.” Leonard v. Springer 197 Ill 532. 64 NE
301.

71. “If any part of the consideration for a promise be illegal, or if there are several
considerations for an unseverable promise one of which is illegal, the promise,
whether written or oral, is wholly void, as it is impossible to say what part or which
one of the considerations induced the promise.” Menominee River Co. v. Augustus
Spies L & C Co.,147 Wis 559-572; 132 NW 1122.

72. “The contract is void if it is only in part connected with the illegal transaction and
the promise single or entire.” Guardian Agency v. Guardian Mut. Savings Bank, 227
Wis 550, 279 NW 83.

73. “It is not necessary for recision of a contract that the party making the
misrepresentation should have known that it was false, but recovery is allowed even
though misrepresentation is innocently made, because it would be unjust to allow
one who made false representations, even innocently, to retain the fruits of a bargain
induced by such representations.” Whipp v. Iverson, 43 Wis 2d 166.

74. “Each Federal Reserve bank is a separate corporation owned by commercial banks in
its region …” Lewis v. United States, 680 F 20 1239 (1982).

HOW AND WHY THE BANKS SECRETLY AND QUICKLY

“SWITCH CURRENCY”

NOT FULFILL THE “LOAN AGREEMENT “(THE CONTRACT)

OBTAIN YOUR MORTGAGE NOTE WITHOUT INVESTING ONE CENT

TO FORCE YOU TO LABOR TO PAY INTEREST ON “THE CONTRACT “

TO REFUSE TO FULFILL “THE CONTRACT “

TO MAKE YOU A DEPOSITOR (NOT A BORROWER)

The oldest scheme throughout History is the changing of currency. Remember the
moneychangers in the temple (BIBLE)? “If you lend money to My people, to the poor
among you, you are not to act as a creditor to him; you shall not charge him interest”
Exodus 22:25. They changed currency as a business. You would have to convert to
Temple currency in order to buy an animal for sacrifice. The Temple Merchants made
money by the exchange. The Bible calls it unjust weights and measures, and judges it to
be an abomination. Jesus cleared the Temple of these abominations. Our Christian
Founding Fathers did the same. Ben Franklin said in his autobiography, “… the inability
of the colonists to get the power to issue their own money permanently out of the hands
of King George III and the international bankers was the prime reason for the
revolutionary war.” The year 1913 was the third attempt by the European bankers to get
their system back in place within the United States of America. President Andrew
Jackson ended the second attempt in 1836. What they could not win militarily in the
Revolutionary War they attempted to accomplish by a banking money scheme which
allowed the European Banks to own the mortgages on nearly every home, car, farm,
ranch, and business at no cost to the bank. Requiring “We the People” to pay interest on
the equity we lost and the bank got free.

Today people believe that cash and coins back up the all checks. If you deposit $100 of
cash, the bank records the cash as a bank asset (debit) and credits a Demand Deposit

Account (DDA), saying that the bank owes you $100. For the $100 liability the bank
owes you, you may receive cash or write a check. If you write a $100 check, the $100
liability your bank owes you is transferred to another bank and that bank owes $100 to
the person you wrote the check to. That person can write a $100 check or receive cash.
So far there is no problem.

Remember one thing however, for the check to be valid there must first be a deposit of
money to the banks ASSETS, to make the check (liability) good. The liability is like a
HOLDING ACCOUNT claiming that money was deposited to make the check good.

Here then, is how the switch in currency takes place

The bank advertises it loans’ money. The bank says, “sign here”. However the bank never
signs because they know they are not going to lend you theirs, or other depositor’s
money. Under the law of bankruptcy of a nation, the mortgage note acts like money. The
bank makes it look like a loan but it is not. It is an exchange.

The bank receives the equity in the home you are buying, for free, in exchange for
an unpaid bank liability that the bank cannot pay, without returning the mortgage
note. If the bank had fulfilled its end of the contract, the bank could not have
received the equity in your home for free.

The bank receives your mortgage note without investing or risking one-
cent.

The bank sells the mortgage note, receives cash or an asset that can then be
converted to cash and still refuses to loan you their or other depositors’ money or
pay the liability it owes you. On a $100,000 loan the bank does not give up $100,000.
The bank receives $100,000 in cash or an asset and issues a $100,000 liability (check) the
bank has no intention of paying. The $100,000 the bank received in the alleged loan is the
equity (lien on property) the bank received without investment, and it is the $100,000 the
individual lost in equity to the bank. The $100,000 equity the individual lost to the bank,
which demands he/she repay plus interest.

The loan agreement the bank told you to sign said LOAN. The bank broke that
agreement. The bank now owns the mortgage note without loaning anything. The bank
then deposited the mortgage note in an account they opened under your name without
your authorization or knowledge. The bank withdrew the money without your
authorization or knowledge using a forged signature. The bank then claimed the money
was the banks’ property, which is a fraudulent conversion.

The mortgage note was deposited or debited (asset) and credited to a Direct Deposit
Account, (DDA) (liability). The credit to Direct Deposit Account (liability) was used
from which to issue the check. The bank just switched the currency. The bank demands
that you cannot use the same currency, which the bank deposited (promissory notes or

mortgage notes) to discharge your mortgage note. The bank refuses to loan you other
depositors’ money, or pay the liability it owes you for having deposited your mortgage
note.

To pay this liability the bank must return the mortgage note to you. However instead of
the bank paying the liability it owes you, the bank demands you use these unpaid bank
liabilities, created in the alleged loan process, as the new currency. Now you must labor
to earn the bank currency (unpaid liabilities created in the alleged loan process) to pay
back the bank. What the bank received for free, the individual lost in equity.

If you tried to repay the bank in like kind currency, (which the bank deposited without
your authorization to create the check they issued you), then the bank claims the
promissory note is not money. They want payment to be in legal tender (check book
money).

The mortgage note is the money the bank uses to buy your property in the foreclosure.
They get your real property at no cost. If they accept your promissory note to discharge
the mortgage note, the bank can use the promissory note to buy your home if you sell it.
Their problem is, the promissory note stops the interest and there is no lien on the
property. If you sell the home before the bank can find out and use the promissory note to
buy the home, the bank lost. The bank claims they have not bought the home at no cost.
Question is, what right does the bank have to receive the mortgage note at no cost in
direct violation of the contract they wrote and refused to sign or fulfill.

By demanding that the bank fulfill the contract and not change the currency, the bank
must deposit your second promissory note to create check book money to end the fraud,
putting everyone back in the same position they where, prior to the fraud, in the first
place. Then all the homes, farms, ranches, cars and businesses in this country would be
redeemed and the equity returned to the rightful owners (the people). If not, every time
the homes are refinanced the banks get the equity for free. You and I must labor 20 to 30
years full time as the bankers sit behind their desks, laughing at us because we are too
stupid to figure it out or to force them to fulfill their contract.

The $100,000 created inflation and this increases the equity value of the homes. On an
average homes are refinanced every 7 1/2 years. When the home is refinanced the bank
again receives the equity for free. What the bank receives for free the alleged borrower
loses to the bank.

According to the Federal Reserve Banks’ own book of Richmond, Va. titled “YOUR
MONEY” page seven, “…demand deposit accounts are not legal tender…” If a
promissory note is legal tender, the bank must accept it to discharge the mortgage note.
The bank changed the currency from the money deposited, (mortgage note) to check
book money (liability the bank owes for the mortgage note deposited) forcing us to labor
to pay interest on the equity, in real property (real estate) the bank received for free. This
cost was not disclosed in NOTICE TO CUSTOMER REQUIRED BY FEDERAL
LAW, Federal Reserve Regulation Z.

When a bank says they gave you credit, they mean they credited your transaction
account, leaving you with the presumption that they deposited other depositors money in
the account. The fact is they deposited your money (mortgage note). The bank cannot

claim they own the mortgage note until they loan you their money. If bank deposits your
money, they are to credit a Demand Deposit Account under your name, so you can write
checks and spend your money. In this case they claim your money is their money. Ask a
criminal attorney what happens in a fraudulent conversion of your funds to the bank’s use
and benefit, without your signature or authorization.

What the banks could not win voluntarily, through deception they received for free.
Several presidents, John Adams, Thomas Jefferson, and Abraham Lincoln believed that
banker capitalism was more dangerous to our liberties than standing armies. U.S.
President James A. Garfield said, “Whoever controls the money in any country is
absolute master of industry and commerce.”

The Chicago Federal Reserve Bank’s book,”Modern Money Mechanics”, explains exactly
how the banks expand and contract the checkbook money supply forcing people into
foreclosure. This could never happen if contracts were not violated and if we received
equal protection under the law of Contract.

HOW THE BANK SWITCHES THE CURRENCY
This is a repeat worded differently to be sure you understand it.
You must understand the currency switch.

The bank does not loan money. The bank merely switches the currency. The alleged
borrower created money or currency by simply signing the mortgage note. The bank does
not sign the mortgage note because they know they will not loan you their money. The
mortgage note acts like money. To make it look like the bank loaned you money the bank
deposits your mortgage note (lien on property) as money from which to issue a check. No
money was loaned to legally fulfill the contract for the bank to own the mortgage note.
By doing this, the bank received the lien on the property without risking or using one
cent. The people lost the equity in their homes and farms to the bank and now they must
labor to pay interest on the property, which the bank got for free and they lost.

The check is not money, the check merely transfers money and by transferring money the
check acts LIKE money. The money deposited is the mortgage note. If the bank never
fulfills the contract to loan money, then the bank does not own the mortgage note. The
deposited mortgage note is still your money and the checking account they set up in your
name, which they credited, from which to issue the check, is still your money. They only
returned your money in the form of a check. Why do you have to fulfill your end of the
agreement if the bank refuses to fulfill their end of the agreement? If the bank does not
loan you their money they have not fulfilled the agreement, the contract is void.

You created currency by simply signing the mortgage note. The mortgage note has
value because of the lien on the property and because of the fact that you are to repay the
loan. The bank deposits the mortgage note (currency) to create a check (currency, bank
money). Both currencies cost nothing to create. By law the bank cannot create currency
(bank money, a check) without first depositing currency, (mortgage note) or legal tender.

For the check to be valid there must be mortgage note or bank money as legal tender, but
the bank accepted currency (mortgage note) as a deposit without telling you and without
your authorization.

The bank withdrew your money, which they deposited without telling you and withdrew
it without your signature, in a fraudulent conversion scheme, which can land the bankers
in jail but is played out in every City and Town in this nation on a daily basis. Without
loaning you money, the bank deposits your money (mortgage note), withdraws it
and claims it is the bank’s money and that it is their money they loaned you.

It is not a loan, it is merely an exchange of one currency for another, they’ll owe you the
money, which they claimed they were to loan you. If they do not loan the money and
merely exchange one currency for another, the bank receives the lien on your property for
free. What they get for free you lost and must labor to pay back at interest.

If the banks loaned you legal tender, they could not receive the liens on nearly every
home, car, farm, and business for free. The people would still own the value of their
homes. The bank must sell your currency (mortgage note) for legal tender so if you use
the bank’s currency (bank money), and want to convert currency (bank money) to legal
tender they will be able to make it appear that the currency (bank money) is backed by
legal tender. The bank’s currency (bank money) has no value without your currency
(mortgage note). The bank cannot sell your currency (mortgage note) without fulfilling
the contract by loaning you their money. They never loaned money, they merely
exchanged one currency for another. The bank received your currency for free, without
making any loan or fulfilling the contract, changing the cost and the risk of the contract
wherein they refused to sign, knowing that it is a change of currency and not a loan.

If you use currency (mortgage note), the same currency the bank deposited to create
currency (bank money), to pay the loan, the bank rejects it and says you must use
currency (bank money) or legal tender. The bank received your currency (mortgage note)
and the bank’s currency (bank money) for free without using legal tender and without
loaning money thereby refusing to fulfill the contract. Now the bank switches the
currency without loaning money and demands to receive your labor to pay what was not
loaned or the bank will use your currency (mortgage note) to buy your home in
foreclosure, The Revolutionary war was fought to stop these bank schemes. The bank has
a written policy to expand and contract the currency (bank money), creating recessions,
forcing people out of work, allowing the banks to obtain your property for free.

If the banks loaned legal tender, this would never happen and the home would cost much
less. If you allow someone to obtain liens for free and create a new currency, which is not
legal tender and you must use legal tender to repay. This changes the cost and the risk.

Under this bank scheme, even if everyone in the nation owned their homes and farms
debt free, the banks would soon receive the liens on the property in the loan process. The
liens the banks receive for free, are what the people lost in property, and now must labor
to pay interest on. The interest would not be paid if the banks fulfilled the contract they
wrote. If there is equal protection under the law and contract, you could get the mortgage
note back without further labor. Why should the bank get your mortgage note and your

labor for free when they refuse to fulfill the contract they wrote and told you to sign?

Sorry for the redundancy, but it is important for you to know by heart their “shell game”,
I will continue in that redundancy as it is imperative that you understand the principle.
The following material is case law on the subject and other related legal issues as well as
a summary.

LOGIC AS EVIDENCE

The check was written without deducting funds from Savings Account or Certificate of
Deposit allowing the mortgage note to become the new pool of money owed to Demand
Deposit Account, Savings Account, Certificate of Deposit with Demand Deposit, Savings
Account, and/or Certificate of Deposit increasing by the amount of the mortgage note. In
this case the bankers sell the mortgage note for Federal Reserve Bank Notes or other
assets while still owing the liability for the mortgage note sold and without the bank
giving up any- Federal Reserve Bank Notes.

If the bank had to part with Federal Reserve Bank Notes, and without the benefit of
checks to hide the fraudulent conversion of the mortgage note from which it issues the
check, the bank fraud would be exposed.

Federal Reserve Bank Notes are the only money called legal tender. If only Federal
Reserve Bank Notes are deposited for the credit to Demand Deposit Account- Savings
Account, Certificate of Deposit, and if the bank wrote a check for the mortgage note, the
check then transfers Federal Reserve Bank Notes and the bank gives the borrower a bank
asset. There is no increase in the check book money supply that exists in the loan process.

The bank policy is to increase bank liabilities; Demand Deposit Account, Savings
Account, Certificate of Deposit, by the mortgage note. If the mortgage note is money,
then the bank never gave up a bank asset. The bank simply used fraudulent conversion of
ownership of the mortgage note. The bank cannot own the mortgage note until the bank
fulfills the contract.

The check is not the money; the money is the deposit that makes the check good. In this
case, the mortgage note is the money from which the check is issued. Who owns the
mortgage note when the mortgage note is deposited? The borrower owns the mortgage
note because the bank never paid money for the mortgage note and never loaned money
(bank asset). The bank simply claimed the bank owned the mortgage note without paying
for it and deposited the mortgage note from which the check was issued. This is
fraudulent conversion. The bank risked nothing! Not even one penny was invested. They
never took money out of any account, in order to own the mortgage note, as proven by
the bookkeeping entries, financial ratios, the balance sheet, and of course the bank’s
literature. The bank simply never complied with the contract.

If the mortgage note is not money, then the check is check kiting and the bank is
insolvent and the bank still never paid. If the mortgage note is money, the bank took our
money without showing the deposit, and without paying for it, which is fraudulent
conversion. The bank claimed it owned the mortgage note without paying for it, then sold

the mortgage note, took the cash and never used the cash to pay the liability it owed for
the check the bank issued. The liability means that the bank still owes the money. The
bank must return the mortgage note or the cash it received in the sale, in order to pay the
liability. Even if the bank did this, the bank still never loaned us the bank’s money, which
is what ‘loan’ means. The check is not money but merely an order to pay money. If the
mortgage note is money then the bank must pay the check by returning the mortgage
note.

The only way the bank can pay Federal Reserve Bank Notes for the check issued is to sell
the mortgage note for Federal Reserve Bank Notes. Federal Reserve Bank Notes are
non-redeemable in violation of the UCC. The bank forces us to trade in non-redeemable
private bank notes of which the bank refuses to pay the liability owed. When we present
the Federal Reserve Bank Notes for payment the bank just gives us back another Federal
Reserve Bank Note which the bank paid 2 1/2 cents for per bill regardless of
denomination.

What a profit for the bank!

The check issued can only be redeemed in Federal Reserve Bank Notes, which the bank
obtained by selling the mortgage note that they paid nothing for.

The bank forces us to trade in bank liabilities, which they never redeem in an asset. We
the people are forced to give up our assets to the bank for free, and without cost to the
bank. This is fraudulent conversion making the contract, which the bank created with
their policy of bookkeeping entries, illegal and the alleged contract null and void.

The bank has no right to the mortgage note or to a lien on the property, until the bank
performs under the contract. The bank had less than ten percent of Federal Reserve Bank
Notes to back up the bank liabilities in Demand Deposit Account, Savings Account, or
Certificate of Deposit’s. A bank liability to pay money is not money. When we try and
repay the bank in like funds (such as is the banks policy to deposit from which to issue
checks) they claim it is not money. The bank’s confusing and deceptive trade practices
and their alleged contracts are unconscionable.

SUMMARY OF DAMAGES

The bank made the alleged borrower a depositor by depositing a $100,000 negotiable
instrument, which the bank sold or had available to sell for approximately $100,000 in
legal tender. The bank did not credit the borrower’s transaction account showing that the
bank owed the borrower the $100,000. Rather the bank claimed that the alleged borrower
owed the bank the $100,000, then placed a lien on the borrower’s real property for
$100,000 and demanded loan payments or the bank would foreclose.

The bank deposited a non-legal tender negotiable instrument and exchanged it for another
non legal tender check, which traded like money, using the deposited negotiable
instrument as the money deposited. The bank changed the currency without the
borrower’s authorization. First by depositing non legal tender from which to issue a check
(which is non-legal tender) and using the negotiable instrument (your mortgage note), to
exchange for legal tender, the bank needed to make the check appear to be backed by

legal tender. No loan ever took place. Which shell hides the little pea?

The transaction that took place was merely a change of currency (without authorization),
a negotiable instrument for a check. The negotiable instrument is the money, which can
be exchanged for legal tender to make the check good. An exchange is not a loan. The
bank exchanged $100,000 for $100,000. There was no need to go to the bank for any
money. The customer (alleged borrower) did not receive a loan, the alleged borrower lost
$100,000 in value to the bank, which the bank kept and recorded as a bank asset and
never loaned any of the bank’s money.

In this example, the damages are $100,000 plus interest payments, which the bank
demanded by mail. The bank illegally placed a lien on the property and then threatened to
foreclose, further damaging the alleged borrower, if the payments were not made. A
depositor is owed money for the deposit and the alleged borrower is owed money for the
loan the bank never made and yet placed a lien on the real property demanding payment.

Damages exist in that the bank refuses to loan their money. The bank denies the
alleged borrower equal protection under the law and contract, by merely exchanging one
currency for another and refusing repayment in the same type of currency deposited. The
bank refused to fulfill the contract by not loaning the money, and by the bank refusing to
be repaid in the same currency, which they deposited as an exchange for another
currency. A debt tender offered and refused is a debt paid to the extent of the offer. The
bank has no authorization to alter the alleged contract and to refuse to perform by not
loaning money, by changing the currency and then refusing repayment in what the bank
has a written policy to deposit.

The seller of the home received a check. The money deposited for the check issued came
from the borrower not the bank. The bank has no right to the mortgage note until the bank
performs by loaning the money.

In the transaction the bank was to loan legal tender to the borrower, in order for the bank
to secure a lien. The bank never made the loan, but kept the mortgage note the alleged
borrower signed. This allowed the bank to obtain the equity in the property (by a lien)
and transfer the wealth of the property to the bank without the bank’s investment, loan, or
risk of money. Then the bank receives the alleged borrower’s labor to pay principal and
Usury interest. What the people owned or should have owned debt free, the bank
obtained ownership in, and for free, in exchange for the people receiving a debt, paying
interest to the bank, all because the bank refused to loan money and merely exchanged
one currency for another. This places you in perpetual slavery to the bank because the
bank refuses to perform under the contract. The lien forces payment by threat of
foreclosure. The mail is used to extort payment on a contract the bank never fulfilled.

If the bank refuses to perform, then they must return the mortgage note. If the bank
wishes to perform, then they must make the loan. The past payments must be returned
because the bank had no right to lien the property and extort interest payments. The bank
has no right to sell a mortgage note for two reasons. The mortgage note was deposited
and the money withdrawn without authorization by using a forged signature and; two, the
contract was never fulfilled. The bank acted without authorization and is involved in a

fraud thereby damaging the alleged borrower.

Excerpts From “Modem Money Mechanics” Pages 3 & 6

What Makes Money Valuable? In the United States neither paper currency nor deposits
have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits
merely book entries. Coins do have some intrinsic value as metal, but generally far less
than face value.

Then, bankers discovered that they could make loans merely by giving their promises to
pay, or bank notes, to borrowers, in this way, banks began to create money. More notes
could be issued than the gold and coin on hand because only a portion of the notes
outstanding would be presented for payment at any one time. Enough metallic money
had to be kept on hand, of course, to redeem whatever volume of notes was presented for
payment.

Transaction deposits are the modem counterpart of bank notes. It was a small step from
printing notes to making book entries crediting deposits of borrowers, which the
borrowers in turn could “spend” by writing checks, thereby “printing” their own money.

Notes, exchange just like checks.

How do open market purchases add to bank reserves and deposits? Suppose the Federal
Reserve System, through its trading desk at the Federal Reserve Bank of New York, buys
$10,000 of Treasury bills from a dealer in U.S. government securities. In today’s world
of Computer financial transactions, the Federal Reserve Bank pays for the securities
with an “electronic” check drawn on itself. Via its “Fedwire” transfer network, the
Federal Reserve notifies the dealer’s designated bank (Bank A) that payment for the
securities should be credited to (deposited in) the dealer’s account at Bank A. At the
same time, Bank A’s reserve account at the Federal Reserve is credited for the amount of
the securities purchased. The Federal Reserve System has added $10,000 of securities to
its assets, which it has paid for, in effect, by creating a liability on itself in the form of
bank reserve balances. These reserves on Bank A’s books are matched by $10,000 of the
dealer’s deposits that did not exist before.

If business is active, the banks with excess reserves probably will have opportunities to
loan the $9,000. Of course, they do not really pay out loans from money they receive as
deposits. If they did this, no additional money would be created. What they do when they
make loans is to accept promissory notes in exchange for credits to tile borrower’s
transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000.
Reserves are unchanged by the loan transactions. But the deposit credits constitute new
additions to the total deposits of the banking system.

PROOF BANKS DEPOSIT NOTES AND ISSUE BANK CHECKS. THE CHECKS
ARE ONLY AS GOOD AS THE PROMISSORY NOTE. NEARLY ALL BANK
CHECKS ARE CREATED FROM PRIVATE NOTES. FEDERAL RESERVE BANK
NOTES ARE A PRIVATE CORPORATE NOTE (Chapter 48, 48 Stat 112) WE USE
NOTES TO DISCHARGE NOTES.

Excerpt from booklet Your Money, page 7: Other M1 Money

While demand deposits, traveler’s checks, and interest-bearing accounts with unlimited
checking authority are not legal tender, they are usually acceptable in payment for
purchases of goods and services.

The booklet, “Your Money”, is distributed free of charge. Additional copies may be
obtained by writing to: Federal Reserve Bank of Richmond Public Services
Department P.O. Box 27622 Richmond, Virginia 23261

CREDIT LOANS AND VOID CONTRACTS: CASE LAW

75. “In the federal courts, it is well established that a national bank has not power to
lend its credit to another by becoming surety, indorser, or guarantor for him.”’
Farmers and Miners Bank v. Bluefield Nat ‘l Bank, 11 F 2d 83, 271 U.S. 669.

76. “A national bank has no power to lend its credit to any person or corporation . . .
Bowen v. Needles Nat. Bank, 94 F 925 36 CCA 553, certiorari denied in 20 S.Ct
1024, 176 US 682, 44 LED 637.

77. “The doctrine of ultra vires is a most powerful weapon to keep private corporations
within their legitimate spheres and to punish them for violations of their corporate
charters, and it probably is not invoked too often .. .” Zinc Carbonate Co. v. First
National Bank, 103 Wis 125, 79 NW 229. American Express Co. v. Citizens State
Bank, 194 NW 430.

78. “A bank may not lend its credit to another even though such a transaction turns out
to have been of benefit to the bank, and in support of this a list of cases might be
cited, which-would look like a catalog of ships.” [Emphasis added] Norton Grocery
Co. v. Peoples Nat. Bank, 144 SE 505. 151 Va 195.

79. “It has been settled beyond controversy that a national bank, under federal Law
being limited in its powers and capacity, cannot lend its credit by guaranteeing the
debts of another. All such contracts entered into by its officers are ultra vires . . .”
Howard & Foster Co. v. Citizens Nat’l Bank of Union, 133 SC 202, 130 SE
759(1926).

80. “. . . checks, drafts, money orders, and bank notes are not lawful money of the
United States …” State v. Neilon, 73 Pac 324, 43 Ore 168.

81. “Neither, as included in its powers not incidental to them, is it a part of a
bank’s business to lend its credit. If a bank could lend its credit as well as its money,
it might, if it received compensation and was careful to put its name only to solid
paper, make a great deal more than any lawful interest on its money would amount
to. If not careful, the power would be the mother of panics . . . Indeed, lending
credit is the exact opposite of lending money, which is the real business of a bank,
for while the latter creates a liability in favor of the bank, the former gives rise to a
liability of the bank to another. I Morse. Banks and Banking 5th Ed. Sec 65; Magee,

Banks and Banking, 3rd Ed. Sec 248.” American Express Co. v. Citizens State
Bank, 194 NW 429.

82. “It is not within those statutory powers for a national bank, even though solvent, to
lend its credit to another in any of the various ways in which that might be done.”
Federal Intermediate Credit Bank v. L ‘Herrison, 33 F 2d 841, 842 (1929).

83. “There is no doubt but what the law is that a national bank cannot lend its credit or
become an accommodation endorser.” National Bank of Commerce v. Atkinson, 55
E 471.

84. “A bank can lend its money, but not its credit.” First Nat’l Bank of Tallapoosa v.
Monroe . 135 Ga 614, 69 SE 1124, 32 LRA (NS) 550.

85. “.. . the bank is allowed to hold money upon personal security; but it must be money
that it loans, not its credit.” Seligman v. Charlottesville Nat. Bank, 3 Hughes 647,
Fed Case No.12, 642, 1039.

86. “A loan may be defined as the delivery by one party to, and the receipt by another
party of, a sum of money upon an agreement, express or implied, to repay the sum
with or without interest.” Parsons v. Fox 179 Ga 605, 176 SE 644. Also see
Kirkland v. Bailey, 155 SE 2d 701 and United States v. Neifert White Co., 247 Fed
Supp 878, 879.

87. “The word ‘money’ in its usual and ordinary acceptation means gold, silver, or paper
money used as a circulating medium of exchange . . .” Lane v. Railey 280 Ky 319,
133 SW 2d 75.

88. “A promise to pay cannot, by argument, however ingenious, be made the equivalent
of actual payment …” Christensen v. Beebe, 91 P 133, 32 Utah 406.

89. “A bank is not the holder in due course upon merely crediting the depositors
account.” Bankers Trust v. Nagler, 229 NYS 2d 142, 143.

90. “A check is merely an order on a bank to pay money.” Young v. Hembree, 73 P2d
393.

91. “Any false representation of material facts made with knowledge of falsity and with
intent that it shall be acted on by another in entering into contract, and which is so
acted upon, constitutes ‘fraud,’ and entitles party deceived to avoid contract or
recover damages.” Barnsdall Refining Corn. v. Birnam Wood Oil Co.. 92 F 26 817.

92. “Any conduct capable of being turned into a statement of fact is representation.
There is no distinction between misrepresentations effected by words and
misrepresentations effected by other acts.” Leonard v. Springer 197 Ill 532. 64 NE
301.

93. “If any part of the consideration for a promise be illegal, or if there are several
considerations for an unseverable promise one of which is illegal, the promise,
whether written or oral, is wholly void, as it is impossible to say what part or which

one of the considerations induced the promise.” Menominee River Co. v. Augustus
Spies L & C Co., 147 Wis 559. 572; 132 NW 1122.

94. “The contract is void if it is only in part connected with the illegal transaction and
the promise single or entire.” Guardian Agency v. Guardian Mut. Savings Bank,
227 Wis 550, 279 NW 83.

95. “It is not necessary for rescission of a contract that the party making the
misrepresentation should have known that it was false, but recovery is allowed even
though misrepresentation is innocently made, because it would be unjust to allow
one who made false representations, even innocently, to retain the fruits of a
bargain induced by such representations.” Whipp v. Iverson, 43 Wis 2d 166.

96. “Each Federal Reserve bank is a separate corporation owned by commercial banks
in its region …” Lewis v. United States, 680 F 20 1239 (1982).

97. In a Debtor’s RICO action against its creditor, alleging that the creditor had
collected an unlawful debt, an interest rate (where all loan charges were added
together) that exceeded, in the language of the RICO Statute, “twice the enforceable
rate.” The Court found no reason to impose a requirement that the Plaintiff show
that the Defendant had been convicted of collecting an unlawful debt, running a
“loan sharking” operation. The debt included the fact that exaction of a usurious
interest rate rendered the debt unlawful and that is all that is necessary to support
the Civil RICO action. Durante Bros. & Sons, Inc. v. Flushing Nat ‘l Bank. 755 F2d
239, Cert. denied, 473 US 906 (1985).

98. The Supreme Court found that the Plaintiff in a civil RICO action need establish
only a criminal “violation” and not a criminal conviction. Further, the Court held
that the Defendant need only have caused harm to the Plaintiff by the commission
of a predicate offense in such a way as to constitute a “pattern of Racketeering
activity.” That is, the Plaintiff need not demonstrate that the Defendant is an
organized crime figure, a mobster in the popular sense, or that the Plaintiff has
suffered some type of special Racketeering injury; all that the Plaintiff must show is
what the Statute specifically requires. The RICO Statute and the civil remedies for
its violation are to be liberally construed to effect the congressional purpose as
broadly formulated in the Statute. Sedima, SPRL v. Imrex Co., 473 US 479 (1985).

DEFINITIONS TO KNOW WHEN EXAMINING A BANK CONTRACT

BANK ACCOUNT: A sum of money placed with a bank or banker, on deposit, by a
customer, and subject to be drawn out on the latter’s check.

BANK: whose business it is to receive money on deposit, cash checks or drafts, discount
commercial paper, make loans and issue promissory notes payable to bearer, known as
bank notes.

BANK CREDIT: A credit with a bank by which, on proper credit rating or proper
security given to the bank, a person receives liberty to draw to a certain extent agreed
upon.

BANK DEPOSIT: Cash, checks or drafts placed with the bank for credit to depositor’s
account. Placement of money in bank, thereby, creating contract between bank and
depositors.

DEMAND DEPOSIT: The right to withdraw deposit at any time.

BANK DEPOSITOR: One who delivers to, or leaves with a bank a sum of money
subject to his order.

BANK DRAFT: A check, draft or other form of payment.

ANK OF ISSUE: Bank with the authority to issue notes which are intended to circulate
as currency.

LOAN: Delivery by one party to, and receipt by another party, a sum of money upon
agreement, express or implied, to repay it with or without interest.

CONSIDERATION: The inducement to a contract. The cause, motive, price or
impelling influences, which induces a contracting, party to enter into a contract. The
reason, or material cause of a contract.

CHECK: A draft drawn upon a bank and payable on demand, signed by the maker or
drawer, containing an unconditional promise to pay a certain sum in money to the order
of the payee. The Federal Reserve Board defines a check as, “…a draft or order upon a
bank or banking house purporting to be drawn upon a deposit of funds for the payment at
all events of, a certain sum of money to a certain person therein named, or to him or his
order, or to bearer and payable instantly on demand of.”

QUESTIONS ONE MIGHT ASK THE BANK IN AN INTERROGATORY

Did the bank loan gold or silver to the alleged borrower?

Did the bank loan credit to the alleged borrower?

Did the borrower sign any agreement with the bank, which prevents the borrower from
repaying the bank in credit?

Is it true that your bank creates check book money when the bank grants loans, simply by
adding deposit dollars to accounts on the bank’s books, in exchange, for the borrower’s
mortgage note?

Has your bank, at any time, used the borrower’s mortgage note, “promise to pay”, as a
deposit on the bank’s books from which to issue bank checks to the borrower?

At the time of the loan to the alleged borrower, was there one dollar of Federal Reserve
Bank Notes in the bank’s possession for every dollar owed in Savings Accounts,
Certificates of Deposits and check Accounts (Demand Deposit Accounts) for every dollar
of the loan?

According to the bank’s policy, is a promise to pay money the equivalent of money?

Does the bank have a policy to prevent the borrower from discharging the mortgage note
in “like kind funds” which the bank deposited from which to issue the check?

Does the bank have a policy of violating the Deceptive Trade Practices Act?

When the bank loan officer talks to the borrower, does the bank inform the borrower that
the bank uses the borrowers mortgage note to create the very money the bank loans out to
the borrower?

Does the bank have a policy to show the same money in two separate places at the same
time?

Does the bank claim to loan out money or credit from savings and certificates of deposits
while never reducing the amount of money or credit from savings accounts or certificates
of deposits, which customers can withdraw from?

Using the banking practice in place at the time the loan was made, is it theoretically
possible for the bank to have loaned out a percentage of the Savings Accounts and
Certificates of Deposits?

If the answer is “no” to question #13, explain why the answer is no.

In regards to question #13, at the time the loan was made, were there enough Federal
Reserve Bank Notes on hand at the bank to match the figures represented by every
Savings Account and Certificate of Deposit and checking Account (Demand Deposit
Account)?

Does the bank have to obey, the laws concerning, Commercial Paper; Commercial
Transactions, Commercial Instruments, and Negotiable Instruments?

Did the bank lend the borrower the bank’s assets, or the bank’s liabilities?

What is the complete name of the banking entity, which employs you, and in what
jurisdiction is the bank chartered?

What is the bank’s definition of “Loan Credit”?

Did the bank use the borrowers assumed mortgage note to create new bank money, which

did not exist before the assumed mortgage note was signed?

Did the bank take money from any Demand Deposit Account (DDA), Savings Account
(SA), or a Certificate of Deposit (CD), or any combination of any Demand Deposit
Account, Savings Account or Certificate of Deposit, and loan this money to the
borrower?

Did the bank replace the money or credit, which it loaned to the borrower with the
borrower’s assumed mortgage note?

Did the bank take a bank asset called money, or the credit used as collateral for
customers’ bank deposits, to loan this money to the borrower, and/or did the bank use the
borrower’s note to replace the asset it loaned to the borrower?

Did the money or credit, which the bank claims to have loaned to the borrower, come
from deposits of money or credit made by the bank’s customers, excluding the borrower’s
assumed mortgage note?

Considering the balance sheet entries of the bank’s loan of money or credit to the
borrower, did the bank directly decrease the customer deposit accounts (i.e. Demand
Deposit Account, Savings Account, and Certificate of Deposit) for the amount of the
loan?

Describe the bookkeeping entries referred to in question #13.

Did the bank’s bookkeeping entries to record the loan and the borrower’s assumed
mortgage note ever, at any time, directly decrease the amount of money or credit from
any specific bank customer’s deposit account?

Does the bank have a policy or practice to work in cooperation with other banks or
financial institutions use borrower’s mortgage note as collateral to create an offsetting
amount of new bank money or credit or check book money or Demand Deposit Account
generally to equal the amount of the alleged loan?

Regarding the borrowers assumed mortgage loan, give the name of the account which
was debited to record the mortgage.

Regarding the bookkeeping entry referred to in Interrogatory #17, state the name and
purpose of the account, which was credited.

When the borrower’s assumed mortgage note was debited as a bookkeeping entry, was
the offsetting entry a credit account?

Regarding the initial bookkeeping entry to record the borrower’s assumed mortgage note
and the assumed loan to the borrower, was the bookkeeping entry credited for the money
loaned to the borrower, and was this credit offset by a debit to record the borrower’s
assumed mortgage note?

Does the bank currently or has it ever at anytime used the borrower’s assumed mortgage
note as money to cover the bank’s liabilities referred to above, i.e. Demand Deposit
Account, Savings Account and Certificate of Deposit?

When the assumed loan was made to the borrower, did the bank have every Demand
Deposit Account, Savings Account, and Certificate of Deposit backed up by Federal
Reserve Bank Notes on hand at the bank?

Does the bank have an established policy and practice to emit bills of credit which it
creates upon its books at the time of making a loan agreement and issuing money or so-
called money of credit, to its borrowers?

SUMMARY

The bank advertised it would loan money, which is backed by legal tender. Is not that
what the symbol $ means? Is that not what the contract said? Do you not know there is no
agreement or contract in the absence of mutual consent? The bank may say that they gave
you a check, you owe the bank money. This information shows you that the check came
from the money the alleged borrower provided and the bank never loaned any money
from other depositors.

I’ve shown you the law and the bank’s own literature to prove my case. All the bank
did was trick you. They get your mortgage note without investing one cent, by making
you a depositor and not a borrower. The key to the puzzle is, the bank did not sign the
contract. If they did they must loan you the money. If they did not sign it, chances
are, they deposited the mortgage note in a checking account and used it to issue a
check without ever loaning you money or the bank investing one cent.

Our Nation, along with every State of the Union, entered into Bankruptcy, in 1933. This
changes the law from “gold and silver” legal money and “common law” to the law of
bankruptcy. Under Bankruptcy law the mortgage note acts like money. Once you sign the
mortgage note it acts like money. The bankers now trick you into thinking they loaned
you legal tender, when they never loaned you any of their money.

The trick is they made you a depositor instead of a borrower. They deposited your
mortgage note and issued a bank check. Neither the mortgage note nor the check is
legal tender. The mortgage note and the check are now money created that never existed,
prior. The bank got your mortgage note for free without loaning you money, and sold the
mortgage note to make the bank check appear legal. The borrower provided the legal
tender, which the bank gave back in the form of a check. If the bank loaned legal tender,
as the contract says, for the bank to legally own the mortgage note, then the people
would still own the homes, farms, businesses and cars, nearly debt free and pay little, if
any interest. By the banks not fulfilling the contract by loaning legal tender, they
make the alleged borrower, a depositor. This is a fraudulent conversion of the
mortgage note. A Fraud is a felony.

The bank had no intent to loan, making it promissory fraud, mail fraud, wire fraud, and a
list of other crimes a mile long. How can they make a felony, legal? They cannot! Fraud

is fraud!

The banks deposit your mortgage note in a checking account. The deposit becomes the
bank’s property. They withdraw money without your signature, and call the money, the
banks money that they loaned to you. The bank forgot one thing. If the bank deposits
your mortgage note, then the bank must credit your checking account claiming the bank
owes you $100,000 for the $100,000 mortgage note deposited. The credit of $100,000 the
bank owes you for the deposit allows you to write a check or receive cash. They did not
tell you they deposited the money, and they forget to tell you that the $100,000 is money
the banks owe you, not what you owe the bank. You lost $100,000 and the bank gained
$100,000. For the $100,000 the bank gained, the bank received government bonds or
cash of $100,000 by selling the mortgage note. For the loan, the bank received $100,000
cash, the bank did not give up $100,000.

Anytime the bank receives a deposit, the bank owes you the money. You do not owe the
bank the money.

If you or I deposit anyone’s negotiable instrument without a contract authorizing it, and
withdraw the money claiming it is our money, we would go to jail. If it was our policy to
violate a contract, we could go to jail for a very long time. You agreed to receive a loan,
not to be a depositor and have the bank receive the deposit for free. What the bank got for
free (lien on real property) you lost and now must pay with interest.

If the bank loaned us legal tender (other depositors’ money) to obtain the mortgage note
the bank could never obtain the lien on the property for free. By not loaning their money,
but instead depositing the mortgage note the bank creates inflation, which costs the
consumer money. Plus the economic loss of the asset, which the bank received for free, in
direct violation of any signed agreement.

We want equal protection under the law and contract, and to have the bank fulfill the
contract or return the mortgage note. We want the judges, sheriffs, and lawmakers to
uphold their oath of office and to honor and uphold the founding fathers U.S.
Constitution. Is this too much to ask?

What is the mortgage note? The mortgage note represents your future loan payments. A
promise to pay the money the bank loaned you. What is a lien? The lien is a security on
the property for the money loaned.

How can the bank promise to pay money and then not pay? How can they take a promise
to pay and call it money and then use it as money to purchase the future payments of
money at interest. Interest is the compensation allowed by law or fixed by the parties for
the use or forbearance of borrowed money. The bank never invested any money to
receive your mortgage note. What is it they are charging interest on?

The bank received an asset. They never gave up an asset. Did they pay interest on the
money they received as a deposit? A check issued on a deposit received from the
borrower cost the bank nothing? Where did the money come from that the bank invested
to charge interest on?

The bank may say we received a benefit. What benefit? Without their benefit we would
receive equal protection under the law, which would mean we did not need to give up an
asset or pay interest on our own money! Without their benefit we would be free and not
enslaved. We would have little debt and interest instead of being enslaved in debt and
interest. The banks broke the contract, which they never intended to fulfill in the first
place. We got a check and a house, while they received a lien and interest for free,
through a broken contract, while we got a debt and lost our assets and our country. The
benefit is the banks, who have placed liens on nearly every asset in the nation, without
costing the bank one cent. Inflation and working to pay the bank interest on our own
money is the benefit. Some benefit!

What a Shell Game. The Following case was an actual trial concerning the issues we
have covered. The Judge was extraordinary in-that he had a grasp of the
Constitution that I haven’t seen often enough in our courts. This is the real thing,
absolutely true. This case was reviewed by the Minnesota Supreme Court on their
own motion. The last thing in the world that the Bankers and the Judges wanted
was case law against the Bankers. However, this case law is real.

_______________________________________________________________________

STATE OF MINNESOTA IN JUSTICE COURT COUNTY OF SCOTT
TOWNSHIP OF
CREDIT RIVER

)MARTIN V. MAHONEY, JUSTICE

FIRST BANK OF MONTGOMERY, Plaintiff, ) CASE NO: 19144

Vs. ) JUDGMENT AND DECREE

Jerome Daly, Defendant. )

The above entitled action came on before the court and a jury of 12 on December 7, 1968
at 10:00 a.m. Plaintiff appeared by its President Lawrence V. Morgan and was
represented by its Counsel Theodore R. Mellby, Defendant appeared on his own behalf.

A jury of Talesmen were called, impaneled and sworn to try the issues in this case.
Lawrence V. Morgan was the only witness called for plaintiff and defendant testified as
the only witness in his own behalf.

Plaintiff brought this as a Common Law action for the recovery of the possession of lot
19, Fairview Beach, Scott County, Minn. Plaintiff claimed titled to the Real Property in
question by foreclosure of a Note and Mortgage Deed dated May 8, 1964 which plaintiff
claimed was in default at the time foreclosure proceedings were started. Defendant
appeared and answered that the plaintiff created the money and credit upon its own books
by bookkeeping entry as the legal failure of consideration for the Mortgage Deed and
alleged that the Sheriff’s sale passed no title to plaintiff. The issues tried to the jury were

whether there was a lawful consideration and whether Defendant had waived his rights to
complain about the consideration having paid on the note for almost 3 years. Mr. Morgan
admitted that all of the money or credit which was used as a consideration was created
upon their books that this was standard banking practice exercised by their bank in
combination with the Federal Reserve Bank of Minneapolis, another private bank, further
that he knew of no United States Statute of Law that gave the Plaintiff the authority to do
this. Plaintiff further claimed that Defendant by using the ledger book created credit and
by paying on the Note and Mortgage waived any right to complain about the
consideration and that Defendant was estopped from doing so. At 12:15 on December 7,
1968 the Jury returned a unanimous verdict for the Defendant. Now therefore by virtue of
the authority vested in me pursuant to the Declaration of Independence, the Northwest
Ordinance of 1787, the Constitution of the United States and the Constitution and laws of
the State Minnesota not inconsistent therewith.

IT IS HEREBY ORDERED, ADJUDGED AND DECREED

That Plaintiff is not entitled to recover the possession of lot 19, Fairview Beach, Scott
County, Minnesota according to the plat thereof on file in the Register of Deeds office.
That because of failure of a lawful consideration the note and Mortgage dated May 8,
1964 are null and void.

That the Sheriffs sale of the above described premises held on June 26, 1967 is null and
void, of no effect.

That Plaintiff has no right, title or interest in said premises or lien thereon, as is above
described.

That any provision in the Minnesota Constitution and any Minnesota Statute limiting the

Jurisdiction of this Court is repugnant to the Constitution of the United States and to the
Bill of Rights of the Minnesota Constitution and is null and void and that this Court has
Jurisdiction to render complete Justice in this cause.

That Defendant is awarded costs in the sum of $75.00 and execution is hereby issued
therefore.

A 10 day stay is granted.

The following memorandum and any supplemental memorandum made and filed by this
Court in support of this judgment is hereby made a part hereof by reference.

BY THE COURT

Dated December 9, 1969

MARTIN V. MAHONEY

Justice of the Peace Credit River Township Scott County, Minnesota

MEMORANDUM

The issues in this case were simple. There was no material dispute on the facts for the
jury to resolve. Plaintiff admitted that it, in combination with the Federal Reserve Bank
of Minneapolis, which are for all practical purposes because of their interlocking activity
and practices, and both being Banking Institutions Incorporated under the laws of the
United States, are in the Law to be treated as one and the same Bank, did create the entire
$14,000.00 in money or credit upon its own books by bookkeeping entry. That this was
the Consideration used to support the Note dated May 8, 1964 and the Mortgage of the
same date. The Money and credit first came into existence when they credited it.

Mr. Morgan admitted that no United States Law of Statute existed which gave him the
right to do this. A lawful consideration must exist and be tendered to support the note.
(See Anheuser Busch Brewing Co. v. Emma Mason, 44 Minn. 318. 46 NW 558.) The
Jury found there was no lawful consideration and I agree Only God can create something
of value out of nothing. Even if defendant could be charged with waiver or estoppel as a
matter of law this is no defense to the plaintiff. The law leaves wrongdoers where it finds
them. (See sections 50, 5 1, and 52 of Am Jur 2d “Actions” on page 584.”) No action will
lie to recover on a claim based upon, or in any manner depending upon, a fraudulent,
illegal, or immoral transaction or contract to which plaintiff was a party. Plaintiffs act of
creating is not authorized by the Constitution and Laws of the United States, is
unconstitutional and void, and is not lawful consideration in the eyes of the law to
support any thing or upon which any lawful rights can be built. Nothing in the
Constitution of the United States limits the jurisdiction of this Court, which is one of
original jurisdiction with right of trial by jury guaranteed.

This is a Common Law Action. Minnesota cannot limit or impair the power of this Court
to render complete justice between the parties. Any provisions in the Constitution and
laws of Minnesota which attempt to do so is repugnant to the Constitution of the United
States and void. No question as to the Jurisdiction of this Court was raised by either party
at the trial. Both parties were given complete liberty to submit any and all facts and law
to the jury, at least in so far as they saw it. No complaint was made by Plaintiff that
Plaintiff did not receive a fair trial. From the admissions made by Mr. Morgan the path of
duty was made direct and clear for the jury. Their verdict could not reasonably have been
otherwise. Justice was rendered completely and without purchase, conformable to the law
in this Court on December 7, 1968.

BY THE COURT

MARTIN V. MAHONEY

Justice of the Peace Credit River Township Scott County, Minnesota

Note: It has never been doubted that a note given on a consideration, which is prohibited
by law is void. It has been determined independent of Acts of Congress, that sailing
under the license of an enemy is illegal. The emission of Bills of Credit upon the books of
these private Corporations for the purposes of private gain is not warranted by the
Constitution of the United States and is unlawful. See Craig v. @ 4 peters reports 912,
This Court can tread only that path which is marked out by duty. M.V.M.

JUDGE MARTIN MAHONEY DECISION AS FOLLOWS

“For the Justice’s fees, the First National Bank deposited @ the Clerk of the District
Court the two Federal Reserve Bank Notes. The Clerk tendered the Notes to me (the
Judge). As Judge my sworn duty compelled me to refuse the tender. This is contrary to
the Constitution of the United States. The States have no power to make bank notes a
legal tender. Only gold and silver coin is a lawful tender.” (See American Jurist on
Money 36 sec.13.)

“Bank Notes are a good tender as money unless specifically objected to. Their consent
and usage is based upon the convertibility of such notes to coin at the pleasure of the
holder upon presentation to the bank for redemption. When the inability of a bank to
redeem its notes is openly avowed they instantly lose their character as money and their
circulation as currency ceases.” (See American Jurist 36-section 9). “There is no lawful
consideration for these Federal Reserve Bank Notes to circulate as money. The banks
actually obtained these notes for cost of printing – A lawful consideration must exist for a
Note. As a matter of fact, the “Notes” are not Notes at all, as they contain no promise to
pay.” (See 17 American Jurist section 85, 215) “The activity of the Federal Reserve
Banks of Minnesota, San Francisco and the First National Bank of Montgomery is
contrary to public policy and contrary to the Constitution of the United States, and
constitutes an unlawful creation of money, credit and the obtaining of money and credit
for no valuable consideration.

Activity of said banks in creating money and credit is not warranted by the Constitution
of the United States.” “The Federal Reserve Banks and National Banks exercise an
exclusive monopoly and privilege of creating credit and issuing Notes at the expense of
the public which does not receive a fair equivalent. This scheme is obliquely designed for
the benefit of an idle monopoly to rob, blackmail, and oppress the producers of wealth.
“The Federal Reserve Act and the National Bank Act are, in their operation and effect,
contrary to the whole letter and spirit of the Constitution of the United States, for they
confer an unlawful and unnecessary power on private parties; they hold all of our fellow
citizens in dependence; they are subversive to the rights and liberation of the people.”
“These Acts have defiled the lawfully constituted Government of the United States. The
Federal Reserve Act and the National Banking Act are not necessary and proper for
carrying into execution the legislative powers granted to Congress or any other powers
vested in the Government of the United States, but on the contrary, are subversive to the
rights of the People in their rights to life, liberty, and property.” (See Section 462 of Title
31 U. S. Code).

“The meaning of the Constitutional provision, ‘NO STATE SHALL make anything but
Gold and Silver Coin a legal tender ‘ payment of debts’ is direct, clear, unambiguous and
without any qualification. This Court is without authority to interpolate any exception.
My duty is simply to execute it, as and to pronounce the legal result. From an
examination of the case of Edwards v. Kearsey, Federal Reserve Bank Notes (fiat money)
which are attempted to be made a legal tender, are exactly what the authors of the

Constitution of the United States intend to prohibit. No State can make these Notes a
legal tender. Congress is incompetent to authorize a State to make the Notes a legal
tender. For the effect of binding Constitution provisions see Cooke v. Iverson. This
fraudulent Federal Reserve System and National Banking System has impaired the
obligation of Contract promoted disrespect for the Constitution and Law and has shaken
society to its foundation.” (See 96 U.S. Code 595 and 108 M 388 and 63 M 147)

“Title 31, U.S. Code, Section 432, is in direct conflict with the Constitution insofar, at
least, that it attempts to make Federal Reserve Bank Notes a legal tender. The
Constitution is the Supreme Law of the Land. Section 462 of Title 31 is not a law, which
is made in pursuance of the Constitution. It is unconstitutional and void, and I so hold.
Therefore, the two Federal Reserve Bank Notes are Null and Void for any lawful purpose
in so far as this case is concerned and are not a valid deposit of $2.00 with the Clerk of
the District Court for the purpose of effecting an Appeal from this Court to the District
Court.” “However, of these Federal Reserve Bank Notes, previously discussed, and that is
that the Notes are invalid, because of a theory that they are based upon a valid, adequate
or lawful consideration. At the hearing scheduled for January 22, 1969, at 7:00 P.M., Mr.
Morgan appeared at the trial; he appeared as a witness to be candid, open, direct,
experienced and truthful. He testified to years of experience with the Bank of America in
Los Angeles, the Marquette National Bank of Minnesota and the First National Bank of
Minnesota. He seemed to be familiar with the operation of the Federal Reserve System.
He freely admitted that his Bank created all of the money and credit upon its books with
which it acquired the Note and Mortgage of May 8, 1964. The credit first came into
existence when the Bank created it upon its books. Further, he freely admitted that no
United States Law gave the Bank the authority to do this. This was obviously no lawful
consideration for the Note.

The Bank parted with absolutely nothing except a little ink. In this case, the evidence was
on January 22, 1969 that the Federal Reserve Bank obtained the Notes for this seems to
be conferred by Title 12 USC Section 420. The cost is about 9/10th of a cent per Note
regardless of the amount of the Note. The Federal Reserve Banks create all of the money
and credit upon their books by bookkeeping entries by which they acquire United States
Securities. The collateral required to obtain the Note is, by section 412 USC, Title 12, a
deposit of a like amount of bonds. Bonds which the Banks acquire by creating money and
credit by bookkeeping entry.”

“No rights can be acquired by fraud. The Federal Reserve Bank Notes are acquired
through the use of unconstitutional statutes and fraud.” “The Common Law requires a
lawful consideration for any contract or Note. These Notes are void for failure at a lawful
consideration at Common Law, entirely apart from any Constitutional consideration.
Upon this ground, the Notes are ineffectual for any purpose. This seems to be the
principal objection to paper fiat money and the cause of its depreciation and failure down
through the ages. If allowed to continue, Federal Reserve Bank Notes will meet the same
fate. From the evidence introduced on January 22, 1969, this Court finds that as of March
18, 1969, all Gold and Silver backing is removed from Federal Reserve Bank Notes.”
“The law leaves wrongdoers where it finds them. (See I Mer. Jur 2nd on Actions Section
550).”Slavery and all its incidents, including Peonage, thralldom, and debt created by

fraud is universally prohibited in the United States. This case represents but another
refined form of Slavery by the Bankers. Their position is not supported by the
Constitution of the United States. The People have spoken their will in terms, which
cannot be misunderstood. It is indispensable to the preservation of the Union and
independence and liberties of the people that this Court, adhere only to the mandate of the
Constitution and administer it as it is written. I, therefore, hold these Notes in question
void and not effectual for any purpose.” (4) January 30, 1969

Judge Martin V. Mahoney

Justice of the Peace Credit River Township

_______________________________________________________________________

CREDIT LOANS AND VOID CONTRACTS PERFECT OBLIGATION AS TO A
HUMAN BEING AS TO A BANK

Furthermore, this Memorandum of law is offered in order to advance understanding of
the complex legal issues, present and embodied in the Common Law, with authorities,
law and cases in support of, which will constitute the following facts:

Privately owned banks are making loans of “credit” with the intended purpose of
circulating “credit” as “money”. Other financial institutions and individuals may
“launder” bank credit that they receive directly or indirectly from privately owned banks.
This collective activity is unconstitutional, unlawful, in violation of Common Law, U.S.
Code and the principles of equity. Such activity and underlying contracts have long been
held void, by State Courts, Federal Courts and the U.S. Supreme Court. This
Memorandum will demonstrate through authorities and established common law, that
credit “money creation” by privately owned bank corporations is not really “money
creation” at all. It is the trade specialty and artful illusion of law merchants, which use
old-time trade secrets of the Goldsmiths, to entrap the borrower and unjustly enrich the
lender through usury and other unlawful techniques. Issues based on law and the
principles of equity, which are within the jurisdiction of this Court, will be addressed.

THE GOLDSMITHS

In his book, Money and Banking (8th Edition, 1984), Professor David R. Kamerschen
writes on pages 56 -63: “The first bankers in the modern sense were the goldsmiths, who
frequently accepted bullion and coins for storage … One result was that the goldsmiths
temporarily could lend part of the gold left with them . . . These loans of their customers’
gold were soon replaced by a revolutionary technique. When people brought in gold, the
goldsmiths gave them notes promising to pay that amount of gold on demand. The notes,
first made payable to the order of the individual, were later changed to bearer obligations.
In the previous form, a note payable to the order of Jebidiah Johnson would be paid to no
one else unless Johnson had first endorsed the note … But notes were soon being used in
an unforeseen way. The note holders found that, when they wanted to buy something,
they could use the note itself in payment more conveniently and let the other person go
after the gold, which the person rarely did . . .The specie, then tended to remain in the
goldsmiths’ vaults. . . . The goldsmiths began to realize that they might profit handsomely
by issuing somewhat more notes than the amount of specie they held. . . These additional

notes would cost the goldsmiths nothing except the negligible cost of printing them, yet
the notes provided the goldsmiths with funds to lend at interest . . . .And they were to find
that the profitability of their lending operations would exceed the profit from their
original trade. The goldsmiths became bankers as their interest in manufacture of gold
items to sell was replaced by their concern with credit policies and lending activities . . .

They discovered early that, although an unlimited note issue would be unwise, they could
issue notes up to several times the amount of specie they held. The key to the whole
operation lay in the public’s willingness to leave gold and silver in the bank’s vaults and
use the bank’s notes. This discovery is the basis of modern banking: On page 74,
Professor Kamerschen further explains the evolution of the credit system: “Later the
goldsmiths learned a more efficient way to put their credit money into circulation. They
lent by issuing additional notes, rather than by paying out in gold. In exchange for the
interest-bearing note received from their customer (in effect, the loan contract), they gave
their own non-interest bearing note. Each was actually borrowing from the other … The
advantage of the later procedure of’ lending notes rather than gold was that . . . more
notes could be issued if the gold remained in the vaults … Thus, through the principle of
bank note issuance, banks learned to create money in the form of their own liability.”
[Emphasis Added]

MODERN MONEY MECHANICS

Another publication which explains modern banking as learned from the Goldsmiths is
Modern Money Mechanics (5th edition 1992), published by the Federal Reserve Bank of
Chicago which states beginning on page 3: “It started with the goldsmiths …” At one
time, bankers were merely middlemen. They made a profit by accepting gold and coins
brought to them for safekeeping and lending the gold and coins to borrowers. But the
goldsmiths soon found that the receipts they issued to depositors were being used as a
means of payment. ‘Then, bankers discovered that they could make loans merely by
giving borrowers their promises to pay, or bank notes… In this way, banks began to create
money … Demand deposits are the modern counterpart of bank notes . . . It was a small
step from printing notes to making book entries to the credit of borrowers which the
borrowers, in turn, could ‘spend’ by writing checks, thereby printing their own money.”
[Emphasis added]

HOW BANKS CREATE MONEY

In the modern sense, banks create money by creating “demand deposits.” Demand
deposits are merely “book entries” that reflect how much lawful money the bank owes its
customers. Thus, all deposits are called demand deposits and are the bank’s liabilities.
The bank’s assets are the vault cash plus all the “IOUs” or promissory notes that the
borrower signs when they borrow either money or credit. When a bank lends its cash
(legal money), it loans its assets, but when a bank lends its “credit” it lends its liabilities.
The lending of credit is, therefore, the exact opposite of the lending of cash (legal
money).

At this point, we need to define the meaning of certain words like “lawful money”, “legal

tender”, “other money” and “dollars”. The terms “Money” and “Tender” had their origins
in Article 1, Sec. 8 and Article 1, Sec. 10 of the Constitution of the United States. 12
U.S.C. §152 refers to “gold and silver coin as lawful money of the United States” and
was unconstitutionally repealed in 1994 in-that Congress can not delegate any portion of
their constitutional responsibility without Amendment. The term “legal tender” was
originally cited in 31 U.S.C.A. §392 and is now re-codified in 31 U.S.C.A. §5103 which
states: “United States coins and currency . . . are legal tender for all debts, public charges,
taxes, and dues.” The common denominator in both “lawful money” and “legal tender
money” is that the United States Government issues both.

With Bankers, however, we find that there are two forms of money – one is government-
issued, and privately owned banks such as WASHINGTON MUTUAL, and JP
MORGAN CHASE, issue the other. As we have already discussed government issued
forms of money, we must now scrutinize privately issued forms of money.

All privately issued forms of money today are based upon the liabilities of the issuer.
There are three common terms used to describe this privately created money. They are
“credit”, “demand deposits” and “checkbook money”. In the Sixth edition of Blacks Law
Dictionary, p.367 under the term “Credit” the term “Bank credit” is described as: “Money
bank owes or will lend a individual or person”. It is clear from this definition that “Bank
credit” which is the “money bank owes” is the bank’s liability. The term “checkbook
money” is described in the book “I Bet You Thought”, published by the privately owned
Federal Reserve Bank of New York, as follows: “Commercial banks create checkbook
money whenever they grant a loan, simply by adding deposit dollars to accounts on their
books to exchange for the borrowers IOU . . . .” The word “deposit” and “demand
deposit” both mean the same thing in bank terminology and refer to the bank’s liabilities.

For example, the Chicago Federal Reserves publication, “Modern Money Mechanics”
states: “Deposits are merely book entries … Banks can build up deposits by increasing
loans … Demand deposits are the modern counterpart of bank notes. It was a small step
from printing notes to making book entries to the credit of borrowers which the
borrowers, in turn, could ‘spend’ by writing checks. Thus, it is demonstrated in “Modern
Money Mechanics” how, under the practice of fractional reserve banking, a deposit of
$5,000 in cash could result in a loan of credit/checkbook money/demand deposits of.
$100,000 if reserve ratios set by the Federal Reserve are 5% (instead of 10%).

In a practical application, here is how it works. If a bank has ten people who each deposit
$5,000 (totaling $50,000) in cash (legal money) and the bank’s reserve ratio is 5%, then
the bank will lend twenty times this amount, or $1,000,000 in “credit” money. What the
bank has actually done, however, is to write a check or loan its credit with the intended
purpose of circulating credit as “money.” Banks know that if all the people who receive a
check or credit loan come to the bank and demand cash, the bank will have to close its
doors because it doesn’t have the cash to back up its check or loan. The bank’s check or
loan will, however, pass as money as long as people have confidence in the illusion and
don’t demand cash. Panics are created when people line up at the bank and demand cash
(legal money), causing banks to fold as history records in several time periods, the most
recent in this country was the panic of 1933.

THE PROCESS OF PASSING CHECKS OR CREDIT AS MONEY IS DONE
QUITE SIMPLY

A deposit of $5,000 in cash by one person results in a loan of $100,000 to another person
at 5% reserves. The person receiving the check or loan of credit for $100,000 usually
deposits it in the same bank or another bank in the Federal Reserve System. The check or
loan is sent to the bookkeeping department of the lending bank where a book entry of
$100,000 is credited to the borrower’s account. The lending bank’s check that created the
borrower’s loan is then stamped “Paid” when the account of the borrower is credited a
“dollar” amount. The borrower may then “spend” these book entries (demand deposits)
by writing checks to others, who in turn deposit their checks and have book entries
transferred to their account from the borrower’s checking account. However, two highly
questionable and unlawful acts have now occurred. The first was when the bank wrote
the check or made the loan with insufficient funds to back them up. The second is when
the bank stamps its own “Not Sufficient Funds” check “paid” or posts a loan by merely
crediting the borrower’s account with book entries the bank calls “dollars.” Ironically, the
check or loan seems good and passes as money — unless an emergency occurs via
demands for cash – or a Court challenge — and the artful, illusion bubble, bursts.

DIFFERENT KINDS OF MONEY

The book, “I Bet You Thought”, published by the Federal Reserve Bank of New York,
states: “Money is any generally accepted medium of exchange, not simply coin and
currency. Money doesn’t have to be intrinsically valuable, be issued by a government or
be in any special form.” [Emphasis added] Thus we see that privately issued forms of
money only require public confidence in order to pass as money. Counterfeit money also
passes as money as long as nobody discovers it’s counterfeit. Like wise, “bad” checks and
“credit” loans pass as money so long as no one finds out they are unlawful. Yet, once the
fraud is discovered, the values of such “bank money” like bad check’s ceases to exist.
There are, therefore, two kinds of money — government issued legal money and privately
issued unlawful money.

DIFFERENT KINDS OF DOLLARS

The dollar once represented something intrinsically valuable made from gold or silver.
For example, in 1792, Congress defined the silver dollar as a silver coin containing
371.25 grains of pure silver. The legal dollar is now known as “United States coins and
currency.” However, the Banker’s dollar has become a unit of measure of a different kind
of money. Therefore, with Bankers there is a “dollar” of coins and a dollar of cash (legal
money), a “dollar” of debt, a “dollar” of credit, a “dollar” of checkbook money or a
“dollar” of checks. When one refers to a dollar spent or a dollar loaned, he should now
indicate what kind of “dollar” he is talking about, since Bankers have created so many
different kinds.

A dollar of bank “credit money” is the exact opposite of a dollar of “legal money”. The
former is a liability while the latter is an asset. Thus, it can be seen from the earlier

statement quoted from I Bet You Thought, that money can be privately issued as: “Money
doesn’t have to … be issued by a government or be in any special form.” It should be
carefully noted that banks that issue and lend privately created money demand to be paid
with government issued money. However, payment in like kind under natural equity
would seem to indicate that a debt created by a loan of privately created money can be
paid with other privately created money, without regard for “any special form” as there
are no statutory laws to dictate how either private citizens or banks may create money.

BY WHAT AUTHORITY?

By what authority do state and national banks, as privately owned corporations, create
money by lending their credit –or more simply put – by writing and passing “bad” checks
and “credit” loans as “money”? Nowhere can a law be found that gives banks the
authority to create money by lending their liabilities.

Therefore, the next question is, if banks are creating money by passing bad checks and
lending their credit, where is their authority to do so? From their literature, banks claim
these techniques were learned from the trade secrets of the Goldsmiths. It is evident,
however, that money creation by private banks is not the result of powers conferred upon
them by government, but rather the artful use of long held “trade secrets.” Thus, unlawful
money creation is not being done by banks as corporations, but unlawfully by bankers.

Article I, Section 10, para. 1 of the Constitution of the United States of America
specifically states that no state shall “… coin money, emit bills of credit, make any
thing but gold and silver coin a Tender in Payment of Debts, pass any Bill of
Attainder, ex post facto Law, or Law impairing the Obligations of Contracts . .
“[Emphasis added]

The states, which grant the Charters of state banks also, prohibit the emitting of
Bills of credit by not granting such authority in bank charters. It is obvious that “We
the people” never delegated to Congress, state government, or agencies of the state, the
power to create and issue money in the form of checks, credit, or other “bills of credit.”
The Federal Government today does not authorize banks to emit, write, create, issue and
pass checks and credit as money. But banks do, and get away with it! Banks call their
privately created money nice sounding names, like “credit”, “demand deposits”, or
“checkbook money”. However, the true nature of “credit money” and “checks” does not
change regardless of the poetic terminology used to describe them. Such money in
common use by privately owned banks is illegal under Art. 1, Sec.10, para. 1 of the
Constitution of the United States of America, as well as unlawful under the laws of the
United States and of this State.

VOID “ULTRA VIRES” CONTRACTS

The courts have long held that when a corporation executes a contract beyond the scope
of its charter or granted corporate powers, the contract is void or “ultra vires”.

In Central Transp. Co. v. Pullman, 139 U.S. 60, 11 S. Ct. 478, 35 L. Ed. 55, the court
said: “A contract ultra vires being unlawful and void, not because it is in itself immoral,
but because the corporation, by the law of its creation, is incapable of making it, the

courts, while refusing to maintain any action upon the unlawful contract, have always
striven to do justice between the parties, so far as could be done consistently with
adherence to law, by permitting property or money, parted with on the faith of the
unlawful contract, to be recovered back, or compensation to be made for it. In such case,
however, the action is not maintained upon the unlawful contract, nor according to its
terms; but on an implied contract of the defendant to return, or, failing to do that, to make
compensation for, property or money which it has no right to retain. To maintain such an
action is not to affirm, but to disaffirm, the unlawful contract.”

“When a contract is once declared ultra vires, the fact that it is executed · does not
validate it, nor can it be ratified, so as to make it the basis of suitor action, nor does the
doctrine of estoppel apply.” F& PR v. Richmond, 133 SE 898; 151 Va 195.

“A national bank … cannot lend its credit to another by becoming surety, indorser, or
guarantor for him, such an act ; is ultra vires . . .” Merchants’ Bank v. Baird 160 F 642.

THE QUESTION OF LAWFUL CONSIDERATION

The issue of whether the lender who writes and passes a “bad” check or makes a “credit”
loan has a claim for relief against the borrower is easy to answer, providing the lender
can prove that he gave a lawful consideration, based upon lawful acts. But did the lender
give a lawful consideration? To give a lawful consideration, the lender must prove
that he gave the borrower lawful money such as coins or currency. Failing that, he
can have no claim for relief in a court at law against the borrower as the lender’s
actions were ultra vires or void from the beginning of the transaction.

It can be argued that “bad” checks or “credit” loans that pass as money are valuable; but
so are counterfeit coins and currency that pass as money. It seems unconscionable that a
bank would ask homeowners to put up a homestead as collateral for a “credit loan” that
the bank created out of thin air. Would this court of law or equity allow a counterfeiter to
foreclose against a person’s home because the borrower was late in payments on an
unlawful loan of counterfeit money? Were the court to do so, it would be contrary to all
principles of law.

The question of valuable consideration in the case at bar, does not depend on any value
imparted by the lender, but the false confidence instilled in the “bad” check or “credit”
loan by the lender. In a court at law or equity, the lender has no claim for relief. The
argument that because the borrower received property for the lender’s “bad” check or
“credit” loan gives the lender a claim for relief is not valid, unless the lender can prove
that he gave lawful value. The seller in some cases who may be holding the “bad” check
or “Credit” loan has a claim for relief against the lender or the borrower or both, but the
lender has no such claim.

BORROWER RELIEF

Since we have established that the lender of unlawful or counterfeit money has no claim
for relief under a void contract, the last question should be, does the borrower have a
claim for relief against the lender? First, if it is established that the borrower has made no
payments to the lender, then the borrower has no claim for relief ‘against the lender for

money damages. But the borrower has a claim for relief to void the debt he owes the
lender for notes or obligations unlawfully created by an ultra vires contract for lending
“credit” money.

The borrower, the Courts have long held, has a claim for relief against the lender to
have the note, security agreement, or mortgage note the borrower signed declared
null and void.

The borrower may also have claims for relief for breach of contract by the lender for not
lending “lawful money” and for “usury” for charging an interest rate several times greater
than the amount agreed to in the contract for any lawful money actually risked by the
lender. For example, if on a $100,000 loan it can be established that the lender actually
risked only $5,000 (5% Federal Reserve ratio) with a contract interest rate of 10%, the
lender has then loaned $95,000 of “credit” and $5,000 of “lawful money”. However,
while charging 10% interest ($10,000) on the entire $100,000. The true interest rate on
the $5,000 of “lawful money” actually risked by the lender is 200% which violates
Usury laws of this state.

If no “lawful money” was loaned, then the interest rate is an infinite percentage.
Such techniques the bankers say were learned from the trade secrets of the
Goldsmiths. The Courts have repeatedly ruled that such contracts with borrowers
are wholly void from the beginning of the transaction, because banks are not
granted powers to enter into such contracts by either state or national charters.

ADDITIONAL BORROWER RELIEF

In Federal District Court the borrower may have additional claims for relief under “Civil
RICO” Federal Racketeering laws (18 U.S.C. § 1964). The lender may have established a
“pattern of racketeering activity” by using the U.S. Mail more than twice to collect an
unlawful debt and the lender may be in violation of 18 U.S.C. §1341, 1343, 1961 and
1962.

The borrower has other claims for relief if he can prove there was or is a conspiracy to
deprive him of property without due process of law under. (42 U.S.C. §1983
(Constitutional Injury), 1985 (Conspiracy) and 1986 (“Knowledge” and “Neglect to
Prevent” a U.S. Constitutional Wrong), Under 18 U.S.C.A.§ 241 (Conspiracy) violators,
“shall be fined not more than $10,000 or imprisoned not more than ten (10) years or
both.”

In a Debtor’s RICO action against its creditor, alleging that the creditor had collected an
unlawful debt, an interest rate (where all loan charges were added together) that
exceeded, in the language of the RICO Statute, “twice the enforceable rate”. The Court
found no reason to impose a requirement that the Plaintiff show that the Defendant had
been convicted of collecting an unlawful debt, running a “loan sharking” operation. The
debt included the fact that exaction of a usurious interest rate rendered the debt unlawful
and that is all that is necessary to support the Civil RICO action. Durante Bros. & Sons,
Inc. v. Flushing Nat ‘l Bank. 755 F2d 239, Cert. denied, 473 US 906 (1985).

The Supreme Court found that the Plaintiff in a civil RICO action, need establish only a

criminal “violation” and not a criminal conviction. Further, the Court held that the
Defendant need only have caused harm to the Plaintiff by the commission of a predicate
offense in such a way as to constitute a “pattern of Racketeering activity.” That is, the
Plaintiff need not demonstrate that the Defendant is an organized crime figure, a mobster
in the popular sense, or that the Plaintiff has suffered some type of special Racketeering
injury; all that the Plaintiff must show is what the Statute specifically requires. The RICO
Statute and the civil remedies for its violation are to be liberally construed to effect the
congressional purpose as broadly formulated in the Statute. Sedima, SPRL v. Imrex Co.,
473 US 479 (1985).

Aside from any legal obligation, there exists a societal and moral obligation enure to both
the Plaintiff and the Defendant in that if you were to defuse a Bomb, and you completed
the task 99% correct, you are still dead. Grantor believes that his position on the law is
sound, but fears grievous repercussions throughout the financial community if he should
prevail. The credit for money scheme is endemic throughout our society and could have
devastating effects on the national economy.

Grantor believes that another approach may be explored as follows:

PERFECT OBLIGATION AS TO A HUMAN BEING

That which is borrowed is wealth. Labor created that wealth, so it is money
notwithstanding its form. Consideration is promised in advance by the Promissor of the
Note, in the nature of principal and interest payments for the consideration provided by
the lender, which is his personal wealth created by his labor.

A Mortgage Note or Promissory Note secures the position of the lender and if there is
default on the promise to pay then the borrower has agreed to accept the strict foreclosure
remedy provided by state statutes.

Then the borrower obligated themselves to pay back the principal and pay for the use of
it, in the form of interest for the years over which the principal is to be paid back. When
payments stop there is a prima facie injury to the lender. When payments stop the
lender has strict foreclosure procedure in state court to remedy the pay back of the
balance of the principal.

Judgment to foreclose on the property is granted upon the mere proof that payments have
ceased as promised. The property is sold to cover the unpaid balance; deficiency
judgment may be needed. All is right with the world. Here the lender would be
prejudiced if complete and swift remedy were not available. Absent such remedy the
government would be party to placing the lender into a condition of involuntary servitude
to the borrower.

PERFECT OBLIGATION AS TO A BANK

In years past banks and savings and loans institutions enjoyed the remedy outlined above.
The reason was they were lending out money belonging to their depositors and there was
prima facie injury to the depositors upon the mere proof that payments had ceased.

Thereby the bank as well as the government would be party to creating a condition of
involuntary servitude upon the depositors if strict foreclosure remedy were not available.
Today depositors are not in jeopardy of being injured when a person borrows money
from a bank. The bank does not lend their money, only their credit in the amount of the
loan (paper accounting). Hence no prima facie injury exists to either the depositors or the
bank upon the mere proof that payments cease. Injury is based upon the payments made
as to the credit line.

PERFECT OR IMPERFECT OBLIGATION

A perfect obligation is one recognized and sanctioned by positive law; one of which the
fulfillment can be enforced by the aid of the law. But if the duty created by the obligation
operates only on the moral sense, without being enforced by any positive law, it is called
an “imperfect obligation,” and creates no right of action, nor has it any legal operation.
The duty of exercising gratitude, charity, and the other merely moral duties are examples
of this kind of obligation. Edwards v. Keaney, 96 U.S. 595, 600, 24 L.Ed. 793.

Government approved the Federal Reserve Bank, Inc., as the Central Banking system for
the United States, and it’s policy is reviewed by Congress albeit, in a haphazard manner.
The Federal Reserve authorizes its “private money” “Federal Reserve Bank Notes” to be
used by lending institutions such as member banks, to operate upon a system of
fractionalizing. The nature of which is that they do not lend either their money or the
money of the depositors, the money is created out of thin air, by the mere stroke of a pen.
When there is no consideration in jeopardy of being returned, then the obligation is to
make the bank injury proof, to the extent of the obligation, which would be to make them
whole.

The only legal obligation is based upon the moral issue, which under the law is an
Imperfect Obligation, to return to them their property, which isn’t wealth, but credit. A
Promissory Note is signed under “economic compulsion” when, the “loan” will not be
consummated unless and until the borrower signs it. Thus, performing the act of signing a
Promissory Note cannot be considered voluntary.

The discharging of the credit is based upon social, economic, and moral standards to
make the bank whole, if injury is claimed, in any court action where default on the
Promissory Note is on record and where the bank fails to verify an injury, the bank
cannot enforce a promise to pay consideration where they provided no consideration. For
the bank to be able to force upon the defendant an amount over and above the credit, is to
force upon the defendants a debt that goes to the control of their labor against their will.
This condition would be Peonage, which has been abolished in this country.

(42 U.S.C. § 1994, and 18 U.S.C. §1581.)

The question then arises as to when is the obligation discharged, to put the bank in a
position, where there is no record of injury to it?

THE CASE IS CLEAR

Conspiracy against rights: If two or more persons conspire to injure, oppress, threaten,
or intimidate any person in any State, Territory, Commonwealth, Possession, or District

in the free exercise or enjoyment of any right or privilege secured to him by the
Constitution or laws of the United States, or because of his having so exercised the same;
or If two or more persons go in disguise on the highway, or on the premises of another,
with intent to prevent or hinder his free exercise or enjoyment of any right or privilege so
secured – They shall be fined under this title or imprisoned not more than ten years, or
both; and if death results from the acts committed in violation of this section or if such
acts include kidnapping or an attempt to kidnap, aggravated sexual abuse or an attempt to
commit aggravated sexual abuse, or an attempt to kill, they shall be fined under this title
or imprisoned for any term of years or for life, or both, or may be sentenced to death. [18,
USC 241]

Deprivation of rights under color of law: Whoever, under color of any law, statute,
ordinance, regulation, or custom, willfully subjects any person in any State, Territory,
Commonwealth, Possession, or District to the deprivation of any rights, privileges, or
immunities secured or protected by the Constitution or laws of the United States, or to
different punishments, pains, or penalties, on account of such person being an alien, or by
reason of his color, or race, than are prescribed for the punishment of citizens, shall be
fined under this title or imprisoned not more than one year, or both; and if bodily injury
results from the acts committed in violation of this section or if such acts include the use,
attempted use, or threatened use of a dangerous weapon, explosives, or fire, shall be fined
under this title or imprisoned not more than ten years, or both; and if death results from
the acts committed in violation of this section or if such acts include kidnapping or an
attempt to kidnap, aggravated sexual abuse, or an attempt to commit aggravated sexual
abuse, or an attempt to kill, shall be fined under this title, or imprisoned for any term of
years or for life, or both, or may be sentenced to death. [18, USC 242]

Property rights of citizens: All citizens of the United States shall have the same right, in
every State and Territory, as is enjoyed by white citizens thereof to inherit, purchase,
lease, sell, hold, and convey real and personal property. [42 USC 1982]

Civil action for deprivation of rights: Every person who, under color of any statute,
ordinance, regulation, custom, or usage, of any State or Territory or the District of
Columbia, subjects, or causes to be subjected, any citizen of the United States or other
person within the jurisdiction thereof to the deprivation of any rights, privileges, or
immunities secured by the Constitution and laws, shall be liable to the party injured in an
action at law, suit in equity, or other proper proceeding for redress, except that in any
action brought against a judicial officer for an act or omission taken in such officer’s
judicial capacity, injunctive relief shall not be granted unless a declaratory decree was
violated or declaratory relief was unavailable. For the purposes of this section, any Act of
Congress applicable exclusively to the District of Columbia shall be considered to be a
statute of the District of Columbia. [42 USC 1983]

Conspiracy to interfere with civil rights: Depriving persons of rights or privileges: If
two or more persons in any State or Territory conspire or go in disguise on the highway
or on the premises of another, for the purpose of depriving, either directly or indirectly,
any person or class of persons of the equal protection of the laws, or of equal privileges
and immunities under the laws; or for the purpose of preventing or hindering the

constituted authorities of any State or Territory from giving or securing to all persons
within such State or Territory the equal protection of the laws; or if two or more persons
conspire to prevent by force, intimidation, or threat, any citizen who is lawfully entitled
to vote, from giving his support or advocacy in a legal manner, toward or in favor of the
election of any lawfully qualified person as an elector for President or Vice President, or
as a Member of Congress of the United States; or to injure any citizen in person or
property on account of such support or advocacy; in any case of conspiracy set forth in
this section, if one or more persons engaged therein do, or cause to be done, any act in
furtherance of the object of such conspiracy, whereby another is injured in his person or
property, or deprived of having and exercising any right or privilege of a citizen of the
United States, the party so injured or deprived may have an action for the recovery of
damages occasioned by such injury or deprivation, against any one or more of the
conspirators. [42 USC 1985(3)]

Action for neglect to prevent: Every person who, having knowledge that any of the
wrongs conspired to be done, and mentioned in section 1985 of this title, are about to be
committed, and having power to prevent or aid in preventing the commission of the same,
neglects or refuses so to do, if such wrongful act be committed, shall be liable to the party
injured, or his legal representatives, for all damages caused by such wrongful act, which
such person by reasonable diligence could have prevented; and such damages may be
recovered in an action on the case; and any number of persons guilty of such wrongful
neglect or refusal may be joined as defendants in the action; and if the death of any party
be caused by any such wrongful act and neglect, the legal representatives of the deceased
shall have such action therefore, and may recover not exceeding $5,000 damages therein,
for the benefit of the widow of the deceased, if there be one, and if there be no widow,
then for the benefit of the next of kin of the deceased. But no action under the provisions
of this section shall be sustained which is not commenced within one year after the cause
of action has accrued. [42 USC 1986]

COURT: The person and suit of the sovereign; the place where the sovereign sojourns
with his regal retinue, wherever that may be. [Black’s Law Dictionary, 5th Edition, page
318.]

COURT: An agency of the sovereign created by it directly or indirectly under its
authority, consisting of one or more officers, established and maintained for the purpose
of hearing and determining issues of law and fact regarding legal rights and alleged
violations thereof, and of applying the sanctions of the law, authorized to exercise its
powers in the course of law at times and places previously determined by lawful
authority. [Isbill v. Stovall, Tex.Civ.App., 92 S.W.2d 1067, 1070; Black’s Law
Dictionary, 4th Edition, page 425]

COURT OF RECORD: To be a court of record a court must have four characteristics,
and may have a fifth. They are:

a. A judicial tribunal having attributes and exercising functions independently
of the person of the magistrate designated generally to hold it [Jones v. Jones,

188 Mo.App. 220, 175 S.W. 227, 229; Ex parte Gladhill, 8 Metc. Mass., 171,
per Shaw, C.J. See, also, Ledwith v. Rosalsky, 244 N.Y. 406, 155 N.E. 688,
689] [Black’s Law Dictionary, 4th Ed., 425, 426]

b. Proceeding according to the course of common law [Jones v. Jones, 188
Mo.App. 220, 175 S.W. 227, 229; Ex parte Gladhill, 8 Metc. Mass., 171, per
Shaw, C.J. See, also, Ledwith v. Rosalsky, 244 N.Y. 406, 155 N.E. 688, 689]
[Black’s Law Dictionary, 4th Ed., 425, 426]

c. Its acts and judicial proceedings are enrolled, or recorded, for a perpetual
memory and testimony. [3 Bl. Comm. 24; 3 Steph. Comm. 383; The Thomas
Fletcher, C.C.Ga., 24 F. 481; Ex parte Thistleton, 52 Cal 225; Erwin v. U.S.,
D.C.Ga., 37 F. 488, 2 L.R.A. 229; Heininger v. Davis, 96 Ohio St. 205, 117
N.E. 229, 231]

d. Has power to fine or imprison for contempt. [3 Bl. Comm. 24; 3 Steph.
Comm. 383; The Thomas Fletcher, C.C.Ga., 24 F. 481; Ex parte Thistleton,
52 Cal 225; Erwin v. U.S., D.C.Ga., 37 F. 488, 2 L.R.A. 229; Heininger v.
Davis, 96 Ohio St. 205, 117 N.E. 229, 231.] [Black’s Law Dictionary, 4th
Ed., 425, 426]

e. Generally possesses a seal. [3 Bl. Comm. 24; 3 Steph. Comm. 383; The
Thomas Fletcher, C.C.Ga., 24 F. 481; Ex parte Thistleton, 52 Cal 225; Erwin
v. U.S., D.C.Ga., 37 488, 2 L.R.A. 229; Heininger v. Davis, 96 Ohio St. 205,
117 N.E. 229, 231.] [Black’s Law Dictionary, 4th Ed., 425, 426]

Taking into consideration all of the documentation contained herein it is
abundantly clear that no foreclosure action is warranted, justified or
lawful. There is no injury to the purported lender. A court of record
should decide what actions should and must be taken as a result of the
unlawful actions of the Plaintiff.

Cases: Deeds of Trust
March 04, 2009
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 (4th 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.4th 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.4th 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.4th 525, 555 (2007); Akins v. Enterprise Rent-A-Car Co., 79 Cal.App.4th 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.4th 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 (4th 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 (4th 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.4th 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)

California Penal Code 530.5
(a) Every person who willfully obtains personal identifying
information, as defined in subdivision (b) of Section 530.55, of
another person, and uses that information for any unlawful purpose,
including to obtain, or attempt to obtain, credit, goods, services,
real property, or medical information without the consent of that
person, is guilty of a public offense, and upon conviction therefor,
shall be punished by a fine, by imprisonment in a county jail not to
exceed one year, or by both a fine and imprisonment, or by
imprisonment in the state prison.
…

Note that the law was modified in 2001 to include with consent and also to make this violation a felony (important later).

In my opinion this law alone makes nearly every single unlawful act in the origination, servicing, securitization and foreclosure of a California homeowners loan a FELONY. This is because in almost all cases the homeowners personally identifiable information is used – such as on an ASSIGNMENT. This could also be applied directly to the FDCPA and the RFDCPA which usually involves a consumer, their address, their account information, etc.

For instance, after receiving the Notice of Default, we sent back a letter to NDEx West in which we disputed the validity the debt in a manner consistent with the requirements of the Fair Debt Collection Practices Act, 15 U.S.C. 1692 et seq. (“FDCPA”), and the
Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code 1788 et seq. (“RFDCPA”). By doing this, we imposed a duty on NDEx West to establish that the NDEx West was attempting to collect on a debt actually owed and that the amount demanded was proper before making further attempts to collect the alleged debt. NDEx West ignored this legal duty by never establishing that there a debt was owed, or that the amount of the demand was accurate, and instead chose to violate both federal and state law by continuing to attempt to collect on the alleged debt.

NDEx West used our personally identifiable information to violate federal and state law. NDEx West willfully obtained our personal identifying information, as defined in California Penal Code subdivision (b) of Section 530.55, and used that information for unlawful purposes (violation of FDCPA and RFDCPA), including to obtain, or attempt to obtain, credit, goods, services, real property, or medical information without our consent (or even with consent assuming it is determined that our initial consent at loan origination applies).

Think about it. If a debt collector violates the FDCPA, they are usually using the consumers personally identifiable information to commit the violation.

State of Washington

RCW 9.35.020
Identity theft.
(1) No person may knowingly obtain, possess, use, or transfer a means of identification or financial information of another person, living or dead, with the intent to commit, or to aid or abet, any crime.

What about Federal law?
The Department of Justice prosecutes cases of identity theft and fraud under a variety of federal statutes. In the fall of 1998, for example, Congress passed the Identity Theft and Assumption Deterrence Act. This legislation created a new offense of identity theft, which prohibits knowingly transfer[ring] or us[ing], without lawful authority, a means of identification of another person with the intent to commit, or to aid or abet, any unlawful activity that constitutes a violation of Federal law, or that constitutes a felony under any applicable State or local law. 18 U.S.C. § 1028(a)(7): This offense, in most circumstances, carries a maximum term of 15 years’ imprisonment, a fine, and criminal forfeiture of any personal property used or intended to be used to commit the offense.

What is a “means of identification”?
(7) the term “means of identification” means any name or number that may be used, alone or in conjunction with any other information, to identify a specific individual, including any-
(A) name, social security number, date of birth, official State or government issued driver’s license or identification number, alien registration number, government passport number, employer or taxpayer identification number;
(B) unique biometric data, such as fingerprint, voice print, retina or iris image, or other unique physical representation;
(C) unique electronic identification number, address, or routing code; or
(D) telecommunication identifying information or access device (as defined in section 1029 (e));

These are huge issues. If you are not in California, Arizona or Washington, consult the identity theft laws for your state!

From Beth Findsen, Attorney in Scottsdale, AZ, she comments that ID Theft may just be the heart of the matter in seeking damages. The logic is simple: they used every borrower’s signature for selling a pool of loans that included OTHER borrowers and a huge undisclosed profit was generated by using the borrower’s signature. Without that signature there would have been no deal. This is especially true if the person was one of the top tier tranche borrowers with 800 FICO scores etc. Without them making the pool look pretty there would have been no sale. Those people were neither compensated nor informed of the use of their very personal information.

The elements are pretty clear. Use of a person’s ID without their consent. Loss to another person. This is another connection between the interests of the borrower and interests of investors.
The essence of securitization of loans has been the unauthorized use of the borrower’s ID to create a collection of loans that were sold as more valuable than any single loan would have been priced, based upon the presence of multiple parties who had no idea that their name and identifying information was being passed around the world like a “whiskey bottle at a frat party” as reported by MSNBC.
Privacy is a commodity. It is constitutionally and statutorily protected. It can be waived or it can be bought, if the person is willing to sell it or waive it. But it cannot be taken by a “lender” (pretender or otherwise) to use for their own profit. That profit belongs to the person or persons whose identity and privacy have been violated — along with punitive damages if it can be applied.

Quoted from Beth:
is it “consent” if it’s based upon a fraudulent misrepresentation or failure to disclose?
in AZ
13-2008. Taking identity of another person or entity; knowingly accepting identity of another person; classification
A. A person commits taking the identity of another person or entity if the person knowingly takes, purchases, manufactures, records, possesses or uses any personal identifying information or entity identifying information of another person or entity, including a real or fictitious person or entity, without the consent of that other person or entity, with the intent to obtain or use the other person’s or entity’s identity for any unlawful purpose or to cause loss to a person or entity whether or not the person or entity actually suffers any economic loss as a result of the offense, or with the intent to obtain or continue employment.

THE FORECLOSURE PROCESS AND THE TRUSTEE’S DUTIES
A. Context of Duties
Despite the name, a “trustee” under a deed of trust has not been held to the high fiduciary duties imposed on a trustee under an express trust.
The trustee has obligations to the trustor, and those obligations emerge in two contexts — the foreclosure process and reconveyance following discharge of the underlying obligation. Foreclosure may proceed either judicially or nonjudicially. [See Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1502-03.] Although judicial foreclosures still occur, most foreclosures involving residential property proceed non judicially. The following discussion focuses on the trustee’s duties toward the trustor during the nonjudicial foreclosure process.
B. Nonjudicial Foreclosure
1. The Notice of Default and Intent to Foreclose
Following the trustor’s default, the beneficiary or the trustee must comply with certain statutory requirements prior to exercising the power of sale under the deed of trust. (Civ. Code § 2924 et seq.) To initiate nonjudicial foreclosure, the beneficiary or trustee must file a notice of default with the county recorder in the county in which the property or some part thereof is situated. (Civ. Code § 2924.) Usually the trustee files the notice at the request of the beneficiary. If there is more than one beneficiary, any beneficiary can instruct the trustee to record the notice of default. [See Perkins v. Chad Development Corp. (1979) 95 Cal.App.3d 645; 157 Cal.Rptr. 201.] Although the statute does not specify who may sign the notice of default, the trustee is authorized to sign it. Williams v. Koenia (1934) 219 Cal. 656, 659; 28 P.2d 351; Hopkins v. J.D. Millar Realty Co. (1930) 106 Cal.App. 409, 414; 289 P. 221.]
Federal law does not require the beneficiary to follow any foreclosure avoidance guidelines suggested by the Federal Department of Housing and Urban Development (HUD) or the Veterans Administration (VA) before recording a notice of default on a government-backed loan. (See Rank v. Nimmo (9th Cir. 1982) 677 F.2d 692, 698-99.) Several courts, however, have concluded that a lender’s failure to follow federal regulations governing mortgage servicing creates a valid equitable defense under state law to a foreclosure. [See Federal Nat. Mto. Assn. v. Moore (N.D. 111. 1985) 609 F.Supp. 194; Cross v. Federal Nat. Mtq. Assn. (Fla. App. 1978) 359 So.2d 464; Bankers Life Co. v. Denton (111.App. 1983) 458 N.E.2d 203; Heritage Bank, N.A. v. Ruh (N.J. Super. 1983) 465 A.2d 547; Associated East Mtg. v. Young (N.J. Super. 1978) 394 A.2d 899; Federal Nat. Mtg. Assn. v. Ricks (N.Y. Sup. Ct. 1975) 372 N.Y.S.2d 485; Federal Land Bank of St. Paul v. Overboe (N.D. 1987) 404 N.W.2d 445; but see Manufacturers Hanover Mortgage Corp. v. Snell (Mich.App. 1985) 307 N.W.2d 401; Federal Nat. Mtg. Assn. v. Prior (Wis.App. 1985) 381 N.W.2d 558.]
a. Content of the Notice of Default
(1) Required Contents
The only requirements for the notice of default are set forth in the trust deed and the statute. (See Lupertino v. Carbahal (1973) 35 Cal.App.3d 742, 747-48; 111 Cal.Rptr. 112.) The notice of default must name the trustors, state either the book and page in which the deed of trust is recorded or a description of the secured property, contain a statement that a breach of the obligation has occurred, set forth the nature of the breach and the election to sell the property to satisfy the obligation, and provide the notice prescribed in Civil Code § 2924c(b)(1) of the right to cure the default and reinstate the obligation if reinstatement is possible. (Civ. Code § 2924.)
An additional requirement is imposed on the trustee if the trustor’s obligation arose for goods or services subject to the Unruh Act. The trustee is required to send an additional notice to the trustor if the default is not cured within 30 days of the recordation of the notice of default. [Civ. Code § 2924f(c).]
(2) Statement of Nature of Breach
One of the most crucial aspects of the notice of default is the statement of the nature of the breach. Soon after this requirement was adopted, the Supreme Court concluded that a general statement of the breach was satisfactory: “a substantial compliance in accord with the spirit and purpose of the statute is sufficient.” Williams v. Koenig. supra, 219 Cal. 656.] If an item of default is not included in the notice of default, payment of the excluded item cannot be demanded to cure the particular default declared, Anderson v. Heart Fed. Sav. & Loan Assn. (1989) 1989 Cal.App. LEXIS 141; Little v. Harbor Pac. Mortgage Investors (1985) 175 Cal.App.3d 717, 720; 221 Cal.Rptr. 59; Miller v. Cote (1982) 127 Cal.App.3d 888, 894; 179 Cal.Rptr. 753; System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 152-53; 98 Cal.Rptr. 725; Tomczak v. Ortega (1966) 240 Cal.App.2d 902, 904; 50 Cal.Rptr. 20; Bisno v. Sax (1959) 175 Cal.App.2d 714, 720; 364 P.2d 814; Hayward Lumber & Inv. Co. v. Corbertt (1934) 138 Cal.App. 644, 650; 33 P.2d 41.]
The question is how clear the statement of the nature of the default must be. In Enqelbertson v. Loan & Blda. Assn. (1936) 6 Cal.2d 477, 478-79; 58 P.2d 647, the court approved a statement of a breach indicating, in part, that a particular installment of interest was due together with subsequent installments and unspecified sums advanced or expended under the trust deed with interest thereon. The court held that, “There is nothing in this section which warrants the construction that a statement of the amount of the items is required.” (Id. at 479.) [See Middlebrook-Anderson v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1038; 96 Cal.Rptr. 338.]
In Birkhofer v. Krumm (1938) 27 Cal.App.2d 513, 522-24; 81 P.2d 609, the notice of default claimed more money than in fact was due. However, the Court of Appeal did not find the notice fatally deficient because the substantial nature of the breach authorized the acceleration of the entire balance due. The court did not consider the effect of the exaggerated size of the default on the trustor’s exercise of the right to reinstate, but the reinstatement right may not have existed since the trust deed predated the adoption of Civil Code § 2924c.
In Little v. Harbor Pac. Mortgage Investors, supra, 175 Cal.App.3d 717, 721 n.6, the court stated in dicta in a footnote that the purpose of the statement of the nature of the default “is to put the debtor on notice as to which breaches the lienholder wishes cured•” (Emphasis in original.) The court indicated that a notice of default containing “a reference to delinquent payments, if any, on the first” (id.) would be sufficient to cover the trustor’s default in paying a senior encumbrance even though the foreclosing junior lienholder was unaware of the default at the time the notice was recorded. Thus, under Little, a foreclosing creditor could demand that the trustor cure delinquent taxes, payments to senior lienholders, and other defaults discovered after the notice of default was recorded as long as every default, “if any,” was listed in the notice of default. The court did not consider the effect of the requirement in Civil Code § 2924c(b)(l), discussed below, that the notice of default state the amount which must be paid to effect reinstatement.
Recent cases and a change in Civil Code § 2924c militate for a more precise statement of the nature of default to enable the trustor to cure the default. Indeed, the dicta in the Little case has been specifically rejected. Anderson v. Heart Fed. Sav. & Loan Assn., supra, 1989 Cal.App. LEXIS 141.] The courts have recognized that:
A purpose of the required statement in the notice of default is to afford the debtor an opportunity to cure the default and obtain reinstatement of the obligation within three months after the notice of default as provided in § 2924c of the Civil Code. System Inv. Corp. v. Union Bank, supra, 21 Cal.App.3d 137, 153; 98 Cal.Rptr. 735.
(Accord, Miller v. Cote, supra, 127 Cal.App.3d 888, 894; 179 Cal.Rptr. 753; see Tomczak v. Ortega, supra, 240 Cal.App.2d 902, 904; 50 Cal.Rptr. 20.) The rationale that the disclosure of the nature of the default is designed to facilitate reinstatement is buttressed by Civil Code § 2924c(b)(1) which requires a statement in the notice of default of the amount due as of a specified date. (Civ. Code § 2924.) As a result, the modern view is that the notice of default will be strictly construed and must correctly set forth the amounts required to cure the default. Sweatt v. The Foreclosure Co. (1985) 166 Cal.App.3d 273, 278; 212 Cal.Rptr. 350.] The purpose of Civil Code § 2924c(b)(1) would be subverted if a beneficiary could set forth in the notice of default a litany of possible defaults, specify that payment of a particular dollar amount by a specified date would cure the default, and then refuse to accept a tender of that sum because the beneficiary learned of an additional delinquency, especially a delinquency that occurred before the notice of default was recorded. Accordingly, the Court of Appeal in Heart rejected predicating a foreclosure on an “if any” qualifier which states a potential ground of default: the notice may state only breaches that have occurred, and the power of sale cannot be exercised until the proper notice requirements have been satisfied.
(3) Spanish Language Considerations
In some situations, the notice of default or the statutorily prescribed statement of the right of reinstatement may have to be written in the Spanish language. Prior to 1989, Civil Code § 1632(a) required that a Spanish translation of certain contracts, loans and other agreements be provided upon the request of a party to the agreement if the transaction was negotiated primarily in Spanish. Under current law, the Spanish translation must be given. A sign advising the parties of their right to a translation must be conspicuously displayed on the business premises. [Civ. Code § 1632(c).]
Beginning in 1989, a Spanish language translation of the disclosures required under Regulation Z and, if applicable, under the industrial loan, consumer finance lender, or personal property brokers’ laws may be given in lieu of the translation of the original contract by supervised financial organizations. A “supervised financial organization” means a bank, savings association, credit union, real estate broker, industrial loan company, consumer finance lender, or personal property broker. [Civ. Code § 1632(b).]
A Spanish language translation does not have to be given to borrowers who negotiate through their own interpreter if the interpreter can read and speak English and Spanish fluently and is not employed or made available through the creditor. Beginning in 1989, the interpreter must be 18 years of age or older. [Civ. Code § 1632(e).]
In Reves v. Superior Court (1981) 118 Cal.App.3d 159; 173 Cal.Rptr. 267, the Court of Appeal held that a notice of repossession and deficiency used under the Rees-Levering Act was covered by Civil Code § 1632. The court further held that in the absence of evidence showing compliance with this section, a deficiency judgment based on an English language notice against a solely Spanish-speaking debtor could not stand. (Id. at 162.) Since Civil Code § 1632 applies to loans subject to the provisions regulating mortgage brokers, industrial loan companies, personal property makers and consumer finance lenders, Reves can perhaps be applied to require Spanish translations of the notice of default if the requirements for the invocation of Civil Code § 1632 are satisfied.
Moreover, the notice of the right to cure contained in the trust deed must be in Spanish if (1) the obligation is a retail installment contract governed by the Unruh Act or a loan for personal, family or household purposes made by a mortgage broker, industrial loan company, personal property broker or consumer finance lender, and (2) the trustor requested a Spanish language translation of the agreement pursuant to Civil Code § 1632. In addition, if the obligation is contained in a home improvement contract subject to the Unruh Act, the seller is required to specify on the contract whether or not the contract was principally negotiated in Spanish, and, if so, the prescribed notice advising of the right to cure the default must be in Spanish. However, the trustee has no liability for failing to provide a Spanish language notice of the right to cure unless Spanish is specified in the home improvement contract or the trustee has actual notice that the obligation was principally negotiated in Spanish.
2. Adequacy of Notice to Trustor
The notice of default must be recorded. (Civ. Code § 2924.) Within ten days of its recordation, the trustee or beneficiary must send the notice of default, by registered or certified mail, to the trustor at the trustor’s last known address. [Civ. Code § 924b(b)(l); see Lupertino v. Carbahal, supra, 35 Cal.App.3d 742, 749.] A notice must also be sent by first-class mail. [Civ. Code § 2924b(e).] Although notice by certified or registered mail is required, notice sent by regular mail and actually received is considered valid notice. [See Crummer v. Whitehead (1964) 230 Cal.App.2d 264, 268; 40 Cal.Rptr. 826.] Publication or personal service is not required. In the very rare instances in which the trust deed does not contain the trustor’s address and the trustor has not recorded a request for notice, the notice of default may be published or personally served in lieu of mailing [Civ. Code § 2924b(4)].
The trustee has no duty to assure that the trustor actually receives notice even though the trustee may know that the trustor actually does not receive notice. The rule developed that “[t]he only requirements of notice of sale essential to the validity of a sale under a power contained in a deed of trust are those expressly and specifically prescribed by the terms of the instrument and by the provisions of the applicable statutes.;/ Lancaster Security Inv. Corp. v. Kessler (1958) 159 Cal.App.2d 649, 652; 324 P.2d 634 (notice of sale); see e.g., I. E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281; 216 Cal.Rptr. 438 (notices of default and sale); Sargent v. Shumaker (1924) 193 Cal. 122, 130; 223 P. 464 (notice of sale); McClatchev v. Rudd (1966) 239 Cal.App.2d 605, 608; 223 P. 464 (notice of default); Lopez v. Bell (1962) 207 Cal.App.2d 394, 397-98; 24 Cal.Rptr. 626 (notices of default and sale).] In McClatchev, for example, the envelope containing the notice of default was returned to the trustee marked “Deceased,” and although the beneficiary and trustee allegedly knew of the trustor’s death and the identity of the administrator of the decedent’s estate, the failure to notify the administrator did not invalidate the sale. (See 239 Cal.App.2d at 607-08.) Since a trustee’s sale has been held valid if the statutory notice requirements were met even though no notice was actually received, the “named trustee in a deed of trust, by virtue of that position alone, is ordinarily under no duty to give different or more specific notices than those prescribed by statute in order to exercise a power of sale.” Lupertino v. Carbahal. supra, 35 Cal.App.3d 742 (notice of default).] However, if the trustee dealt with the trustor at an address other than the address specified in the trust deed, the trustee might be estopped to use the invalid address. [See Lupertino v. Carbahal, supra, 35 Cal.App.2d 742, 748-49.]
Current law requires that the notices of default and sale be sent to the trustor at the trustor’s “last known address.” [Civ. Code § 2924b(b)(l) and (2).] The “last known address” is the last business or residence address actually known by the trustee or beneficiary. [Civ. Code § 2924b(b)(3).] The beneficiary must inform the trustee of the trustor’s last address actually known by the beneficiary. (Id.) The trustee incurs no liability for failing to send any notice to the last address unless the trustee has actual notice of it. (Id.) Constructive knowledge of the correct address is irrelevant, and the trustee has no duty of inquiry. [See I. E. Associates v. Safeco Title Ins. Co. supra, 39 Cal.3d 281, 285.]
Although the trustee’s compliance with statutory notice requirements has been deemed sufficient, no appellate case has considered whether the statutory provision for registered or certified mail requires that the mailed notice be received. In Dept. of Forestry v. Terry (1981) 124 Cal.App.3d 140; 177 Cal.Rptr. 92, the California Department of Forestry brought an action to foreclose a statutory lien for costs incurred in correcting certain violations of law. The costs were incurred after the defendant failed to respond to a notice to take corrective action sent by the state by certified mail as required by statute. The statute did not expressly require that the defendant receive the notice, but the Court of Appeal held that the process of certified or registered mail requires that the receiver sign for the mail, and therefore service is complete when the mail is received, not when the notice is deposited for mail collection. (Id. at 147.) Civil Code § 2924b which requires certified or registered mail may be similarly interpreted.
A court, however, could conclude that receipt of the certified mailing was unnecessary because the notices must also be sent by first-class mail. [Civ. Code § 2924b(e).] In the absence of fraud, an affidavit of mailing is conclusive proof that the notice was mailed. (Id.) A properly addressed and mailed letter is presumed to have been received. [Evid. Code § 641.] Accordingly, compliance with the certified and first-class mailing requirements may be sufficient even if receipt of the certified mailing is not

signed for.
In contrast to the procedure authorized for nonjudicial foreclosures, forced sales involving the government require scrupulous adherence to due process standards. [See Mennonite Board of Missions v. Adams (1983) 462 U.S. 791; 103 S.Ct 2706.] For example, in Barras v. Transamerica Title Ins. Co. (1982) 133 Cal.App.3d 845, 849-52; 184 Cal.Rptr. 262, the Court of Appeal required the government to go beyond the statutory notice requirements for tax sales which provide for publication, posting in a public place, and mailing notice to the last known address of the last assessee; to protect the rights of equitable owners in possession, the government was constitutionally compelled to post notice on the property. [See e.g., Atkins v. Kessler (1979) 97 Cal.App.3d 784; 159 Cal.Rptr. 231 holding the notice requirements of the Improvements Act of 1911 unconstitutional.] Since state action is not involved in nonjudicial foreclosure proceedings, the constitutional due process safeguards do not apply to the process. [See Garfinkle v. Superior Court (1978) 21 Cal.3d 268; 145 Cal.Rptr. 208.] Moreover, foreclosure by a private lender under a federally-guaranteed mortgage program does not constitute governmental action sufficient to invoke due process requirements even though the private parties are subject to extensive federal regulation. [See Rank v. Nimmo, supra, 677 F.2d 692, 702.]
3. The Right to Reinstatement
The trustor and junior lienholders have the right to cure the default and reinstate the obligation as though no default had occurred if a monetary default has occurred prior to the maturity date fixed in the obligation. [Civ. Code § 2924c(a)(1) . ] To reinstate, the trustor or junior lienholder must pay the beneficiary the amount of the default (i.e., arrearages, advances, taxes, etc.) plus allowable costs and expenses and trustee’s fees. (Id. ) The beneficiary may also be entitled to attorney’s fees. (See discussion in Chapter I B 3 h “Attorney’s Fees”, supra. ) The amount of the default plus attorney’s fees, if any, must be paid at any time within the period beginning on the date the notice of default was recorded until five business days before the date of sale stated in the initial recorded notice of sale. [Civ. Code § 2924c(e).] No right of reinstatement exists during the five business days preceding the sale. (JEd.; see Civ. Code § 9 for definition of “business day.”) However, if the sale is postponed or a new notice of sale is recorded, the right of reinstatement is revived until five business days before the newly scheduled date. (.Id. ) Again, no reinstatement right exists during the five business day period preceding the continued sale date. (Id.)
The filing of a bankruptcy petition does not toll or suspend the reinstatement period for the trustor or junior lienholders.
Napue v. Gor-Mev West, Inc. (1985) 175 Cal.App.3d 608; 220 Cal.Rptr. 799; In re Pridham (E.D. Cal. 1983) 31 B.R. 497; Triangle Management Services v. Allstate Savings & Loan Assn. (N.D.Cal. 1982) 21 B.R. 699.] However, if the trustor or junior lienholder’s right of reinstatement has not elapsed, the bankruptcy trustee may exercise the right before the later of the end of the reinstatement period or 60 days after the bankruptcy petition has been filed. [11 U.S.C. § 108(b); Napue v. Gor-Mev West, Inc., supra, 175 Cal.App.3d 608, 619.]
Notwithstanding the beneficiary’s demand that the entire balance be paid, the obligation is reinstated by the payment of the amount in default plus fees during the reinstatement period. [Civ. Code § 2924c(a)(1).] Thus, Civil Code § 2924c relieves the trustor and junior lienholder from the burden of the acceleration clause. After the reinstatement period, the beneficiary may still waive the acceleration of the balance, accept payment to cure the default, and reinstate the loan, but the beneficiary is not compelled to do so.
During the reinstatement period, payment or tender of payment of the default nullifies the right to proceed with the foreclosure. Any sale conducted after the entire amount necessary to cure the default was paid or properly tendered is invalid. Munger v. Moore (1970) 11 Cal.App.3d 1, 8; 89 Cal.Rptr. 323; Tomczak v. Ortega,supra, 240 Cal.App.2d 902, 906; 50 Cal.Rptr. 20; Bisno v. Sax, supra, 175 Cal.App.2d 714, 724; Macmus v. Morrison (1949) 93 Cal.App.2d 1, 3; 208 P.2d 407.]
Partial payments will not ordinarily cure the default. If the tender does not include all amounts needed to cure the default plus costs, the tender is ineffective. [See e.g., Enaelbertson v. Loan & Blda. Assn., supra, 6 Cal.2d 477, 479; Cassinella v. Allen (1914) 168 Cal. 677, 680-81; 144 P. 746.] Generally, the beneficiary may accept partial payments on the amount due after the notice of default is recorded without waiving the default, any rights under the acceleration clause, or the right to proceed with the foreclosure. [See Sellman v. Crosby (1937) 20 Cal.App.2d 562, 564-65; 67 P.2d 706; see also R. G. Hamilton Corp., Ltd. v. Corum (1933) 218 Cal. 92, 97; 21 P.2d 413; Bisno v. Sax, supra, 175 Cal.App.2d 714, 724; Birkhoffer v. Krurom, supra, 27 Cal.App.2d 513, 524; Harris v. Whittier Bldq. & Loan Assn. (1936) 18 Cal.App.2d 260, 268; 63 P.2d 840.] Nevertheless, the beneficiary’s conduct in conjunction with the acceptance of partial payments may be construed as a waiver or may estopped the beneficiary from claiming a default or invoking an acceleration clause. [See Altman v. McCollum (1951) 107 Cal.App.2d 847; 236 P.2d 914; see also R. G. Hamilton Corp., Ltd. v. Corum (1933) 218 Cal. 92, 97, 21 P.2d 413; Glas v. Glas (1896) 114 Cal. 566, 569, 46 P. 667; see discussion in Chapter III B(3)(c), “Waiver or Estoppel to Claim Payment or Default”, infra.]
The court may also suspend or toll the acceleration clause and thereby extend the right to cure the default and reinstate the loan. In Bisno v. Sax, supra, 175 Cal.App.2d 714, 724-30, the court relieved the trustors from the acceleration clause since they had cured the default during the seven-month pendency of a preliminary injunction. In Hunt v. Smyth (1972) 25 Cal.App.3d 807; 101 Cal.Rptr. 4, the trustor filed a complaint seeking a preliminary injunction 13 days before the expiration of the reinstatement period. The foreclosure was stayed through the lengthy appeal process. Nearly three years after the notice of default was originally filed, the Court of Appeal remanded the case to the trial court for a determination of the amount then owing and gave the trustors 13 days after that determination to make payment. (Id. at 837.)
If a junior lienholder cures the trustor’s default on the senior encumbrance, the junior lienholder may then foreclose based on the trustor’s failure to meet the obligation secured by the senior encumbrance or the failure to reimburse the junior lienholder for the amount of the advance to reinstate the senior lien. (See discussion in Chapter I B 3 d, “Senior Encumbrances,” supra.) The trustor or junior lienholder who cures a default may request that the beneficiary cause to be executed and recorded a notice of rescission of the notice of default. [Civ. Code § 2924c(a) (2). ] The notice of rescission must be recorded within 30 days of receipt of a written request. (Id.) No charge may be made except for recording fees. (Id.)
4. The Right of Redemption
The trustor has the right to redeem the real property securing the debt before the foreclosure sale (Civ. Code § 2903) by paying the entire secured obligation. [Civ. Code § 2905; see Winnett v. Roberts (1979) 179 Cal.App.3d 909, 922; 225 Cal.Rptr. 82; Kleeckner v. Bank of America (1950) 97 Cal.App.2d 30, 33; 217 P.2d 28; Lichtv v. Whitney (1947) 80 Cal.App.2d 696, 701; 182 P.2d 582.]
A tender of the proper amount due, even if rejected, extinguishes the lien and precludes foreclosure• [See, e.g., Winnett v. Roberts. supra, 179 Cal.App.3d 909, 902; Lichtv v. Whitney, supra, 80 Cal.App.2d 696, 701; see also Code Civ. Proc. § 2074.] In Winnett the court held that a tender of the principal amount without interest was sufficient because the note was usurious and the creditor was not entitled to receive interest.
Junior lienholders have a similar right of redemption. (Civ.Code § 2904.) If the junior lienholder redeems the property, the junior lienholder becomes subrogated to the rights of the satisfied senior lienholder and may add the amount paid to the senior lienholder to the amount secured by the junior lien. [See Civ. Code §§ 2876, 2904; Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn. (1986) 184 Cal.App.3d 817, 825; 229 Cal.Rptr. 269.] The deed of trust routinely provides the same remedies. (See discussion in Chapter I B 3 d, “Senior Encumbrances,” supra.)
As a practical matter, the trustor or junior lienholder will generally attempt to exercise the right of reinstatement. However, if that right lapses, the right of redemption may become critically important.
5. Giving the Notice of Sale
At least three months must elapse between the date the notice of default is recorded and the date the trustee may give notice setting the sale. [Civ. Code § 2924.] The period is three calendar months, not 90 days. [See Hayward Lumber & Inv. Co. v. Corbett, supra, 138 Cal.App. 644, 651; see generally Tomczak v. Ortega, supra, 240 Cal.App.2d 902, 906, but see Bennett v. Ukiah Fair Assn. (1936) 7 Cal.2d 43; 59 P.2d 805.] There is no requirement that the notice of sale be given within any prescribed time after the three-month period elapses. [See Arata v. Downer (1937) 21 Cal.App.2d 406; 69 P.2d 213 (three years between notice
of default and sale)•]
The notice of sale must contain, in pertinent part, the name of the original trustor, the time of sale, the street address and the specific place at that address where the sale will be held, the name, street address and telephone number of the trustee, a special notice if a single home is being sold, a description of the property to be sold, the property’s street address or other common designation, and a statement of the total amount of the unpaid balance of the obligation and reasonable estimated costs, expenses and advances. The trustee has no liability for any good faith error in stating the proper amount, and an error or omission in the street address will not affect the validity of the notice if the legal description is given. [Civ. Code § 2924f(b).]
The trustee must record the notice of sale at least 14 days prior to the date of the sale. The trustee must post the notice of sale in a public place at least 20 days before the sale date and must publish the notice of sale once per week for the same period in an appropriate newspaper of general circulation. [Civ. Code § 2924f(b).] The publication requirement has been interpreted to mean that three successive publications are required, even though the first and last would be separated by only 14 days, since there can only be three weekly publications in the 20-day period; and, the first publication must be at least 20 days prior to the sale

date. Hotchkiss v. Darling (1933) 130 Cal.App. 625, 626-27; 20 P.2d 343; McCabe v. Willard (1931) 119 Cal.App. 122, 125; 6 P.2d 258.]
The trustee must also post a copy of the notice of sale in some conspicuous place on the property at least 20 days before the date of sale where possible and not restricted for any reason. If possible, and if not restricted for any reason, the trustee must post the notice on the door of a single family residence, but the trustee’s failure to post the notice on the door does not affect a sale to a bona fide purchaser for value. In the absence of any contrary evidence, the notices which have been posted are presumed to have remained in place for the required period. Hotchkiss v. Darling, supra, 130 Cal.App. 625, 627.]
If the trustee cannot place the notice on the front door of the single family residence, the notice must be placed in some conspicuous place on the property. [Civ. Code § 2924f(b).] The trustee may face a problem with compliance if the single family residence is not readily accessible, such as a condominium unit in a locked building. In this circumstance, many trustees have attempted a practical resolution by posting the notice near the main entry to the condominium units. However, this practice may not strictly satisfy the statute and may conceivably be an unfair collection practice in certain circumstances. [See Civ. Code § 1788.12(d).] The trustee, though, is permitted to post the notice

of sale at a guard gate or similar impediment at a “development community” if access to the single family residence in the development is blocked by a gate or other impediment.
Moreover, the trustee must send a copy of the notice of sale to the trustor’s address last known to the trustee at least 20 days before the date of sale. [Civ. Code § 2924b(2) (b). ] The rules applicable to the last known address requirement for notices of default also apply to notices of sale. [See Civ. Code § 2924b(2)(c); Chapter II B 2, “Adequacy of Notice to Trustor/’ supra.]
The trustee’s duty to assure that the trustor receives the notice of the sale is similar to the trustee’s duty to assure that the trustor receives the notice of default. (See Chapter II B 2, “Adequacy of Notice to Trustor,” supra.) The general rule is that the trustee need only comply with the statutory notice requirements notwithstanding whether the trustor knows of the sale. [ See e.g., Civ. Code § 2924b(b)(2) and (c); I. E. Associates v. Safeco Title Ins. Co., supra, 39 Cal.3d 281; Witter v. Bank of Milpitas (1928) 204 Cal. 570, 572-73, 269 P. 614; Sargent v. Shumaker, supra, 193 Cal. 122; Lopez v. Bell, supra, 207 Cal.App.2d 394.]
Without proper notice, a foreclosure sale is void. [See Scott v. Security Title Ins. & Guar. Co. (1937) 9 Cal.2d 606, 613; 72 P.2d 143; United Bank & Trust Co. v. Brown (1928) 203 Cal. 359; 264 P. 482.] However, defects in notice, such as setting the sale date before the expiration of the 20-day notice period, can be corrected prior to the sale, and the sale date may be postponed to permit an adequate period for correction. [See Mack v. Golino (1950) 95 Cal.App.2d 731; 213. P.2d 760.]
6. Notice Regarding Balloon Payment
A special notice must be given before the final payment is due on a balloon payment loan. [Civ. Code § 2924i.] A balloon payment loan is a loan which provides for a final payment as originally scheduled which is more than twice the amount of any of the immediately preceding six regularly scheduled payments. [Civ. Code § 2924i(d) (1). ] A balloon payment loan is also defined as a loan in which the holder of the loan exercises a call provision whereby the holder calls the loan due and payable either after a specified period or date. [Civ. Code § 2924i(d)(l) and (2).]
The notice requirement applies only if the following conditions are met: (1) the loan has a maturity exceeding one year; (2) the note for the loan was executed after January 1, 1984; (3) the loan is secured by a trust deed or mortgage on real property containing one to four residential units one of which is or will be occupied by the borrower; (4) the loan is not open-end credit; (5) the loan is not part of a transaction subject to Civil Code § 2956 (sales involving purchase money liens on residential property); and (6) the loan is not made for the principal purpose of financing construction. [Civ. Code § 29241(a), (b), and (g).]
If the statute applies, the holder of the loan must deliver or send by first-class mail a written notice to the trustor or the trustor’s successor in interest between 90 and 150 days before the due date of the final payment. The notice must state the name and address of the person to whom the final payment must be made, the date by which the payment must be made, the amount or good faith estimate of the amount to be paid (assuming timely payment of all scheduled payments due between the date of the notice and the date when the final payment is due), and a statement that the borrower has the right to refinance the final payment if such is the case. [See Civ. Code § 29241(c).]
If the notice is not given, the due date of the balloon payment is then deemed to be the latest of the following: (a) the due date specified in the loan, (b) 90 days from the date of delivery or mailing of the required notice, or (c) the due date specified in the notice. [See Civ. Code § 29241(e).] If the due date is extended beyond the date specified in the loan, the loan continues to accrue interest at the contract rate, and payments continue to be due at any periodic interval and on any payment schedule specified in the note. (Id.) Payments must be credited as the note requires, and any default in making any extended periodic payment shall be considered a default under the loan. (Id.)
Any person who willfully violates the notice requirement is liable for the actual damages suffered by the borrower as the proximate result of the violation and for the prevailing borrower’s reasonable attorney’s fees. [See Civ. Code § 2924i(f)(1).] The validity of the credit or security document, however, is unaffected by the failure to give notice. (Id-) If the violation of the section was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid the error, there is no liability. [See Civ. Code § 2924i(f)(2).]
Civil Code § 2924i does not specify what effect failure to give the required notice has on the validity of any foreclosure sale predicated on the borrower’s nonpayment of the final balloon or call payment by the date specified in the note. Under the statute, the due date is extended; therefore, no default occurred when the balloon or call payment was not made by the date set forth in the note. Since no default occurred, the foreclosure sale should be held invalid subject to whatever rights may be held by a bona fide purchaser or encumbrancer. [See Chapter III B 3, “Dispute as to What, if any, Amount Owed”; III B 5, “Defective Procedure”; III D 4, “Conclusiveness of Deed Recitals”; III F, “The Status of Bona Fide Purchaser or Encumbrancer; infra. ] A sale could be predicated on a default in making any required extended periodic payments; however, the notice of default would have to state accurately the nature of the breach. [See Chapter III B 5 a, “Defective Notice of Default”, infra.1
7. Conduct of the Foreclosure Sale
The trustee must conduct the sale by public auction between 9 a.m. and 5 p.m. on any business day, Monday through Friday, in the county where all or some part of the property is located. [Civ. Code § 2924g(a).] Although the trustee usually conducts the sale, the sale may also be handled by anyone designated by the trustee. [See Civ. Code § 2924d(d); Central Sav. Bank of Oakland v. Lake (1927) 201 Cal. 438, 447; 257 P. 521.]
Ordinarily, the trustee or the trustee’s agent appears at the time and place designated in the notice of sale, announces the sale, identifies the property up for sale, and indicates the terms of sale, e.g., the amount of the minimum bid, whether the bids must be in cash or cashier’s check, etc. (See 1 Miller & Starr, Current Law of California Real Estate 534.) But this procedure is not mandated by statute. The trustee may require every bidder to show evidence of the bidder’s ability to deposit the full amount of the final bid in cash; a cashier’s check; a check drawn by a credit union, savings and loan association, savings association, or savings bank; or any equivalent specified as acceptable in the notice of sale. [Civ. Code § 2924h(b).] [See Witter v. Bank of Miloitas, supra, 204 Cal. 570, 580.] The trustee cannot refuse to accept a cashier’s check made payable to the bidder to be endorsed to the trustee. (Baron v. Colonial Mortgage Service Co. (1980) 111 Cal.App.3d 316; 168 Cal.Rptr. 450.) The selling beneficiary may bid a credit up to the amount owed without tendering that amount in cash. [Civ. Code § 2924h(b); Coraelison v. Kornbluth (1975) 15 Cal.3d 590, 607; 125 Cal.Rptr. 557; Passanisi v. Merit McBride Realtors, Inc.. supra, 190 Cal.App.3d 1496.] However, a junior lienholder cannot use the amount of the lien as a credit bid. [See Pacific Loan Management Corp. v. Superior Court (1987) 196 Cal.App.3d 1485, 1493; 242 Cal.Rptr. 547.]
The trustee has discretion to postpone the sale. The trustee, for example, may exercise that discretion by postponing the sale to protect the beneficiary’s or the trustor’s interests. [See Bank of Seoul & Trust Co. v. Marcione (1988) 198 Cal.App.3d 113, 118-19; 244 Cal.Rptr. 1; Pacific Readv-Cut Homes v. Title G. & T. Co. (1929) 103 Cal.App. 1, 5-6; 283 P. 963.] In addition, the trustee may postpone the sale at the instruction of the beneficiary or upon the written request of the trustor, if the trustor requests the postponement to obtain cash sufficient to satisfy the obligation or bid at the sale and the written request identifies the source from which the funds are being obtained. The trustee must grant at least one request by the trustor for a postponement not to exceed one day. [Civ. Code § 2924g(c)(l); Whitman v. Transtate Title Co. (1985) 165 Cal.App.3d 312, 320-21; 211 Cal.Rptr. 582.]
A sale also may be postponed by court order, operation of law, or mutual agreement between the trustor and beneficiary. If the sale has been stopped by an injunction, restraining order, stay effected by court order or operation of law, the sale may not be conducted sooner than seven days after the termination of the injunction, order, or stay unless a court expressly directs the conduct of the sale within that seven day period. [Civ. Code § 2924g(d).] If the sale was postponed to a time within that seven day period, a notice of postponement must be given. (.Id.)
While there is no limit to the number of postponements, if the trustee postpones the sale more than three times based on the exercise of its discretion or the instruction of the beneficiary, the trustee must give a new notice of sale. [Civ. Code § 2924g(c).] A postponement at the trustor’s request, by court order, or by operation of law, such as the automatic stay under the bankruptcy law [11 U.S.C. § 362(a)], is not included in counting the three postponements requiring a renoticing of the foreclosure sale. [See California Livestock Production Credit Assn. v. Sutfin (1985) 165 Cal.App.3d 136, 141; 211 Cal.Rptr. 152.]
The trustee must publicly declare the postponement and its reason at the time and place scheduled for sale, must declare the new date and time as well as place (which must be the same place), and must keep records of each postponement and the reason for it. The trustee does not have to give any further notice of a postponement. [Civ. Code § 2924g(d).] The trustee, for example, has no duty to give any special notice of a postponement to the trustor or the trustor’ s representative. (See California Livestock Production Credit Assn. v. Sutfin, supra, 165 Cal.App.3d 136, 141-42.)
The overriding duty of the trustee to the trustor is to conduct the sale fairly and properly to benefit the trustor:
A sale under a power in a mortgage or trust deed must be conducted in strict compliance with the terms of the power. The sale must be made fairly, openly, reasonably, and with due diligence and sound discretion to protect the rights of the mortgagor and others, using all reasonable efforts to secure the best possible or a reasonable price. Kleckner v. Bank of American Nat. Trust & Sav. Ass’n., supra, 97 Cal.App.2d 30, 33.[Accord, Bank of Seoul & Trust Co. v. Marcione, supra, (1988) 198 Cal.App.3d 113, 118-19; Baron v. Colonial Mortgage Service Co., supra. 111 Cal.App.3d 316, 323; Block v. Tobin (1975) 45 Cal.App.3d 214, 221; 119 Cal.Rptr. 288; Hill v. Gibraltar Sav. & Loan Assn. (1967) 254 Cal.App.2d 241, 243; 62 Cal. Rptr. 188; Brown v. Busch (1957) 152 Cal.App.2d 200, 204; 313 P.2d 19; see generally I.E. Associates v. Safeco Title Ins. Co., supra, 39 Cal.3d 281, 285 n.3.] But if the sale is openly and fairly conducted without any impropriety, the trustee can purchase the property for the trustee’s own benefit. (See Stephens, Partain & Cunningham v. Hollis, (1987) 196 Cal.App.3d 948, 955; 242 Cal.Rptr. 251.)
The trustee cannot fix or restrain bidding in any manner [Civ. Code § 2924h(g)] or “arbitrarily reduce the pool of available bidders.” (Bank of Seoul & Trust Co. v. Marcione, supra, 198 Cal.App.3d 118.) The trustee should exercise discretion to promote competitive bidding. (Id.; Baron v. Colonial Mortgage Service Co., supra, 111 Cal.App.3d 316, 323.) Accordingly, the trustee cannot use the device of repeated postponements to discourage and frustrate the participation of bidders so that the sale can be manipulated in favor of the beneficiary or anyone else. Such conduct constitutes a breach of the trustee’s duty to the trustor and is deceitful. (See Block v. Tobin (1975) 45 Cal.App.3d 214; 119 Cal.Rptr. 288.) Moreover, such conduct is a restraint on bidding. A trustee engaging in deceit or a restraint on bidding

is subject to criminal prosecution. [See Civ. Code § 2924h(f).]
The trustee is under no obligation to engage in improper or illegal conduct at the behest of the beneficiary. Indeed, the trustee is under an obligation to the trustor to conduct the sale fairly and reasonably. If the beneficiary insists on the trustee’s violating the law or its duty to the trustor in the conduct of the sale, the trustee should refuse. The beneficiary may substitute a new trustee pursuant to the trust deed or Civil Code § 2934a. As a practical matter, if the trustee refuses to act wrongfully, the beneficiary will either cease seeking improper trustee conduct or will substitute a new trustee. In the unlikely event the trustee needs judicial relief, the trustee can apply to the superior court for discharge as trustee [see generally Civ. Code § 2282(e)] and may be entitled to attorney’s fees depending on the terms of the trust deed.
The full parameters of the rule that the trustee must use all reasonable efforts to obtain a reasonable price have not been determined. Moreover, this rule cannot be easily reconciled with the oft-repeated rule that “mere inadequacy of price, however gross, is not itself a sufficient ground for setting aside a sale legally made” in the absence of fraud, unfairness, or irregularity in the trustee’s conduct of the sale. [E.g., Sargent v. Shumaker, supra, 193 Cal. 122, 129; Winbialer v. Sherman (1917) 175 Cal. 270, 275-76; 165 P. 943; Whitman v. Transtate Title Co., supra, 165 Cal.App.3d 312, 323; Crummer v. Whitehead, supra. (1964) 230 Cal.App.2d 264/ 266; Crofoot v. Tarman (1957) 147 Cal.App.2d 443f 446-47; 305 P.2d 56; see also Smith v. Allen (1908) 68 Cal.2d 93; 65 Cal.Rptr. 153.] The trustee must, for example, delay the sale and give the trustor at least one day to raise money to satisfy the debt. [Civ. Code § 2924g(c)(l); see Winbialer v. Sherman, supra, 175 Cal. 270; Whitman v. Transtate Title Co.. supra, 165 Cal.App.3d 312, 320-23; Foae v. Schmidt (1951) 101 Cal.App.2d 681.] The trustee may continue the sale and refuse to sell to the highest bidder if the bid is inadequate to satisfy the debt. [See Pacific Ready-Cut Homes, Inc. v. Title Guar. & Trust Co.. supra, 103 Cal.App. 1.]
The trustee, however, is under no obligation “to make other efforts to procure bidders than to advertise the sale . . . * Stockwell v. Barhum (1908) 7 Cal.App. 413, 420; 94 P. 400], or to delay the sale because of a decline in property values. (See Enqelbertson v. Loan & Blda. Assn., supra, 6 Cal.2d 477, 479.) The trustee is also not obligated to continue the sale even for a short time to allow bidders to obtain the necessary funds required to cover their bids: “[i]t is the duty of a trustee, once it has started, to continue with reasonable dispatch with a sale under a trust deed; the terms being cash, the trustee is not required to hold up the sale while sundry bidders leave the place to go to banks or elsewhere to get cash.” (Kleckner v. Bank of America Nat. Trust & Sav. Assoc, supra, 97 Cal.App.2d 30, 33-34.) Indeed, it might be a breach of duty to the beneficiary for the trustee to continue a sale and thereby risk losing a bid from a third party sufficient to satisfy the debt. [See Hill v. Gibraltar Sav. & Loan Assn., supra, 254 Cal.App.2d 241/ 244-45; Stockwell v. Barnum, supra, 7 Cal.App. 413, 420.) However, under Winbiqler, Foqe, Kleckner, Hill, supra, and Civil Code § 2924g(c)(l), the trustee may breach its obligation to the trustor if it fails to grant a reasonable continuance to the trustor to obtain funds when the only bidder is the beneficiary.
The sale is complete upon the delivery of the trustee’s deed although it is deemed complete at the conclusion of the public auction for the purpose of applying the antideficiency statutes. see Little v. CFS Service Corp. (1987) 188 Cal.App.3d 1354, 1362; 233 Cal.Rptr. 923; Ballencree v. Sadlier (1986) 179 Cal.App.3d 1, 5; 224 Cal.Rptr. 301.]
Since the trustee, beneficiary, and the bidders are the primary players at the foreclosure sale, the “trustor cannot be characterized as a ‘seller’ under a duty to disclose known defects as exists in the normal vendor-vendee relationship.” [Sumitomo Bank v. Taurus Developers, Inc., supra, 185 Cal.App.3d 211, 221.] Thus, when the beneficiary makes a full credit bid, the beneficiary is not entitled to rely on the representations or nondisclosures by the trustor during the negotiation of the loan transaction or on nondisclosures during the trustee’s sale. (Id. at 222.)
a. Foreclosure Sales on Lien Contracts
In addition to the general sale requirements discussed above, special rules apply to the foreclosure of deeds of trust contained in retail installment obligations for the purchase of goods or services subject to the provisions of the Unruh Act. [Civ. Code §§ 1801 et sec.1
If the default is not cured within 30 days following the recordation of the notice of default, the trustee must mail a statutorily prescribed notice to the trustor at the trustor’s last known address. [Civ. Code § 2924f(c)(3).]
The trustee is also required to accept offers for the purchase of the property during the ten days preceding the sale date. The offers are revocable until accepted. If an offer is accepted in writing by both the trustor and the beneficiary before the scheduled sale date, the sale must be postponed to a definite date before which the trustor may convey the property according to the terms of the offer. When the sale is consummated, the foreclosure proceedings are deemed canceled. [Civ. Code § 2924f(c)(4).]
b. Effect of Military Service
A foreclosure sale held during the trustor’s military service or within three months thereafter is invalid if the trustor incurred the debt and owned the property securing the debt before military service, and if the trustor still owned the property at the time of the foreclosure. The provision does not apply if the trustor waives the right or the court so orders. [50 App. U.S.C. SS 532(1), 532(3); see 50 App. U.S.C. S 517.]
8. Distribution of the Sale Proceeds
Once collected, the trustee must dispose of the sale proceeds. The distribution occurs in the following order: (1) payment of costs and expenses of sale (cf. Civ. Code § 2273); (2) reimbursement to the foreclosing beneficiary of any advances made to redeem a prior lien (Civ. Code §§ 2903, 2904); (3) payment of the foreclosed debt [see generally Windt v. Covert (1907) 152 Cal. 350, 355-56; 93 P. 67]; (4) payment of junior lienholders in order of their priority [see Caito v. United California Bank (1978) 20 Cal.3d 694, 701; 144 Cal.Rptr. 751; Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485, 1491; Strutt v. Ontario Sav. & Loan Assn. (1972) 28 Cal.App.3d 866, 876; 105 Cal.Rptr. 395; Dockrey v. Gray (1959) 172 Cal.App.2d 388, 391; 341 P.2d 746; Sohn v. California Pac. Title Ins. Co., supra, 124 Cal.App.2d 757, 766, 269 P.2d 223]. A junior lienholder retains its claim to surplus proceeds in the absence of any impropriety even if that junior lienholder purchased at the senior lienholder’s sale. [See Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485, 1492.] Any remaining surplus must be paid to the trustor. [See Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485/ 1491; Nomellini Constr. Co. v. Modesto Sav. & Loan Assn. (1969) 275 Cal.App.2d 114, 118, 79 Cal.Rptr. 717; Atkinson v. Foote (1919) 44 Cal.App. 149, 156-67, 186 P. 831; see also Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1504.] Since senior liens are unaffected by the foreclosure of junior liens [see Streiff v. Darlington (1937) 9 Cal.2d 42, 45, 68 P.2d 728], senior liens are not paid out of the proceeds of the sale on the junior lien. [See Sohn v. California Pac. Title Ins. go. (1954) 124 Cal.App.2d 757, 766; 269 P.2d 223.]
A number of disputes may arise concerning the amount owed on the obligation and amounts for costs, expenses, advances, preservation of the property, and attorney’s fees. For example, the beneficiary may claim a prepayment penalty as a result of accelerating the balance because of the default, but, depending on the wording of the prepayment provision, the beneficiary may not be entitled to any penalty. [See Chapter I B 3 f, “Prepayment Penalties”, supra. 1 Other amounts to which the beneficiary may not be entitled include usurious interest [see Arneill Ranch v. Petit(1976) 64 Cal.App.3d 277; 134 Cal.Rptr. 456] or advances on delinquent senior encumbrances made after the foreclosure sale [see Streiff v. Darlington, supra, 9 Cal.2d 42, 45-46]. [See also Eastland Sav. & Loan Assn. v. Thornhill & Bruce, Inc. (1968) 260 Cal.App.2d 259; 66 Cal.Rptr. 90.]
The trustor has the right to obtain a judicial determination of the amount due on the obligation and the costs of sale and may establish the existence of a surplus in this manner. [See Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1504; de la Cuesta v. Superior Court (1984) 152 Cal.App.3d 945, 950; 200 Cal.Rptr. 1.] The trustor can bring an action for an accounting (see Code of Civ. Proc. § 1050), declaratory relief and injunction, or money had and received and an accounting. (See Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.2d 1496, 1512. If the trustor owes a judgment to the beneficiary, the trustor can establish an offset of surplus proceeds against the judgment through a motion to compel satisfaction or partial satisfaction of judgment. (Id. at 1513.) The trustee is also obligated to account to the trustor for any excess bid over the amount properly required to satisfy the debt. [See Streiff v. Darlington, supra, 9 Cal.2d 42, 45-46; Arneill Ranch v. Petit, supra, 64 Cal.App.3d 277, 294. To the extent the excess is in the form of the beneficiary’s credit bid, the beneficiary will be liable to the trustor for the amount in cash. Arneill Ranch v.Petit, supra, 64 Cal.App.3d at 295 (see also Passanisi v. Merit McBride Realtors, Inc., supra, 190 Cal.App.3d 1496, 1512 (offset)).
The beneficiary and, thus, the trustee are not liable to the trustor for any profit realized on the resale of the property, particularly if the profit represents the equity value formerly encumbered by sold out junior liens. [See Strutt v. Ontario Sav. & Loan Assn., supra, 28 Cal.App.3d 866, 876.]
Before filing an action against the trustee for an accounting and for the claimed share of the surplus, counsel for the trustor should consider the trustee’ s culpability and potential entitlement to attorney’s fees. If the trustee has not participated in any wrongdoing and is sued solely as a stakeholder, the trustee will be able to file a motion or action in interpleader and may be entitled to reasonable attorney’s fees and costs which the court could award from the disputed amount deposited in court. (Code of Civ. Proc. §§ 386, 386.5, 386.6; see Pacific Loan Management Corp. v. Superior Court, supra, 196 Cal.App.3d 1485, 1488-90.) In certain circumstances such as where surplus money is being held by an institutional lender’s subsidiary trustee, the trustor may decide to claim directly against the beneficiary, rather than sue the trustee.
Quarrels about the distribution of the proceeds should not affect a bona fide purchaser at the foreclosure sale who takes free of the claims of the trustor and junior lienholders. [See generally Central Sav. Bank of Oakland v. Lake, supra, 201 Cal. 438, 448; Hohn v. Riverside County Flood Control & Wat. Conserv. Dist. (1964) 228 Cal.App.2d 605, 613; 39 Cal.Rptr. 647.]
9. Trustee Charges
The fees imposed on a trustor for trustee services are limited by statute. For the period from the recording of the notice of default until the notice of sale is mailed, the trustee’s fees assessed against a trustor cannot exceed $200 if the unpaid principal sum secured is $50,000 or less, plus one-half of one percent of the unpaid principal sum secured exceeding $50,000 up to and including $150,000, plus one-quarter of one percent of the unpaid principal sum secured exceeding $150,000 up to and including $500,000, plus one-eighth of one percent of the unpaid principal sum secured exceeding $500,000. [Civ. Code § 2924c(d).] If the foreclosure sale is on a trust deed contained in a retail installment obligation subject to the Unruh Act, the trustee may charge $50 in addition to the amount authorized by Civil Code § 2924c. [Civ. Code § 2924f (c) (5). ] From the date the notice of sale is mailed until the property is sold, the trustee’s fees, in lieu of the above fees, may not exceed $300 if the unpaid principal sum is $50,000 or less, plus one percent of any portion of the unpaid principal sum secured exceeding $50,000 up to $150,000, plus one-half of one percent of the unpaid principal sum secured exceeding $150,000 up to $500,000, plus one-quarter of one percent of any portion of the unpaid principal sum secured exceeding $500,000. [Civ. Code § 2924d(a).] Upon sale of the property, in lieu of other fees, $300 or one percent of the unpaid balance, whichever is greater, may be deducted by the trustee from the sale proceeds, but the trustor is not personally liable for the fee after the sale. [Civ. Code §§ 2924c(d), 2924d(b).] Fees within the statutory limits are conclusively presumed valid and lawful. [Civ. Code §§ 2924c(d), 2924d(a), 2924d(b).]
However, if the amount or nature of the default is disputed and litigation results, the court may set the trustee’s fees at a sum less than the maximum statutorily authorized amount. [Sweatt v. The Foreclosure Co., supra, 166 Cal.App.3d 273, 278.)
The only costs and expenses which may be charged are those which are reasonable and actually incurred for recording, mailing, publishing, and posting required notices, for a trustee’s sale guarantee and for the postponement of a sale pursuant to a trustor’s written request under Civil Code § 2924g provided the charge does not exceed $50. [Civ. Code §§ 2924c(c), 2924d(a), 2924d(b).]
Kickbacks for the referral of any business involving trustee services are forbidden. If an unlawful rebate occurs, the offenders are liable to the trustor for treble the amount of the kickback plus reasonable attorney’s fees and costs in addition to any other remedy. The payment of an unlawful rebate will not affect the validity of a foreclosure sale to a bona fide purchaser or the rights of an encumbrancer for value without notice. [Civ. Code § 2924d(c).] If an illegal kickback is paid and the amount is imposed on the trustor under the guise of trustee’s fees, the trustor could argue that an improper statement of the default was set forth in the notice of default and the notice of sale. In such a situation, the trustor may seek to halt or invalidate the sale because of the defective notice. However, if the sale is to a bona fide purchaser, the trustor may be able to argue that the trustee is liable for all the damages sustained by the loss of the property and not just for the kickback amount which is relatively small amount, even when trebled. The trustee’s illegal misstatement of the appropriate fees in the notices rendering the notices defective should sufficiently taint the sale to make the trustee liable beyond the kickback.
10. Effect of Nonjudicial Foreclosure
a. Redemption
The trustor generally has no right of redemption after a nonjudicial foreclosure sale. [See e.g., Bank of Italy Nat’l. Trust & Sav. Ass’n. v. Bent lev (1933) 217 Cal. 644, 655; 20 P.2d 940; Ballenaee v. Sadlier, supra, 179 Cal.App.3d 1, 5; Pv v. Pleitner (1945) 70 Cal.App.2d 576, 579, 161 P.2d 393; City Lumber Co. v. Brown (1920) 46 Cal.App. 603, 608-09; 189 P. 830; see generally Roseleaf Corp. v. Chieriahino (1963) 59 Cal.2d 35, 43-44; 27 Cal.Rptr. 873.]
After a nonjudicial foreclosure sale for at least the full amount of the underlying debt, the trustor’s obligations under the promissory note and the trust deed are extinguished. (See, e.g., Cornelison v. Korabluth, supra, 15 Cal.3d 590, 606; Ballenaee v. Sadlier, supra, 179 Cal.App.3d 1, 5.)
A significant, but seldom employed, exception to this general rule permits the trustor to redeem the property from the beneficiary after the sale if the beneficiary both served as trustee and acquired the property. (Coosey v. Sacramento Bank (1901) 133 Cal. 659; 66 P. 7.) The right of the trustor to treat the sale as voidable and to redeem the property should be applicable to a beneficiary, such as an institutional lender, that purchases the property at a foreclosure sale conducted by an “in-house” or “captive” trustee [see Baron v. Colonial Mortgage Service Co., supra, 111 Cal.App.3d 316, 322-23], which is a subsidiary business entity of the beneficiary. [See Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 116; 92 Cal.Rptr. 851.]
The general rule allowing no redemption after a nonjudicial foreclosure differs from the redemption rules that apply after a judicial foreclosure. After a judicial foreclosure in which the beneficiary’s right to a deficiency judgment is waived or precluded by law, the notice of sale may not be given until 120 days after the date the notice of levy was served on the judgment debtor, but there are no post-sale redemption rights. (Code of Civ. Proc. § 701.545.) After a judicial foreclosure in which the court may order a deficiency, the notice of sale may be given upon entry of judgment, but the debtor or the debtor’s successor in interest may redeem the property (a) during a three-month period following the sale if the sale price is sufficient to satisfy the debt plus interest and costs, or (b) during a one-year period following the sale if the sale price is insufficient to satisfy the debt plus interest and costs. (Code of Civ. Proc. §§ 729.010, 729.020, 729.030.)
b. Junior Liens
The trustee’s deed relates back in time to the date the trust deed was originally executed. Carpenter v. Smallpacre (1934) 220 Cal. 129, 132; 29 P.2d 841.] Thus,
The trustee’s deed on the sale under the power of sale passed to the purchasers . . . the title to the property held by the maker of the security instrument on the date he executed the same, and any title afterwards acquired. [Citation omitted. ]
The purchaser at the trustee’s sale and the grantee in the trustee’s deed acquires title free of all rights of the trustor or anyone claiming under or through him, and his title is free of all claims subordinate to the encumbrance pursuant to which the sale was made. Hohn v. Riverside County Flood Control & Wat. Conserv. Dist., supra, 228 Cal.App.2d 605, 612-13.
[See Streiff v. Darlington, supra, 9 Cal.2d 42, 45; Weber v. McCleverty (1906) 149 Cal. 316, 320-23; 86 P. 706; FPCI Re-Hab 01 v. E&G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1023; 255 Cal.Rptr. 157; Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn., supra, 184 Cal.App.3d 817, 825; Bracey v. Gray (1942) 49 Cal.App.2d 274, 277-78; 121 P.2d 770; Duaand v. Magnus (1930) 107 Cal.App. 243, 247, 290 P. 309; see also Sain v. Silverstre (1978) 78 Cal.App.3d 461, 471; 144 Cal.Rptr. 478.] The foreclosure sale does not extinguish liens for real property taxes and assessments which have priority regardless of the date the liens attach [see Rev. & Tax Code § 2192.1] or mechanic’s liens recorded after the recordation of the deed of trust in foreclosure if the work commenced before the deed of trust was recorded. [See Civ. Code § 3134.] The effect of a foreclosure on other liens is beyond the scope of this handbook.
c. Deficiencies
1. Deficiency Judgments
If a beneficiary forecloses by a power of sale, a judgment for any deficiency between the sale proceeds and the debt is prohibited. (Code of Civ. Proc. § 580d.) However, a junior lienholder whose security is extinguished by the foreclosure of a senior lien still can sue the obligor to collect the underlying debt. (See e.g., Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d 35, 39.)
A beneficiary may choose to pursue judicial foreclosure (see Code of Civ. Proc. §§ 725a and 726) which permits a deficiency judgment in some circumstances. (See Code of Civ. Proc. § 726.) However, the deficiency judgment cannot exceed the difference between the debt owed and the greater of the fair market value of the property or its sale price. (See Code of Civ. Proc. §§ 580a and 726.) In addition, a deficiency judgment is prohibited if the obligation is owed to the seller of the property or to a lender of all or a portion of the purchase price of an owner-occupied dwelling for not more than four families. (Code of Civ. Proc. § 580b.)
A full discussion of the anti-deficiency statutes and judicial foreclosure procedures is beyond the scope of this handbook.
2. Beneficiary1s Right to Insurance Proceeds After Foreclosure
The trust deed usually gives the beneficiary the right to the proceeds of a hazard insurance policy as additional security. The beneficiary would be entitled to those proceeds up to the amount of the indebtedness remaining after the foreclosure sale. (See Cornelison v. Kornbluth, supra, 15 Cal.3d 590, 607; Armsev v. Channel Associates, Inc. (1986) 184 Cal.App.3d 833, 837-38; 229 Cal.Rptr. 509.) However, if the full amount of the indebtedness is satisfied through the foreclosure sale by the beneficiary’s full credit bid or by payment by a third party bidder, the beneficiary will not be entitled to any of the insurance proceeds. [See id.; Duarte v. Lake Gregory Land and Water Co. (1974) 39 Cal.App.3d 101/ 105; 113 Cal.Rptr. 893.]
d. Junior Lienholder as Bidder at Senior Lienholder’s Sale
A junior lienholder may bid at a sale conducted by a senior lienholder. If the junior lienholder purchases the real property security at the nonjudicial foreclosure sale, the junior lienholder is not precluded from obtaining a deficiency judgment by Code of Civil Procedure section 580d. Walter E. Heller Western, Inc. v. Bloxham (1985) 176 Cal.App.3d 266, 273; 221 Cal.Rptr. 425.] However, the fair value limitations of Code of Civil Procedure Section 580a apply. (Id.)
11. Right to Possession
After the foreclosure sale, the purchaser generally has the immediate right to possession. [See, e.g., Farris v. Pacific States Aux. Corp. (1935) 4 Cal.2d 103, 105, 48 P.2d 11; Central Sav. Bank of Oakland v. Lake, supra, 201 Cal. 438, 448.] The purchaser is accorded the right to use summary unlawful detainer proceedings to obtain possession. (See Code of Civ. Proc. § 1161a; see discussion in chapter III, section E, at p. 111-36, infra.) The foreclosed owner is subject to a three-day notice to quit; however, a tenant or subtenant of rental housing must be given a notice to quit at least as long as a rental period but not exceeding 30 days [See Code of Civ. Proc. § 1161a(b)(3) and (c).]
However, a local rental control or housing ordinance which limits the grounds for eviction may limit or preclude the purchaser at a trustee’s sale from obtaining possession. [See Gross v. Superior Court (1985) 171 Cal.App.3d 265, 274-76; 217 Cal.Rptr. 284.]
The foreclosure sale also extinguishes any leases made after the deed of trust. [See Sullivan v. Superior Court (1921) 185 Cal. 133, 138, 195 P. 1061; Dugand v. Magnus, supra, 107 Cal.App. 243, 247. ] The sale should extinguish any unrecorded lease exceeding one year made prior to the recordation of the trust deed. (See Civ. Code § 1214.) If a lease is recorded before a trust deed, the lease will survive the foreclosure of the trust deed, and the purchaser will be entitled to receive rent after the date of purchase. [See Fahrenbaker v. E. Clemens Horst Co. (1930) 209 Cal. 7, 9, 284 P. 905.]
12. Damages for Improper Sale
The sale process must closely adhere to the procedure set forth in Civil Code §§ 2924 et sea.; “The statutory requirements must be strictly complied with, and a trustee’s sale based on a statutorily deficient notice of default is invalid.” (Miller v. Cote, supra. 127 Cal.App.3d 888, 894.) A trustee is liable to the trustor for damages sustained from an “illegal, fraudulent or willfully oppressive” foreclosure sale. Munaer v. Moore, supra, 11 Cal.App.3d 1, 7.] Normally, the trustor will attempt to stop or vacate a foreclosure sale based on an invalid notice of default. (See Chapter III B 5 a, “Defective Notice of Default”, infra.) However, an action for damages may be the only avenue of redress if the property has been sold to a bona fide purchaser.
a. Liability for Deficient Notice
Although no case has held a trustee liable for damages for a deficient notice of default, a variety of theories depending on the nature of the trustee’s failings would support causes of action for damages. In any event, the trustor will likely have to show prejudice or an impairment of rights as a result of the deficiency in the notice of default. (See U.S. Hertz. Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 86; 116 Cal.Rptr. 44.) If the appropriate nexus between the notice and the loss is established, the trustor may be able to show that (1) the trustee intentionally failed to perform, or was negligent in performing, its duties under the trust deed and statute; (2) the trustee engaged in negligent or intentional misrepresentation in setting forth the information contained in the notice of default; (3) the trustee breached the covenant of good faith and fair dealing which is implied in a trust deed (see Schoolcraft v. Ross (1978) 81 Cal.App.3d 75; 1146 Cal.Rptr. 57); and (4) the trustee may have the duty as agent of the trustor to inquire of the beneficiary to verify the accuracy of the information contained in the notice of default and the trustor’s entitlement to a Spanish translation (but see Civ. Code § 2924c(b)(1) providing that the trustee has no liability for failing to give a Spanish language explanation of the right of reinstatement unless Spanish is specified on a lien contract or unless the trustee has actual knowledge that the obligation was negotiated principally in Spanish).
b. Liability for Deficient Sale
If the property is sold without compliance with notice requirements the trustee may be liable for damages. The trustor must first establish that any damages were sustained. Since a sale held without proper notice may be void, the trustor may suffer no damages because no sale was actually effected. (Scott v. Security Title Ins. & Guar. Co.. supra. 9 Cal.2d 606, 613-14, 72 P.2d 143.) However, the trustor may be precluded from attacking the sale and recovering the property from the purchaser if the sale was made to a bona fide purchaser for value and without notice and the trustee’s deed recites that all notice requirements were met. (See Chapter III F, “The Status of Bona Fide Purchaser or Encumbrancer’1, section 4, at p. 111-32; F, at p. 111-40, infra.) As a result, the trustor will have incurred damage.
The trustee will be liable to the trustor for damages resulting from the trustee’s bad faith, fraud or deceit (Scott v. Security Title Ins. & Guar. Co., supra, 9 Cal.2d 606, 611.) In Scott, the trustee failed to post notice of the sale and then sold the property in satisfaction of the debt. The sale was set aside because of the improper notice, and the trustee thereafter properly sold the property but only for a nominal sum insufficient to pay the debt. The beneficiary obtained the deficiency from a former owner who had assumed the debt and who in turn sued the trustee for breach of contract and agency. The Supreme Court held that the only valid sale was regularly conducted, and that the trustee had no liability for breach of contract or agency for mistakenly performing the first sale which was declared a nullity. (9 Cal.2d at 612-14.) The court indicated that the only liability might be for negligence but that the plaintiff could not recover since that theory had not been alleged. (9 Cal.2d at 614.)
Munger indicates that a trustee can be held liable for its negligence in the conduct of an illegal sale. [See supra, 11 Cal.App.3d at 7 citing Civ. Code § 1708; Dillon v. Legg (1968) 68 Cal.2d 728; 69 Cal.Rptr. 72; Davenport v. Vaughn (1927) 137 S.E. 714, 716 (the trustee is “charged with the duty of fidelity, as well as impartiality; of good faith and every requisite degree of diligence; of making due advertisement; and giving due notice . . . . If, through haste, imprudence, or want of diligence, his conduct was such as to advance the interest of one person to the injury of another, he became personally liable to the injured party”).]
c. Beneficiary’s Liability For Trusteefs Misconduct
The trustee is the common agent of the parties, and, as a result, a party to whom the trustee owes a duty to conduct a fair and open sale may impute a breach of that duty to the beneficiary. (Bank of Seoul & Trust Co. v. Marcione, supra, 198 Cal.App.3d 113, 120.)
13. Mobilehome and Manufactured Home Foreclosures
The foreclosure process for a “manufactured home” or a “mobilehome,” as those terms are respectively defined (see Health & Safety Code §§ 18007 and 18008), is the same as the foreclosure process for real property if any of the following conditions are met: (1) the manufactured home or mobilehome is affixed to a permanent foundation as provided by Health & Safety Code § 18551, (2) the security for the loan for these types of homes includes the real property on which the manufactured home or mobilehome is installed or affixed, or (3) the loan or credit sale was made under circumstances requiring disclosures under Regulation Z (Health & Safety Code §§ 18039.1, 18039.5). A lawyer representing an owner of one of these types of homes should ascertain whether either condition (1), (2), or (3) apply and should remember that, even though the home may be on a permanent foundation, the permanent foundation system may not comply with Health & Safety Code § 18551. If the manufactured home or mobilehome does not meet the description in Health & Safety Code § 18039.1 but is required to be registered pursuant to the Mobilehomes-Manufactured Housing Act of 1980, the default procedure is governed by special rules set forth in Health & Safety Code § 18037.5 which permit a sale generally pursuant to Commercial Code § 9504.
The mobilehome foreclosure procedures present a number of questions, and the statutes should be scrutinized by counsel. One of the questions concerns the right to cure a default provided in Health & Safety Code § 18037.5(a). The statute is silent on whether the default can be cured by paying only the arrearage and disregarding the accelerated balance or whether the right to cure the default is tantamount to a right of redemption. [Compare Health & Safety Code § 18037.5(a) with Civ. Code §§ 2924c,2983.3(b).] The language of the notice of default form suggests that a right of reinstatement is intended, and the statute should be liberally construed as a remedial statute protecting mobilehome owners from the loss of their residences.
A more detailed discussion of the foreclosure procedures and problems related to deficiency judgments is beyond the scope of this manual.
14. Condominium Assessment Lien Foreclosures
An assessment, including all charges, interest, costs, attorney’s fees, and penalties, levied on a condominium owner becomes a lien against the condominium upon the recordation of a notice of assessment containing certain statutorily required information. (See Civ. Code § 1367.) The lien expires one year after its recordation unless it is earlier satisfied and released or enforced or unless it is extended up to one additional year by the recordation of a written extension. (Id.) The lien may be enforced by a sale of the condominium as prescribed by Civil Code sections 2924, 2924b and 2924c “applicable to the exercise of powers of sale in mortgages and deeds of trust” or in any other manner permitted by law. (Id.) However, the nonjudicial foreclosure procedure cannot be used, with respect to subdivisions under the jurisdiction of the Department of Real Estate, against a person to enforce a lien for penalties imposed for any of the following reasons: (a) failure to comply with the governing instruments [Covenants, Conditions, and Restrictions, Articles of Incorporation, and Bylaws] or (b) as a means of reimbursing the association for costs incurred (1) in the repair of damage to common areas allegedly caused by the person or (2) in bringing the individual and the person’s subdivision interest into compliance with the governing instruments. [See 10 Cal.Adm. Code § 2792.26(c).]
The statutes authorizing a sale in accordance with nonjudicial foreclosure procedures conspicuously omit reference to Civil Code sections 2924d, 2924f, 2924g, and 2924h. (See Civ. Code § 1367.) Since the condominimum lien statutes suggest that the sale should be conducted in accord with law applicable to the exercise of the power of sale, an association enforcing its lien by the nonjudicial foreclosure method will not likely escape the protections and procedures required by the omitted Civil Code sections. Moreover, the condominium’s governing instruments may provide by contract that the enforcement procedure must follow Civil Code section 2924d, 2924f, 2924g, and 2924h.
A lawyer representing a condominium owner in foreclosure should consider the constitutionality of the foreclosure procedure. The constitutionality of the nonjudicial foreclosure process was upheld against attack on due process grounds because the contractually created private power of sale did not involve state action. (See Garfinkle v. Superior Court, supra, 21 Cal.3d 68.) The assessment lien foreclosure procedure, however, is established by statute and, thus, may involve State action. Nevertheless, the governing instruments, depending on their wording, may be construed to provide a contractual basis for the exercise of the power of sale.
15. Mixed Collateral – Real and Personal Property Security
A creditor may secure a single obligation with a security interest in real property and personal property. For example, a personal loan may be secured by a trust deed on the borrower’s house and a lien on both of the borrower’s automobiles. In the event of default, the creditor may foreclose in any sequence (1) under real property law (e.g., Civ. Code § 2924 et seg.) as to the real property and Article 9 of the Commercial Code as to the personal property; (2) under real property law as to the real property and some or all of the personal property; or (3) under real property law as to the real property and some of the personal property and under Article 9 as to other personal property. [Comm. Code § 9501(4).]
Commercial Code section 9501(4)(b) may be construed to abrogate substantially the operation of real property foreclosure and antideficiency protections in non-consumer transactions. [See Hetland and Hansen, ‘”Mixed Collateral’ Amendments to California’s Commercial Code – Court Repeal of California’s Real Property Foreclosure and Antideficiency Provisions Or Exercise in Futility?,” 75 Cal.L.Rev. 185 (1987).] However, Commercial Code section 9501(4)(b) does not apply to loans or credit sales made to individuals primarily for personal, family, or household purposes. [Comm. Code § 9501(4)(c)(v).] One commentator has indicated that the rules in existence before the 1986 amendment to Commercial Code section 9501(4) apply; thus, a foreclosure of mixed collateral would be governed by real property law. [See CEB, California Mortgage and Deed of Trust Practice Supp., § 44, p. 47 (1988).]
The exemption for consumer transactions casts doubt on the applicability of other provisions of the section which are predicated on the abrogation of real property foreclosure rules. For example, the disposition of personal property collateral and the application of the proceeds to the debt does not cure a monetary default so as to affect the secured party’s rights regarding other personal property collateral. [Comm. Code § 9501(4)(d)(ii).] This provision presupposes that the reinstatement rights afforded by Civil Code section 2924c do not apply. [Comm. Code § 9501(4)(b).] But, reinstatement rights continue to apply in consumer transactions. [Comm. Code § 9501(4)(c)(v).] As a result, if the sale proceeds from the disposition of personal property collateral are sufficient to cure the default under Civil Code section 2924c, the obligation will be reinstated, and the creditor should be precluded from enforcing any other security interest•
For example, suppose a loan is secured by a consumer’s house, car, and pickup truck. The consumer defaults, the creditor accelerates the $10,000 balance, and the amount needed to cure the default is $2,000. The creditor conducts a sale of the car and nets $2,000. A creditor might argue that the sale does not cure the default and that the creditor could proceed against the pickup. [See Coram. Code § 9501(4)(d)(ii).] Civil Code section 2924c, however, continues to apply to the obligation, and the $2,000 sale would be sufficient to reinstate the obligation. Because no default remains, the creditor could not proceed against the pickup.
A lawyer representing a homeowner who has given both real and personal property as security should evaluate whether the security interest is excessive. A court may conclude that a security interest which was disproportionate to the extension of credit and subjected a homeowner to the loss of significant personal property, such as cars and work related vehicles, as well as the homeowner’s home was unduly oppressive and unconscionable. As a result, the court might limit the enforcement of the creditor’s security interest. (See Civ. Code § 1670.5; )

I. WHERE THE TRUSTEES DEED TRANSFERS BY CREDIT BID TENDER OF THE FULL DEBT IS NOT APPROPRIATE.

A. CREDIT BIDS ARE DISTINGUISHED FROM PURCHASE MONEY BIDS.
California Civil Code 2924h (b) provides:
(b) At the trustee’s sale the trustee shall have the right (1) torequire
every bidder to show evidence of the bidder’s ability todeposit with the
trustee the full amount of his or her final bid incash, a cashier’s
check drawn on a state or national bank, a checkdrawn by a state or
federal credit union, or a check drawn by a stateor federal savings and
loan association, savings association, orsavings bank specified in
Section 5102 of the Financial Code andauthorized to do business in this
state, or a cash equivalent whichhas been designated in the notice of
sale as acceptable to thetrustee prior to, and as a condition to, the
recognizing of the bid,and to conditionally accept and hold these
amounts for the durationof the sale, and (2) to require the last and
highest bidder todeposit, if not deposited previously, the full amount
of the bidder’sfinal bid in cash, a cashier’s check drawn on a state or
nationalbank, a check drawn by a state or federal credit union, or a
checkdrawn by a state or federal savings and loan association,
savingsassociation, or savings bank specified in Section 5102 of
theFinancial Code and authorized to do business in this state, or a
cashequivalent which has been designated in the notice of sale
asacceptable to the trustee, immediately prior to the completion of
thesale, the completion of the sale being so announced by the fall ofthe
hammer or in another customary manner. The present beneficiary ofthe
deed of trust under foreclosure shall have the right to offsethis or her
bid or bids only to the extent of the total amount due thebeneficiary
including the trustee’s fees and expenses.This provision provides for
the purchase options at a trustee’s sale.
The first type of bid at a trustee sale is a purchase money bid.
Purchase money bidders are by definition third parties who pay with cash
or a check. Unless there is a lis pendens or obvious title flaw which
puts them on constructive notice, PMBs are given the status of good
faith purchasers and the sale cannot be undone — even with tender.
Therefore, there can be two types of purchase money bidders:good faith
purchasers for value, and those on constructive notice of clouds or
flaws in title. Either type of purchase money bidder is required under
Civil Code 2924h to pay with cash or check,the actual cost of their
winning bid.
Lastly, the section provides for what is known commonly as a “credit
bid.” In a credit bid, the creditor on the note applies the amount of
indebtedness toward its bid on the property, therebyallowing it to take
title without paying a single dollar out of pocket at the sale. The
rationale is simple: the creditor has already lent the borrower/trustor
a sum of money in exchange for the trust deed For seemingly obvious
reasons, credit bidders are not allowed the status of a “good faith
purchaser for value” because they are deemed to be aware of any
improprieties of title which would undermine their title position.
B. PRINCIPLES OF EQUITY AND FAIRNESS GENERALLY REQUIRE PURCHASE MONEY
TENDER IN FAVOR OF PURCHASE MONEY BIDDERS.
Where a third party shows up to a trustee sale and without any notice of
title issues, comes out of pocket to purchase an auctioned home in good
faith, then simple fairness requires that he be paid back the moneyhe
spent prior to being divested of the title he purchased, prior to the
court allowing an action to proceed against that title, which he would
have to defend or forfeit. Tender is the general rule where it comes to
PMBs.
However, the law also provides exceptions to the tender requirement,
even in cases of PMBs. For instance, where the sale is void because
the trustee holding the sale is not empowered to hold a sale on a
property, then tender is not required to set aside the trustee’s deed
after sale because it is void and good title did not transfer in the
first instance. Bank of America v. LaJolla Group II. Tender is also
excepted in the case offraud, where the equities of the case favor the
victim, even over a good faith purchaser for value. (CITE) Such
exceptions are easily rationalized in light of the need for society to
depend on due process and fairness.
In these cases, the amount of tender required is the amount of the
winning bid.
C. PRINCIPLES OF EQUITY AND FAIRNESS DO NOT REQUIRE FULL DEBT TENDER IN
FAVOR OF CREDIT BIDDERS.
However, where a credit bid is made, the bidder is not a good faith
purchaser. It is the creitor party. The trustee deed is a mere matter
of paperwork, without a penny out of pocket. All the tender that is
required to put a credit bidder in a pre-sale condition is 1) cost of
the trustee sale, 2) interest and fees, and 3) reinstate the preexisting
debt which would still be serviced by the creditor but for the sale.
Especially where it may be shown that a sale was knowingly wrongful,
without right, and carried out in spite of borrower’s preexisting claims
on the validity of the debt or recorded lis pendens, equity weighs
heavily against requiring the borrower to make a full tender of the
challenged debt rather than what is required to put the creditor in a
pre-sale position.
Defendants argue that the tender in these cases should be not the sale
price, not the amount required to put the defendant in a pre-sale
position, but the full amount of the debt! In so doing, Defendants are
conflating the idea of a RESCISSION tender with the concept of a SET
ASIDE TENDER. While sharing a common name, these are two very different
beasts.
III. TENDER IS AN EQUITABLE PROCEDURE SUBJECT TO THE COURT’S EQUITABLE
DISCRETION AND THE COURT MAY FASHION TENDER IN THE APPROPRIATE FORM.
a. Court’s equitable discretion allows it great leeway in fashioning a
remedy appropriate to this case.
Court has equitable discretion (cite) etc. .
b. The creditor does not need tender of the full debt to be put in a
pre-sale condition.
Do the math — What has the creditor actually been displaced from its
pre-sale position?
c. A Credit Bidders Expectations do Not Require the Same Reconciliation
that a PMB’s Expectations Require.
The creditor was not expecting payment in full for 30 more years vs. a
PMB has immediate expectation of title for money and the deal the PMB
gets is title for money; the deal the bank had wasmonthly payments at
interest over 30 years.
d.
In a public policy sense, the imposition of full debt tender on
borrowers as to credit bid grantees by many courts in this state has
caused the floodgates to open for massive abuse of the California
non-judicial foreclosure system. This effect has been caused because
banks view wrongful foreclosure as having no practical recourse where
the only penalty for a wrongful foreclosure is getting a 30-year debt
paid in full 25 years early — which is in reality not a penalty at all,
but rather an incentive to hold more foreclosure sales whether they are
wrongful or not.
CONCLUSION
If the sale was wrongful to begin with, and the title has not passed
beyond the pre-sale parties, no rationale exists for overburdening the
Plaintiff with a full-debt tender where the sale has been a matter of
paperwork rather than payment, and to require a tender bond in the
amount of the cost of the sale and fair marker rent going forward would
adequately protect the creditor from prejudice.

… Just a rough draft.
Any thoughts on the idea?
Any help in drafting?
I think it may help to go through some of the tender cases and look at
the equities, the status of the parties, and see if we can find some
strong exception cases where the court’s rationale is actually looking
at the equities rather than the word “tender”.

Declarationrevised3-30-10FINAL Niel Garfield

UNITED STATES BANKRUPTCY COURT
DISTRICT OF ARIZONA, TUCSON DIVISION
In re: LUCY SANTA CRUZ
LUCY SANTA CRUZ, Plaintiff
vs.
U.S. BANK N.A., AS TRUSTEE FOR THE HOLDERS OF
MASTR ADJUSTABLE MORTGAGES TRUST 2007-HF2 IN A
SECURITIZATION TRANSACTION PURSUANT TO
POOLING AND SERVICING AGREEMENT DATED AS OF
JULY 1, 2007;
WELLS FARGO BANK, NA, AS MASTER SERVICER, TRUST
ADMINISTRATOR, CUSTODIAN AND CREDIT RISK
MANAGER;
BARCLAYS CAPITAL REAL ESTATE, INC., D/B/A HOMEQ
SERVICING AS SERVICER;
MORTGAGE ELECTRONIC REGISTRATION SYSTEMS,
INC.;
EVERBANK, AS LENDER;
AND JOHN AND JANE DOES, INDIVIDUALS,
CORPORATIONS, AND ANY OTHER FORM OF LEGAL
ENTITY 1 THROUGH INFINITY, unknown Defendants
(collectively “Defendants”)
Adversary # 4:09-ap-01447-JMM
Case # 08-10544-TUC-JMM
DECLARATION OF NEIL FRANKLIN
GARFIELD PERTAINING TO
DEBTOR’S AMENDED COMPLAINT
AND MOTION TO DISMISS
COMPLAINT
Chapter 13
STATE OF ARIZONA ))
COUNTY OF MARICOPA )
Neil Franklin Garfield, deposes and states unsworn under penalty of perjury as follows:
“I am over the age of eighteen years and qualified to make this affidavit. I have no direct or
indirect interest in the outcome of the case at Bar for which I am offering my observations,
analysis, opinions and testimony. I have been a licensed member in good standing of the Florida
Bar since May 31, 1977. My Resume is attached and incorporated herein.
“My area of expertise, based upon knowledge, training and experience is in the field of securities,
the securities industry, derivative securities, securities regulation, special purpose vehicles,
structured investment vehicles, creation of trusts pooling agreements, issuance of asset backed
securities and specifically mortgage backed securities by special purpose vehicles in which an
entity is named as trustee for the holders of certificates of mortgage backed securities, the
economics of securitized residential mortgages, securitization of mortgage loans, accounting in
the context of said securitizations and REMIC vehicles and pooling and servicing of securitized
loans. I have been what might be referred to as a “Wall Street Insider” with contacts in
investment banking, including intermediary conduits, underwriters of reissued securities that
were sold to investors in the form of mortgage-backed securities. I have knowledge, training and
experience of various precursor asset protection strategies, including minimization of tax
liability, which also are constructed to be made bankruptcy remote in commercial and real estate
settings. I have knowledge, training and experience in loan origination, underwriting and the
assignment and assumption of securitized residential mortgage loans. I also have legal
knowledge, training and experience, including the areas of securities law, real property law,
Internal Revenue Code law as applicable to REMICs and Uniform Commercial Code law. I also
have knowledge, training and experience in the practices prevalent during the period of 2001-
2008 that enabled the accumulation and availability of an overwhelming abundance of
investment dollars, made possible because the derivatives sold to investors were made to appear
that they contained both exceptional growth and zero risk, because the history of mortgage
success up to that point in time had been high, and because these instruments were in addition
made to appear undeniably and excessively guaranteed by 3rd party sources. I also have
knowledge, training and experience that this abundance of funding was one of the direct and
inevitable causes of violations against homeowners and purchasers pertaining to funding of
mortgage loans for purchases and refinancing, including predatory lending practices and Truth in
Lending Act violations.
“All factual testimony made by me is true and correct to the best of my knowledge and belief.
All opinion testimony made by me is beyond a reasonable degree of probability in my area of
expertise, which is set forth in the above paragraph and in my Resume. I have no direct or
indirect interest in the outcome of the case at Bar for which I am offering my observations,
analysis, opinions and testimony.
“I have been asked to render opinions pertaining to the above case, in which Lucy Santa Cruz, is a
bankruptcy Debtor, and the Mortgage Note (“Note”), and Deed of Trust (“DOT”), the obtaining
of Automatic Stay Relief, the propriety of foreclosure, and securitization issues, among others,
are in question. The original Lender according to said documents was Everbank (“Lender”). An
Order lifting stay was entered by the Court on 03/22/09 in favor of HomEq Servicing
Corporation fka TMS Mortgage, Inc., dba The Money Store, (“HEQ”) was the Movant in this
proceeding. The Stay was lifted in favor of HEQ.
“I evaluated the materials listed below, among other materials, facts and data in basing my
opinions and inferences. Each of these documents and other materials, facts and data are of the
type that experts in my field would customarily rely upon in forming opinions and inferences.
The information sources I reviewed were sufficient for me to testify as to the facts and opinions
that are included herein. Where additional information is required to make other factual
statements and express opinions on further subject matter, I have so stated. To the extent that
information was presented to me by way of the forensic review and analysis performed by Brad
Keiser of Foreclosure Defense Group, I have confirmed the information through my review of
the loan closing documentation. I also performed independent internet searches as to
Securitization Documents available to the public online. Most of the testimony in this
Declaration was plainly clear from review of the below listed materials, but to the extent that
technical or specialized principles and methods were required, they have been reliably applied:
A. The closing loan documents relating to the loan transactions that are the
subject of this lawsuit. Not attached, because too voluminous and others are already
of record with the Court.
B. The factual results of a forensic review and analysis performed by Brad Keiser
of Foreclosure Defense Group, which I have attached hereto as Exhibit A.
C. The Qualified Written Request, served upon Everbank; MERS; Homeq; Mark
Bosco of Tiffany & Bosco and the responses, such as they were. They were
incomplete. In addition I also reviewed additional correspondence sent to the Mark
Bosco, who was the Substitute Trustee, that constituted written notice alleging several
improprieties in him going forward with the foreclosure Trustee Sale. Additionally,
there were emails from Ronald Ryan to Bosco requesting an accounting and other
information pertaining to the sale and return emails from the same law firm that
previously represented Defendant, HomEq and now represent Defendant,
Everbank/Everhome. These series of letters and email correspondence are attached as
Exhibit B
D. The following recorded documents: Note; Deed of Trust; Substitution of
Trustee; Statement of Breach or Non-Performance; Notice of Trustee’s Sale; Trustee’s
Deed. Not attached because already of record with the Court.
E. Various Bankruptcy Court pleadings and the Proof of Claim.
F. Various applicable Securitization Documents pertaining to Mortgage Trust
Pool, U.S. Bank N.A., Trustee for the Holders of the Pooled Mortgages, entitled
“Holders of MASTR Adjustable Mortgages Trust 2007-HF2,” including but not
limited to the Pooling and Servicing Agreement Dated As of July 1, 2007 (“PSA”);
Prospectus Supplement, dated July 30, 2007 (“ProS”). The Securitization Documents
are too voluminous to attach to this Declaration as they are perhaps 1000 pages. I
have attached a few key pages from the PSA, including a diagram of the transaction,
with the identity of the various Participants typed thereon, and a few pages from the
ProS. EXHIBIT C.1 and C.2.
G.I have also reviewed the MERS Min Summary and Milestone History, and the
correspondence whereby they were transmitted by Shar Bahmani, Esq., Wright, Finlay
& Zak, 4665 MacArthur Court, Suite 280, Newport Beach CA 92660, on behalf of
Everhome aka Everbank, which are attached hereto as Exhibit D.
H. I have also reviewed the MERS Servicer ID Report, which is attached as
Exhibit E.
“I use the following definition of “Creditor” taken from research in cases, the Bankruptcy Code
and the Uniform Commercial Code. A “Creditor” is a legal entity that has advanced funds, goods
or services in consideration of the right to payment, or has purchased the right to be paid. In the
bankruptcy context, a “Creditor” is an entity that had a Claim against Debtor before the case was
filed. 11 U.S.C. § 101(10). A “Claim” is a right to payment. § 101(5). Only a Creditor may file
a Proof of Claim. § 501(a). The “Official Form 10 reflects this requirement by describing the
‘Name of Creditor’ as ‘the person or other entity to whom the debtor owes money or property.”
In the context of securitized residential mortgages (including the one in the instant case), a
“Creditor” is a legal entity or group of entities or persons under the law who have advanced
money for the funding of mortgage loans and who are owed money from those mortgage loans.
The creditor in the case at bar can be generically described as an Investor, as defined under the
rules and regulations of the Securities and Exchange Commission who has paid money to an
intermediary in a chain of securitization that resulted in the funding of one or more residential
loan transactions; the promise to pay is from an entity usually referred to as a Special Purpose
Vehicle (SPV) which is frequently erroneously referred to as a “Trust” with a “Trustee,” that in
the applicable Pool in this case was U.S. Bank N.A. The creditor/investor receives an instrument
which is generically referred to as a Mortgage Backed Asset Certificate (“Certificate”). The
Certificate incorporates terms by which the promise to pay interest and principal is made by the
issuing SPV. The promise to pay is conditioned upon several terms, including but not limited to
the performance of a pool of loans, the obligations of third parties, and impliedly the receipt of
insurance proceeds triggered by partial non-performance of the pool of assets allocated to the
SPV. In turn the SPV pool is carved out of other pools created by Aggregators employed by
investment banking firms. The Aggregators are parties to Pooling and Service Agreements and
Assignment and Assumption Agreements, which are Securitization documents that predate the
funding of the loans in any of the Pools. The Certificate issued to the Investor conveys a
percentage interest in the Pool of assets that is allocated to the SPV.
“I was asked to render an opinion as to the factual basis pertinent to the issue of Standing. As
relates to Constitutional Standing, my opinion is premised on the following definition:
Constitutional standing under Article III requires, at a minimum, that a party must
have suffered some actual or threatened injury as a result of the defendant’s conduct,
that the injury be traced to the challenged action, and that it is likely to be redressed by
a favorable decision.
Valley Forge Christian Coll. v. Am. United for Separation of Church and State, 454 U.S. 464,
472 (1982); United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517
U.S. 544, 551 (1996). My presumption, in the context of the question posed to me, is that
standing requires that a party will suffer financial loss derived from non-performance (i.e., nonpayment)
of the subject contract, which in this case is the obligation that arose when the subject
loan was funded on behalf of the debtor as homeowner and referred to in some documents as the
Borrower. Since the funding occurred out of a pool of money received by the investment banker
from the investors, the investors are the creditors. By way of indenture (usually incorporating a
prospectus) the investors agreed to an operating plan that defined the functions of the conduit
which was used to funnel funds to the investor from the pool. This operating plan is loosely and
erroneously referred to as a trust, with the manager referred to as a Trustee. However, since no
assets remain in the conduit which is defined under the Internal Revenue Code as a REMIC (Real
Estate Mortgage Investment Conduit). The REMIC is referred to in the world of finance as an
SPV (Special Purpose Vehicle). I presume the words “conduit” and “vehicle” convey the fact
that no actual business events of taxable or monetary significance takes place in the REMIC. I
conclude that this corroborates my opinion that the investors are the creditors, having been the
only parties to advance funds from which the subject loan was funded.
The note signed by said borrower and the mortgage-backed bond accepted by the investor who
purchased said security are both evidence of the obligation. The Deed of Trust is intended to be
incident to the note and possibly incident to the bond, if the chain of title was perfected. The
Payee on the note and the payee on the bond are different parties. The bonds were issued with
three principal indentures: (1) repayment of principal non-recourse based upon the payments by
obligors under the terms of notes and mortgages in the pool (2) payment of interest under the
same conditions and (3) the conveyance of a percentage ownership in the pool of loans, which
means that collectively 100% of the investors own 100% of the the entire pool of loans. This
means that the “Trust” does NOT own the pool nor the loans in the pool. It means that the
“Trust” is merely an operating agreement through which the investors may act collectively under
certain conditions. Accordingly, it is my opinion that the parties with standing in relation to a
securitized loan are the debtor/borrowers and the creditor/investors. This would be further
corroborated if, as a matter of fact, the investment banker followed industry standard of selling
the mortgage backed security FORWARD. “Selling forward” means that the security was sold
and the money was collected before the first loan was funded on behalf of borrowers. However,
even if the investment banker had not closed the sale of the securities with investors before
accepting applications for loans, it would have been on the basis of an expectation of said
funding. Ultimately, in all securitized loans there is really only one transaction — a loan from the
investors to the homeowner. Without an investor there would be no loan; conversely without a
borrower there would be no investor or investment.
“It is accordingly my opinion that none of the following parties are or ever were creditors and
that they therefore lack standing as defined above: U. S. Bank, N.A. As Trustee for the Holders
of MASTR Adjustable Mortgages Trust 2007-HF2 in a series of securitization transactions,
pursuant to Pooling and Servicing Agreement, dated July 1, 2007 (“USB as Trustee”); HomEq
Servicing fka HomEq Servicing Corporation, fka TMS Mortgage, Inc., dba The Money Store;
Wells Fargo Bank NA, MERS, nor Everbank had at any time relevant to the subject matter
before this Court, the filing of the Bankruptcy Case on 08/14/2008 to the present, suffered any
actual or threatened injury as a result of the Debtor’s non-payment of monthly payments pursuant
to the original terms of the Note, nor because of her alleged default thereon, nor can any actual or
threatened injury be traced to any other proceedings in bankruptcy court, including but not
limited to the motion for relief from stay proceedings, any action involving a Proof of Claim, the
Chapter 13 Plan or otherwise, and therefore there never was any legitimate redress available to
any of these parties by a favorable decision. Specifically, Everbank, named as “Lender” in the
Note and Deed of Trust at least held physical possession of the Note issued to it by Debtor,
though it likely did not have the right to enforce the Note, between approximately 4/11/2007 to
4/28/2007, but no later than 4/28/2007. Specifically, pursuant to the materials I have reviewed,
which I have been asked to assume includes all evidence presented to the Court, along with my
knowledge and experience involving securitized mortgages, and my legal training and
experience, it is certain that HomEq did not hold, own, nor have the right to enforce the Note at
any time from the filing of the case through to the time it obtained stay relief in this case. The
evidence in the Court’s record that is contrary to this opinion appears to constitute an intentional
attempt to misleadingly make it appear that Everbank was the holder of the Note, and that MERS
could contend that it could act through its Nominal Beneficiary status on behalf of Everbank
(apparently sometimes referred to as “Everhome”), when the case was filed and when the
automatic stay was lifted. However the Motion was filed on behalf of HomEq and the Order
Lifting Stay granted in Favor of it. The evidence fails even on its face to successfully even to
create the appearance that HomEq was the: A) holder of the Note; B) owner of the Note; or C)
party with the right to enforce the Note. Moreover, the evidence is overwhelming that neither
Everbank aka Everhome, nor HomEq held any interest at all in the Property, Note nor Deed of
Trust at the time the case was filed, nor any time thereafter. It is clear that Everbank transferred
the ownership of the Note to the above described Mortgage Pool, for which USB as Trustee
operated as the Trustee. There is no evidence in the record that any other Defendant attempted to
claim to own, hold, nor to have the right to enforce the Note at any time in these proceedings.
“The specific evidence that neither HomEq Servicing fka HomEq Servicing Corporation, fka
TMS Mortgage, Inc., dba The Money Store; Wells Fargo Bank NA, MERS, nor Everbank had at
any time relevant to the subject matter before this Court, the filing of the Bankruptcy Case on
08/14/2008 to the date of the Order Lifting Stay, dated 3/19/2009, nor even to the present is that
Between 4/28/2007 and 09/27/2007, the ownership of the Note was transferred from Everbank to
Mortgage Asset Securitization Transactions, Inc. as Depositor, and then to UBS Real Estate
Securities Inc., as Transferor, and then to U.S. Bank, N.A., as Trustee of MBS Trust.
Accordingly, it was impossible for any of these Defendants to own the Note during the above
time frame. Besides an admission from Attorney for Everhome, Shar Bahmani, Esq., Wright,
Finlay & Zak, these facts match with the MERS Min Summary and Milestone History
information, as well as pursuant to the legal and contractual requirements in the herein described
Securitization Documents of the above referenced Trust. Among other things, former Counsel
for HomEq filed Doc 49 on 02/19/09,”Declaration of Witness [Joy Vanish] filed by MARK
BOSCO of TIFFANY & BOSCO, P.A. on behalf of c/o Mark S. Bosco HomEq Servicing
Corporation fka TMS Mortgage, Inc., dba The Money Store,” which also admits that the Note
was owned by the above described mortgage pool.
“Accordingly it is my opinion that, pursuant to the above definition, none of the Defendants that
attempted to proceed in this Court to have the automatic Stay Lifted or to file a Proof of Claim
had Constitutional Standing to invoke the subject matter jurisdiction of the Bankruptcy Court in
this case. In re Foreclosure Cases, 521 F.Supp.2d 650 (S.D. Ohio, 2007); In re Kang Jin
Hwang, 396 B.R. 757, 764 (Bankr.C.D.Cal., 2008); In re Jacobson, 402 B.R. 359 (Bankr.
W.D.Wash., 2009).
“As relates to the issue of Real Party in Interest, the factual criteria and question I have
presupposed is: “Whether any of said Creditors own financial interest was at stake in the
outcome of the litigation before the Bankruptcy Court.”
“My opinion is offered based on all evidence before the Court to date is as follows.
A) That U. S. Bank, N.A. As Trustee for the Holders of MASTR Adjustable Mortgages
Trust 2007-HF2 in a series of securitization transactions, pursuant to Pooling and
Servicing Agreement, dated July 1, 2007 (“USB as Trustee”), did not have any of its
own funds at risk in the outcome of the litigation. USB as Trustee may have been, but
in my opinion was probably not, fully and completely authorized to appear as the
named party on behalf of the Real Party in Interest, in a representative capacity for the
parties whose own funds were at risk, the Creditors, whom I have described above, as
the investors in the securities for the above described and named Mortgage Trust Pool.
Also, the proof in the record is inadequate to establish that the ownership of the Note,
holdership of the Note, or right to enforce the Note was properly pooled to the above
described Mortgage Trust Pool. Accordingly, as the record stands, the evidence does
not establish USB as Trustee as being the Real Party in Interest.
B) Neither HomEq Servicing, fka HomEq Servicing Corporation, fka TMS
Mortgage, Inc., dba The Money Store; Wells Fargo Bank, MERS, nor Everbank was a
party whose own funds were at risk in the outcome of the litigation, and therefore none
of them were a Real Party in Interest.
“Additionally, my review of the evidence of record is that HomEq presented to the Court false
and misleading statements in conjunction with the following filings and proceedings, and in the
supporting evidentiary documents filed in conjunction with each such filing: A) Motion for
Relief from Stay; B) Proof of Claim, and C) in its Objection to Chapter 13 Plan. Additionally,
my opinion is that HomEq filed the Pleadings and the supporting documentation, and made
representations to the Court with knowledge that they were false and misleading. For example,
the following are false and misleading statements made with knowledge they were false.
A) Motion for Relief from Stay, Doc 22 Filed 11 04 08: “Movant is the
Assignee of the Deed of Trust.” ¶ 2; “Debtor is in default on her obligation to
Movant for which the property is security. . .” ¶ 5; “Debtor is indebted to HomEq
Servicing Corporation fka TMS Mortgage, Inc., dba The Money Store for the
principal balance in the amount of $131,205.36, plus accruing interest, costs, and
attorneys fees.” ¶ 6.
B) Proof of Claim, Claim 9 Filed 11/06/08: Issue not ripe, because claim
was filed by U.S. Bank National Association as Trustee, this is additional proof that
stay relief was obtained by party without standing (“HomEq”).
C) Objection to Chapter 13 Plan, Doc 32 Filed 11/14/08: “The Chapter 13 Plan
does not adequately provide for repayment of arrearages owed to HomEq Servicing
Corporation fka TMS Mortgage, Inc., dba The Money Store, pursuant to the proof
of claim in the amount of $11,997.53.” ¶ 1;
“In terms of the real estate portion of the transaction, the homeowner was the Borrower and the
Investor was the actual Creditor. The investor is still the Creditor if the investor has not sold,
transferred or alienated the hybrid mortgage backed security and if the investor has not been
directly or indirectly paid through credit default swaps, with or without subrogation, or paid
through a federal program with or without subrogation. Since no such instruments appear on
record, any right of subrogation would appear to be equitable. Thus for purposes of this
declaration, the unknown and undisclosed Investors constitutes the only Creditor presumed to
exist until the undersigned is presented with contrary evidence of the type that an expert in my
field of expertise would normally take into account in forming opinions and conclusions.
Therefore I conclude that if there remain any Creditors, pursuant to the Note, they are the
unidentified Investors and all other parties are intermediary or representative or disinterested.
Debtor has made unsuccessful attempts to obtain from Movant and others the identity of the
lender, the documentation authenticating the identity of the lender, and an accounting from the
lender as to all money paid or received in connection with the subject obligation. Neither
Affiant, nor Movant, nor the Court will be able to determine amount of Debtor’s equity in the
property until a complete accounting of all debits and credits including but not limited to the 3rd
party payments referred to above. Until such time as requests for said information have been
answered, I will be unable to identify with certainty the exact identity of the current creditor,
meaning the true owner of the alleged obligation, other than to say that it is not Movant, nor any
Participant in the Securitization chain.
“The only party that can claim to be a Holder in Due Course (“HDC”) of the Note are those that
paid value for the Note, without knowledge that there were any pending challenges to its validity
and who fulfill the other requirements for HDC status. This HDC and the Third Party Sources
are the only ones that could conceivably suffer a monetary or pecuniary loss resulting from
non-payment of the obligation. The Investor could lose if because they advanced the actual funds
from which the Financial Product Loan was funded, assuming these Investors that purchased
asset backed securities were those in which ownership of the Loans were described with
sufficient specificity as to at least express the intent to convey ownership of the obligation as
evidenced by the Promissory Note and an interest in real property consisting of a security interest
held by an entity that was described as the Beneficiary of a Trust created by an instrument
entitled “Deed of Trust.” These Investors were not named. This practice has been intentional, in
my opinion, based on the overwhelming commonality of this obvious reoccurring obvious
failure, and other overwhelming evidence. The Third Party Sources that could conceivably lose
because they would have paid value prior to default or notice of default, and fall within one or
more of the following classifications:
a) Insurers that paid some party on behalf of said investors;
b) Counterparties on credit default swaps;
c) Conveyances or constructive trusts arising by operation of law
through cross collateralization and over collateralization within the aggregate
asset pools or later within the Special Purpose Vehicle tranches;1
d) The United States Treasury Department through the Troubled
Assets Relief Program in which approximately $600 billion of $700 billion has
been authorized and paid to purchase or pay the obligation on “troubled” (non
performing) assets of the LOANS are part of the class of assets targeted by
TARP;
e) The United States Federal Reserve, which has extended credit
on said troubled assets and has exercised options to purchase said troubled
assets;
f) Any other party that has traded in mortgage backed securities
1 “Tranches” is an industry term of art referring to the types of division within a Special Purpose
Vehicle.
from the aggregated pools or securitized tranches containing interests in the
Notes.
“I concur with the allegations in the Amended Complaint that challenge the validity of
endorsements and/or transfers as they have been presented in Court to obtain stay relief, and I
believe that there is good cause, based on the totality of circumstances to challenge that the Note
was endorsed or otherwise properly transferred to the Mortgage Trust for which U.S. Bank is or
was the Trustee. In my opinion, it is unlikely that any HDC exists, because of the way
securitization was universally practised within the investment banking community during 2001
through 2008. Hence the loan product sold to the subject homeowner included a Promissory
Note that was evidence of a real obligation that arose when the transaction was funded but lost its
negotiability in the securitization process, which thus bars anyone from successfully claiming
HDC status, such as by:
a) Also concurring with allegations in the Amended Complaint,
the negotiability of the note was negatively affected by (1) the splitting of the
note and mortgage as described herein; (2) by the addition of terms,
conditions, third party obligors and undisclosed profits, fees, kickbacks all
contrary to existing federal and state applicable statutes and common law
(which has relevance to the TILA, RESPA and related allegations in ¶¶ 21-23
in the Amended Complaint); and (3) knowledge of title and chain of title
defects in the ownership of the note, beneficial interest in the encumbrance,
and position as obligee on the obligation originally undertaken by the subject
homeowner.
b) None of the known Participants in the subject securitization
chain, including but not limited to Defendants herein, has suffered any
financial loss relating to the loan, nor are they threatened with any future loss
even if foreclosure never occurs.
c) None of the known securitization Participants has ever been
the real party in interest as a lender or financial institution underwriting a loan
while funding same with respect to the loan.
d) None of the known securitization Participants, will suffer any
monetary loss through non performance of the loan.
e) All of the known securitization Participants received fees and
profits relating to the loans.
f) The existence and identity of the real parties in interest was
withheld from the Borrowers/Plaintiffs in the closing and servicing of the loan,
and since.
g) All of the known securitization Participants fail to meet one or
more of the following two tests required for HDC status: 1) without actual
knowledge of defects; and/or 2) in good faith, meaning a legitimate belief that
the loan was solid, based upon the information they had at the time of
purchase of the Note.
“There was never a real Beneficiary named on any DOT, as in this case, prior to the foreclosure
as the Plaintiff’s Amended Complaint accurately points out in several paragraphs.
“Several transactions have purportedly taken place regarding the subject loan, as the Note was
transferred up the chain of securitization to the Trustee of the MBS Pool. In my opinion, the
“Lender,” as set forth in the original DOT, or Everbank in this case, in securitized loans is at best
only a nominee for an undisclosed principal. The transaction with the homeowner was subject to
a pre-existing contractual relationship wherein the Investors advanced the cash for the loan and
profits, fees, expenses, rebates, and kickbacks. This is known to many of the known and
unknown securitization Participants, inasmuch as they have been the recipients of memoranda
from legal counsel and advisers, which in my opinion are not protected by attorney client
privilege or the attorney work product privilege, in which they have been informed that any
nominee that does not advance cash for funding the loan and does not receive any payments on
the obligation. A situation has been created which at least theoretically would allow multiple
parties to make claims on the same property from the same borrower, claiming the same Note
and DOT as the basis therefore. The intended monetary effect of the use of such a Nominee was
to provide obfuscation of profits and fees that were disclosed neither to the Investor who put up
the money nor to the Borrower in this loan. In the case at bar, it is my opinion based upon a
reasonable degree of financial analytical certainty, that the total fees and profits generated were
actually in excess of the principal stated on the note which is to say that Investors unknowingly
placed money at risk the amount of which vastly exceeded the funding on the loan to the
borrower. The only way this could be accomplished was by preventing both the Borrower and
the Investor from accessing the true information, which is why the industry practice of Nominees
like the private MERS system were created. Even where MERS is not specifically named in the
originating documents presented to the homeowner at the “closing” it was industry practice from
2001-2008 to utilize MERS “services”, or to implement practices similar to those utilized by
MERS. Therefore it is possible and even probable that the data from the closing was entered into
the MERS electronic registry and that an assignment was executed to MERS purportedly giving
MERS some power over the obligation, the Note and/or the encumbrance. As a general rule in
securitized transactions and especially where MERS is named as Nominee, documents of transfer
(assignments, indorsements, etc.) are created and executed contemporaneously with the notice of
default thus selecting a Participant in or outside the securitization chain to be the party who
initiates collection and foreclosure.
“The notice of default in the case at bar was substantially before any fabrication or creation of
documents of transfer and before any such documents were recorded. Further it does not appear
that any such documents were executed in recordable form under the laws of Arizona and in
accordance with Arizona statutes governing recordation of instruments that purport to show an
interest in real estate. Hence it is my opinion that the existence of any document of transfer in
this case is inconsistent with the authority, apparent or actual, to execute same without some
additional documentation establishing a foundation for the document of transfer, assignment,
indorsement etc., from the true Beneficiaries. No such document having been produced the
inescapable conclusion is that no authority exists and that if permitted to move forward with a
foreclosure or foreclosure sale, a title defect would be created beyond the current cloud on title,
thus rendering the title permanently unmarketable without the entry of a court order from a court
of competent jurisdiction declaring the rights of all stakeholders, potential and otherwise. This
opinion should not be construed to deny the existence or validity of the Note, DOT or underlying
obligation. This particular opinion is solely that none of the parties known to the homeowner
had any authority, apparent or otherwise, to declare the obligation in default or to pursue
collection on the Note or enforcement of the encumbrance. This concurs with allegations
express and implied in the Amended Complaint.
“The loan made to Debtor was part of a two way transaction in which the two parties at each end
thereof each purchased a “Financial Product.” On one end, the home buyer or refinancer was
“sold” a residential home loan. On the other side, a Mortgage Bond was sold to an Investor. In
my opinion, both financial products were securities. Neither set of securities were properly
registered or regulated, and the information that would reveal the identity of the “Lender” is in
the sole care, custody and control of the Loan Servicer or another Intermediary conduit in the
Securitization Chain, including but not limited to the Trustee or Depositor for the Special
Purpose Vehicle that re-issued the homeowner’s Note and encumbrance as a Derivative Hybrid
Debt Instrument (bond) and equity instrument (ownership of percentage share of a pool of assets,
of which the subject loan was one such asset in said pool). Said Security, the Bond, that was sold
to an Investor was done by use of the Borrower’s identity and obligation without permission. In
my opinion, it is equally probable that the Investors were kept unaware that a maximum of only
2/3 of their investment was actually going to fund Debtor’s loan and others similarly situated,
with the excess being used to create instant income for Participants. Debtor was unaware that
such large profits or premiums were being generated by virtue of his identity and signature on the
purported loan documents.
“According to information from Debtor, Debtor has made unsuccessful attempts to obtain from
Movant and others the identity of the Investor/Creditor and possession of documentation
authenticating this identity. Neither Affiant, Movant, nor the Court will be able to determine the
identity of the Creditor, if any still remains, until requests for information and documentation
have been complied with.
“It is also my opinion that there is a very high probability that all or part of the Debtor’s Note was
paid in whole or in part by third parties, based upon industry practice, my personal review of
hundreds of similar transactions including the one at bar, and published reports. Until such time
that the identity of the Creditor, the document trail, and the precise money pertaining to
payments by third party sources is disclosed, neither Affiant, Movant, nor the Court will be able
to determine the amount of Debtor’s equity in the Property. Debtor’s “Obligation” is the amount
of money owed to the Creditor. The Obligation originated with the advance of capital by
Investors who purchased mortgage-backed securities and ended with the promise to pay by the
homeowner who is the debtor in the transaction. The securitization chain obscures the fact that
the Investor was the Creditor to the Homeowner/Debtor. HomEq’s prior assertion of a default is
based upon partial and insufficient information relating only to first party (Debtor) payments and
excluding many undisclosed Third Party payments and receipts that were obscured in the
securitization chain. Contrary to the Defendant’s assertion of default, it is my opinion that it is
much more likely than not that the debtor’s obligation has not been in default at any time and
even if in default it is highly unlikely that any party or entity in this adversary is at risk of loss.
The general practices of the industry during the period of time in which the subject transactions
were originated resulted in third party payments upon a Declaration of Default by a party without
knowledge of the entire accounting of all debits and credits. This triggered insurance-type
payments to the Investment Bank that originated the securitization chain that more likely than not
exceeded the total principal of the subject obligation, resulting in a liability of the Investment
Bank to the Debtor, the Creditor or both. Since the Investment Bank never advanced funds
except those delivered by or on behalf of Investors, neither the Investment Bank nor any other
Participant in the securitization chain was ever a Creditor. Further, based upon repeated
interactions with Servicers across the country and the specific documentation reviewed in this
case, it is highly unlikely that any of the current parties in litigation have or desire to have any
knowledge of Third Party debit or credit transactions in the securitization chain of the
transactions originated from the subject of this action. Hence, based upon industry practice, it is
my opinion that it is far more likely than not that they would be ignorant of the true status of the
amount of principal or interest due, if any on the subject obligation. It is not known by the
Servicer (in this case “HomEq”) or Originator (the “Lender” on original Deeds of Trust – in this
case, Everbank), whether the Debtor’s note is or ever was in default, a fact that can only be
known by the real Creditor, the Investment Bank that is the real party in charge of the
securitization management decisions (in this case, Swiss Bank U.B.S. or one of its subsidiaries),
although possibly the Trustee for the Pool (in this case, U.S. Bank as Trustee) and/or the Trust
Administrator (in this case, Wells Fargo Bank, N.A.) know at least some of the information.
Based upon experience with the parties claiming an interest in the financial product sold to the
homeowner in this case and their behaviour and method of operating as demonstrated in other
cases, it is my opinion that none of the Participants, with whom the Debtor had contact,
individually or collectively, has knowledge or has done due diligence to determine the existence
of a default as to the Creditor, nor whether as a factual matter, the Note, DOT or obligation has
been extinguished or paid in whole or in part by co-obligors, insurers, federal bailout and/or
etcetera. The reason “as a factual matter” is emphasized is that Investment Bank in charge of the
entire security never intended to credit any borrowers accounts for payments by these third party
sources. Considering the fact that Affiant is aware of many dozens of times in which there is a
pending action to enforce a mortgage and to foreclose upon the home in which information
providing the Identity of the Creditor and the fact that Third Party payments have been made on
behalf of Borrower’s Obligation, it is my opinion that this behaviour is intentional and designed
to obscure the facts long enough for the Court to presume that the action taken to collect on the
debt or foreclose on the home was reasonable and proper.
“It is also my opinion that many different parties in the securitization chain came to express title
or claim rights to enforce the DOT and Note and that there was an intention to split the Note
from the DOT, while heretofore unusual in the marketplace was commonplace in securitization
of residential loans. The recorded encumbrance was never effectively or constructively
transferred because it was never executed in recordable form nor was an effort made to create
such a document by the parties to the instant case until they decided to pursue foreclosure. All
transfers or purported transfers of the Note were not accompanied by the encumbrance being
incident to said transfers because the DOT interest as recorded remained in the name of the
Originator, or that party defined as the “Lender” in the Note and DOT. Applicable Arizona Deed
of Trust statutes require that every change of beneficiary interest in a DOT to real property to be
recorded. And Arizona recording statutes require that every change of beneficiary interest in a
DOT to real property to be recorded to be enforceable against a bone fide purchaser for value
without notice of a competing claim. Hence, it is my opinion, that the holder of the Note, either
singular or plural, were not the same parties as those who purportedly held the DOT at any time
pertinent to this case and that this was the result that was intended by the mortgage Originator
and the Participants in the securitization chain, since it was a typical practice in the investment
banking industry in their process of securitising loans throughout the period of 2001-2009. In
my opinion, with a high degree of certainty, the Debtor’s title was and is subject to a cloud on
title, a claim of unmarketable title and possibly a title defect that cannot be cured without court
order as a result of the manner in which Debtor’s loan was securitized. In all cases reviewed by
me, which include more than fifty securitization chains, the Prospectus and other published
documents clearly express that a securitized mortgage is treated sometimes as being secured by
real estate, and sometimes as not being secured by real estate, depending on the context and
purpose of the accounting. The naming of a party other than the Investor as Beneficiary under
the DOT as distinct from a third party named as Payee on the promissory note and the same or
other third party named as Beneficiary under the policy of title insurance demonstrates an intent
or presumption or reasonable conclusion that there was intent by some or all of the parties at
various times in the steps of the securitization process to separate the Note from the Deed of
Trust, thus creating a cloud on title for both the owner of the property and any party seeking to
express or claim an interest in the real property by virtue of the encumbrance.
“I have also reviewed, for the past 40 years, published Financial Accounting Standards obviously
intended for auditors involved in auditing and rendering opinions on the financial statements of
entities involved in securitization, securities issuance and securities sale and trading. If the
known Participants in the securitization scheme followed the rules, they did not post the instant
transaction as a loan receivable. The transaction most likely was posted on their ledgers as fee
income or profit which was later reported on their income statement in combination with all
other such transactions. These rules explain how and why the transactions were posted on or off
the books of the larger originating entity. These entries adopted by said companies constitute
admissions that the transaction was not considered a loan receivable on its balance sheet, or on
the ledgers used to prepare the balance sheet, but rather shown on the income statement as a fee
for service as a conduit. These admissions in my opinion are fatal to any assertion by any such
party currently seeking to enforce mortgages in their own name on their own behalf, including
but not limited to the securitization Participant in this case.
“It also appears that the standard industry practice of creating a yield spread premium between
the Creditor and Originator was extended and expanded in the case of the securitization chain
such that in this case, in my opinion, it is highly probable, far beyond 50% probability that the
Debtor’s loan was sold or pre-sold to the Investors at a gross profit to the Participants in the
securitization chain of at least 35% of the total principal balance of the note. It is also my
opinion that this was done without full disclosure to the Investors and that this is tantamount to
fraud upon the Investors. In my opinion the investors were and remain completely unaware that
much, and in many cases most of the money they supplied was used to fund fees for the
Participants in the securitization chain, with the rest used to fund bloated mortgage loans based
upon inflated appraisals by companies that had a less than arm’s length relationship with the
Originator and others involved in obtaining approval for the loan. These yield spread premiums
far exceed those ever paid prior to the securitization of residential mortgages. With yield spread
premiums such as these, there was no way that there could ever be a legitimate profit made by
any Investor under ordinary circumstances, with the exception of those in upper tranches, whose
profit was insured from the start, no matter how lacking in viability were these investment
vehicles on the whole, because of the way payments to the Investors were prearranged. It is also
my opinion that the overall Security was planned by the Aggregator (in this case, U.B.S. and
subsidiaries) and other Participants to fail from the start. The reason for the intended failure of
the overall Pool in my opinion was to better insure that the fraud perpetrated on the Investors
would be less likely to be discovered and to make it so that additional unearned profit could be
made by the Aggregator and other Participants, based on the Third Party Payments discussed
above that were payable only when there was a declaration of default by the Pool, often called a
“trigger event.” In my opinion, the allegations in the Amended Complaint regarding fraud and
conversion, as well as intentional aiding and abetting or conspiracy are well taken. The theory
that each Participant, including the very first party in the securitization chain, the Lender on the
Deed of Trust, is complicit in acts and series of acts with knowledge that these actions will harm
the debtors, including fraud and conversion, and/or are part of a scheme to commit fraud and
conversion in the form of not crediting borrowers account by third party source payments,
thereby converting ownership of the property from the borrower, the Debtor Plaintiff in this case,
is well respected among those that study transactions of this sort.
“The following are types of wrong performed upon borrowers, at least some of which occurred
with the Debtor/Plaintiff in this case, by Loan Brokers and Originators (“Lenders” in the original
deeds of trust), which were acts in furtherance of an overall fraud and conversion scheme that
were necessary to its success, because without a large number of loans doomed to fail from the
start the main planner and major Participants could not be certain that the Mortgage Pools as a
whole would fail.
a) The fact that Borrowers paid as much as double what the homes were
actually worth, due to a real estate market that was artificially inflated because of
the wealth of investment dollars looking for a home following the bursting of the
dot.com bubble, followed by what amounts to an economic depression for the
working poor. Borrowers can’t afford the payments and they are losing their homes,
and the unbelievable abundance of foreclosures shows the extent to which any
defect in character they may have is common to large numbers of persons.
Appraisal values were often over-inflated even above the artificially high values
provided by the market and appraisers were advised they would not receive further
business unless they cooperated.
b) Borrowers were mislead as to what the monthly payments would be a few
years into the loans.
c) In more extreme cases, Borrowers were often offered teaser rates that they
qualified for, but which greatly increased within a very short period of time.
d) There was so much investment money looking for someone to borrow it
that could sign a note during this time, that loans were pushed at people with
persuasive and high pressure tactics;
e) Borrowers were advised that they could afford much more home then they
really could. It appears hard to resist a home that is much nicer than one thought
they could afford, when someone that appears to be a reputable professional assures
them they can afford. Optimism and wishful thinking overpower reason.
f) Loan brokers were pushed to offer loans that were on worse terms than
the borrower could qualify for. Sometimes they received higher commissions, often
in secret, for getting people to take out loans on terms that were less beneficial then
a loan that Borrowers would have qualified for. And sometimes the only loan
products that loan brokers had available to them were those containing unfavorable
terms.
g) Borrowers were advised that they did not have to worry about the
payments being unaffordable in the future, because they would be definitely be able
to refinance again at that point, because the market was so solid.
h) Underwriters were pushed by supervisors to pass through bad loans,
many of which were obviously doomed to fail from the start.
“Under the Truth in Lending Act, Regulation Z, and the Real Estate Settlement Procedures Act,
these undisclosed yield spread premiums are a liability of Participants in the securitization chain,
including the loan Originator and all Participants owed to the Homeowner/Debtor. In my
opinion, this disclosure does not appear on any of the Homeowner/Debtor’s documents
identifying the parties participating in fee-splitting or yield spread premiums nor the amounts
involved as required by the Truth in Lending Act and the Real Estate Settlement and Procedures
Act. Further, no information appears in Debtor’s closing documentation that would have caused
him to inquire about such a premium.
“In my opinion, the allegations contained in ¶¶ 21-23 of the Amended Complaint, pertaining to
TILA, RESPA and similar statutes are well taken. Questions as to statute of limitation would not
be applicable on a number of theories, including, but not limited to: fraud tolls the statute of
limitations; and until the name of the true creditor, lender, beneficiary is made known to the
borrower, the statute of limitations time frame does not begin to run.
“A MBS Pool Trust is not really a true “Trust.” The Trustee thereof has been involved in a joint
enterprise with the other Participants in the creation of a Financial Product for sale to Investors,
the purchasers of Mortgage Bonds. The so-called Pool “Trustee” is more like an administrator.
The first loyalty of the Pool Trustee is not to the Investors, but to the parties to which it entered
into contract with, the Participants. Based on its actions as can be seen over and over again, it
seems it is more interested finding ways not to reimburse the Investors than to find ways to do so.
In the securitization of the loans, the rights of various named mortgagees, assignees and/or
Trustees have each been superseded by succeeding conduits including the alleged Trustee or
officer of the Special Purpose Vehicle that issued bonds to the Investor who at least at some
point in time material to the subject transaction with the homeowner in the subject transaction
was holder of Mortgage Backed Securities. The powers of said officer or Trustee are limited to
ONLY what the Certificate Holders authorize. It cannot be overemphasized that the Investors
were not signatories to the Securitization Documents. Only the Participants were. The
transaction with the Investor in which they advanced “loan” money for the subject homeowner’s
loan product, was consummated most likely before the transaction with the homeowners or was
subject to binding agreements between various Participants in the securitization scheme that
pre-dated the transaction with the homeowner. Therefore, the actual and undisclosed Creditor
was the Investor who advanced the cash and who was known by the securitization Participants,
and therefore was the only party entitled to claim first lien either legally or under equitable
subrogation. Accordingly, the only potential party to a foreclosure wherein the purported
creditor alleges financial injury and therefore a right to collect the obligation, enforce the Note or
enforce the DOT is either a party who has actually advanced cash and stands to lose money or an
authorized representative who can disclose the principal, provide proof of service or notice and
show such express, unequivocal and complete authority to perform all acts and make all
decisions without condition. In my opinion, any condition placed upon the Trustee to act for the
MBS Pool Certificate Holders, including the power to enter into any compromise, makes the
Trustee something less than the Real Party in Interest on behalf of the Certificate Holders. Also,
a party must be present that is answerable to the claims, affirmative defenses and counterclaims
of the homeowners for such causes of action or defenses as might be applicable or they would be
blocked potentially by collateral estoppel if the court determined the foreclosing party was acting
within the scope of its agency for the Principal, the Certificate Holders. In my opinion, as above,
and with a reasonable degree of factual and legal certainty, the disclosed principals in the
securitization chain, up to and including the Pool Trustee, are not the Creditors nor are they
authorized agents for the Creditors, without proof that they have been granted this authority
pursuant to the terms of the Securitization documents. Otherwise, the Participants, including
Servicers and Pool Trustees, in my opinion, are interlopers or impostors whose design is to take
title to property they have no right to claim, and to enforce a Note which is evidence of an
obligation that is not owed to them but rather to another. The details of this information, whether
the Special Purpose Vehicle still exists, whether the investor has been paid in full through Third
Party Payments, are known only to these securitization Participants and the heretofore
undisclosed Investors. And the Participants have demonstrated time and time again that they are
not credible. In my opinion the attorneys for the known Securitization Participants do not have
any authority to represent the Creditor, and could not represent them due to the obvious conflict
of interest, to wit: the Investors upon learning that a substantial amount of their advance of cash
was pocketed by the intermediaries and now is left with a mortgage whose nominal value is far
below what was paid, and whose fair market value is far below the nominal value, would have
potential substantial claims against the securitization Participants for fraud, conversion, breach of
contract, and other claims. Fraud upon the investors in relevant to borrowers because it is
additional evidence of an overall fraud and conversion scheme against borrowers, because it
tends to show motive and intent in the fraud and conversion claims made by borrowers.
“This concludes this Unsworn Declaration, made under penalty of perjury.”
Signed on _________________________________, 2010.
_________________________
Neil Franklin Garfield, Esq.

The court won’t hear your arguments on defective foreclosure make a motNotice of motion and Motion Strike Portionsion to transfer  Opposition for Motion to Strike UD complaint

Opp. of Defendant Deutsche

first aCaparas, Answer_to_UD_Complaint[1]

Amended complaint

SUMMONS AND COMPLAINT – CONFORMED

WMc’s demurrer for 10-22-09

Our motion to consolidate

request for admission of plaintiff deutsch bank national tust company to defendant hermenegildo

SPECIAL INTERROGATORIES TO PLAINTIFFS DEUTCHE BANK NATIONAL TRUST COMPANT TO DEFENDANT JUANITY CAPARA

Motion to Consolidate P & A

Notice of Motion to Consolidate

requests for admission to plaintiff

DEMURRER PACKET

Pre-Foreclosure Complaint (Plaintiffs)

LEGAL AID DOC word

Background;  The Emergence of the Trust Deed

The deed of trust (often referred to as “trust deed”) is the most common instrument by which real property serves as security for the performance of an obligation. It is simply a contract to provide to the lender a remedy for non-payment. That is a contract by which the borrower agrees that if they fail to make the payments the lender may sell the property at a private sale. It is not considered an action but a private contract.

A brief historical.

A detour is helpful in understanding the modern legal consequences of the deed of trust which emerged as a device to circumvent various debtor protections to relieve the harsh consequences of mortgage defaults. (See generally Hetland, California Real Estate Secured Transactions 11; 1 Miller & Starr, California Real Estate 315.) In the 15th century, the security instrument commonly used in England was a mortgage, which took the form of a conveyance of real property by a debtor to a creditor. Although an absolute conveyance on its face, a mortgage was subject to a condition subsequent by which the debtor could retake or “redeem” title when the debtor performed the underlying obligation. If the debtor did not perform, by the specified deadline, the property was effectively forfeited to the creditor. Gradually, equity courts began to permit debtors to redeem the property although the secured obligation was performed long after the designated time for performance.  In response, creditors sought to

bar the debtors’ equity of redemption. The courts granted equitable decrees ordering debtors to redeem by a specified time or be forever foreclosed from redeeming. (See e.g., 3 Powell on Real Property 546-49; 1 Miller & Starr, California Real Estate 314-15.)

California recognizes the common law right of redemption. [Civ. Code § 2889; see e.g., Hamud v. Hawthorne (1959) 52 Cal.2d 78, 84; 338 P. 2d 387.] However, equitable redemption was effectively negated by the California Supreme Court’s sanction of the use of the deed of trust. Koch v. Briggs (1859) 14 Cal. 256; 73 Am.Dec. 65.] The court considered a transaction in which a debtor simultaneously executed a promissory note and a deed conveying the debtor’s property to a trustee with a power of sale. The power of sale gave the trustee the authority to sell the property at public auction if the debtor defaulted on the debt and to apply the proceeds of sale to satisfy the obligation. The court ruled that, although the deed of trust was a conveyance executed to secure a debt, it was not a mortgage, and consequently, there was no equity of redemption or necessity of foreclosure.

Although some cases followed the conveyance-of-title theory °f Koch, a series of Supreme Court cases culminating in Bank of Italy Nat. Trust & Sav. Assn. v. Bentlev (1933) 217 Cal. 644; 20 P.2d 940 emphasized that mortgages and trust deeds served identical purposes and functions and applied most mortgage rules and theoriesto trust deed problems.  Today,. . . in California there is little practical difference between mortgages and deeds of trust, . . . they perform the same basic function, and … a deed of trust is practically and substantially only a mortgage with power of sale. . . [D]eeds of trust are analogized to mortgages and the same rules are generally applied to deeds of trust that are applied to mortgages. Domarad v. Fisher & Burke, Inc. (1969) 270 Cal.App.2d 543, 553; 76 Cal.Rptr. 529.

2.   Statute of Limitations

Although most of the distinctions between the deed of trust and mortgage have been abolished, one significant difference remains: the effect of the statute of limitations on the exercise of the power of sale. When recovery on the underlying obligation is barred by the statute of limitations, a creditor cannot judicially foreclose on either a mortgage or deed of trust. [Flack v. Boland (1938) 11 Cal.2d 103, 106; 77 P.2d 1090.] Likewise, the statute of limitations will bar the exercise of a power of sale in a mortgage. A lien is extinguished by the lapse of time within which an action can be brought on the underlying obligation [Civ. Code § 2911(1)]. The lien of the mortgage includes the power of sale to enforce the lien; therefore, when the statute of limitations runs on the obligation, the lien, including the power

of sale, expires.  Faxon v. All Persons (1913) 166 Cal. 707; 137 P. 919.

A different rule applies to the power of sale in a deed of trust. The anachronistic view that a deed of trust constitutes a transfer of title rather than a lien still governs judicial analysis of the operation of the statute of limitations. Since the deed of trust is not construed as a lien, Civil Code § 2911(1) does not apply, and the creditor may exercise the power of sale even after recovery on the underlying obligation is time barred. (E.g., Flack v. Boland,, 11 Cal.2d 103, 106; Napue v. Gor-Mev West, Inc. (1985) 175 Cal.App.3d 608, 616; 220 Cal.Rptr. 799.) As the Court of Appeal summarized,

. the running of the statute of limitations on the principal obligation did not extinguish the debt or operate as payment [citations omitted], it did not affect the title of the trustee under the deed of trust [citations omitted], nor did it operate to extinguish the power of sale conferred upon him. The power of sale under a deed of trust may be exercised after an action on the principal obligation is barred. Sipe v.’ McKenna (1948) 88 Cal.App.2d 1001, 1005-06; 200 P.2d 61.

Special rules, however, apply to bar ancient deeds of trust.  (See Civ. Code, §§ 882.020 et sea.)

3.   Form of Deed of Trust

While a deed of trust must contain certain information, no particular form is statutorily mandated. A permissive form of mortgage appears in Civil Code § 2948, and many of the rules and formalities applicable to mortgages apply to deeds of trust. A deed of trust must be in writing and be signed by the party to be charged. (Code of Civ. Proc. § 1971; see Civ. Code § 2922.) A deed of trust must describe the property and should also indicate the “conveyance” to the trustee with power of sale and the beneficial interest of the beneficiary. (Hetland, California Real Estate Secured Transactions 10.)

Today, most deeds of trust are on preprinted forms prepared by the lender or title company. Despite a great deal of similarity among these forms, there are variations. Some institutional lenders use uniform documents approved by the Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Special provisions may be contained if the loan is insured by the Department of Housing and Urban Development (HUD) or guaranteed by the Veterans Administration.

Such content variations aside, deeds of trust generally fall within two broad categories — “long form” or “short form.” The long form contains all of the lengthy, boilerplate provisions of the trust deed.  The short form is usually a one-page document

which omits many of the standardized clauses but incorporates these provisions by reference to a fictitious deed of trust which was earlier recorded in the county in which the actual deed of trust is to be recorded. Civil Code § 2952 provides for this practice of recordation of a fictitious deed of trust, and further, declares that the parties are bound by the terms of the incorporated fictitious deed of trust as though the incorporated terms were included in the executed deed of trust. Among the advantages of the short form are lower costs for printing and recordation. However, whether fictitious trust deed provisions will continue to be enforceable under developing views on adhesion contracts and unconscionability is unclear.

Both long and short preprinted trust deed forms are adhesion contracts, Wilson v. San Francisco Fed. Sav. & Loan Assn. (1976) 62 Cal.App.3d 1, 7; 132 Cal.Rptr. 903; Lomanto v. Bank of America (1972) 22 Cal.App.3d 663, 669; 99 Cal.Rptr. 442.]

Courts have held adhesion contracts unconscionable if they surprise the weaker, adhering party with terms outside of that party’s reasonable expectation. [See e.g., A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486; 186 Cal.Rptr. 114.] In Lomanto, the Court stated that while the lender was not required to call attention to a usual provision in a trust deed, the lender may have to accentuate an unusual provision by oral disclosure, “print of distinctive size,” or “placing it in a box with heavy

borders.” (22 Cal.App.3d at 669-70.) In the context of trust deeds, special adhesion questions arise with the short form trust deed. A borrower may be extremely surprised by a term incorporated from a fictitious document of which the borrower has no actual knowledge. Yet superficially, Civil Code § 2952 permits such surprise. However, the statute can be harmonized with the court’s view that borrowers should be relieved of the operation of unconscionable provisions as expressed in cases like Lomanto.

Section 2952 binds the borrower to the incorporated terms in the fictitious trust deed as though the terms were set forth in full. But, to the extent that Lomanto requires that the terms receive special emphasis if they actually were set forth, some special emphasis should be given in the short form to the incorporated terms. The special emphasis would need to apprise the borrower of the unusual provisions which have been incorporated by force of law.

The uncertainties surrounding the potentially unconscionable use of fictitious trust deeds have prompted some lending institutions to use only long form trust deeds. (See 1 Miller & Starr, California Real Estate 322 n. 9.) Many title companies have taken a different tack, using a short form deed of trust modified to include the remaining provisions from the fictitious trust deed on the reverse. To save recording charges, only the front side of the modified short form is recorded. Since the recorded front side

still refers to the fictitious trust deed, that reference incorporates the provisions on the unrecorded reverse side. In any case involving a short form deed of trust, it should be determined whether the trust deed actually executed contained more terms than revealed by the recorded copy on the front side of the short form.

4.   Parties to a Trust Deed

a.   Trustor

The trustor is an owner of any interest in real property (see Civ. Code § 2947) who gives a security interest in that real property.

Although the trustor is usually the debtor, the trustor can give a deed of trust to secure someone else’s debt [see e.g., Everlv Enterprises, Inc. v. Altman (1960) 54 Cal.2d 761; 8 Cal.Rptr. 455.] or to secure the trustor’s guarantee of someone else’s performance. [See e.g., Indusco Management Corp. v. Robertson (1974) 40 Cal. App.3d 456; 114 Cal.Rptr. 47.]

The trustor need not necessarily be the sole owner in order to encumber the property, but if there are multiple owners and not all execute the trust deed, the effect of an encumbrance depends on whether the property is held as community property, joint tenancy, or tenancy in common.

(1)  Issues Arising if Title is Held as Community Property

Civil Code § 5127 provides, in pertinent part, that “both spouses either personally or by duly authorized agent, must join in executing any instrument by which such community real property . . . is sold, conveyed, or encumbered. . .” (emphasis added). [See also O’Banion v. Paradiso (1964) 61 Cal.2d 559; 39 Cal.Rptr. 370; Italian American Bank v. Canepa (1921) 52 Cal.App. 619, 621; 199 P.55.] The purpose of this provision is to give each spouse veto power over disadvantageous dispositions of community property. [See Strong v. Strong (1943) 22 Cal.2d 540, 544; 140 P.2d 386.] However, a transfer or encumbrance made without the consent of one spouse is not void but merely voidable by the no consenting spouse, not by a creditor or other third party, and will be treated as valid until voided. [See, e.g., Clar v. Cacciola (1987) 193 Cal.App.3d 1032, 1033; 238 Cal.Rptr. 726; Jack v. Wong Shee (1939) 33 Cal.App.2d 402, 415; 92 P.2d 499.] The transaction may be set aside in its entirety during the life of the transferring or encumbering spouse, but after that person’s death, the no consenting spouse can only set aside the transfer or encumbrance as to one-half the property or interest. [See e.g., Britton v. Hammell (1935) 4 Cal.2d 690, 692; 52 P.2d 221; 1 Qgden’s Revised California Real Property Law 323.]

The law has been recently clouded by Mitchell v. American Reserve Ins. Co. (1980) 110 Cal.App.3d 220; 167 Cal.Rptr. 760 and

its progeny. In Mitchell, the husband executed a promissory note and deed of trust on the couple’s home without the wife’s knowledge, for the purpose of obtaining a bail bond from a third party. In the wife’s action to void the encumbrance, the court granted only limited relief from the lien and none from the underlying obligation. The court held that the nonconsenting wife could remove the lien only as it related to her interest. The encumbrance was held to be valid and enforceable as to the consenting husband’s interest. The court further ruled that the underlying obligation, as distinct from the security interest created by the trust deed, remained the obligation of both spouses since the property of the community is liable for the debts of either spouse incurred during marriage. (See Civil Code § 5116.) The holding in Mitchell preserving the lien against the consenting spouse has been followed and rejected. [See Wolfe v. Lipsev (1985) 163 Cal.App.3d 633, 642; 209 Cal.Rptr. 801 (“an encumbrance of community property by one spouse contrary to the provisions of Civil Code section 5127 is valid and binding as to the consenting spouse’ s one-half interest . . . but voidable as it relates to the non-consenting spouse’s one-half interest.”); Head v. Crawford (1984) 156 Cal.App.3d 11, 17-18; 202 Cal.Rptr. 534 (following Mitchell); Andrade Development Co. v. Martin (1982) 138 Cal.App.3d 330, 336 n. 3; 187 Cal.Rptr. 863 (rejecting Mitchell); see also Harper v. Rava (1984) 154 Cal.App.3d 908, 912; 201 Cal.Rptr. 563 and In re Jones (C.D.Cal. 1985) 51 B.R. 834 (following Andrade).] The court in Jones concluded that the non-consenting spouse could

set aside a trust deed before the death of the consenting spouse, the dissolution of the marriage, or a change in the community character of the property; after these events, the non-consenting spouse could set aside a conveyance only as to his or her one-half interest.

Even if the no consenting spouse can avoid the encumbrance, he or she has to overcome several additional obstacles. The no consenting spouse may be estopped to contest the transaction or be deemed to have waived the community property interest if he or she knew about the transaction and participated in the negotiations or failed to object. MacKav v. Darusmont (1941) 46 Cal.App.2d 21, 26-27; 115 P.2d 221; Bush v. Rogers (1941) 42 Cal.App. 2d 477, 480-81; 109 P.2d 379.] The no consenting spouse may also be estopped if he or she authorized the other spouse to make the encumbrance and accepted the benefits of the transaction. Pin re Nelson (9th Cir. 1985) 761 F.2d 1320, 1323.] Moreover, between a bona fide encumbrancer without knowledge of the marriage and a no consenting spouse, the latter has been required to satisfy the obligation as a condition of avoiding the encumbrance. [See Mark v. Title Guarantee & Trust Co. (1932) 122 Cal.App. 301, 310-13; 9 P.2d 839.] The court in Mark reasoned that although the husband sold the property without his wife’s consent and squandered the proceeds, the receipt of the sale price benefitted the community, and the community should not be able to void the conveyance without returning the consideration. In addition, if record title to the

property is held in the name of one spouse,  transfers or

encumbrances  by  that  spouse  are presumed  valid,  and  the

nonconsenting spouse can assail thetransfer or encumbrance for

only one year after its recordation. (Civ. Code § 5127.)

(2)  Joint Tenancy and Tenancy in Common

If the deed of trust and obligation are executed by all joint tenants or tenants in common, the entire property is subject to the encumbrance. See Caito v. United California Bank (1978) 20 Cal.3d 694, 701; 144 Cal.Rptr. 751.] All tenants need not consent for a valid encumbrance to be created. A tenant in common or joint tenant may encumber his or her interest without the consent of any other co-tenant. The encumbrance will not affect the interest of the no consenting co-tenant. [See Caito v. United California Bank,, 20 Cal.3d at 701; Schoenfeld v. Norbera (1970) 11 Cal.App.3d 755, 765; 90 Cal.Rptr. 47 (tenancy in common); Kane v. Huntley Financial (1983) 146 Cal.App.3d 1092, 1097; 194 Cal.Rptr. 880; Clark v. Carter (1968) 265 Cal.App.2d 291; 70 Cal.Rptr. 923 (joint tenancy).]

A couple of special issues arise with a joint tenancy. The encumbrance is limited to the joint tenancy interest held by the encumbering joint tenant. [See People ex rel. Dept. of Pub. Works v. Noaarr (1958) 164 Cal.App.2d 591, 593; 330 P.2d 858.] The creation of the lien is a nullity as against the right of

survivorship of the other joint tenant.” Hammond v. McArthur (1947) 30 Cal.2d 512, 515; 183 P. 2d 1.] At death, the encumbering joint tenant’s interest in the real property ceases, and the survivor’s interest expands to include the interest formally held by the decedent. Since the decedent’s interest “ceased to exist, the lien of the mortgage expired with it.” (People ex rel. Dept. of Pub. Works v. Noqarr,, 164 Cal.App.2d 591, 594.) Accordingly, “the mortgage or trust deed beneficiary may not enforce the security after the death of the joint tenant executing the security device.” Clark v. Carter,, 265 Cal.App.2d 291, 294 (emphasis in original); Hamel v. Gootkin (1962) 202 Cal.App.2d 27, 29; 20 Cal.Rptr. 372.]

Conversely, if the none cumbering joint tenant dies first, the interest of the survivor, the encumbering joint tenant, expands to the decedent’s interest, and the encumbrance covers the survivor’s broadened interest. [See generally Civ. Code § 2930; Parry v. Kellev (1877) 52 Cal. 334.]

The encumbrance of one joint tenant’s interest does not sever the joint tenancy. Clark v. Carter,, 265 Cal.App.2d 291, 294; Hamel v. Gootkin,, 202 Cal.App.2d 27.] However, a foreclosure sale on the encumbering joint tenant’s interest while both joint tenants are living will terminate the joint tenancy status of the debtor’s interest, and the buyer at the sale will become a tenant in common with the other owners.  [See Kane v.

Huntley Financial,, 146 Cal.App.3d 1092, 1098; see generally Zeialer v. Bonnell (1942) 52 Cal.App.2d 217, 219; 126 P.2d 118 (execution sale on judgment lien of joint tenant’s interest terminates joint tenancy with buyer becoming tenant in common) and People ex rel. Dept. of Pub. Works v. Noqarr,, 164 Cal.App.2d 591, 595 (judgment lien and mortgage lien have virtually identical effect on joint tenancy).]

(3)  Creditor Reliance on Record Title; A Special Problem with Spouses

Special problems arise where there is a question as to exactly how a husband and wife hold title to real property. As discussed above, the ability of a spouse to set aside an encumbrance may depend on whether the property is held as community property, joint tenancy, or tenancy in common. Each of these forms of ownership is unique (Civ. Code § 682), and a husband and wife may hold title in any of these forms (Civ. Code § 5104), although title cannot be held simultaneously in more than one form. [See e.g., Siberell v. Siberell (1932) 214 Cal. 767, 773; 7 P.2d 1003.]

All real property acquired during marriage (except for separate property defined in Civ. Code §§ 5107 and 5108) is declared to be community property if acquired after January 1, 1975, or is presumed to be community property if acquired before that date unless a contrary intention is expressed in the

instrument of conveyance. (Civ. Code § 5110.) A contrary intention would be, for example, that the property was acquired in joint tenancy. Siberell v. Siberell,, 214 Cal. 767, 773.] Although real property acquired during marriage is considered community property, the law before 1985 permitted spouses to convert community property into separate property and vice versa [see e.g., Estate of Furtsch (1941) 43 Cal.App.2d 1, 5; 110 P.2d 104] by agreement — whether express or implied, written or oral [e.g., Beam v. Bank of America (1971)

6 Cal.3d 12, 25; 98 Cal.Rptr. 137] — without any consideration other than mutual consent if the transaction is fair. Estate of Wilson (1976) 64 Cal.App.3d 786, 798; 134 Cal.Rptr. 749.] Beginning in 1985, a transmutation of property must be in writing and is ineffective against third parties without notice of it unless the document declaring the transmutation is recorded. [Civ. ‘Code § 5110.730.] A transmutation is also subject to the law governing fraudulent transfers.  [Civ. Code § 5110.720.]

The form of the transaction is not dispositive of the true state of title as between the spouses. Extrinsic evidence can be used to show that spouses intended property to remain in the community though property is held by one spouse as his or her separate property or is held by both spouses as tenants in common or joint tenants. Tomaier v. Tomaier (1944) 23 Cal.2d 754, 757; 146 P.2d 905; see e.g., Gudeli v. Gudeli (1953) 41 Cal.2d 202, 212; 259 P.2d 656.]  Extrinsic evidence can also show that property nominally held as community property was actually held as a tenancy in common, Tompkins v. Bishop (1949) 94 Cal.App.2d 546; 211 P.2d 14.] Property, however, cannot be held in joint tenancy, regardless of the parties’ intention, unless the existence of a joint tenancy is declared in the instrument of conveyance. [See e.g., Civ. Code § 683; Cordasco v. Scalero (1962) 203 Cal.App.2d 95, 103; 21 Cal.Rptr. 339.]

Although the form in which title is held does not necessarily determine the true state of the title between spouses, as between a no consenting spouse and a bona fide encumbrancer for value and without notice, the courts have tended to uphold the encumbrancer’s reliance on record title, notwithstanding how the spouses intended to retain title. In Kane v. Huntley Financial,, 146 Cal.App.3d 1092, the Court of Appeal held that the recording laws protected the lien obtained by a bona fide encumbrancer for value and without notice from a husband who appeared on the record as a joint tenant on a residence which he had orally agreed was his wife’s separate property. Although the trust deed purported to encumber the entire property, the trust deed was held to bind only the husband’s purported one-half interest. [See Caito v. United California Bank,, 20 Cal.3d 694 (recording laws protect bona fide encumbrancer from unrecorded liens, equities, and agreements between co-tenants); see generally Rilev v. Martinetti (1893) 97 Cal. 575; 32 P. 579; Pepin v. Stricklin (1931) 114 Cal.App. 32; 299 P. 557 (husband’s judgment creditor purchasing at execution sale

takes free of wife’s unrecorded equity).]

b.   Trustee

Under the terms of a deed of trust, the trustor nominally conveys title to the trustee with the power to sell the encumbered property to satisfy the terms of the secured obligation in the event of the trustor’s default. Despite the name “trustee,” a trustee under a deed of trust has not been held to the duties of a trustee under an express trust: “Just as a panda is not an ordinary bear, a trustee under a deed of trust is not an ordinary trustee.” Stephens, Partain & Cunningham v. Hollis (1987) 196 Cal.App.3d 948, 955; 242 Cal.Rptr. 251.] Rather, “[t]he rights and powers of trustees in nonjudicial foreclosure proceedings have long been regarded as strictly limited and defined by the contract of the parties and the statutes.” n. E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281, 287; 216 Cal.Rptr. 438.]

Although the trustee has been referred to as the common agent of the trustor and the beneficiary [see, e.g., Ainsa v. Mercantile Trust Co. (1917) 174 Cal. 504, 510; 163 P. 898], the trustee does not have the general common law duties of an agent. (See I. E. Associates., 39 Cal.3d at 285, 287-88.) For example, in the absence of any fraud, irregularity, or misconduct, the trustee can purchase property at the foreclosure which the trustee conducts. Stephens, Partain & Cunningham v. Hollis,, 196 Cal.App.3d

948, 955-56.] In addition, service of process on the trustee does not constitute service on the trustor or beneficiary and does not impose any obligation on the trustee to notify the beneficiary or trustor of the action.  (Civ. Code § 2937.7.)

Nevertheless, the trustee cannot enter a side agreement with one of the parties that impairs the rights of the other party. See Ballenaee v. Sadlier (1979) 179 Cal.App.3d 1, 5; 224 Cal.Rptr. 301.] In addition, the trustee’s breach of its duties to the trustor to conduct a fair sale may be imputed to the beneficiary who profits from the breach. [See Bank of Seoul & Trust Co. v. Marcione (1988) 198 Cal.App.3d 113, 120; 244 Cal.Rptr. 1.]

Since the trustee begins to play a significant role in the trust deed relation only upon the foreclosure or reconveyance of the trust deed, the nature of the trustee’s duties will be discussed in detail in later entries.

The trustee need not formally consent to be named as trustee in the deed of trust. [See Huntoon v. Southern Trust and Commerce Bank (1930) 107 Cal.App. 121, 128; 290 P. 86.] Frequently, organizations such as title companies make available to the public printed trust deed forms designating the organization as the trustee. A creditor and debtor can use such a deed of trust form, thereby appointing the designated organization as trustee, without notice to the trustee that it has been appointed and without obtaining the trustee’s consent.

A new trustee may be substituted pursuant to Civil Code § 2934a or the terms of the trust deed. The manner of substitution provided in the trust deed may be restricted by Civil Code § 2934a [see Civ. Code § 2934a(c)], but all of the provisions of the statutory method of substitution do not necessarily have to be followed. [See U.S. Hertz, Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 83-85; 116 Cal.Rptr. 44.]

A trustee has authority to sue to carry out the trustee’s statutory duties.  [Code Civ. Proc. § 369(b).]

c.   Beneficiary

The beneficiary is the secured party. If there is more than one beneficiary under a deed of trust, each beneficiary may protect the security without joining with the others, and each is empowered to initiate a foreclosure in the event of default. [See Perkins v. Chad Development Corp. (1979) 95 Cal.App.3d 645, 650-51; 157 Cal.Rptr. 201.]

The deed of trust is accessory to the primary obligation — it is a mere incident to the debt — and is not enforceable separate from the underlying debt. [See e.g., Civ. Code § 2909; Adler v. Sargent (1895) 109 Cal. 42; 41 P. 799.] The assignment of the underlying obligation carries with it the security of the

deed of trust. [See e.g., Civ. Code § 2936; Seidell v. Tuxedo Land Co. (1932) 216 Cal. 165, 170; 13 P.2d 686; Domarad v. Fisher & Burke, Inc.,, 270 Cal.App.2d 543, 554.] An assignment of the deed of trust without a transfer of the debt is, as the Supreme Court observed in Adler, without effect and gives the assignee of the trust deed no rights. Adler v. Sargent,, 109 Cal. 42, 48-49; see e.g., Kellev v. Upshaw (1952) 39 Cal.2d 179, 192; 246 P.2d 23.] Therefore, the beneficiary’s assignee must have also received an assignment of the underlying obligation in order to enforce the terms of the trust deed. But if the assignee of the beneficiary’s interest has also received an assignment of the debt, the assignee can enforce the trust deed even though the trust deed does not name the assignee.

The beneficiary may serve as trustee under the deed of trust [see e.g., Witter v. Bank of Milpitas (1928) 204 Cal. 570, 576; 269 P. 614; More v. Calkins (1892) 95 Cal. 435, 438; 30 P. 583] and, as trustee, may bid at the sale Bank of America Nat‘ 1 Trust & Sav. Ass’n. v. Century Land & Wat. Co. (1937) 19 Cal.App.2d 194, 196; 65 P. 2d 110] and collect a trustee’s fee California Trust Co. v. Smead Inv. Co. (1935) 6 Cal.App.2d 432, 435; 44 P.2d 624]. However, such a two-party trust deed under certain circumstances may be construed as a mortgage with power of sale [see Godfrey v. Monroe (1894) 101 Cal. 224; 35 P. 761], the enforcement of which may be barred by the statute of limitations.  [See First Federal

Trust Co. v. Sanders (1932) 192 Cal. 194; 219 P. 440; see also “Statute of Limitations”,. 1

In addition, if the beneficiary serves as trustee at the foreclosure sale and acquires the property, the sale is voidable by the trustor if the trustor offers to redeem the property from the beneficiary after the sale. Copsev v. Sacramento Bank (1901) 133 Cal. 659; 66 P. 7.] This right, often neglected, has very significant applicability to foreclosures conducted by a so-called “in-house” or “captive” trustee which is a subsidiary of the foreclosing creditor. [See Karlsen v. American Sav. & Loan Ass’n. (1971) 15 Cal.App.3d 112, 116; 92 Cal.Rptr. 851.]

5.   Execution, Acknowledgment and Delivery of the Trust Deed

A lien on real property is created by execution and delivery of a deed of trust. [See Livingston v. Rice (1955) 131 Cal.App.2d 1, 3-4; 280 P.2d 52.]

a.   Execution or Signing of the Trust Deed by the Trustor

The trustor must sign the trust deed. [Code of Civ. Proc. § 1971; see Civ. Code §§ 1091 and 2922.] If someone signs on behalf of the trustor, the trustor’s authorization for that person to sign

must be in writing. (See Civ. Code §§ 1091, 2309, 2922 and 2933.) The trust deed also may be executed by someone other than the trustor at the trustor’s request and in the trustor’s presence. [See Blaisdell v. Leach (1894) 101 Cal. 405, 409; 35 P. 1019; Rich v. Ervin (1948) 86 Cal.App.2d 386, 395; 194 P.2d 809.] The trustor may also be estopped to deny the signature if the trustor knows of the unauthorized signature, permits it to be used, and accepts the benefit of the transaction. (See Blaisdell v. Leach,, 101 Cal. 405, 409-10.)

b.   Acknowledgment of the Trust Deed by the Trustor

Acknowledgment of the trust deed before a notary is not necessary to create a binding lien between the parties. [See e.g., Civ. Code § 1217; Bank of Ukiah v. Petaluma Sav. Bank (1893) 100 Cal. 590; 35 P. 170.] However, acknowledgment is required to record the deed of trust (Civ. Code § 2952; Gov. Code § 27287) and preserve its priority from later bona fide purchasers or encumbrancers.  (Civ. Code § 1214.)

c.   Delivery of the Trust Deed

To be effective, a trust deed must be delivered. [See Civ. Code §§ 1054, 1091, 2922; Code of Civ. Proc. § 1933; Stirton v. Pastor (1960) 177 Cal.App.2d 232, 234; 2 Cal.Rptr. 135; see also Hahn v. Hahn (1954) 123 Cal.App.2d 97; 266 P.2d 519; Richardson v. Suiter (1946) 74 Cal.App.2d 682, 685-86; 169 P.2d 252.]

Whether delivery has occurred is a question of fact. Delivery requires that the trustor intended the trust deed to operate presently to create a security interest in favor of the beneficiary. How the intention is manifested does not matter, and actual physical delivery is not determinative. [E.g., Huth v. Katz (1947) 30 Cal.2d 605, 608-09; 184 P.2d 521; Hotalina v. Hotalina (1924) 193 Cal. 368, 382-85; 224 P. 455; Meyer v. Wall (1969) 270 Cal.App.2d 24, 27; 75 Cal.Rptr. 236.] Delivery cannot be conditional. (See Civ. Code § 1056.) While the cases in this area deal with deeds, the reasoning should fully apply to trust deeds viewed either as a grant of title to the trustee or a grant of a lien under the rules applicable to mortgages. (See Civ. Code § 2922.) If the trust deed has not been delivered, it is void— invalid not only against the beneficiary but also against any bona fide purchaser or encumbrancer of the beneficiary’s interest. [See Marlenee v. Brown, (1943) 21 Cal.2d 668, 679; 134 P.2d 770; Trout v. Tavlor (1934) 220 Cal. 652, 656; 32 P.2d 968; Gould v. Wise (1893) 97 Cal. 532, 535-36; 32 P. 576; see also Brvce v. O’Brien

(1936) 5 Cal.2d 615, 616; 55 P.2d 488.] However, even if the requisite element of delivery is not present, the trustor’s subsequent “ratification” can validate the deed of trust. [See Marlenee v. Brown,, 21 Cal.2d 668, 679.] Also, nondelivery may be overcome if the trustor’s conduct establishes negligence or an estoppel. [See Civ. Code § 3543; Trout v. Taylor,, 220 Cal. 652, 656-57; Shirley v. All Night & Day Bank (1913) 166 Cal. 50, 55; 134 P. 1001; Gould v. Wise,, 97 Cal. 532, 536-37.]

6. Trust Deeds on Encumbered Property

The trustor’s nominal transfer of title in creating the first trust deed does not preclude the trustor’s creation of other trust deeds. Davidow v. Corporation of America (1936) 16 Cal.App.2d 6; 60 P.2d 132.] Theoretically, there is no limit on the number of trust deeds which can be given on a parcel of real property.

7. All Inclusive Trust Deed

An all inclusive trust deed (“AITD”), also known as a “wrap around” or overriding trust deed, is a trust deed securing the trustor’s indebtedness to the beneficiary, but the amount of the indebtedness includes a debt owed by the beneficiary on a senior trust deed covering the same property. [See Armsev v. Channel Associates, Inc. (1986) 184 Cal.App.3d 833, 837; 229 Cal.Rptr. 509.]  For example, suppose A sells property to B for $50,000

subject to a first trust deed of $25,000. B makes a down payment of $10,000 and gives A a promissory note and deed of trust for $40,000. Since the $40,000 note includes the $25,000 first trust deed loan, the $40,000 note and trust deed are considered all inclusive; they “wrap around” the existing first trust deed loan. The trustor’s debt is for the full face amount of the note, including senior obligations, and the trust deed secures the entire indebtedness. (Id. at 838-39.) Thus, if a trustor fails to make payments on one of the obligations underlying the AITD, the beneficiary can accelerate the entire unpaid balance due under the AITD and set that amount, rather than the amount owed under the underlying obligation, as the minimum bid. [See FPCI Re-Hab 01 v. E&G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1023; 255 Cal.Rptr. 157.]

B.   The Obligations Secured by a Deed of Trust

1.   The Underlying Obligation

The validity of the trust deed depends on the validity and enforceability of the underlying obligation:

The mortgage must stand or fall with the note. It is well settled in California that a mortgage or mortgage lien is a mere incident of the debt or obligation which it is given to secure.   [Citations omitted.]   There

cannot be a mortgage if there is no debt or other obligation to be secured.   [Citations omitted.]   A mortgage in California has no existence independent of the thing secured by it.  Coon v. Shrv (1930) 209 Cal. 612, 615; 289 P. 815.

[See e.g., Adler v. Sargent., 109 Cal. 42; Turner v. Gosden (1932) 121 Cal. App. 20, 22; 8 P.2d 505.]

2.   Obligation to Pay Accelerated Balance

A note and/or a deed of trust invariably contain a provision permitting the secured party to accelerate the balance due on the obligation, including accrued interest, in the event the obligor/trustor defaults on making any installment payment or performing any additional obligation contained in the deed of trust. The trustor then is obligated to pay the full amount. (But see Civ. Code § 2924c discussed infra.) In any conflict between an acceleration provision in the note and deed of trust, the provision in the note governs. Pacific Fruit Exchange v. Duke (1930) 103 Cal.App. 340, 345; 284 P. 729.]

However, even without an acceleration clause, the secured party may be able to accelerate. The power of sale clause has the same effect as an acceleration clause because it provides for the sale of the property on any default to satisfy the entire debt.

(See also Code of Civ. Proc. § 728 involving judicial foreclosure.)

3.   Other Obligations Imposed by the Deed of Trust

The deed of trust invariably imposes several obligations on the trustor other than the payment of the obligation, such as payment of taxes, insurance and prior encumbrances. These obligations are discussed in the following sections. In the event the trustor breaches these obligations, the trust deed affords the beneficiary two options: (1) foreclosing without advancing money to perform the obligation, or (2) performing the obligation, demanding reimbursement, and foreclosing if reimbursement is not made. The amount advanced because of the trustor’s default is covered by the security of the trust deed under a provision generally securing future advances or specifically securing advances to perform the trustor’s obligations. [See also Civ. Code §§ 2876 and 2904 (2).] Thus, in addition to the failure to pay an obligation, the trustor’s failure to reimburse the amount advanced by the beneficiary is also a breach of the trust deed, authorizing foreclosure. [See Security-First Nat. Bank of Los Angeles v. Lamb (1931) 212 Cal. 64; 297 P. 550.] For any breach, the beneficiary can invoke the acceleration clause and foreclose on the entire amount due.

a.   Fire Insurance and Eminent Domain Proceeds

(1)  Obligation to Pay Premiums

One of the most standard obligations of the trustor is the maintenance of adequate fire insurance. The lender may require that the trustor maintain hazard insurance coverage in an amount up to the replacement value of the improvements on the property. (Civ. Code § 2955.5.) If the trustor fails to pay, the beneficiary may pay for the insurance and add the amount advanced to the principal. [See Freeman v. Lind (1986) 181 Cal.App.3d 791, 806; 226 Cal.Rptr. 515; see also Campbell v. Realty Title Co. (1942) 20 Cal.2d 195, 197-98; 124 P.2d 810; Covne v. Mason (1936) 13 Cal.App.2d 176, 178-79; 56 P.2d 541.] A beneficiary may accelerate and foreclose if the trustor fails to pay fire insurance premiums notwithstanding whether the failure to pay the premiums causes any impairment of the security interest in the real property. (Civ. Code § 2924.7; Fin. Code §§ 1227.2, 7461.) These statutes abrogate case authority which prevented the beneficiary from declaring a default if the beneficiary’s security interest in the property was not impaired by the trustor’s failure to maintain insurance. [See Freeman v. Lind,, 181 Cal.App.3d 791; see also Kreshek v. Sperling (1984) 157 Cal.App.3d 279; 204 Cal.Rptr. 30; Stats. 1987, ch. 397, § 5; Stats. 1988, ch. 179, § 3.]

The beneficiary will most likely advance money to purchase a fire insurance policy before foreclosing to avoid a potential fire loss (especially since the trustor’s liability may be limited to the missed premium or by the antideficiency statute if the fire loss is considered waste).

Issues that counsel representing a property owner in this situation should consider include: (1) whether the beneficiary placed the insurance with an insurer affiliated or related in some way with the beneficiary, (2) whether the beneficiary received a commission on the sale of the insurance, and (3) whether the insurance premium is higher than the trustor paid and higher than the rate available on alternative policies. The beneficiary is bound by the covenant of good faith and fair dealing implied in deeds of trust. [See generally Schoolcraft v. Ross (1978) 81 Cal.App.3d 75; 146 Cal.Rptr. 57; Milstein v. Security Pac. Nat. Bank (1972) 27 Cal.App.3d 482; 103 Cal.Rptr. 16.]

Moreover, to the extent that the beneficiary is acting as an insurance broker, the beneficiary is acting on behalf of the debtor as his or her agent [see Ins. Code § 33; Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 117; 132 Cal.Rptr. 796] and should procure insurance at a favorable premium. [See Colpe Investment Co. v. Seeley & Co. (1933) 132 Cal.App. 16; 22 P.2d 35; Anno., Inadequacy of Property Insurance Procured, 72 ALR 3d 747, 758.] In Colpe, the court held that if one undertakes to obtain insurance for another,

. . . it is the duty of an agent to exercise good faith and reasonable diligence to procure insurance on the best terms he can obtain; and if he is a professional agent he should be required to exercise the particular skill reasonably to be expected of such an agent, and to have knowledge as to the different companies and terms available with respect to the commission assured by him. Colpe Investment Co. v. Seeley & Co.,, 132 Cal. App. at 19.

A beneficiary’s excessive charge for insurance may be a breach of the beneficiary’s implied covenant of good faith and fair dealing and/or the beneficiary’s duties as an insurance broker. The foreclosure may be attacked if the premium is excessive. The amount owed to cure the default may be affected by the nature and extent of the beneficiary’s breach.

(2)  Beneficiary’s Control of Insurance and Eminent Domain Proceeds

The standard trust deed provides that the beneficiary controls the disposition of insurance and eminent domain proceeds and may apply the proceeds to reduce the unpaid balance of the obligation. Courts have held that this provision is tempered by the implied covenant of good faith and fair dealing which requires the

beneficiary to permit the trustor to use insurance proceeds for the rebuilding of damaged improvements if the value of the beneficiary’s security interest is not impaired. (Schoolcraft v. Ross,, 81 Cal.App.3d 75, 77; see Kreshek v. Sperling,, 157 Cal.App.3d 279, 283.) In Kreshel, the court held that the beneficiary was not entitled to insurance proceeds even though the trustor was not going to rebuild because the beneficiary’s security interest was not impaired. (157 Cal.App.3d at 283.) Kreshek and Schoolcraft rely on the reasoning of Milstein v. Security Pac. Nat. ,, 27 Cal.App.3d 482 which held that a beneficiary’s right to apply condemnation proceeds to reduce the trustor’s outstanding indebtedness had to be construed in light of the covenant of good faith and fair dealing; as a result, the beneficiary could not retain condemnation proceeds in excess of those necessary to prevent any impairment of its security interest.

However, if the trustor is in longstanding default and has no right of reinstatement and if allowing the trustor to rebuild would indefinitely postpone the beneficiary’s matured right to foreclose, the beneficiary may apply insurance proceeds to the reduction of the unpaid debt. Ford v. Manufacturers Hanover Mortgage Corp. (9th Cir. 1987) 831 F.2d 1520.]

Statutory changes after Schoolcraft and Kreshek recognize that the beneficiary’s right to dispose of insurance proceeds is enforceable notwithstanding whether the beneficiary’s security

interest in the property has become impaired by the loss that caused the insurance proceeds to become payable. [Civ. Code § 2924.7(b) (effective 1-1-89); Fin. Code §§ 1227.3, 7462.] Uncodified statements of legislative intent make clear that these statutes do not abrogate Schoolcraft^;s holding that the lender may not prohibit the use of insurance proceeds for rebuilding absent a showing that the lender’s security interest in the property has been impaired. (See Stats. 1987, ch. 397, § 5; Stats. 1988, ch. 179, § 3.]

b.   Taxes

A lien resulting from unpaid property taxes or other assessments takes priority over all other liens, even those created before the property tax or assessment lien. (Rev. & Tax Code § 2192.1.) To preserve the property as security for the debt, trustors are charged generally with the duty of paying all taxes and assessments. [See Donkin v. Killefer (1939) 32 Cal. App.2d 729, 732; 90 P.2d 810.] Notwithstanding this general principal, trust deeds routinely specify that the trustor must pay taxes and assessment within some period, often ten days, before delinquency.

If a delinquency occurs, the deed of trust permits the beneficiary to pay the delinquent taxes, add the amount paid to the secured debt, and foreclose if not reimbursed even though there are no other defaults.  (See Security-First Nat. Bank of Los Angeles

v. Lamb,, 212 Cal. 64, 68-9.) The beneficiary has similar rights to advance money to pay taxes even in the absence of any express authority in the trust deed and is entitled to subrogation. [See Civ. Code §§ 2876, 2904 (2); Beeler v. American Trust Co. (1946) 28 Cal.2d 435, 440; 170 P.2d 439; Savings & Loan Society v. Burnett (1895) 106 Cal. 514, 536; 39 P. 922; Stafford v. Russell (1953) 117 Cal.App.2d 326, 333; 255 P.2d 872; Diehl v. Hanrahan (1945) 68 Cal.2d 32, 37; P.2d 853.]

The beneficiary, however, is not required to pay delinquent taxes and assessments. Dowd v. Glenn (1942) 54 Cal.App.2d 748, 756; 129 P.2d 964.] But, the trust deed usually provides that the trustor’s mere failure to pay taxes is grounds to accelerate the maturity of the debt and foreclose. (Civ. Code § 2924.7; Fin. Code §§ 1227.2, 7461.)

If a senior lienholder pays delinquent taxes and adds the amount advanced to the secured debt, the junior lienholder can declare a default and foreclose even though all payments due to the junior lienholder are current since the junior’s security has been reduced by the increased amount owed the senior, Manning v. Queen (1968) 263 Cal.App.2d 672, 674; 69 Cal.Rptr. 734.] Presumably, the borrower could relieve the default by reimbursing the senior encumbrancer even though the junior may demand an amount equivalent to what the senior advanced as a condition for reinstating the junior lien.

The failure to pay property taxes also constitutes waste, but the ability of the secured party to sue for damages and collect by means other than foreclosure is governed by the one form of action and anti-deficiency rules. Osuna v. Albertson (1982) 134 Cal.App.3d 71; 184 Cal.Rptr. 338; see Civ. Code § 2929; Code of Civ. Proc.

§§ 580b, 580d, 726; but see Krone v. Goff (1975) 53 Cal.App.3d 191, 195; 127 Cal.Rptr. 390.]

c.   Impound Accounts

Some secured obligations require the trustor to maintain an impound account for the payment of taxes and insurance (and perhaps other purposes) related to the property. The failure to make periodic impound account payments is deemed a default even though taxes and insurance premiums are not yet due.

An impound account may not be required under an obligation secured by a deed of trust covering a single-family, owner occupied dwelling unless an impound account is required by a state or federal regulatory authority; the loan is made, guaranteed, or insured by a state or federal agency; the trustor fails to pay timely two consecutive tax installments; the original amount of the loan is 90 percent or more of the sale price or appraised value; or the combined principal amount of all loans secured by the

property exceeds 80 percent of the appraised value of the property. [Civ. Code § 2954(a).] The parties may agree to an impound if the beneficiary furnishes the trustor with a written statement indicating that an impound account is not required and whether interest will be paid. (Id. ) The beneficiary may not require that the amount maintained in the account exceed the amount necessary to pay tax, insurance, and other covered obligations as they become due.  [Civ. Code § 2954.1(b).]

d.   Senior Encumbrances

Most trust deeds require that the trustor must pay all sums due to holders of senior encumbrances. A default on a senior encumbrance is often expressly made a default on a junior encumbrance. In addition, the deed of trust permits the junior lienholder to advance money to the senior lienholder to satisfy any delinquency, add the amount advanced to the security of the junior lien, declare a default on the junior lien, and foreclose. Similar authority is provided by statute. [See Civ. Code §§ 2876, 2903-05; Windt v. Covert (1907) 152 Cal. 350, 352-54; 93 P. 67; Little v. Harbor Pac. Mortgage Investors (1985) 175 Cal.App.3d 717, 720; 221 Cal.Rptr. 59; Stafford v. Russell,, 117 Cal.App.2d 326, 333.]

Junior lienholders may learn of delinquencies on senior encumbrances not subject to a notice of default through the notice

of delinquency request procedure. The beneficiary or mortgagee of any trust deed or mortgage on real property containing one to four residential units may, with the trustor’s or mortgagor’s consent, submit a request to a senior lienholder for written notice of all delinquencies of four months or more in principal or interest payments even though the requester’s lien is not in default. [Civ. Code § 2924e(a).] The trustor’s or mortgagor’s consent must be effected by a signed and dated agreement separate from the loan and security documents or disclosed in at least 10-point type.  (.Id.)

The request covers delinquencies until any of the following occurs: the date the request is withdrawn, the date the requester’s interest terminates as stated in the request, or five years from mailing except that it may be repeatedly renewed for five year periods within six months of expiration. [Civ. Code § 2924e(b).] The beneficiary must give notice of delinquency within 15 days following the end of four months from any delinquency; however, no delinquency notice is required if the senior lienholder files a notice of default. [Civ. Code § 2924e(c).] The senior lienholder is liable for damages and a $300 statutory penalty for failing to give the notice unless the failure was the product of a bona fide error notwithstanding the use of procedures reasonably adapted to avoid the failure.  [Civ. Code § 2924e(d).]

e.  Waste

(1) Foreclosure on Breach of Duty to Maintain

The standard trust deed requires the trustor to maintain the property in good condition and repair and also prohibits the trustor from removing or destroying buildings or committing acts of waste. The law provides that a person whose property is subject to a mortgage lien or deed of trust may not do anything to impair substantially the value of the property. [Civ. Code § 2929; Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 599; 125 Cal.Rptr. 557.] Waste can be committed by the mere failure to maintain the property; affirmative misconduct need not be shown to establish waste. In re Mills (9th Cir. 1988) 841 F.2d 902, 905; but see Krone v. Goff,, 53 Cal.App.3d 191, 195.] Failure to pay taxes can constitute waste since a tax lien becomes senior to all others, and a sale of the property to pay taxes will extinguish all deeds of trust.  (Osuna v. Albertson,, 134 Cal.App.3d 71.)

In addition to maintaining the property, most trust deeds require additional acts, such as keeping the property free of mechanics’ liens. Many of these acts have little or nothing to do with sufficiently preserving the value of the property as adequate security for the debt. Consequently, failure to perform these acts might not constitute a basis for foreclosure, since the gravamen of the anti-waste provision and Civil Code § 2929 is preventing

action which would impair the ability of the creditor to realize the debt from the value of the security [see Cornelison v. Kornbluth,, 15 Cal.3d 590, 606-08; Easton v. Ash (1941) 18 Cal.2d 530, 539; 116 P.2d 433; Buckout v. Swift (1865) 27 Cal. 433, 437; 87 Am.Dec. 90; Robinson v. Russell (1864) 24 Cal. 467, 473.] In order to be a breach permitting foreclosure, the acts or omissions of the trustor must threaten the creditor’s ability to satisfy the obligation out of the proceeds of the sale of the property. [See Bart v. Streuli (1935) 5 Cal.2d 67, 68; 52 P. 2d 922.] However, a beneficiary is permitted to accelerate the maturity of the debt and foreclose if the trustor does not make timely payments of taxes, rents, assessments, or insurance premiums notwithstanding whether the failure impairs the value of the security interest in the real property. (Civ. Code § 2924.7; Fin. Code § 1227.2, 7461.)

No case has dealt with the situation where a beneficiary’s loan relied on a certain loan-to-value ratio and the beneficiary later faces an act by the trustor diminishing the value of the property. Can the beneficiary foreclose based on the reduced loan-to-value ratio even though the reduced value is sufficient security for the debt?

(2) Damages for Breach of Duty to Maintain

The trustor who commits waste may be liable for damages.  In Comelison,, the Supreme Court held that if the obligation is purchase money, the trustor will not be liable for a deficiency judgment resulting from waste unless bad faith (i.e., reckless, intentional or malicious conduct) is proven. (15 Cal.3d at 603-04; see In re Mills,, 841 F.2d 902, 905.) If the obligation is not purchase money and the foreclosure is nonjudicial, the trustor will not be liable for a deficiency resulting from waste unless bad faith is proven. (15 Cal.3d at 604-05.) Even if the waste is committed in bad faith, no recovery can be had if the debt is satisfied at the foreclosure sale by the proceeds of a third party’s purchase or by the beneficiary’s full credit bid. [15 Cal.3d at 606-08; see Sumitomo Bank v. Taurus Developers, Inc. (1986) 185 Cal.App.3d 211, 217-222; 229 Cal.Rptr. 719.] Although the lienholder can avail himself of the injunctive remedy to prevent waste and the damage remedy for recompense [e.g., Lavenson v. Standard Soap Co. (1889) 80 Cal. 245, 247; 22 P. 184], it appears to be undecided whether an action for damages for waste is barred by the one form of action rule. [See Code of Civ. Proc. § 726; American Sav. & Loan Assn. v. Leeds (1968) 68 Cal.2d 611, 614; 68 Cal.Rptr. 453; cf. Krone v. Goff,, 53 Cal.App.3d 191, 193-95.]

Comelison is not followed in waste actions involving FHA insured trust deeds. [See United States v. Haddon Haciendas Co. (9th Cir. 1976) 541 F.2d 777 (case involving operator of a housing project).]

f.  Prepayment Penalties

Promissory notes secured by trust deeds routinely require that the trustor must pay a penalty if all or a portion of a loan is repaid earlier than scheduled. In home loan transactions, state law generally provides that the borrower can prepay 20 percent of the original principal amount in any one-year period, but the creditor may subject the borrower to a penalty of up to a maximum of six months’ advance interest on the amount prepaid in excess of 20 percent of the original principal amount. (Civ. Code § 2954.9.) A similar rule applies to loans obtained through mortgage brokers. (Bus. & Prof. Code § 10242.6.) Prepayment penalty clauses commonly provide for this type of penalty formula and have been commonly upheld. [See, e.g., Meyers v. Home Sav. & Loan Assn. (1974) 38 Cal.App.3d 544; 113 Cal.Rptr. 358; Lazzareschi Inv. Co. v. San Francisco Fed. Sav. & Loan Assn. (1971) 22 Cal.App.3d 303; 99 Cal.Rptr. 417.]

If the prepayment penalty clause imposes a payment for “involuntary prepayment,” the lender can demand a prepayment penalty if the lender accelerates the balance upon the trustor’s default. (See Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn. (1986) 184 Cal.App.3d 817, 824-25; 229 Cal.Rptr. 269.] The obligation to pay the prepayment penalty is secured by the deed of trust. [See Golden Forest Properties, Inc. v. Columbia Sav. & Loan Assn. (1988)  202  Cal.App.3d  193,  199;  248  Cal.Rptr.  316.]

Accordingly, the trustor and junior lienholders would have to pay the penalty to redeem the property. (See Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn.,, 184 Cal.App.3d 817, 825.) Moreover, the foreclosing creditor is entitled to recover the amount of the penalty from foreclosure sale proceeds. (See Golden Forest Properties, Inc. v. Columbia Sav. & Loan Assn.,, 202 Cal.App.3d at 199.)

However, if the prepayment penalty provision does not apply to involuntary prepayment, i.e. payment forced as the result of the lender’s acceleration of the debt, the lender is not entitled to collect the penalty. [See Tan v. California Fed. Sav. & Loan Assn. (1983) 140 Cal.App.3d 800, 809-11; 189 Cal.Rptr. 775.]

g.  Late Payments

Promissory notes secured by trust deeds routinely provide that the trustor must pay a late charge if an installment is not made by the due date or within a short period following the due date. The amount of the late charge and the length of a grace period, if any, following the due date within which a payment can be made without a late charge is subject to some statutory regulation. [See, e.g., Civ. Code § 2954.4 (6% late charge, 10-day grace period on certain loans secured by single family, owner occupied dwellings); Bus. & Prof. Code § 10242.5 (10% late charge, 10-day grace period on loans made or arranged by real estate brokers and

subject to the Necessitous Borrowers Act); Fin. Code § 15001 (6% late charge, no grace period on credit union loans secured by real property.]

If payment can be made after the due date before a late charge may be assessed, payments made after the so-called “due date” but before the payments are deemed “late” are considered to be timely. [See Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal.App.3d 818, 827; 214 Cal.Rptr. 531.] Foreclosure may not be used as a remedy for minor delays in paying installments.  (Id. at 827, 831.)

h.  Attorney’s Fees

Deeds of trust routinely provide that the trustor must pay attorney’s fees and costs incurred (1) in any action in which the trustee or beneficiary may appear, and (2) in connection with the protection of the security. Attorney’s fees are an issue in three contexts: fees incurred for processing a foreclosure, fees incurred for advising the beneficiary or trustee, and fees incurred in litigation.

(1) Processing the Foreclosure

Civil Code § 2924c permits a trustor to cure a default and reinstate the obligation, notwithstanding the acceleration of the

debt, by paying the arrearage, costs, and trustee’s or attorney’s fees as limited by Civil Code § 2924c(d). Trustee’s or attorney’s fees incurred after mailing of the notice of sale are limited by Civil Code § 2924d. Since the statutes use the disjunctive “or,” trustee’s or attorney’s fees, but not both, may be assessed. (See Hetland, California Real Estate Secured Transactions 172; 1 Miller & Starr, Current Law of California Real Estate 521.)

The limitation on attorney’s fees provided by these statutes, however, concerns fees incurred in the processing of the foreclosure. If the beneficiary incurs attorney’s fees for other purposes and if the trust deed authorizes the recovery of their fees, they may also be recovered. [See Passanisi v. Merit McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1512 n. 10; 236 Cal.Rptr. 59; Hetland, California Real Estate Secured Transactions 173; 1 Miller & Starr, Current Law of California Real Estate 520.]

(2) Fees for Advising the Beneficiary or Trustee

Most deeds of trust provide that the beneficiary may retain counsel at the trustor’s expense to take necessary steps to protect the security. These attorney services need not involve litigation; for example, the services of an attorney for an elderly widow which consisted of writing letters and making telephone calls to determine whether the property was covered by a fire insurance policy were held covered by this provision. Buck v. Barb (1983) 147 Cal.App.3d 920,  924-25;  195 Cal.Rptr.  461.]   Similarly, attorney’s fees for checking insurance, coverage; warning unpaid material providers not to remove fixtures; recovering fixtures already removed; and meeting with general creditors, unpaid subcontractors, and others interested in refinancing and completing the trustor’s project were all properly chargeable to the trustor. O’Connor v. Richmond Sav. & Loan Assn. (1968) 262 Cal.App.2d 523, 526-29, 68 Cal.Rptr. 882, disapproved on other grounds in Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 738; 1108 Cal.Rptr. 845; see also Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496, 1511-12.]

If these attorney’s fees expended for protection of the security pursuant to the terms of the deed of trust are set forth in the notice of default [see Bisno v. Sax (1959) 175 Cal.App.2d 714, 720; 364 P.2d 814], payment of these fees may be made a condition of reinstatement. (See Buck v. Barb,, 147 Cal.App.3d 920, 925.)

The provision of the trust deed allowing the beneficiary to claim reimbursement for legal expenses incurred to protect the security is potentially subject to abuse. A beneficiary interested in frustrating the trustor’s ability to reinstate could inflate the amount needed for reinstatement by incurring attorney’s fees. The Buck case suggests that attorney’s fees for essentially nonlawyer services, such as making a telephone call to inquire about fire insurance coverage, are permissible. As a result, an unscrupulous beneficiary could hire an attorney to accomplish routine tasks in order to pad the amount needed to cure the default.

The use of the trust deed provision permitting the recovery of expenses for preserving the security cannot be used to sanction the incurring of unnecessary legal expenses. The purpose of the trust deed provision is to allow the beneficiary to take needed steps and incur reasonable expense to protect the property securing the obligation to assure that the value of the security is not impaired. Whether the steps taken are necessary will depend on the facts of the case and the parties involved.

For example, a beneficiary has the clear right to insist on the maintenance of a fire insurance policy covering the real property securing the obligation.

The beneficiary may need to inquire whether this insurance is in force. In Buck, an inexperienced, elderly widow was the beneficiary under a trust deed representing part of the purchase price of the home which she sold. The trustor repeatedly defaulted on the obligation and failed to furnish proof of fire insurance on the property, and the elderly widow was obliged to seek the aid of an attorney. (See 147 Cal.App.3d at 923-24.) That this elderly widow was obliged to retain an attorney does not furnish justification for a financial institution, real estate broker, sophisticated investor, or other experienced beneficiary to retain an attorney to inquire about fire insurance.

A lawyer representing a homeowner should evaluate any charge for attorney’s fees purportedly incurred to protect the security. If the charge is unreasonable, unnecessary, or unrelated to the protection of the security, the charge is not allowed under the terms of the trust deed. If the amount is not properly due under the obligation, it need not be paid to effect reinstatement which requires payment only of the amount then due. [See Civ. Code § 2924c(a)(1).] Moreover, the beneficiary’s imposition of an unneeded charge which hampers the trustor’s ability to reinstate the obligation may constitute a breach of the covenant of good faith and fair dealing. [See section VA 7, “Duty of Good Faith and Fair Dealing Between Lenders and Borrowers”, The best procedure would be to obtain a judicial determination of the reasonableness of the charge. [See Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496, 1504, 1512; de la Cuesta v. Superior Court (1984) 152 Cal.App.3d 945, 950; 200 Cal.Rptr. 1.]

(3) Litigation Fees

(a)  Beneficiary’s Litigation Fees

Attorney’s fees may be awarded to the beneficiary in an action under the deed of trust if it so provides.  [E.g., Wutzke v. Bill Reid Painting Service, Inc. (1984) 151 Cap.App.3d 36,46; 198 Cal.Rptr. 418; Melnvk v. Robledo (1976) 64 Cal.App.3d 618, 621; 134 Cal.Rptr. 602; Nevin v. Salk (1975) 45 Cal.App.3d 331, 339; 119 Cal.Rptr. 370; Johns v. Moore (1959) 168 Cal.App.2d 709, 715; 198 Cal.Rptr. 418.] These fees are secured by the deed of trust and take priority over junior liens. (See Wutzke v. Bill Reid Painting Service, Inc.,, 151 Cap.App.3d 36, 46-47.)

If the demand for attorney’s fees is set forth in the notice of default, the payment of the fees may be made a condition of reinstatement. (See Bisno v. Sax,, 175 Cal.App.2d 714, 720.) In Hunt v. Smyth (1972) 25 Cal.App.3d 807, 837; 101 Cal.Rptr. 4, the court authorized the imposition of attorney’s fees and costs at both the trial and appellate levels as a condition of reinstatement. The Hunt opinion does not discuss whether attorney’s fees were demanded in the notice of default, but since the notice of default pre-dated the litigation, the amount of attorney’s fees and costs could not have been specified.

If the beneficiary has obtained a judgment for attorney’s fees, for example by prevailing in an action to enjoin the foreclosure, the beneficiary may add the amount of the judgment to the balance owed under the obligation. (See Passanisi v. Merit McBride Realtors, Inc.,, 190 Cal.App.3d 1496.) The beneficiary may enforce the judgment apart from the secured obligation and is not affected by the antideficiency and one form of action provisions.

(Id. at 1505-09.) However, the beneficiary is barred by res judicata from claiming entitlement under the trust deed to a greater amount of attorney’s fees in connection with the litigation than was awarded by the court. (Id. at 1510.) If the beneficiary’s bid exceeds the amount of the debt, costs and expenses, and the attorney’s fees to which the beneficiary is entitled, a surplus is created. (Id. at 1510-12.) If the trustor has a right to the surplus, the trustor can offset the surplus against the amount of the judgment the trustor owes for attorney’s fees and can compel acknowledgment of the offset through a motion for satisfaction or partial satisfaction of judgment. (Id. at 1513.)

In addition to attorney’s fees, the beneficiary may also be able to obtain sanctions against a trustor who engages in frivolous tactics to delay foreclosure. [See Code Civ. Pro. §§ 128.5, 907; Cal. Rules of Court, Rule 26(a); Kapelus v. Newport Equity Funds, Inc. (1983) 147 Cal.App.3d 1, 9; 194 Cal.Rptr. 893.] The trustor should likewise be able to recover sanctions against a beneficiary who engages in frivolous tactics.

(b)  Trustor’s Litigation Fees

The trustor, however, is not without an attorney fee remedy. Under Civil Code § 1717, the prevailing party in an action concerning the deed of trust is entitled to attorney’s fees. Thus,

if the trustor prevails in litigation, the trustor is entitled to reasonable attorney’s fees, and the same rule applies to the trustor’s successor in interest even if he or she did not expressly assume the obligation under the deed of trust. valley Bible Center v. Western Title Ins. Co. (1983) 138 Cal.App.3d 931; 188 Cal.Rptr. 335; Wilhite v. Callihan (1982) 135 Cal.App.3d 295, 301-02; 185 Cal.Rptr. 215; Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309; 168 Cal.Rptr. 552; see Buck v. Barb,, 147 Cal.App.3d 920.] In Valley Bible Center, the court clearly held that the trustor could recover attorney’s fees in an action brought by the trustor to challenge the beneficiary’s and trustee’s rights under the trust deed.  (138 Cal.App.3d at 932.)

(c)  Trustee’s Litigation Fees

An attorney’s fee provision in a trust deed also generally covers the trustee. The trustee may be entitled to attorney’s fees if the trustee’s participation is necessary to the resolution of the litigation. [See Title Guarantee and Trust Co. v. Griset (1922) 189 Cal. 382, 389-91; 208 P. 673; Mitau v. Roddan (1906) 149 Cal. 1, 15-17; 84 P. 145.] However, in Field v. Acres (1937) 9 Cal.2d 110; 69 P.2d 422, the Supreme Court held that the trustee was not involved in a judicial foreclosure, that the proceeding was between the beneficiary and the trustor, and that the trustee was not entitled to attorney’s fees although it had been named by the beneficiary in the action.  Since the cases view a trustee under

a deed of trust as “only a functionary of limited power, under a type of mortgage conferring upon him the power to convey under the prescribed conditions” (Carpenter v. Title Ins, & Trust Co., (1945) 71 Cal.App.2d 593, 597; 163 P.2d 73), the trustee serves essentially a technical function. Accordingly, Professor Hetland concludes that “when the dispute is solely between the beneficiary and the trustor, the trustee’s appearance is only technically necessary, and he cannot have attorney’s fees.” (Hetland, California Real Estate Secured Transactions 175.)

4.  The Obligations of Successors and Assigns

Deeds of trust routinely contain a clause binding the successors and assigns of all parties; however, many of a trust deed’s rights and obligations are transferred by operation of law.

a.  The Trustor’s Transferee

The grantee of property on which a trust deed has been placed is not personally liable on the underlying obligation unless the grantee assumes it. [E.g., Braun v. Crew (1920) 183 Cal. 728, 731; 192 P. 531; Andres v. Robertson (1918) 177 Cal. 434, 439; 170 P. 1129; Hibernia Sav. & Loan Soc. v. Dickinson (1914) 167 Cal. 616, 621; 140 P. 265.] Nevertheless, a grantee who does not assume the obligation takes the property subject to the trust deed, and the property becomes primarily liable for the payment of the debt

(Braun v. Crew,, 183 Cal. 728, 731). As a result, although not personally liable, a nonassuming grantee’s property can be sold to satisfy the secured debt. [See e.g., Rodgers v. Peckham (1898) 120 Cal. 238; 52 P. 483; Hohn v. Riverside County Flood Control & Wat. Conserv. Dist. (1964) 228 Cal.App.2d 605; 39 Cal.Rptr. 647.] A nonassuming grantee may, however, be liable for bad faith waste. (Cornelison v. Kornbluth,, 15 Cal.3d 590.)

b.  The Beneficiary’s Transferees

The assignee of the note and deed of trust may enforce them against the trustor in the same manner as the original beneficiary. See Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735, 744; 155 Cal.Rptr. 132, app. dis. 444 U.S. 948; section c, at p. 1-10,; see generally McCown v. Spencer (1970) 8 Cal.App.3d 216, 225) 87 Cal.Rptr. 213.] The assignee may actually have superior rights as a holder in due course taking free of personal defenses which could have been asserted against the original beneficiary. [See Comm. Code §§ 3302-3305; see e.g., Szczotka v. Idelson (1964) 228 Cal.App.2d 399; 39 Cal.Rptr. 466 (foreclosure by holder in due course of usurious note).] For example, the assignee is not under an obligation to make inquiry to discover the existence of defenses “unless the circumstances or suspicions are so cogent and obvious that to remain passive would amount to bad faith” or unless “the failure to make inquiry arose from a suspicion that inquiry would disclose a vice or defect in the

instrument or transaction. . . .” Cameron v. Security First Nat. Bank (1967) 251 Cal.App.2d 450, 458; 59 Cal.Rptr. 563; see e.g., Mann v. Leasko (1960) 179 Cal.App.2d 692, 697-98; 4 Cal.Rptr. 124.] A holder in due course of a promissory note likewise takes the deed of trust securing the note free of personal defenses. [See e.g., Gribble v. Mauerhan (1961) 188 Cal.App.2d 221, 225; 10 Cal.Rptr. 296; Mann v. Leasko,, 179 Cal.App.2d 692, 696-97.]

Moreover, recorded documents may not impart notice of any defense or claim to a person who otherwise meets the holder in due course criteria. [Comm. Code § 3304(5); see Ross v. Title Guarantee & Trust Co. (1934) 136 Cal.App. 393; 29 P.2d 236; cf. Haulman v. Crumal (1936) 13 Cal.App.2d 612, 621; 57 P.2d 179.] In Ross, the plaintiff sued to cancel a note and deed of trust on the grounds of no consideration and fraud and filed a lis pendens naming the payee. Subsequently, a person who met the standards of a holder in due course acquired the note and deed of trust from someone who had previously acquired them from the defendant named in the lis pendens. The court concluded that the lis pendens imparted no notice to negate the person’s status as holder in due course of the note and as bona fide purchaser of the trust deed since his immediate transferor was not named in the lis pendens.

The strict reading of the holder in due course rule has been substantially abrogated in several areas affecting consumers. The Unruh Act specifically declares that assignees of the seller under a retail installment sale are subject to all of the equities and defenses which the buyer could assert against the seller, but the assignee’s liability may not exceed the amount owing at the time of the assignment [Civ. Code § 1804.2(a)]. A seller of goods or services to be used for personal, family, or household purposes may not enter a credit sale contract or accept the proceeds of a purchase money loan unless the consumer’s obligation contains a prescribed clause subjecting the holder of the obligation to the claims and defenses which the consumer could assert against the seller, but the consumer’s recovery is limited to the amount which the consumer already paid. (16 C.F.R. Part 433.) In addition, if the seller and financer of the transaction are too closely connected or if the financer takes too active a part in the seller’s business or the particular sale at issue, the financer will not be able to take the sanctuary of the holder in due course doctrine. see Vasouez v. Superior Court (1971) 4 Cal.3d 800, 822-25; 94 Cal.Rptr. 796; Morgan v. Reasor Corp. (1968) 69 Cal.2d 881, 893-896; 73 Cal.Rptr. 398; Commercial Credit Corp. v. Orange County Machine Works (1950) 34 Cal.2d 766; 214 P.2d 819; see also Unico v. Owen (1967) 50 N.J. 101; 232 A.2d 405.]

5.  Servicing Agent

Frequently, the beneficiary may designate another to act as the beneficiary’s agent to collect payments due on the secured obligation.  A loan servicing agent must be licensed as a real estate broker unless exempt from disclosure. [See Bus. & Prof. Code §§ 10130/ 10131(d).] Most financial institutions are exempt from the licensing requirements. (See Bus. & Prof. Code § 10133.1.)

The beneficiary transferring the servicing of a loan secured by a single family residence to a different servicing agent and the new servicing agent must give the trustor written notice before the borrower becomes obligated to pay the new servicing agent. [Civ. Code § 2937(e).]

The servicing agent is also required to give the beneficiary a copy of a notice of default recorded in connection with the serviced obligation, notice of a notice of default recorded by a senior lien holder/ and notice of the time and place of a scheduled sale of the property unless the beneficiary has requested notice under Civil Code § 2924b.  (Civ. Code § 2924.3.)

6.  Beneficiary’s Obligation To Provide Beneficiary or Payoff Demand Statement

The trustor and junior lienholders, among others, may require the beneficiary to deliver a beneficiary statement or a payoff demand statement. [Civ. Code § 2943(b), (c).] A “beneficiary statement” contains a statement of the amount of the unpaid obligation,  the interest rate,  the total amount of overdue

installments of principal and interest, the amount of the periodic payments, the maturity date, the date on which taxes and assessments were paid, the amount of hazard insurance in effect and the term and premium of that insurance, the amount in any impound account for taxes and insurance, the nature and amounts of charges, costs or expenses which have become a lien on the property, and whether the obligation may be transferred. [Civ. Code § 2943(a)(1).] A “payoff demand statement’⁷ sets forth the amount required as of the date of its preparation to satisfy fully the entire indebtedness and information reasonably necessary to calculate the payoff amount on a per diem basis for the period of time, not exceeding 30 days, during which the per diem amount is not changed by the terms of the note.  [Civ. Code § 2943(a)(5).]

The beneficiary statement may be made before or within two months after the recordation of a notice of default, and the beneficiary must deliver the statement within 21 days of the receipt of a written demand for it. [Civ. Code § 2943(b).] The beneficiary must deliver a payoff demand statement if the beneficiary receives a written demand for it before the first publication of a notice of sale and must deliver the statement within 21 days of the receipt of the written demand. [Civ. Code § 2943(c).]

The trustor and junior lienholders may rely on the beneficiary and payoff demand statements, and any amendments made to them, to determine the amount necessary to satisfy fully the obligation until the foreclosure sale auction is concluded. [Civ. Code § 2943(d)(1), (d)(3)(B).] Any amount not included in the statements remains owing as an unsecured obligation. [Civ. Code § 2943(d)(3).]

If the beneficiary willfully fails to deliver a beneficiary or payoff demand statement within 21 days after receipt of a written demand, the beneficiary is liable for damages and a $300 statutory penalty.  [Civ. Code § 2943(e)(4).]

The beneficiary may charge $60 for each statement. [Civ. Code § 2943(e)(6).]

› TITLE 11 – US CODE – BANKRUPTCY › TITLE 11 – US CODE – CHAPTER 3 – CASE ADMINISTRATION › TITLE 11 – US CODE – SUBCHAPTER IV – ADMINISTRATIVE POWERS
11 USC 362 – Automatic stay
Mon, 12/21/2009 – 10:25 — caselaw
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a corporate debtors tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.
(b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay
(1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor;
(2) under subsection (a)
(A) of the commencement or continuation of a civil action or proceeding
(i) for the establishment of paternity;
(ii) for the establishment or modification of an order for domestic support obligations;
(iii) concerning child custody or visitation;
(iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or
(v) regarding domestic violence;
(B) of the collection of a domestic support obligation from property that is not property of the estate;
(C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute;
(D) of the withholding, suspension, or restriction of a drivers license, a professional or occupational license, or a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act;
(E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act;
(F) of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or under an analogous State law; or
(G) of the enforcement of a medical obligation, as specified under title IV of the Social Security Act;
(3) under subsection (a) of this section, of any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustees rights and powers are subject to such perfection under section 546 (b) of this title or to the extent that such act is accomplished within the period provided under section 547 (e)(2)(A) of this title;
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental units or organizations police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental units or organizations police or regulatory power;
[(5) Repealed. Pub. L. 105–277, div. I, title VI, 603(1), Oct. 21, 1998, 112 Stat. 2681–866;]
(6) under subsection (a) of this section, of the exercise by a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency of any contractual right (as defined in section 555 or 556) under any security agreement or arrangement or other credit enhancement forming a part of or related to any commodity contract, forward contract or securities contract, or of any contractual right (as defined in section 555 or 556) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such contracts, including any master agreement for such contracts;
(7) under subsection (a) of this section, of the exercise by a repo participant or financial participant of any contractual right (as defined in section 559) under any security agreement or arrangement or other credit enhancement forming a part of or related to any repurchase agreement, or of any contractual right (as defined in section 559) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such agreements, including any master agreement for such agreements;
(8) under subsection (a) of this section, of the commencement of any action by the Secretary of Housing and Urban Development to foreclose a mortgage or deed of trust in any case in which the mortgage or deed of trust held by the Secretary is insured or was formerly insured under the National Housing Act and covers property, or combinations of property, consisting of five or more living units;
(9) under subsection (a), of
(A) an audit by a governmental unit to determine tax liability;
(B) the issuance to the debtor by a governmental unit of a notice of tax deficiency;
(C) a demand for tax returns; or
(D) the making of an assessment for any tax and issuance of a notice and demand for payment of such an assessment (but any tax lien that would otherwise attach to property of the estate by reason of such an assessment shall not take effect unless such tax is a debt of the debtor that will not be discharged in the case and such property or its proceeds are transferred out of the estate to, or otherwise revested in, the debtor).
(10) under subsection (a) of this section, of any act by a lessor to the debtor under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease before the commencement of or during a case under this title to obtain possession of such property;
(11) under subsection (a) of this section, of the presentment of a negotiable instrument and the giving of notice of and protesting dishonor of such an instrument;
(12) under subsection (a) of this section, after the date which is 90 days after the filing of such petition, of the commencement or continuation, and conclusion to the entry of final judgment, of an action which involves a debtor subject to reorganization pursuant to chapter 11 of this title and which was brought by the Secretary of Transportation under section 31325 of title 46 (including distribution of any proceeds of sale) to foreclose a preferred ship or fleet mortgage, or a security interest in or relating to a vessel or vessel under construction, held by the Secretary of Transportation under chapter 537 of title 46 or section 109 (h) of title 49, or under applicable State law;
(13) under subsection (a) of this section, after the date which is 90 days after the filing of such petition, of the commencement or continuation, and conclusion to the entry of final judgment, of an action which involves a debtor subject to reorganization pursuant to chapter 11 of this title and which was brought by the Secretary of Commerce under section 31325 of title 46 (including distribution of any proceeds of sale) to foreclose a preferred ship or fleet mortgage in a vessel or a mortgage, deed of trust, or other security interest in a fishing facility held by the Secretary of Commerce under chapter 537 of title 46;
(14) under subsection (a) of this section, of any action by an accrediting agency regarding the accreditation status of the debtor as an educational institution;
(15) under subsection (a) of this section, of any action by a State licensing body regarding the licensure of the debtor as an educational institution;
(16) under subsection (a) of this section, of any action by a guaranty agency, as defined in section 435(j) of the Higher Education Act of 1965 or the Secretary of Education regarding the eligibility of the debtor to participate in programs authorized under such Act;
(17) under subsection (a) of this section, of the exercise by a swap participant or financial participant of any contractual right (as defined in section 560) under any security agreement or arrangement or other credit enhancement forming a part of or related to any swap agreement, or of any contractual right (as defined in section 560) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such agreements, including any master agreement for such agreements;
(18) under subsection (a) of the creation or perfection of a statutory lien for an ad valorem property tax, or a special tax or special assessment on real property whether or not ad valorem, imposed by a governmental unit, if such tax or assessment comes due after the date of the filing of the petition;
(19) under subsection (a), of withholding of income from a debtors wages and collection of amounts withheld, under the debtors agreement authorizing that withholding and collection for the benefit of a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code of 1986, that is sponsored by the employer of the debtor, or an affiliate, successor, or predecessor of such employer
(A) to the extent that the amounts withheld and collected are used solely for payments relating to a loan from a plan under section 408(b)(1) of the Employee Retirement Income Security Act of 1974 or is subject to section 72(p) of the Internal Revenue Code of 1986; or
(B) a loan from a thrift savings plan permitted under subchapter III of chapter 84 of title 5, that satisfies the requirements of section 8433(g) of such title;

but nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section 414 (d), or a contract or account under section 403(b), of the Internal Revenue Code of 1986 constitutes a claim or a debt under this title;
(20) under subsection (a), of any act to enforce any lien against or security interest in real property following entry of the order under subsection (d)(4) as to such real property in any prior case under this title, for a period of 2 years after the date of the entry of such an order, except that the debtor, in a subsequent case under this title, may move for relief from such order based upon changed circumstances or for other good cause shown, after notice and a hearing;
(21) under subsection (a), of any act to enforce any lien against or security interest in real property
(A) if the debtor is ineligible under section 109 (g) to be a debtor in a case under this title; or
(B) if the case under this title was filed in violation of a bankruptcy court order in a prior case under this title prohibiting the debtor from being a debtor in another case under this title;
(22) subject to subsection (l), under subsection (a)(3), of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor;
(23) subject to subsection (m), under subsection (a)(3), of an eviction action that seeks possession of the residential property in which the debtor resides as a tenant under a lease or rental agreement based on endangerment of such property or the illegal use of controlled substances on such property, but only if the lessor files with the court, and serves upon the debtor, a certification under penalty of perjury that such an eviction action has been filed, or that the debtor, during the 30-day period preceding the date of the filing of the certification, has endangered property or illegally used or allowed to be used a controlled substance on the property;
(24) under subsection (a), of any transfer that is not avoidable under section 544 and that is not avoidable under section 549;
(25) under subsection (a), of
(A) the commencement or continuation of an investigation or action by a securities self regulatory organization to enforce such organizations regulatory power;
(B) the enforcement of an order or decision, other than for monetary sanctions, obtained in an action by such securities self regulatory organization to enforce such organizations regulatory power; or
(C) any act taken by such securities self regulatory organization to delist, delete, or refuse to permit quotation of any stock that does not meet applicable regulatory requirements;
(26) under subsection (a), of the setoff under applicable nonbankruptcy law of an income tax refund, by a governmental unit, with respect to a taxable period that ended before the date of the order for relief against an income tax liability for a taxable period that also ended before the date of the order for relief, except that in any case in which the setoff of an income tax refund is not permitted under applicable nonbankruptcy law because of a pending action to determine the amount or legality of a tax liability, the governmental unit may hold the refund pending the resolution of the action, unless the court, on the motion of the trustee and after notice and a hearing, grants the taxing authority adequate protection (within the meaning of section 361) for the secured claim of such authority in the setoff under section 506 (a);
(27) under subsection (a) of this section, of the exercise by a master netting agreement participant of any contractual right (as defined in section 555, 556, 559, or 560) under any security agreement or arrangement or other credit enhancement forming a part of or related to any master netting agreement, or of any contractual right (as defined in section 555, 556, 559, or 560) to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with 1 or more such master netting agreements to the extent that such participant is eligible to exercise such rights under paragraph (6), (7), or (17) for each individual contract covered by the master netting agreement in issue; and
(28) under subsection (a), of the exclusion by the Secretary of Health and Human Services of the debtor from participation in the medicare program or any other Federal health care program (as defined in section 1128B(f) of the Social Security Act pursuant to title XI or XVIII of such Act).

The provisions of paragraphs (12) and (13) of this subsection shall apply with respect to any such petition filed on or before December 31, 1989.
(c) Except as provided in subsections (d), (e), (f), and (h) of this section
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(2) the stay of any other act under subsection (a) of this section continues until the earliest of
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied;
(3) if a single or joint case is filed by or against debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707 (b)
(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case;
(B) on the motion of a party in interest for continuation of the automatic stay and upon notice and a hearing, the court may extend the stay in particular cases as to any or all creditors (subject to such conditions or limitations as the court may then impose) after notice and a hearing completed before the expiration of the 30-day period only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed; and
(C) for purposes of subparagraph (B), a case is presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing evidence to the contrary)
(i) as to all creditors, if
(I) more than 1 previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was pending within the preceding 1-year period;
(II) a previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was dismissed within such 1-year period, after the debtor failed to
(aa) file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be a substantial excuse unless the dismissal was caused by the negligence of the debtors attorney);
(bb) provide adequate protection as ordered by the court; or
(cc) perform the terms of a plan confirmed by the court; or
(III) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under chapter 7, 11, or 13 or any other reason to conclude that the later case will be concluded
(aa) if a case under chapter 7, with a discharge; or
(bb) if a case under chapter 11 or 13, with a confirmed plan that will be fully performed; and
(ii) as to any creditor that commenced an action under subsection (d) in a previous case in which the individual was a debtor if, as of the date of dismissal of such case, that action was still pending or had been resolved by terminating, conditioning, or limiting the stay as to actions of such creditor; and
(4)
(A)
(i) if a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under section 707 (b), the stay under subsection (a) shall not go into effect upon the filing of the later case; and
(ii) on request of a party in interest, the court shall promptly enter an order confirming that no stay is in effect;
(B) if, within 30 days after the filing of the later case, a party in interest requests the court may order the stay to take effect in the case as to any or all creditors (subject to such conditions or limitations as the court may impose), after notice and a hearing, only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed;
(C) a stay imposed under subparagraph (B) shall be effective on the date of the entry of the order allowing the stay to go into effect; and
(D) for purposes of subparagraph (B), a case is presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing evidence to the contrary)
(i) as to all creditors if
(I) 2 or more previous cases under this title in which the individual was a debtor were pending within the 1-year period;
(II) a previous case under this title in which the individual was a debtor was dismissed within the time period stated in this paragraph after the debtor failed to file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be substantial excuse unless the dismissal was caused by the negligence of the debtors attorney), failed to provide adequate protection as ordered by the court, or failed to perform the terms of a plan confirmed by the court; or
(III) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under this title, or any other reason to conclude that the later case will not be concluded, if a case under chapter 7, with a discharge, and if a case under chapter 11 or 13, with a confirmed plan that will be fully performed; or
(ii) as to any creditor that commenced an action under subsection (d) in a previous case in which the individual was a debtor if, as of the date of dismissal of such case, such action was still pending or had been resolved by terminating, conditioning, or limiting the stay as to such action of such creditor.
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that
(i) may, in the debtors sole discretion, notwithstanding section 363 (c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditors interest in the real estate; or
(4) with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved either
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property. If recorded in compliance with applicable State laws governing notices of interests or liens in real property, an order entered under paragraph (4) shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order by the court, except that a debtor in a subsequent case under this title may move for relief from such order based upon changed circumstances or for good cause shown, after notice and a hearing. Any Federal, State, or local governmental unit that accepts notices of interests or liens in real property shall accept any certified copy of an order described in this subsection for indexing and recording.
(e)
(1) Thirty days after a request under subsection (d) of this section for relief from the stay of any act against property of the estate under subsection (a) of this section, such stay is terminated with respect to the party in interest making such request, unless the court, after notice and a hearing, orders such stay continued in effect pending the conclusion of, or as a result of, a final hearing and determination under subsection (d) of this section. A hearing under this subsection may be a preliminary hearing, or may be consolidated with the final hearing under subsection (d) of this section. The court shall order such stay continued in effect pending the conclusion of the final hearing under subsection (d) of this section if there is a reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion of such final hearing. If the hearing under this subsection is a preliminary hearing, then such final hearing shall be concluded not later than thirty days after the conclusion of such preliminary hearing, unless the 30-day period is extended with the consent of the parties in interest or for a specific time which the court finds is required by compelling circumstances.
(2) Notwithstanding paragraph (1), in a case under chapter 7, 11, or 13 in which the debtor is an individual, the stay under subsection (a) shall terminate on the date that is 60 days after a request is made by a party in interest under subsection (d), unless
(A) a final decision is rendered by the court during the 60-day period beginning on the date of the request; or
(B) such 60-day period is extended
(i) by agreement of all parties in interest; or
(ii) by the court for such specific period of time as the court finds is required for good cause, as described in findings made by the court.
(f) Upon request of a party in interest, the court, with or without a hearing, shall grant such relief from the stay provided under subsection (a) of this section as is necessary to prevent irreparable damage to the interest of an entity in property, if such interest will suffer such damage before there is an opportunity for notice and a hearing under subsection (d) or (e) of this section.
(g) In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section
(1) the party requesting such relief has the burden of proof on the issue of the debtors equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.
(h)
(1) In a case in which the debtor is an individual, the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, or subject to an unexpired lease, and such personal property shall no longer be property of the estate if the debtor fails within the applicable time set by section 521 (a)(2)
(A) to file timely any statement of intention required under section 521 (a)(2) with respect to such personal property or to indicate in such statement that the debtor will either surrender such personal property or retain it and, if retaining such personal property, either redeem such personal property pursuant to section 722, enter into an agreement of the kind specified in section 524 (c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365 (p) if the trustee does not do so, as applicable; and
(B) to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action, unless such statement specifies the debtors intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.
(2) Paragraph (1) does not apply if the court determines, on the motion of the trustee filed before the expiration of the applicable time set by section 521 (a)(2), after notice and a hearing, that such personal property is of consequential value or benefit to the estate, and orders appropriate adequate protection of the creditors interest, and orders the debtor to deliver any collateral in the debtors possession to the trustee. If the court does not so determine, the stay provided by subsection (a) shall terminate upon the conclusion of the hearing on the motion.
(i) If a case commenced under chapter 7, 11, or 13 is dismissed due to the creation of a debt repayment plan, for purposes of subsection (c)(3), any subsequent case commenced by the debtor under any such chapter shall not be presumed to be filed not in good faith.
(j) On request of a party in interest, the court shall issue an order under subsection (c) confirming that the automatic stay has been terminated.
(k)
(1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys fees, and, in appropriate circumstances, may recover punitive damages.
(2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages.
(l)
(1) Except as otherwise provided in this subsection, subsection (b)(22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that
(A) under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and
(B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition.
(2) If, within the 30-day period after the filing of the bankruptcy petition, the debtor (or an adult dependent of the debtor) complies with paragraph (1) and files with the court and serves upon the lessor a further certification under penalty of perjury that the debtor (or an adult dependent of the debtor) has cured, under nonbankrupcty[1] law applicable in the jurisdiction, the entire monetary default that gave rise to the judgment under which possession is sought by the lessor, subsection (b)(22) shall not apply, unless ordered to apply by the court under paragraph (3).
(3)
(A) If the lessor files an objection to any certification filed by the debtor under paragraph (1) or (2), and serves such objection upon the debtor, the court shall hold a hearing within 10 days after the filing and service of such objection to determine if the certification filed by the debtor under paragraph (1) or (2) is true.
(B) If the court upholds the objection of the lessor filed under subparagraph (A)
(i) subsection (b)(22) shall apply immediately and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(ii) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the courts order upholding the lessors objection.
(4) If a debtor, in accordance with paragraph (5), indicates on the petition that there was a judgment for possession of the residential rental property in which the debtor resides and does not file a certification under paragraph (1) or (2)
(A) subsection (b)(22) shall apply immediately upon failure to file such certification, and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(B) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the docket indicating the absence of a filed certification and the applicability of the exception to the stay under subsection (b)(22).
(5)
(A) Where a judgment for possession of residential property in which the debtor resides as a tenant under a lease or rental agreement has been obtained by the lessor, the debtor shall so indicate on the bankruptcy petition and shall provide the name and address of the lessor that obtained that pre-petition judgment on the petition and on any certification filed under this subsection.
(B) The form of certification filed with the petition, as specified in this subsection, shall provide for the debtor to certify, and the debtor shall certify
(i) whether a judgment for possession of residential rental housing in which the debtor resides has been obtained against the debtor before the date of the filing of the petition; and
(ii) whether the debtor is claiming under paragraph (1) that under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment of possession was entered, and has made the appropriate deposit with the court.
(C) The standard forms (electronic and otherwise) used in a bankruptcy proceeding shall be amended to reflect the requirements of this subsection.
(D) The clerk of the court shall arrange for the prompt transmittal of the rent deposited in accordance with paragraph (1)(B) to the lessor.
(m)
(1) Except as otherwise provided in this subsection, subsection (b)(23) shall apply on the date that is 15 days after the date on which the lessor files and serves a certification described in subsection (b)(23).
(2)
(A) If the debtor files with the court an objection to the truth or legal sufficiency of the certification described in subsection (b)(23) and serves such objection upon the lessor, subsection (b)(23) shall not apply, unless ordered to apply by the court under this subsection.
(B) If the debtor files and serves the objection under subparagraph (A), the court shall hold a hearing within 10 days after the filing and service of such objection to determine if the situation giving rise to the lessors certification under paragraph (1) existed or has been remedied.
(C) If the debtor can demonstrate to the satisfaction of the court that the situation giving rise to the lessors certification under paragraph (1) did not exist or has been remedied, the stay provided under subsection (a)(3) shall remain in effect until the termination of the stay under this section.
(D) If the debtor cannot demonstrate to the satisfaction of the court that the situation giving rise to the lessors certification under paragraph (1) did not exist or has been remedied
(i) relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to proceed with the eviction; and
(ii) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the courts order upholding the lessors certification.
(3) If the debtor fails to file, within 15 days, an objection under paragraph (2)(A)
(A) subsection (b)(23) shall apply immediately upon such failure and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and
(B) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the docket indicating such failure.
(n)
(1) Except as provided in paragraph (2), subsection (a) does not apply in a case in which the debtor
(A) is a debtor in a small business case pending at the time the petition is filed;
(B) was a debtor in a small business case that was dismissed for any reason by an order that became final in the 2-year period ending on the date of the order for relief entered with respect to the petition;
(C) was a debtor in a small business case in which a plan was confirmed in the 2-year period ending on the date of the order for relief entered with respect to the petition; or
(D) is an entity that has acquired substantially all of the assets or business of a small business debtor described in subparagraph (A), (B), or (C), unless such entity establishes by a preponderance of the evidence that such entity acquired substantially all of the assets or business of such small business debtor in good faith and not for the purpose of evading this paragraph.
(2) Paragraph (1) does not apply
(A) to an involuntary case involving no collusion by the debtor with creditors; or
(B) to the filing of a petition if
(i) the debtor proves by a preponderance of the evidence that the filing of the petition resulted from circumstances beyond the control of the debtor not foreseeable at the time the case then pending was filed; and
(ii) it is more likely than not that the court will confirm a feasible plan, but not a liquidating plan, within a reasonable period of time.
(o) The exercise of rights not subject to the stay arising under subsection (a) pursuant to paragraph (6), (7), (17), or (27) of subsection (b) shall not be stayed by any order of a court or administrative agency in any proceeding under this title.
[1] So in original. Probably should be “nonbankruptcy”.

11 U.S.C. Section 362 of the Bankruptcy Code, otherwise known as the “Automatic Stay” is perhaps the most well known section in the Code. The Stay comes into play in every bankruptcy case at the moment the bankruptcy petition is filed with the Court Clerk’s office. Section 362(a) delineates the types of matters which are “stayed”, and subsection 362(b) describes the matters which are not bound by the Stay. Subsection 362(c) explains the time period during which the stay operates in cases under various chapters in the Code, and subsections 362(d) – (g) provides the framework for motions filed with the Bankruptcy Court for “Relief from the Stay” to enable a creditor to take action which is otherwise prohibited under subsection 362(a).

Subsection 362(h) describes the penalties that can be assessed for violations of the Automatic Stay. It reads as follows:

(h) An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Note that subsection (h) only refers to individuals, Moratzka v. Visa U.S.A., 159 B.R. 247 (Bankr. D. Minn. 1993); corporations which find that they are victims of stay violations must resort to the general contempt powers of the Bankruptcy Court under 11 U.S.C. Section 105 to obtain relief. See In re Chateaugay Corp., 920 F. 2d 183 (2nd Cir. N.Y. 1990); Jove Eng’g v. I.R.S., 92 F. 3d 1539 (11th Cir. Ala. 1996). It is also important to recognize that subsection 362(h) is considered as an additional right for debtors and not foreclosing other remedies that might be available to debtors. 130 Cong. Record 6504 (House March 26, 1984).

This subsection has been interpreted to have a restriction built into the remedies available: the violation must be “willful” in order for damages and attorneys’ fees to be awarded. An example of how “willful” has been defined some courts is contained in Atkins v. Martinez, 176 B.R. 1008 (Bankr. D. Minn. 1994): “The element of deliberation that is contemplated here, of course, is the specific intent to proceed with an act, knowing that it is proscribed by a court order”. Recently, the First Circuit decided Fleet Mortgage Group, Inc. v. Kaneb, 1999 WL 1006329 (1st. Cir.) and described how “willful” will be defined in this circuit.

The Court concluded that a willful violation does not require a specific intent to violate the stay. The standard under Subsection 362(h) is met if there is knowledge of the stay and the defendant intended the actions which constituted the violation. Kaneb, supra. at 2. Further, where the creditor received actual notice of the automatic stay, courts must presume that the violation was deliberate. Kaneb, at 2. Finally, the First Circuit gave guidance as to the burden of proof in stay violation actions. “The debtor has the burden of providing the creditor with actual notice. Once the creditor receives actual notice, the burden shifts to the creditor to present violations of the automatic stay.” Kaneb, at 2.

Also of interest in the Kaneb case is that the debtor was awarded damages in the sum of $25,000 for emotional distress and $18,200.68 in attorneys’ fees and costs of appeal. The emotional distress damages were deemed appropriate, in part, due to the specificity with which the debtor was able to describe the harm he suffered as a result of the bank’s stay violations. Counsel should carefully read this decision to learn what to do (and not to do) in prosecuting and defending stay violation actions under subsection 362(h).

There are two types of proceedings that can be brought: a “motion for order to show cause” which requests the Court to issue an order requiring the offending creditor to appear before the Court and explain its conduct (reminiscent of Ricky Ricardo telling Lucy that she “has some esplainin’ to do”); or a formal adversary proceeding (summons and complaint). Either mechanism for bringing the mater to the Court’s attention appears to be equally effective, unless the creditor is an individual or business with few contacts with Maine – in that scenario, the summons and complaint process is best to catch the attention of the offending creditor.

The Kaneb decision should be well cited for years since it may spawn a new pursuit of stay violators. While debtors may have been willing to let creditors off the hook with minor sanctions for a stay violation in the past, more significant sanctions could be sought in these matters in the future. The prospect of stay violations by credit card companies can only increase as the card companies and/or their accounts are bought and sold. Currently, credit card accounts in bankruptcy are considered commodities to be exchanged. It is expected that the selling companies will not always adequately label the accounts they package for sale, or that the buying companies have procedures in place to address bankruptcy concerns. Automatic Stay violators beware!

12. Damages for Improper Sale
The sale process must closely adhere to the procedure set forth in Civil Code §§ 2924 et sea.; “The statutory requirements must be strictly complied with, and a trustee’s sale based on a statutorily deficient notice of default is invalid.” (Miller v. Cote, supra. 127 Cal.App.3d 888, 894.) A trustee is liable to the trustor for damages sustained from an “illegal, fraudulent or willfully oppressive” foreclosure sale.Munaer v. Moore, supra, 11 Cal.App.3d 1, 7.] Normally, the trustor will attempt to stop or vacate a foreclosure sale based on an invalid notice of default. However, an action for damages may be the only avenue of redress if the property has been sold to a bona fide purchaser.
a. Liability for Deficient Notice
Although no case has held a trustee liable for damages for a deficient notice of default, a variety of theories depending on the nature of the trustee’s failings would support causes of action for damages. In any event, the trustor will likely have to show prejudice or an impairment of rights as a result of the deficiency in the notice of default. (See U.S. Hertz. Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 86; 116 Cal.Rptr. 44.) If the appropriate nexus between the notice and the loss is established, the trustor may be able to show that (1) the trustee intentionally failed to perform, or was negligent in performing, its duties under the trust deed and statute; (2) the trustee engaged in negligent or
intentional misrepresentation in setting forth the information contained in the notice of default; (3) the trustee breached the covenant of good faith and fair dealing which is implied in a trust deed (see Schoolcraft v. Ross (1978) 81 Cal.App.3d 75; 1146 Cal.Rptr. 57); and (4) the trustee may have the duty as agent of the trustor to inquire of the beneficiary to verify the accuracy of the information contained in the notice of default and the trustor’s entitlement to a Spanish translation (but see Civ. Code § 2924c(b)(1) providing that the trustee has no liability for failing to give a Spanish language explanation of the right of reinstatement unless Spanish is specified on a lien contract or unless the trustee has actual knowledge that the obligation was negotiated principally in Spanish).
b. Liability for Deficient Sale
If the property is sold without compliance with notice requirements the trustee may be liable for damages. The trustor must first establish that any damages were sustained. Since a sale held without proper notice may be void, the trustor may suffer no damages because no sale was actually effected. (Scott v. Security Title Ins. & Guar. Co.. supra. 9 Cal.2d 606, 613-14, 72 P.2d 143.) However, the trustor may be precluded from attacking the sale and recovering the property from the purchaser if the sale was made to a bona fide purchaser for value and without notice and the trustee’s deed recites that all notice requirements were met. (See Chapter III F, “The Status of Bona Fide Purchaser or Encumbrancer’1, section 4, at p. 111-32; F, at p. 111-40, infra.) As a result, the trustor will have incurred damage.
The trustee will be liable to the trustor for damages resulting from the trustee’s bad faith, fraud or deceit (Scott v. Security Title Ins. & Guar. Co., supra, 9 Cal.2d 606, 611.) In Scott, the trustee failed to post notice of the sale and then sold the property in satisfaction of the debt. The sale was set aside because of the improper notice, and the trustee thereafter properly sold the property but only for a nominal sum insufficient to pay the debt. The beneficiary obtained the deficiency from a former owner who had assumed the debt and who in turn sued the trustee for breach of contract and agency. The Supreme Court held that the only valid sale was regularly conducted, and that the trustee had no liability for breach of contract or agency for mistakenly performing the first sale which was declared a nullity. (9 Cal.2d at 612-14.) The court indicated that the only liability might be for negligence but that the plaintiff could not recover since that theory had not been alleged. (9 Cal.2d at 614.)
Munger indicates that a trustee can be held liable for its negligence in the conduct of an illegal sale. [See supra, 11 Cal.App.3d at 7 citing Civ. Code § 1708; Dillon v. Legg (1968) 68 Cal.2d 728; 69 Cal.Rptr. 72; Davenport v. Vaughn (1927) 137 S.E. 714, 716 (the trustee is “charged with the duty of fidelity, as well as impartiality; of good faith and every requisite degree of diligence; of making due advertisement; and giving due notice . . . . If, through haste, imprudence, or want of diligence, his conduct was such as to advance the interest of one person to the injury of another, he became personally liable to the injured party”).]
c. Beneficiary’s Liability For Trusteefs Misconduct
The trustee is the common agent of the parties, and, as a result, a party to whom the trustee owes a duty to conduct a fair and open sale may impute a breach of that duty to the beneficiary. (Bank of Seoul & Trust Co. v. Marcione, supra, 198 Cal.App.3d 113, 120.)

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Hall, Krysltal.Security Connection.FirstFranklintoBOA

By Robert O. Barton
Edited by Barbara Kate Repa

Real Estate Law
Foreclosures: California’s One Action Rule
With interest rates on adjustable mortgages on the way up, the pundits suggest we are headed for another round of foreclosure activity the likes of which we have not seen since the S&L crisis in the 1980s. That makes now a good time to review the laws relating to foreclosure and deficiency judgments—and recent changes that have occurred in that area.
The Legislature enacted the One Form of Action rule—often simply called the One Action Rule—to eliminate multiple actions when a creditor elects to sue after a debtor’s real property has gone into default. It specifically provides: “There can be but one form of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property.” (Cal. Code of Civ. Proc. § 726(a).)
In jurisdictions without such a rule, property owners can be forced to simultaneously defend against both a personal action on the debt and a foreclosure action on the security, making it difficult, if not impossible, for the debtor to avoid a deficiency judgment. Not only is this unfair to property owners who reasonably relied on the value of the security for protection from personal liability, but it further strains limited judicial resources.
California’s deficiency-judgment statutes were intended to work in tandem with the One Action Rule to avoid such problems. Because the One Action Rule has the effect of inducing most creditors to foreclose on their security interests before seeking a personal judgment, these statutes protect debtors from a deficiency judgment if the property subject to foreclosure is a dwelling intended to be occupied by four or fewer families—one of which includes the purchaser—and if the loan secured by the deed of trust or mortgage was used to pay all or part of the purchase price of the property being foreclosed. (Cal. Code of Civ. Proc. Code § 580b.)
The purposes behind the One Action Rule and the deficiency-judgment statutes are to prevent multiple actions, compel exhaustion of all security before a deficiency judgment is entered, and ensure that debtors are credited with the fair market value of the secured property before they are subjected to personal liability. (See In re: Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, 234 F.3d 1108, 1115 (9th Cir. 2000).)

Deficiency-Judgment Protection
In the years leading up to the S&L crisis, many lenders had substantially relaxed their appraisal standards. Profits were high and the focus was on making loans, not on ensuring that the underlying security was adequate. When properties began to go into default at unprecedented rates, it became obvious that thousands of appraisals were inflated, and countless borrowers were unnecessarily exposed to debt far in excess of the value of their secured real property. In short order, this vicious cycle flooded the pool of Real Estate Owned (REO) properties in lender inventories and ultimately brought down a major industry.
A primary purpose of the antideficiency statutes is to place the risk of such overvaluation and inadequate security on the lenders who stand to profit directly from the loans they make. Taken together, sections 726, 580a, 580b, and 580d of the California Code of Civil Procedure constitute a comprehensive statutory scheme that specifically protects defaulting borrowers from being taken advantage of by overly aggressive lenders who may care more about making loans than protecting borrowers. (See Clayton Dev. Co. v. Falvey, 206 Cal. App. 3d 438, 445 (1988).)
Under this scheme, if the proceeds from the sale of the real property are insufficient to cover the debt, the lender’s right to a deficiency judgment may be limited or barred under one or more of these statutes. (See Prestige, 234 F.3d at 1115.) Thus, the One Action Rule works in concert with California’s deficiency-judgment statutes to give a borrower leverage against a creditor who wants the freedom to choose between either enforcing a security interest via a foreclosure proceeding, or circumventing the antideficiency statutes and suing on the underlying note-whichever better suits its needs. (See Clayton Dev. Co., 206 Cal. App. 3d at 445.)

Exceptions to the Rules
The antideficiency provisions, which primarily aim to protect against overvaluation by lenders, apply automatically only to standard purchase-money transactions. (See Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 41 (1963) and Sprangler v. Memel, 7 Cal. 3d 603, 610, and 612 (1972).) Thus, for example, section 580b does not apply when the purchaser intends to proceed with a different use of the property, such as commercial development, because the purchaser controls the success of the venture and should bear the risk of failure.
Section 580b also does not apply when the borrower has refinanced the real property, often to take out additional equity or obtain financing at better terms. (See Union Bank v. Wendland, 54 Cal. App. 3d 393, 400 (1976).) Conversely, when the borrower has never refinanced and the real property is still encumbered by the original purchase-money trust deed, the borrower retains the protection of the antideficiency-judgment statutes. (See Foothill Village Homeowners Ass’n v. Bishop, 68 Cal. App. 4th 1364, 1367 n.1 (1999).)

The Dual Role
For a borrower in default, the One Action Rule offers two important benefits. It may be used upfront as an affirmative defense, or it may be invoked later as a sanction.
If the borrower successfully asserts the One Action Rule as an affirmative defense, the lender will be forced to foreclose its security interest before pursuing a money judgment against the debtor for any deficiency—if that is even possible given the protections available to the borrower under the antideficiency statutes. (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991, 997 (1990).)
A borrower who wishes to rely on the antideficiency-judgment statutes to avoid personal liability must raise the One Action Rule as an affirmative defense in the answer or, at the latest, by the start of trial—that is, when the lender would still have a chance to comply with the rule-or he or she is “simply too late.” (See Scalese v. Wong, 84 Cal. App. 4th 863, 868 (2000) and Spector v. National Pictures Corp., 201 Cal. App. 2d 217, 225—26 (1962).)
However, a borrower who fails to assert the One Action Rule as an affirmative defense may still invoke it as a sanction against the lender, because by not foreclosing on its security interest in the action brought to enforce the debt, the lender has made an election of remedies and waived any right to subsequently foreclose on the security or sell the security under a power of sale. (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991 at 997 (1990) and Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, 234 F.3d 1108 at 1114 (2000).)
Beginning in 1990, the law changed in two important ways. First, the California Supreme Court held that a creditor cannot be subject to the double sanction of losing both the security interest and the underlying debt. Second, a court of appeal held that a creditor could not enforce an agreement with the debtor to waive application of the One Action Rule as a sanction. These decisions have significant ramifications for borrowers and lenders alike.

No Double Sanctions
The landmark case of Security Pacific Nat’l Bank v. Wozab places limits on using the One Action Rule as a sanction. In Wozab the California Supreme Court held that it would be inequitable to subject a lender to the double sanction of losing both the security and the underlying debt. Indeed, the court held that allowing the Wozabs to evade their debt almost in its entirety would be both a gross injustice to the bank and a corresponding windfall to the Wozabs, allowing them the benefit of their bargain without incurring the burden. (51 Cal. 3d at 1005—06.)
Later decisions by the Ninth Circuit Court of Appeals continue to apply the precedent set in Wozab.
In DiSalvo v. DiSalvo, the Bankruptcy Appellate Panel of the Ninth Circuit reversed, in part, a decision that double-sanctioned a creditor’s efforts to collect first on the debt, in violation of section 726, by extinguishing both the security interest in the real property and, indeed, the $100,000 debt itself. (221 B.R. 769, 775 (9th Cir. 1998), overruled in part as to other issues by In re DiSalvo v. DiSalvo, 219 F.3d 1035 (9th Cir. 2000).) Although, as the bankruptcy court observed, the creditor’s actions in attempting to collect the $100,000 debt netted only $83, the creditor controlled the security-first aspect of the One Action Rule and could have invoked it at any time to bar the collection efforts.
Because a bankruptcy court can provide sufficient protection for a debtor whose business is threatened by the actions of a creditor without requiring that the creditor forfeit both the security and the debt, the appellate court held that the bankruptcy court’s sanction of extinguishing the debt was an abuse of discretion “so severe as to be punitive and would result in a windfall to debtor.” (219 F.3d at 1037.)
In Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, decided later the same year, the Ninth Circuit was asked to address the issue again in a case in which the debtor sought to bar a creditor’s unsecured claim against his bankruptcy estate. (234 F.3d at 1111 (2000).)
Prestige, the debtor, purchased a car wash business from East Bay, the creditor, giving East Bay a promissory note secured by a deed of trust that included the personal guarantee of one of Prestige’s partners, Jerry Brassfield. After Prestige defaulted on the note, East Bay filed an action on the guaranty rather than foreclosing on its security interest in the car wash. Although Brassfield asserted the One Action Rule as an affirmative defense, East Bay obtained a writ of attachment against $75,000 in Brassfield’s personal bank accounts.
Shortly thereafter, Prestige filed a petition for bankruptcy. The bankruptcy court held that Brassfield was a primary obligor on the note, ” ‘such that the purported guaranty added no additional liability,’ and that East Bay had taken its action under § 726(a), resulting in waiver of its security interest in the real property.” (234 F.3d at 1112.) As a result, the superior court dissolved the writs, and East Bay released its attachment.
Unable to collect against the guaranty and having lost its security interest in the car wash, East Bay filed proof of its now unsecured claim in the bankruptcy action. The bankruptcy court decided in the creditor’s favor, holding that East Bay “lost its security only, not its debt, and was not subject to the provisions of § 580b.” The Ninth Circuit affirmed, citing Wozab and DiSalvo. In reaching its decision, the appellate court noted that Prestige had taken advantage of its right to invoke the sanction aspect of section 726 in the bankruptcy court, resulting in East Bay’s loss of its security interest.
Moreover, just as in Wozab—where the court observed that the debtors had accepted the bank’s reconveyance of the deed and thus acquiesced in, indeed demanded, the bank’s decision not to foreclose—Prestige was the one who sought to have East Bay’s security interest waived. Thus, under the holdings of both Wozab and DiSalvo, it would be inequitable to impose a double sanction that would deny East Bay both its security interest in the car wash and the underlying debt. (234 F.3d at 1115.)
The law is clear: Violating the One Action Rule extinguishes the creditor’s security interest, but not the debtor’s underlying obligations. Thus, after Wozab and its progeny, debtors who are protected by the deficiency-judgment statutes should take care not to waive the One Action Rule lest they lose its protection, yet remain liable “in total” for their debts.

No Waiver of Sanction
In O’Neil v. General Security Corp., the court held that a borrower’s agreement with his lender to waive application of the One Action Rule as a sanction and allow the lender, who had already brought a personal action against the borrower, to proceed with a foreclosure action against the secured property is not enforceable. (4 Cal. App. 4th 587, 598 (1992).)
First, the court held that the sanction aspect of the One Action Rule operates for the benefit of both the primary borrower and third parties claiming an interest in the property, whether as successors-in-interest or as third-party lienholders. As such, the court concluded that the security and priority rights in the secured property held by a third party have independent status, are entitled to independent protections, and cannot be defeated by unilateral waivers by the borrower in favor of the lender. Indeed, the court questioned whether such a waiver agreement would even be enforceable against the borrower who made it.
Second, the court held that all of the lender’s remedies, including foreclosure of the security, merge into and are extinguished by the judgment, limiting the lender’s subsequent remedies to those remedies available to it as a judgment creditor.
Third, the court held that if a borrower’s waiver agreement were enforceable, many of the policies and protections of the statutory scheme would be undermined.
Although the O’Neil decision might trap an unwary lender who pursues a personal judgment first in reliance on the borrower’s agreement to waive the sanction aspect of the One Action Rule, this is not its greatest danger. A bigger problem could arise if a lender secures a single promissory note with deeds of trust on properties located in multiple jurisdictions, one of which is California. If the note goes into default, the lender might want to commence foreclosure actions against its security interests in all jurisdictions simultaneously. However, under California’s One Action Rule, filing a foreclosure action in another jurisdiction before foreclosing the lender’s security in this state could result in the lender losing its security interest in the California property.
In addition, under the holding in O’Neil, an agreement with the borrower to waive the sanction aspect of the One Action Rule following a default would be of no help. Thus, before proceeding with such an arrangement, a prudent lender should carefully consider its exit strategy in the event that the loan goes into default.

Certification
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