ASSAILING THE FORECLOSURE

Introduction

Neither the beneficiary nor the trustee needs to invoke any judicial procedure or obtain any judicial process to cause the sale of property pursuant to a power of sale. The only court procedure needed to complete the full foreclosure process is an action for unlawful detainer, after the consummation of the sale, to oust the former owner from possession.

The onus of challenging the merit of the foreclosure and the fairness and regularity of the process is placed on the trustor or junior lienholder. Thus, judicial supervision, examination, and intervention would come almost exclusively through an action instituted by the trustor or, to a lesser extent, a junior encumbrancer. The notion is that the minimum period of three months coupled with the succeeding 20-day period is sufficient time for the trustor to take appropriate action to stop the foreclosure sale. [See generally Smith v. Allen (1968) 68 Cal.2d 93, 96; 65 Cal.Rptr. 153.] In Py v. Pleitner (1945) 70 Cal.App.2d 576, 582; 161 P.2d 393, for example, the court denied the trustor any relief but commented that “[w]e appreciate the unfortunate position in which appellant finds herself because she did not seek legal advice to protect her legal rights.”

The foreclosure proceeding can be attacked before and after the sale; however, as discussed below, the trustor may be unable to successfully assert claims, regarding the invalidity of the proceeding, against a bona fide purchaser for value and without notice. If an action is initiated prior to the sale, the basic remedy sought is an injunction to restrain the foreclosure sale in addition to other remedies such as quiet title or cancellation of the trust deed. If an action is initiated after the foreclosure sale, the trustor will seek various remedies and will attempt to vacate the sale and to enjoin the purchaser from attempting to oust the trustor from possession. After the sale, the battleground may be in unlawful detainer proceedings where raising defenses based on the obligation or the trust deed may not be allowed or, if allowed, would be perilous.

Grounds for Attacking the Foreclosure

One of the fundamental grounds for attacking a foreclosure is that the lien is invalid. The lien may be invalid and unenforceable because of defects related to its negotiation and execution. Moreover, since the lien is a mere incident to the obligation which it secures, the lien cannot be enforced if the obligation is invalid or if the obligation has not been breached. The lien also may not be enforced if the breach is less than the amount stated in the notice of default and the trustor cures the

default by paying the lesser amount.

In addition, the foreclosure can be stopped if the procedural requirements and safeguards established by statute are not followed. Thus, defects in the notice of default, notice of sale, the reinstatement procedure, or the proposed or actual conduct of the sale afford grounds for preventing or voiding the sale.

The Obligation is Unenforceable

Various common law theories (e.g., fraud in factum, fraud in inducement, duress, failure of consideration, unconscionability, forgery, etc.) may be raised to render the obligation unenforceable.

The Lien is Unenforceable

Common Law Theories

Various common law theories (e.g., fraud, mistake, no delivery, forgery, community property but both spouses did not encumber, etc.) may be raised to render the lien unenforceable.  105 Cal.App.3d 65, 75-80; 164 Cal.Rptr. 279; Thomas v. Wright (1971) 21 Cal.App.3d 921; 98 Cal.Rptr. 874; Brewer v. Home Owners Auto Finance Co. (1970) 10 Cal.App.3d 337; 89 Cal.Rptr. 231.]

One form of transaction involving seller participation in the financing is the seller assisted loan. In this type of loan, the seller assists the buyer in obtaining a loan for all or part of the purchase price of the vehicle from a third party lender. If the seller is significantly involved in the procurement of the loan, the Rees-Levering Act applies. [See Hernandez v. Atlantic Finance Co. of Los Angeles, supra, 105 Cal.App.3d 65, 70, 73-80.] Rees-Levering exempts loans made by supervised financial organizations, such as banks and consumer finance lenders, and security interests taken in connection with such loans from the Act’s coverage [Civ. Code § 2982.5(a)]; however, this exemption applies only to loans independently obtained by purchasers without seller assistance. [See Hernandez v. Atlantic Finance Co. of Los Angeles, supra, 105 Cal.App.3d 65, 70.] If Rees-Levering applies to a seller assisted loan, any trust deed or other real property lien securing the loan will be void. [See Civ. Code § 2984.2(c); Brewer v. Home Owners Auto Finance Co.. supra, 10 Cal.App.3d 337.]

After Hernandez was decided, the Legislature amended the Rees-Levering Act to include special provisions for seller assisted loans.  [Civ. Code § 2982.5(d).]  The seller may assist the buyer

in obtaining a loan for all or part of the purchase price; however, any real property lien securing the loan is void and unenforceable unless the loan is for $7,500 or more and is used for certain recreational vehicles. [Civ. Code § 2982.5(d)(1) and (2).] This section does not apply to seller assisted loans made by banks and savings and loan associations which continue to be governed by Hernandez principles.

Neither Hernandez nor Civil Code section 2982.5(d) defines seller assisted loan. In Hernandez, the seller completed the buyer’s credit application, repeatedly called the buyer to inform her that credit had been approved, picked her up and drove her to the seller’s place of business to sign documents, and drove her to the lender’s place of business to sign more documents. (105 Cal.App.3d at 73.) Hernandez, presents an extreme example of seller involvement in obtaining financing. A seller assisted loan may occur without the degree of seller involvement present in Hernandez. For example, a seller assisted loan embraces a loan in which the seller prepares or helps the buyer prepare a loan application and forwards it to the lender. [See Eldorado Bank v. Lytle (1983) 147 Cal.App.3d Supp. 17, 21; 195 Cal.Rptr. 499.] Although a precise definition of seller assisted loan does not appear in the cases or the statute, the term appears to be broad and at least includes loans arranged or facilitated by the direct involvement of the seller in preparing and/or submitting loan information to the creditor.

The Rees-Levering Act does not specifically address the situation of a seller assisted loan which is used partly for a vehicle purchase and partly for some other purpose such as a home improvement or bill consolidation. A creditor could argue that the lien covering the non-vehicle portion of the loan is not in violation of the statute and, therefore, is not void to the extent the lien secures repayment of the nonvehicle loan. However, the lien is taken as part of an entire loan transaction. The purpose of the transaction was to obtain a vehicle loan. Other portions of the loan may have been required by the creditor as a condition to giving the vehicle loan, such as a pay off of other creditors. The creditor may use the setting of the vehicle loan negotiation as a method of persuading buyers to obtain loans which they neither sought nor needed. Since the Legislature apparently did not want a buyer to enter the door of a vehicle dealer and come out with a trust deed on the buyer’s home, the broad language invalidating

real property security interests should extend to the entire vehicle inspired loan. [See Civ. Code §§ 2982.5(d)(1) and 2984.2(c).]

The creditor could argue that it may be entitled to an equitable lien for the non-vehicle portion of the loan. An equitable lien may be created when justice requires if a party intends to give a mortgage as security for a debt. [See generally Estate of Pitts (1933) 218 Cal. 184, 189; 22 P.2d 694; McColaan v. Bank of California Nat. Assn. (1929) 208 Cal. 329, 338; 281 P. 381; Lentz v. Lentz (1968) 267 Cal.App.2d 891, 894; 73 Cal.Rptr. 686; see also Forte v. Nolfi (1972) 25 Cal.App.3d 656, 692; 102 Cal.Rptr. 455 in which the court gave an unwitting assignee of a forged trust deed an equitable lien to the extent of the consideration received by the debtor who had originally intended to execute a trust deed.] However, the buyer cannot waive rights against the seller. [See Civ. Code 2983.7(c) and (e).] Thus, the buyer’s intent is essentially irrelevant since the buyer cannot waive the prohibition against trust deeds in transactions covered under Rees-Levering even if the buyer intends to do so. Moreover, the creditor’s right to an equitable lien, in any case, will depend on the circumstances of the case and whether justice would be served by the imposition of an equitable lien. If, for example, the creditor required an unsophisticated buyer to pay other obligations,  particularly unsecured or low interest rate secured

obligations, as a condition to obtaining an automobile loan unlawfully secured by a trust deed, the creditor may have worsened the buyer’s financial condition. As a result, an equitable lien for the nonvehicle portion of the loan which the buyer did not seek or require would inequitably reward the creditor’s conduct; thus, the creditor should be left unsecured. Even if the creditor could receive an equitable lien for the non-vehicle portion of the loan, the creditor cannot nonjudically foreclose it. Since there is no power of sale, the equitable lien can be enforced only by judicial foreclosure.  [See Code of Civ. Proc. § 726.]

An exception to the general rule that Rees-Levering prohibits real property liens may be found in Civil Code section 2982.5(b). That section permits the seller to assist the buyer in obtaining a loan “upon any security” for all or part of the down payment “or any other payment” on a conditional sale contract or purchase order. Rees-Levering does not prohibit a real property lien for such a loan. [See Civ. Code §§ 2982.5(b), 2984.2(b).]

The validity of a real property lien taken in connection with seller assisted financing may turn on whether the loan falls within Civil Code section 2982.5(b) or section 2982.5(d). These sections do not specify the size of the loans to which they respectively apply; therefore, there may be a dispute over whether a loan is for a downpayment or “any other payment” [Civ. Code § 2982.5(b)] or a

loan for “the full purchase price, or any part thereof.” [Civ. Code § 2982.5(d).] The legislative scheme apparently contemplates that the loans covered under Civil Code section 2982.5(b) are small in amount and are used for modest downpayments or pickup payments (the difference between the downpayment demanded by the seller and the amount given by the buyer toward the downpayment.) [ See Hernandez v. Atlantic Finance Co. of Los Angeles, supra, 105 Cal.App.3d 65, 76-77.] Lenders such as banks normally do not take real property liens for such relatively small amounts, and personal property brokers and consumer finance lenders which regularly make small loans for car purchases are precluded from taking any real property lien for loans under $5,000. [See Fin. Code §§ 22466 and 24466.] Thus, a specific prohibition on real property liens for small loans covered under Civil Code section 2982.5(b) was probably thought unnecessary. Since real property liens cannot be taken to secure loans for all or part of the purchase price or for financing under conditional sales contracts, it would be absurd to sanction a real property lien for a small loan. Given the protective purpose and policy of the Rees-Levering Act and its hostility to real property security, a seller assisted loan involving real property security should be deemed to be covered by Civ. Code §§ 2982.5(d) and 2984.2(a) and (c). Otherwise, Civ. Code § 2982.5(b) would become an exception which would destroy the rule.

Retail Installment Sales

The Unruh Act [Civ. Code § 1801 et seq.] governs the sale of goods and services for a deferred payment price, including finance charges, payable in installments. [See Civ. Code §§ 1802.3 -1802.6.] Any real property lien taken to secure payment on a contract for goods which are not to be attached to real property is void. [Civ. Code §§ 1804.3(b), 1804.4.) Thus, for example, liens securing contracts for carpeting installed by the tackless strip method are void because carpeting so installed is not attached to real property. [See People v. Custom Craft Carpets, Inc. (1984) 159 Cal.App.3d 676, 685; 206 Cal.Rptr. 12.]

In Custom Craft, the Court observed that whether goods are attached to real property is a question of fact. However, neither the Unruh Act nor Custom Craft equate an article’s being “attached to real property” with being a fixture. Therefore, the facts to be analyzed relate to the goods’ method and degree of attachment to the real property and not to the parties’ intent which is a fundamental element in establishing fixture status.

Other provisions of the Unruh Act affect the validity of a security interest in real property. For example, a retail installment contract for goods or services which contains a lien must contain a statutorily designated warning notice printed in a prescribed manner in the same language used in the contract; otherwise the lien is void and unenforceable. [Civ. Code § 1803.2(b)(3).] The Unruh Act also includes the following requirements:

1. A contract providing for a real property security interest must have the phrase “Security Agreement” printed in at least 12-point type at the top of the contract.  [Civ. Code § 1803.2(b)(1)];

2. The entire agreement of the parties regarding cost and terms of payment including any promissory note or any other evidence of indebtedness must be contained in a single document. [Civ. Code § 1803.2(a); see Morgan v. Reasor Corp. (1968) 69 Cal.2d 881; 73 Cal.Rptr. 398];

3. The contract must contain all of the disclosures required by Regulation Z. [Civ. Code § 1803.3(b).] Regulation Z requires, in part, the disclosure of the existence of a security interest in property [12 C.F.R. § 226.18(m)] and the disclosure of the right of rescission. [12 C.F.R. § 226.23(b)];

4. The seller must not obtain the buyer’s signature on a contract containing blank spaces to be filled in

after it has been signed.  [Civ. Code § 1803.4.]

Any prohibited contract provision is void. [Civ. Code § 1804.4.] Thus, for example, if the lien provision were blank when the customer signed the contract and were subsequently completed or if the lien were not part of a single document containing all of the costs or terms of payment, the lien provision should be declared void. Even if the lien were not declared void, the penalty against the seller for the violation of the Unruh Act is the loss of all finance charges, including those already collected [Civ. Code § 1812.7], which might sufficiently offset the amount in default to stop the foreclosure.

The Unruh Act applies to credit sales. The statutory scheme specifically deals with retail installment sales in which the seller extends credit by permitting the buyer to obtain the goods and services on a deferred payment basis. [See, e.g., Civ. Code §§ 1802.5, 1802.6.] The essence of the transaction is the sale, and the credit terms merely facilitate the sale. In practice, the seller frequently assigns the installment contract to a third party creditor such as a bank or finance company in the business of supplying consumer credit. Indeed, a seller under a retail installment contract often has no intention of extending credit to a buyer through the maturity date of the contract but nevertheless

enters into the contract with a view to assigning the contract soon after the sale to a creditor with which the seller had made previous arrangements for financing. See Morgan v. Reasor Corp., supra, 69 Cal.2d 881, 895.] Such prearranged assignment of the credit sale contract does not alter the characterization of the transaction as a credit sale. [See Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 50; 145 Cal.Rptr. 380.]

The Unruh Act also applies to transactions, involving sales financed from the proceeds of seller assisted loans, that are credit sales in substance. [Civ. Code § 1801.6(a).] A seller assisted loan transaction has the same attributes as a credit sale. The buyer is willing to buy only on credit. The seller arranges for credit; however, instead of using a retail installment contract which is assigned to a third party creditor, the seller arranges for the creditor to loan the money directly to the buyer, and the seller receives the proceeds of the loan.

The conventional retail installment sale and the seller assisted loan transaction embody similar relationships and objectives. The buyer obtains goods on a deferred payment basis, but instead of making monthly payments to the creditor as the assignee of the installment contract, the buyer makes monthly payments to the creditor as the lender. The seller has arranged for credit for the buyer either through a direct loan by the

creditor or an “indirect loan” consisting of the creditor’s advancing money for the buyer’s purchase in exchange for receiving an assignment of the buyer’s installment obligation. The seller receives payment either in the form of the proceeds from the loan or the proceeds from the assignment. A transaction in the form of a sale financed by a seller assisted loan is strikingly similar to the transaction held to be a credit sale in Boerner v. Colwell Co., supra, 21 Cal.3d 37, 41-42, 50-51. The Legislature has declared that Boerner should be considered in determining whether a transaction is in substance a credit sale. [Civ. Code §1801.6(a).] Since a seller assisted loan transaction is in substance a credit sale, it should be governed by the Unruh Act restrictions regarding credit sales. [See 64 Ops.Cal.Atty.Gen. 722; see also Hernandez v. Atlantic Finance Co. of Los Angeles, supra, 105 Cal.App.3d 65 holding that seller assisted loans for automobile purchases were governed by the Rees-Levering Act.]

The Unruh Act also provides coverage for transactions which are loans both in substance and in form. This coverage applies when the lender and the seller share in the profits and losses of the sale and/or the loan or when the lender and the seller are related by common ownership and control and that relationship is a material factor in the loan transaction.  [See Civ. Code § 1801.6(b).]

Creditors  may attempt  to  shield  seller assisted  loan

transactions from the requirements of the Unruh Act by claiming that transactions in the form of loans are exempt from the Unruh Act unless the lender and seller share profits and losses or have common ownership and control as described in Civil Code section 1801.6(b). However, Civil Code section 1801.6(a) declares that the substance, not the form, of the transaction is paramount. The legislative intent expressed in Civil Code section 1801.6(a) dictates the construction of section 1801.6(b); thus, section 1801.6(b) cannot be read to exempt all transactions in the form of a loan regardless of the transactions true substance. Accordingly, section 1801.6(b) must be viewed as exempting certain actual loan transactions from the Unruh Act but not exempting credit sales cast in the form of loans.

3.   Dispute as to What, if any. Amount Owed

a.   Disputed Amount Owed

The notice of default should appropriately describe the nature of the breach. As the Court of Appeal observed, “The provisions of section 2924 of the Civil Code with reference to inclusion, in the notice of default, of a statement setting forth the nature of the breach ‘must be strictly followed.'”  System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 152-53; 98 Cal.Rptr. 735.] A foreclosure sale should not be permitted if the amount of the

debt is disputed or uncertain. [See More v. Calkins (1892) 85 Cal. 177, 188; 24 P. 729; cf. Sweatt v. Foreclosure Co, (1985) 166 Cal.App.3d 273, 276; 212 Cal.Rptr. 350; but see Ravano v. Sayre (1933) 135 Cal.App. 60; 26 P.2d 515.] Accordingly, the sale may be enjoined until the court determines the correct amount owed. [See Producers Holding Co. v. Hills (1927) 201 Cal. 204, 209; 256 P. 207; More v. Calkins, supra, 85 Cal. 177, 188, 190; see also Hunt v. Smyth (1972) 25 Cal.App.3d 807, 837; 101 Cal.Rptr. 4; Lockwood v. Sheedy (1958) 157 Cal.App.2d 741, 742; 321 P.2d 862.] If some liability is admitted, then that amount may have to be tendered to do equity [see Meetz v. Mohr (1904) 141 Cal. 667, 673; 75 P. 298]; however, the court could enjoin the entire sale, under a defective notice of default which improperly states the nature of the default, notwithstanding the existence of a clear breach, and could permit the beneficiary to file a proper notice of default upon which the foreclosure may proceed. (See Lockwood v. Sheedy, supra, 157 Cal.App.2d 741, 742.) Of course, if there is no default (e.g. the full amount due has been tendered), a foreclosure is void. [See e.g., Lichty v. Whitney (1947) 80 Cal.App.2d 696, 702; 182 P.2d 582 (tender of amount due); Huene v. Cribb (1908) 9 Cal.App. 141, 144; 98 P. 78; see also Winnett v. Roberts (1979) 179 Cal.App.3d 909, 921-22, 225.]

b. Payment Excused

The trustor may also dispute whether any amount is owed if the beneficiary breaches its obligation to the trustor and the breach excuses the trustor’s performance. [See System Inv. Corp, v. Union Bank, supra, 21 Cal.App.3d 137, 154.]

c. Waiver or Estoppel to Claim Payment or Default

The trustor may deny that any amount is owed at that particular time, or may deny that the prescribed amount demanded is owed, if the beneficiary has waived the time requirements contained in the obligation by accepting late payments or if the beneficiary has accepted payments smaller than that permitted in the contract.

A waiver is unlikely to be construed as permanent in the absence of a writing or new consideration. A permanent waiver is, in effect, a change in the agreement equivalent to a novation requiring new consideration. [E.g., Hunt v. Smyth, supra, 25 Cal.App.3d 807, 819; Bledsoe v. Pacific Ready Cut Homes, Inc. (1928) 92 Cal.App. 641, 644-45; 268 P. 697.] The beneficiary and trustor may modify their payment schedule in writing without new consideration. [See Civ. Code §§1698(a), 2924c (b)(1).] The beneficiary’s conduct, however, may constitute a temporary waiver.

The beneficiary cannot declare the trustor in default of the terms of the obligation where the beneficiary has temporarily waived such terms — until the beneficiary has given definite notice demanding payment in accord with the obligation and has provided the trustor a reasonable length of time to comply. In addition, the beneficiary must give the trustor definite notice that future payments must comply with the terms of the obligation. [E.g., Hunt v. Smyth. supra, 25 Cal.App.3d 807, 822-23; Lopez v. Bell (1962) 207 Cal.App.2d 394, 398-99; 24 Cal.Rptr. 626; Bledsoe v. Pacific Ready Cut Homes, Inc., supra, 92 Cal.App. 641, 645.] Even if the beneficiary’s conduct does not constitute a knowing relinquishment of rights, it may create an equitable estoppel. [See e.g., Altman v. McCollum (1951) 107 Cal.App.2d Supp. 847; 236 P.2d 914.]

d.   Offsetting Obligation

The trustor also may offset against the amount claimed by the beneficiary any amount due the trustor from the beneficiary. [See Hauger v. Gates (1954) 42 Cal.2d 752, 755; 249 P.2d 609; Richmond v. Lattin (1883) 64 Cal. 273; 30 P. 818; Goodwin v. Alston (1955) 130 Cal.App.2d 664, 669; 280 P.2d 34; Cohen v. Bonnell (1936) 14 Cal.App.2d 38; 57 P.2d 1326; Zarillo v. Le Mesnacer (1921) 51 Cal.App. 442; 1196 P.902 (damages for conversion offset against debt secured by chattel mortgage); Williams v. Pratt (1909) 10 Cal.App. 625, 632; 103 P. 151.]  In Goodwin, supra, the mortgagor

established that the mortgagee charged usurious interest, and the penalty of the trebled interest payments along with other amounts were setoff against the mortgage debt. As a result, the debt was effectively satisfied, the mortgage was thereby extinguished and no foreclosure was permitted, and the mortgagee was held liable to the mortgagor for damages.  (See 130 Cal.App.2d at 668-69.)

The Supreme Court made clear in Hauaer, supra, that the trustor, in the context of the nonjudicial foreclosure of a deed of trust, could use the right of setoff. [See 42 Cal.2d at 755.] Normally, setoff is employed defensively through an affirmative defense or cross-complaint (or formerly counterclaim) in response to an action for money. The court in Hauaer, however, saw no distinction between the right of setoff held by a trustor defending a foreclosure action or by a trustor affirmatively attacking a nonjudicial foreclosure proceeding. (Id. at 755-56.) Accordingly, the Supreme Court held that the trustor, as plaintiff, could establish the impropriety of a foreclosure by showing that the trustor was not in default on his obligation since the obligation was offset by an obligation which the beneficiary owed to him. (Id. at 753, 755.) The court further held that the trustor did not have to bring an independent action to establish the setoff. (Id. at 755.) Moreover, the court declared that unliquidated as well as liquidated amounts could be setoff; thus, the court allowed the trustor to setoff an unliquidated claim for damages for breach of

contract.  (Id.)

Hauaer and the other cases cited above are based on former Code of Civ. Proc. § 440 which has been superseded by Code of Civ. Proc. § 431.70. The rule of these cases should not be altered because the new section appears broader than the old. Furthermore, the Legislative Committee Comment to section 431.70 not only states that the new section continues the substantive effect of section 440 but also approvingly cites Hauaer.

The right of setoff has substantial significance in contesting the validity of any foreclosure since the trustor may establish that no default occurred or, indeed, no indebtedness exists because of an offsetting amount owed by the beneficiary to the trustor. As discussed above, this offset may be a liquidated or an unliquidated claim. In addition, the claim which the trustor may wish to offset may be barred by the statute of limitations at the time of the foreclosure, but as long as the trustor’s claim and the beneficiary’s claim coexisted at any time when neither claim was barred, the claims are deemed to have been offset. [See Code of Civ. Proc. § 431.70.] The theory is that the competing claims which coexisted when both were enforceable were offset to the extent they equaled each other without the need to bring an action on the claims. Therefore, since the offsetting claim is deemed satisfied to the extent it equaled the other claim, there was no

existing claim against which the statute of limitation operates. See Jones v. Mortimer (1946) 28 Cal.2d 627, 632-33; 170 P.2d 893; Singer Co. v. County of Kings (1975) 46 Cal.App.3d 852, 869; 121 Cal.Rptr. 398; see also Hauger v. Gates, supra, 42 Cal.2d 752, 755.]

The right of setoff not only gives the trustor the ability to setoff liquidated and unliquidated claims for money paid or for damages, but also permits setoffs for statutory penalties to which the trustor may be entitled because of the beneficiary’s violation of the law. In Goodwin v. Alston, supra, 130 Cal.App.2d 664 the debtor in a foreclosure action offset his obligation against the treble damages awarded to him for the creditor’s usury violations. Similarly, the penalty for violating the federal Truth in Lending Act — twice the amount of the finance charge but not less than $100 or more than $1,000 [15 U.S.C. § 1640(a)(2)(A)(i)] — may be offset against the obligation owed the creditor.-‘ [See 15 U.S.C. § 1640(h); Reliable Credit Service, Inc. v. Bernard (La.App. 1976) 339 So.2d 952, 954, cert, den. 341 So.2d 1129, cert, den. 342 So.2d 215; Martin v. Body (Tex.Civ.App. 1976) 533 S.W.2d 461, 467-68].

Although Truth in Lending penalties may be offset against the creditor’s claim, the debtor may not unilaterally deduct the penalty; rather, the offset must be raised in a judicial proceeding, and the offset’s validity must be adjudicated.  [15 U.S.C. § 1640(h); see e.g., Pacific Concrete Fed. Credit Union v. Kauanoe (Haw. 1980) 614 P.2d 936, 942-43; Lincoln First Bank of Rochester v. Rupert (App.Div. 1977) 400 N.Y.S. 618, 621.]

Although no cases have authorized the trustor’s offset of punitive damages against the obligation owed, no reason appears to prevent the offset of punitive damages. Normally, if punitive damages were appropriate, sufficient fraud, oppression, or other misconduct would be established to vitiate the entire transaction. But even if the transaction were rescinded, the injured trustor likely would be required to return any consideration given by the offending beneficiary. The trustor almost always will have spent the money, usually to satisfy another creditor or to purchase goods or services which cannot be returned for near full value. A punitive damage offset may reduce or eliminate the trustor’s obligation to restore consideration paid in a fraudulent, oppressive, or similarly infirm transaction.

4. De Minimis Breach

Foreclosure is a drastic remedy, and courts will not enforce a forfeiture if the default is de minimis in nature such as a minor delay in making an installment payment. [See Bavpoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1988) 168 Cal.App.3d 818, 829-32; 214 Cal.Rptr. 531.]

5. Defective Procedure

The trustee’s failure to comply with the statutorily mandated

procedures for a foreclosure sale is an important basis for attacking the foreclosure sale. The trustor bears the onus of establishing the impropriety of the sale, for a foreclosure is presumed to be conducted regularly and fairly in the absence of any contrary evidence Stevens v. Plumas Eureka Annex Min. Co. (1935) 2 Cal.2d 493, 497; 41 P.2d 927; Sain v. Silvestre (1978) 78 Cal.App.3d 461, 471 n. 10; 144 Cal.Rptr. 478; Hohn v. Riverside County Flood Control & Wat. Conserv. Dist. (1964) 228 Cal.App.2d 605, 612; 39 Cal.Rptr. 647; Brown v. Busch (1957) 152 Cal.App.2d 200, 204; 313 P.2d 19.] The presumption can be rebutted by contrary evidence [See, e.g., Wolfe v. Lipsv (1985) 163 Cal.App.3d 633,639; 209 Cal.Rptr. 801] and the courts will carefully scrutinize the proceedings to assure that the trustor’s rights were not violated. [See e.g., System Inv. Corp. v. Union Bank, supra, 21 Cal.App.3d 137, 153; Stirton v. Pastor (1960) 177 Cal.App.2d 232, 234; 2 Cal.Rptr. 135; Brown v. Busch, supra, 152 Cal.App.2d 200, 203-04; Pierson v. Fischer (1955) 131 Cal.App.2d 208, 214; 280 P.2d 491; Pv v. Pleitner, supra, 70 Cal.App.2d 576, 579.]

a.  Defective Notice of Default

A foreclosure may not be predicated on a notice of default which fails to comply strictly with legal requirements: “. . . a trustee’s sale based on a statutorily deficient notice of default is invalid.”   Miller v. Cote (1982) 127 Cal.App.3d 888, 894; see

System Inv. Corp. v. Union Bank, supra, 21 Cal.App.3d 137, 152-53; Lockwood v. Sheedy. supra, 157 Cal.App.2d 741, 742.] Defective service of the notice of default will also invalidate the sale procedure. [See discussion in Chapter II, supra, “Adequacy of Notice to Trustor.]

b.  Defective Notice of Sale

Some cases hold that a sale held without proper notice of 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; Standlev v. Knapp (1931) 113 Cal.App. 91, 100-02; 298 P. 109; Seccombe v. Roe (1913) 22 Cal.App. 139, 142-43; 133 P. 507; see also discussion in Chapter II B 4 supra, “Giving the Notice of Sale”.] However, if a trustee’s deed has been issued that states a conclusive presumption that all notice requirements have been satisfied, the sale is voidable and may be vacated if the trustor proves that the conclusive presumption does not apply and that notice was defective. The conclusive presumption may not apply if there are equitable grounds for relief such as fraud or if the purchaser is not a bona fide purchaser for value. [See Little v. CFS Service Corp. (1987) 188 Cal.App.3d 1354, 1359; 233 Cal.Rptr. 923;

Moreover, a serious notice defect that was directly prejudicial to the rights of parties who justifiably relied on notice procedures may independently justify setting aside a sale, especially if the trustee’s deed has not been issued and the highest bidder’s consideration has been returned. [See Little v. CFS Service Corp., supra. 188 Cal.App.3d 1354, 1360-61.]

c.  Improper Conduct of Sale

As discussed above, the trustee must strictly follow the statutes and the terms of the deed of trust in selling the property. [See discussion in Chapter II B, supra, “Nonjudicial Foreclosure”.] For example, the Court of Appeal has declared that:

The power of sale under a deed of trust will be strictly construed, and in its execution the trustee must act in good faith and strictly follow the requirements of the deed with respect to the manner of sale. The sale will be scrutinized by courts with great care and will not be sustained unless conducted with all fairness, regularity and scrupulous integrity …. Pierson v. Fischer, supra, 131 Cal.App.2d 208, 214.

Postponements

One of the major problems occurring at sales involves postponements: the trustee may fail to postpone a sale when the trustor needs a postponement or the trustee may unnecessarily postpone the sale and thereby discourage the participation of bidders. Current law expressly gives the trustee discretion to postpone the sale upon the written request of the trustor for the purpose of obtaining cash sufficient to satisfy the obligation or bid at the sale. [Civ. Code § 2924g(c) (1). ] There are no limitations on the number of times the trustee may postpone the sale to enable the trustor to obtain cash. The trustor is entitled to one such requested postponement, and any postponement for this reason cannot exceed one business day. (Id.) Failure to grant this postponement will invalidate the sale. [See discussion in Chapter II B 7, supra, “Conduct of the Foreclosure Sale”.] However, the trustee is under no general obligation to postpone the sale to enable the trustor to obtain funds, particularly when the trustor receives the notices of default and sale and has months to raise the money. [See Oiler v. Sonoma County Land Title Co. (1955) 137 Cal.App.2d 633, 634-35; 290 P.2d 880.] In addition, the trustee’s duty to exercise its discretion to favor the trustor is tempered by the trustee’s duty to the beneficiary; thus, for example, the trustee may be more obliged to postpone the sale at the trustor’s request if only the beneficiary appears at the sale

to bid than if other bidders appear who are qualified to bid enough to satisfy the unpaid debt.

The foreclosure sale may also have to be postponed if there is an agreement between the beneficiary and the trustor for a postponement. An agreement to postpone a trustee’s sale is deemed an alteration of the terms of the deed of trust and is enforceable only if it assumes the form of a written agreement or an executed oral agreement. [See Civ. Code § 1698; Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 121; 92 Cal.Rptr. 851; Stafford v. Clinard (1948) 87 Cal.App.2d 480, 481; 197 P.2d 84.] Thus, a gratuitous oral promise generally is insufficient to support an agreement to continue the sale; however, if the oral agreement is predicated on a promissory estoppel or if the trustor fully performs the trustor’s consideration for the oral agreement, the trustor may enforce the beneficiary’s oral promise to postpone. Raedeke v. Gilbraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665; 111 Cal.Rptr. 693.] In Raedeke, the trustor could obtain a responsible purchaser for the property, and the beneficiary agreed. The trustor obtained the purchaser, but the beneficiary foreclosed. The Supreme Court held that the trustor fully performed its promise — to procure a buyer — which was good consideration for the agreement to postpone and that the beneficiary’s breach entitled the trustor to damages for the wrongful foreclosure.

Although the failure to postpone may be a problem, the trustee’s improper granting of postponements is generally a far greater problem. Notice of a postponement must be given “by public declaration” at the time and place “last appointed for sale,” and no other notice need be supplied. [Civ. Code § 2924g(d).] Therefore, any prospective bidder will have to attend each appointed time for sale to discover whether the sale will occur or be postponed. As a result, prospective bidders will be discouraged from participating in a sale involving numerous postponements, and there will be less chance that an active auction will occur which will generate surplus funds to which the trustor may be entitled. [Cf. Block v. Tobin (1975) 45 Cal.App.3d 214; 119 Cal.Rptr. 288.]

The abuse of the postponement procedure prompted the Legislature to curb the trustee’s ability to make discretionary postponements. The trustee may make only three postponements at its discretion or at the beneficiary’s direction without re­commencing the entire notice procedure prescribed in Civ. Code § 2924f. [Civ. Code § 2924g(c)(1).] In addition, the trustee must publicly announce the reason for every postponement and must maintain records of each postponement and the reason for it. [Civ. Code § 2924g(d).]

A lawyer representing a client whose home has been sold at a foreclosure sale involving discretionary or beneficiary directed

postponements should, at the first opportunity for discovery, obtain production of the foreclosure file and any documents relating to it, and any documents relating to the postponement and reasons for it, including the statutorily mandated record concerning the postponement, as well as any notes, telephone messages, logs, or calendar entries relating to the postponement. In addition, the lawyer should quickly discover who attended the sale to determine whether the reason for the postponement was given “by public declaration” and, if so, whether the same reason is indicated for the postponement in the record maintained by the trustee.

The failure to postpone properly should invalidate the sale. Certainly, a sale held without any public announcement of the date, time, and place to which the sale has been postponed is invalid. [See Holland v. Pendelton Mortgage Co. (1943) 61 Cal.App.2d 570, 573-74; 143 P.2d 493.] The cases upholding sales made on postponed dates are based on the trustee’s compliance with the notice of postponement requirements prescribed by statute or contained in the trust deed. [See e.g., Cobb v. California Bank (1946) 6 Cal.2d 389, 390; 57 P.2d 924; Craig v. Buckley (1933) 218 Cal. 78, 80-81; 21 P.2d 430; Alameda County Home Inv. Co. v. Whitaker (1933) 217 Cal. 231, 234-35; 18 P.2d 662.] Since the trustee sale must be conducted in strict compliance with the notice requirements, a notice of postponement which does not contain a statement of the

reason for the postponement is defective.  Any sale held pursuant to the defective notice may be held to be improper.

Moreover, the records relating to the postponement may reveal that the postponement was unnecessary or may lead to evidence establishing that the postponement was made in bad faith. As discussed above, fraud, unfairness, and irregularity in the conduct of the sale should render the sale invalid.

e.  Bidder Collusion

One of the more pernicious aspects of foreclosure sales — and one of the most difficult to prove — is the existence of agreements among bidders to suppress bidding. The arrangement may consist of one bidder paying the others not to bid. The bidders may also agree that one of the group will buy the property without competition and that then the group will hold a secret auction among themselves to determine who will be the ultimate purchaser. The difference between the purchase price at the public auction and the ultimate purchase price determined at the secret auction will be divided among the colluding parties; thus, junior lienholders and the trustor are deprived of surplus funds which would have resulted from open and competitive bidding.

Such bid rigging is clearly illegal.  Offering or accepting

consideration not to bid, or fixing or restraining bidding at a foreclosure sale, is specifically declared unlawful and constitutes a crime. [Civ. Code § 2924h(f).] Agreements between bidders to fix or restrain bidding, to make sham bids, or to become a party to a fake sale have been routinely denounced as illegal, void, unenforceable and a fraud on the public. [See Russell v. Soldinaer (1976) 59 Cal.App.3d 633, 641-45; 131 Cal.Rptr. 145; Roberts v. Salot (1958) 166 Cal.App.2d 294, 298-99; 333 P.2d 232; see also Haley v. Bloomouist (1928) 204 Cal. 253, 256-67; 268 P. 365; Packard v. Bird (1870) 40 Cal. 378, 383; Jenkins v. Frink (1866) 30 Cal. 586, 591-92; 89 Am.Dec. 134.] The problem of determining market price by secret arrangement rather than by open bidding was most clearly addressed in Crawford v. Maddux (1893) 100 Cal. 222; 34 P. 651. In Crawford, a bidder at an execution sale was willing to purchase the property at several times the amount of the judgment. The bidder agreed with another that the other person should refrain from bidding, that the bidder would buy the property for the minimum amount, and that the bidder would pay the other person the difference between the purchase price and the maximum price the bidder would have been willing to pay if the sale were open and competitive. The Supreme Court had no difficulty in concluding that the arrangement “was against public policy, and wholly void.”  (Id. at 225.)

The chilling of bidding at a trustee’s sale is a fraud on the

trustor, and the trustor may have the sale vacated. [Bank__of America Nat¹!. Trust & Sav. Ass’n. v. Reidv (1940) 15 Cal.2d 243, 248; 101 P.2d 77; Roberts v. Salot, supra, 166 Cal.App.2d 294, 299; see Bertschman v. Covell (1928) 205 Cal. 707, 710; 272 P. 571 (dictum).] The fraudulent bidder not only will have to return the property but also will be liable for any encumbrances placed on the property. See Roberts v. Salot, supra, 166 Cal.App.3d 294, 301.] The trustor’s damage is not measured by the difference between the artificially low public sale price and the secret price paid by one of the bidders to his co-conspirators. The appropriate measure of damages should be the fair market value of the property at the time of the sale less the value of the liens against the property. [See Munaer v. Moore (1970) 11 Cal.App.3d 1, 11; 89 Cal.Rptr. 323.] The bidding restraint is illegal regardless of whether small or large amounts are involved; the bidders cannot determine the trustor’s damage by their own private manipulations. [See Crawford v. Maddux, supra, 100 Cal. 222, 225.]

The bidding conspiracy may also be actionable under the Cartwright Act which denounces combinations of two or more people to restrain trade or commerce. [See Bus. & Prof. Code §§ 16720(a), 16726.] Violations of the Cartwright Act contain substantial sanctions: “Any person who is injured in his business or property by reason of . . .” an unlawful restraint of trade may recover treble damages and reasonable attorney’s fees and costs.  [Bus. &

Prof. Code § 16750(a).] The Cartwright Act is patterned after the Sherman Act, and federal cases interpreting federal law apply to the construction of state law. [E.g., Partee v. San Diego Chargers Football Co. (1983) 34 Cal.3d 378, 392; 466 U.S. 904, cert, den.; 194 Cal.Rptr. 367; Mailand v. Burckle (1978) 20 Cal.3d 367, 376; 143 Cal.Rptr. 1; Marin County Bd. of Realtors v. Palsson (1976) 16 Cal.3d 920, 925; 130 Cal.Rptr. 1.]

Proving a Cartwright violation may be a difficult task. The threshold question is whether there was an agreement to restrain bidding. The answer to this question, of course, is crucial not only to the antitrust claim but also to attacking the sale on common law grounds. In the absence of direct evidence, circumstantial evidence may point to a conspiracy. For example, A, B, and C are professional and experienced bidders at foreclosure sales. Each has had substantial dealings with the others. A, B, and C attend the foreclosure sale and each qualifies to bid more than $10,000 over the minimum opening bid placed by the beneficiary. A buys the property for $1 over the minimum bid. Eight days later, A deeds the property to B for $6,000 more than A’s purchase price. Similar transactions have occurred involving the three bidders, and each has become the ultimate purchaser at different times. Such pattern of conduct evinces a bidding agreement. In order to gather other evidence needed to establish an agreement, a lawyer representing a homeowner should obtain,

through discovery from the trustee, all records revealing who attended the sale, who qualified to bid and for how much, and to whom the trustee’s deed was issued.

If a conspiracy can be shown, the Cartwright plaintiff will have to address the legal issue of whether the bidding is trade or commerce. This should not be difficult. The Cartwright Act has been expansively interpreted: “. . .it forbids combinations of the kind described with respect to every type of business.” Soeeale v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 43; 172 P.2d 867; see Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d 920, 925-28.] The Speeale court also recognized that the Cartwright Act reflects this state’s common law proscriptions against competitive restraints and price fixing. [See 29 Cal.2d at 44.] Virtually any business carried on for gain is embraced in the antitrust laws [see United States v. National Assn. of Real Estate Bds. (1950) 339 U.S. 485, 490-92; 70 S.Ct. 711], and the antitrust laws, in reaching all commerce, touch transactions which may be noncommercial in character and may involve illegal or sporadic activity. [See United States v. South-Eastern Underwriters Assn. (1944) 322 U.S. 533, 549-50; 64 S.Ct. 1162.]

Agreements restraining bidding are clearly the type of combinations prohibited under the antitrust laws. Price fixing agreements are per se unlawful under the Cartwright Act.  [E.g.,

Mailand v. Burckle (1978) 20 Cal.3d 367, 376-77; 143 Cal.Rptr. 1; Kollincr v. Dow Jones & Co. (1982) 137 Cal.App.3d 709, 721; 189 Cal.Rptr. 797; Rosack v. Volvo of America Corp. (1982) 131 Cal.App.3d 741, 751; 182 Cal.Rptr. 800, cert, den. (1983) 460 U.S. 1012.] An agreement to submit collusive, rigged bids is likewise a per se violation. [See e.g., United States v. Brighton Bldq. & Maintenance Co. (7th Cir. 1979) 598 F.2d 1101, 1106, cert. den. 444 U.S. 840; United States v. Champion International Corp. (9th Cir. 1977) 557 F.2d 1270, cert, den. 434 U.S. 938; United States v. Flom (5th Cir. 1977) 558 F.2d 1179, 1183.]

After establishing bidder conspiracy and a violation of the Cartwright Act, the complainant property owner then will have to show injury emanating from the violation to establish entitlement to the treble damage and the attorney’s fee and cost remedies. [Bus. & Prof. Code § 16750(a); see A. B.C. Distrib.’ Co. v. Distillers Distrib. Corp. (1957) 154 Cal.App.2d 175, 191; 316 P.2d 71.] The property owner need not show a competitive injury, for the protections of the Cartwright Act extend to consumers and all others who are victimized by the violation of law. [See Saxer v. Philip Morris, Inc. (1975) 54 Cal.App.3d 7, 26; 126 Cal.Rptr. 327.] The nature and extent of the injury, however, may be difficult to prove because of the difficulty in determining the price at which the property would have sold in the absence of a conspiracy to fix the price.

For example, suppose property worth $100,000 is sold to satisfy the $19,990 unpaid balance of a note secured by a first trust deed. Only two bidders attend the sale, and they conspire. One of the bidders purchases the property for $20,000 and pays the other $10,000. Has the trustor been injured by $10,000, $80,000, or some other amount? Crawford v. Maddux, supra, 100 Cal. 222, 225; 34 P. 651 indicates that the consideration paid for the suppression of bidding is not the common law measure of damage for the illegal bidding restraint; however, that amount should logically be the minimum amount of the injury under the Cartwright Act. The purchaser would have paid at least that additional amount to acquire the property at the public sale in the absence of collusion since the purchaser in fact paid that amount as part of the collusive sale.

Normally, the damages in a price fixing case consist of the full amount of the overcharge — i.e., the difference between the artificially high price and the price that would have otherwise prevailed. [See e.g., National Constructors Assn. v. National Electrical Contractors (D. Md. 1980) 498 F.Supp. 510, 538, mod. on other grounds (4th Cir. 1982) 678 F.2d 492.] Similarly, if prices are set artificially low, the damages will be the difference between the artificially low price and the price which would have been charged to fully maximize profits. [See Knutson v. Daily Review, Inc. (9th Cir. 1976) 548 F.2d 795, 812, cert. den. (1977)

433 U.S. 910.] Although no cases are specifically on point, an argument should be made that the antitrust injury suffered by a property owner whose home was sold through collusive bidding should be the difference between the artificially low price and the reasonable or fair value of the property at foreclosure. This view is buttressed by the holding in Munaer v. Moore, supra, 11 Cal.App.3d 1, 11 that the trustee’s or beneficiary’s liability for an improper sale should be the fair market value of the property in excess of encumbrances.

However, it could be argued that even in the absence of collusive bidding, “. . . it is common knowledge that at forced sales such as a trustee’s sale the full potential value of the property being sold is rarely realized . . . .” strutt v. Ontario Sav. & Loan Assn. (1972) 28 Cal.App.3d 866, 876; 105 Cal.Rptr. 395.] Complete fair market value cannot be realistically expected in the context of a foreclosure sale. Consequently, it would be unlikely that the property’s full value would be realized at a foreclosure sale even without the bidding conspiracy. On the other hand, some courts consider foreclosure sales prices at less than 70 percent of fair market value to be unfair, at least for bankruptcy purposes. [See e.g., Durrett v. Washington Nat. Ins. Co. (5th Cir. 1980) 621 F.2d 201; the rejection of the Durrett fair value rationale in In re Madrid (Bank.App.Pan. 9th Cir. 1982) 21 B.R. 424, aff’d on other grounds (9th Cir. 1984) 725 F.2d 1197 was

predicated on a noncollusive, regularly conducted sale.] Accordingly, as an alternative to the fair market value measure of damage, the measure of damages could be deemed the difference between the collusive bid price and 70 percent of the fair market value of the property less encumbrances.

The collusive bidder should not be permitted to complain that a more precise measure of damage based on the ultimate sale price in an open and competitive public auction was not used, because the bidding conspiracy itself prevented a more precise evaluation of the measure of damages. As the United States Supreme Court observed,

Where the tort itself is of such a nature as to preclude the ascertainment of the amount of damages with certainty, it would be a perversion of fundamental principles of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts. In such case, while the damages may not be determined by mere speculation or guess, it will be enough if the evidence shows the extent of the damages as a matter of just and reasonable inference, although the result be only approximate. The wrongdoer is not entitled to complain that they cannot be measured with the exactness and precision that would be possible if the

case, which he alone is responsible for making, were otherwise.

There is no sound reason in such a case, as there may be, to some extent, in actions upon contract, for throwing any part of the loss upon the injured party, which the jury believe from the evidence he has sustained; though the precise amount cannot be ascertained by a fixed rule, but must be matter of opinion and probable estimate. And the adoption of any arbitrary rule in such a case, which will relieve the wrong-doer from any part of the damages, and throw the loss upon the injured party, would be little less than legalized robbery.

Whatever of uncertainty there may be in this mode of estimating damages, is an uncertainty caused by the defendant’s own wrongful act; and justice and sound public policy alike require that he should bear the risk of the uncertainty thus produced. . . . [citation omitted]. Story Parchment Co. v. Patterson Paper Co. (1931) 282 U.S. 555, 563-65; 51 S.Ct. 248.

See Biaelow v. RKO Radio Pictures, Inc. (1946) 327 U.S. 251, 264-66; 66 S.Ct. 574.]

Trustee’s Unfair Conduct

As previously mentioned, the trustee must conduct the sale “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 reasonable price.” Baron v. Colonial Mortgage Service Co. (1980) 111 Cal.App.3d 316, 323; 168 Cal.Rptr. 450.] The trustee’s obligations in conducting a sale and its duty to the trustor are discussed in detail in Chapter II B 7, supra, “Conduct of the Foreclosure Sale”.] Obviously, a sale tainted with the trustee’s fraud or improper conduct is subject to attack, and the trustee may be liable to the trustor as well as to innocent bidders. (See Block v. Tobin, supra, 45 Cal.App.3d 214.]

Inadequacy of Price

The cases are legion that inadequacy of price, even gross inadequacy of price, will not justify a repudiation of a trustee’s sale in the absence of fraud, unfairness, or irregularity of some type. [See e.g., Scott v. Security Title Inc. & Guar. Co., supra, 9 Cal.2d 606, 611; Prudential Ins. Co. of America v. Sly (1937) 7 Cal.2d 728, 731; 62 P.2d 740, cert. den. 301 U.S. 690; Encelbertson v. Loan & Building Assn. (1936) 6 Cal.2d 477, 479; 58 P.2d 647; Central Nat. Bank of Oakland v. Bell (1927) 5 Cal.2d 324, 328; 54

P.2d 1107; Stevens v. Plumas Eureka Annex Min. Co., supra. 2 Cal.2d 493, 496; 41 P.2d 927; Baldwin v. Brown (1924) 193 Cal. 345; 352-53; 224 P. 462; Sargent v. Shumaker. supra, 193 Cal. 122, 129; 223 P. 464; Winbialer v. Sherman (1917) 175 Cal. 270, 275; 165 P. 943; Crummer v. Whitehead (1964) 230 Cal.App.2d 264, 266; 40 Cal.Rptr. 826; Lancaster Security Inv. Corp. v. Kessler (1958) 159 Cal.App.2d 649, 655; 324 P.2d 634.]

The fraud, unfairness, or irregularity which must accompany inadequate price in order for the sale to be set aside, must be such “as accounts for and brings about the inadequacy of price.” Stevens v. Plumas Eureka Annex Min. Co., supra, 2 Cal.2d 493, 496.] Thus, the inadequacy of price must be caused by or related to the irregularity or to some misconduct by the trustee. [See e.g., Sargent v. Shumaker. supra, 193 Cal. 122, 131-33; Crofoot v. Tarman (1957) 147 Cal.App.2d 443, 446-47; 305 P.2d 56; Bank of America Nat’l. Trust & Sav. Ass’n. v. Century Land & Wat. Co. (1937) 19 Cal.App.2d 194, 196; 65 P.2d 109.] In Crofoot, for example, the trustee had done no wrong, and the court rejected the trustor’s argument that misinformation supplied by someone other than the trustee when coupled with inadequate price afforded grounds for relief.

The quantum of fraud, unfairness, or irregularity needed to avoid a foreclosure sale may be slight,  especially if the

inadequacy of price is great. [See e.g., Sargent v. Shumaker, supra, 193 Cal. 122, 129; Winbialer v. Sherman, supra, 175 Cal. 270, 275; Bank of Seoul & Trust Co. v. Marcione (1988) 198 Cal.App.3d 113, 119; Whitman v. Transtate Title Co. (1988) 165 Cal.App.3d 312, 323.] Inadequacy of price is indicative of fraud and will support a trial court’s finding of fraud if one is made. [See Scott v. Security Title Inc. & Guar. Co., supra, 9 Cal.2d 606, 612.]

If the trustor’s property is sold for an inadequate price, the trustor’s loss for breaching the obligation and trust deed far exceeds the beneficiary’s damage from the breach. Indeed, the beneficiary reaps a windfall if the beneficiary purchases the property at the foreclosure sale for an inadequate price. Arguably, the clause in the trust deed which permits the sale at such a dramatically low price could be construed to be a provision authorizing an impermissible forfeiture or penalty or providing for what is in effect punitive damages for the breach. The Supreme Court has apparently rejected this viewpoint and has stated that the trustor has ample opportunity after the recordation of the notice of default to avoid the potentially harsh consequences of foreclosure. See Smith v. Allen, supra, 68 Cal.2d 93.] In Smith, the Supreme Court observed that if:

. the borrower has a substantial equity in the

property, the above mentioned statutory provisions (Civ. Code §§ 2924 et sea.) afford him an opportunity to refinance his monetary obligations or to sell his equity to a third party.  (Id. at 96.)

The court concluded that the Legislature intended that a proper “foreclosure sale should constitute a final adjudication of the rights of the borrower and the lender.”  (Id.)

The recent legislative denunciation of unconscionability may point to a different result in cases involving significantly inadequate prices. Indeed, the new statutes regarding unconscionability may lead California to recognize the well established equity rule that extreme inadequacy of price in itself justifies the overturning of a foreclosure sale. [See Washburn, “The Judicial and Legislative Response to Price Inadequacy in Mortgage Foreclosure Sales,” 53 So.Cal.L.Rev. 843, 862-69.] The new statutes and accompanying legislative findings may also undermine the rationale of cases like Smith holding that the nonjudicial foreclosure process does not produce forfeitures or other impermissible, inequitable results.

The insertion of an unconscionable provision into a contract is deemed unfair or deceptive. [Civ. Code § 1770(s).] If a court finds  that  a  contract or any clause of  the  contract  is

unconscionable, the court may refuse to enforce the contract or the unconscionable provision or may limit the unconscionable provision to avert any unconscionable result. [Civ. Code § 1670.5(a).] It is unlawful, and perhaps criminal, for any person to participate in a transaction involving a residence already in foreclosure whereby that person takes unconscionable advantage of the homeowner. [Civ. Code § 1695.13.] Any such transaction resulting in unconscionable advantage is subject to rescission. [Civ. Code § 1695.14.]

Moreover, the express policy of this state is “to preserve and guard the precious asset of home equity, and the social as well as economic value of homeownership.” [Civ. Code § 1695(b).] This state has adopted the national housing goal — “the provision of a decent and a suitable living environment for every American family. …” [Health & Safety Code § 50002.] The Legislature has recognized the “vital statewide importance” of housing, in part, “as an essential motivating force in helping people achieve self-fulfillment in a free and democratic society.” [Health & Safety Code § 50001(a).] Accordingly, “It is the policy of the State of California to preserve home ownership.” [Stats. 1979, c. 655, § 1(g), p. 2016.] The Legislature was mindful, however, that the foreclosure process does not provide complete protection to homeowners whose homes are in jeopardy:

Many homeowners in this state are unaware of the legal rights and options available to them once foreclosure proceedings have been initiated against their homes. The present foreclosure process fails to provide sufficient meaningful information to homeowners to enable them to avoid foreclosure or save the equity in their homes. (Stats. 1979, c. 655, § 1(c), p. 2016.)

In light of the legislative concern about continued home ownership, the preservation of home equity, and the operation of unconscionable contracts, the courts should not tolerate the use of the power of sale to deprive a homeowner of substantial equity. The loss of equity may not only be financially disastrous but may prevent the homeowner from acquiring another home immediately after the foreclosure or likely ever thereafter. Sales made at unconscionably low prices should be voided under the enhanced power of the court to avoid unconscionable results in the enforcement of contracts.

Traditionally, courts in the United States adopted Lord Eldon’s rule that “a sale will not be set aside for inadequacy of price, unless the inadequacy be so great as to shock the conscience, or unless there be additional circumstances against its unfairness . . . .* Graffam v. Burgess (1886) 117 U.S. 180, 191-92.] This rule was adopted in California with respect to execution

sales, and, in Odell v. Cox (1907) 151 Cal. 70, 74; 90 P. 194, the California Supreme Court recognized that:

. . . according to very respectable authority, inadequacy of price may be so gross as in itself to furnish satisfactory evidence of fraud or misconduct on the part of the officer or purchaser, and justify vacating the sale.

See Young v. Barker (1948) 83 Cal.App.2d 654, 659; 189 P.2d 521.]

The California cases dealing with inadequacy of price in trustee’s sales are based on execution sale cases such as Odell, supra♦ [See e.g., Winbialer v. Sherman, supra, 175 Cal. 270, 275.] California courts have not expressly adopted the first element of Lord Eldon’s rule—that inadequacy of price so great as to shock the conscience will invalidate a sale—in examining trustee’s sales; the courts have expressly accepted only the second element--that inadequate price, when coupled with unfairness which produces the inadequacy, will render a sale voidable. The cases have neither expressly rejected the first element of Lord Eldon’s rule nor explained the element’s omission from the general formulation of the rule on inadequacy of sale’s price. Federal common law, however, recognizes that a trustee’s sale may be invalidated if the sale price is so low that it shocks the conscience.  [See United

States v. Wells (5th Cir. 1968) 403 F.2d 596, 598; United States v. MacKenzie (D. Nev. 1971) 322 F.Supp. 1058, 1059, aff’d. (9th Cir. 1973) 474 F.2d 1008.] Since California now statutorily acknowledges the equitable power of the court to safeguard parties from the oppression of unconscionable contractual terms, California courts should embrace the rule prohibiting sales based on shockingly insignificant sales prices.

Enjoining the Sale

1.  Propriety of Injunctive Relief

An action to enjoin a foreclosure sale is a well recognized remedy to prevent an unwarranted foreclosure. [See 2 Ogden’s, Rev. Cal. Real Prop. Law 959.] An injunction may issue to prevent acts which: (a) cause great or irreparable injury; (b) violate the party’s rights and tend to render the judgment ineffectual; (c) create harm for which money damages are inadequate; (d) may lead to a multiplicity of actions; and (e) violate a trust. [Code of Civ. Proc. § 526; see Civ. Code §§ 3368, 3422.]

In determining whether to issue any preliminary injunction, the trial court must examine two interrelated factors:

The first is the likelihood that the plaintiff will

prevail on the merits at trial. The second is the interim harm that the plaintiff is likely to sustain if the injunction were denied as compared to the harm that the defendant is likely to suffer if the preliminary injunction were issued. IT Corp. v. County of Imperial (1983) 35 Cal.3d 63, 69-70; 196 Cal.Rptr. 715.

[See e.g., Robbins v. Superior Court (1985) 38 Cal.3d 199, 206; 211 Cal.Rptr. 398; Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 527-28; 67 Cal.Rptr. 761; Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust, supra, 168 Cal.App.3d 818, 824.] Whether or not the trustor is likely to prevail on the merits is obviously a question of fact in each case. If the trustor is not likely to prevail, the injunction may be denied notwithstanding any irreparable harm which may attend the foreclosure:

In a practical sense it is appropriate to deny an injunction where there is no showing of reasonable probability of success, even though the foreclosure will create irreparable harm, because there is no justification in delaying that harm where, although irreparable, it is also inevitable. Jessen v. Keystone Sav. & Loan Assn. (1983) 142 Cal.App.3d 454, 459; 191 Cal.Rptr. 104.

Foreclosure is a “drastic sanction.” Bavpoint Mortgage Corp.

v. Crest Premium Real Estate etc. Trust, supra, 168 Cal.App.3d 818, 837.] Irreparable injury will almost always be involved in a home foreclosure, especially if the grounds for invalidating the foreclosure rest on the voidability rather than the voidness of the transaction. Since a bona fide purchaser may buy the property at a foreclosure sale free of many, if not all, of a particular trustor’s defenses to the sale, the court’s failure to enjoin an improper foreclosure may doom the trustor to the loss of the property. “The Status of Bona Fide Purchaser or Encumbrancer”.] Furthermore, courts presume in a foreclosure context that the property is unique, that its loss is irreparable, and that money damages are inadequate unless the property is being openly marketed and has no special value to the owner other than its market price. [See Jessen v. Keystone Sav. & Loan Assn.. 142 Cal.App.3d 454, 457-58; 191 Cal.Rptr. 104; Stockton v. Newman (1957) 148 Cal.App.2d 558, 564; 307 P.2d 56.] In addition, the trustor will suffer irreparable injury because the trustor generally has no right of redemption after a foreclosure sale.  [See discussion in Chapter II B 10a, supra, “Redemption”.]

A foreclosure will often render ineffectual any ultimate relief that may be awarded. If the trustor, for example, is entitled to damages but not rescission in a particular transaction, the trustor would be allowed to retain the property and would be compensated in damages.  But, such a judgment would be rendered

ineffectual through the loss of the property at foreclosure. [See Stockton v. Newman, supra, 148 Cal.App.2d 558, 563-64.] Similarly, a foreclosure would render moot the trustor’s attempt to cancel a trust deed if the property were to be sold to a bona fide purchaser. Thus, an injunction is necessary to preserve the status quo. [See Weinqand v. Atlantic Sav. & Loan Assn. (1970) 1 Cal.3d 806, 819; 83 Cal.Rptr. 650.]

Courts have held that injunctions are appropriate to restrain foreclosure sales in various contexts. The following is an illustrative but not exclusive list: (a) no default [see Freeze v. Salot (1954) 122 Cal.App.2d 561, 564; 266 P.2d 140; cf. Salot v. Wershow (1958) 157 Cal.App.2d 352, 355; 320 P.2d 926]; (b) disputes about the amount owed [see e.g., Paramount Motors Corp. v. Title Guar. & Trust Co. (9th Cir. 1926) 15 F.2d 298, 299; More v. Calkins, supra, 85 Cal. 177, 188]; (c) disputes about the amount owed because of the trustor’s offsetting claims [see Hauger v. Gates (1954) 42 Cal.2d 752, 756]; (d) fraud [see e.g., Stockton v. Newman, supra, 148 Cal.App.2d 558, 563-64; Daniels v. Williams (1954) 125 Cal.App.2d 310, 312-13; 270 P.2d 556; see also U.S. Hertz, Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 79; 116 Cal.Rptr. 44]; (e) no consideration [see Ybarra v. Solarz (1942) 56 Cal.App.2d 342; 132 P.2d 880 (no consideration for novation creating balloon payment)]; (f) improper notice of default [see Lockwood v. Sheedv, supra, 157 Cal.App.2d 741, 742; see also Strike

v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735; 155 Cal.Rptr. 132 (court vacates notice of default and permits new notice, but disallows usurious interest), app. dis. 444 U.S. 948; System Inv. Corp. v. Union Bank, supra, 21 Cal.App.3d 137, 152-53; (g) trustee’s breach of duty in conducting the sale [see Baron v. Colonial Mortgage Service Co., supra, 111 Cal.App.3d 316, 324]; (h) trustor’s minor delays in making installment payments [see Bavpoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust, supra, 168 Cal.App.3d 818, 827.]

Unless the obligation or trust deed is fundamentally infirm so that no foreclosure would be proper, most preliminary injunctive relief will only temporarily halt the foreclosure until corrective measures are taken. For example, if the amount is disputed, the foreclosure may be enjoined until the court determines the amount properly owed. [See Producers Holding Co. v. Hill, supra, 201 Cal. 204, 209; More v. Calkins, supra, 85 Cal. 177, 188.] If the notice of default is defective, the court may enjoin the sale on that particular notice of default without prejudice to the beneficiary’s recording a proper notice of default. [See Lockwood v. Sheedv, supra, 157 Cal.App.2d 741, 742.] Alternatively, the court could vacate a notice of default containing an improper demand (e.g., usurious interest) without issuing a preliminary injunction and permit the beneficiary to file a proper notice. [See Strike v. Trans-West Discount Corp., supra, 92 Cal.App.3d 735; 155 Cal.Rptr.

132.]

2.  Scope of Injunctive Relief

The injunctive relief requested should be for an order restraining the trustee and the beneficiary. If only the trustee is enjoined, the beneficiary might be able to circumvent the order by substituting a new trustee. [See Civ. Code § 2934a.] A trustee can employ an agent or subagent to perform the trustee’s tasks under a trust deed. [See Civ. Code § 2924d(d); Orloff v. Pece (1933) 134 Cal.App. 434, 436; 25 P.2d 484.] Therefore, the injunction should cover all agents, subagents, employees, representatives and all other persons, corporations, or other entities which act by, on behalf of, or in concert with the trustee and beneficiary.

The injunction should apply not only to selling, attempting to sell, or causing the sale of the property, but also should enjoin any act authorized or permitted by Civil Code §§ 2924, 2924b, 2924f, 2924g, and 2934a in connection with or incident to the sale. Some of the acts authorized or permitted by these sections may not be construed to be covered by a general anti-sale injunction.

For example, in American Trust Co. v. De Albergria (1932) 123 Cal.App. 76, 78; 10 P.2d 1016, the trustee postponed a sale after

a temporary restraining order issued and held the sale on the postponed date after the order was dissolved. The court held that the order restraining the continuing of the sale did not preclude postponements. Frequently, if a temporary restraining order prevents a sale, the trustee will postpone the sale so that it will be held on the same day as and immediately after the hearing on the preliminary injunction. If the preliminary injunction is denied, the sale will take place post haste. If, however, the trustee is prevented from postponing the sale, a new notice of sale will have to be given, and the trustor will have the opportunity to use the new notice of sale period to raise money or consider other appropriate remedies, including bankruptcy. If the sale is postponed in violation of a restraining order, the sale will be voidable. See Powell v. Bank of Lemoore (1899) 125 Cal. 468, 472; 58 P. 83; Baalev v. Ward (1869) 37 Cal. 121 139; 10 P.2d 1016; American Trust Co. v. De Alberqria, supra, 123 Cal.App. 76, 78.]

The injunction should also restrain the beneficiary from transferring the note and trust deed without informing the transferee of the trustor’s claims and defenses. Otherwise, the transferee may be a holder in due course and take the obligation and security free of the trustor’s rights. [See e.g., Szczotka v. Idelson (1964) 228 Cal.App.2d 399; 39 Cal.Rptr. 466;

National Banks

The statute precluding preliminary injunctions against national banks [12 U.S.C. § 91] does not prevent a state court from issuing a preliminary injunction against a national bank to restrain a nonjudicial foreclosure pending the adjudication of the trustor’s rights. [See Third National Bank In Nashville v. Impac Ltd., Inc. (1977) 432 U.S. 312; 97 S.Ct. 2307.] Kemple v. Security-First Nat. Bank (1967) 249 Cal.App.2d 719; 57 Cal.Rptr. 838 and First Nat. Bank of Oakland v. Superior Court (1966) 240 Cal.App.2d 109; 49 Cal.Rptr. 358 are contra but no longer good authority.]

Tender

The general rule is that the trustor cannot obtain an injunction against a foreclosure without tendering the amount owed. see Sipe v. McKenna (1948) 88 Cal.App.2d 1001, 1006; 200 P.2d 61.] Similarly, the court may dissolve an injunction it issued if the trustor does not tender what is owed. [See Meetz v. Mohr, supra, 141 Cal. 667, 672-73.] If the injunction action is commenced during the reinstatement period, the tender would have to be the amount needed to cure the default. [See Civ. Code § 2924c; Bisno v. Sax (1959) 175 Cal.App.2d 714, 724; 346 P.2d 814.]

A tender is an offer of full performance. An offer of partial performance has no effect. [Civ. Code § 1486; see e.g., Gaffrev v. Downey Savings & Loan Assn. (1988) 200 Cal.App.3d 1154, 1165; 246 Cal.Rptr. 421.] The tender cannot be conditioned on any act of the beneficiary which the beneficiary is not required to perform. [Civ. Code § 1494; see e.g., Karlsen v. American Sav. & Loan Assn.. supra, 15 Cal.App.3d 112, 118.]

A tender is effective only if the trustor has the present ability to fulfill the tender. [See Civ. Code § 1495; see e.g., Napue v. Gor-Mev West, Inc. (1985) 175 Cal.App.3d 608, 621; Karlsen v. American Sav. & Loan Assn., supra, 15 Cal.App.3d 112, 118.] If the trustor’s continued ability to perform is at issue during or at the conclusion of an action, the court may consider the trustor’s ability at that time. [See Napue v. Gor-Mev West, Inc., supra, 175 Cal.App.3d 608, 621-22.] The trustor’s offer to sell the property to pay the debt is a sufficient tender of full payment if the property is worth considerably more than the debt. [See In re Worcester (9th Cir. 1987) 811 F.2d 1224, 1231.] On the other hand, the trustor’s mere hope that a lender would release property from the lien, that the property would be sold, and that any additional amount owed would be refinanced is an insufficient tender. [See Karlsen v. American Sav. & Loan Assn., supra, 15 Cal.App.3d 112, 118.)

A proper tender “stops the running of interest on the obligation, and has the same effect upon all its incidents as performance thereof.” [Civ. Code § 1504.] A valid tender of a payment, even if refused, precludes a foreclosure based on the failure to make that payment unless the entire balance of the obligation has been accelerated. [See Bisno v. Sax, supra, 175 Cal.App.2d 714, 724.]

If the entire amount of the obligation is tendered, the lien created by the deed of trust is discharged even if the tender is refused: the creditor maintains the right to collect the amount owed but loses its security interest. [See Civ. Code §§ 1504, 2905; Sondel v. Arnold (1934) 2 Cal.2d 87, 89; 39 P.2d 793; Lichtv v. Whitney, supra, 80 Cal.App.2d 696, 701-02; Wagner v. Shoemaker (1938) 29 Cal.App.2d 654, 657; 85 P.2d 229; Wiemever v. Southern T. & C. Bank (1930) 107 Cal.App. 165, 173-74; 290 P. 70.] As a result of the discharge of the trust deed, the trustee has no power to proceed with a foreclosure. [See Winnett v. Roberts, supra, 179 Cal.App.3d 909, 922; Biusno v. Sax, supra, 175 Cal.App.2d 714, 724; Kleckner v. Bank of America (1950) 97 Cal.App.2d 30, 33; 217 P.2d 28.] Accordingly, any foreclosure sale that has been conducted is void and conveys no title. r Lichtv v. Whitney, supra, 80 Cal.App.2d 696, 702.]

There are, however, several notable exceptions to the rule

requiring tender. Tender is not required if the trustor seeks to rescind the obligation and trust deed on the ground of fraud because payment would be an affirmance of the debt. [See Stockton v. Newman, supra, 148 Cal.App.2d 558, 564.] No tender is required when nothing is owed such as, for example, when the trustor’s obligation is offset by the beneficiary’s obligation to the trustor. [See Hauqer v. Gates, supra, 42 Cal.2d 752, 753; see also In re Worchester. supra, 811 F.2d 1224, 1230 n.6.] Moreover, tender is not required when the amount owed is in dispute and the foreclosure should be stayed to permit an accounting or adjudication of the amount of the debt. [See More v. Calkins, supra, 85 Cal. 177, 188-90; see also Stockton v. Newman, supra, 148 Cal.App.2d 558.] The Supreme Court has also recognized that a tender is not necessary when the trustor is willing to make a tender but is frustrated in doing so by the beneficiary’s bad faith conduct.  [See McCue v. Bradbury (1906) 149 Cal. 108; 84 P. 993.]

5.  Bank Deposit

A tender does not discharge the ultimate obligation to make the payment tendered. Tender is an offer of performance, not performance itself.  [See e.g., Walker v. Houston (1932) 215 Cal.742, 745; 12 P. 2d 952.] However, a tender of full payment accompanied by a deposit of that amount in the name of the creditor with a bank or savings and loan association and notice to the creditor extinguishes the payment obligation. [Id* at 746; Civ. Code § 1500.] The deposit must be unconditional. [See e.g., Gaff rev v. Downey Sav. & Loan Assn., supra, 200 Cal.App.3d 1154, 1167.]

A bank deposit does not have to be made when tender is required to prevent a foreclosure or vacate a sale. For example, the tender of the amount owed to reinstate an obligation is sufficient to cure the default and reinstate the obligation; a bank deposit is not necessary, rMagnus v. Morrison (1949) 93 Cal.App.2d 1, 3; 208 P.2d 407.]

Bond or Undertaking

If an injunction is granted, the law requires that an undertaking be given. [Code of Civ. Proc. § 529(a)(c).] This statutory requirement does not specifically apply to temporary restraining orders. The Supreme Court advises that the “better practice” is for the trial court to require a bond for a temporary restraining order, but such an order is not void if a bond is not required. Biasca v. Superior Court (1924) 194 Cal. 366; 228 P. 861; see River Farms Co. v. Superior Court (1933) 131 Cal.App. 365,

370; 21 P.2d 643.] A bond, however, is required for a preliminary injunction. [Code of Civ. Proc. § 529; Neumann v. Moretti (1905) 146 Cal. 31, 32-33; 79 P. 512.]

Significantly, the court can waive the bond requirement for poor litigants. The party seeking a preliminary injunction without bond need not proceed in forma pauperis; however, the court will use in forma pauperis standards in determining whether to grant the injunction without bond. Conover v. Hall (1974) 11 Cal.3d 842, 850-52; 114 Cal.Rptr. 642.]

If a bond is required, the lawyer representing the homeowner should assure that the bond is not too large, especially because the homeowner likely will be unable to afford any bond, let alone a large one. The purpose of the bond is to protect the defendant against damages in the event the court determines that the injunction should not have been issued. [Code of Civ. Proc. § 529.] The deed of trust, however, covers the trustor’s continuing default and accruing unpaid interest. Therefore, the deed of trust should be ample security for the beneficiary if there is sufficient equity in the property to cover additional interest and other expenses emanating from the delay. As a result, any bond should be nominal unless the equity in the property is insufficient; in that event, the bond should only be large enough to cover anticipated damage not covered by the security.  Moreover, a bond

which is significantly larger than necessary to protect against damages may improperly restrict the trustor’s access to the courts and thus may infringe on the trustor’s due process rights. [See Lindsev v. Normet (1972) 405 U.S. 56, 74-79; 92 S.Ct. 862.]

7.  Appeals

An appeal is allowed from an order of the trial court granting or denying a temporary restraining order, preliminary injunction, or final injunction. [Code of Civ. Proc. §§ 904.1(a), 904.1(f); U.S. Hertz, Inc. v. Niobrara Farms, supra, 41 Cal.App.3d 68, 72.] The trial court may restrain the foreclosure pending appeal even though the court may have denied a final injunction. [See City of Pasadena v. Superior Court (1910) 157 Cal. 781, 787-88; 109 P. 620.]  In City of Pasadena, the Supreme Court observed that:

Common fairness and a sense of justice readily suggests that while plaintiffs were in good faith prosecuting their appeals, they should be in some manner protected in having the subject-matter of the litigation preserved intact until the appellate court could settle the controversy . . . in order that, if it be ultimately decided that the judgment appealed from was erroneous, his property may be saved to him.  (.Id. at 795-96.)

The appellate courts likewise can issue a stay order or writ of supersedeas which is injunctive in nature to preserve the status quo pending appeal. [Code of Civ. Proc. § 923; see generally, Agricultural Labor Relations Board v. Tex-Cal Land Management, Inc. (1987) 43 Cal.3d 696, 708; 238 Cal.Rptr. 780; People ex rel. San Francisco Bay Conserv. & Dev. Comm. v. Emeryville (1968) 69 Cal.2d 533; 72 Cal.Rptr. 790.]

8.  Notice of Rescission and Lis Pendens

If the sale is not enjoined, the trustor is in serious jeopardy of losing the right to regain the property in the event it is sold to a bona fide purchaser or the purchaser uses the property for security for a loan from a bona fide encumbrancer. Although the bona fides doctrine will not vitiate those claims predicated on voidness which the trustor is not barred from asserting after a foreclosure sale, the doctrine will hamper, if not preclude, the ability of the trustor to vacate the sale based on claims that render the obligation, the trust deed, or the sale voidable., “The Status of Bona Fide Purchaser or Encumbrancer”. ] Therefore, a lawyer representing a homeowner in foreclosure should immediately take steps to avert the application of the bona fides doctrine by giving constructive notice of the homeowner’s claims.

Notice of Rescission

Every acknowledged conveyance of real property which is recorded with the County Recorder provides constructive notice to subsequent purchasers and encumbrancers. [Civ. Code § 1213.] A conveyance is defined to include any instrument which affects the title to real property [Civ. Code § 1215], and any instrument affecting title to real property may be recorded. [Gov. Code § 27280.] The effect of the recordation is to make every conveyance, except a lease not exceeding one year, void as to all subsequent purchasers and encumbrancers in good faith and for a valuable consideration who record their conveyance prior to the recordation of the earlier conveyance.  [Civ. Code § 1214.]

In Dreifus v. Marx (1940) 40 Cal.App.2d 461, 466; 104 P.2d 1080, the Court of Appeal held that a recorded notice or rescission of a deed, which had been served on the defendants and which states grounds for rescission based on fraud, undue influence, and lack of consideration, affected title to real property and imparted constructive notice of the rightful owner’s claims and assertions of title. [See Civ. Code § 1215 defining conveyance to include a document affecting title.]  As the court held,

Its effect was to declare to the world that the author of the notice had by delivery of a deed been defrauded by the

party upon whom the notice had been served, or had failed to receive consideration for the deed, which fact was notice of the invalidity of such prior deed. By the presence of said notice upon the official records of the county, appellant [a subsequent encumbrancer] had constructive notice of the contents of the instrument which was her initial step in her rescissory proceedings to nullify the alleged fraudulent transaction. (.Id. at 466.)

Since the notice of rescission becomes effective upon its service on the persons against whom rescission is sought, the notice must be served in addition to being recorded to impart constructive notice. [See Brown v. Johnson (1979) 98 Cal.App.3d 844, 850; 159 Cal.Rptr. 675.] Although not specifically required by the cases, the recordation of a declaration of service along with the notice of rescission appears to be advisable.

The recognition of a recorded and served notice of rescission as a document imparting constructive notice should not be interpreted to mean that any recorded document purporting to affect title will create constructive notice: “It is settled that an instrument which is recorded but which is not authorized to be recorded and given constructive notice effect by statute does not impart constructive notice to subsequent purchasers.” Brown v.

Johnson, supra, 98 Cal.App.3d 844, 849; see e.g., Owens v. Palos Verdes Monaco (1983) 142 Cal.App.3d 855, 868; 191 Cal.Rptr. 381 (partnership statement); Lawyers Title Co. v. Bradbury (1981) 127 Cal.App.3d 41, 45; 179 Cal.Rptr. 363 (court order for child and spousal support); Brown v. Johnson, supra, 98 Cal.App.3d 844; (notice of vendor’s lien); Stearns v. Title Ins. & Trust Co. (1971) 18 Cal.App.3d 162, 169; 95 Cal.Rptr. 682 (surveys); Black v. Solano Co. (1931) 114 Cal.App. 170, 173-74; 299 P. 843 (royalty agreement); Hale v. Penderarast (1919) 42 Cal.App. 104, 107-08; 183 P. 833 (notice of property repurchase agreement); Rowley v. Davis (1917) 34 Cal.App. 184, 190-91; 167 P. 162 (notice that absolute deed intended as mortgage).] Therefore, any document contesting the transaction should be recorded in the form of a notice of rescission.

b.  Lis Pendens

As soon as a complaint is filed, a lis pendens should be recorded. The recordation of this lis pendens gives constructive notice to prospective purchasers and lenders of the claims asserted in the action. [Code of Civ. Proc. § 409(a); see e.g., Putnam Sand & Gravel Co., Inc. v. Albers (1971) 14 Cal.App.3d 722, 725; 92 Cal.Rptr. 636.] Therefore, even if the temporary restraining order or the preliminary injunction is denied, subsequent purchasers and encumbrancers will take their interest subject to the plaintiff’s

claims and will not have a bona fide status.

A lis pendens is simply a notice that there is pending litigation “concerning real property or affecting the title or the right of possession of real property.” [Code of Civ. Proc. § 409(a).] The notice must include the names of the parties, the object of the action, and a description of the property. (Id.) Prior to recording, the notice must be served by registered or certified mail, return receipt requested to all known addresses of the adverse parties and all owners of record as shown in the latest assessment information in the possession of the county assessor’s office. [Code of Civ. Proc. § 409(c).] A copy of the lis pendens must also be filed with the court in which the action is filed. fid.) A proof of service must be recorded with the lis pendens or, in lieu thereof, a declaration under penalty of perjury stating that the address of the adverse party is unknown. [Code of Civ. Proc. § 409(d).] If the service and proof of service requirements are not satisfied, the lis pendens is void.  (Id.)

D.  Attack on the Sale’s Validity

1.  Vacating the Foreclosure Sale and Obtaining Damages

The traditional method of challenging a foreclosure sale is through a suit inequity,  Anderson v. Heart Fed. Sav. & Loan Assn.

(1989) 1989 Cal.App. LEXIS 141.]

The trustor can seek to set aside any improper foreclosure sale:

It is the general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties. Sham bidding and the restriction of competition are condemned, and inadequacy of price when coupled with other circumstances of fraud may also constitute ground for setting aside the sale. Bank of America v. Reidy, supra. 15 Cal.2d 243, 248.

[See e.g., Stirton v. Pastor, supra, 177 Cal.App.2d 232, 234; Brown v. Busch. supra, 152 Cal.App.2d 200, 203-04; Pv v. Pleitner, supra, 70 Cal.App.2d 576, 579.] In a more modern formulation of the rule, the Court of Appeal has stated that —

“The courts scrutinize a sale held under power in a trust deed carefully, and will not sustain it unless it is conducted with fairness, openness, scrupulous integrity, and the trustee exercises sound discretion to protect the rights of all

interested parties and obtain the best possible price.” Bank of Seoul & Trust Co. v. Marcione, supra, 198 Cal.App.3d 113, 119.

The plaintiff bears the burden of proof and, if the action is based on irregularities in the sale process, must show injury from the claimed irregularities. [See e.g., Stevens v. Plumas Eureka Annex Min. Co., supra. 2 Cal.2d 493, 497; Sargent v. Shumaker, supra, 193 Cal. 122; Anderson v. Heart Fed. Sav. & Loan Assn., supra, 1989 Cal.App. LEXIS 141.] The injured trustor does not have to attempt to enjoin the sale before bringing an action to vacate the sale. [See Hauaer v. Gates, supra, 42 Cal.2d 752, 756.] The trustor is not estopped from raising claims concerning the sale’s validity which could have been raised before the sale. (Id. ) However, the trustor’s action may be barred by laches. [See Smith v. Sheffev (1952) 113 Cal.App.2d 741, 744; 248 P.2d 959.]

The trustor may seek damages instead of, or as an alternative to, setting aside the sale. [See Munaer v. Moore, supra, 11 Cal.App.3d 1, 7; Standlev v. Knapp, supra, 113 Cal.App. 91, 100-02; see also Stockton v. Newman, supra, 148 Cal.App.2d 558, 563-64. ] The decision to seek damages and/or the rescission of the trustee’s sale may be influenced by whether a jury trial is desired. An action to vacate a trustee’s sale is equitable in nature and, hence, the trustor would not be entitled to a jury

trial. An action for damages, however, is an action at law in which the right to jury trial ordinarily exists. If the legal and equitable issues are joined, the trial court has the discretion to try the equitable issues first, and if the trial court’s determination of these issues is dispositive, nothing remains to be considered by the jury. [See Raedeke v. Gibraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665, 671; 111 Cal.Rptr. 693.]

2. Grounds for Attacking the Sale

The grounds for attacking the sale are discussed above.

3. Tender

Since the action to set aside the sale is equitable in nature, the trustor seeking equity is compelled to do equity by tendering the amount of the obligation owed. [See e.g., Shimpones v. Sticknev (1934) 219 Cal. 637, 649; 28 P.2d 673; Napue v. Gor-Mev West, Inc. . supra, 175 Cal.App.3d 608, 621; Karlsen v. American Sav. & Loan Assn.. supra, 15 Cal.App.3d 112, 117; Crummer v. Whitehead, supra, 230 Cal.App.2d 264, 268; Foae v. Schmidt (1951) 101 Cal.App.2d 681, 683. Pv v. Pleitner, supra, 70 Cal.App.2d 576, 582.]

For a discussion of tender and the circumstances which excuse tender, A junior lienor seeking to set aside the sale of a senior lienor because of irregularities that impaired the junior lienor’s opportunity to reinstate or redeem must tender the full amount owing on the senior obligation. [See FPCI RE-HAB 01 v. E&G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1021-22; 255 Cal.Rptr. 157; Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575; 205 Cal.Rptr. 15 (junior lienor had no notice of sale but its right of reinstatement had elapsed); but see United States Cold Storage v. Great Western Sav. & Loan Assn. (1985) 165 Cal.App.3d 1214, 1223-25; 212 Cal.Rptr. 232.] If the ground for vacating the sale does not involve an irregularity precluding the exercise of the right of reinstatement or redemption, tender is not necessary. [See FPCI RE-HAB 01 v. E&G Investments, Ltd., supra, 207 Cal.App.3d 1018, 1022.]

4.  Conclusiveness of Deed Recitals

Trustee’s deeds routinely contain a series of recitals concerning the propriety of the foreclosure. The recitals usually cover every aspect of the foreclosure and purport to be conclusive evidence that the recited facts occurred. The authority of the trustee to make these recitals which ostensibly bind the trustor

is derived from the trust deed. [See Little v. CFS Service Corp., supra, 188 Cal.App.3d 1354, 1358.] The recitals include such facts as the following: a default occurred and still existed at the time of sale, a properly completed notice of default was properly mailed to all parties, not less than three months elapsed between the recordation of the notice of default and the posting and the first publication of the notice of sale, all posting and mailing requirements specified in the trust deed and by statute for the notice of sale were met, the beneficiary properly demanded that the trustee sell the property, and the trustee properly sold the property in full accordance with the terms of the trust deed and all laws. Obviously, this formidable array of recitals, if conclusively binding on the trustor, would be an insuperable obstacle to setting aside the sale. The courts and the Legislature have traditionally recognized the validity of some of these recitals, but the courts have fashioned important exceptions which must be considered by counsel representing a homeowner trying to vacate a trustee’s sale.

As a general proposition, California courts have historically sustained the validity of trustee’s deed recitals regarding the regularity of sale procedures, such as properly publishing and posting notices, as conclusive evidence of the facts recited. [See e.g., Pacific States Sav. & Loan Co. v. O’Neill, supra, 7 Cal.2d 596, 599; 61 P.2d 1160; Cobb v. California Bank, supra, 6 Cal.2d

389, 390; Central Nat. Bank v. Bell, supra, S Cal.2d 324, 327; Sorensen v. Hall (1934) 219 Cal. 680, 682; 28 P.2d 667; Simson v. Eckstein (1863) 22 Cal. 580, 592; 54 P.2d 1107.] The theory underlying this rule is that the trustee, as the trustor’s agent, has been empowered by the trustor in the terms of the deed of trust to bind the trustor in making conclusive admissions regarding the regularity of the sale process. [See Mersfelder v. Spring (1903) 139 Cal. 593, 595; 73 P. 452; Little v. CFS Service Corp., supra, 188 Cal.App.3d 1354, 1358; Pierson v. Fischer, supra, 131 Cal.App.2d 208, 216-17; 280 P.2d 491.] However, the trustee is not obliged to issue a trustee’s deed containing conclusive presumptions regarding the regularity of sales procedures if the procedures were defective. [See Little v. CFS Service Corp., supra, 188 Cal.App.3d 1354, 1360.]

The Legislature has provided that recitals dealing with compliance with all legal requirements for mailing copies of notices, publishing or personally delivering a copy of the notice of default and posting and publishing the notice of sale are prima facie evidence of compliance and conclusive evidence in favor of a bona fide purchaser. [Civ. Code § 2924; see Garfinkle v. Superior Court, supra, 21 Cal.3d 268, 279 n.16; (Supreme Court withholds opinion on validity and effect of Civ.Code §2924 presumptions); a discussion of what is a “bona fide purchaser” is contained in, “The Status of a Bona Fide Purchaser or Encumbrancer” . ] Thus, recitals regarding the mailing, posting, and publishing of notices are conclusive only as to a bona fide purchaser but are rebuttable as to everyone else. [See Napue v. Gor-Mev West. Inc., supra, 175 Cal.App.3d 608, 620-21; Wolfe v. Lipsev, supra, 163 Cal.App.3d 633, 639-40.] The obvious purpose of the presumption is to protect a bona fide purchaser at a trustee’s sale from certain claims of procedural defects. [See Napue v. Gor-Mev West, Inc.. supra, 175 Cal.App.3d 608, 615.]

The statute does not deal with the effect of purported conclusive recitals regarding matters other than the mailing, posting, and publishing of notices. [See Wolfe v. Lipsev, supra, 163 Cal.App.3d 633, 640 (application of presumptions in Civ.Code §2924 to notices of postponement is “questionable”). The courts, however, recognized that the recitals did not prevent an examination into any fraud or unfairness in the sale process about which the purchaser has notice. Thus, for example, the Supreme Court declared that conclusive recitals “would not, perhaps, preclude the inquiry in an equitable proceeding into the fairness of the sale, or with other matters which on equitable principles might entitle the party injured to relief . . . .” Mersfelder v. Spring, supra, 139 Cal. 593, 595; see e.g., Taliaferro v. Crola (1957) 152 Cal.App’.2d 448, 449-50; 313 P.2d 136; Karrell v. First Thrift of Los Angeles (1951) 104 Cal.App.2d 536, 539; 232 P.2d 1; Seccombe v. Roe (1913) 22 Cal.App. 139, 143; 133 P. 507.]

The courts have also declared that no recitals are conclusive between the beneficiary and the trustor. As the Court of Appeal held,

We are of the opinion that this stipulation as to conclusiveness, reading the whole deed and various requirements together, was only intended and only had the effect to protect an innocent purchaser or a third party to the transaction who acquired at such sale the legal title, but that as between the trustor and the beneficiary, when such beneficiary takes the legal title under a sale made in violation of terms of the trust, the trustor is not estopped to deny the regularity of the sale and to obtain equitable relief through a redemption thereof …. Seccombe v. Roe, supra, 22 Cal.App. 139, 143-44.