EQUITABLE DEFENSE IN FORECLOSURE EVICTIONS SUMMARY The general rule is that in an unlawful detainer proceeding, challenges to ownership of the subject property are not allowed. CCP sec. 1161a provides that a plaintiff who qualifies as a bona fide purchaser for value, and who presents a trustee s deed reciting a proper foreclosure process, earns a conclusive presumption of ownership. There appears, however, to be one combination of events that may allow a challenge to the foreclosure process to be heard. That combination occurs when four facts are proffered in the form of reliable evidence by the defendant of the unlawful detainer. All four are required to allow the defense to be presented at trial. First, the action is a post-foreclosure eviction by plaintiff-beneficiary versus defendant-former owner/trustor of the property. Second, the plaintiff was not a bona fide purchaser for value at a trustee s sale. Third, defendant alleges fraud or defects in the foreclosure process by which the plaintiff acquired the trustee s deed. Fourth, the defendant tenders the amounts due up to the date of trial. Once defendant has established the existence of the above evidence, defendant should be allowed to prove that possession should not pass to plaintiff because the trustee s deed was obtained by fraud or in violation of the statutes governing non-judicial foreclosure. Should defendant prevail, there is no effect on the deed or the legal ownership of the property because those issues are not before the court in this proceeding. This action is solely limited to the right of possession. It is important to note that this does not actually represent a challenge to ownership of the property, but rather an equitable challenge to the right of the holder of the trustee s deed to evict by way of an act of fraud. For example, the fraud may exist where there was a forbearance agreement in place and not in default when the sale took place. This exception does not open to challenge any issues regarding fraud in the inducement to enter the loan, nor any other issues not directly related to the manner and validity of the foreclosure process. LAW AND DISCUSSION The sole objective of an unlawful detainer action is to determine the right to possession of the subject real property. Counterclaims, cross-complaints, and affirmative defenses are not allowed in an action in unlawful detainer, even though the alleged cause contained grows out of the subject matter involved in the original suit. (Smith v. Whyers, 64 Cal.App. 193, 194, 221 P. 387; Arnold v. Krigbaum, supra, 169 Cal. at p. 145, 146 P. 423; Lakeside Park Assn. of Kelseyville v. Keithly, 43 Cal.App.2d 418, 422, 110 P.2d 1055; Knowles v. Robinson, 60 Cal.2d 620,625,36 Cal.Rptr. 33, 387 P.2d 833; Cheney v. Trauzettel, 9 Cal.2d 158, 159,69 P.2d 832). The purpose of this rule is to prevent tenants who have violated the covenants of their leases from frustrating the ordinary and summary remedy provided by statute for the restitution of the premises. As observed in Lakeside Park, supra, The reason for this rule is that the injecting of other issues extrinsic to the right of possession may defeat the very purpose of the statute. (43 Cal.App.2d p. 1
422, 110 P.2d at p. 1058.) Accordingly, under this general rule a tenant is not permitted to interpose a defense usual or permissible in ordinary actions at law. (Arnold v. Krigbaum, supra, 169 Cal. at p. 146, 146 P. 423.) The general rule, however, has two recognized exceptions. The first exception is where the tenant has voluntarily surrendered possession before trial. (Servais v. Klein, 112 Cal.App. 26, 36, 296 P. 123; Heller v. Melliday, 60 Cal.App.2d 689, 697,141 P.2d447.) The basis for this exception is that since the right to possession is no longer in issue, the rationale underlying the general rule evaporates and the action thus becomes an ordinary one for damages. The second exception is the one pertinent to this discussion. This exception permits the court to inquire into equitable considerations in an unlawful detainer action. (See Schubert v. Lowe, 193 Cal. 291, 295--296, 223 P. 550; Johnson v. Chely, 43 Cal. 299, 305; Manning v. Franklin, 81 Cal. 205, 207--208, 22 P. 550; Pico v. Cuyas, 48 Cal. 639,642; Gray v. Maier & Zobelein Brewery, 2 Cal.App. 653,658, 84 P. 280; Knight v. Black, 19 Cal.App. 518, 525--527, 126 P. 512; Rishwain v. Smith, 77 Cal.App.2d 524, 531, 175 P.2d 555; Strom v. Union Oil Co., 88 Cal.App.2d 78, 83, 198 P.2d 347; Abstract Investment Co. v. Hutchinson, supra, 204 Cal.App.2d 242, 247--248, 22 Cal.Rptr. 309.) In Schubert, supra, the Supreme Court cited, with approval, language in Gray, supra, that in an unlawful detainer action the equitable powers of the court may not be extended "into a full examination of all the equities involved, to the end that exact justice be done." (193 Cal. at p. 295,223 P. at p. 552.) In Schubert, the defendant was permitted to raise the equitable defense that the tenancy was not a month-to-month tenancy as alleged by the plaintiff, but that his occupation was under an oral agreement to lease. Note that the reference in Schubert to not going forward into a full examination of all the equities involved, to the end that exact justice be done pertains to the limited nature of an unlawful detainer. A finding for defendant in an unlawful detainer does not have the effect of voiding the deed. The finding merely determines that no right of possession will be transferred to the plaintiff. Similarly, in Rishwain, supra, the defendants pleaded and proved that as a part of the consideration for the purchase of the plaintiffs' mercantile business the plaintiffs agreed to lease the building in which the business was located. In Johnson, supra, the tenant was permitted to show that, being already in possession, he was induced to enter into the lease upon which the landlord was relying through deception and imposition practiced upon the tenant by the landlord. The equitable defense urged in Manning, supra, was that the relationship was not that of landlord and tenant, but a sale of an interest in property; and, similarly, in Pico, that it was a partnership. "The basic teaching of Knowles, Lakeside, and the entire line of cases these decisions reflect, that a defense normally permitted because it 'arises out of the subject matter' of the original suit is generally excluded in an unlawful detainer action if such defense is extrinsic to the narrow issue of possession, which the unlawful detainer procedure seeks speedily to resolve. Neither Knowles, Lakeside nor any other California decision, however, prohibits a tenant from interposing a defense which does directly relate to the issue of possession and which, if established, would result in the tenant's retention of the premises. (Emphasis Added) The thrust of the Knowles' line of cases is basically to prevent tenants from frustrating the summary statutory remedy through introduction of extraneous matter; the decisions accomplish this objective by confining the unlawful detainer action to issues directly relevant to the ultimate question of possession." Green v. Superior Court (1974) 10 Ca1.3d 616. 2
CCP sec. 1161a(b) codifies the legal plaintiff s authority to evict someone after a perfected sale under foreclosure. In Vella v. Hudgins 20 Cal 3d 251, the court held that "qualified exception to the rule that title cannot be tried in unlawful detainer is contained in Code of Civil Procedure section 1161a, which extends the summary eviction remedy beyond the conventional landlord-tenant relationship to include certain purchasers of property such as Hudgins. Section 1161a provides for a narrow and sharply focused examination of title. To establish that he is a proper plaintiff, one who has purchased property at a trustee's sale and seeks to evict the occupant in possession must show that he acquired the property at a regularly conducted sale and thereafter duly perfected his title. Thus, we have declared that to this limited extent, as provided by the statute,... title may be litigated in such a proceeding. " "Section 2924 of the Civil Code creates a conclusive presumption in favor of a bona fide purchaser at a trustee's sale that if the trustee's deed recites that all requirements of law have been complied with regarding the mailing, posting, publication, or personal delivery of the notice of default and the notice of sale, the recital is conclusive. In other words, failure to comply with the notice requirements is a ground to cancel the sale only as against a party who is not a bona fide purchaser. A sale to a bona fide purchaser is not voidable." Napque v. Gor-Mey West. Inc. (1985) 175 Ca1.App.3d 608.) "The elements of bona fide purchase are payment of value, in faith, and without actual or constructive notice of another's rights. (See Trusts; 77 Am.Jur.2d, Vendor and Purchaser 633 et seq.)" 4 Witkin, Summary of California Law (9 th ed. 1987) Real Property, 206, page 411. In Little v. CFS Service Corp., supra, 188 Ca1.App.3d at pages 1358-1359,233 Ca1.Rptr. 923, the court reviewed the California cases which considered whether defects in notice made a foreclosure sale void or voidable. The court found: "Although the extent of the defect is not determinative, what seems to be determinative is the existence and effect of a conclusive presumption of regularity of the sale. A deed of trust, which binds the trustor, may direct the trustee to include in the deed to the property recitals that notice was given as required under the deed of trust and state that such recitals shall be conclusive proof of the truthfulness and regularity thereof." (Id. at p. 1359,233 Ca1.Rptr. 923.) Where no such recitals as to the regularity of a sale appear in a deed and there was a defect in the notice to the trustor, the deed has been found void. (Ibid.) Where such recitals appear on the face of a deed but the deed also sets forth facts which are inconsistent with the recital of regularity, the deed has been found void on the basis that the deed showed that the recitals were not valid. (Ibid., citing Holland v. Pendleton Mtge. Co. (1943) 61 Ca1.App.2d 570, 576-577, 143 P.2d 493.) Only where recitals of regularity appear in the deed and no contrary recitals are made have notice defects been found to make a deed voidable, rather than void. (Little v. CFS Service Corp., supra, 188 Cal.App.3d at p. 1359,233 Cal.Rptr. 923.) In such instances a trustor then bears the burden of showing that there are grounds for equitable relief from the deed, such as fraud or that the buyer was not a bona fide purchaser for value, and that there were also defects in notice. (Ibid.)" (Dimock v. Emerald Properties LLC (2001) 81 Cal.App.4th 868, 877.) (Emphasis Added). TENDER REQUIREMENT An age old maxim of equity is that, to gain equity a party must do equity. In equity "[a] valid and viable tender of payment of the indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust. (Shimpones v. Stickney, 219 Cal. 637,649,28 P.2d 673; Humboldt Savings Bank v. McCleverty, 161 Cal. 285, 290,119 P. 82; Copsey v. Sacramento Bank, 133 Cal. 659,666, 66 P. 7,204; 3
Crummer v. Whitehead, 230 Cal.App.2d 264, 268,40 Cal.Rptr. 826; Mack v. Go Uno, 65 Cal.App.2d 731, 735, 213 P.2d 760; Py v. Pleitner, 70 Cal.App.2d 576,581--582, 161 P.2d 393; Carpenter v. Hamilton, 59 Cal.App.2d 149, 151, 138 P.2d 355; Touli v. Santa Cruz County Title Co., 20 Cal.App.2d 495, 499, 67 P.2d 404.)" (Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 117.) Furthermore, "'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.' (Bank of America etc. Assn. v. Reidy, supra, 15 Cal.2d at p. 248, 101 P.2d 77.) A debtor may apply to a court of equity to set aside a trust deed foreclosure on allegations of unfairness or irregularity that, coupled with the inadequacy of price obtained at the sale, mean that it is appropriate to invalidate the sale. (Sierra Bay Fed. Land Bank Assn. v. Superior Court (1991) 227 Cal.App.3d 318,337;,277 Cal.Rptr. 753 3 Witkin, Summary of Cal. Law (9th ed.1987) Security Transactions in Real Property, 149.)" (Lo v. Jensen (2001) 88 Ca1.AppAth 1093, 1097-1098.) The appellate court in Lo, supra at pages 1097, 1099, affirmed the trial court's judgment setting aside a trustee's sale, even though the plaintiff debtor did not tender payment of the arrears prior to initiating the action. The appellate court found that the judgment itself satisfied the tender requirement in that as a condition of setting aside the trustee's sale and trustee's deed the debtor was required to tender only the amount in arrears. One could argue that there should be no requirement of tender, because the fraud alleged is a violation of statutory requirements covering foreclosure proceedings, and therefore it should be considered a legal defense, rather than one in equity. It appears, however, based on the above citations, that the exception that allows a challenge to plaintiff s right of possession is based on fraud, an equitable issue. Although it may require proof of violation of statutes to prevail, that does not alter its character as an equitable challenge. With no tender of payment, a decision by the court in favor of defendant could be meaningless and temporary. In essence, this creates an equitable threshold to an issue to be decided based on evidence of violations of statutory law. The tender required need not be the total amount due on the deed of trust if the fraud alleged is related to a forbearance agreement. In that case the tender would more logically be the amount then due under the agreement, as the court found in Lo, supra. The amount of the tender will depend on an analysis of the agreement in effect at the time of the foreclosure sale. If the original note was still in effect, was there an acceleration triggered by a default? If the answer is yes, the court could find that the entire amount of the loan (or an approved remortgage agreement) may be required. If the answer is no, the total of payments (and late fees) to the date of trial may be required. If there was a forbearance agreement in effect, the total of payments under that agreement to the date of trial may be required. It could further be argued that a fifth requirement could be the existence of an action for fraud in a court of appropriate jurisdiction. This would be similar to the requirement of tender of payment, in that the fraud alleged in the unlawful detainer is strictly related to the issue of possession of the property, not the ownership of the property. As stated in the Schubert case, supra, there is not to be a full examination of all of the equities. A finding for defendant in the unlawful detainer merely establishes defendant s right to remain in possession of the property. If no action has been taken to resolve any underlying issues with the loan, a judgment for defendant here could again be meaningless and temporary. 4
The argument against such a requirement might be that most defendants appear in pro per, and lack the ability to pursue a full civil action in unlimited jurisdiction. Also, a finding in favor of defendant here will leave the plaintiff in legal limbo, requiring plaintiff to bring such an action to clear the title. In fact, even if there were such a suit and plaintiff were to prevail on title issues, it would have no effect on whether the foreclosure process was valid. That is a separate issue to be tried in the present unlawful detainer action. Case law is currently silent on this issue, suggesting that at present there is no such fifth requirement. THE PRACTICAL EFFECT As with the limited scope of an unlawful detainer proceeding, the scope of this study is limited to a single issue: May a defendant establish a right to challenge the foreclosure procedure in the trial of an unlawful detainer? The number of foreclosure evictions has risen dramatically in the current economy. With that rise has come an influx of defenses based on a range of alleged frauds by lenders, mortgage brokers, and real estate agents. Faced with the standard rule that ownership of the property is established with the presentation of a certified trustee s deed, defendants have searched for a way to challenge the eviction while fighting a fraud case in the unlimited jurisdiction court. While the specific issues are new and untested in our appellate courts, the equitable principals are old and established. The first line of defense has been to request a stay of the UD pending the resolution of the fraud case. The UD statutes give little support to that request, because of the priority and right to swift prosecution of these matters. Also, the request for a stay is actually a request for temporary restraining order, and all of the requirements for a TRO apply. One of those requirements is that the petitioner demonstrates a likelihood of success in the underlying action. Proper authority for the order rests with the court in which the underlying action has been filed, where the determination of chance of success is more easily made. A stay should therefore not be granted in the lower court. The issue addressed here, fraud in the foreclosure procedure, usually comes before the court in one of two ways, in response to a motion by plaintiff for summary judgment or as a proffered defense at trial. It may or may not have been pled in the answer. The basis for the viability of this defense is that, if the lender did not buy the property at arms length through a bidding process, there could exists an opportunity for the lender to simply take the property wrongfully by faking or shortcutting the statutory requirements. If offered at trial, as part of the defense case, an offer of proof should be requested from the defendant. It should contain proffered evidence to establish all four of the requirements listed at the top of this discussion. Evidence on the issue of whether plaintiff is a BFP may be taken from the trustee s deed itself. If it shows that the plaintiff/purchaser at sale was the same as the beneficiary of the trust deed, that should be sufficient to establish that plaintiff was not a BFP. If the defendant cannot proffer evidence sufficient to prove all four elements, it is proper to deny the presentation of evidence on the issue of ownership. The offer of proof should contain a description of the testimony or documents that would be proffered, to afford both sides a proper record on appeal. 5
If the offer of proof is complete, testimony should be monitored to limit it to the issues pertinent to possession, and not further to damages or a complete determination of the ultimate fraud issues. If the issue is presented in response to plaintiff s motion for summary judgment, plaintiff need not address the issue in the motion or statement of undisputed facts. Plaintiff s burden is to prove each element of the cause of action, not to negate all possible defenses. Once the plaintiff has met that burden, the burden shifts to the defendant to show that a triable issue of one or more material facts exists as to that cause of action. CCP 437c(o)(1); Aguilar v. Atlantic Richfield Company (2001) 25 Cal 4 th 826. The defendant s burden is then to present evidence to establish the four prongs of the equitable defense stated above. Plaintiff may have established the first two by submitting the trustee s deed. Defendant must offer evidence of the final two to establish a triable issue. That means either evidence of a forbearance agreement and evidence of breach by plaintiff, or evidence of failure to follow at least one of the statutory requirements of the laws of foreclosure by plaintiff, followed by evidence of tender of the amount due under either theory. Submitted by Commissioner Lowell Richards, Contra Costa Superior Court. Much credit is due to Hon. Steven C. Bailey, Sacramento Superior Court, for most of the case cites above. Most references were taken from his well considered tentative ruling on an unlawful detainer in December of 2008. 6