Legal Update

BUYER OF HOME IN FORECLOSURE LOSES BIG JUDGMENT FOR FAILING TO USE THE CORRECT PURCHASE CONTRACT

  • May 31st, 2011
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Buyer of a home in foreclosure failed to follow the statutory requirements of the Home Equity Sales Contract Act, which requires notice of right to cancel, thereby permitting the seller to recover an award of $660,000 in damages plus attorney fees against the buyer. Capon v. Monopoly Game LLC 193 CA 4th 344 (2011).

FACTS:   Since 1991, Plaintiff owned his home in Hillsborough, California.  In 2003 he encountered financial difficulties which resulted in a default on his second mortgage.  A notice of default and subsequent notice of trustee’s sale were recorded, setting a date for the trustee sale of his home.

Monopoly Game LLC was in the business of purchasing residential properties in foreclosure.  Mr. Gladney (the company owner) learned of the pending foreclosure of Plaintiff’s home, met with Plaintiff on the day of the foreclosure sale and agreed to purchase Plaintiff’s home for $100,000.  This was $100,000 more than the Plaintiff would have received if the home was sold at the trustee sale.  Before the trustee sale took place, Plaintiff signed a one-page Agreement to Sell Real Property and a grant deed in favor of Monopoly.  Although not stated in the court’s opinion, Monopoly presumably paid the arrearages owed to the foreclosing lender and stopped the foreclosure sale.

Less than 30 days later, Monopoly found a buyer for the Property and sold it for $1.5 million, netting a $300,000 profit after paying off the mortgages.   At the time of the sale to the new buyer, Plaintiff had not moved out of his home.  Monopoly helped obtain a restraining order against Plaintiff, resulting in his arrest and removal from the home, and forcing him to leave behind most of his personal belongings, including some expensive scientific equipment.  Monopoly disposed of Plaintiff’s personal belongings so the new buyer could move in.

Two years later Plaintiff filed suit against Monopoly and the new buyer seeking a rescission of the sale of his home plus damages and attorney fees for violation of the Home Equity Sales Contract Act (HESCA).

Under HESCA § 1695.19(a), an “equity purchaser” is any person who acquires title to a residence in foreclosure, unless the purchaser intends to use the property as a “personal residence”.  HESCA requires a written agreement between an equity purchaser and an equity seller and specifies that the contract must “include the total consideration given, the terms of payment and terms of any rental agreement; a conspicuous statement of the right to cancel within five business days or until 8 a.m. on the day scheduled for foreclosure, with an attached notice of cancellation; and a conspicuous notice that until the right to cancel has ended, the equity purchaser cannot ask the seller to sign a deed or any other document.

None of these requirements were satisfied by the purchase agreement used in this transaction.

The trial court ruled that HESCA did not apply, because Monopoly acquired title for the purpose of permitting Gladney to use the Property as his personal residence.  The Court of Appeal disagreed and reversed.

DECISION:  The Court of Appeal began its analysis by reviewing the intention of the legislature when enacting the Home Equity Sales Contract Act.    The intent of the legislature was to protect homeowners facing foreclosure from unfair purchases of their home equity.  The legislature recognized the equity value of a residence may be a homeowner’s most valuable financial asset.

The trial court determined the defendants Monopoly and Gladney were one in the same under a theory of alter ego and that Monopoly was not an “equity purchaser”, as defined by HESCA, because Gladney intended to use the property as his personal residence. The Court of Appeal disagreed.

The Court observed that the Defendant’s interpretation of the statute would provide more opportunity for misuse.  The statue does not specify any particular period of time for personal use.  Allowing companies, such as an LLC, to fall under the exception would allow them to acquire title to properties and then resell them after “using” them residentially for a relatively short period time. The Court reiterated; “Application of the exception in this case would be particularly ironic, because Monopoly Game, which is in the business of home equity purchasing, is the “archetypal” purchaser targeted by the Act.”

ANALYSIS:    In enacting HESCA, the legislature sought to protect vulnerable homeowners who are facing foreclosure, from exploitation by investor-purchasers looking to make a profit.  Where, as here, the investor forced the homeowner out of his home, threw away his personal property, and then sold the home for a quick $300,000 profit, the court will usually step in and reverse the transaction.  When purchasing property from homeowners in foreclosure, investor-purchasers and their real estate agents should use the CAR form Notice of Default Purchase Agreement (NODPA 4/10), which includes the requisite HESCA language.  Otherwise they are exposed to significant legal liability.

Full text of the decision:

http://scholar.google.com/scholar_case?case=7091875081803129255&hl=en&as_sdt=2&as_vis=1&oi=scholarr

Mark L. Strombotne, Esq.

Real Estate Transactions and Litigation

MLS@StrombotneLaw.com

Strombotne Law Firm

16450 Los Gatos Blvd., Suite #110

Los Gatos, CA  95032

phone:  408-971-9540

www.StrombotneLaw.com

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This case was recently decided and is subject to change by further appellate court review.  You should consult legal counsel to evaluate this legal precedent in the context of your specific facts.  The distribution of Legal Update does not by itself create an attorney-client relationship with the reader.