The 6th District Court of Appeals in California opened the door for a homeowner to sue their lender and possibly recover their home after foreclosure, if the borrower can prove that the circumstances and terms of the underlying loan were egregious, oppressive and predatory. Lona v. Citibank 202 CA4th 89 (2011).
FACTS: In 2007, Jonas Lona responded to a mortgage broker’s ad, and refinanced the existing $1.24 million loan on his Hollister home with two new loans totaling $1.5 million. The first loan had an initial interest rate of 8.25% and the second loan had an interest rate of 12.25% with a balloon payment due in 15 years. The loan application stated that Lona’s income was $20,000 per month whereas in reality, Lona made only $3,333 a month as a maintenance mechanic for Monterey Mushrooms. The monthly payments due on the new loans totaled $12,381, almost four times his monthly income. Lona was almost 50 years old and had an eighth grade education in Mexico. English was not his first language, the loan documents were not adequately explained to him in English or Spanish, and he had little understanding of the loans he received.
Lona was unable to make his monthly mortgage payments and defaulted after only five months. The lender foreclosed on the property by trustee sale. Lona sued the lender to set aside the foreclosure on the grounds of predatory lending.
In response to the homeowner’s claim, the lender moved for summary judgment, arguing that the homeowner had violated the “tender rule” by failing to tender the full amount due on the loans (i.e. $1.5 million), which was required to set aside the sale; that none of the exceptions to the tender requirement applied; and that the homeowner voluntarily entered into the loan agreements and was personally responsible for the loss of his home. The trial court granted summary judgment and dismissed the case. The Sixth District Court of Appeals reversed the dismissal and re-instated the homeowner’s lawsuit.
DECISION: Generally, a challenge to the validity of a trustee’s sale is an attempt to have the sale set aside and to have the title restored to the homeowner. A nonjudicial foreclosure sale is accompanied by a common law presumption that it ‘was conducted regularly and fairly.’ This presumption may only be rebutted by substantial evidence of prejudicial procedural irregularity. Lona had no evidence of irregularity at the trustee sale. Instead, Lona’s primary contention was that the trustee’s sale was void because the underlying loan and deed of trust was unconscionable, illegal, and void at the inception.
The Court observed that the loan was a “contract of adhesion” because of the lender’s superior bargaining strength and the borrower’s inability to change any terms. An adhesive contract will be deemed unconscionable, if it does not fall with the reasonable expectations of the weaker party and is unduly oppressive. The court ruled that under the facts of this case, there was sufficient evidence of unequal bargaining power, oppression and surprise, to raise a triable issue regarding unconscionability sufficient to reverse summary judgment.
A second legal basis for the lender’s motion to dismiss the case was the borrower’s failure to tender the full amount of the unpaid debt (i.e. $1.5 million) before filing the lawsuit. Because the action is in equity, a defaulted borrower who seeks to set aside a trustee’s sale is required to do equity before the court will exercise its equitable powers. Consequently, as a condition precedent to an action by the borrower to set aside the trustee’s sale on the ground that the sale is voidable because of irregularities in the sale notice or procedure, the borrower must normally offer to pay the full amount of the debt for which the property was security. However one exception to the tender requirement is when the borrower’s action attacks the validity of the debt. Here Lona’s action alleged the loan contract was illegal at the time of formation and was therefore unenforceable. The Court found that the lender failed to refute this exception so the case was reinstated and allowed to go forward to trial.
ANALYSIS: This case provides homeowners who have lost their home in foreclosure, with a new legal avenue to set aside the foreclosure sale and to overcome the usually insurmountable hurdles of tendering full payment of the loan and proving the trustee sale was procedurally defective. Now, a lender who makes a predatory loan to a borrower who did not understand the terms of the loan may be forced to go to trial. However it remains to be seen if these facts are enough for the borrower to win at trial and recover title to their home.
Full text of the decision:
http://www.leagle.com/decision/In%20CACO%2020111221087
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