Court Finds Foreclosure Sale to Bona Fide Purchaser Can Be Void Due to Unconscionable Loan.

By: Julia M. Wei

Mr. and Mrs. Orcilla owned a house in San Jose, California.  In May of 2006, Ms. Orcilla refinanced the house through Quick Loan Funding, Inc. , borrowing $525,000.  At the time, Mr. Orcilla was not employed and Ms. Orcilla’s monthly income was less than $3,000 per month.  The loan’s monthly payments were $4,220.49.

Ms. Orcilla defaulted on the loan in 2007 and Notice of Default was recorded.  The 2007 Notice of Default was rescinded and then in April of 2008, another Notice of Default was recorded.  Quick Loan lost their lending license in May of 2008.  Presumably, the Orcillas’ loan was assigned to Countrywide[1].  In August of 2008, Countrywide offered Ms. Orcilla a loan modification letter stating, “[t]his [a]greement will bring your loan current” and Ms. Orcillla signed and returned the Letter in September of 2008.  A year and half later, on April 23, 2008 the trustee sent a Notice of Trustee’s Sale to Ms. Orcilla.  In May of 2010, the lender and trustee went forward with the foreclosure sale and the bona fide purchaser (“BFP”) at sale was Big Sur, Inc.

The Orcillas filed successive bankruptcies and a federal suit as part of their efforts to overturn the sale and avoid eviction.  As part of their state action to quiet title and for other relief, the Orcillas named Bank of America (“BofA”) (successor to Countrywide) and Big Sur, Inc.

Big Sur successfully demurred to the Orcillas’ complaint on the grounds that Big Sur was a bona fide purchaser for value and the sale was final as to it.  BofA also later demurred and the trial court dismissed the Orcillas complaint.  The lower court’s decision also noted the Orcillas had never made a payment under the loan modification.  This appeal followed.

The Orcillas were ostensibly in pro per and the complaint was lengthy and contained various claims regarding BofA’s failure to consider their loan modification and alleged other perceived defects in the foreclosure sale.  Ultimately the appellate court refined the Orcillas’ claim to this — the loan was illegal because both the loan and the loan modification were unconscionable.

THE DECISION:  The Orcilla decision goes on to determine that as the claim was for equitable relief, there must be tender or an exception to the tender rule in order to seek to set aside a foreclosure sale.  Here, the Orcilla court found that case law has recognized four exceptions to the tender requirement in actions to set aside a foreclosure sale and all four were present in the Orcillas’ complaint:

(1) the borrower attacks the validity of the debt (e.g., based on fraud);

(2) the borrower has a counter-claim or set-off sufficient to cover the amount due;

(3) it would be inequitable as to a party not liable for the debt; or

(4) the trustee’s deed is void on its face (e.g., because the trustee lacked power to convey property).

The Court concluded the complaint was sufficiently pled to void a sale to Big Sur, Inc., the BFP, since the loan itself was unconscionable.  However, the Court also held that as a BFP, Big Sur was insulated from any sort of quiet title claim.  While apparently inconsistent, the Court seems to be distinguishing that any claim that the sale was voidable, the BFP would likely prevail, but here if the defect pre-dated the sale in that the loan was unconscionable, such a remedy may remain viable to the borrower.

Why this case is important:  After Yvanova, does the Orcilla case present a circumstance where post-foreclosure, the borrower has successfully alleged that the sale is void or merely voidable?

The Orcilla case does not address whether the transaction is void or merely voidable.  Instead, the opinion turns on the Court’s finding there is substantial allegation by the plaintiff that the loan terms and/or loan modification terms were “substantively unconscionable” and thus, unenforceable.  However, a review of the prior caselaw suggests a split between authorities, with one case finding that a loan defect would be “outside” the foreclosure proceedings and another case determining that a loan defect would render the later sale void—an alarming result.

COMMENT:   Full disclosure, I represented Big Sur throughout the Orcillas multiple bankruptcies, their failed federal case, the failed appeal of the unlawful detainer in the superior court and federal appeal to the 9th Circuit.  The lender and/or Big Sur, Inc. prevailed in all of those prior actions.  Though the Melendrez decision suggested the opposite result should have occurred, the 6th District apparently wanted to tack on to their ruling in Lona v. Citibank (Lona v Citibank (2011) 202 CA4th 89, finding that no tender was required and then the loan was alleged to be an unconscionable contract.). In Melendrez, the borrowers had a repayment agreement with their lender.  The borrowers alleged the lender should have postponed the sale but failed to do so.  Accordingly, the Melendrez court concluded that after the foreclosure sale, the sale to the BFP was final and could not be set aside as there were no irregularities in the actual foreclosure sale itself—only a contractual claim between the borrower and lender. (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238.)  A search of the filings will also indicate that BofA settled with the Orcillas before oral argument and that the Orcillas requested dismissal of their case prior to oral argument.  Regardless, the court retained jurisdiction and issued this opinion for publication.

One is left to wonder as these cases go on remand back to the lower courts how they will determine if a defect in the foreclosure sale is merely a defect in the procedure, and somehow voidable (or the defect one that is curable), or a defect of such magnitude that the foreclosure sale is a void act.

Orcilla, et al v. Big Sur, Inc., et al Opinion filed February 11, 2016 (Sixth District H040021)

[1] The California Department of Corporations revoked Quick Loan’s lending license and the Orcillas allege Quick Loan never sold or assigned the Note or its interest in the Deed of Trust.