Wednesday, April 23, 2014

FYI: Cal App Ct Reverses Ruling in Favor of Lender in Alleged Inability to Repay Lawsuit

Monday, January 23, 2012

The California Court of Appeal, Sixth Appellate District, recently reversed a trial court's order requiring tender in order to overturn a trustee's sale, as in the Court's view the borrower raised triable issues of material fact as to whether the deed of trust was allegedly illegal and unenforceable, and whether the borrower's claims would allegedly offset any amount due under the mortgage loan. 
 
A copy of the opinion is available at:
 
Plaintiff-appellant borrower (the "borrower") obtained a mortgage loan providing for monthly payments of more than $12,000, although his monthly income was only $3,333.  The borrower fell behind on his payments, and the property was sold at a nonjudicial foreclosure sale.  The borrower sued his lender and loan servicer, among others (collectively, the "lender") asking for the sale to be set aside and claiming that the loan was invalid and unconscionable, on the grounds that he did not understand the nature of the transaction and that the lender did not consider his inability to repay the loan. 
 
The lender moved for summary judgment, arguing that the borrower was required to tender the amount due on the loan in order to move for the sale to be set aside, which he did not do.  The lender further argued that the borrower voluntarily entered into the loan transaction, and that the borrower was responsible for his failure to make payments.  The lower court granted summary judgment to the lender, and the borrower appealed. 
 
On appeal, the borrower argued that the sale of the subject property was void because the loan was unconscionable, illegal and void at inception.  The lender asserted that the borrower did not support his allegations with any evidence, and that the borrower improperly relied on conclusions rather than facts, among other arguments. 
 
The Appellate Court held that the loan contract between the borrower and the lender was one of adhesion, and that a contract of adhesion will be denied enforcement if it is unduly oppressive or unconscionable.  An unconscionability analysis includes both procedural and substantive elements; the former focuses on unequal bargaining power, and the latter considers whether the results were one-sided. 
 
Although the borrower alleged unconscionability with regard to whether the lender considered his inability to repay the loan, the lender did not address that issue in its filings.  Accordingly, the Court held that "the [lender] failed to meet [its] burden on summary judgment because their motion failed to address all of the allegations of [the borrower]..." 
 
The lender did argue that the borrower did not present any evidence supporting his unconscionability argument.  However, the Appellate Court noted that in California, a defendant is required to "present evidence, and not simply point out through argument, that the plaintiff does not possess and cannot reasonably obtain the needed evidence." 
 
Further, the Appellate Court held that the record "revealed triable issues of material fact."  Specifically, the Appellate Court pointed to the borrower's claims that his education and command of English were limited; that the loan documents were supposedly not explained to him; and that he supposedly did not understand what he was signing, indicated a triable issue of procedural unconscionability.  In addition, the borrower's allegations regarding the disparity between his income and monthly mortgage payment created a triable issue of fact with regard to substantive unconscionability. 
 
Finally, the Court noted that under several circumstances, a party seeking to overturn a trustee's sale is not required to offer to pay the full amount of the debt.  The Court found that two of these exceptions were relied upon by the borrower:  (1) that the deed of trust was allegedly illegal and unenforceable, and  (2) that the borrower's claims would allegedly offset any amount due under the mortgage loan. 
 
Consequently, the Court reversed the lower court's decision to grant summary judgment to the lender.  



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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