When a borrower has defaulted, it is frustrating enough. Deciding to foreclose is a (sometimes) difficult, but necessary, decision. What is infuriating is when the borrower sues (always on the eve of the Trustee’s Sale) seeking to prevent the sale. The lawsuits are seldom meritorious (I’ve coined the phrase “wrongful infliction of money” for them), but most often they will seek a court order (TRO then Injunction) to prevent the sale. Their allegations vary but follow a general pattern we’ve seen hundreds of times.
It is tremendously important not to hide under the covers and let these go. If an injunction issues, you are in for a long haul of litigation before you ever get your hands on the precious REO. Ordinarily, you should expect to lose the TRO (Judges usually fall for the ‘crying widow’ allegations). Here is the good news: the “T” stands for “temporary,” so you get another chance 30 days later. Expect to win that one.
Here is how:
1. Opposing a Preliminary Injunction
- In General: In California, the rules for obtaining an injunction are outlined in the California Code of Civil Procedure (CCP) Sections 525-533 and the California Rules of Court, Rules 3.1150-3.1152. An injunction can be granted in cases where ongoing damage cannot be fixed with money, or where it is difficult to determine the monetary value of the damage.
- Winning the Case: To secure a preliminary injunction, the plaintiff must demonstrate a strong chance of winning the case, significant harm without the injunction, greater fairness compared to the other party, and public benefit. In this instance, the plaintiff has not convincingly shown all these points.
- Paying Off Debt to Stop Foreclosure: To stop a foreclosure sale, the full amount owed must be paid first, especially when the sale is imminent or has already occurred.
- Notices in Foreclosure: If legal notices were not properly given but the intended recipient received them in time to protect their interests, it is generally considered acceptable.
- Buying Foreclosed Property: If all legal steps in a foreclosure were followed, there is a strong presumption that everything was done correctly, particularly for an unaware buyer.
- Loans for Business vs. Personal Use: The primary consideration for determining if a loan was for business or personal use is the purpose of the loan, not the security used.
- Asking for a Clear Declaration: To win a case for a clear declaration, such as questioning the validity of a property transfer, the plaintiff must show a real, current dispute and that the transfer directly harmed them.
- Joining All Necessary Parties: If someone has a stake in the subject of a lawsuit and their absence could lead to double trouble or conflicting obligations for the existing parties, they should be included in the case.
- Paying to Stop Foreclosure: To stop a foreclosure, the full amount owed must be offered. The court seeks fairness and will not intervene without real benefit or purpose.
- Lenders Selling Debt: The law allows lenders to sell debt to non-institutional investors, and selling consumer debt to different parties does not violate the law.
- Joint Ventures and Property: Sharing profits from selling land does not automatically create a joint venture; joint control and management of the business are required.
- Licensing Issues: Defendants not being properly licensed to make loans does not matter if the loans were for business, not personal use, thus usual licensing rules do not apply.
- Lender’s Responsibilities: Generally, lenders do not owe special duties to borrowers beyond the usual money-lending responsibilities. They are not responsible for ensuring the borrower’s success or for problems with the borrower’s construction projects.
- Changing Written Contracts Verbally: A written contract cannot be changed by a verbal agreement unless the verbal agreement is also written down and signed by everyone involved.
- Loan Purpose: Lenders can rely on the borrower’s stated purpose of the loan. If the borrower claims it is for personal use, the lender does not have to double-check.
- Consumer Protection Laws and Business Loans: Laws like RESPA and TILA, which protect consumers, do not apply to business loans.
- Foreclosure and the Rosenthal Act: Foreclosing on a property to recover a debt is not covered by the Rosenthal Act.
- Slander of Title: Claiming slander of title requires showing that a false statement was published without legal justification, causing financial loss.
- Unfair Contract Terms: A contract is considered unfair if its terms were extremely one-sided at the time it was made.
- Unfair Business Practices: To claim unfair business practices, specifics on how the law was broken are required. Just claiming harm from valid legal documents is insufficient.
- Usury Laws and Real Estate Brokers: Loans arranged by licensed real estate brokers are not subject to certain interest rate limits.
- Valid Transfer of Property Rights: For a property rights transfer to be valid, it must be written and delivered to the new owner. Even if the transfer seems questionable, it does not harm the person who owes money on the property.
- Wrongful Foreclosure: Claiming wrongful foreclosure is not possible until the property has actually been sold.
2. Irreparable Injury
- In General: When deciding on a temporary restraining order (TRO), the court considers who would be hurt more—the person requesting the order or the other party—and leans towards protecting the one at greater risk.
- Specific Laws: If the plaintiff wins under certain laws but would only receive money, these laws are not relevant for obtaining a TRO.
- Delay and Harm: If the plaintiff waited too long to request the injunction, it could unfairly harm the defendant.
- Investment Property: If the property is for investment and has a market price, losing it can usually be fixed with money, so an injunction is not typically needed.
- Suing for Damages: Usually, an injunction is not granted if suing for damages would solve the problem.
3. Balancing What’s Fair
- Defaulting on a Loan: Stopping loan payments before anything else goes wrong does not allow one to play the victim.
- Purpose of Nonjudicial Foreclosure: Nonjudicial foreclosure aims to quickly and efficiently address defaults, protect borrowers from wrongful loss, and ensure sales are final and fair to new buyers.
- Investment Property Again: Losing investment property is not seen as causing irreparable harm because it can usually be fixed with money.
- Residential Property: Even if it is a home, courts can deny an injunction if it would unfairly harm the lender and the plaintiff does not have a strong case.
- Taking Advantage: It is not fair to allow someone to back out of a loan after they have received the money.
4. Public Interest
- Foreclosure laws aim to provide creditors with a quick way to handle defaults, protect borrowers from wrongful property loss, and ensure sales are final and fair to new buyers. Allowing someone to remain in default while preventing the lender from protecting their interests is not in the public interest.
5. Opposing a Preliminary Injunction
- In General: The court evaluates who would be hurt more by the decision and the likelihood of the plaintiff winning their case.
- Tender Offer: To cancel a contract or stop an action, it is usually required to offer to pay back what is owed first.
- Financial Code Sections: These laws do not specifically define “consumer,” but other laws and federal regulations suggest it means a natural person, not a business or organization.
- Standing: The affected party must be the one bringing the lawsuit.
6. Applying for a TRO/Preliminary Injunction
- In General: The main purpose of a TRO or preliminary injunction is to maintain the status quo until the court decides the full case.
- TROs: A TRO can be requested if immediate harm or danger is shown.
- Preliminary Injunctions: These are used in serious cases where the harm to the plaintiff is significant and immediate, and the other party is not greatly affected.
- Success on the Merits: It must be shown that there is a likelihood of winning on legal grounds such as breach of contract, fraud, or interference with economic advantage.
- Irreparable Harm: This refers to harm that cannot be fixed with money.
- Balance of Equities: The court leans towards protecting the party who would be more harmed by its decision.
- Undertaking: If a preliminary injunction is issued, the requesting party usually must promise to pay for any damages if the injunction turns out to be unnecessary.
7. Dissolving Injunctions
- The court can change or end an injunction if the facts or laws change or if it is the right thing to do.
8. Posting an Undertaking
- If a preliminary injunction is issued, a financial guarantee to cover potential damages caused by the injunction is usually required.
9. Res Judicata & Collateral Estoppel
- These principles mean that once a judgment is made in a case, the same issues cannot be brought up in a new lawsuit.
10. Standing
- Directly affected parties have the right to bring a lawsuit.
- Every action must be prosecuted in the name of the real party in interest. A party who is not the real party in interest lacks standing to sue. The real party in interest possesses the right being sued upon, according to substantive law. Thus, someone who is not a party to a contract has no standing to enforce the contract or recover damages for wrongful withholding of benefits to the contracting party.
- Standing is essential for a cause of action to exist. Actions must be prosecuted by the real party in interest unless otherwise provided by statute.
- Cancellation of Assignment of Deed of Trust: For a borrower to establish standing to cancel an assignment of a deed of trust, they must prove a concrete and actual beneficial interest. However, California courts have determined that borrowers do not have standing to challenge a party’s ability to foreclose in pre-foreclosure suits.
- Pre-Foreclosure: California courts have consistently ruled that borrowers do not have standing to bring pre-foreclosure suits challenging the validity of an assignment of a deed of trust. Preemptive suits are not allowed because they interfere with the nonjudicial foreclosure process.
- Even if an assignment is invalid, the borrower lacks standing to challenge it because their obligations under the note remain unchanged. The true victim would be the party with a present beneficial interest in the promissory note. Requiring the assignee to prove their right to foreclose would undermine the efficiency of nonjudicial foreclosure.
- “Robo-signing” & Forgery: Arguments of robo-signing or forgery do not provide grounds to set aside a foreclosure sale. Courts have ruled that homeowners lack standing to challenge the assignment of a deed of trust, even if the assignment is alleged to be fraudulent.
- The alleged injury from foreclosure is due to the borrower’s default, not the assignment of the deed of trust. Thus, the borrower does not suffer an injury from the assignment itself.
- The same analysis applies to allegations of robo-signing. Courts have determined that borrowers lack standing to seek relief based on these allegations.
- Substitution of Trustee
- Borrowers in default do not have standing to challenge the substitution of a trustee. A beneficiary has the right to substitute the trustee, and this does not affect the borrower.
- To challenge the foreclosure process, the borrower must demonstrate that any irregularities were prejudicial to their interests. Plaintiffs have not shown any prejudice resulting from the substitution of the trustee.
- California courts have determined that borrowers lack standing to challenge a substitution of trustee when they are in default, as the foreclosure would proceed regardless of the trustee’s identity.
Please reach out to the Litigation and Bankruptcy team at Geraci LLP to help guide you through the complexities relating to TROs and Injunctions.
