BUYING AT A TRUSTEE’S SALE RECENTLY BECAME RISKIER

Until recently the conventional wisdom was that unless the borrower actually obtained an injunction against a trustee’s sale, then the buyer at such a sale would have the right to expect that his or her title could not be contested by the borrower later. Two cases have recently shaken that wisdom. I previously wrote about a case in which the borrower had agreed with the lender, after the notice of trustee’s sale had been published, to bring the loan current with a number of payments and the trustee’s sale was delayed repeatedly until more than 120 days had elapsed from the issuance of the notice until the sale. The borrower’s final payment was several days late based on the agreement with the lender and the lender ordered the trustee’s sale to be held anyway. The buyer at the trustee’s sale was an experienced real estate investor and the court determined that such an investor should have been put on notice by the sequence of delays in the trustee’s sale that something was not right with this particular sale, and the court ultimately voided the trustee’s sale and restored the property to the borrower. This case went all the way to the state Supreme Court, which upheld that decision by the Court of Appeals.

Another recent case has added a wrinkle. In this case some investors lent money to a homeowner who apparently suffered some mental disability and dealt largely through the holder of her power of attorney. The lenders, however insisted on having the borrower sign the loan documents including a statement that the loan was for business purposes, a statement that was largely apparently untrue. The loan began as $20,000 for the payment of some bills and then mushroomed to $100,000 because the lenders could offer a better interest rate on a larger loan. The loan was to be repaid in three years with payments of $1,000 per month limited to interest only and a balloon payment at the end of the term. The borrower made about three payments and then defaulted. The lenders issued a notice of trustee’s sale and the borrower filed a lawsuit and asked among other things for an injunction to restrain the sale. The court heard the motion for injunction the day before the scheduled trustee’s sale and granted the request for a restraining order, conditioned on the borrower’s depositing into court by the following day the $15,000 in arrears on the promissory note and a $10,000 bond. The borrower failed to deposit the money by the deadline and the trustee held the sale at which the lender bought the home for the amount of the loan and evicted the borrower.

When the borrower’s lawsuit was dismissed by the lower court for failure by the borrower to restrain the trustee’s sale, the borrower appealed to the Court of Appeals. That court decided that the Deed of Trust Act did not require the court to dismiss claims such as a Consumer Protection Act violation. The court also decided that based on the circumstances of the case the lower court was wrong to dismiss the borrower’s request to overturn the trustee’s sale. The court said that the fact that the borrower obtained a restraining order meant that she did not waive her rights to seek relief from the trustee’s sale even though she did not fulfill the condition of the restraining order that she deposit the arrears and the bond with the court.

For investors who buy at trustee’s sales these cases increase the diligence that is required for the investor to have confidence in his or her title. Under the first case the investor should scrutinize the schedule of the sale to learn whether there is a pattern of delay that would indicate the borrower was in an agreement with the lender to bring the loan current. Under the second case the investor may wish to look at court records to find out whether the borrower started a lawsuit to restrain the sale, even if the trustee appears to be going forward with the sale as scheduled.

The preceding is intended for education and may not be construed as legal advice.

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