California's Legislature responded to the residential foreclosure crisis by, among other things, enacting new statutes aimed at clarifying the rights of borrowers facing foreclosure and imposing new restrictions on foreclosing lenders. A recent case, Intengan v. BAC Home Loans Servicing LP, 2013 Cal. App. LEXIS 225, serves as a reminder that the manner in which courts interpret these statutes may affect how foreclosure-avoidance actions are litigated, and how long that litigation lasts.
Relevant Background and Summary of Case
At the height of the residential foreclosure crisis, the California Legislature enacted California Civil Code Section 2923.5 ("Section 2923.5"), which imposes new obligations upon foreclosing lenders and their agents. Perhaps most importantly, the lender or its agent must now contact a defaulting borrower to discuss alternatives to foreclosure or, failing that, attempt with due diligence to do so. So important is this obligation that, under Section 2923.5, a foreclosing lender may not record a notice of default until after it has complied. It must also attach a declaration attesting to Section 2923.5 compliance to all notices of default recorded after the statute was enacted.
The most prominent case on Section 2923.5 compliance, Mabry v. Superior Court, held, among other things, that a defaulting borrower's remedy for a violation of Section 2923.5 was limited to postponing a pending foreclosure sale until a lender complied with the statute. The Mabry court rejected the position that the required declaration had to be made under penalty of perjury, correctly noting that "[t]he way [S]ection 2923.5 is set up, too many people are necessarily involved in the process for any one person to likely be in the position where he or she could swear that all … requirements of the declaration … were met." In other words, the Mabry court recognized that the person signing a Section 2923.5 declaration on behalf of a foreclosing lender would likely have to rely upon records and representations provided by others in the loan-servicing chain. As a consequence, the court said, the declaration need not be signed under penalty of perjury.
In defending against wrongful foreclosure actions brought by defaulting borrowers at the pleading stage, lenders have often relied upon the Mabry decision, paired with decisions like Fontenot v. Wells Fargo Bank, N.A., which held that courts could take judicial notice not only of the existence of documents recorded against real property, but of their contents as well, to request judicial notice of their Section 2923.5 compliance. Relying on these same authorities, courts have just as regularly granted such requests for judicial notice, thereby allowing lenders to establish the fact of their compliance very early in a case, resulting in the dismissal of numerous, baseless foreclosure-avoidance actions at the pleading stage.
In Intengan, which was certified for partial publication, the California Court of Appeal rejected a lender's contention that a trial court was authorized to take judicial notice of both the existence of a Section 2923.5 declaration attesting to statutory compliance and, accordingly, the lender's actual compliance with the statute, at least in cases where a defaulting borrower alleged that, notwithstanding the existence of the required declaration, a lender or its agents had failed to comply with the statute. While approving of cases like Fontenot, the Intengan court held that "[w]hile judicial notice could be … taken of the existence of [a] declaration, it could not be taken of the facts of compliance asserted in the declaration, at least where … [a plaintiff] has alleged and argued that the declaration is false and the facts asserted in the declaration are reasonably subject to dispute." (emphasis added.) In other words, in the portion of its opinion certified for publication, the Intengan court held that, at least in certain circumstances, trial courts may not be able to take judicial notice of the fact of Section 2923.5 compliance despite their taking judicial notice of the existence of a Section 2923.5 declaration.
A cynical reader of the Intengan decision might conclude that it allows for a defaulting borrower to convert any proper, non-judicial foreclosure into a judicial proceeding simply by alleging non-compliance with Section 2923.5. This is not necessarily so. Specifically, the Intengan reasoning only applies where a defaulting borrower claims non-compliance and the facts asserted in the subject declaration are reasonably subject to dispute. This will not always be the case; for instance, lenders often retain U.S. Postal Service records of delivery of Section 2923.5 contact materials, which may be judicially noticed. As such, it is possible that the effects of the Intengan decision may ultimately not be widespread.
Nonetheless, lenders and their agents should be prepared for the possibility that foreclosure-avoidance actions that might previously have been dismissed at the pleading stage will now proceed to summary judgment. As a consequence, it is more important than ever that lenders and their agents prepare and retain copious, detailed records of compliance with all statutory obligations relevant in the foreclosure context, as these materials may be key evidence in subsequent summary judgment proceedings. Lenders faced with extended litigation based on alleged statutory noncompliance might also consider conducting early discovery to establish the truthfulness of any challenged Section 2923.5 declaration, which, once established, could underlie a lender's request for sanctions were it determined that litigation was being prosecuted in bad faith.