California courts have to date been reluctant to inject themselves into the comprehensive nonjudicial foreclosure scheme enacted by the Legislature at Civil Code section 2924 et seq. This reluctance extends to claims that the foreclosing party does not have a beneficial interest in or physical possession of the underlying note.  (See, for example, Debrunner v. Deutsche Bank Nat. Trust Co. (2012) 204 Cal.App.4th 433, 440-441.) In large part, this is in recognition of the “bargain” the nonjudicial foreclosure process represents: In exchange for an expedited and predictable “out of court” process to recover their security through a trustee’s sale, lenders give up the right to seek a “deficiency judgment” (i.e., the difference between what is owing and what is bid at the sale) against the borrower. The nonjudicial foreclosure remedy would lose its luster if at each juncture the borrower could obtain court supervision of the process. In that case, (and assuming a deficiency is otherwise permissible) a lender may as well file a judicial foreclosure action under Code of Civil Procedure section 726, allowing it to obtain a money judgment against the borrower for any deficiency.

The recent case of Pfeifer v. Countrywide Home Loans represents a departure from that trend, albeit a small and narrow one. Alan Pfeifer and his mother Florence, who suffered from Alzheimer’s disease, were borrowers under a loan insured by the Federal Housing Administration (“FHA”). The loan went into default, and the Pfeifers sued to enjoin the foreclosure sale and for damages. The basis for the Pfeifers’ claim was that since the loan was insured by the FHA the lender was subject to certain servicing requirements set forth in regulations promulgated by the Department of Housing and Urban Development (“HUD”), including the requirement of a face-to-face interview between the lender and the borrower prior to commencing any foreclosure proceedings. (24 CFR § 203.604.) The purpose of the face-to-face interview was to discuss possible alternatives to foreclosure.

The deed of trust indicated on its face that the loan was insured by the FHA and required compliance with regulations promulgated by the Secretary of HUD, which contain the interview requirement. The court found that the “face-to-face interview” was a condition precedent to the lender exercising the right of foreclosure under the deed of trust, and since the lender had not conducted such a face-to-face interview, the borrower could enjoin the foreclosure. The court found that requiring the face-to-face interview as a condition precedent to nonjudicial foreclosure was consistent with the policies underlying the nonjudicial foreclosure statute, even though nonjudicial foreclosure is intended to be a self-contained and streamlined process free of court involvement.

With respect to the Pfeifers’ claims for damages against the lender, the court determined that there was no private right of action for damages for failure to comply with HUD servicing requirements, and therefore dismissed those damage claims. The borrowers’ appropriate remedy was to enjoin the trustee’s sale. The court further found that simply because the borrowers had defaulted, and had failed to tender the amounts due under the mortgage, did not preclude them from seeking to enforce the pre-foreclosure HUD requirements by enjoining the sale. This latter holding is in contrast to cases holding that a tender is required – with limited exceptions – in connection with claims to invalidate a trustee’s sale which has already occurred.  (See, for example, Shuster v. BAC Home Loans Servicing, L.P. (2012) 211 Cal.App.4th 505, 512-153.)

This case illustrates several points:

  • Courts will enforce pre-foreclosure obligations of the lender clearly set forth in the deed of trust (in this case, through incorporation of HUD servicing requirements), before allowing nonjudicial foreclosure to occur.
  • Pre-foreclosure borrower contact/counseling requirements can be contractual (i.e., contained in the deed of trust), as well as statutory, such as those set forth in the California Homeowners Bill of Rights (Civil Code Section 2923.5 et. seq.).
  • While California courts are generally reluctant to interfere in the non-judicial foreclosure process, especially when the borrower is admittedly in default of amounts owed, they will do so (generally by enjoining the sale) when a condition precedent to the sale is not satisfied.
  • Tender by the borrower of amounts due is not necessarily required in connection with efforts to enjoin a trustee’s sale which has not yet occurred.