“Nonjudicial foreclosures” (also known as “trustee’s sales”) are available in California to enforce defaulted real estate loans. The procedures for nonjudicial foreclosure proceedings, including service and recordation of the notice of default and the posting and publication of the notice of trustee’s sale, are highly technical and are governed by various provisions of the Civil Code. Borrowers’ advance waivers of these provisions are not effective.
Lenders generally prefer nonjudicial foreclosure to judicial foreclosure because (i) usually (barring a bankruptcy filing by the borrower) a nonjudicial foreclosure can be completed in a much shorter time period than a judicial foreclosure (in approximately four months versus up to two years), (ii) the borrower does not have a right of redemption following a nonjudicial foreclosure sale, and (iii) the legal and other fees incurred in connection with a nonjudicial foreclosure are usually much less expensive than those incurred in a judicial foreclosure. However, in a nonjudicial foreclosure, the tradeoff is that the lender loses up any the right it may have to pursue a deficiency judgment against the borrower: under California law, a deficiency judgment is always prohibited after a nonjudicial foreclosure has been completed.
The timetable for nonjudicial foreclosures requires the trustee to wait three months after recording and serving the notice of default before giving 20 days’ notice of sale. In addition, trustees customarily allow for an additional 11 days in scheduling the sale date in order to determine whether any federal tax liens were recorded as of 31 days before the sale date. These timetables can be significantly extended if the borrower files for bankruptcy protection, triggering the automatic stay to preclude foreclosure, or if the borrower brings an action challenging a nonjudicial foreclosure.
The borrower has a right to cure the default under the loan up to 5 business days before the date that the real property collateral is sold in the nonjudicial foreclosure. If the sale date is postponed, the borrower’s right to cure is extended. If the lender fails to provide the borrower with the information about the amount that is due, and as a result the borrower tries to, but cannot, cure its default, the lender opens the foreclosure to challenge.
The lender may credit bid (bid up to the amount owed to it under the loan) at the nonjudicial foreclosure sale. However, the lender must carefully ascertain the amount that is due to it under the loan, because if it claims amounts not due to it (for example, a usurious rate of interest if the loan was not exempt from California’s usury laws), the borrower may have grounds to challenge the foreclosure sale.
It is not uncommon for lenders and borrowers to extend the sale date for a nonjudicial foreclosure in order to continue workout discussions. (Sometimes lenders unilaterally extend the sale date for other reasons.) There are limits on how many extensions can be done before the trustee must provide a new formal “Notice of Sale” for the rescheduled nonjudicial foreclosure sale.
Many nonjudicial foreclosure sales of commercial real estate attract no bidders other than the foreclosing lender. Because bidders other than the foreclosing lender must immediately pay their bid amounts in cash or cash equivalents, such as cashier’s checks, many would-be bidders would rather buy foreclosed properties after the foreclosure, from the foreclosing lender. However, the foreclosing lender is not allowed to “chill the bidding” by taking certain steps to discourage other bidders from attempting to bid. Specifically, it is unlawful to (1) to offer to accept or accept from another,
any consideration of any type not to bid, or (2) to fix or restrain
bidding in any manner, at a nonjudicial foreclosure sale; however, it is lawful for any person including the trustee, to state that a
property being foreclosed is being sold in an “as-is” condition.
Though bidding strategies can vary, many foreclosing lenders will credit bid not more than about 90% of the current appraised value of the property. However, bid strategies vary considerably from lender to lender. It is usually imprudent to bid in the entire amount of the debt owed, in case a problem with waste or fraud is discovered later, after the winning bidder (usually the foreclosing lender) takes title to the property.
[Under recently enacted legislation that expires January 1, 2013, certain additional requirements apply to foreclosures involving residential real property. These requirements include the following:
- In the case of a mortgage loan made during 2003 through 2007 to a borrower whose principal residence is the mortgaged property, the foreclosing lender generally must contact (or take specified due diligence actions to contact) the borrower in person or by telephone in order to assess the borrower’s financial situation, discuss the borrower’s options for avoiding foreclosure and provide the borrower with certain additional information. The lender must do this at least 30 days prior to recording the required notice of default.
- In the case of a loan secured by a property that includes one or more rental housing units, any tenant or subtenant in possession of a unit at the time of the foreclosure sale must be given at least 60 days’ notice (double the amount of time afforded under prior law) to move from the foreclosed property.
- In all cases, the legal owner must maintain vacant residential property purchased at a foreclosure sale or acquired through foreclosure under a mortgage or deed of trust. This maintenance requirement includes caring for the exterior of the property (such as preventing excessive foliage growth that diminishes the value of surrounding properties) and taking action to prevent trespassers or squatters from remaining on the property, to prevent mosquito larvae from growing in standing water and to prevent other conditions that create a public nuisance. A governmental entity may impose civil fines and penalties (of up to $1,000 per day) for failure to do so.
(The last two of the above requirements apply to both judicial and nonjudicial foreclosure proceedings.)]
Many technical requirements must be met in the various notices and other steps in a nonjudicial foreclosure. In California, obtaining a trustee’s sale guaranty is virtually required in order for the lender to make sure it provides the required notices to the right parties. If a lender makes a mistake in the notices or the process, the borrower may be able to challenge the validity of the foreclosure.
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Practical Counsel 
Very informative article. Look forward to your next
According to my Trustee it is virtually identical.
Are the non judicial foreclosure and deficiency proceedures, the same as Nevada?
I don’t know, Susan; I am licensed only in California. Perhaps some Nevada lawyers can weigh in on this question?
Best regards,
Maura
If the borrower is generally protected after the foeclosure…does that extend to the guarantor, if there is one.
Dear John:
You’ve asked an important, and very difficult to answer, question. California law in this area is both complicated and nuanced. I’m writing a post (which will go up as soon as I can get it done as one or more posts) which will go over the extent to which guarantors are protected after nonjudicial foreclosures of the borrower’s property. So, as old TV announcers used to say, “Don’t touch that dial!” — please check back for the detailed answer.
Best regards
Maura O’Connor
Moira:
Regarding guarantor liability for deficiency following non-judicial foreclosure, isn’t the “short” (overly simplified) answer as follows?
Provided (i) borrower entity is not alter ego of guarantor (e.g., lender required guarantor to form borrower entity solely for purpose of avoiding non-recourse provisions), and (ii) the guaranty agreement was properly drafted and contained all necessary waivers (i.e., the “Gradsky” waivers), then lender can proceed against guarantor on its guarantee even though lender has foreclosed non-judicially.
Rick:
Yes; but as you know, there are often some other fillips. First, there are some subrogation rights that often are missed, because “safe harbor” language is not provided for them in Civ. Code Section 2856, which codified the “Gradsky” waivers). Second, the case law about “sham guaranties” where the borrower entity is the alter ego of the guarantor is not that well developed, as it relates to LLCs (frequently set up, particularly in CMBS/conduit loans, specifically to isolate assets from creditors of the parent) so I think there’s some risks around guarantor liability in those structures. Third, some loan documents add guarantors as jointly and severally liable with borrowers on obligations secured by California real estate; this has, or under applicable law probably should have, the effect of extending the borrower’s protection against deficiency judgment after a nonjudicial foreclosure to the guarantor despite the presence of any waivers.
Thanks, though, for a thoughtful and good simplification of the general rule.
Best regards,
Maura O’Connor
One major problem for lenders and trustees that has not been challenged yet is that the lender must have the origional note with the indorsments in order to take it to foreclosure. The trustee must verify or hold the origional note to take it to sale and produce upon request, the written agreement between the beneficiary and themselves. I would venture to say that 99% of all loans have been securitised and sold off, and with many banks folding or merging, they can’t provide these documents. You can do a quiet title action and force them to produce. If they can’t, the courts can order the debt extingished.
Hey, I found your blog while searching on Google your post looks very interesting for me. I will add a backlink and bookmark your site. Keep up the good work! 🙂
I believe non-judicial foreclosures are the most cost effective route for growing states with lots of seasonal visitors and many speculators investing in the market.
Great resource here.. thanks alot.
I am interested in knowing more about, lender is not allowed to “chill the bidding”. Can we contact by email to discuss my case. Thanks
Dear Tom:
While I cannot give specific legal advice in this column, I’d be happy to discuss your matter offline and see if we can help. You can reach me through my email at my office; my contact information is available at my firm’s website, http://www.seyfarth.com.
Look forward to talking with you,
Maura
In a trustee sale (commercial building loan) where the 3rd loan lender in line is foreclosing, what exactly happens to the other 2? Specifically, if the lender of the 3rd loan bids at his own foreclosure, he can only bid up to his own loan & costs and gets the trust deed subject to the other 2 loans? And if an outside bidder bids,he still ownly gets a trust deed subject to the other 2 loans?
Dear Hella:
You are correct: if there’s a trustee’s sale of a junior lien, the purchaser at the trustee’s sale takes the property subject to the existing senior liens. Which means that if you are buying a property at a foreclosure sale, you need to do your diligence to make sure you understand what debts you will, in effect, have to take on — because the buyer at the trustee’s sale won’t be personally liable for such pre-existing debts, but the pre-existing liens can be enforced by the lenders against the property through a foreclosure. Incidentally, we see a lot of buyers who don’t understand this, and don’t do the diligence they really need to do to protect their interests: it’s vital to understand EXACTLY what you are buying, including its title and physical condition. I highly recommend using a competent real estate lawyer to assist in performing such due diligence prior to your bidding at a trustee’s sale, as the lender and trustee have very strong protections against later claims from buyers at such sales.
Best regards,
Maura
What remedies do borrowers have if the notice of default was filed for a much higher amount then the actual default amount or just major errors in general? AFTER the trustee sale…
Thanks!
Dear Albert:
Generally, a borrower can bring an actions before the trustee’s sale seeking to have the local court with jurisdiction stop (enjoin) the trustee’s sale. While it’s theoretically possible to do so after the sale, it would likely be much harder for a borrower to prevail in such an action, because a court could reasonably wonder why the borrower did not act sooner. I haven’t ever seen this happen in my practice (which is commercial), and — BIG CAVEAT — haven’t researched this, but expect that the borrower would have a very tough set of showings to make after a trustee’s sale has been finished (such as, the borrower never got notice of the default or the sale, or was defrauded, or the like) in order to win such an action.
Best regards,
Maura
It was blatant fraud, the private lender filed a NOD for more than $800k over what the real amount should have been to block us from selling or refinancing the property (because she wanted it back) and was able to convince the trustee that it was an accurate number…