Does a Lender Need to Continue to Notify of Trustee Sale Until the Sale

This article discusses a trustee's statutory duties for publicly conducting a privately agreed-to foreclosure sale.

Power-of-sale provision

A lender or carryback seller holding a note secured by a trust deed which is in default has two foreclosure methods available to enforce collection of the secured debt:

· a judicial foreclosure sale, also called a sheriff's sale [Calif. Code of Civil Procedure §726]; or

· a nonjudicial foreclosure sale, also called a trustee's sale. [Calif. Civil Code §2924]

The key to the trust deed holder's ability to nonjudicially foreclose on the secured real estate by a trustee's sale is the power-of-sale authority and power-of-sale provision contained in the trust deed. [See Figure 1]

Other security devices used to create a lien on real estate to secure a debt which may also contain a power-of-sale provision include:

· a land sale contract [Petersen v. Hartell (1985) 40 C3d 102; see first tuesday Form 165 §15];

· a lease-option sale [See first tuesday Form 163 §19];

· a UCC-1 financing statement [Lovelady v. Bryson Escrow, Inc. (1994) 27 CA4th 25]; or

· the conditions, covenants and restrictions (CC&Rs) of an association for collection of assessments. [CC §1367]

The grant of the power-of-sale provides a private contract remedy for the recovery of money, agreed to by the owner of the secured property, authorizing the secured creditor to hold a nonjudicial foreclosure sale by public auction, called a trustee's sale. [CC §2924]

The lender, carryback seller, homeowners association or other holder of a lien on the real estate with a power-of-sale provision or statutory authority typically forecloses by a trustee's sale. However, if the secured note evidences a recourse debt with a remaining balance exceeding the fair price of the lender's position in the secured real estate, the lender may choose a judicial foreclosure and seek a money judgment for any deficiency in the property's value to satisfy the debt.

By foreclosing under the power-of-sale provision, the holder of a lien on real estate avoids a costly court action for judicial foreclosure should the owner default on the trust deed.

Editor's note — When a lender completes a foreclosure by trustee's sale, it cannot then obtain a deficiency judgment against the owner of the secured real estate. On the other hand, the owner cannot redeem the property after the trustee's sale as he can after a judicial foreclosure sale.

Who conducts the sale

A trust deed is a security device which creates a fictional trust to "hold title" to the secured real estate for the benefit of a lienholder, until the debts secured by the trust deed are fully satisfied. Thus, a trust deed has three parties:

· at least one trustor (the owner(s) of the secured real estate);

· a trustee who need not be named; and

· at least one beneficiary (a lender, carryback seller, common interest association or other lienholder).

The trustee's sale is conducted by the trustee who is either:

· named in the trust deed; or

· appointed by the beneficiary of the trust deed at the time the beneficiary initiates the foreclosure process.

A broker, attorney, trust deed service, subsidiary of the lender, or the lender itself may be appointed as the trustee. The trustee, unless replaced by substitution, may process the foreclosure, beginning with the recording of the notice of default (NOD) and ending with the delivery of the trustee's deed and delivery of any sales proceeds. [Bank of America National Trust & Savings Assn. v. Century Land & Water Co. (1937) 19 CA2d 194]

Generally, trust deeds prepared and distributed by title or escrow companies name their company as the trustee. However, a trust deed or other security device need not name the trustee at all. The beneficiary then simply appoints a trustee to handle the NOD or reconveyance. [See first tuesday Form 450]

Also, the beneficiary may appoint a substitute trustee to replace a named trustee for various reasons, such as:

· the named trustee no longer exists;

· the named trustee is uncooperative; or

· the beneficiary simply wants to use a different trustee for any reason. [CC §2934a]

The stages of foreclosure

A trustee's actions under a power-of-sale provision are strictly controlled by California statutes. To successfully complete a trustee's foreclosure sale of the secured real estate, the trustee and beneficiary of the trust deed must adhere to the procedures fully detailed in the foreclosure statutes for handling a trustee's sale. [Garfinkle v. Superior Court of Contra Costa County (1978) 21 C3d 268]

For the trustee the foreclosure process and fees are broken down into three stages:

1. Recording and serving a notice of default (NOD);

2. Recording and serving the notice of trustee's sale (NOTS); and

3. Conducting the sale of the real estate, which includes auctioning off the property, executing the trustee's deed and distributing any sales proceeds.

In contrast to the three stages for the trustee's processing of the foreclosure, the owner of the real estate and the beneficiary are concerned primarily with two different periods of time which control payment of the debt:

· the reinstatement period, which runs from the recording of the NOD and ends prior to five business days before the trustee's sale; and

· the redemption period, which also runs from the recording of the NOD but ends with the completion of the trustee's sale of the secured property.

Trustee's sale guarantee

When a trust deed is in default and a foreclosure on the property must be commenced, the beneficiary delivers a Declaration of Default and Demand for Sale to the trustee. The declaration contains instructions directing the trustee to initiate foreclosure on the secured real estate as authorized under the power of sale granted in the trust deed.

Even though the trustee received the beneficiary's declaration of default, the trustee's foreclosure process does not begin and foreclosure fees are not incurred by the property owner until the trustee or beneficiary records a notice of default (NOD). [System Investment Corporation v. Union Bank (1971) 21 CA3d 137]

Once the NOD is recorded, the trustee must strictly follow statutory notice requirements. To be able to properly serve all the notices on the required persons, the trustee orders out a trustee's sale guarantee from a title company before or at the time the NOD is recorded.

The trustee's sale guarantee advises the trustee on:

· who must receive a copy of the NOD and notice of trustee's sale (NOTS) — the person(s) entitled to receive notice that the secured obligation is in default and the property will be sold nonjudicially at the trustees's sale; and

· the location of the secured real estate where a copy of the NOTS will be posted and in which newspapers the NOTS will be published.

Thus, the trustee's sale guarantee contains:

· the name and address of each person who has recorded a request for a copy of the NOD;

· the name and address of each party with a recorded interest in the real estate securing the obligation in default;

· any junior (later recorded) easements and to whom the easements were granted;

· the property's legal description;

· a plot map locating the property; and

· the names of the newspapers in general circulation in which the NOTS, and the NOD if necessary, are to be published.

The trustee's sale guarantee provides coverage for the trustee should he fail to notice any party of record due to an omission in the guarantee.

Additionally, the trustee employs the title company as his agent to record documents, such as the NOD, NOTS, rescission of NOD and the trustee's deed.

The notice of default and election to sell

When ordering out a trustee's sale guarantee from a title insurance company, the trustee instructs the title company to record the notice of default (NOD) in the office of the county recorder in the county or counties where the secured real estate is located. [CC §2924]

The NOD contains a statutorily mandated statement which sets forth the monetary default on the note or other obligation secured by the trust deed. [CC §2924c(b)(1)]

The monetary default statement informs the owner:

· he must continue to pay other obligations required of him by the trust deed, such as hazard insurance and property taxes; and

· if he does not make future payments on the obligations in default, the owner is required to make the payments to reinstate the loan. [See Form 471]

The NOD does not need to state the actual amounts of the monetary defaults on the recurring obligations. However, the NOD must state the nature of the present defaults on the note, such as failure to have paid hazard insurance premiums and property taxes. [CC §2924c(a)(1)(B)]

To determine the amount needed to cure the default, the NOD directs the owner or other interested persons seeking to reinstate the trust deed or redeem the property to contact the trustee by listing the trustee's name, address and telephone number after the beneficiary's name on the NOD.

Thus, the trustee insulates the beneficiary from all direct contact with the owner or junior lienholder during the foreclosure process.

If the NOD does not list a default actually known to the beneficiary at the time of recording, the unnamed default does not need to be cured for the loan to be reinstated. [In re Peters (9th Cir. BAP 1995) 184 BR 799]

However, the beneficiary may later record a separate NOD to notice the omitted default, and pursue a separate foreclosure based on the omitted default. [CC §2924]

Delivering the NOD

Within 10 business days after recording a notice of default (NOD), two copies of the NOD are mailed to each:

· the owner of the property;

· the administrator of a deceased owner's estate; and

· each person who has recorded a request to receive a copy of the NOD. [Estate of Yates v. West End Financial Corporation, Inc. (1994) 25 CA4th 511; CC §2924b(b)(1)]

One copy of the NOD is sent by registered or certified mail, the other copy is sent by first-class mail. [CC §2924b(b)(1), (e)]

Within one month after recording the NOD, the trustee is required to send a copy of the NOD by registered or certified mail and another copy by first-class mail to holders of a recorded interest in the secured property, including:

· the owner's successor-in-interest to the estate or any portion thereof (easements);

· any junior trust deed holder;

· the assignee of a junior trust deed;

· a buyer on a land sales contract;

· a lessee on a lease; and

· the state Office of the Controller, if a Notice of Lien for Postponed Property Taxes is recorded against the property. [CC §2924b(c)]

Any person interested in obtaining a copy of the NOD, and who is not listed in the statute as a person who is to automatically receive notice, must record a request for NOD to assure they will be notified of the default and sale, such as a request by a tenant under an unrecorded lease or a licensee with signs located on the property. [See first tuesday Form 412]

Proof of service required

A trustee or person depositing the notice of default (NOD) into the mail must prepare a proof of service form and include a copy of the form with the NOD in each mailing. [CC §2924b(e)]

The completed copy of the proof of service form (held in the trustee's file) establishes the NOD was mailed to the persons listed in the form, i.e. the parties entitled to receive the NOD. [CC §2924b(e)]

When the statutory rules for mailing, serving, posting or publishing the NOD are met as reflected in the trustee's file, the statutory service requirement is satisfied, even if the current owner of the property or other intended recipients never actually receive the NOD. [CC §2924b(e)]

If the trustee does not meet the statutory service requirements, the trustee's sale may be voidable, depending on whether the foreclosing lender or a third party buys the property.

The notice of trustee's sale

A trustee (or beneficiary) may begin noticing the date set for the sale of a property by foreclosure on the day following three months after the notice of default (NOD) is recorded. [CC §2924]

The date the sale will be held may be set for any business day, Monday through Friday, between the hours of 9 a.m. and 5 p.m. [CC §2924g(a)]

In general practice, a date down of the trustee's sale guarantee issued to the trustee is ordered out from the title company the day before or the day on which the title company, as instructed, records the notice of trustee's sale (NOTS).

The date down notifies the trustee of any interests recorded on the title to the property after the NOD is recorded. However, the trustee is not required to give notice of the impending trustee's sale to any person who recorded an interest in the property after the NOD was recorded. [CC §2924b(c)(1)]

The trustee prepares an NOTS which contains:

· the trustee's or his agent's name, street address and telephone number (or toll-fee number if located out of state);

· the street address or common designation of the secured property;

· the county assessor's parcel number of the secured property;

· the dollar amount of the debt in default, including reasonably estimated advances for hazard insurance premiums, property taxes due and foreclosure costs; and

· a statutory statement informing the owner he is in default. [CC §2924f]

If the property does not have a street address or other common designation, the NOTS must contain:

· a legal description of the property;

· a statement that directions to the property can be obtained from the beneficiary by written request within 10 days from the first publication of the NOTS; and

· the name and address of the beneficiary requesting the sale of the property. [CC §2924f(b)]

The NOD and NOTS in Spanish

If the loan secured by the trust deed was negotiated in Spanish, the trust deed may contain a request for a Spanish-language notice of default (NOD). The trustee is then obligated to serve the owner an NOD translated into Spanish. [CC §2924c(b)(1)]

The trustee does not need to serve the owner of the property with a Spanish-language NOD if:

· the trust deed does not contain a request for a Spanish- language NOD; or

· the trustee does not have actual knowledge the loan was negotiated in Spanish. [CC §2924c(b)(1)]

When a Spanish-language NOD is required to be served and the beneficiary fails to instruct the trustee to serve one when the trust deed failed to request a Spanish-language NOD, the beneficiary will be liable for any damages incurred by the owner of the secured property for failure to serve a Spanish language NOD.

When a trust deed is negotiated in Spanish, a notice of trustee's sale (NOTS) served on the owner must be accompanied by a Spanish translation since the NOTS alters the owner's rights and obligations. [CC §1632(d)]

Delivering the NOTS

At least 20 calendar days before the date selected by a trustee to hold a trustee's sale, the trustee must send two copies of the notice of trustee's sale (NOTS) to each party the trustee previously sent the notice of default (NOD). [CC §2924b(c)(3)]

As with the NOD, one copy of the NOTS is sent by registered or certified mail, while the other is sent by first-class mail. [CC §2924b(b)(2), (e)]

To ensure the sale of the secured property at a public auction is properly advertised, the notice requirements for the NOTS are more comprehensive than the notice requirements for the NOD.

In addition to mailing the notice to all interested parties of record, the trustee must perform all of the following at least 20 calendar days prior to the sale:

· post a copy of the NOTS in one public place in the city of the sale, or if the sale is not to be held in a city, the judicial district in which the property is to be sold;

· post a copy of the NOTS in a conspicuous place on the property to be sold (for example, a door if the property is a single family residence); and

· start publishing a copy of the NOTS once a week for three consecutive calendar weeks in a newspaper of general circulation in the city where the property is located (the name of the newspaper is provided by the title company in the trustee's sale guarantee.) [CC §2924f(b)(1)]

Editor's note — A "calendar week" means Monday through Saturday. [CC §2924f(a)]

For example, if a sale is set for a Wednesday, advertising the sale for the three consecutive Thursdays occurring prior to the sale date satisfies the publishing requirement.

If the property is not located in a city, or a newspaper is not published in the city, the trustee may publish the notice in an adjudicated newspaper of general circulation in the judicial district where the property is located. [CC §2924f(b)(1)]

The trustee then instructs the title company to record the NOTS in the county where the property is located on a date at least 14 calendar days before the sale date. [CC §2924f(b)(1)]

For example, the NOTS would have to be recorded no later than Wednesday the 14th if the sale date selected was Wednesday the 28th.

No statutory duty to notify the IRS

An Internal Revenue Service (IRS) tax lien recorded within 30 days of the actual trustee's sale is eliminated by the trustee's sale, and the IRS then has no right to its 120 day redemption of the property after the foreclosure sale.

When a date down is ordered on the foreclosure guarantee policy prior to the 20-day advertising period before sale, the trustee may discover an IRS tax lien has been recorded since recording the notice of default (NOD).

To eliminate an IRS tax lien which was recorded more than 30 days before the sale date, but after the NOD was recorded, the IRS must be served notice of the sale postmarked at least 25 days before the sale date. [Internal Revenue Code §7425]

However, the trustee has no statutory duty to serve the IRS with a notice of trustee's sale (NOTS). [Diediker v. Peelle Financial Corporation (1997) 60 CA4th 288; CC §2924b(c)(2)]

Additionally, federal statutes do not require the IRS to be notified of any private sale of secured real estate. [IRC §7425(b)]

Thus, a beneficiary must instruct the trustee to set the sale date and give the notice needed to eliminate any IRS tax lien recorded after recording the NOD.

This article will be continued in the next first tuesday Journal issue.

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Source: https://journal.firsttuesday.us/equity-sharing-co-ownership-2/243/

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