The lender MUST contact the trustor and anyone else on the mortgage loan to assess their financial situation and explore their options to avoid foreclosure (called a “foreclosure avoidance assessment”). The lender cannot start the foreclosure process until at least 30 days after contacting them to make this assessment; and must advise the trustor during that first contact that the trustor have the right to request another meeting about how to avoid foreclosure. That meeting must be scheduled to take place within 14 days.

• REVERSAL OF SALE

In California, there is a time period and process that is required before a home can be foreclosed. Most homes in California are foreclosed through a non-judicial foreclosure. In order to foreclose on a home through a non-judicial foreclosure a notice of default has to be issued and recorded with the county recorder. Once a notice of default has been recorded, there is a required 3 month waiting period before a notice of sale date can be issued. The notice of sale date must set the sale date of the home at least 21 days out from the notice of sale date. What happens if you were not able to stop the sale of the home prior to the sale date? Is there any recourse in California? There are some recent cases decisions that seem to indicate that bankruptcy judges may be willing to treat the sale of the property as void in bankrupt, if the purchaser has not recorded the deed of trust.

The issue stems from California Civil Code 1091 which states:

“An estate in real property, other than an estate at will or for a term not exceeding one year, can be transferred only by operation of law, or by an instrument in writing, subscribed by the party disposing of the same, or by his agent thereunto authorized by writing.”

A transfer of an interest in property is complete under this section when the transfer occurs by operation of law or by a transfer of interest where there is a validly executed, delivered and accepted deed of trust. When a property is sold at foreclosure it is not transferred by operation of law, therefore the transfer only occurs through an instrument in writing. What happens then in the situation where there has been a foreclosure sale but the new owner has not yet accepted, delivered and executed a deed of trust.

In the case of In Re Gonzalez, the debtor filed for bankruptcy after the sale date had occurred but prior to the deed being prepared and recorded. Judge Wallace, voided the sale of the property, stating that under section 1091 of the California Civil Code, the sale required a validly accepted, delivered, and executed deed of trust. This case was heard in the Central District of California, and the judge determined that although the sale had occurred, the sale became void when the debtor filed for bankruptcy. Judge Wallace found that the borrower’s bankruptcy petition can void a trustee sale even if the petition is filed after the trustee’s sale is completed, as long as the borrower files prior to the execution of the trustee’s deed upon sale. The post-petition issuance of a deed of trust was found to be a violation of the automatic stay. This is in contrast to other courts that have found the sale to be final and the transfer of the interest in property to occur upon the acceptance of the highest bid at the foreclosure sale.

This case also presents an interesting situation for cases involving foreclosure sales by homeowners associations. When a homeowners association foreclosure sale is conducted in California, there is a required 90 day redemption period, in which the HOA cannot record the deed of trust. I recently was involved in a case in which the debtor’s home was foreclosed by the homeowners association but the deed of trust had not been accepted, delivered or executed due to the 90 day redemption period. The debtor filed for bankruptcy prior to the expiration of the redemption period. The judge in this case followed the reasoning from In Re Gonzalez and found that the sale of the property was not complete at the time of the filing of the bankruptcy case.

Although it is an uphill battle to reverse a foreclosure sale, it can be done successfully under certain circumstances. If the deed of trust has not been prepared and recorded there is a potential that the judge can find that the sale is not final and is in fact void at the time of the bankruptcy filing.