No way, said the court.
A debt buyer who sued a foreclosed borrower, not for money owed, but for fraud in obtaining the loan, was slapped down by a California appeals court.
Because the loan it bought was used to buy a home, California’s anti deficiency statute prevented the lender or the debt buyer from suing Ms. Monroy for the money yet owed on the note.
Instead, Heritage Pacific Financial, a Texas debt buyer, sued her for fraud it claimed she committed in the application to get the loan in the first place.
The narrow holding of the state appeals court is that when Heritage Pacific bought the loan, it didn’t buy the fraud claim.
The paperwork assigning the rights in a batch of bad loans it bought didn’t identify the fraud claim as part of what was sold.
Better yet, the court went on to uphold a token award against the debt buyer for violation of the Fair Debt Collection Practices Act and $89,000 in attorneys fees to the borrower’s attorney.
I swear, it seems like one of the first and the few judicial decisions that push back against the perpetrators of the mortgage mess and their allies.
Or perhaps it’s just a push back against debt buyers scarfing up junior liens that were cut off when a senior lien foreclosed.
Let’s savor the victory, in any event.
The original loans
The fact pattern is familiar: the borrower, Ms. Monroy, was a Spanish speaking housekeeper. The decision didn’t say whether she could read or whether the loan documents were presented in Spanish, as required by California law.
The loan application fabricated a $9200 a month income for her as a business owner and contained uncontroverted misstatements about the purchase transaction.
She took out two loans from the same lender to buy a home in Richmond, California for $425,000 in 2006, toward the end of the mortgage lending frenzy.
By summer of 2008, the senior lien foreclosed and she lost the property. The junior lien was destroyed as a lien on the house by the foreclosure. It was “cut off”.
Heritage Pacific bought the junior note from the original lender and proceeded to sue Ms. Monroy for fraud associated with the original loan transaction.
Their suit got them nothing, due to energetic legal representation of the borrower and a pair of courts that wouldn’t play along with the further exploitation of unsophisticated borrowers.
The path ahead
I suspect that Heritage_Pacific_v_Monroy is just the first of a spate of suits on cut off junior liens that will follow from the foreclosure epidemic we’ve experienced.
This decision is not published in the official reports of the California Court of Appeals. Therefore, it can’t be cited in other cases as precedent.
But we can mine the successful arguments and the authorities that the court of appeals found decisive.
We can remember, as well, that the debt buyer’s threats to sue her for claims against her that had no merit resulted in an FDCPA damage award.
A review of California law
If you suffered a foreclosure on California property, consider the following.
- The typical, out of court foreclosure sale prevents the foreclosing creditor from suing you on the debt
- A foreclosure sale destroys the lien of any creditor whose lien is junior to the foreclosing creditor
- A lender who made a loan to enable you to buy a home you lived in cannot sue you for the debt
- A creditor whose lien was destroyed by a foreclosure and whose loan was not used to buy the home still has an enforceable claim for money against you
We hope other courts will follow Monroy and we can add to the list: an assignment of a promissory note does not transfer the lender’s fraud claims to the debt buyer.
Image courtesy of Margnac and Flickr.
