Trial Court: San Benito County Superior Court Superior Court No.: CU0800167 Trial Judge: The Honorable Harry J. Tobias (San Benito County Super. Ct. No. CU0800167)
The opinion of the court was delivered by: Walsh, J.*fn12
CERTIFIED FOR PUBLICATION
Responding to a mortgage broker's "marketing enticement," a homeowner agreed in January 2007 to refinance his home for $1.5 million. With a monthly income of only $3,333, the homeowner quickly fell behind in his monthly payments of $12,381.36. In August 2008, the home was sold at a non-judicial foreclosure sale. The homeowner filed an action against the lender, the loan servicer, and others to set aside the trustee's sale claiming that he was a victim of predatory lending. He claimed the transaction was invalid because the loan broker ignored his inability to repay the loan, and, as a person with limited English fluency, little education, and modest income, he did not understand many of the details of the transaction which was conducted entirely in English.
In response to the homeowner's claim, the lender and the loan servicer moved for summary judgment, arguing: that the homeowner had failed to tender the amounts due on the loans, which was required to set aside the sale; that none of the exceptions to the tender requirement applied; and that the homeowner voluntarily entered into the loan agreements and was personally responsible for the loss of his home. The trial court granted summary judgment to the lender and loan servicer.
We will reverse the summary judgment. In doing so, we define the elements of an equitable cause of action to set aside a foreclosure sale and exceptions to the requirement that the borrower tender any amounts due under the loan. We hold that summary judgment was improper because: the homeowner presented sufficient evidence of triable issues of material fact with regard to the alleged unconscionability of the transaction; and the motion did not address a pertinent exception to the tender requirement, which the homeowner had raised in his complaint.
PARTIES AND ISSUES ON APPEAL
In August 2008, the home of plaintiff and appellant Jonas Z. Lona (Lona) was sold at a non-judicial foreclosure sale. Three months later, Lona filed this action against the lender, the trustee, the mortgage broker, and the servicer of the loan, alleging a variety of claims, including a cause of action to set aside the trustee's sale.
In May 2010, Citibank (the lender) and EMC (the loan servicer) filed a motion for summary judgment that challenged the only remaining claim against them, the cause of action to set aside the trustee's sale. They argued that Lona: (1) had failed to make a valid tender offer, which was required to set aside the trustee's sale; (2) had failed to rebut the presumption that the trustee's sale was valid with evidence of irregularity in the sale procedure; and (3) had voluntarily entered into the loans. Finding no triable issue of material fact, the trial court granted the motion for summary judgment.
On appeal, Lona argues that the court erred in granting summary judgment because: (1) the court was biased against Lona and its ruling was based on "extraneous" factors regarding the conduct of the case that were unrelated to the motion; and (2) the ruling ignored triable issues of material fact. After conducting a de novo review of the record, we will reverse the summary judgment.
The operative pleading, the second amended complaint, alleges that in January 2007, in response to the "marketing enticement" of mortgage broker First Net Mortgage (Mortgage Broker), Lona refinanced his home, which had an existing mortgage debt of $1.24 million.*fn1
The refinancing consisted of two loans that totaled $1.5 million: a first loan for $1.125 million and a second loan for $375,000. In January 2007, Lona executed two notes and two deeds of trust in favor of Franklin Financial (Franklin). The deeds of trust granted Franklin a security interest, with the power of sale, in residential property located at 1143 Stony Brook Drive, Hollister, California (Property). The deeds of trust named First American Title as trustee.
The first loan ($1.125 million) was for a 30-year term, with a fixed interest rate of 8.25 percent for the first five years and an adjustable rate thereafter. The note, which was "interest only," specified that the monthly payments would be $8,451.75 for the first five years. After five years, the interest rate would adjust annually. The adjusted rates would be based on the LIBOR (London Interbank Offered Rate) plus 2.25 percent, could not increase by more than one percent per annum, and could not be less than 3.25 percent or greater than 13.25 percent.*fn2
The second loan ($375,000) was a fixed rate loan for a term of 15 years. The interest rate was 12.25 percent per year and the monthly payments were $3,929.61. The note included a "Balloon Payment Disclosure" on a separate form which stated that, assuming all payments were made on time, "a final balloon payment" of $327,009.91 would be due at the end of 15 years. Thus, at the end of that 15-year term, Lona would have paid $47,990.09 toward the principal.
With payments of $8,451.75 on the first loan and $3,929.61 on the second loan, Lona's monthly payments after refinancing totaled $12,381.36. The loan, which paid off Lona's prior $1.24 million mortgage and increased his indebtedness to $1.5 million, presumably generated $260,000 to cover fees and other pay outs from escrow; however, the record does not indicate what happened to the $260,000.
Although married, Lona owned the Property as his sole and separate property. At the time he refinanced, he was approximately 50 years old. He had an eighth grade education in Mexico. He came to the United States in 1972 at age 15 and lived here ever since. He testified through an interpreter at his deposition. His income was approximately $40,000 per year;*fn3 other sources of income included his wife's income. She owned a collection business; the amount of her income is not in the record.
The record does not contain copies of Lona's loan application. At deposition, Lona testified that the loan and title documents were in his name only and that when he signed the loan documents, he did not understand what he was signing; it "went very fast," and the mortgage brokers did not give him "too good of an explanation." Though Lona testified that the mortgage brokers did not explain what the documents were, that he did not ask, and that he signed at least one document without reading it, he also testified that he discussed the initial interest rate and the initial amount of his monthly payments with the mortgage brokers.
At unknown times, Franklin Financial assigned its interest in the first loan to Citibank, EMC became the "servicer of the loan," and Quality Loan Service Corporation (Trustee) took over as trustee.
In June 2007, five months after signing the loan documents, Lona defaulted on the first loan. In September 2007, the Trustee recorded a notice of default. The notice of default identified the amount due under the first loan as "$33,725.40 as of September 17, 2007."
In January 2008, the Trustee recorded a notice of trustee's sale dated December 31, 2007, which set the trustee's sale for January 31, 2008. The trustee's sale was continued or postponed. Lona never cured the default and a trustee's sale was completed several months later. A trustee's deed upon sale was recorded in August 2008.
The second amended complaint alleges that Citibank purchased the Property at the trustee's sale, sought to forcibly evict Lona from his home, and filed an unlawful detainer action against him. The record does not contain any evidentiary documents that support these allegations. However, at the hearing on the motion for summary judgment, both counsel advised the court that the unlawful detainer action had been consolidated with this action, that Lona has "been living for free in this property for the duration of the action," and that he had not posted a "surety bond or security bond or any impound funds."
Lona filed his original complaint in November 2008. The second amended complaint filed in July 2009 names Citibank, EMC, Mortgage Broker, and Franklin as defendants. Mortgage Broker and its principal, Ransome McKissick, filed general denials.
Citibank and EMC filed a series of demurrers challenging the pleadings. In September 2009, the court issued an order sustaining their demurrers to the second amended complaint in part. Although copies of the orders on the demurrers are not in the record, it appears undisputed that two other causes of action against Citibank and EMC (trespass and breach of the covenant of good faith and fair dealing) were dismissed as a result of their demurrers. According to the register of actions, Citibank and EMC answered the second amended complaint. However, a copy of their answer is not in the record.
In May 2010, Citibank and EMC filed a summary judgment motion challenging the cause of action to set aside the trustee's sale. In the motion, they argued that Lona had not made a valid tender offer, which was required to set aside the trustee's sale, and that none of the narrow exceptions to the tender offer requirement applied. They also argued that Lona had voluntarily entered into the loans and that he did not overcome the presumption of validity by pleading and proving an irregularity in the trustee's sale and resulting prejudice.
In opposition to the motion, Lona argued that the loans were illegal and void from the day they were signed, because they did not consider his ability to pay. He argued further that the defendants did not have a valid contract upon which to exercise their contract remedies, including foreclosure, and that no tender was required because the contract was illegal. He asserted that since his cause of action to set aside the trustee's sale was based on the illegality of the loan documents, he was not required to allege an irregularity in the trustee's sale. He argued that regardless of the voluntary nature of the transaction, he could not consent to an illegal contract. In his separate statement in opposition to the motion, Lona submitted additional undisputed material facts that: (1) he earned only $40,000 per year when the loans were approved; (2) the total monthly payments on the loans ($12,381.36) were four times his monthly income; (3) only his income was considered in qualifying him for the loans; and (4) he had only an eighth grade education. Citibank and EMC did not file a reply.
At the hearing on the motion, Lona argued that he was never told the first loan was an adjustable rate loan; nor was he told how much the payments could be. He asserted that his English was limited and that no one explained the contract terms to him in either English or Spanish. He argued that there were factual disputes that precluded summary judgment regarding: what he knew, what the loan brokers told him, and whether he was responsible for the representations regarding his income on the loan application. Citibank and EMC disputed the assertion that this was an illegal loan. They argued that Lona had not alleged any facts that would create triable issues and that he relied on conclusions and not facts, which was not enough to avoid summary judgment.
In response to Lona's argument that the lender should not have given him this loan, the court asked, "Isn't the cause of action really against Franklin Financial if there's fraud committed?" The court observed that, although Franklin had been served, it had not appeared in the action, and that eight months previously the court had directed Lona to demand an answer from Franklin or take its default. In response, Lona argued that, as a successor in interest, ...