«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»
Second, registration, the registration fee, and property management company non-inspection fees seem to primarily concern administrative duties. Since the CVAPO imposes these duties on the lender, it is arguable that the trust deed covenants pertaining to the borrower’s maintenance, repair, and security obligations are not implicated. The duties are administrative in nature in that they enable the City to monitor the lender, as opposed to the substantive contractual obligations to keep secure the property. Further, the CVAPO defines the relationship between the municipality and the lender rather than that between lender and borrower, which relationship is defined by the loan agreement and its covenants. A borrower who faces a foreclosure may thus have the basis to challenge the advances paid by the lender for registration, the registration fee, and property management fees as administrative duties unrelated to the borrower’s covenants to maintain and keep secure the property. This could become a major concern for the lender if the advances for the “administrative” category are substantial.
As for attorney’s fees, it is reasonable to presume that an attorney will spend time to review the CVAPO beyond what would be the usual loan document review. Each borrower, property, and foreclosure involves particular circumstances that must be evaluated on a loan-by-loan basis. In that the lender is subject to strict liability for violations of the CVAPO,302 legal counsel ought to thoroughly analyze the loan documents in light of the obligations under the CVAPO, and then advise the client accordingly.
Consequently, the attorney’s fees will be higher. While it appears such fees could be added to the debt owed by the borrower, that might not be the case, at least with regard to those fees attributable to analysis and advice 300 However, the Fourth District Court of Appeals, Division Three has held that where a lender violates Section 2923.5, the sole remedy for the borrower is additional time to discuss a resolution of the default. See Mabry v. Superior Court, 185 Cal. App. 4th 208, 214, 225 (2010).
301 See Rodriguez v. J.P. Morgan Chase & Co., 809 F. Supp. 2d 1291, 1295 (S.D. Cal. 2011). On the question of preemption, the cases are in conflict. See supra notes 244–45.
302 CHULA VISTA, CAL., MUN. CODE § 15.60.110 (2013).
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about the “administrative” duties imposed on the lender if a court accepts the two-category approach described above. If a borrower asserts the twocategory approach, the issue becomes whether the advances to comply with the CVAPO, including attorney’s fees, can be made part of the amount owed by the borrower and recoverable through a foreclosure. If they are not recoverable, the CVAPO increases the lender’s losses for a nonperforming loan.
4. The Underlying Purpose of Lender’s Advances and Other Costs
“[A]side from the expenses of foreclosure, there are other costs, including legal fees, which [a creditor may incur while] protecting the security. Under appropriate contract provisions, such expenses may be treated as collateral advances and added to the amount of the debt.”303 In Bruntz v.
Alfaro, where the lender was unsuccessful in the recovery of attorney’s fees because he refused to accept the borrowers’ tender of the correct amount to cure the default, the court concluded that “[w]hether a particular expense may be treated as an advance, or is subject to the limitations in Civil Code section 2924c, will depend upon the purpose for which the expense was incurred and the particular contractual terms involved.”304 Thus, the determination as to whether “other costs” are limited by the foreclosure statutory scheme or are advances that can become part of the debt turns on the purpose for the expense.
In Walker v. Countrywide Home Loans, Inc., the subject deed of trust authorized the lender to “do and pay for whatever is necessary to protect the value of the Property and the Lender’s rights in the Property” to “make reasonable entries upon and inspections of the Property,” to enter “on the Property to make repairs,” and to include amounts disbursed, including attorney’s fees, to “become additional debt of Borrower.”305 Countrywide made thirteen separate “verify occupancy” inspections prior to its recording of a notice of default.306 The Walker court held that the lender’s charges for the actual cost of performing property inspections did not violate California’s unfair competition law based on its conclusion that “the deed of trust ‘unequivocally permits’ Countrywide to charge the Walkers with the reasonable cost of the property inspections.”307 The Walker opinion did not rule in the context of the foreclosure statutory scheme as to whether postBruntz v. Alfaro, 212 Cal. App. 3d 411, 421 (1989).
304 Id.; see also Caruso v. Great W. Sav., 229 Cal. App. 3d 667, 676–77 (1991) (“[T]he [trial] court failed to distinguish between [attorney] fees actually incurred as an expense of the foreclosure process, which fees are statutorily limited, and other fees incurred, such as those relating to the protection of the lender’s deed of trust, which are not so limited.”).
305 Walker v. Countrywide Home Loans, Inc., 98 Cal. App 4th 1158, 1165 (2002).
307 Id. at 1178–80.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 403 notice of default inspections were recoverable under the deed of trust,308 but it did state that “[i]nspecting property after a default is an action that reasonably may be necessary to protect a lender’s security interest.”309 Advances paid in the form of inspection fees to protect a lender’s security can be added to the borrower’s debt and are recoverable through a nonjudicial foreclosure.310 Pursuant to Walker, then, a lender that makes advances for pre-notice of default inspections in compliance with the CVAPO can add the cost to the amount owed by the borrower where the deed of trust authorizes inspections to protect the security. Unresolved by Walker, however, is whether inspections that take place after a notice of default is recorded can be added to the debt. As soon as the notice of default is recorded, monthly inspections conducted by lenders or by their local property management companies pursuant to the CVAPO will start and may continue for a lengthy, if not an indefinite, period of time. Thus, the amount of a lender’s advances for inspections could become substantial and obviously important to the lender.
The holding of the Walker court based the lender’s recovery of prenotice of default inspection costs on the trust deed language.311 As described above, the inspections of the property in Walker was “to protect the value of the Property and the Lender’s rights in the Property.” Where the language of another trust deed is similar to that in Walker, the logic of the pre-notice of default inspection approved of in Walker would dictate that the purpose of the post-notice of default inspection allows recovery of those postnotice inspection costs. Assuming lenders subject to the CVAPO use deeds of trust that contain the same or similar language, the post-notice of default inspection costs required by the CVAPO can be added to the debt owed by the borrower and recoverable through foreclosure sale proceeds because the purpose of the inspections to protect the value of the property and the lender’s security interest continue after the notice of default is recorded.
In Buck v. Barb, the defendant lender retained an attorney to determine whether the borrowers obtained fire insurance, as required by the loan agreement to protect the security.312 Because the plaintiff–borrower was uncooperative, the attorney expended time to eventually confirm that the insurance policy was indeed in place.313 The court held that the deed of trust provisions regarding protection of the security and employment of 308 See id. at 1174 n.5.
309 Id. at 1178.
310 See id. at 1178–80.
311 Walker v. Countrywide Home Loans, Inc., 98 Cal. App 4th 1158, 1178–80 (2002).
312 Buck v. Barb, 147 Cal. App. 3d 920, 920 (1983).
313 Id. at 924.
counsel authorized the lender to recoup the attorney’s fees she incurred.314 In O’Connor v. Richmond Savings and Loan Association, the lender employed a law firm “to advise the lender in connection with the entire loan transaction” after the borrower–developer became financially distressed, defaulted on the loan payments, and failed to pay carpenters and other subcontractors.315 To deal with recorded mechanics’ liens, removal of materials and fixtures, and vandals, the law firm worked to secure the partially completed homes on seventeen different lots and initiated a nonjudicial foreclosure.316 The O’Connor court held the lender was entitled to the attorney’s fees it had advanced since the deeds of trust authorized the lender to incur and recover costs, including attorney’s fees, to protect its security interest.317 The court reasoned, “[t]he fees here are governed, not by the above code sections or by any other statute, but by the contract regarding attorney's fees, as set forth in the deeds of trust.”318 Just as Buck v. Barb upheld the recovery of attorney’s fees to protect the security, a lender that incurs attorney’s fees for review of and advice about compliance with the CVAPO can add those fees to the borrower’s debt as long as the deed of trust authorizes such fees to protect the security.319 A fire insurance policy, as existed in Buck, is one of many ways in which a property is kept secure and complements the tasks a lender must do under the CVAPO. As in O’Connor, attorney’s fees for services that deal directly with the legal issues raised by the facts on the ground—as would be the case under the CVAPO—impact the level of protection of the security and should therefore be recoverable.
Attorney’s fees do raise some questions though if the fees are construed to relate to the lender’s “administrative” duties under the CVAPO rather than to protection of the security. “Administrative” duties under the CVAPO are the sole responsibility of the lender, a borrower would assert, and such duties were not within the contemplation of the parties at the time the loan agreement, with its covenants set forth in the trust deed, was formed. The duties cannot be delegated to the borrower because the express language of the CVAPO imposes the duties on the lender and declares the lender will be held strictly liable for violations.320 If a court were to accept the borrower’s argument, the attorney’s fees paid by a lender to review the CVAPO for its “administrative” aspects could not be added to the 314 Id. at 925–26 (it appears all attorney’s fees were incurred prior to the time the notice of default was recorded).
315 O’Connor v. Richmond Sav. & Loan Ass’n, 262 Cal. App. 2d 523 (1968) (overruled on other grounds, Garrett v. Coast & S. Fed. Sav. & Loan Ass’n, 9 Cal. 3d 731 (1973)).
316 O’Connor, 262 Cal. App. 2d 523, 526–27.
317 Id. at 528–29. (It is not clear from the facts whether some of the attorney’s fees were for ser
amount owed by the borrower and thus would not be recoverable through foreclosure. Acceptance of the “administrative” duties argument puts in jeopardy the recovery of not only the attorney’s fees, but also the registration fees and the property management non-inspection expenses since these expenditures relate to the municipality’s oversight of the lender’s management of the property.
The “administrative” duties argument misses two fundamental points, however. First, all of the duties imposed by the CVAPO relate to the security and the purpose of protecting it.321 Even if administrative in nature, such duties are necessary tasks closely connected to the substantive efforts to maintain and keep secure the collateral property. Second, were it not for the borrower’s default and acts that led the property to be “not legally occupied” or to show “evidence of vacancy,” the lender would not have incurred any CVAPO related costs whatsoever and would not have retained counsel to review and give advice about the CVAPO. A reasonable reading of the typical language in a deed of trust regarding protection of the security would encompass registration, registration fees, property management, and related attorney’s fees as essential to the purpose of the protection of security.
Though no case has so ruled, the same reasoning as in the cases discussed above would allow the costs, expenses, and fees paid by a lender to comply with the CVAPO to be added to the borrower’s debt and recovered through foreclosure as long as the underlying deed of trust authorizes the lender to take such action for the purpose of protecting the security.322 Accordingly, costs and fees for post-notice of default inspections, registration fees, retention of a property manager, and related legal fees are advances that would be recoverable at the trustee’s sale.
5. Foreclosure, the CVAPO, and Miscellaneous Issues
As code enforcement officers “compel” lenders to maintain and keep secure the collateral property, the CVAPO raises the specter that the lender’s entry on to the owner–borrower’s property can expose the lender to tort liability or can be taken as a breach of the loan agreement due to an interference with the quiet use and enjoyment of the property, the failure to notify and obtain the consent of the borrower, or a trespass.323 321 CHULA VISTA, CAL., MUN. CODE § 15.060.010.
322 See generally supra notes 303–19 and accompanying text.
323 See generally 12 MILLER & STARR, CAL. REAL EST. §§ 36:1 et seq. (3d ed. 2002); see also Richard E. Gottlieb, Margaret J. Rhiew, Brett J. Natarelli, Reckless Abandon: Vacant Property Ordinances Create Legal Uncertainties, 68 BUS. LAW. 669 (2013).
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A lender that enters the property to conduct inspections and maintenance could actually hand the borrower the factual bases for such claims.