What To Expect In A Post Foreclosure Lawsuit And How To Get Rid Of It Prior To Trial

By the time that a client is on the phone with me, he’s already exhausted every chance at a cash-for-keys deal. The client is usually frustrated, anxious and upset. Why not? The client has put up hundreds of thousands of dollars for real estate that he can’t use or sell because the prior property owner won’t leave. Worse, the prior owner has filed suit against everyone-the bank, the trustee, and the purchaser at foreclosure (my client)-and recorded a lis pendens against the property. Thinking that they have all of the leverage, I’ve seen prior owners demand as much as $80,000.00 to turn over the keys and vacate property that they no longer own and have no right to occupy. Other foreclosed out owners that I’ve encountered have been more base, insinuating that if cash-for-keys isn’t paid they’ll strip the place. My experience in foreclosure litigation since 2008 has taught me that “cash-for-keys” is a euphemism, a polite way to say extortion.

My clients are smart business people. They come to me only when it’s time for the nuclear option. They have found in the foreclosed prior owner one who is desperate, unreasonable, and greedy; a person who is addicted to free housing, bent on dragging things out, and marked my client for a shake down. Before suing my client, the prior owner may have already utilized a credit-busting bankruptcy to delay foreclosure only to later suffer the foreclosure where my client bought. Thus, the prior owner doesn’t fear adding an eviction to his credit report to complete the deadbeat trifecta. I advise that the only way to deal with such a person is to hit him hard, dispel any hope in his mind of benefitting, and begin handing him a series of in-court defeats that will eventually result in him waiving the white flag.

First, get an eviction case going. I have my office serve the prerequisite notices on the prior owner that day. Four days later, I file an eviction case against the prior owner. Second, on the day that I get hired, I set a hearing date for a motion to expunge the lis pendens. Third, I begin preparation of my demurrer to the prior owner’s complaint seeking to have the court throw out the case. Fourth, I have contact with the prior owner or his attorney and withdraw all cash-for-keys deals. This contact may be more symbolic than anything else since it’s unlikely that any such offer is pending at the time. But I make contact anyway to emphasize to the prior owner (or his attorney) that there’s no money for the case and to deliver my lecture that he should be ashamed of himself for filing such a frivolous suit against an innocent buyer at foreclosure.

The way matters are now scheduled where I practice in San Diego, the prior owner’s first citadel to fall is possession. In other words, the prior owner loses my client’s eviction case. Naturally, the prior owner does all that he can to delay the case (another bankruptcy during the pendency of the eviction case is not out of the realm) by requesting continuances, taking the case to trial rather than settling, and staying in the property all the way to lock out. But the sheriff will enforce the eviction judgment and throw the prior owner off the property. Depending upon the prior owner’s degree of obnoxiousness and greed, attending the lock out can be a gratifying moment for both attorney and client. Getting possession is a big victory for my client because he can now start preparing the property for sale or rent so he’s no longer losing any time.

While the eviction case is pending, I also recommend to clients that they periodically check on the property and look for any signs of stripping by the prior owner. If the prior owner is taking out fixtures or otherwise damaging the property, I recommend that clients contact me at once so that I can go into court immediately and obtain a restraining order. Because stripping has become so commonplace during the foreclosure crisis, the courts where I practice tend to be very liberal about issuing restraining orders to stop stripping.

The next loss for the prior owner is expungement of his lis pendens. With the lis pendens gone, my client now has clear title. Coupled with the win in the eviction case, my client has achieved at that point possession and the ability to transfer the property free and clear. The court’s ruling expunging the lis pendens is often followed by a loud hissing noise. This hissing noise is the sound of the air going out of the prior owner’s case. The court’s ruling expunging the lis pendens is a serious blow to the plaintiff because it’s an implied rejection by the court of the prior owner’s case and a foreshadowing of plaintiff’s failure at trial. (See my post regarding lis pendens for a further explanation of this point).

The coup de grace is the demurrer. Recall that the demurrer is a motion that challenges the legal sufficiency of the plaintiff’s complaint. There are some limitations to demurrer that you should know about. First, in deciding the motion, the court is limited to the four corners of the complaint. What that means is that the court will not consider any evidence when ruling on the demurrer. The court only looks at the complaint. The sole issue in a demurrer is whether the allegations of the complaint state a legal claim not whether the plaintiff can prove them. Thus, to prevail on a demurrer, the complaint itself must be defective in its allegations; shortcomings in evidence aren’t considered.

The other limitation is that when the court grants the demurrer it can do so “with leave to amend.” In other words, the court will give the plaintiff another chance to plead his case to see if he can plead a good claim. Thus, it usually takes at least two demurrers before the court will grant the demurrer “without leave to amend” (the ruling that I’m after) which means that the plaintiff’s case is done. However, the court, in its discretion, can allow the plaintiff more than one chance to amend. Thus, it’s possible to be stuck in demurrer hell where you’re winning each demurrer but the court keeps giving the plaintiff chances to amend. The upside to the demurrer, though, is that it’s the fastest (and least expensive) way to get rid of a bad case. In San Diego, civil cases take around fourteen months or so from filing to trial. If my client prevails on demurrer, however, he can be out of the case in about four months.

In my experience, particularly when my basis for the demurrer is the tender rule (please see my post on California’s tender rule), the judges in San Diego don’t allow many chances to amend. In fact, in my cases where I demur on the ground of the tender rule, the judges have only given the plaintiff one chance to amend before giving the case the boot. But each case is different. I’m able to tell after reading the complaint whether my client should file a demurrer.

Some cases may not be good for demurrer because the plaintiff alleges a good claim although he probably can’t prove it. In those cases, I would advise bypassing demurrer for a pre-trial motion called a motion for summary judgment. A motion for summary judgment is the mother of all motions. It’s essentially a trial in writing. If my client wins the motion, he wins the case. And, unlike a demurrer, the plaintiff must prove up his case in writing. The court considers evidence, not just the complaint’s allegations. The downside to a summary judgment motion is that it can get pricey. The upside to a motion for summary judgment is that it resolves the case sooner and prior to trial. Thus, a motion for summary judgment can actually save money in the long run because it dispenses with the need for an expensive trial.

A good lawyer can determine whether to go the demurrer or summary judgment route. I tend the favor demurrer because I want to keep the pressure on the plaintiff and I want to keep handing him losses. Remember, the plaintiff’s strategy is to delay. It is common for the plaintiff, therefore, to be constantly asking for continuances. Plaintiffs in post-foreclosure cases will also try to create discovery disputes as a way to delay. The judges that I practice in front of tend to see through plaintiff efforts to delay in post-foreclosure cases and customarily deny continuance requests and show impatience toward discovery disputes. Thus, by the time of the demurrer, the plaintiff has probably already lost at six or seven hearings and is getting dispirited. I don’t like to give up that momentum so I will recommend demurrer if I see a good ground for it. So, if you are an investor in real estate who has been sued, there are ways to get the litigation out of your hair fairly quickly and get on with enjoying return on your investment.

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How To Remove A Lis Pendens From Your Property

If you’ve ever been involved in litigation over a piece of real estate, you know about the dreaded lis pendens. A lis pendens is simply a notice recorded with the county recorder which states that the right of ownership or possession of a piece of real estate is the subject of an existing lawsuit. In other words, the recorded lis pendens is notice to the world that ownership (typically) of a piece of real estate is disputed and that there is a plaintiff in existing litigation who is making claims to the property adverse to the owner of title.

A lis pendens isn’t a lien or mortgage against the property but it can have the same effect. A lis pendens is a cloud on the property’s title. The lis pendens shows up in the chain of title and will show up on a preliminary title report. Practically speaking, the lis pendens ties up the property until it is removed, either upon resolution of the litigation or involuntarily by court order. The law regards a lis pendens as a legally binding notice on any subsequent purchaser of, or lender on, the property. Thus, a lis pendens prevents BFP status. (Please see my post on Bona Fide Purchaser). Therefore, if a person buys or lends against a property that has a lis pendens recorded against it, he does so subject to, and at the risk of, the existing dispute and litigation. So, should the litigation resolve in favor of the plaintiff, the buyer or lender who invested after the lis pendens recorded could find his rights to the property now in conflict with prevailing plaintiff.

You may ask, why would anyone buy or lend against a property with a lis pendens? The answer: they don’t. A lis pendens cripples real estate. If you have one recorded against your property, you want it off, fast. As long as the lis pendens is there, you can forget selling or refinancing your property. True, you may find a wheeler-dealer type who’ll buy your property, or a hard money lender who’d refinance, subject to the lis pendens, but they’ll demand a steep discount or high interest to assume that risk. Why take such a financial hit when you can just have the court order the lis pendens removed?

In the post-foreclosure context, the typical course is that prior owner files his lawsuit to set aside the foreclosure sale. He records his lis pendens on the same day that he filed the lawsuit. If the prior owner is represented by a lawyer, he can record a lis pendens as a matter of right; he doesn’t even have to ask the court for permission. Now what? It’s probably best that you hire a lawyer. The lawyer will file a motion to expunge the lis pendens. In the motion, the lawyer will ask the court for an order removing the lis pendens and for an award of attorney’s fees against the prior owner who recorded it for the cost of bringing the motion.

Although filing a lis pendens is easy for the prior owner, opposing a motion to expunge the lis pendens is much harder. In other words, it may be easy to record a lis pendens against property but it isn’t so easy to keep it there. Once the new owner files the motion to expunge, the law places the burden of proof on the former owner to justify keeping the lis pendens on the property. To keep the lis pendens, the law requires that the former owner show the “probable validity” of his lawsuit against the new owner. In plain language, the former owner will have to prove in his opposition to the motion that he would probably win the case at trial if it ever got there. In effect, the prior owner will have to put on a mini-trial, in writing, sufficient to show the court that his case has such merit that he would prevail at trial. That is a tough burden for the plaintiff early on in a lawsuit.

I always recommend to clients that they get a motion to expunge on file immediately. I usually prevail in these motions and get a nice award of attorney’s fees for my clients as well. There are many advantages to winning a motion to expunge. Prevailing on the motion, obviously, frees up the client’s property. He’s now free to sell it. If the client does sell the property during the pendency of the case, he creates another degree of separation (and another bona fide purchaser) between the plaintiff and the property thereby dealing another serious blow to the plaintiff’s hope of ever getting the property back.

Losing the motion also has a serious demoralizing effect on the plaintiff. Remember, the plaintiff’s burden when opposing the motion is to show the probable validity of his case. Thus, when the court rules against the plaintiff on the motion to expunge, the court is implicitly telling the plaintiff that the court doesn’t think that plaintiff will win the case at trial. This ruling is a tough piece of feedback for the plaintiff and a strong signal to how the court will rule if the case ever comes before him for trial. This ruling can be particularly demoralizing to the plaintiff if his theory of recovery is novel or requires an extension of existing law. In ruling against him on the motion, the court is essentially telling the plaintiff no dice and is impliedly rejecting plaintiff’s theory of the case. Another advantage is that the attorney fee award can act as a bargaining chip or, through immediate collection efforts, as a means to disrupt the plaintiff’s financial life. Losing a motion to expunge can also be a part of a series of losses that the plaintiff suffers early in the case which can further pressure him to abandon his litigation.

California’s Tender Rule And How Investors Can Use It To Defeat Post-Foreclosure Lawsuits

Despite its reputation, California law can be pro-creditor. One example is California’s tender rule. The rule applies where a foreclosed property owner has sued asking the court to set aside the foreclosure sale and return the property to him. (Yes, that actually happens.) The prior owner typically files this lawsuit shortly after foreclosure and before the new owner can evict him. These lawsuits are generally a last ditch effort by the defaulting borrower to further delay the inevitable and to continue living without a housing cost. Unfortunately, the new laws passed in the wake of the financial crisis have given defaulting borrowers more ammunition for delaying, and driving up the cost of, foreclosure, a cost all too often borne by the purchaser at foreclosure.

The tender rule is straightforward. The rule provides that, before a court will set aside a completed foreclosure sale, the defaulting borrower (the one, ironically, now doing the suing) must tender the full amount of the unpaid debt on the loan foreclosed upon before the court will allow the borrower’s case to go forward. For example, let’s say that the borrower owed $500,000.00 on the foreclosed obligation at the time of the foreclosure sale. The court will require the borrower (now the plaintiff in our hypothetical case) to tender the full amount of that indebtedness before the court will even allow the borrower’s case to proceed beyond the pleading stage. The plaintiff can rarely make such a tender. Therefore, the tender rule can often be the early death knell for these post-foreclosure lawsuits.

The tender rule is judicially created. Like most rules evolved from the common law, it’s founded in fairness and practicality. The way that the courts look at it, if a party who has defaulted on a debt wants his collateral back, he has to pay the debt. It would be unfair to allow the defaulting borrower to get his property back for free, particularly where a third party has bought the property at foreclosure and is out the money. The courts consider the rule a practical one because there is no point in the court exercising its power to set aside the foreclosure sale just to put the borrower back in default.

What is a tender? A tender of payment is an unequivocal, viable, offer to pay the full amount of a debt. In short, a tender is an offer to pay in full, in cash, now. In the case of California’s tender rule, the defaulting borrower must allege in his complaint, right at the start of the case, that he can pay the debt, in full, now. This requirement is a real sore point for the defaulting borrower because most cannot allege the ability to tender the indebtedness. If he can’t allege tender of the debt, his complaint is open to attack by the defendants and can lead to the court throwing out the case early on. Since defaulting borrowers must allege their cases under oath, most will not make a false allegation of tender. Therefore, if the defaulting borrower can’t tender, he won’t say that he can, he’ll just lose.

The tender rule has exceptions. For example, if, under the law, the foreclosure sale was void, then the defaulting borrower does not have to tender. Examples of a void sale would be a foreclosure conducted by the wrong trustee or a foreclosure sale held after the borrower cured the default. Another exception to the tender rule is if the borrower alleges that the underlying debt foreclosed upon was illegal or invalid. The court will also not require tender if it would be inequitable to do so such as a case where the trusteee violated the deed of trust in the way in which he foreclosed.

However, tender is the general rule. Thus, it will be the defaulting borrower’s burden to prove that he fits into one of the exceptions. The exceptions to the rule are infrequent, particularly these days where the banks and trustees have finally gotten their acts straight. Also, most problems with the foreclosure process are ironed out in pre-foreclosure litigation so that, once the foreclosure sale happens, it’s probably a good sale. In my experience with the judges in San Diego County, they follow the tender rule and narrowly construe the exceptions. So, if the plaintiff cannot fit himself squarely into an exception, the court will require tender.

The issue of whether tender is required should be raised by the defendants right at the start of the case, most commonly in a motion attacking the complaint called a demurrer in California. In deciding the demurrer, the court will have the opportunity at the start of the case to determine whether tender is required or if an exception applies. If it’s the former, the defendants win since it’s highly unlikely that the borrower can allege tender. So if you’ve bought at foreclosure and have been sued, take heart. There is a way to get rid of the case relatively quickly and without having to lose an arm and a leg to attorney’s fees.

What Is A BFP And Why Should You Care?

I’ve had many clients who buy at foreclosure, drawn to the rock bottom prices and willing to take the risk of purchasing sight-unseen.  Buying real estate at foreclosure since the 2008 financial crisis can be like taking a long walk in the dark, a walk made even longer and uncertain by all of the legal “reforms” that have granted new rights to tenants and defaulting borrowers at the expense of the real estate investor. 

These politically-motivated “reforms” have, in essence, given the defaulting (and foreclosed out) borrower new potential legal grounds for setting aside the foreclosure sale and given tenants new grounds for staying even longer in your property post-foreclosure.  The real result of the politicians’ misguided efforts to appear compassionate toward those who borrowed money and then didn’t pay it back is, not surprisingly, money.  The prior owners and tenants use the legal “reforms” to jack up the price of cash-for-keys deals for the new property owner.   

An ancillary negative effect of all the “foreclosure reforms” is that it has (not surprisingly) lead to an explosion in foreclosure litigation.  As a result, the courts have had to get into the act interpreting these statutes thereby creating expanded grounds for tenants and defaulting homeowners to kick up more sand post-foreclosure.  Needless to say, the law of foreclosure has become extremely complicated. 

Investors can take some relief in the fact that the courts, with a couple of exceptions, have towed the line on BFP status.  Specifically, the courts have largely protected the BFP’s exalted status in the law despite the best efforts of defaulting borrowers to dilute, and carve out exceptions to, BFP status.   

So, what is a BFP?  BFP is an acronym for bona fide purchaser.  A bona fide purchaser of real estate is one who buys property without knowledge of any adverse claims against it and gives value for the property.  In short, a BFP is an innocent, after-the-fact buyer who doesn’t know of any disputes relating to, or claims against, the property he’s buying.  The law protects a BFP by allowing him to acquire the property free and clear of all adverse claims that he didn’t know about when he bought.

In the foreclosure context, the third party buyer at foreclosure is almost always a BFP.  (If the foreclosing bank, by contrast, winds up taking the property back at foreclosure, BFP status is not as obvious).  Once a foreclosed piece of property is transferred by the trustee to a BFP, it is much harder for the foreclosed out prior owner to get a court to later set aside the foreclosure sale. 

Indeed, the only genuine claim by the defaulting borrower that he could raise against a BFP is that the foreclosure was “void”.  However, the courts have narrowly defined what constitutes a “void” foreclosure sale and “void” sales are not very common.  These days, by the time that the property is sold at foreclosure, there have probably been long running battles between the defaulting borrower and the bank.  One benefit of BFP status is that, in most circumstances, you can acquire the property free and clear of whatever disputes between the bank and borrower preceded the foreclosure. 

If you do get sued by a foreclosed homeowner, you should have a lawyer who specializes in this area look at your case right away.  If he determines that you qualify as a BFP, he’ll probably be able to get a good result for you and get the court to throw out prior to trial the defaulting borrower’s case against you.  But you’ll need the all-important determination of BFP status and then the attorney can guide your defense from there.