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.

About howardfburns
I am a foreclosure litigation and landlord/tenant attorney in San Diego, California. I have been an attorney in San Diego, California for 29 years during which time I have represented landlords, property management companies, real estate investors, and secured creditors in hundreds of litigated cases. Howard F. Burns, Esq. Law Office of Howard F. Burns 8880 Rio San Diego Drive, Ste. 800 San Diego, CA 92108 (619) 243-1757 (Telephone) (619) 297-1497 (Facsimile) (Email) www.lawofficeofhowardfburns (Website)

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