California Appeals Court: Notice of Default is Void if Description of Default Includes “if any”

Edstrom_MortgageSecuritization_POSTER_17_x_22_v4_1California Appeals Court: Notice of Default is Void if Description of Default Includes “if any”

By Daniel Edstrom
DTC Systems, Inc.

Thank you to HYDROGENE for this one.  According to this decision, the “if any” in the following of a Notice of Default voids the document:

TOGETHER WITH LATE CHARGES AS SET FORTH IN SAID NOTE AND DEED OF TRUST, ADVANCES, ASSESSMENTS AND ATTORNEY’S FEES, IF ANY

UPDATE NOTE added 1/9/2012: The Supreme Court of California denied review of this case but ordered that the opinion be not officially published (See California Court–Rules 976, 977 and 979)

Excerpt (fairly long):

Validity Of Notice Of Default
EMC sought to exercise the power of sale in the Deed of Trust on Anolik’s home based on Anolik’s alleged breach of various obligations secured by the Deed of Trust. Anolik alleged in the fourth cause of action in his second amended complaint (for wrongful foreclosure) that “the events of default as alleged . . . in the Notice of Default . . . [we]re false and untrue” and that “the Notice of Default and Election to Sell [wa]s void” as a result.

The trial court concluded the Notice of Default “was proper and is not invalid or void.” Anolik contends the trial court erred in this conclusion. We agree. “The procedure for foreclosing on security by a trustee’s sale pursuant to a deed of trust is set forth in Civil Code section 2924 et seq.”5 (Miller v. Cote (1982) 127 Cal.App.3d 888, 894.) Because nonjudicial foreclosure is a “drastic sanction” and a “draconian remedy” (Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal.App.3d 818, 827, 830), “[t]he statutory requirements must be strictly complied with.” (Miller, at p. 894.)

Under section 2924, a power of sale in a deed of trust “shall not be exercised” until a notice of default is recorded “identifying the . . . deed of trust . . . and containing a statement that a breach of the obligation for which the . . . transfer in trust is security has occurred, and setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust . . . that is in default . . . .”

“The provisions of section 2924 . . . with reference to inclusion, in the notice of default, of a statement setting forth the nature of the breach ‘must be strictly followed.’ [Citation.] The person relying upon the notice of default is ‘bound’ by its provisions, and ‘cannot insist upon any grounds of default other than those stated in that notice.’” (System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 152-153; see also Hayward Lbr. & Invest. Co. v. Corbett (1934) 138 Cal.App. 644, 650 [person recording notice of default is “powerless to insist upon . . . grounds for default” other than those described in the notice].)

“[T]he intent of [section 2924] is sufficiently complied with if the notice of default contains a correct statement of some breach or breaches sufficiently substantial in their nature to authorize the trustee or beneficiary to declare a default and proceed with a foreclosure.” (Birkhofer v. Krumm (1938) 27 Cal.App.2d 513, 523-524.) “[E]rroneous statements [that] may appear in the notice about other breaches . . . may properly be treated as immaterial.” (Id. at p. 524.) Moreover, “the failure to include an actually known default shall not invalidate the notice of sale and the beneficiary shall not be precluded from asserting a claim to this omitted default or defaults in a separate notice of default.” (§ 2924.)

From the foregoing authorities, we distill the following rule: To be valid, a notice of default must contain at least one correct statement of a breach of an obligation the deed of trust secures. Moreover, the breach described in the notice of default must be substantial enough to authorize use of the drastic remedy of nonjudicial foreclosure. If a notice of default does not satisfy these requirements, then the notice is invalid and the lender cannot exercise the power of sale based on that notice. As we will explain, that is the case here.

The Notice of Default here was signed on July 5, 2000, and recorded the next day. It asserted that Anolik’s “past due payments plus permitted costs and expenses” totaled $7,049.06 as of July 5, 2000. It further asserted “that a breach of, and default in, the obligations for which [the] Deed of Trust is security has occurred in that payment has not been made of: [¶] THE INSTALLMENT OF PRINCIPAL AND INTEREST WHICH BECAME DUE ON 03/01/2000 AND ALL SUBSEQUENT INSTALLMENTS, TOGETHER WITH LATE CHARGES AS SET FORTH IN SAID NOTE AND DEED OF TRUST, ADVANCES, ASSESSMENTS AND ATTORNEY’S FEES, IF ANY.”

EMC contends the Notice of Default was valid because “EMC demonstrated at the trial that the amount in default listed in the [Notice of Default], $7,049.06 as of July 5, 2000, was in fact accurate.” This argument fails because section 2924 does not even require a statement of “the amounts which are in default.” (Middlebrook-Anderson Co. v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1038.) What the statute requires is a statement “setting forth the nature of each breach actually known to the beneficiary.” (§ 2924.) Thus, in determining whether the Notice of Default was valid, we address ourselves to the nature of the breaches described in the Notice of Default — that is, Anolik’s alleged failure to pay “THE INSTALLMENT OF PRINCIPAL AND INTEREST WHICH BECAME DUE ON 03/01/2000 AND ALL SUBSEQUENT INSTALLMENTS, TOGETHER WITH LATE CHARGES AS SET FORTH IN SAID NOTE AND DEED OF TRUST, ADVANCES, ASSESSMENTS AND ATTORNEY’S FEES, IF ANY.”

We begin with the validity of the latter part of the assertion of breach — the phrase that begins with the words “TOGETHER WITH.” In effect, this part of the Notice of Default asserted “payment ha[d] not been made of [¶] . . . [¶] LATE CHARGES AS SET FORTH IN SAID NOTE AND DEED OF TRUST, ADVANCES, ASSESSMENTS AND ATTORNEY’S FEES, IF ANY.”

The first question is whether the words “IF ANY” were intended to modify only the immediately preceding phrase (“ATTORNEY’S FEES”) or instead were intended to modify all four items that precede those words in the phrase beginning with “TOGETHER WITH”: that is, (1) “LATE CHARGES AS SET FORTH IN SAID NOTE AND DEED OF TRUST,” (2) “ADVANCES,” (3) “ASSESSMENTS,” and (4) “ATTORNEY’S FEES.”

It is an “established rule” of statutory construction “that ‘a limiting clause is to be confined to the last antecedent, unless the context or the evident meaning of the statute requires a different construction.’” (Elbert, Ltd. v. Gross (1953) 41 Cal.2d 322, 326-327.) Applying that rule to the interpretation of the Notice of Default,6 we conclude the context here requires a different construction. The assertion of breach in the Notice of Default begins with the assertion of a specific breach: the failure to pay “THE INSTALLMENT OF PRINCIPAL AND INTEREST WHICH BECAME DUE ON 03/01/2000 AND ALL SUBSEQUENT INSTALLMENTS.” The words “TOGETHER WITH” then introduce a list of four other, more generally described breaches: the failure to pay: (1) “LATE CHARGES AS SET FORTH IN SAID NOTE AND DEED OF TRUST,” (2) “ADVANCES,” (3) “ASSESSMENTS,” and (4) “ATTORNEY’S FEES.” The words “IF ANY” follow this list. Given this division of the assertion of breach into one specific breach and four general breaches, it reasonably follows that the words “IF ANY” were intended to modify all four of the generally described breaches, rather than simply the last of the four.

This leads us to the question of whether a notice of default that qualifies an assertion of one or more breaches with the words “if any” satisfies the requirements of section 2924. It does not.

Section 2924 requires a notice of default to “set[] forth the nature of each breach actually known to the beneficiary.” (§ 2924, italics added.) As this court explained in Anderson v. Heart Federal Sav. & Loan Assn. (1989) 208 Cal.App.3d 202, “[a]dding the qualifier ‘if any’ . . . to an assertion of default indicates the party claiming default has no knowledge of the truth or falsity of the assertion.” (Id. at p. 213.) “The purpose [of requiring a notice of default to identify what breach has occurred] is to put the beneficiary to the task of ascertaining the existence of a breach before the invocation of the power of sale and the trustor on notice of the obligations the beneficiary contends have been breached. An assertion of a breach ‘if any’ utterly fails those purposes.” (Id. at p. 214.)

By asserting that Anolik’s breach included the failure to pay late charges, advances, assessments, and attorney fees, “IF ANY,” EMC did not describe a breach “actually known” to EMC. Therefore, the latter part of the assertion of breach in the Notice of Default was invalid.

After this court decided Anderson, the Legislature amended sections 2924 and 2924c (which relates to curing a default described in a notice of default). (Stats. 1990, ch. 657.) In doing so, the Legislature specifically stated its intent was “to supersede the holding in [Anderson] to the extent that decision restricted the ability of mortgagees and beneficiaries under trust deeds to demand payment of all amounts in default under the terms of an obligation secured by a mortgage or deed of trust as a condition to reinstatement of the obligation and avoidance of a sale of the security property to satisfy the obligation.” (Stats. 1990, ch. 657, § 3, p. 3159.) Having examined the 1990 revisions to sections 2924 and 2924c, we conclude the Legislature’s intent to supersede Anderson related to other portions of Anderson that involved section 2924c, on which we do not rely. (See Anderson v. Heart Federal Sav. & Loan Assn., supra, 208 Cal.App.3d at pp. 215-217.) Indeed, by adding the words “actually known” to section 2924 as part of the 1990 amendments, the Legislature actually bolstered Anderson’s conclusion that an “if any” proviso in a notice of default is invalid.

Conclusion
Because the Notice of Default was invalid, the judgment must be reversed. Anolik was entitled to judgment in his favor on his fourth cause of action for wrongful foreclosure, in which he sought “a judgment of this court determining that the Notice of Default . . . and all further proceedings taken thereon, are null and void and of no force and effect.” He also was entitled to a permanent injunction on his first cause of action enjoining EMC from proceeding with nonjudicial foreclosure based on the invalid Notice of Default. Of course, EMC is not precluded from recording a new notice of default and proceeding with a nonjudicial foreclosure based on new, accurate assertions of default by Anolik, if he remains in default.

Since it is not clear whether the trial court would have found against Anolik on his fifth cause of action for damages for wrongful foreclosure if the court had found the Notice of Default was invalid, our decision may effect that cause of action as well, but that is for the trial court to decide on remand.

Finally, because we are reversing the judgment in favor of EMC, we must also reverse the order awarding EMC its attorney fees, which was premised on EMC’s being the prevailing party in seeking to enforce the Note and the Deed of Trust.

DISPOSITION
The judgment and the order awarding attorney fees to EMC are reversed, and the case is remanded to the trial court for further proceedings consistent with this opinion. Anolik shall recover his costs on appeal. (Cal. Rules of Court, rule 27(a).)

Download this ruling here: http://dtc-systems.net/wp-content/uploads/2012/01/Anolik_vs_EMC_void_NOD.pdf

Author: dmedstrom

Reverse Engineering and Failure Analysis - Reverse Engineering Wall Street

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