By Glen Hansen
The ongoing mortgage crisis in California’s residential real estate market reinforces the current importance of California’s Home Equity Sales Contract Act law (“HESCA”), which is codified in Civil Code section 1695 et seq. Several cases in 2009 applying HESCA demonstrate how courts will enforce the strict requirements of that statute.
HESCA was enacted to protect owners of residence in foreclosures, including homeowners in financial distress from fraud, deception, and unfair dealings by home equity purchasers. (Civ. Code, § 1695 subd. (a).) HESCA is designed to closely regulate transactions between an equity purchaser and an equity seller resulting in the sale of a residential property in foreclosure. HESCA contains specific, detailed regulations concerning the content and form of contracts for the sale of a home in foreclosure. The contract must include the total consideration given, terms of payment and terms of any rental agreement; a conspicuous statement of the right to rescind the contract within five business days or until 8 a.m. on the day scheduled for foreclosure, with an attached notice of cancellation; and a conspicuous notice that until the right to cancel has ended, the equity purchaser cannot ask the seller to sign a deed or any other document. (Civ. Code, §§ 1695.3–1695.5.) The equity purchaser must provide, and complete, the contract in conformity with these terms. (Civ. Code, § 1695.6, subd. (a).) During the ‘cooling off’ period, the equity purchaser cannot take title to the property by written instrument or recordation thereof; transfer or encumber any interest in the property; or pay the seller any consideration. (Civ. Code, §1695.6, subd. (b).) Moreover, the purchaser cannot make untrue or misleading statements about the value of the property, any foreclosure proceeds, or the terms of sale. (Civ. Code, §1695.6, subd. (d).) Additionally, when the seller grants the residence by an instrument purporting to be an absolute conveyance but reserves or is given an option to repurchase, the equity purchaser cannot grant any interest in the property to another without the written consent of the seller. (Civ. Code, §1695.6, subd. (e).) Finally, it is unlawful to take unconscionable advantage of the property owner in foreclosure. (Civ. Code, §1695.13.)
For a transaction to fall within the requirements of HESCA, listed above, each of the three following elements must exist:
(a) The residence must have been in foreclosure. Under section 1695.1(b), “residence in foreclosure” and “residential real property in foreclosure” are defined as “residential real property consisting of one- to four-family dwelling units, one of which the owner occupies as his or her principal place of residence, and against which there is an outstanding notice of default.”
b) The seller must have been an “equity seller.” Under section 1695.1(c), “equity seller” means “any seller of a residence in foreclosure.”
(c) The buyer must have been an “equity purchaser.” Under section 1695.1(a), “equity purchaser” means “any person who acquires title to any residence in foreclosure, except a person who acquires title as follows: (1) For the purpose of using such property as a personal residence. (2) By a deed in lieu of foreclosure of any voluntary lien or encumbrance of record. (3) By a deed from a trustee acting under the power of sale contained in a deed of trust or mortgage at a foreclosure sale. (4) At any sale of property authorized by statute. (5) By order or judgment of any court. (6) From a spouse, blood relative, or blood relative of a spouse.”
If a transaction falls within HESCA and the equity purchaser fails to satisfy the requirements outlined above, equity sellers are entitled to recover from equity purchasers’ actual damages, reasonable attorneys’ fees and costs, exemplary damages and/or equitable relief, and treble damages. (Civ. Code, §1695.7.)
The courts’ willingness to enforce the public policy purposes underlying HESCA is evident in Hoffman v. Blum (9th Cir., July 20, 2009), 572 F.3d 999. In Hoffman, Chapter 11 debtor Thomas Lloyd defaulted on his mortgage payments for his residence. Lloyd then entered into a transaction with creditor Jeffrey Hoffman, under which Hoffman purchased Lloyd’s residence and leased the property back to Lloyd. Additionally, Hoffman gave Lloyd an option permitting Lloyd to re-purchase the property during a two-year period. Although HESCA applied to this transaction, Hoffman did not comply with HESCA because he failed to give Lloyd notice of the right to rescind. When Lloyd defaulted on the lease payments, Hoffman filed an unlawful detainer action. Before trial on the unlawful detainer action, Hoffman and Lloyd entered into a written settlement agreement that contained a general release of all known and unknown claims and expressly waived the protections of Civil Code section 1542. However, the settlement agreement did not expressly refer to any rights provided by HESCA, or to the existence of any claims under HESCA. Four months later, after filing a Chapter 11 bankruptcy petition, Lloyd recorded a document entitled "Notice of Rescission of Grant Deed Recorded Pursuant to Home Equity Sales Contract" in order to rescind the sale of his residence under section 1695.14 of HESCA. The parties litigated that rescission in Lloyd’s bankruptcy proceeding. The Bankruptcy Court and the District Court concluded that the Notice of Rescission was timely and effective to cancel the original sale contract. The Ninth Circuit affirmed and explained: “If the language of the release does not state that HESCA was complied with, and that the seller therefore did not know of the seller’s HESCA rights, then the buyer must come forward with evidence that the seller’s HESCA rights were explained and the seller understood these rights. Because the buyer could not satisfy that burden, the Settlement Agreement did not extinguish Lloyd’s HESCA rights.” Not lost on the court was the Legislature’s declaration that “[a]ny waiver of the provisions of [HESCA] shall be void and unenforceable as contrary to the public policy.” (Civ. Code, § 1695.10.)
Courts have also made it clear that civil liability under HESCA does not require the equity seller to prove fraudulent conduct on the part of the equity purchaser. That was illustrated in Silva v. Chadwick (In re Paulette Chadwick) (Bankr. N. D. Cal., Jan. 23, 2009), 2009 Bankr. LEXIS 697. In Silva, the U.S. Bankruptcy Court for the Northern District of California held that a seller (i.e., creditor) was not entitled to summary judgment in a bankruptcy adversarial proceeding against the purchaser (i.e., debtor) based on a state court default judgment that the creditor earlier obtained against the debtor under HESCA. The reason was that the default judgment was based on both fraud, which is non-dischargeable conduct under the Bankruptcy Code, and statutory liability under HESCA, which is not. The court emphasized that HESCA “does not require any finding of fraud” and therefore the state court’s default finding of fraudulent violation of HESCA was unnecessary to the default judgment. For counsel who bring HESCA claims, this case demonstrates the importance of pleading a fraud claim separate and apart from HESCA if the facts so warrant, so that if a judgment is obtained under the fraud claim, the equity purchaser may not be able to discharge the judgment in bankruptcy.
If, however, the equity purchaser engages in fraud or deceit as a part of the conduct that violates HESCA, the courts will readily apply criminal penalties to the purchaser that are provided in HESCA. In People v. Shetty (June 18, 2009) 174 Cal.App.4th 1488, a purchaser defrauded an 80-year-old seller into signing documents that cause the home to be sold, and that failed to include the disclosure requirements of HESCA. The elderly seller was led to believe by the purchaser, falsely, that the home was merely being refinanced. The purchaser pled nolo contendere to a misdemeanor count based on a violation of Civil Code section 1695.8 of HESCA, which was brought more than three years, but less than four years later. That section of HESCA provides: “Any equity purchaser who violates any subdivision of section 1695.6 or who engages in any practice which would operate as a fraud or deceit upon an equity seller shall, upon conviction, be punished by a fine of not more than twenty-five thousand dollars ($25,000), by imprisonment in the county jail for not more than one year, or in the state prison, or by both that fine and imprisonment for each violation.” In Shetty, the court held that, because the criminal count was an alternative felony misdemeanor based on fraud, a four-year statute of limitations of limitations applied and the criminal action against the equity purchaser was timely.
All of these cases demonstrate the court’s willingness to strictly enforce the provisions of HESCA. These cases also underscore the importance of following the precise requirements of HESCA in transactions involving the sale of foreclosed residences during this depressed real estate market.
Glen C. Hansen is a senior associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.