In 1998 Alanna Spencer, a first-time home buyer, bought a two-bedroom condominium in Hayward, California. Later, Spencer became delinquent on her mortgage payments to her lender. The lender recorded a notice of default to begin foreclosure proceedings in November 2002. Spencer filed a Chapter 13 Bankruptcy petition in January 2003. The automatic stay provided upon filing this bankruptcy halted the foreclosure proceedings.
One year into the bankruptcy, the lender on Spencer’s mortgage filed a motion with the bankruptcy court seeking relief from the automatic stay so that it could proceed with its foreclosure against Spencer. While this motion was pending, Spencer signed a contract to sell her home for $220,000, less than its appraised value of $290,000, to Ryan Marshall, a licensed real estate broker doing business in Alameda County, California. Spencer at the same time signed an agreement to lease her home back from Marshall and also signed an option agreement which allowed Spencer to repurchase her home from Marshall at a price of $260,000, within one year after the sale to Marshall.
The sale of the condominium by Spencer to Marshall was approved by the Chapter 13 Bankruptcy Trustee for Spencer’s bankruptcy, but was not submitted to the bankruptcy court itself for approval. This procedure for approval of the sale was set forth in the bankruptcy court’s order approving Spencer’s Chapter 13 plan, and was a common procedure in use in the U.S. Bankruptcy Court in Oakland, California at that time.
In September 2004 the escrow for the sale by Spencer closed, and the proceeds were used to pay off Spencer’s creditors in the Chapter 13. The Bankruptcy Court then issued an order discharging Spencer’s debts in the bankruptcy. Soon after the close of the sale, title to the property was transferred to a corporation partly owned by Marshall; this transfer of title was made without the consent of Spencer.
Spencer continued to reside in the condominium under the leaseback, but she was unable to repurchase the home from Marshall’s assignee by the deadline of September 2005. Upon the expiration of the one-year leaseback, Spencer was served with a 60-day notice to terminate her tenancy.
In December 2005 Spencer sued Marshall and related entities. Among other things, Spencer alleged that the terms of the contracts between Spencer and Marshall violated the terms of the Home Equity Sales Contract Act (HESCA).1
HESCA seeks to regulate transactions between an equity purchaser and an equity seller resulting in the sale of residential real property in foreclosure. At the heart of the statutory scheme is the requirement that the agreement between buyer and seller be in writing, with specific terms aimed at protecting the homeowner.2 The contract must include the total consideration given, terms of payment and terms of any rental agreement; a conspicuous statement of the right to cancel 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.3 The equity purchaser must provide, and complete, the contract in conformity with these terms.4
During the “cooling off” period, the equity purchaser cannot take title to the property by written instrument; cannot transfer or encumber any interest in the property; or pay the seller any consideration.5 Moreover, the purchaser cannot make untrue or misleading statements about the value of the property, any foreclosure proceeds, or the terms of sale.6 Additionally, when the seller grants the residence by an instrument purporting to be an absolute conveyance such as a deed, but reserves or is given an option to repurchase the residence, the equity purchaser cannot grant any interest in the property to another without the written consent of the equity seller.7 Finally, it is unlawful to take unconscionable advantage of the property owner in foreclosure.8 Depending on the nature of the violation, the aggrieved seller may be entitled to rescission, other equitable relief or damages, including punitive damages.9
At the time of trial, it was found that Spencer’s home was in foreclosure at the time of the sale to Marshall; the foreclosure proceeding started by Spencer’s lender had been halted by the bankruptcy filing, but had not been finally terminated. There was also no dispute that the contract documents used by Marshall did not comply with the formal requirements of HESCA. It was also found that Marshall had improperly transferred the title to the property without Spencer’s consent (which was required because she held an option to repurchase. Marshall was found liable for damages of $280,000, including $210,000 in punitive damages, reduced by $27,300 for unpaid rent.
On appeal, Marshall contended that he was exempt from the requirements of HESCA, citing a provision that a purchaser is exempt from the requirements of HESCA when the purchaser acquires title “At any sale of property authorized by statute.”10 Marshall contended that a The 11 case reviewed is Spencer v. Marshall (2008) 168 Cal.App.4th 783. provision of the U.S. Bankruptcy Code which states that the bankruptcy trustee, after notice and a hearing, may sell property of the bankrupt’s estate (such as the condominium). Marshall contended that because the sale of the property was approved by Spencer’s bankruptcy trustee under the procedure established by the local rule in the Oakland bankruptcy court, this amounted to a sale “authorized by statute.
Marshall also contended that a second exemption in HESCA applied: that a purchaser who acquires title “by order or judgment of any court” is exempt.
The appeal court rejected these arguments, finding that Marshall did not purchase the property “at” a sale authorized by statute, such as a purchase of a property at a government sale for unpaid taxes, and that the first exception cited by Marshall therefore did not apply. The court also found that no court order or transfer ever directed that the sale to Marshall take place; that the only scrutiny of the sale was by the bankruptcy trustee, and not the court itself, and that the bankruptcy trustee had no interest in ensuring that the terms of the sale were fair to Spencer, but only the creditors in the bankruptcy were fairly treated.
The appeal court also found that HESCA was enacted to protect homeowners in foreclosure from fraud, deception and unfair dealing, and that the trial court had not been wrong in finding that Marshall had engaged in the type of abuse prohibited by HESCA. The trial court had found Spencer’s version of what happened more credible than Marshall’s rendition. Spencer stated that she saw Marshall’s offer as the only way she could remain in her home and testified that Marshall misled her into believing that, by selling the property to him and getting out of bankruptcy, she could afford, with his help in obtaining financing, to buy back her home within a year. The court concluded that Spencer was especially vulnerable to Marshall’s predatory tactics. The appeal court concluded that the record amply supported the trial court’s findings that Spencer was vulnerable and susceptible to Marshall’s promises that he could help her.
This case gives clear warning to all persons, including real estate brokers and agents, that in dealing with owners of residences that are in foreclosure, great care must be exercised to ensure that the requirements of HESCA are complied with in connection with any sale of the property by the homeowner. It is imperative that the documents used in any such sale be reviewed by someone with specific expertise in the area of home equity sales. It is also critical that the substantive terms of the transaction be fair to the home equity seller, and that the procedures outlined in the contract documents concerning options to repurchase be followed exactly, taking care that no transfer of title or encumbrance of the property takes place within the term of any option to repurchase held by the equity seller.11
1 California Civil Code §§1695 et seq.
2 California Civil Code §§1695.2, 1695.3, 1695.5
3 California Civil Code §§1695.3 – 1695.5
4 California Civil Code §§1695.6(a)
5 California Civil Code §§1695.6(b)
6 California Civil Code §§1695.6(d)
7 California Civil Code §§1695.6(e)
8 California Civil Code §§1695.13
9 California Civil Code §§1695.7, 1695.14
10 California Civil Code §§1695.1(a)(4)