By: Micaela L. Neal

Taniguchi v. Restoration Homes, LLC,No. A152827, 2019 WL 1923068 (Cal. Ct. App. Apr. 30, 2019), as corrected (May 2, 2019).

Back in the era of the Great Depression, the California Legislature enacted Civil Code Section 2924c, which provides that when all or part of the principal secured by a mortgage or deed of trust becomes due as a result of the borrower’s default in making payments, the borrower may reinstate the loan and avoid foreclosure by paying the amount in default, along with certain fees and expenses.  The statute was intended to counteract the “acceleration clauses” often included by lenders in loan documents (which accelerate the loan and require full payment of the entire loan in the event of default), and served the public policy of saving equities in homes, given that such equities were often built over time through the borrower’s monthly payments.  A California Court of Appeal recently held that this policy is still as important as ever.

In the case at hand, the borrowers had defaulted on their mortgage payments years earlier, and as a result entered into a loan modification agreement with their lender which provided, among other things, that approximately $116,000 of indebtedness (due to accrued and unpaid interest and principal and fees and costs from that first default) would be deferred until maturity of the loan.  Four years passed, and the borrowers defaulted again.  The lender notified the borrowers that to cure the second default and reinstate the loan, they would not only have to pay the current amount in default, fees and expenses, but would also have to pay the previously deferred amount, plus fees and interest.

The Court determined that this requirement to pay the previously deferred amount (which had grown to approximately $120,000) for reinstatement was excessive, and a violation of Section 2924c.  In so holding, the Court noted that the protection provided by the statute cannot be waived, and the logical interpretation of the statute is that the “amount in default” is clearly the missed payments on the modified loan – not those payments plus all previously deferred payments. The Court noted that the previously deferred amount was not “due and owing,” as, had the borrowers made all of their monthly payments, the lender could not have claimed the deferred sum until the end of the loan.  To require payment of that amount would deprive the borrowers of any opportunity to cure the precipitating default and reinstate the modified loan.

The takeaway for lenders is that the sanctity of Section 2924c may not be disregarded or manipulated, and borrowers must be afforded the protections of the statute, notwithstanding prior transgressions.

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Micaela L. Neal is an attorney with Wanger Jones Helsley PC and practices in Fresno and Sacramento.  Her practice includes frequent lender representation, with an emphasis on disputes involving contracts, debt collection, creditor’s rights, bankruptcy, partnership dissolution, breach of fiduciary duty, and indemnity.  This article is intended to notify our clients and friends of changes and updates to the law and provide general information.  It is not intended, nor should it be used, as legal advice, and it does not create an attorney-client relationship between the author and the reader.