Respecting Foreclosure: Section 2923.5 Remedies Clarified

On July 8, 2008, at the height of California's foreclosure crisis, Gov. Arnold Schwarzenegger signed into law SB 1137, commonly known as the Perata Mortgage Relief Act (the "PMRA"). The purpose of the PMRA was to slow or curb escalating home foreclosure rates. Some of the new regulations embodied in the PMRA were enacted as California Civil Code Section 2923.5. The enactment of Section 2923.5 soon led to a host of borrower lawsuits, yet the scope and applicability of the statute were unclear.

After a long period of uncertainty within the state and federal courts, the June 2, 2010 decision of the 4th District Court of Appeal, in Mabry v. Superior Court, 2010 Cal.App. LEXIS 794, has finally brought some clarity to the applicability of the statute. The Mabry decision also provides some relief to mortgage lenders because it holds that Section 2923.5 cannot be used to undo foreclosures or serve as a basis for money damages.

The key provision of Section 2923.5 is its requirement that mortgage lenders and their agents contact the borrower to "assess" the borrower's financial situation and to "explore" alternatives to foreclosure, prior to the filing of a notice of default and commencing a foreclosure. A declaration attesting to compliance with the statute must also be attached to any notice of default subsequently filed by the lender or its agent.

Since its enactment, Section 2923.5 has served as the basis for innumerable borrower lawsuits, typically seeking to suspend a pending foreclosure or invalidate a completed foreclosure. In addition, these suits often seek to recover monetary damages for lenders' (or their agents') alleged failures to comply with the statute.

Until now, the bulk of Section 2923.5 litigation has been administered in the federal courts, and federal decisions have largely defined the contours of Section 2923.5 jurisprudence. The majority of lender-defendants have been federally regulated banks, and their response to Section 2923.5 lawsuits has been essentially uniform: they have argued that Section 2923.5 is preempted by federal law - specifically by the Home Owners' Loan Act, 12 USCS Sections 1461, et seq., and its related Office of Thrift Supervision regulations; and they have also argued that Section 2923.5 does not provide for a private right of action, and thus no defaulting borrower has standing to sue under the statute.

Although there has not been complete consistency, the federal courts have been largely sympathetic to the arguments made by mortgage lender defendants. For example, with respect to the Home Owners' Loan Act preemption, numerous federal courts have agreed that this Act preempts Section 2923.5. (For example, Parcray v. Shea Mortgage Inc., 2010 U.S. Dist. LEXIS 40377, in the Eastern District, Odinma v. Aurora Loan Servs., 2010 U.S. Dist. LEXIS 28347, and Murillo v. Aurora Loan Servs., 2009 U.S. Dist. LEXIS, both in the Northern District.) Most federal court decisions have been based upon the rationale that Section 2923.5 purports to regulate the processing and servicing of mortgages by federally regulated savings associations - precisely what the Home Owners' Loan Act bars states from regulating.

With regard to a private right of action under Section 2923.5, federal courts have likewise sided with lenders, and looked to California state law, which holds that a private right of action exists only where the language of a statute or its legislative history clearly reflects a legislative intent to create such a right, and that such an intent must be expressed in clear and unmistakable terms. The text of Section 2923.5 does not reflect any explicit legislative intent to give rise to a private right of action, and, on that basis, federal courts have repeatedly found that none exists. Examples include Gaitan v. Mortgage Elec. Registration Servs. Inc., 2009 WL 3244729, in the Central District and Anaya v. Advisor Lending Group, 2009 WL 2424037, in the Eastern District. On the other hand, at least one federal court, Ortiz v. Accredited Home Lenders Inc., 639 F.Supp.2d 1159, 1166 (S.D. Cal. 2009), held that Section 2923.5 contains a private right of action, even without that explicit authorization, largely because "the California legislature would not have enacted this 'urgency' legislation, intended to curb high foreclosure rates in the state, without any accompanying enforcement mechanism."

Until now there has been no reported state court decision on these important issues. The Mabry court's decision therefore reflects an important step forward in our understanding of Section 2923.5, particularly because, amidst a flurry of other rulings, the court disagreed with the majority federal court view, and found both that Section 2923.5 is not preempted by federal law, and that it does give rise to a private right of action.

With regard to the issue of Home Owners' Loan Act preemption, the Mabry court found on the record before it that Section 2923.5 was enacted as part of California's foreclosure regime, "traditionally...a matter of state real property law." At least superficially distinct from mortgage servicing, foreclosure thus was not, according to Mabry something that either the Home Owners' Loan Act or its related federal regulations intended to preempt (the court suggested that a different record might result in a finding of preemption.) With regard to a private right of action, the court agreed with the Ortiz reasoning, and found (after an extensive historical and contextual discussion) that it was improper to look exclusively at Section 2923.5 to determine legislative intent. Rather, the court suggested that Section 2923.5 should be read together with a previously existing foreclosure provision, California Civil Code Section 2924g - which provides a private enforcement mechanism in the foreclosure context - to conclude there was a private right of action for a violation of Section 2923.5.

The Mabry court's decision cannot be viewed as a boon to borrower plaintiffs, however. In finding that Section 2923.5 is not preempted by federal law and that it does provide for a private right of action, the court also determined that a borrower's remedy under the statute is limited to the postponement of a pending foreclosure; that is, a cause of action brought under Section 2923.5 can only result in the postponement of a pending foreclosure, in order to allow a lender or its agents to contact the borrower properly to "assess" the borrower's financial situation and to "explore" alternatives to foreclosure. Under Mabry, there is no remedy for a violation of Section 2923.5 after a foreclosure has already concluded, nor may a borrower recover damages for a statutory violation.

Lenders may and will still argue in federal court that Section 2923.5 is preempted and contains no private right of action, under the authority of decisions, like the 9th Circuit's opinion in Estrella v. Brandt, 682 F.2d 814, 817, and the Central District's opinion in Wilson v. Haria, 479 F.Supp.2d 1127, 1135. But even in state court, and in federal courts that do follow it, the Mabry decision likely renders Section 2923.5 of little practical value to the plaintiffs' bar. After all, the decision severely restricts the remedies available under the statute by disallowing efforts to invalidate a completed foreclosure or recover money damages. For plaintiff borrowers facing foreclosure, however, the Mabry decision provides something of a lifeline, by allowing borrowers to delay a pending foreclosure where their lender has failed to comply with the requirements of Section 2923.5.

In the near term, the Mabry decision may result in an increase of borrower lawsuits predicated upon Section 2923.5, some of which will doubtless be frivolous, seeking to delay even those pending foreclosures where a lender and its agents have complied with the statute. But here, too, Mabry brings clarity, stating that the declaration of compliance required by Section 2923.5 need not be signed under penalty of perjury, and that the language of the declaration need not be customized to the facts of each borrower default - it may instead be a form that tracks the statutory options for compliance. In the longer term, however, Mabry may provide guidance to both lenders and borrowers, by more fully defining their rights, obligations, and remedies under Section 2923.5. Thus, the Mabry decision may ultimately reduce foreclosure-related litigation, which would be beneficial to both borrowers and their lenders.

Joshua A. del Castillo is an attorney in the Bankruptcy and Creditors' Rights and Litigation groups at Allen Matkins Leck Gamble Mallory & Natsis. He can be reached at jdelcastillo@allenmatkins.com.