City of Richmond Foreclosure Ordinance -
Friday, September 04, 2009
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577 Salmar Avenue, 2nd Floor
Campbell, CA 95008
(408) 341-0234
(408) 341-0250 Fax
padleson@ahk-law.com
By: PHILLIP M. ADLESON, Esq.
Corporate Counsel for the California Mortgage Association and for the United Trustee’s Association
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The Tower of Babel for Foreclosures: What if Every City Had its Own Foreclosure Ordinance?
The City of Richmond, California Now Requires Notices of Default to be Served on All Residential Tenants.
Most default professionals are doing all they can to keep up with the rapidly changing federal and state laws affecting deeds of trust (mortgages) and nonjudicial foreclosures. Can you image trying to process a foreclosure in California if all 58 counties and each city in each county had its own nonjudicial foreclosures procedures? Well, get ready, because here it comes!
On June 16, 2009, the City of Richmond enacted Ordinance No. 16-09 N.S., “Creating Chapter 7.105 of the City of Richmond Municipal Code Relating to Residential Eviction Control for Properties in Foreclosure (“Richmond Ordinance”). In addition to “eviction control” provisions relating to when a tenant can be evicted after a foreclosure, the Richmond Ordinance contains Section 7.105.080 (“Notice of Default Section”) which provides:
“At the same time a mortgagor or trustee serves a notice of default under the mortgage or deed of trust on the owners of record of a rental unit occupied by a tenant or tenants, the mortgagor or trustee shall serve copies of that notice on all tenants occupying the rental unit.”
The Richmond Ordinance provides no definition of “mortgagor,” “trustee” or of the words “serve” or “serves.”
Have you been complying with the Richmond Ordinance since June 16, 2009? If so, how did you figure out how to comply with it? When did you find out about it? Unfortunately, unlike state and federal legislation that can be tracked prior to passage so that all stakeholders can have input, it is almost impossible for default professionals to track and have input into, or advance notice of, the passage of local ordinances that may impact their business.
The Richmond Ordinance raises three major issues for default professionals. First, the notice of default provision is probably unconstitutional and preempted by state nonjudicial foreclosure law. Second, there are a number of practical problems that will result from the Richmond Ordinance. Third, if allowed to stand, this Ordinance will encourage other local governments in California to tamper with and supplement the California statewide nonjudicial foreclosure process; creating a Tower of Babel of nonjudicial foreclosure procedures.
State Law Preemption.
The California Legislature has enacted a statewide comprehensive statutory scheme regulating nonjudicial foreclosures which the California Supreme Court has held “totally occupies the field.” Generally, when a legislative scheme occupies a field, it preempts common law and local laws, particularly where the matter is one of statewide (as opposed to local) concern. Several years ago the California Supreme Court held that state predatory lending laws preempt local predatory lending ordinances because the state law fully occupies the field and predatory lending is a matter of statewide (not local) concern. It is hard to conceive that the courts would come to a different conclusion with respect to nonjudicial foreclosures. Notwithstanding this, the City of Richmond now requires that the “mortgagor” or “trustee” who “serves” the notice of default on the owner of record shall, at the same time, “serve copies of that notice on all tenants occupying the rental unit.” The Richmond Ordinance is limited to residential rental units in the City of Richmond.
The Trigger.
Compliance with the Notice of Default Section of the Richmond Ordinance is triggered when: the “mortgagor or trustee serves a notice of default under the mortgage or deed of trust on the owners of record of a rental unit occupied by a tenant or tenants.”
The Ambiguity of the Ordinance.
The “trigger” to the Notice of Default Section of the Richmond Ordinance is as clear as mud. Many terms in the Richmond Ordinance are undefined, uncertain or ambiguous so that a person trying to comply with the law’s terms must totally guess at their meaning.
While the term “mortgagor” is not defined in the Richmond Ordinance, generally the “mortgagor” is the borrower and owner of record when a deed of trust is given. Under state law, a “mortgagor” never mails or records the notice of default. Why would a “mortgagor” start a foreclosure on himself/herself? The City of Richmond’s first response to this issue was that the use of the word “mortgagor” in the ordinance was a scrivener’s error (e.g., clerical error) so trustees, mortgagees and beneficiaries should just do what the City intended, not what it actually said in the actual wording of the Ordinance. However, even if the City meant “mortgagee,” the Notice of Default Section of the Richmond Ordinance is still uncertain.
Assuming a “mortgagor” is never going to trigger the Richmond Ordinance by serving a notice of default on the record owner, the only other person named in the ordinance who does is the “trustee.” While trustees do mail and record notices of default, the most common practice these days is for the notice of default to be mailed and recorded by a “foreclosure agent” of the beneficiary. Generally, trustees substitute in just prior to recording the notice of sale (aka “sub-by-code”). Since the Civil Code allows notices of default to be prepared, mailed and recorded by the beneficiary, mortgagee, trustee or their authorized agent, the Richmond Ordinance is never triggered where the notice of default is given by the beneficiary, mortgagee or their agent because they are neither the “mortgagor” nor the “trustee” mentioned in the Richmond Ordinance. Therefore, where someone other than the “trustee” of record mails the notice of default, how would anyone know whether, and when, the Richmond Ordinance has been triggered requiring a notice of default to be “served” of all tenants of a residential unit?
But wait; it gets worse. Even if one ignores the actual language used in the Richmond Ordinance and interprets it to mean: “whenever a person authorized by state statute mails a copy of the notice of default a copy of that notice to the owner of record, that person must also ‘serve’ a copy of the notice of default on all tenants occupying a residential unit,” the Richmond Ordinance still requires the person processing the foreclosure to guess as to its meaning. The ordinance should be found to be unconstitutionally void-for-vagueness under the due process clauses of the California and Federal Constitutions.
Without reading language into the Richmond Ordinance, if the notice of default is mailed by the beneficiary, mortgagee or a foreclosure agent (none of whom are mentioned in the ordinance), then the ordinance is not triggered. Therefore, a “trustee” giving notice of default would trigger the ordinance but the same acts performed by a mortgagee, beneficiary or foreclosure agent would not. As such, the “trustee” would be treated differently (i.e., would have to send notice of defaults to all tenants) than a mortgagee, beneficiary or foreclosure agent - none of whom are mentioned in the Richmond Ordinance - even though they are persons entitled to give notice of default under state law. This raises issues of equal protection under the state and federal Constitutions.
If triggered, the Richmond Ordinance requires that the “mortgagor” or “trustee” “serve” a copy of the notice of default on “all tenants” occupying a residential rental unit. Does “serve” mean: mail, post, publish, personal service or something else? We do not know because the Richmond Ordinance does not define “serves” or “serve.”
Even if we did know what “serve” meant, how would the person authorized to mail the notice of default know who are “all of the tenants occupying the rental unit”? Especially in a multi-unit building, how would one know which units to address the copies of the notice of default to and for which tenants? Generally, under state law, only persons designated by statute with specified recorded interests or with a request for notice of default recorded prior to the notice of default being recorded are persons entitled to receive a copy of the recorded notice of default. Most residential tenants do not record their leases and have no interest of record, therefore would not be entitled to notice of default.
The very result that the City of Richmond is trying to achieve (i.e., giving residential tenants notice of the foreclosure) is already covered by Civil Code § 2924.8 which was enacted by the state Legislature in 2008 as part of SB 1137. Unlike the Richmond Ordinance, Civil Code § 2924.8 requires that a special notice of sale to a resident (not a notice of default) be posted on the property to be foreclosed and that only one copy must be sent to the property, addressed to the “resident.”
But the Richmond Ordinance’s defects and ambiguities don’t stop there. Since the notice of default to all tenants must be sent at the same time the “mortgagor” or “trustee” “serves” notice of default on the “owner of record,” it is difficult, if not impossible, to determine when that is. Under state law, a notice of default must be served on the original trustor (owner) within 10 days of recording the notice of default. However, where the trustor has sold the property to a “successor-in-interest” (buyer taking subject to or assuming the secured loan) who is the owner at the time of the default, the notice of default must be mailed to that successor-in-interest within one month of recording the notice of default (unless the successor has a recorded request for notice of default). Given that, under the Richmond Ordinance, should the copy of the notice of default be served upon all tenants in a residential unit in the City of Richmond within 10-days or one-month after recording the notice of default?
Even if the word “mortgagor” was a clerical error and the City of Richmond really meant “mortgagee,” the Ordinance is still unclear and unworkable.
The Potential Practical Problems and Consequences.
While the City of Richmond’s goal of protecting tenants in properties subject to foreclosure may be laudable, the Richmond Ordinance, Notice of Default Section is totally ill-conceived. The Richmond Ordinance is likely to have the following consequences:
- It will create potential title problems for many foreclosures of residential rental properties in the City of Richmond because it is not clear whether the presumptions, privileges and protections in the Civil Code relating to nonjudicial foreclosures will apply to the Notice of Default Section of the Richmond Ordinance. In other words, could the failure to give notice of default to a tenant occupying a residential unit, invalidate a trustee’s sale?
- The problems and ambiguities in the Richmond Ordinance will spur disputes over whether the notices of default were properly given, resulting in increased litigation over foreclosures.
- Because most tenants do not have recorded leases, trustee’s sales guaranties will not be able to identify the tenants and their addresses (particularly in a multi-unit building).
- If other local government entities throughout California enact similar ordinances affecting nonjudicial foreclosure notices or procedures, it could create a veritable Tower of Babel for foreclosure laws, making it virtually impossible to develop a practical, efficient, cost-effective and balanced nonjudicial foreclosure process.
- After a tenant receives a copy of the notice of default, he/she is likely to vacate the property; stop paying rent, or allow unauthorized subtenants into the property.
- The result of this will be that it will make it more difficult for owners of residential rental units in foreclosure to reinstate, rent, or sell their properties, almost assuring that foreclosures of these types of properties will result in a completed foreclosure.
- Because of these problems, residential properties in Richmond are likely to destabilize the rental market in the City of Richmond and cause these types of properties to become a blight much sooner than they otherwise would under the Notice of Sale to Resident provisions of Civil Code § 2924.8 (which is given at the same time as the notice of sale is posted).
What is the Industry Doing About the City of Richmond Ordinance? What You Must Do?
The California Mortgage Association “CMA” and the United Trustees Association (“UTA”) have joined forces as plaintiffs in a lawsuit challenging the City of Richmond Ordinance’s Notice of Default Section. A hearing on UTA/CMA’s application for a preliminary injunction restraining the City of Richmond from enforcing the ordinance will be heard on September 15, 2009, in the Superior Court of Contra Costa County. This effort is not likely to end with the granting or denial of a preliminary injunction. Ultimately, a published appellate decision is needed to clearly establish the limitations of local regulation of the notice provisions in nonjudicial foreclosures. This will be an expensive endeavor which neither UTA nor CMA can afford on its own.
We need your help now! Without financial support from UTA and CMA members as well as others in the industry, this effort cannot be successfully pursued. Contributions can be made as follows:
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To CMA (Make check payable to “CMA”)
Reference: “City of Richmond Fund”
C/o Joseph Davis, Executive Director
2520 Venture Oaks Way, Suite 150
Sacramento, CA 95833
joseph@caladmanagement.com
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Conclusion
While the eviction control part of the City of Richmond’s Ordinance should be questioned, clearly the Notice of Default Section of the ordinance is preempted by state law and is so vague that it violates the due process clauses of the state and federal Constitutions (i.e., is “void for vagueness”).
If the City of Richmond Notice of Default Section is allowed to stand, trustees and beneficiaries can expect to see similar local ordinances appear all over California each with its own unique provisions, making it literally impossible to process nonjudicial foreclosures on a statewide basis.
Each member of the default services and title industries should support CMA’s and UTA’s efforts to challenge the Richmond Ordinance before this problem spreads throughout the state.
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