Foreclosure and Probate Estates: Strategies for Prevention
and Remedial Actions to Protect Client's Assets and Attorney Fees
Special thanks go to the following individuals for their respective contributions:
Harlean Carroll, Los Angeles Superior Court, Central District
for drawing my attention to the increase in mortgage defaults by probate estates
and the need to educate the legal community on how to treat such cases; and,
Rande Johnsen, Director of Foreclosure at Trustee Corps. Orange, CA
for his technical guidance on the foreclosure process and patiently answering
my endless questions.
This article is intended to provide the legal professional a framework for
evaluating estates which have real property in foreclosure, plan a course of
remedial action(s), and avoid the loss of an asset. Perhaps more importantly,
this article covers specific guidelines for default preventive actions, which
can be employed in all probate and trust matters consisting of encumbered real
estate.
The concerns over protecting assets from forced sale or complete loss has
been an increasingly big concern for probate practitioners. Despite a robust
California economy and a stronger real estate market over recent years, the
threat of loss of estate realty due to foreclosure has actually increased. The
exposure to the client and the attorney, which results from an estate with property
in default, can be substantial, with many hidden risks.
Estates typically default on a decedent's mortgage due to one or more of the
following reasons:
- Lack of sufficient cash flow/cash reserves in estate
- Executor/Administrator unaware of loan(s) on the decedent's property
- Erroneous assumptions by Executor/Administrator that mortgage lender will
wait until close of probate for payment of monthly installments
- Executor/Administrator and/or heirs unwilling or unable to make payments
- Difficulty in selling realty due to marketability issues such as deferred
maintenance (poor condition), title problems, etc.
- Adversarial relationships between heirs
- Issues regarding delegation of payment responsibility
- Poor communication between Executor/Administrator, Attorneys and lenders
According to foreclosure trustee, Rande Johnsen, the increased frequency of
estates defaulting over past years may be the result of changes in the mortgage
marketplace:
- In the past, lenders offered more flexibility on loans once advised of opening
probate.
- Lack of direct relationship between lenders and borrowers and frequent sale
of loans.
- Mounting pressure from lending institutions to reduce their number of non-productive
mortgages by investors, bank management, VA, FHA, FNMA, etc.
Issues & Concerns: Lost Assets, Time and Bad Faith
Paramount among concerns for the attorney and the personal representative
is the loss of real property to a secured creditor through foreclosure. Frequently,
the only asset of any tangible value is a single family dwelling, usually the
decedent's residence.
Despite the fact that such an asset may easily have a fair market value of
$100,000 or more, the estate is most likely to be focused on realizing the fullest
value possible in order to pay creditors, costs of administration and distribute
to heirs.
Stopping foreclosure by selling or borrowing, while maybe necessary, only
reduces the amount of proceeds available for ultimate distribution. Moreover,
while it may be possible to salvage costs of administration from certain mortgage
holders (discussed more fully later) there is no straightforward process established
to deal with these secured creditors. This leaves the probate practitioner no
other choice but to negotiate on a case-by-case basis with no assurance that
any satisfactory outcome is available to the estate client.
The same may be said for a Conservatorship in which the Conservatee's property
has fallen behind in payments and the lender has started foreclosure action.
Often, a loan is discovered in default too late in the process to effect an
inexpensive cure. This presents a good argument for using professional fiduciaries
(who might act more responsibly).
There are other arguments to support proceeding cautiously to avoid the risk
of loss of estate realty due to foreclosure. Protecting the attorney's fees,
while not being of primary importance, is a factor after first considering the
interests of the client. The time invested on a small, problematic case may
not be recoverable as extraordinary fees or may be lost entirely if the property
goes to trustee's sale. There are still further exposures to the attorney from
litigation by heirs and creditors, and the potential claims of malpractice by
dissatisfied estate representatives. In all, accepting a probate in foreclosure
is risky business.
The Foreclosure Process: Understanding the Trustee's Timetable
The non-judicial foreclosure process is conducted pursuant to Calif. Civil
Code § 2924.
§ 2924 allows lenders to foreclose upon real property securing their
loan without the time and expense of a court action. A non-judicial foreclosure
can take as few as 111 days from start to finish. The following is a simplified
version of the process.
The Foreclosure Process in Five Steps:
Step 1 Notice of Default is Recorded (day 1)
Step 2 Reinstatement of Loan can occur any time up to and
including 5 business days preceding the sale
Step 3 Foreclosure Sale Date Set (3 Months following Notice
of Default date)
Step 4 Notice of Trustee Sale prepared, published, recorded,
mailed and posted
Step 5 Foreclosure Sale Date (Sold at Public Auction, usually
3-4 weeks following Notice of Sale; may be as few as 111 days)
Special Issues and Concerns Regarding Estates in Foreclosure
Importance of Trustee's Proper Noticing of Personal Representative(s)
Since the trustee is responsible for accurate and timely noticing of a pending
foreclosure sale, communication with both the lender and the trustee ought to
be documented thoroughly. If the trustee has no knowledge of a probate proceeding
of the mortgage trustor (decedent), a non-judicial sale may typically proceed
without much chance of a sale being set aside. However, if such a foreclosure
sale takes place without the trustee having properly noticed the personal representative
(after being informed of the probate), such a sale may either be postponed until
the trustee republishes noticing all parties, re-records the Notice of Default,
or the estate may enjoin the trustee/lender in a legal action to set aside the
sale. Therefore, the importance of informing the trustee and lender of the probate
(and documenting same) is vital to protecting the asset. [See: Estate of Yates
25 Cal.App.4th 511; 32 Cal.Rptr.2d 53 [May 1994], Baker v. West End Financial
Corp., Inc.]
Problems Regarding Insolvent Estates
California real estate values have experienced dramatic price variations in
the past decade. More recently, the numbers of properties which are over-mortgaged
(under-secured) when values have dropped below loan principal balances has risen
dramatically. Property sellers who find themselves in this situation may hear
a new real estate term: "Short sale."
However, when encumbered estate property is sold, the priority of claims to
the sales proceeds, specifically, certain cost of administration or other expenses,
have a priority claim over payment to secured creditors. In regards to secured
creditors (i.e. mortgage lenders) PC Section 10361 provides that the Application
of Purchase money shall be applied in the following order:
- Expenses of administration which are reasonably related to the administration
of the property sold as provided in paragraph (1) of subdivision (a) of Section
11420;
- The payment of the expenses of the sale;
- The payment and satisfaction of the amount secured by the lien on the property
sold if payment and satisfaction of the lien is required under the terms of
the sale.
Section 11420 of California Probate Code (Priority for Payments of Debts)
further elaborates on this theme, essentially restating PC 10361.
When a non-judicial foreclosure sale takes place, the application of the proceeds
and the responsibilities of the foreclosure trustee to distribute same would
appear the same as in a traditional, voluntary sale. However, since the trustee
represents the lender, there are still important unresolved issues, such as
how to treat a credit sale resulting in a reversion back to the secured lender.
It's almost a foregone conclusion that the mortgage lending industry will soon
lobby to limit their financial exposure.
The main point of discussing these issues regarding noticing and priority
of claims in this report is that a fair amount of confusion still exists.
Note: Please refer to Old Republic Title Co. Titlegram Re: Foreclosure
by Gary Bregman. Copies are available free of charge by calling Larry Christian
@ 800-388.4853, X6509
Preventive Actions
What actions can be taken to avoid a foreclosure action in the first place?
Here is a brief checklist:
- Always obtain a preliminary (title) report, not a profile, for each property
upon opening a probate case. Most title insurance companies will permit you
to purchase a report for a modest charge and the c ost may be credited toward
purchase of a title policy at later time when the property is either sold
or financed.
- Write to lenders and lienholders. Keeping these parties informed will lessen
the chances of miscommunication and counter-productive efforts on everyone's
part.
- Obtain account balances from lienholders & creditors. Know what you owe.
- Request proof of lien and debt. Obtain copies of promissory notes and trust
deeds and review terms and conditions for repayment. In some circumstances,
recorded judgments or liens may have expired or otherwise be held invalid.
- Keep secured loans current. The total expense to the estate will be minimized
if the lender does not deem it necessary to initiate foreclosure to collect
on a debt. It's quite possible that the original borrower may have had a history
of collection problems with his/her mortgage lender who is now less than motivated
to offer much assistance.
Remedial Actions
Not all remedies to foreclosure are available to an executor/administrator
of a probate estate or other fiduciary as would be available to a natural person.
This speaks directly to using certain bankruptcy laws or other actions intended
primarily for consumer debtors.
- Don't let the client procrastinate if a lender begins foreclosure. The client
must be made to understand both the limits to available options and the reality
of the situation.
- Send all written communication to lender via certified, registered mail.
This single action could help your client buy more time to cure the default
or sell. Should the trustee not properly notice the personal representative,
this could delay foreclosure.
- Advise client/heirs to consider advancing personal funds to cure the default,
or...
- Refinance the old debt with a lender who will lend to a fiduciary under
such circumstances, or...
- List the property for sale with a real estate broker or auctioneer experienced
with both probate realty and foreclosure, or...
- Consider litigating if you feel that a case with merit exists.
Conclusions
Administrating estates, which are subject to the effects of a mortgage in
default, appear increasingly common and most probate attorneys will encounter
the problem sooner or later. While remedies do exist for estates in foreclosure,
the better course of action is prevention. The cost in terms of time, money
and aggravation typically far outweigh the effort of a few extra steps during
the administration process.
Do you want to learn more about remedial actions for an estate currently in
or in danger of default? Please contact Rick Harmon at The Suburban Group Mortgage
Bankers at: (714) 490-7106
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