Southland Home Mortgage, LLC v. Valle (In re Valle), Bk. No. 10-15196-LT7, RS No. JEB-1 (Bankr. SD Calif., Feb. 16, 2011).
In a recent bankruptcy case, a bankruptcy court in California dealt with the issue of what happens to people renting from a landlord who has defaulted in mortgage payments and is therefore subject to foreclosure.
The Protecting Tenants in Foreclosure Act (the "Act"), allows renters to remain in a leasehold for the later of 90 days or the end of the lease term if they entered their lease before the date of a notice of foreclosure.
Under California law, a lender must deliver a notice of default when a borrower stops making the payments agreed upon in the mortgage documents. In this case, the tenant's landlord entered into a mortgage for a property, defaulted on payments, then entered into a two year lease after receiving notice from the mortgage company of the default. The mortgage company claimed that the notice of default it provided acted as such a notice of foreclosure, and that the Act cannot protect the debtors in this situation because the notice of default was issued prior to the signing of the lease at issue here.
To avoid foreclosure, the landlord filed two bankruptcy cases. Eventually, however, the property was sold at auction, and the purchaser moved to evict the tenants. The tenants claimed that the Act protected them from such an eviction.
The court held that notice of default is not a notice of foreclosure for purposes of the Act because a notice of default does not give notice of the date that the property's title will be transferred, nor does it provide a date for a foreclosure sale. In fact, the California notice of default has nothing to do with foreclosure specifically.
