Orcilla v. Big Sur, Inc.
Facts: A homeowner refinances their property with an adjustable rate mortgage (ARM) secured by a trust deed on the property. The monthly payments on the ARM greatly exceed the homeowner’s monthly income. The homeowner defaults on their payments and the trustee records a notice of default (NOD). The homeowner requests a loan modification from the mortgage holder and their application is approved. Under the terms of the modification, the monthly payments still exceed the homeowner’s monthly income. The homeowner cannot pay their modified mortgage and defaults again. The trustee then sends a notice of trustee’s sale (NOTS) to the homeowner and the property is sold at an auction to a bona fide purchaser. The purchaser obtains an unlawful detainer (UD) judgment against the homeowner.
Claim: The homeowner seeks to pursue the mortgage holder for money losses and quiet title to the property, claiming the trustee’s sale is invalid and unconscionable since both the ARM and loan modification were overly harsh and one-sided as the payments greatly exceeded their monthly income.
Counterclaim: The mortgage holder claims all allegations of invalidity by the homeowner are void since the homeowner did not comply with the payment requirements of the loan modification and, when the property was sold to a bona fide purchaser, the sale obtained a statutory presumption of validity.
Holding: A California court of appeals holds the homeowner is entitled to pursue the mortgage holder for money losses since both the ARM and loan modification are substantively unconscionable as to be unlawful as they unreasonably favored the mortgage holder to the disadvantage of the homeowner. [Orcilla v. Big Sur, Inc. (2016) 244 CA4th 982]
Editor’s note — The presumption of validity granted to a transaction due to the sale of a property to a bona fide purchaser only applies to challenges to the NOD and the NOTS. In this case, the homeowner does not challenge the NOD or the NOTS, but the legality of the loan and loan modification.