By: Donald L Swanson
What happens when a Debtor goes through bankruptcy, gets a Chapter 7 discharge, believes a second mortgage on the homestead is gone, makes no payments thereon, and hears nothing for eleven years—then the hammer drops, with a lien foreclosure sale pending?
That’s precisely the issue in Campos v. Dyck O’Neal, Inc., Case No. 2:24-cv-01317, U.S. District Court for Eastern California (decided September 20, 2024).
Facts
Plaintiffs (husband and wife) have owned their home since 2006. They financed its purchase with two loans: one for 80% of the purchase price (approx.. $300,000), and another for the remaining 20% (approx. $75,000). Campos v. Dyck is about the second of the two loans—the one for 20%.
Plaintiffs make payments on the second loan until 2009. Then, in 2012, they file Chapter 7 bankruptcy, listing both liens. They schedule their residence at a value of $161,400.00 and their first lien in the amount of $307,085.00. Plaintiffs receive their discharge, and the bankruptcy proceeding closes that same year—2012.
For the next eleven years, Plaintiffs receive no account statement, no letter, no call and no communication of any kind, regarding the 20% loan. They think they owe nothing more on it.
Then, in 2023, Plaintiffs receive a notice of default, (i) stating they owe nearly $200,000 on the 20% loan, and (ii) warning that, if they do not repay in full, their homestead will be sold in a foreclosure sale.
Plaintiffs learn that Defendant had become the loan’s servicer on the 20% loan, and they attempt to contact Defendant to resolve the matter informally. But their attempts are unsuccessful, as is their attempt to obtain a loan modification. Plaintiffs describe Defendant as “extremely unhelpful.”
Then, a notice of trustee’s sale is recorded, with a sale scheduled for May 17, 2024.
So, Plaintiffs file the Campos v. Dyck lawsuit on May 7, 2024. Plaintiffs’ complaint asserts claims under federal law for violating the Truth in Lending Act and Fair Debt Collections Practices Act, various federal regulations, California contract law, and the California Unfair Competition Law. And they seek declaratory relief.
The next day, Plaintiffs apply for a temporary restraining order (“TRO”) on an ex parte basis, after notifying Defendant of their plan to do so. Defendant does not appear, does not respond to the ex parte application, and Plaintiffs’ TRO request is granted, based on these findings:
- Plaintiffs raise “serious questions” about their likelihood of success under California’s Unfair Competition Law (UCL);
- a sale would be an irreparable harm;
- the balance of hardships tips sharply in favor of a short delay in the sale date, and
- the public interest favors a TRO, which would permit the matter to be resolved on its merits.
Nevertheless, the court, (i) notes that Plaintiffs did not comply with meet-and-confer requirements and other local rules for all TROs, and (ii) cautions that “it may very well be that defendant has violated no law and has acted fairly under the UCL.”
The court also sets a hearing on a preliminary injunction.
Withdrawals and Renewals
But then, Plaintiffs withdraw their ex parte application because Defendant agrees to postpone the foreclosure sale. And so, the court dissolves the TRO.
But several weeks later, Plaintiffs again seek an emergency TRO on an ex parte basis because defense counsel will not agree to postpone the sale any further. Defendant opposes the ex parte application. The Court reviews the record, again, finds that Plaintiffs are entitled to a TRO, again—for the same reasons as before—and sets a hearing on a preliminary injunction.
A few days before that hearing, Plaintiffs again withdraw their request for an injunction, without explaining why. A week later, Plaintiffs seek to amend their complaint to add two additional defendants and to modify their legal claims—this motion is granted without opposition.
A few days later, Plaintiffs file their third and currently pending emergency / ex parte application for a TRO, without any effort to meet and confer or to satisfy various other local rules.
This time, the Court sets a deadline for oppositions, and it orders Plaintiffs to show cause why the ex parte application should not be denied, due to:
- their latest withdrawal (Plaintiffs say in response—the withdrawal was so they could file their amended complaint); and
- failures to comply with meet and confer requirements of local rules (Plaintiffs say in response—that’s because of Defendant’s previous unwillingness to postpone the sale).
So, the Court grants Plaintiffs’ ex parte application, sets a hearing on a preliminary injunction, and orders a mandatory settlement conference. What follows is a summary of the Court’s rational.
Findings
The Court finds now, as in previous orders, as follows.
Plaintiffs have raised “serious questions” about the merits of their claims under the California Business & Professions Code.
For “unfair” acts or practices under that Code, the Court must determine whether the practice “violates established public policy” or “is immoral, unethical, oppressive or unscrupulous and causes injury to consumers which outweighs its benefits.”
On this record, as was true before, it is a serious question whether a lender or servicer acts “unfairly” by allowing interest to accrue on a mortgage loan for many years without notice, then demanding immediate repayment in full under threat of a foreclosure sale.
The Court also finds, again, that a foreclosure sale would cause irreparable injury to Plaintiffs, i.e., a loss of their interest in real property.
Because a TRO has only a short duration, any harm Defendants might suffer will be negligible. So, the balance of harms tips sharply in favor of a TRO.
The court finds, again, that a TRO will serve the broader public interest by permitting the court to consider the parties’ arguments and the record on a more appropriate timeline, without causing any great delays.
And finally, the court imposes no bond requirement, given the likely absence of any harm over the short duration of this TRO.
Caution
But the court adds these cautionary words:
- this will be the final TRO in this action;
- there will be no future relief to Plaintiffs, if they fail to meet and confer in good faith with all opposing counsel, as required by local rules; and
- future failures to comply with this Court’s orders and local rules may result in sanctions, including monetary sanctions.
Mandatory Settlement Conference
Further, the Court requires a mandatory settlement conference with a Magistrate Judge, to narrow the parties’ disputes and avoid unnecessary future motion practice.
Specifically, the Court directs the parties to, in the mandatory settlement conference, come up with a short-term agreement to, (1) litigate appropriately focused motions on a non-emergency, standard timeline, or (2) reach a broader agreement on some or all of Plaintiffs’ claims.
Opinion’s Conclusion
The opinion’s conclusion says:
- Defendants are enjoined from conducting a trustee sale of Plaintiffs’ residence;
- this TRO shall expire in fourteen days absent further order of this court; and
- a hearing on plaintiffs’ request for a preliminary injunction is set.
Conclusion
It will be interesting to see how this case turns out,
Post Script
Fortunately for everyone involved, it appears that the parties reached a settlement, through a settlement conference conducted by the Magistrate Judge. And the Plaintiffs filed their Notice of dismissal of the lawsuit, with prejudice, on November 27, 2024.
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