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A Lender May Not Rescind A Full Credit Bid In Order To
Obtain Fire Insurance Proceeds.
Steven B. Haley,
Esq.
Adleson, Hess & Kelly
www.ahk-law.com
In
the case of Norwest Mortgage, Inc. v. State Farm (3/18/02)
2002 DJDAR 3741, the court of appeal ruled that a lender may not rescind a
full credit bid in order to obtain fire insurance proceeds. In this case,
after the borrower had defaulted, Norwest (holder of a first deed of trust)
started a nonjudicial foreclosure. The borrower filed a Chapter 7
bankruptcy proceeding, and Norwest obtained relief from the automatic stay.
Shortly thereafter, the property was severely damaged by a fire. Norwest
was aware of the fire, noted the substantial fire damage in its computer
file on the loan, and initiated a claim under the fire insurance policy.
Trustee’s
Sale No. 1:
Norwest retained Trustee No. 1 to handle the trustee’s sale. Trustee No. 1
had access to Norwest’s computer file on the loan, including the notation
regarding the substantial fire damage. Norwest obtained the property
through a full credit bid. The Trustee’s Sale Deed was not recorded.
Thereafter, State Farm notified Norwest that its claim under the fire
insurance policy was rejected, due to the full credit bid. Trustee’s
Sale No. 2:
Norwest then had Trustee No. 1 rescind the first trustee’s sale, and to
notice a new sale at a lower amount, so that Norwest could pursue its claim
for the fire insurance proceeds. Norwest then retained Trustee No. 2 to
handle the second trustee’s sale. Norwest also advised State Farm that Sale
No. 1 had been rescinded, and that a new trustee’s sale had been scheduled.
Despite Norwest’s instructions as to the new, lower bid to be made at the
second trustee’s sale, Trustee No. 2 entered a full credit bid for Norwest
at the second sale. At Norwest’s instruction, Trustee No. 2 did not record
the Trustee’s Sale Deed, and republished a third trustee’s sale.
Trustee’s
Sale No. 3:
Finally, at the third trustee’s sale, Norwest obtained title to the property
on the lower bid amount. State Farm rejected Norwest’s claim for the fire
insurance proceeds, citing the full credit bids. Norwest filed suit against
State Farm for breach of contract, bad faith, and declaratory relief. The
trial court granted a summary judgment in favor of State Farm. Norwest
appealed.
The
Court of Appeal affirmed the trial court decision. The court noted the
exhaustive & comprehensive nature of the nonjudicial foreclosure statutes,
that a sale conducted in compliance with all statutory notice requirements
is rebuttably presumed to be conducted regularly and properly (Civil Code §
2924), and that the statutes do not provide for rescission in a case of this
nature. The court also rejected Norwest’s argument for rescission based
upon unilateral mistake of fact. Norwest had not been defrauded or misled
into making a full credit bid. As the beneficiary, Norwest had the burden
of making an informed bidding decision; in this case, it had knowledge of
the fire damage, and did not properly protect itself.
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