Wednesday, January 2, 2008

California Foreclosure Investors Get Big Win In State Appeals Court

A California state appeals court in a recent decision held that, under the California Home Equity Sales Contract Act, the bond requirement under Civil Code Section 1695.17 for an equity purchaser's [foreclosure investor's] representative is "void for vagueness under the due process clause and may not be enforced."

The case involved a homeowner facing foreclosure who sued to void a deed in a transaction in which he sold his home to an investor the day before a foreclosure sale. The sale was one that fell within the scope of the California Home Equity Sales Contract Act which, among a slew of other things, requires that a representative acting as intermediary on behalf of a foreclosure investor be bonded for an amount equal to twice the fair market value of the property being sold. The trial court agreed with the homeowner, ruled in favor of voiding the deed, and the foreclosure investor filed an appeal.

In reversing the lower court decision, the California appeals court analyzed the provision in the law requiring the bond, the applicable case law, and ultimately ruled as follows:

  • We are convinced that the amorphous requirement of section 1695.17, requiring proof the representative is "bonded by an admitted surety insurer in an amount equal to twice the fair market value of the real property which is the subject of the contract," provides no guidance on the amount, the obligee, the beneficiaries, the terms or conditions of the bond, the delivery and acceptance requirements, or the enforcement mechanisms of the required bond. Instead, persons of ordinary intelligence must necessarily guess at what the statute requires for them to comply with its obligations. Under these circumstances, the bond requirement of section 1695.17 is void for vagueness under the due process clause and may not be enforced.

After additional analysis, the appeals court further ruled that its finding of unconstitutionality was limited strictly to the bonding requirement found in Section 1695.17. The other provisions of the statute remain unaffected.

This decision becomes effective on January 14, 2007. However, should the homeowner appeal the decision to the California Supreme Court (and the court decides to hear the case), the decision will not go into effect until the state high court rules on the matter.

To view the appeals court decision, see Schweitzer v. Westminster Investments (may require free registration; available online courtesy of

Editor's Note:

The importance of this decision to those in California can be measured by looking to those who jumped into the litigation as "friends of the court" in this case. The office of the California Attorney General filed a "friend of the court" brief supporting the homeowner's position; on behalf of those who represent foreclosure investors (ie. real estate agents) as well as the foreclosure investor itself, the California Association of Realtors filed an amicus brief.

Does this case now mean that it's "open season" on California homeowners facing foreclosure, with licensed real estate agents and unlicensed foreclosure investor "bird dogs" coming out of the woodwork on behalf of investors (both those who buy property outright, as well as the foreclosure rescue operators offering sale leaseback arrangements)?

If the California Supreme Court decides to hear an appeal (assuming one is filed), and the state legislature acts quickly enough to correct the perceived constitutional infirmities in the statute while the appeal is pending, then maybe not. Otherwise, ... ???

Thanks to Ontario, California attorney Tim Liebaert with the firm Ritchie, Klinkert, McCallion & Liebaert for the "heads-up" on this case and the input for this post. For more on Tim Liebaert, see Southern California Woman Alleged Victim Of Home Theft, Mortgage Broker Arrested.

Tuesday, January 1, 2008

Homestead Waiver Declared Invalid; Big Win For Florida Homeowners As State Exemption From Forced Sale Dodges Bullet

In Florida, The Associated Press reports:

  • A 1985 amendment to the Florida Constitution does not allow debtors to waive a long-standing ban on the forced sale of their homes to pay off unsecured creditors, the state Supreme Court ruled [last month]. The justices unanimously rejected an appeal by Miami lawyer Deborah Chames. She had obtained a $33,206.76 judgment for legal fees against a former divorce client, Henry DeMayo, and a lien against his home. The 3rd District Court of Appeal reversed the lien even though the retainer agreement DeMayo signed included a waiver of a constitutional provision exempting primary homes from forced sales.

  • For more than a century, the [Florida] Supreme Court has held that the exemption cannot be waived. In the new opinion the justices wrote the amendment that expands the exemption to any "natural person," not just heads of families, doesn't change the legal precedent prohibiting waivers.

  • Chames argued the amendment also turned the exemption into a personal right that can be waived. Justice Raoul Cantero wrote for the court that there's no indication voters intended to do that when they approved the amendment. "We find the amendment to the homestead exemption a slim reed on which to recede from 123 years of precedent," Cantero wrote.
Source: Ban remains on forced home sales by unsecured creditors.

To view the decision of the Florida Supreme Court, see Chames v. DeMayo (Fla. 12-20-07).

Go here to watch the oral arguments in the Florida Supreme Court, in which some members of the court, among other things, expressed serious concerns about the possible ethical and conflict of interest problems that may arise when an attorney asks a client to sign away their homestead rights as part of entering into a retainer agreement.


In this case, I think it is important to observe that the homeowner came very close to losing equity in his home by reason of his former attorney attempting to enforce her money judgment against him for unpaid legal fees as a lien on his home. The circuit court initially considering the matter ruled in favor of the attorney. Further, the Florida appellate court initially ruled, in a split decision, to affirm the circuit court's decision in favor of the attorney. It was only as a result of a motion for a rehearing, and a strongly worded dissent, that the appeals court reconsidered the matter, withdrew its original decision, and issued a unanimous decision in favor of the homeowner. The two judges originally voting against the homeowner joined in a concurring opinion as to result only (and which reads like a dissenting opinion) in the revised decision in which they acknowledged that they were duty bound to apply the existing Florida high court precedent, but added that they disagreed with the outcome in this case, believing that the precedent was, in effect, obsolete. They proceeded to certify, as a question of great public importance, the issue to the Florida high court, which agreed to hear the case.

See also Hold De Mayo!, in the Oct. 2006 edition of the newsletter of The Coral Gables Bar Association.

The point here is that if the homeowner didn't have the ability to appeal the erroneous circuit court opinion in the first place (homeowners asserting their homestead rights against creditors typically are in financial trouble and don't have the money to retain an attorney to represent them), DeMayo, like most financially strapped homeowners, would have been "dead in the water."

I note that the attorney of record representing the homeowner, Henry DeMayo, in both appeals (and presumably in the circuit court proceeding as well), was an attorney named Sophie DeMayo. As it turns out, attorney DeMayo is homeowner DeMayo's sister. It appears likely that homeowner DeMayo did not have the financial wherewithal to proceed in this matter if he had to retain and pay for an attorney, but may have been lucky enough to be able to seek and rely on the largesse of attorney DeMayo, his sister (who, by the way, actually "confessed" to the court at the start of her oral argument that she was not a civil litigator), to defend his homestead rights. I think it's undeniable that most homeowners in Mr. DeMayo's shoes don't have an attorney in the family, and accordingly (and as noted above), would be "dead in the water" as it relates to defending their home equity against an attempt to impose a judgment lien on their home by a creditor.

I further note that this case, once it reached the Florida Supreme Court, got the serious attention of the office of the Florida Attorney General; and both the Real Property Probate and Trust Law Section and the Business Law Section of The Florida Bar, as all three jumped into the fray by filing amicus briefs in the matter supporting the homeowner's position - (1) RPP&T Law Section amicus brief, (2) Business Law Section amicus brief, (3) Florida AG amicus brief (even some in The Florida Bar apparently had a problem with the signing away of homestead rights in the manner described in this case).

Hopefully, as a result of this case, Florida attorneys who get their clients to (unwittingly or otherwise) sign away their homstead rights as part of entering into a retainer agreement will stop the practice. If those attorneys are so concerned with whether their clients will be able to foot their legal bill, they should simply ask the clients for a mortgage on their homes as collateral for the unpaid fees that have accrued or may accrue in the future - homestead rights don't protect a homeowner against the lien of a mortgage, or a mortgage foreclosure sale. Mortgage foreclosure sales in Florida are not considered "forced sales" in the context of the homestead exemption. See Patterson vs. Taylor, 15 Fla. 336 (Fla. 1875); Hart v. Sanderson's Administrators, 18 Fla. 103 (Fla. 1881); Carter's Administrators v. Carter, 20 Fla. 558 (Fla. 1884). (On this point, I will add that, while the Florida Constitution doesn't prohbit an attorney from having a client sign a mortgage as collateral security for legal fees, there possibly could be a question as to its permissiblility in terms of professional legal ethics, judging by Justice Pariente's response during oral arguments in this case when she learned - apparently for the first time - that there were attorneys out there having clients pledging their homes to attorneys to secure payment of fees.)

I recognize that it's much easier to get homeowners to sign a waiver of their homestead rights than it is to get them to sign a mortgage to secure legal fees since most are (1) unaware of the ramifications, and/or (2) preoccupied with the specific legal problem that they are seeking legal counsel for in the first place. However, the fact that it's so much easier to get a homeowner to sign a waiver of their homestead rights is precisely the reason why Florida law has prohibited it for 120+ years, and as the Florida high court in this case has once again (and hopefully, once and for all) reminded us.

Editor's Note:

The Florida homestead exemption at issue in this case is the exemption that protects a Florida resident's home from a forced sale by an unsecured creditor who obtains and attempts to enforce a money judgment against a debtor's home. The law can be found in Article X, Section 4 of the Florida Constitution. The implementing statute for this constitutional provision can be found in Chapter 222 of the Florida Statutes.

This exemption is often confused (by both Florida attorneys and non-attorneys alike) with a real property tax exemption available to Florida homeowners. This tax exemption provides for, among other things, the first $25,000 of assessed value in a home to be exempted from the imposition of real estate taxes. The law dealing with this exemption, which is also referred to as a homestead exemption, can be found in Article VII, Section 6 of the Florida Constitution. The implementing statute for this constitutional provision can be found in Chapter 196 of the Florida Statutes.

While the obvious common link between the two exemptions is that they are both benefits granted to Florida homeowners by the state Constitution, the exemptions, and the provisions granting these benefits, are separate, distinct, and operate completely independently of each other (ie. one exemption has nothing to do with the other - notwithstanding what more than a few Florida attorneys - and Florida circuit court judges - may say and think).