## Facts

- Eun Hoi Hwang and her husband bought a San Pedro, California commercial property and “indoor swap meet” business from James and Edna Stearns in 1990.
- As part of the purchase price, the Hwangs gave the Stearns a promissory note (described in the opinion as $870,000) secured by a second-priority deed of trust (described as $800,000).
- The payment stream on the Stearns’ loan was current when the Stearns began the nonjudicial foreclosure process.
- The Stearns claimed Hwang was in default based on delinquent property taxes (and demanded other items such as late charges and attorneys’ fees), even though the promissory note and deed of trust did not make nonpayment of property taxes an event of default under the Stearns’ deed of trust.
- On February 23, 1994, counsel for the Stearns sent a letter asserting “defaults” and giving a short period to cure, while also threatening foreclosure.
- The Stearns prepared a notice of default the same day as the letter and recorded it shortly thereafter; the recorded notice stated an arrearage amount and did not state the nature of the asserted default.
- A notice of default was posted on the premises. After the posting, many tenants stopped paying rent and moved out, reducing the revenue Hwang used to service the debt.
- Hwang had obtained a refinancing commitment (about $750,000) that was later canceled because of the pending foreclosure.
- Before a trustee’s sale occurred, Hwang filed a Chapter 11 bankruptcy petition, which stopped the sale, and she filed an adversary proceeding against the Stearns seeking relief for wrongful foreclosure (among other requested determinations).

## Issues

1. May a deed-of-trust beneficiary commence California nonjudicial foreclosure when the borrower’s loan payments are current, based solely on delinquent property taxes that are not stated as an event of default in the note or deed of trust?
2. Does a notice of default satisfy California’s statutory foreclosure scheme when it recites an amount due but does not specify the nature of the default?
3. Must a debtor prove the foreclosing party’s intent or negligence to recover for wrongful commencement of nonjudicial foreclosure that violates the debtor’s property rights?

## Decision

- The court held that the Stearns wrongfully commenced the nonjudicial foreclosure against Hwang’s property.
- Even assuming the property taxes were delinquent, that delinquency did not authorize foreclosure because the parties’ written instruments did not make tax nonpayment a default under the Stearns’ deed of trust.
- The court held the notice of default was deficient because it did not specify the nature of the default as required by California’s statutory nonjudicial foreclosure framework.
- The court held Hwang’s wrongful-foreclosure theory sounded in protection of property rights and did not require proof that the Stearns acted with intent to harm or even negligently.
- The court rejected the Stearns’ effort to defeat Hwang’s wrongful-foreclosure claim on summary judgment given the lack of contractual and statutory basis for the foreclosure commencement.

## Legal Principles

- In California nonjudicial foreclosure, the beneficiary’s right to foreclose is defined by the deed of trust and the governing statutes; a beneficiary may not treat an omitted obligation (such as paying property taxes) as a foreclosure-triggering default when the instruments do not say so.
- California’s nonjudicial foreclosure statutes create detailed, mandatory procedural requirements; a foreclosure begun without meeting statutory notice requirements is wrongful and may be invalid as against the trustor.
- A notice of default must state the nature of the default, not merely an arrearage figure, so the trustor is informed what must be cured.
- Wrongful commencement of nonjudicial foreclosure can be actionable even if no trustee’s sale occurs, where the initiation and publication/posting of foreclosure notices injure the trustor’s property interests.
- For a property-rights-based wrongful foreclosure claim in this context, the debtor need not prove the creditor’s bad faith, intent, or lack of due care; the focus is whether foreclosure was commenced without contractual and statutory authority and caused harm.

## Conclusion

In *In re Hwang*, the bankruptcy court held that the Stearns wrongfully began California nonjudicial foreclosure even though Hwang’s loan payments were current, because the loan documents did not make delinquent property taxes an event of default and the notice of default failed to state the nature of the default; the court also ruled that Hwang could pursue damages for wrongful commencement without proving the Stearns’ intent or negligence.


In re Hwang, 189 B.R. 786 (1995)