Enforcement of a Defaulted Loan Secured by a Mobilehome

Tom Wolfe
Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

Recently, our firm has noticed an uptick in requests for an explanation of the process of enforcing a defaulted loan secured by a mobilehome being used as a residence, including how to take possession of the mobilehome to dispose of it.  That process is intricate and involves an interface between multiple California codes as well as coordination with the mobilehome park. The result is a labyrinthine route to the credit union’s end goal of simply collecting on a nonperforming loan.  An overview with some practical considerations is outlined below.

REAL PROPERTY VERSUS PERSONAL PROPERTY

Whether the security is treated as real property or personal property for enforcement purposes hinges on whether the mobilehome is “affixed” to the foundation.  Mobilehomes located in a mobilehome park could theoretically be affixed to the mobilehome park land, but this tends not to be the norm.

In most cases, if the mobilehome is owned but the land on which it sits is rented or leased, it is considered personal property.  If the land and mobilehome are owned by the same party and the mobile home is permanently “affixed” to the land, it is considered real property.  Health & Safety Code §18551(a) outlines the specific procedure to affix the mobilehome to the foundation but this requires a building permit, proof of ownership of the land, and proof that the manufactured home is either free of liens or that the lienholder consents to the installation.  In many cases, mobilehome park leases specifically prevent affixation, or otherwise consider the mobilehome “chattel.” Credit unions are urged to review the lease before financing and make sure their underwriting process uncovers whether a mobilehome was previously affixed so that they do not inadvertently finance a mobilehome that is already considered real property, even if an unlikely scenario. This is because, in the event of default, Health and Safety Code §18039.1 would require credit unions to follow the same procedures applicable to real property. 

FOR MOBILEHOMES THAT ARE PERSONAL PROPERTY

The following provisions pertain to mobilehomes that are not affixed to a permanent foundation, and are therefore considered personal property.

Notice of Default or Notice of Belief of Abandonment

Unless the member has abandoned the property, upon default, the credit union must send a Notice of Default to each registered owner by registered or certified mail.  The exact form and language of this Notice of Default can be found in full in Health and Safety Code §18037.5(a)(1).  Generally, it must identify the security agreement by title or caption and date, describe the default, state the creditor's right to sell the property, the registration numbers, the location of the property, the requirements necessary to cure the default, and the final date to cure.  This Notice of Default must also be forwarded to any junior lienholder.

If the credit union has a reasonable belief the property has been abandoned, instead of sending a Notice of Default, it can send a Notice of Belief of Abandonment.  The exact form and language of this Notice of Belief of Abandonment can be found in full in Health and Safety Code §18037.5(a)(6).  Generally, it must be personally delivered or sent via registered mail or certified mail.  It must identify the address of the property and the security agreement or conditional sale contract and must state the credit union’s right to sell the property, describe the default, and include registration numbers and contact information.  The Notice of Belief of Abandonment must inform the recipient of the right to notify the credit union that the property is not, in fact, abandoned.  The member or registered owner must respond within at least 15 days if personally served, or 18 days, if mailed.  If the member voluntarily surrenders the mobilehome, we still urge sending a Notice of Belief of Abandonment to the member or otherwise ensure the member signs a statement that they have voluntarily surrendered the Vehicle.[1]

Moving Forward With a Sale and Practical Considerations

If the default is not cured within the time indicated on the Notice of Default, or if there is no response to the Notice of Belief of Abandonment, Health and Safety Code §18037.5 describes the credit union’s ability to sell the property by sending a Notice of Sale as required by the Commercial Code.  However, while this makes sense if the mobilehome has been abandoned or voluntarily surrendered, if the mobilehome is still occupied by the member, we do not believe moving forward with a sale before securing sole possession of the property is feasible.

Even if the Commercial Code and security agreement provide the credit union with the right to self-help repossession, the credit union’s agents would still only be able to obtain possession of the mobilehome so long as that repossession does not breach the peace.  When the mobilehome is acting as the member’s primary residence, we believe the process is fraught with legal risk.   The mobilehome most likely would not be removed from the mobilehome park, so the credit union theoretically would need to change the locks and remove the member’s personal effects.  However, because those personal effects would be home goods, the process of taking possession of a mobilehome through self-help repossession, even if capable of being accomplished without breach of the peace, appears too close to an “illegal eviction” for comfort.

The necessary next step would be an action for Claim and Delivery, but it is unclear whether a sheriff would enforce a Claim and Delivery judgment (i.e., a “judgment for possession”) or vehicle levy against a member when that member uses the mobilehome as their residence, since it too would be tantamount to an eviction.  Thus, we believe after the Claim and Delivery, the credit union would additionally need a formal judgment for Unlawful Detainer, meaning the credit union must file two lawsuits before it can retrieve or otherwise secure its property for sale.  The Commercial Code, Health and Safety Code, and Code of Civil Procedure (concerning Unlawful Detainer actions) provide no guidance on how to proceed in such a scenario or whether the credit union is simply intended to bypass both Claim and Delivery and Unlawful Detainer actions and sell the mobilehome occupied – similar to foreclosure of real property – and allow the purchaser to deal with the occupants.  This would likely scare away any potential buyers unless the mobilehome is severely reduced in price, which leads us to conclude that Claim and Delivery and Unlawful Detainer actions are the proper steps to adjudicate the credit union’s right to possession, and then allow a sheriff to evict the holdover owner.

Once in possession of the mobilehome, the credit union would dispose of it pursuant to Division 9 of the Commercial Code.  We urge credit unions to refer to Eric North’s California Repossessions Law and Procedures Guide to guide  them through the process for giving notice and disposing of any collateral, including mobilehomes, in a manner that is adequate and commercially reasonable.

Antideficiency Statutes

One crucial difference between mobilehome and traditional automobile defaults is the credit union’s ability to collect a deficiency balance after its disposition.  Two anti-deficiency statutes exist specifically for mobilehome sales – Health and Safety Code §18038.7 and Civil Code §2983.8(a). Each is worded slightly different, but each is effectively intended to ensure that the member is not burdened with a deficiency judgment after the sale of virtually all mobilehomes located in a mobilehome park.[2]

Two cases appear to be directly on point for each of these antideficiency statutes, but both cases are over 30 years old, with each coming to a different conclusion.  [See Bank of Sonoma Cty. v. Dorries, 185 Cal. App. 3d 1291, 230 Cal. Rptr. 459 (Ct. App. 1986) and Sec. Pac. Nat. Bank v. Casavant, 205 Cal. App. 3d 127, 252 Cal. Rptr. 175 (Ct. App. 1988).]  The original intent of the legislature when enacting these anti-deficiency statutes was to avoid saddling consumers who encounter economic hardship with the additional burden of continuing to make payments on a mobilehome in which they no longer live, so our firm believes that the discrepancy or poor wording in the statutes and caselaw should be resolved on that basis.  For direct loans, credit union’s may currently be able to collect a deficiency balance, but we do not believe the law is settled and counsel our clients to be prepared for a colorable argument against it.

Interaction With the Mobilehome Park Upon Default of Rent

Because the member additionally owes rent to the mobilehome park, that member most likely will fall delinquent on both obligations at the same time.  Under the Mobilehome Residency Law, Civil Code §798, et seq., mobilehome parks are obligated to give written Notice of Termination of Tenancy to the member to remove the mobilehome from the park within a period of not less than 60 days, which must also be sent to the credit union.  Civil Code §798.56a outlines the response the credit union must give to the mobilehome park, with strict timelines, providing the credit union’s intention to exercise one of three options:[3] i) to sell the obligation secured by the mobilehome to the management for the amount specified in its written offer; ii) to foreclose on its security interest in the mobilehome; or iii) to request that the management pursue the termination of tenancy against the homeowner by offering to reimburse management for the reasonable attorney's fees and court costs incurred in that action.

If the credit union chooses the second or third option, it may keep the mobilehome within the mobilehome park until it is resold only if all of the requirements from Civil Code §798.56a(b) are met, which includes:

a) notifying the mobilehome park in writing within 60 days following receipt of the notice of termination of tenancy of the intention to exercise this option and satisfying all responsibilities and liabilities of the homeowner owed to management for the 90 days preceding the mailing of notice of termination of tenancy up to the sale of the mobilehome;

b) within 60 days following receipt of the notice of termination of tenancy, commencing all necessary actions such that the mobilehome complies with mobilehome park rules and regulations and the Health and Safety Code standards; and

c) complying with the requirements of Civil Code §798.70, et seq. related to transfer of the mobilehome to a third party, including advertising, listing, fees, removal if commensurate with a sale, repairs, a mobilehome park’s right to approval of a prospective purchaser, disclosures, etc.

Failure to respond to the Notice of Termination of Tenancy within the time permitted may result in the mobilehome being removed from the premises and may also result in the mobilehome park having a warehouseman's lien against the mobilehome. As such, we encourage credit unions to be in persistent contact with the mobilehome park if the member defaults on either obligation – loan or rent – to ensure that the credit union does not lose its collateral or first position lien.  We additionally encourage credit unions to act quickly on any defaulted loan, contacting the mobilehome park immediately to ensure that it receives future notice and that it has not missed any notices that were previously sent to the member.

CONCLUSION

To be blunt, the process for enforcing a defaulted loan secured by a mobilehome that is being used as a residence, located in a mobilehome park, is complex.  The interaction between the Health and Safety Code, Commercial Code, Civil Code, Code of Civil Procedure, Vehicle Code, and the Truth-in-Lending Act guarantee that there are considerable pitfalls to credit unions attempting to enforce their mobilehome loan and security agreements extrajudicially.  Additionally, the necessary collaboration with the mobilehome park may create unpredictable issues and frustrations that make a disposition and sale challenging.  In light of these complexities and the expense of litigating such a collections case, a credit union may wish to have a generous policy in place to incentivize the member to surrender the mobilehome (e.g. “cash for key”) and otherwise maintain good relations with the mobilehome park management.  If you have additional questions concerning mobilehome loans that are currently in default, please feel free to contact our firm to discuss.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

[1] Pursuant to Civil Code §798.61, if the mobilehome park determines the unit abandoned, it must post a Notice of Belief of Abandonment for not less than 30 days and send copies of the notice to the credit union. If no response is received, the mobilehome park may file a petition for a judicial declaration of abandonment of the mobilehome, which could result in the mobilehome park selling the mobilehome if the credit union does not act.  To prevent this, the credit union is encouraged to immediately reach out to the mobilehome park if it has any belief that the member has abandoned the mobilehome in order to ensure that no Notice of Belief of Abandonment from the mobilehome park was missed.

[2] A major caveat to this is that the statutory provisions are not a model of clarity.  They create a possible conflict, particularly when the Truth-in-Lending Act governs the transaction, that calls into question whether the antideficiency provisions of Health and Safety Code §18038.7 and Civ. Code, §2983.8 are inapplicable.

[3] The mobilehome park is required to send a Three-Day Notice to Pay Rent or Quit if the member has defaulted on payment of rent, which must also be sent to the credit union.  The credit union should treat receipt of either notice, three-day or 60-day, as an invitation to contact the mobilehome park and to trigger its requirement to respond under Civil Code §798.56a as outlined herein.

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