Coronavirus, Foreclosure & Contract Law

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LoanSafe Member
Jun 22, 2010
North bay
If you're behind on payments and facing foreclosure because of the coronavirus don't give up. Stand up for your rights, the law may be on your side.

While making monthly payments seems like an absolute under the mortgage contract, just like in any contract under certain circumstances performance is excused. One of those is if performance has been rendered impossible or impracticable by unforeseeable events beyond either party's control. This isn't a personal event like the loss of employment but something of larger significance. One such event is called a force majeure which is an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic, or an event described as an "act of God." It essentially frees both parties from liability or obligation and excuses a party's non-performance entirely or suspends it for the duration of the force majeure.

In many business contracts there is a force majeure clause but not in the mortgage contract. Not to worry, in the absence of such a clause the default is that performance is excused; the clauses generally serve to modify the conditions of the excuse.

This is also found in the common law in Restatement (Second) of Contracts. Section 265 deals with impossibility that discharges the contract and section 269 (seen below) is about impracticability that suspends performance.

"Impracticability of performance or frustration of purpose that is only temporary suspends the obligor’s duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.

In many states it's written into the statutory code.* California Civil Code § 1511 provides that the performance of an obligation is excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States...

In California, the test for whether a force majeure / act of God situation is present is “whether…there was such an insuperable interference…as could not have been prevented by the exercise of due diligence.” Pac. Vegetable Oil Corp. v. C.S.T., Ltd., 29 Cal.2d 238 (Cal. 1946).

The principle underlying the doctrine of force majeure is set forth in the Maxims of Jurisprudence in Cal. Civ. Code § 3526: “No man is responsible for that which no man can control.”

What this could mean for a homeowner unable to make payments due to Covid-19 is that those missed payments cannot place you in default because your performance has been excused and can remain excused until the pandemic has loosened its grip. If performance is excused a default can't occur. An event of default is the condition precedent that triggers the creditor's right to foreclose. You may in fact be foreclosure-proof. Maybe not indefinitely but possibly for the duration.

Let's say that as a result of the pandemic your job or business is lost for good. Under those circumstances, your obligations under the contact may be discharged. It's important to note that that doesn't mean a free house at all. The contract and the debt are not one and the same, the debt would still exist but it wouldn't be secured by the contract and could possibly be unloaded as an unsecured debt in Chapter 13.

It's important to contact your servicer and tell them you've been impacted by the pandemic. Specifically, tell them that as a result your performance under the loan contract was rendered impossible or impracticable. You should show good faith at this point by alerting them to your situation. It might not be as effective to spring it on them just as they are trying to foreclose. You could tell them that your performance has been excused and depending on your intentions you could assure them that after a given period of time you should be able to resume monthly payments. The word resume is significant because you don't want forbearance, you're not asking for time and intending to repay the skipped payments. I'd recommend not accepting forbearance as it may be an admission that payments are owed.

The banks are going to hate this because in many ways it becomes more their problem than ours. So they're going to act like they're being really generous by offering forbearance while making sure they get paid every penny back with interest. Don't let them, they've taken enough of our money as it is.

An important caveat: I'm just a homeowner, not a lawyer. I've been studying contract law for the past ten years in my battle with the banks but not this particular aspect. Also, this is an unprecedented situation, we don't know how courts will be ruling or how the law will be interpreted. Don't follow my suggestions without asking others and doing your own research. I'm just trying to give people some hope and some tools to fight for their homes.

* If you need help finding the applicable statutes for your state just reply to this thread and ask.
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