In Pro Value Properties, Inc. v. Quality Loan Service Corp., (— Cal.Rptr.3d —, Cal.App. 2 Dist., Jan. 23, 2009), a California Court of Appeal considered a dispute over the interest rate that applies when a sale of property is voided due to a ministerial error during non-judicial foreclosure proceedings. The court ruled that the obligation is statutory in nature, not contractual, and that the statutory interest rate of seven percent, rather than the contractual rate of 10 percent, therefore applies.
Quality Loan Service (“QLS”) instituted non-judicial foreclosure proceedings on a residential property. QLS was not the trustee named in the deed of trust, so under Civil Code §2934 QLS was required to record a Substitution of Trustee, but failed to do so. QLS then sold the property to Pro Value Properties, Inc. (“PVP”) for $842,000. Realizing there was no recorded Substitution of Trustee identifying QLS as the trustee, QLS determined the sale was void and returned the $842,000 to PVP. PVP initially rejected the return of the funds claiming it was the rightful owner of the property.
A trial court ruled that the sale was void and ordered the return of the funds to PVP, along with interest at the rate of 10 percent, the amount that applies to obligations founded on a contract. QLS appealed the interest ruling claiming it should have owed interest of only seven percent, the amount that applies to statutory obligations.
The California Constitution provides prejudgment interest of seven percent per annum, but Civil Code Section 3289 provides that interest chargeable after a breach of contract, which does not stipulate an interest rate, is 10 percent. The question is whether there was a contract between PVP and QLS that would cause the higher interest rate to apply.
A non-judicial foreclosure is a creature of statute. The dispute resulted not from a breach of contract but from QLS’s failure to execute the ministerial acts required by statute. In a non-judicial foreclosure sale, the trustee does not contract with the purchaser, but rather performs ministerial acts that result in the transfer of title to the purchaser. Therefore, the trial court erred when it ruled that the contractual interest rate applied so the judgment was modified to change the interest owed by QLS to PVP from 10 percent to seven percent.
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