Hoffman et al v. Lloyd et al

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-1-
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
THOMAS LLOYD,
Debtor.
JEFFREY E. HOFFMAN,
Plaintiff,
vs.
THOMAS R. LLOYD, an individual,
EDWARD L. BLUM, an individual, and
DOES 1 through 20, inclusive,
Defendants.
THOMAS LLOYD,
Cross-Plaintiff,
vs.
JEFFREY E. HOFFMAN, dba H & B
PROPERTIES; H & B PROPERTIES, LLC,;
J. EDWARDS INVESTMENT GROUP, INC.,
and NORCAL FINANCIAL, INC.,
Cross-Defendants.
____________________________________
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Case No. 04-32921 TEC
Chapter 11
Adv. Proc. No. 05-3328 TC
O P I N I O N
Thomas E. Carlson, Bankruptcy Judge.
Signed and Filed: April 30, 2007
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
April 30, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 1 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 	1 The Option does not state the price at which Lloyd could
repurchase the Residence.
-2-
The principal question presented is whether a homeowner who
sells his home while facing foreclosure may cancel that sale long
after the fact, because the sale contract omitted one of two
notices of the right to cancel required under section 1695.5 of the
California Home Equity Sales Contracts Act. 	Because the sale
contract failed to provide notice of the right to cancel “in
immediate proximity to the space reserved for the equity seller’s
signature,” the contract did not substantially comply with the
requirements of section 1695.5 and, as a consequence, the time to
cancel the sale never expired.
FACTS
Thomas Lloyd owned and resided in a single-family house in San
Francisco (the Residence). 	In May 2003, he was in default on his
mortgage payments and looking for help, when he met Jeffrey
Hoffman. 	Lloyd sold the Residence to Hoffman in a transaction that
Lloyd hoped would enable him ultimately to keep the Residence.
1. 	The Sale of the Residence
On May 28, 2003, Lloyd and Hoffman signed three related
contracts regarding the Residence: the Purchase-Sale Agreement; the
Lease; and the Option. 	The Purchase-Sale Agreement provided for
Hoffman to purchase the Residence from Lloyd for $900,000. 	The
Lease provided for Lloyd to rent back the Residence from Hoffman on
a month-to-month basis. 	The Option permitted Lloyd to repurchase
the Residence from Hoffman on or before June 30, 2005. 1
Of great importance to the present action, the Purchase-Sale
Agreement did not contain a notice of the right to cancel next to
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 2 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
2 HESCA is codified in sections 1695 through 1695.17 of the
California Civil Code. 	Unless otherwise noted, all statutory
references in this decision are to sections of the California Civil
Code.
-3-
the line for Lloyd’s signature. 	Through the Home Equity Sales
Contracts Act 2 (HESCA), the California Legislature closely regulates
sales of residences that occur after foreclosure proceedings have
begun, to protect “homeowners in financial distress” against “the
importunities of equity purchasers who induce homeowners to sell
their homes for a small fraction of their fair market values. . .
.” 	§ 1695(a). 	Under HESCA, the Purchase-Sale Agreement should
have contained notice of the right to cancel next to the line for
Lloyd’s signature, and Lloyd had a right to cancel the sale up to
five calendar days after he was accorded proper notice of that
right.
The sale of the Residence to Hoffman closed on August 25,
2003. 	On that date, Lloyd executed a grant deed, and Hoffman paid
the purchase price by taking out a new loan against the Residence
in the amount of $640,000. 	The proceeds of that loan were used to
retire Lloyd’s existing loans ($591,738) and to pay Lloyd
approximately $20,000. 	Lloyd remained on the premises under the
Lease. 	Hoffman transferred his interest in the Residence to H&B
Properties, an LLC in which he was the sole member.
2. 	Settlement of the Unlawful Detainer Action
Lloyd soon fell behind in the rent payments due under the
Lease. 	H&B Properties filed an unlawful detainer action on June 2,
2004. 	This action was settled before trial via an agreement
executed on August 3, 2004 (the Settlement Agreement). 	The
Settlement Agreement allowed Lloyd 90 days either: (a) to find a
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 3 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-4-
buyer for the Residence; or (b) to repurchase the Residence
himself. 	If Lloyd failed to perform either alternative, the Option
and Lease would be terminated, and judgment would be entered
against Lloyd for unpaid rent and attorneys fees.
Shortly after the parties executed the Settlement Agreement,
H&B Properties further encumbered the Residence by obtaining a
$110,000 loan from Norcal Financial, secured by a second deed of
trust. 	Norcal Financial is another entity controlled by Hoffman.
Of importance to this case, the Settlement Agreement contained
broad mutual releases. 	Those releases apply to claims unknown at
the time of the release, because the parties expressly waived the
protections of California Civil Code section 1452. 	The Settlement
Agreement did not expressly address any rights under HESCA.
Lloyd was unable to perform under the Settlement Agreement and
filed a chapter 11 petition in this court on October 15, 2004.
3. 	The Notice of Rescission
On October 18, 2004, Lloyd recorded a document entitled Notice
of Rescission of Grant Deed Recorded Pursuant to Home Equity Sales
Contract (the Notice of Rescission). 	In that Notice, Lloyd
asserted the right under HESCA to rescind both the grant deed to
Hoffman and the Purchase-Sale Agreement.
Hoffman initially sought to litigate the validity of the
Notice of Rescission in the California state courts. 	He filed a
motion seeking relief from the automatic stay to permit him to file
a state-court action against Lloyd. 	Noting that the validity of
the Notice of Rescission turned upon California law, this court
granted the requested relief from stay. 	Hoffman filed an action
against Lloyd in the San Francisco County Superior Court seeking
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 4 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-5-
cancellation of the Notice of Rescission and damages resulting from
the slander of title that the Notice created. 	Lloyd answered and
asserted a cross complaint against Hoffman seeking an accounting,
quiet title to the Residence, and other relief. 	On September 14,
2005, Lloyd removed the Superior Court action to this court. 	At
this juncture, Hoffman did not file a motion to remand, but instead
sought to have this court summarily grant relief in his favor.
4. 	The Settlement Agreement Does Not Bar Rescission
Hoffman filed a motion to have this court cancel the Notice of
Rescission on the ground that it was barred by the general release
in the Settlement Agreement. 	In opposing that motion, Lloyd argued
that the release in the Settlement Agreement should not bar
cancellation of the sale, because HESCA expressly provides “[a]ny
waiver of the provisions of this chapter shall be void and
unenforceable as contrary to public policy.” 	§ 1695.10.
The court determined that it must hold an evidentiary hearing.
In light of section 1695.10, the general release would be
enforceable, if at all, only if it represented a knowing and
intelligent waiver of Lloyd’s rights under HESCA. 	Lloyd had
submitted a declaration stating that he was unaware of his right to
cancel under HESCA at the time he signed the Settlement Agreement.
There thus existed a genuine issue of material fact regarding the
enforceability of the release.
Before the evidentiary hearing commenced, Hoffman disclosed a
copy of a one-page document entitled “Notice Required by California
Law” (the Signed Separate-Page Notice). 	This Notice explained the
right to cancel under HESCA, stated the seller could cancel the
sale on or before June 4, 2003, and purported to bear Lloyd’s
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 5 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
3 In an unpublished Decision After Trial filed on March 20,
2006, this court explained its conclusions of law in the following
language. I conclude that the release was effective with
respect to Lloyd’s rights under Section 1695 only if:
(1) the release occurred in the settlement of a ripe
controversy in which the significance of those rights had
become apparent; and (2) the release constituted a
knowing and intelligent waiver of those rights. 	In so
concluding, I note the following. 	First, the California
Legislature expressly provided that rights under Section
1695 cannot be waived. 	Cal. Civ. Code § 1695.10.
Although I do not believe that the Legislature meant to
bar settlement of ripe claims arising under Section 1695,
the anti-waiver provision suggests that any such
settlement should be attended with adequate safeguards.
Second, California courts have held that any waiver of an
important statutory right must be knowing and
intelligent. 	Cathay Bank v. Lee, 14 Cal.App. 4th 1533,
1539 (1993); accord In re Acosta, 182 B.R. 561, 566-67
(N.D.Cal. 1994). 	Third, Section 1695 is important
consumer protection legislation, much like the Federal
Truth-in-Lending Act. 	Thus, I find both persuasive and
pertinent a decision in which a general release that did
not specifically acknowledge the right to rescind under
TILA was held not to bar the later exercise of that
right. 	Mills v. Home Equity Group, Inc., 871 F.Supp.
-6-
undated signature at the bottom. 	Lloyd’s counsel asserted at a
pretrial hearing that the signature was a forgery and stated that
he would object to introduction of the document at trial.
Following the evidentiary hearing, the court determined that
the general release in the Settlement Agreement did not bar Lloyd
from cancelling the sale of the Residence under HESCA. 	After
hearing testimony from the parties and counsel involved in the
negotiation of the Settlement Agreement (during which Hoffman did
not attempt to introduce the Signed Separate-Page Notice), this
court made the finding of fact that Lloyd was unaware of his rights
under HESCA at the time he signed the Settlement Agreement. 	The
court made the conclusion of law that the general release was not
applicable to Lloyd’s rights under HESCA if he was unaware of those
rights at the time he executed that release. 3
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 6 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 1482, 1485-86 (D.D.C. 1994).
-7-
5. 	Summary Judgment Granted
Following the denial of Hoffman’s motion, Lloyd filed a motion
for summary judgment. 	He argued that Hoffman, as the equity
purchaser, had the duty to comply with the HESCA requirements
regarding notice of the right of cancellation. 	§ 1695.5(a). 	He
argued that the Purchase-Sale Agreement did not comply with those
notice requirements because, among other reasons, it failed to
provide notice of the right to cancel next to the space for the
seller’s signature (the Next-to-Signature Notice). 	§ 1695.5(a).
He argued that the right to cancel never expired and that the
Notice of Rescission was timely, because proper notice of that
right had never been given. 	§ 1695.5(d).
In support of the motion for summary judgment, Lloyd submitted
a declaration stating that on May 28, 2003, he signed only three
documents (the Purchase-Sale Agreement, the Lease, and the Option),
and that none contained the Separate-Page Notice.
Hoffman opposed the motion for summary judgment, contending
that he had substantially complied with the notice requirements of
HESCA. 	Hoffman argued that the Signed Separate-Page Notice
fulfilled the purpose behind the required Next-to-Signature Notice.
In support of his argument, Hoffman submitted his own declaration,
in which he stated that the Signed Separate-Page Notice was part of
his business records.
This court granted summary judgment for Lloyd regarding
Hoffman’s failure to comply with the notice requirements of HESCA
and the timeliness of Lloyd’s Notice of Rescission. 	Hoffman, as
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 7 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-8-
the equity purchaser, had the duty to show compliance with the
notice requirements of HESCA. 	§ 1695.6(a). 	To have any hope of
showing substantial compliance with the Next-to-Signature Notice
requirement, Hoffman had to offer admissible evidence that Lloyd
had signed the Separate-Page Notice on the same date he signed the
Purchase-Sale Agreement. 	Lloyd’s purported signature was not
dated. 	Hoffman’s declaration did not state that Hoffman saw Lloyd
sign the Notice, and therefore did not constitute admissible
evidence that Lloyd signed it at the same time he signed the
Purchase-Sale Agreement. 	Hoffman had not requested further time
under Rule 56(f) to obtain such evidence. 	In light of Hoffman’s
failure to comply with the notice requirements of HESCA, the time
to cancel never ran, and the Notice of Rescission was therefore
timely. 	§ 1695.5(d).
On the basis of the summary judgment, the court ordered the
dismissal of Hoffman’s claims for slander of title and for
cancellation of the Notice of Rescission. 	The court also stated
its intent to grant Lloyd’s claim to quiet title to the Residence
in his name. 	The court reserved the issue of whether Lloyd should
be required to return any consideration received as a condition of
cancelling the sale, and did not immediately enter judgment on any
of the claims.
6. 	Conditions on Rescission
The parties briefed the question whether any conditions should
be imposed on Lloyd’s cancellation of the sale. 	Hoffman asked that
Lloyd be required to pay more than $500,000 to restore Hoffman to
his former position. 	He sought reimbursement for many categories
of expenses he had incurred: mortgage interest, property taxes,
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 8 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-9-
transfer taxes, maintenance, improvements, insurance, loan fees,
management fees, attorneys fees, and unpaid rent. 	Lloyd
acknowledged that he must return any net value received. 	He
argued, however, that much of the amount Hoffman sought did not
represent value Lloyd received, and that the value Lloyd did
receive was fully offset by the increased debt against the property
Lloyd would now be required to pay. 	The court issued a tentative
ruling that no reimbursement would be required, and scheduled a
hearing for February 28, 2007 to allow the parties to address the
question further.
7. 	The Motion to Reopen the Summary Judgment
Hoffman responded to this tentative ruling by attempting to
reopen the ruling granting Lloyd’s motion for summary judgment.
Hoffman first argued that the Signed Separate-Page Notice had been
sufficiently authenticated by Hoffman’s declaration stating that
Notice to be part of his business records, and by the similarity
between the signature on the Notice and Lloyd’s signatures on the
Purchase-Sale Agreement, Lease, and Option. 	He also argued that
because the Notice itself was dated Mary 28, 2003, it constituted
sufficient evidence that Lloyd signed it on that date to create a
triable issue of fact. 	Hoffman next sought to reopen the summary
judgment by offering new evidence. 	He submitted a declaration from
Asher Robertson, the broker who represented Lloyd in the sale to
Hoffman, stating that Hoffman had signed the Separate-Page Notice
on the same date he signed the Purchase-Sale Agreement, Lease, and
Option.
In opposing Hoffman’s motion, Lloyd first disputed that
summary judgment had been improperly granted. 	Even if the Signed
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 9 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-10-
Separate-Page Notice was dated May 28, 2003, the signature on the
Notice was undated, and Hoffman had offered no evidence to
controvert Lloyd’s declaration that he did not sign the Separate-
Page Notice on May 28th. 	Lloyd next contended that Hoffman should
not be allowed to offer the Robertson declaration at such a late
date, because Hoffman had met with Robertson for several hours in
January 2006, well before the summary judgment motion.
At the February 28, 2007 hearing, it became apparent that
there remained two legal questions the court must resolve. 	First,
the parties agreed that the court should determine whether the
Signed Separate-Page Notice would constitute substantial compliance
with the HESCA notice requirements, before considering (or
reconsidering) the factual question whether Lloyd had signed that
notice at the same time he signed the Purchase-Sale Agreement.
Second, the court should determine what categories of reimbursement
Lloyd must make as a condition to cancellation of the sale. 	If the
legal standard Lloyd urged was correct, Hoffman would not be
entitled to reimbursement, even if Hoffman prevailed regarding the
relevant factual disputes.
DISCUSSION
I.
COMPLIANCE WITH HESCA REQUIREMENTS
REGARDING NOTICE OF RIGHT TO CANCEL, AND
THE TIMELINESS OF THE NOTICE OF RESCISSION
1. 	Statutory Framework
The California Legislature enacted HESCA in 1979 to protect
homeowners in foreclosure from fraudulent schemes by home equity
purchasers. 	The Legislature found that homeowners in financial
distress were often induced to sell their homes for a small
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 10 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 4 In section 1695, the Legislature made detailed findings and
conclusions, which are set forth in more detail in part II.4,
infra.
-11-
fraction of their market value through various types of pressure
and misrepresentation. 4 	HESCA protects homeowners by: (1) requiring
home equity sales contracts to be in writing and to contain certain
disclosures; (2) providing the equity seller an opportunity to
cancel the sale; and (3) prohibiting the equity purchaser from
paying consideration, receiving a conveyance, or encumbering the
property until the right to cancel has expired. 	§§ 1695.2 through
1695.6.
The protections of HESCA apply to the sales of residential
property of 1-4 units that the seller occupies as his or her
principal residence, and against which there is an outstanding
notice of default under a deed of trust or mortgage. 	§ 1695.1(b).
The statute expressly excludes from its coverage various types of
sales posing less opportunity for abuse: foreclosure sales, deeds
in lieu of foreclosure, sales directed by court order, sales to a
spouse or blood relative, and sales to a person who intends to
reside in the property. 	§ 1695.1(a).
HESCA closely regulates the form of home equity sales
contracts. 	Such contracts must be in writing, must state the total
consideration to be paid and the terms of payment, and must state
the time at which possession is to be transferred, and the terms of
any rental agreement. 	§§ 1695.2, 1695.3. 	The contract must also
contain two types of notices: (1) a notice of the seller’s right to
cancel, described in more detail below; and (2) a notice that the
buyer cannot ask the seller to sign any deed or other document
until the right to cancel has expired. 	§§ 1695.3(h), 1695.5(a).
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 11 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-12-
The equity seller’s right to cancel is the heart of the
statutory scheme. 	The equity seller may cancel the contract until
the earlier of midnight of the fifth business day after he or she
signs a contract “that complies with this chapter,” or 8:00 a.m. on
the day scheduled for a foreclosure sale. 	§ 1695.4(a). 	The seller
may exercise the right to cancel by delivering to the equity
purchaser any writing indicating the seller’s intention to cancel
the contract. 	§ 1695.4(b), (c).
The written contract must contain two separate notices of the
right to cancel. 	The first of these notices is what I shall call
the Next-to-Signature Notice. 	The contract
shall contain in immediate proximity to the space
reserved for the equity seller’s signature a conspicuous
statement . . . as follows: “You may cancel this contract
for the sale of your house without any penalty or
obligation at any time before (date and time of day).
See the attached notice of cancellation form for an
explanation of this right.”
§ 1695.5(a).
The second of these notices is what I shall call the Separate-
Page Notice. 	The contract must be accompanied by a “notice of
cancellation” on a separate page attached to the contract that
states the deadline for cancellation, explains how the seller may
cancel the contract, and contains a space in which the seller may
indicate his or her intent to exercise the right to cancel.
§ 1695.5(b).
HESCA states expressly that the right to cancel does not
expire before the seller has received the required notices.
Section 1695.5(d) states “[u]ntil the equity purchaser has complied
with this section [governing notice of the right to cancel], the
equity seller may cancel the contract.” 	Section 1695.4(a) provides
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 12 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-13-
that the five-day cancellation period begins when “the equity
seller signs a contract that complies with this chapter.”
To make the right to cancel more effective, the equity
purchaser may not pay any consideration, accept a deed, record a
deed, or transfer or encumber the property until the right to
cancel has expired. 	§ 1695.6(b). 	Thus, the Legislature
contemplated that the equity seller would not have to return any
consideration, or undo any other aspect of the contemplated sale,
as a condition of cancelling the sale contract. 	The statute also
states that the seller’s right to cancel is “[i]n addition to any
other right of rescission. . . .” 	§ 1694.5(a).
The equity seller is not protected against third parties who
in good faith and without knowledge “of a violation of this
chapter” purchase the property for value from the equity purchaser
or who loan money to the equity purchaser secured by the property.
§ 1695.6(b)(3).
HESCA provides that an equity seller may recover damages and
attorneys fees if the equity purchaser does not promptly and
“without condition” honor a timely notice of cancellation.
§ 1695.7. 	The court must treble any actual damages resulting from
the equity purchaser encumbering the property before the
cancellation period has expired. 	Id.
2. 	Facts Related to Compliance with the Statute
The Purchase-Sale Agreement did not contain the Next-to-
Signature Notice required under section 1695.5(a). 	The parties
used a standard-form purchase-sale agreement that did not contain
or provide room for such a notice next to the signature line.
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 13 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
5 The contract also did not contain the notice required by
section 1695.3(h), stating that the equity purchaser cannot ask the
equity seller to sign any deed until the right to cancel has
expired. 	It appears, however, that the failure to provide this
notice is immaterial. 	If the contract substantially complied with
the statutory requirements regarding notice of the right to cancel,
the right to cancel expired before Lloyd signed any deed. 	If the
contract did not substantially comply, the right to cancel has
never expired, without regard to any violation of section
1695.3(h).
-14-
Lloyd may, however, have signed the Separate-Page Notice. 	As noted
above, this is disputed. 	For the purpose of the present inquiry, I
will assume that Lloyd signed the Separate-Page Notice on the same
day he signed the Purchase-Sale Agreement.
Whether the equity sale contract contained the required
notices of right to cancel determines whether Lloyd timely
exercised the right to cancel. 	As noted above, HESCA states in two
different places that the time limit on the right to cancel does
not begin to run until the equity seller signs a contract that
provides the required notices of that right. 	§§ 1695.4(a),
1695.5(d).
Lloyd contends that he timely exercised the right to cancel,
because the contract he signed did not contain the Next-to-
Signature Notice. 	Hoffman contends that Lloyd did not timely
exercise the right to cancel, because the Purchase-Sale Agreement
together with the Signed Separate-Page Notice substantially
complied with the statutory requirements. 	Hoffman contends that
Lloyd’s signature on the Separate-Page Notice brought that notice
to Lloyd’s attention, thereby fulfilling the statutory
purpose behind the Next-to-Signature Notice. 5
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 14 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-15-
3. 	The Doctrine of Substantial Compliance
The California Supreme Court defined “substantial compliance”
regarding consumer-protection laws in Stasher v. Harger-Haldeman,
58 Cal. 2d 23 (1962). 	The statute at issue there required
contracts concerning conditional sales of motor vehicles to be in
writing and to contain various notices regarding purchase price and
payments. 	The court set forth the following test for determining
whether the notices given satisfied the requirements of the
statute.
Substantial compliance, as the phrase is used in the
decisions, means actual compliance in respect to the
substance essential to every reasonable objective of the
statute. 	But when there is such actual compliance as to
all matters of substance then mere technical
imperfections of form or variations in mode of expression
by the seller, or such minima as obvious typographical
errors, should not be given the stature of non-compliance
and thereby transformed into a windfall for an
unscrupulous and designing buyer.
Id. at 29.
The California Court of Appeal applied Stasher to a notice
requirement similar to the one involved here in Malek v. Blue Cross
of California, 121 Cal.App. 4th 44 (2004). 	Malek involved Health
and Safety Code section 1363.1, which provides that an arbitration
agreement in a health care plan is enforceable only if notice of the
arbitration provision is prominently displayed “immediately before
the signature line” and clearly discloses that the parties are
giving up their constitutional right to trial in a court of law.
Id. at 50. 	The enrollment form at issue disclosed that the parties
relinquished their right to trial “in a court of law before a jury.”
This notice, however, was not displayed immediately before the
signature line. 	Id. at 61.
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 15 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-16-
Malek held that the notice provided did not substantially
comply with the statute. 	The court reasoned that placement of the
notice next to the signature line was essential to one of the
objectives of the statute.
The purpose of section 1363.1 is to disclose the
requirement to arbitrate and to ensure a knowing waiver of
the right to a jury trial. . . . [T]here is no indication
that the Maleks knowingly waived their right to a jury
trial based on the juxtaposition of the signature line.
The arbitration provision is on the left-hand side of the
enrollment form while the signature line is on the lower
right-hand side of the form. 	The signature line appears
directly below the authorization to obtain or release
medical information. 	This placement is not a technical
defect of form because it leaves in doubt whether the
Maleks knowingly waived their right to a jury trial.
Under these circumstances, the statutory objectives of
section 1363.1 have not been met.
Id. at 72-73 (emphasis in original).
Stasher and Malek do not directly resolve the present case.
Stasher does tell us, however, that substantial compliance means
actual compliance with every reasonable purpose of the statute.
Malek tells us that placement of a notice next to the signature line
of a contract may be essential to the purpose of a statute.
4. 	Does the Present Contract Substantially Comply with Section
1695.5?
To determine whether Hoffman substantially complied with
section 1695.5, we must determine whether the legislative purpose
behind the Next-to-Signature Notice is satisfied by Lloyd’s
signature on the Separate-Page Notice.
The Legislature stated that the right to cancel is intended to
help homeowners make sound decisions while they are under the
strain of foreclosure proceedings. 	The “Legislative findings and
declarations” state in relevant part:
(a) 	The Legislature finds and declares that . . .
[d]uring the time period between the commencement of
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 16 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-17-
foreclosure proceedings and the scheduled foreclosure
sale date, homeowners in financial distress, especially
the poor, elderly, and financially unsophisticated, are
vulnerable to the importunities of equity purchasers . .
. .
(b) 	The Legislature declares that it is the express
policy of the state to preserve and guard the precious
asset of home equity, and the social as well as the
economic value of homeownership.
. . .
(d) 	The intent and purposes of this chapter are the
following:
(1) 	To provide each homeowner with information
necessary to make an informed and intelligent decision
regarding the sale of his or her home to an equity
purchaser [and] . . . to afford homeowners a reasonable
and meaningful opportunity to rescind sales to equity
purchasers . . . .
(2) This chapter shall be liberally construed to
effectuate this intent and to achieve these purposes.
§ 1695.
The most important expression of legislative purpose, of
course, is the language of the statute itself. 	Cal. School
Employees Ass’n. v. Governing Bd. of the Marin Cmty. Coll. Dist., 8
Cal. 4th 333, 338 (1994) (en banc). 	A salient characteristic of
HESCA is that it requires two notices of the right to cancel: the
Next-to-Signature Notice and the Separate-Page Notice. 	Under the
oft-cited doctrine that courts must attempt to give effect to all
provisions of a statute, I assume that each of the required notices
serves a function the other does not. 	Cal. Code Civ. Proc. § 1858;
Parris v. Zolin, 12 Cal. 4th 839, 845 (1996). 	More specifically,
because the Separate-Page Notice explains the right to cancel in
more detail than the Next-to-Signature Notice, I must assume that
the Next-to-Signature Notice provides some separate, additional
benefit.
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 17 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 6 As noted above, for the purpose of this decision, the court
assumes without deciding that Lloyd signed the Separate-Page Notice
on the same date he signed the Purchase-Sale Agreement.
-18-
It is not hard to discern the benefit to be derived from the
Next-to-Signature Notice: the equity seller is more likely to
notice it. 	People of all degrees of sophistication understand the
importance of the signing of a written contract. 	It is at that
stage that the seller should be focused most carefully on the
details of the transaction. 	I conclude that the Legislature
required that notice of the right to cancel be placed “in immediate
proximity” to the signature line to increase the likelihood that
the equity seller would effectively comprehend that right. 	While
the Separate-Page Notice provides a full description of the right
to cancel, it does not have the same ability to grab the attention
of the equity seller by being in the seller’s field of vision at
the key moment when the seller executes the contract.
Does Lloyd’s signature 6 on the Separate-Page Notice make up for
Hoffman’s failure to place a notice next to the signature line on
the Purchase-Sale Agreement?
The Legislature could have required the equity seller to sign
and date the Separate-Page Notice. 	By requiring instead that
notice be placed next to the signature line of the sale contract,
the Legislature determined that the signing of the sale contract
provides a unique opportunity to draw the seller’s attention to the
right to cancel. 	Such a determination is not unreasonable. 	It is
reasonable to assume that most people who sell a home view the
signing of the sale contract as the crucial event, and treat the
numerous other papers they complete as formalities subsidiary to
that event.
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 18 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-19-
I determine that actual compliance with the Next-to-Signature
Notice requirement is essential to the purpose of HESCA. 	This is
so because of the Legislature’s express finding that homeowners in
foreclosure are often pressured to make poor decisions, the central
role of the right to cancel in the statutory scheme for helping
homeowners to avoid poor decisions, and the existence of a
reasonable basis to believe that placing notice of the right to
cancel next to the signature line of the sale contract affords a
unique opportunity to draw attention to that right. 	Thus, the
Purchase-Sale Agreement, even with the Signed Separate-Page Notice,
does not substantially comply with the requirements of section
1695.5, because it is not in “actual compliance in respect to the
substance essential to every reasonable objective of the statute.”
Stasher, supra, 58 Cal 2d. at 29.
II.
CONDITIONS UPON CANCELLATION
Hoffman contends that Lloyd should be permitted to cancel the
sale only upon tendering to him more than $500,000, the amount
Hoffman contends is necessary to restore him to his former
position. 	Lloyd concedes that the court may require him to return
value he received to prevent unjust enrichment. 	Lloyd argues,
however, that when all facets of the transaction are properly
accounted for, he received no net value. 	The most important
difference between the parties concerns the viewpoint the court
should apply to the question of restitution. 	Hoffman argues that
he must be restored to the status quo ante, even though he is the
party responsible for the circumstances justifying cancellation of
the contract. 	Lloyd argues the contrary.
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 19 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
7 Hoffman cites Runyan v. Pacific Air Industries, Inc., 2 Cal.
3d 304, 316 (1970) as stating “[i]t is the purpose of rescission
‘to restore both parties to their former position as far as
possible.’” 	Neither Runyan, nor any other case Hoffman cites,
actually holds that the party responsible for the circumstances
justifying rescission must be restored to the status quo ante when
that would require the rescinding party to restore more than the
value that party received, and when that would impose a loss on the
rescinding party for the benefit of the more culpable party.
-20-
1. 	The Appropriate Legal Standard
California law does not support Hoffman’s theory. 	The Civil
Code instructs the courts to prevent unjust enrichment of the
rescinding party whenever possible, but does not require that the
party against whom rescission is invoked be restored to the status
quo ante. 	Section 1691 states that the party rescinding a contract
must offer to “[r]estore to the other party everything of value
which he has received from him under the contract. . . .” 	Section
1692 states in relevant part:
If in an action or proceeding a party seeks relief based
upon rescission, the court may require the party to whom
such relief is granted to make any compensation to the
other which justice may require and may otherwise in its
judgment adjust the equities between the parties.
Case law confirms that the primary goal is to avoid unjust
enrichment when possible, and that the court enjoys broad
discretion in setting appropriate conditions upon rescission. 	See
McCoy v. West, 70 Cal. App. 3d 295, 302 (1977). 7
The Restatement of Restitution provides that even restitution
aimed at preventing unjust enrichment should not be ordered when
that would frustrate the policy giving rise to the right to
rescind.
A person who renders performance under an agreement
that is illegal or otherwise unenforceable for reasons of
public policy may obtain restitution . . . as necessary
to prevent unjust enrichment, if the allowance of
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 20 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 8 The notes accompanying this draft provision provide that it
reformulates the applicable rules of sections 197-99 of the Second
Restatement of Contracts without altering specific outcomes.
-21-
restitution will not defeat or frustrate the policy of
the underlying prohibition.
R ESTATEMENT (T HIRD ) OF R ESTITUTION § 32 (Tentative Draft No. 3,
2004). 8
2. 	Accounting for Benefits and Setoffs
Viewed against this standard, Hoffman is entitled to no
restitution. 	Much of the restitution Hoffman seeks does not
represent value provided to Lloyd. 	Furthermore, as explained in
the following paragraphs, the value Hoffman did provide Lloyd is
more than offset by the increased debt that Hoffman placed on the
Residence and that Lloyd will likely have to pay.
Lloyd does not dispute that he received value equal to the
cash he received and his prior debt that Hoffman paid. 	Upon
closing, Hoffman paid Lloyd $20,000 in cash. 	Hoffman also paid off
the loans Lloyd had previously taken out against the Residence,
which had a balance due of approximately $592,000.
Improvements to the Residence Hoffman made may also represent
value Lloyd received. 	The parties differ largely as to how these
improvements should be valued. 	Hoffman seeks reimbursement of the
entire $14,500 he claims he spent on the improvements. 	Lloyd
contends that the proper measure should be the value of the
improvements to him. 	For the present analysis, I will use
Hoffman’s figure.
Operating expenses Hoffman paid should be considered value
provided to Lloyd only for the period Lloyd had possession of the
Residence. 	Hoffman seeks reimbursement of $163,000 he paid for
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 21 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
9 Lloyd also contends that Hoffman is not entitled to
reimbursement for any interest payments made, because any such
amounts would represent payment on a loan subject to rescission
under the Federal Truth-in-Lending Act. 	I need not reach this
issue because, as noted below, I determine that Lloyd is not
required to make any reimbursement of Hoffman as a condition to
cancelling the sale, without regard to the TILA issue.
-22-
property taxes, mortgage interest, insurance, and maintenance
during the 40 months between the transfer and the end of 2006.
Hoffman argues that if he had not purchased the Residence, Lloyd
would have had to make these payments. 	While this is true, it is
also true that if Lloyd had not sold the Residence and had made
those payments himself, he also would have enjoyed possession and
the other benefits of ownership for the entire 40-month period. 	It
is undisputed that the Residence is now leased to third parties,
and that Lloyd has been denied possession of the Residence for at
least 15 of the 40 months since the sale closed. 	It is appropriate
to make Lloyd responsible for expenses only for the period he had
possession of the Residence. 	Runyan, supra, 2 Cal. 3d at 315;
McCoy, supra, 70 Cal. App. 3d at 301. 	Thus, Lloyd is properly
charged with no more than $101,875, which represents 25/40 of the
$163,000 claimed. 9
Lloyd should not be deemed to have received the rental value
of the Residence in addition to the expenses of maintaining the
property for the period he had possession of the Residence. 	To
adjust for both rental value and avoided expenses would constitute
double-counting. 	Charging Lloyd for the property taxes,
maintenance, insurance, and mortgage interest Hoffman paid while
Lloyd had possession is sufficient to prevent unjust enrichment,
and more accurately measures the benefit Lloyd received. 	McCoy,
supra, 70 Cal. App. 3d at 302 (monetary adjustment required upon
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 22 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
10 Hoffman appears to seek these attorney fees under the fee
clause in the Settlement Agreement. 	As noted above, this court has
determined that the release in the Settlement Agreement does not
bar Lloyd’s right to cancel the sale under HESCA, because of the
anti-waiver provisions of section 1695.10. 	To the extent that
Hoffman seeks to enforce the fee clause to require Lloyd to pay
fees Hoffman incurred in unsuccessfully contesting Lloyd’s exercise
of the right to cancel under HESCA, the fee clause should also be
considered an illegal contract. 	Under section 1695.7, Lloyd is
entitled to recover attorneys fees as the prevailing party.
-23-
rescission of sale of property to take account of post-transfer,
pre-rescission possession is not rent, but is merely a means to
prevent unjust enrichment). 	Lloyd’s possession should not be
valued under the terms of the Lease, because Hoffman could not have
become Lloyd’s landlord without violating the statutory prohibition
against taking title before the cancellation period expired.
§ 1696(b).
The other amounts Hoffman seeks do not represent value
transferred to Lloyd. 	Hoffman seeks reimbursement of $26,500 in
fees paid in obtaining the loan used to make the purchase, transfer
taxes of $6,000 paid on the purchase, and $45,000 in management
fees payable to himself for leasing the Residence. 	Finally,
Hoffman seeks reimbursement of $400,000 in attorneys fees incurred,
and to be incurred, in the present action. 	None of these amounts
represent amounts Lloyd would have had to pay but for the transfer
to Hoffman. 10
The total value Lloyd received from Hoffman is more than
offset by the corresponding detriment that Lloyd has suffered in
the form of increased debt against the Residence. 	To effect the
purchase, Hoffman obtained a loan from GreenPoint Mortgage in the
amount of $640,000, secured by a deed of trust on the Residence.
Later H&B Properties took out a second loan from Norcal Financial
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 23 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
11 It is far from certain that Lloyd will be able to avoid
these encumbrances. 	HESCA affords broad protection to loans
extended by lenders unrelated to the purchaser, such as GreenPoint
Mortgage. 	That the transfer to the equity purchaser may be set
aside does not mean that a loan placed on the property by that
equity purchaser may also be set aside. 	§§ 1695.6(b)(3),
1695.6(e), 1695.12, 1695.14(c). 	The holder of the second loan,
Norcal Financial, is apparently owned by Hoffman, and Hoffman has
at various times stated that he would cause that loan to be
released. 	To date he has not done so. 	It is not appropriate at
this stage for this court to disregard for Hoffman’s benefit a loan
that Hoffman continues to assert.
-24-
in the amount of $110,000, secured by a junior deed of trust on the
Residence. 	The current combined balance on these loans is
approximately $754,000. 11 	The debt the Residence is now subject to
exceeds by $26,125 the sum of all value Lloyd received from
Hoffman.
Cash purchase price 	$ 	20,000
Prior debt retired 	592,000
Adjusted operating expenses 	101,875
Improvements 	14,500
Sub-total 	728,375
Less debt Hoffman incurred 	(754,500)
Net benefit conveyed 	$ 	26,125
The rescinding party need not restore value received from the other
party where that value has been fully offset by other effects of
the transaction. 	Gatje v. Armstrong, 145 Cal. 370, 374 (1904).
3. 	Additional Policy Considerations
Finally, I determine that imposing any condition on
cancellation of the sale of the Residence would unduly interfere
with both the express language and the policies of HESCA. 	The
Legislature designed the equity seller’s right to cancel not to
require the unwinding of a completed transfer, by expressly
prohibiting the equity purchaser from accepting consideration,
receiving a deed, or encumbering the property before the right to
cancel has expired. 	§ 1695.6(b). 	Cancellation is more complex
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 24 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-25-
here, solely because Hoffman did not take care to ensure that the
right to cancel had expired before he completed the purchase. 	This
is a case where Hoffman and Lloyd cannot both be restored to the
status quo ante, because some of the reimbursements Hoffman seeks
are for transactions costs that do not represent value provided to
Lloyd, and because those transaction costs were simply lost when
the sale was cancelled. 	In such circumstances, it is Hoffman who
should bear the loss. 	By violating section 1695(b), Hoffman
created the circumstances that prevent both parties from being
restored to the status quo ante. 	McCoy, supra, 70 Cal. App. 2d at
303.
I determine that Lloyd need not tender any sum to Hoffman as a
condition to cancelling the sale of his Residence to Hoffman. 	I
also determine that the policies embodied in HESCA require that the
Residence be restored to Lloyd immediately. 	§ 1695. 	This court
will therefore order immediate entry of a judgment cancelling the
sale, quieting title to the Residence in Lloyd, and dismissing
Hoffman’s claims. 	Fed.R.Bankr.P. 7054(a); Fed.R. Civ.P.54(b).
Lloyd’s claims for damages and attorneys fees will be determined at
a later date.
CONCLUSION
The Purchase-Sale Agreement did not substantially comply with
HESCA, because it did not contain the Next-to-Signature Notice of
the right to cancel required under section 1695.5(a). 	Lloyd’s
exercise of the right to cancel was timely under section 1695.5(d),
because he had not previously been afforded proper notice of that
right. 	No conditions should be placed on Lloyd’s right to cancel,
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 25 of
26

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-26-
because Lloyd received no net benefit from the transaction that he
should be required to return to Hoffman.
Case: 05-03328 Doc# 116 Filed: 04/30/07 Entered: 04/30/07 15:42:45 Page 26 of
26