Assessing the Latest Developments in Protecting Tenants after Foreclosure

In the two and one-half years since the Protecting Tenants at Foreclosure Act took effect, Congress, federal courts, the California Legislature, and local governments have all endeavored to provide additional clarity on the issue with mixed results. In a follow-up to his 2009 Emerging Issues Analysis on the effects of foreclosure on tenant-occupied property, Christopher Martz tracks those attempts and discusses the latest developments in the field. He writes:

II. Congress Extends the Protecting Tenants at Foreclosure Act and Defines a Critical Term

     The PTFA remains unchanged for the most part since its original passage with two notable exceptions:

• Sunset Date Pushed Back. Perhaps in hopes that the worst of the foreclosure crisis would pass within a few years, Congress initially set the PTFA to expire at the end of 2012. Unfortunately, the crisis has only deepened since 2009 and with the passage of the Dodd-Frank financial reform Act, the PTFA now extends through the end of 2014 [Pub. L. No. 111-203 (2010)].

• Date of Notice of Foreclosure Defined. The Dodd-Frank legislation also amended the PTFA by defining this critical term. The PTFA provides that bona fide tenants who enter a fixed-term lease prior to the notice of foreclosure are entitled to remain in possession for the remainder of the lease unless the new owner intends to occupy the property as their primary residence [Pub. L. No. 111-22, § 702(a) (2009)]. Congress left it to the courts to determine the date of the notice of foreclosure in individual eviction cases. As might have been expected, this ambiguity created significant controversy and divergent practices. As a result, the scope of the pool of protected tenancies was uncertain. The amended version of the Act clears up the ambiguity. The date of notice of foreclosure is defined as the date of the completed title transfer [Pub. L. No. 111-22, § 702(c) (2009), as amended by Pub. L. No. 111-203 (2010)]. Consequently, even tenancies created after foreclosure proceedings begin may enjoy the protections of the PTFA, provided they meet the remaining criteria. In practice, counsel can expect that a larger number of tenancies will survive foreclosure by operation of the Act.

III. Federal Courts Rule on Preemption, Subject Matter Jurisdiction, and a Right of Action Under the PTFA

     Since the passage of the PTFA, District Courts across California have had the opportunity to pass on the Act's implications and relationship to state and local law. As of early 2012, no published Circuit Court opinions address the Act. Below is a discussion of the three most important District Court holdings.

1. No Preemption

     The plain language of the PTFA indicates that it is not meant to preempt state or local law relating to the landlord-tenant relationship following foreclosure.Although no appellate court in California has yet taken up this question, District Courts in all four federal judicial districts in California have confirmed this reading of the Act [Wells Fargo Bank v. Lapeen (N.D. Cal. 2011) U.S. Dist. LEXIS 60671, *10-*12 [enhanced version available to lexis.com subscribers] ("by its plain text, the PTFA is focused on providing additional or supplemental protections to state or local laws") ....

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