FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JEFFREY E. HOFFMAN; H&B
PROPERTIES, LLC; J. EDWARDS
INVESTMENT GROUP, INC.; NORCAL
FINANCIAL, INC., No. 08-15814
Appellants,
D.C. No.
3:06-CV-02416-
v.
MHP
THOMAS R. LLOYD; EDWARD L.
BLUM,
Appellees.
JEFFREY E. HOFFMAN; H&B
PROPERTIES, LLC; J. EDWARDS
INVESTMENT GROUP, INC.; NORCAL No. 08-15883
FINANCIAL, INC., D.C. No.
Appellants,
3:07-CV-02417-
v. MHP
THOMAS R. LLOYD; EDWARD L. OPINION
BLUM,
Appellees.
Appeal from the United States District Court
for the Northern District of California
Marilyn H. Patel, District Judge, Presiding
Argued and Submitted
May 15, 2009—San Francisco, California
Filed July 20, 2009
9269
9270 HOFFMAN v. LLOYD
Before: Mary M. Schroeder and Dorothy W. Nelson,
Circuit Judges, and Consuelo B. Marshall*, District Judge.
Opinion by Judge Schroeder
*The Honorable Consuelo B. Marshall, Senior United States District
Judge for the Central District of California, sitting by designation.
HOFFMAN v. LLOYD 9271
COUNSEL
Jeffrey Goodrich, San Francisco, California, for the appellees.
Dennis Davis, San Francisco, California, for the appellants.
OPINION
SCHROEDER, Circuit Judge:
Jeffrey E. Hoffman and related plaintiff-creditors chal-
lenged Chapter 11 debtor Thomas R. Lloyd’s exercise of his
9272 HOFFMAN v. LLOYD
right to rescind the sale of his foreclosed home under Califor-
nia’s Home Equity Sales Contract Act, known as “HESCA.”
See Cal. Civ. Code § 1695, et seq. The district court affirmed
the bankruptcy court’s summary judgment in favor of the
debtor, Lloyd, because Hoffman never provided Lloyd with
notice of his HESCA rights, as required by California law.
The district court ruled that a general release Lloyd signed
during the course of settling an unlawful detainer action by
Hoffman against Lloyd did not relinquish Lloyd’s HESCA
rights, because Lloyd, at the time of the settlement, had no
notice or knowledge of such rights. The underlying facts are
more fully set forth in the bankruptcy court’s opinion, which
is published at Hoffman v. Lloyd (In re Thomas Lloyd), 369
B.R. 549 (Bankr. N.D. Cal. 2007).
Lloyd owned and resided in a single-family home in San
Francisco, California. In May 2003, he was in default on his
mortgage payments. That month, seeking relief, Lloyd entered
into a sale and lease-back transaction with Hoffman whereby
Hoffman purchased Lloyd’s residence and, contemporane-
ously, leased the property back to Lloyd. Additionally, Hoff-
man gave Lloyd an option permitting Lloyd to re-purchase the
property during a two-year period.
Because Lloyd’s home was in foreclosure at the time of the
transaction, HESCA, a California homeowner protection stat-
ute, applied. See Cal. Civ. Code § 1695 et seq. HESCA pro-
vides protection to homeowners whose property is in
foreclosure. Its stated purpose is to “provide each homeowner
with information necessary to make an informed and intelli-
gent decision regarding the sale of his or her home to an
equity purchaser.” Cal. Civ. Code § 1695(d)(1). To effectuate
its purpose, HESCA obligates a buyer of property that is in
foreclosure to provide to the seller, among other things, notice
of the seller’s right to rescind the sale contract. Id. §§ 1695.4-
1695.5(d). Until a buyer complies with this obligation, the
seller may cancel the sale contract. Id. § 1695.5(d). Evidenc-
ing a strong desire for adherence to HESCA’s protections, the
HOFFMAN v. LLOYD 9273
California legislature provided that “[a]ny waiver of the pro-
visions of [HESCA] shall be void and unenforceable as con-
trary to the public policy.” Id. § 1695.10. The sale contract
between Lloyd and Hoffman for the sale of Lloyd’s fore-
closed property did not comply with HESCA, because it
failed to give Lloyd notice of his right to rescind. Lloyd exe-
cuted a grant deed and Hoffman paid the purchase price.
When Lloyd subsequently defaulted on the lease payments,
Hoffman filed an unlawful detainer action on June 2, 2004.
Before trial on the unlawful detainer action, Hoffman and
Lloyd, both represented by counsel, entered into a written
“Settlement and Mutual Release Agreement” (the “Settlement
Agreement”). This agreement contained a general release of
all known and unknown claims and expressly waived the pro-
tections of California Civil Code § 1542:
In consideration of the foregoing, . . . LLOYD, H &
B, HOFFMAN, and J. EDWARDS hereby mutually
release and forever discharge each other . . . claims
of every kind and nature whatsoever, whether known
or unknown, . . . arising from the [unlawful detainer
action] or arising from or related to the Property, the
purchase by [Hoffman], the Lease, the Option or the
Repurchase Agreement, . . .
. . . LLOYD, H & B, HOFFMAN, and J.
EDWARDS, and each of them, expressly waive the
provisions of California Civil Code Section 1542[,]
which provides as follows:
A general release does not extend to claims
which the creditor does not know or suspect
to exist in his favor at the time of executing
the release, which if known by him must
have materially affected his settlement with
the debtor.
9274 HOFFMAN v. LLOYD
The Settlement Agreement did not expressly refer to any
rights provided by HESCA, or to the existence of any claims
under HESCA.
Four months later, on October 18, 2004, after filing a Chap-
ter 11 bankruptcy petition, Lloyd recorded a document enti-
tled “Notice of Rescission of Grant Deed Recorded Pursuant
to Home Equity Sales Contract” (“Notice of Rescission”) pur-
suant to California Civil Code § 1695.14. In this document,
Lloyd asserted his right under HESCA to rescind the sale of
his residence. Hoffman then filed a state court suit seeking
cancellation of the Notice of Rescission; Lloyd answered and
asserted a cross-complaint against Hoffman seeking an
accounting, quieting of title, and other relief. The issues were
subsequently litigated in Lloyd’s bankruptcy proceeding.
The bankruptcy court proceedings focused on the issue of
whether the Settlement Agreement, which included a general
release and waiver of California Civil Code § 1542, relin-
quished Lloyd’s right to rescind the sale under HESCA. Anal-
ogizing from California case law requiring waivers to be
knowing and intelligent, the bankruptcy court concluded that
settlements and releases of HESCA rights must also be know-
ing and intelligent. Lloyd, 369 B.R. at 554 n. 3. The court then
conducted an evidentiary hearing and found as a matter of fact
that Lloyd was unaware of his rights under HESCA at the
time he signed the Settlement Agreement. Id. at 554. Accord-
ingly, the bankruptcy court found that because Lloyd was
unaware of his rights, the Settlement Agreement did not relin-
quish Lloyd’s HESCA claims, including his right to rescind
the original sale of the property. Id.
Following the evidentiary hearing, the bankruptcy court
granted summary judgment in favor of Lloyd, finding that
Hoffman had not complied with HESCA and, therefore,
Lloyd’s right to cancel the contract never expired. Id. at 554-
55. The bankruptcy court accordingly concluded the Notice of
HOFFMAN v. LLOYD 9275
Rescission was timely and effective to cancel the original sale
contract.
The district court reached the same conclusion as the bank-
ruptcy court, but reasoned more directly. Under its view, no
evidentiary hearing was required, because the sale did not
comply with HESCA, the Settlement Agreement did not
expressly release HESCA rights, and, further, the buyer did
not come forward with any evidence suggesting the seller
actually knew of his HESCA rights at the time of signing the
Settlement Agreement.
[1] The district court looked to California law on the
enforceability of comprehensive releases of both known and
unknown claims in the context of settlement agreements.
Relying on Winet v. Price, 6 Cal. Rptr. 2d 554, 562 (Cal. Ct.
App. 1992), the district judge observed that California courts
will seek to avoid literal enforcement of a general release that
purports to extinguish unknown and non-matured claims
where there are countervailing concerns. Such concerns
include whether there were unequal bargaining positions
between the parties, whether there were factors that made it
doubtful that the release’s terms were actually understood, or
whether the enforcement of such releases would otherwise be
inequitable. See Winet, 6 Cal. Rptr. 2d at 562.
[2] District Judge Patel then concluded that where, as here,
an equity purchaser fails to provide a sale contract that com-
plied with the requirements of HESCA, the right to rescind is
not extinguished and survives even after the execution of a
broad release of all known and unknown claims. Judge Patel
said, “[i]n such instances, the court will require evidence that
the equity purchaser has notified the equity seller of his right
to rescind, and that the seller has actual understanding of the
rights he relinquishes under the release.” If the language of
the release does not state that HESCA was complied with, and
that the seller therefore did not know of the seller’s HESCA
rights, then the buyer must come forward with evidence that
9276 HOFFMAN v. LLOYD
the seller’s HESCA rights were explained and the seller
understood these rights. Because the buyer could not satisfy
that burden, the Settlement Agreement did not extinguish
Lloyd’s HESCA rights.
We agree with the district court’s analysis, to reach the
same result as the bankruptcy court. Any contrary result
would undermine HESCA by permitting a purchaser to defeat
the seller’s right to rescind by first executing a sale contract
without the required notices, and then executing a release pur-
porting to extinguish any known and unknown claims. As
Judge Patel recognized, “[t]his kind of backdoor loophole is
inequitable and frustrates the purposes of HESCA.”
AFFIRMED.