Borrowers Have Standing to Sue For Wrongful Foreclosure Based On Allegedly Void Assignment

On February 18, 2016, the California Supreme Court issued its long-awaited decision on whether borrowers have standing to base an action for wrongful foreclosure on allegations that a purported assignment of the note and deed of trust to the foreclosing party bore defects rendering the assignment void. The Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.”

In Yvanova v. New Century Mortgage Corporation, et al. (S218973), a borrower had executed a deed of trust securing a note for residential property. Two years later, the deed of trust was transferred to a liquidation trust following the beneficiary’s bankruptcy. Three years after the liquidation transfer, the beneficiary purportedly assigned the deed of trust again, but this time to an investment trust. The closing date for the investment trust (i.e., the date by which all loans and mortgages or trust deeds must be transferred to the investment pool) had already passed. One more transfer took place before a Notice of Trustee’s Sale was served. The property was sold at a trustee’s sale, and a Trustee’s Deed Upon Sale was recorded.

Following the foreclosure sale, the borrower sued for quiet title, naming as defendants the entities that had been involved with the various assignments. The plaintiff-borrower alleged that the assignment into the investment trust was void for two reasons: (1) the original beneficiary’s assets had previously been transferred to a bankruptcy trustee; and (2) the transfer into the investment trust was untimely because the investment trust had already closed. Demurrers were ultimately sustained without leave to amend. The Court of Appeal affirmed the judgment for the defendants on the grounds that plaintiff lacked standing to assert defects in the assignment, to which she was not a party, and because plaintiff did not allege she had tendered payment of her debt.

The Supreme Court disagreed with the appellate court. According to the Supreme Court, the issue of a plaintiff’s standing turned on whether the plaintiff had alleged that the subject assignment was void, and not on whether a borrower was a party to the assignment. The Court explained that “[u]nlike a voidable transaction, a void one cannot be ratified or validated by the parties to it even if they so desire.” As such, a foreclosing party acting pursuant to a void assignment “has acted without legal authority by pursuing a trustee’s sale, and such an unauthorized sale constitutes a wrongful foreclosure.”

The Supreme Court also rejected the defendants’ arguments that a borrower who is in default on his or her loan suffers no prejudice from foreclosure by an unauthorized party, since, as the defendants argued, the actual holder of the beneficial interest on the deed of trust could equally well have foreclosed on the property: “The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security.” Accordingly, a “home loan borrower has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void, depriving the foreclosing party of any legitimate authority to order a trustee’s sale.”

Although Yvanova finally resolves the issue of whether a borrower can challenge alleged defects in the securitization of a loan for purposes of sufficiently pleading a claim for wrongful foreclosure, the Supreme Court was adamant that its “ruling in this case is a narrow one”:

We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party’s right to proceed. Nor do we hold or suggest that plaintiff in this case has alleged facts showing the assignment is void or that, to the extent she has, she will be able to prove those facts. Nor, finally, in rejecting defendants’ arguments on standing do we address any of the substantive elements of the wrongful foreclosure tort or the factual showing necessary to meet those elements.

The Supreme Court remanded the matter to allow the Court of Appeal to reconsider the question of an amendment to plead wrongful foreclosure, including whether the plaintiff had alleged sufficient facts showing a void assignment. In the meantime, all prior holdings that borrowers lack standing to challenge an allegedly void assignment have been expressly disapproved of by the Supreme Court. (Citing Jenskins v. JPMorgan Chase Bank, N.A.; Siliga v. Mortgage Electronic Registration Systems, Inc.; Fontenot v. Wells Fargo Bank, N.A.; and Herrera v. Federal National Mortgage Ass’n.) Preemptive lawsuits to challenge foreclosure authority are still barred.

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February 18, 2016