Business Solutions Law Alert: Preemptive Lawsuits Challenging Foreclosure Authority Still Not Allowed Despite Recent Glaski Decision

On August 27, 2013, the California Court of Appeal affirmed a trial court’s decision to sustain the nominee-defendant’s demurrer without leave to amend, where the plaintiff-borrowers argued that the nominee lacked the ability to foreclose on the property or assign the deed of trust. (Siliga v. Mortgage Electronic Registration Systems, Inc., Case No. B240531.) The court held that the plaintiffs could not challenge the authority of the foreclosing party “absent a ‘specific factual basis’” for the claim that the foreclosure was not initiated by the correct person.

The Siligas executed a deed of trust for their primary residence, securing a promissory note in favor of Accredited Home Lenders (the “Lender”). The deed of trust identified Mortgage Electronic Registration Systems, Inc. (“MERS”) as the beneficiary and provided that “MERS has the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property, and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.”

Quality Loan Services Company (“QLS”) recorded a notice of default and election to sell under deed of trust upon MERS’s request. MERS then assigned the deed of trust to Deutsche Bank.

To stop the pending foreclosure, the Siligas filed a complaint against Deutsche, MERS, and QLS. A First Amended Complaint was filed in which the Siligas alleged, among other things, that (a) MERS had no authority to assign the deed of trust and the note to Deutsche and (b) Deutsche had no authority to commence a nonjudicial foreclosure because it was never validly assigned and because Deutsche did not possess the promissory note. Deutsche, MERS, and QLS demurred on the grounds that, among other things, the Siligas’ attacks on the defendants’ authority to act in connection with the foreclosure were groundless. The demurrer was sustained without leave to amend, and the Siligas appealed.

Relying primarily on Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, and Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, the Court of Appeal refused to allow the Siligas to delay the nonjudicial foreclosure process by pursuing preemptive judicial actions that they deemed challenged the authority of a foreclosing “beneficiary” or beneficiary’s “agent.” The court defined an action as “preemptive” when the plaintiff alleges no “specific factual [basis]” for the claim and instead “create[s] an additional requirement for the foreclosing party, apart from the comprehensive statutory requirements, by requiring the foreclosing party to demonstrate in court that it is authorized to initiate a foreclosure.” As a result, the trial court properly sustained the defendants’ demurrer.

As for the assignment of the deed of trust, the Court of Appeal noted that the only way to determine whether MERS had authority to assign the note to Deutsche was to look at the agreement between MERS and the Lender. Requiring MERS to “prove in court its authority to initiate a foreclosure,” however, would violate the rulings set forth in Jenkins and Gomes. As such, this claim failed and was subject to demur.

The Siliga decision from the Second District comes on the heels of the recent Fifth District opinion, Glaski v. Bank of America, Case No. F064556 (click here for August 21 Glaski alert). In Glaski, the Fifth District held that the improper transfer of a loan into a securitized trust was a valid theory for a wrongful foreclosure claim. Although the Siliga court did not address Glaski, the two cases can be reconciled. In Glaski, the plaintiff alleged specific facts about how his loan was not transferred into a securitized trust until after the closing date. Since the issue on appeal was whether the trial court erred by sustaining the defendants’ demurrer, the Glaski court was not determining whether the foreclosing party had authority to initiate a foreclosure, but rather whether the plaintiff had alleged sufficient facts to support his theory that the loan was untimely transferred into the trust. Conversely, in Siliga, the plaintiff was bringing a preemptive lawsuit, asking the court to determine whether the foreclosing party had authority to foreclose before the foreclosure even took place.

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September 11, 2013