Wednesday, April 23, 2014

FYI: Cal App Confirms No Requirement to Record Assignment to Note Holder in Foreclosure of Deed of Trust

Friday, April 27, 2012

The California Court of Appeal, First District, recently held that California's statutory requirement to record anassignment to the note holder prior to foreclosure applied only to mortgages and not to deeds of trust, and that a non-judicial foreclosure sale on a deed of trust was valid without a pre-sale recording reflecting the assignment to the note holder.  
A copy of the opinion is available at: 
As you may recall, Cal. Civ. Code § 2932.5 provides as follows: "Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded."
Plaintiff Borrower defaulted on a residential mortgage loan secured by a deed of trust.  After the borrower's default, a substitute trustee ("Trustee") sold the property at public auction to the servicer ("Purchaser").  Shortly after the sale, a Trustee's Deed Upon Sale was recorded in favor of the Purchaser. 
The Borrower later filed a complaint against the Trustee and the Purchaser, attempting to assert numerous causes of action, including unfair competition and unlawful business practices under California's Business and Professional Code.   The complaint alleged that the foreclosure was unlawful because there was no recordedassignment to the note holder prior to the foreclosure sale.  The Purchaser demurred, asserting that the Borrower had failed to state a claim because California's Civil Code Section 2932.5 did not require the recording of an assignment to the note holder when the note is secured by a deed of trust prior to foreclosure sale
After sustaining the demurrer and denying the Borrower's motion for reconsideration, the trial court entered judgment in favor of the Trustee and Purchaser. 
The Borrower appealed.  The Court of Appeal affirmed. 
Relying on "well settled" federal and California case law, the Court of Appeal ruled that Section 2932.5 applied only to mortgages and not to deeds of trust.  See Stockwell v. Barnum, 7 Cal. App. 413 (1908).  In so doing, the Court observed that Stockwell distinguished between a mortgage, which creates only a lender's lien on the real property owned by the mortgagor, and a deed of trust, which passes legal title to a trustee possessing the power of sale, regardless of the holder of the underlying note.

Based on various federal and state court opinions that blurred the distinction between mortgages and deeds of trust, the borrower unsuccessfully argued that the purpose of Section 2932.5 is to allow borrowers to identify the holder of their loans.  The Court of Appeal noted that, contrary to the Borrower's assertion, "Section 2932.5 requires the recorded assignment of a mortgage so that a prospective purchaser knows that the mortgagee has the authority to exercise the power of sale," and that "[t]his is not necessary when a deed of trust is involved, as the trustee conducts the sale and transfers title."

The Court further observed that applying Section 2932.5 to deeds of trust would effectively transfer the power of sale to the lender, contrary to the terms of the trust deed and the state statutory requirements for transferring the power of sale to a different trustee.
In confirming that Section 2932.5 applied only to mortgages, the Court concluded that because title transfers to the trustee under a deed of trustand thus enables the trustee to transfer marketable record title to a purchaser, there was no requirement to record an assignment to the note holder prior to the initiation of the non-judicial foreclosureof the deed of trust.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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