The California Court of Appeal, Fourth District, recently held that where a loan servicer has been assigned the right to foreclose, California Code of Civil Procedure Sec. 725a does not prohibit the servicer from filing a judicial foreclosure action in its own name, and rejected the borrower's argument of lack of compliance with the underlying Pooling and Servicing Agreement as irrelevant to the borrower's default.
A borrower obtained a mortgage loan secured by a deed of trust, as well as a home equity line of credit. The originator of those loans entered into a Pooling and Servicing agreement ("PSA"), which provided for the conveyance of certain mortgage loans into a securitized trust, including the borrower's. The PSA also appointed a master servicer ("servicer") to service the loans. Accordingly, the originator transferred its interest to the bank acting as trustee of the trust.
The borrower defaulted on both loans, and nonjudicial foreclosure proceedings were instituted and suspended several times. The borrower then filed a complaint against the servicer, alleging irregularities in the nonjudicial foreclosure process, among other allegations.
The servicer filed a cross-complaint for judicial foreclosure, and moved for summary judgment. The lower court was not satisfied that junior lienholders had received notice of the suit, and accordingly requested that the servicer re-file its motion for summary judgment with that defect corrected. The servicer did so, and the lower court granted the motion for summary judgment. The borrower appealed.
As you may recall, California Code of Civil Procedure Sec. 725a ("Sec. 725a") provides that in a judicial foreclosure, "the beneficiary or trustee named in a deed of trust or mortgagee named in a mortgage...shall have the right to bring suit to foreclosure the same..."
On appeal, the borrower argued that Sec. 725a allows only beneficiaries, trustees and mortgagees to initiate judicial foreclosure actions. The borrower noted that the statute applicable to nonjudicial foreclosures specifically provides that agents of the trustee, mortgagee or beneficiary may institute foreclosure proceedings. Cal. Civil Code Sec. 2924(a)(1). Therefore, the borrower argued that if the Legislature had intended to allow agents, such as servicers, to initiate judicial foreclosure proceedings, it would have included similar language in Sec. 725a.
The Court disagreed, finding that Sec. 725a "does not explicitly prevent a beneficiary or trustee from contracting its right [to file a judicial foreclosure] to a loan servicer." Further, the Court observed that because nonjudicial foreclosures proceed without court involvement, "the Legislature saw fit to explicitly set out who could initiate a nonjudicial foreclosure....The Legislature did not have the same concerns in drafting section 725a."
Having determined that Sec. 725a does not prohibit a loan servicer from initiating a judicial foreclosure, the Court next analyzed whether the servicer was properly assigned the right to bring the foreclosure action by contract. The borrower raised several allegations in connection with this issue, including among others that the servicer cannot foreclosure because the lender supposedly did not transfer its interest to the servicer, and that the servicer "is not in compliance with the PSA."
The Court found neither allegation persuasive. Regarding the first issue, the Court found that the servicer "has been assigned a cause of action (judicial foreclosure) that arose out of a legal obligation (the promissory note and deed of trust). Whether the promissory note and/or the deed of trust were assigned to [the servicer] is therefore immaterial." The Court likewise found no merit in the borrower's PSA argument, noting that whether the servicer might have breached the PSA has no bearing on the borrower's failure to repay his loan.
Finally, the borrower challenged the lower court's decision on the basis that the junior lienholder was not joined as a co-defendant in the action. The Court found that the borrower forfeited the argument by raising it only on appeal, and in any event held that it was without merit: "A junior lienholder's interest in a property that is subject to a judicial foreclosure on a senior lien is not affected if the junior lienholder is not included as a defendant in the judicial foreclosure action."
The Court did find for the borrower on one issue: it held that the foreclosure decree's award of rent to the servicer was premature, "because the identity of the purchaser was not known at the time."
Accordingly, the Court remanded the matter to the lower court with orders to strike the rent award from the foreclosure decree, but otherwise affirmed the lower court's judgment.
Eric Tsai
McGinnis Wutscher Beiramee LLP
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