Tuesday, June 3, 2014

FYI: Cal App Confirms Borrower Cannot Challenge PSA, No Standing to Challenge Securitization, Declines to Follow Glaski v. Bank of America

The California Appeals Court, Second District, recently affirmed a trial court’s dismissal of a borrower’s complaint to quiet title because the borrower failed to allege either tender to cure her default on the promissory note, or fraud at the time the deed of trust was entered into.

Specifically, the Appellate Court held that a party cannot challenge a pooling and servicing agreement to which he or she is not a party.  The Court further held that a borrower has no standing to allege that a mortgage and a deed of trust were improperly securitized and assigned.

The Appellate Court also declined to follow Glaski v. Bank of America, (2013) 218 Cal. App. 4th 1079 (“Glaski”), which held that an “obligor may resist foreclosure on any ground that renders an assignment in the chain of title void.”

A copy of the opinion is available at:http://www.courts.ca.gov/opinions/documents/B247188.PDF

In 2006, plaintiff borrower (“Plaintiff”) executed a promissory note with a mortgage lender (“Lender”) in the amount of $483,000.00 secured by a deed of trust on real property located in Woodland Hills, California.  The deed of trust entitled the Lender to substitute the trustee without notice to the borrower, assign the note to third parties without notice, and sell the property in case of default.

In 2007, the Lender went into bankruptcy and subsequently assigned the deed of trust via a pooling and servicing agreement to defendant bank (“Defendant”).  In August of 2008, Defendant served Plaintiff with a notice of default in the amount of $14,711.79. In January 2012, Defendant served Plaintiff with a second notice of default claiming she owed $63,960.80.

In August 2012, there was a notice of trustee sale, alleging Plaintiff had an unpaid loan balance of $537,934.03. On September 14, 2012 the property was sold. In February 2013, Defendant transferred the deed of trust to present trustee (the “Trustee”).

Plaintiff filed suit on May 14, 2102.  After two successful motions to dismiss, Plaintiff alleged a single cause of action for “Quiet Title.”  The substantive allegations of Plaintiff’s complaint were: (1) the assignment of the deed of trust from the Lender to Defendant was void; (2) the 2103 substitution of the Trustee was void; and (3) the Trustee’s sale of the property was unlawful and invalid.

Defendant demurred to Plaintiff’s Second amended complaint on the ground that Plaintiff failed to state a cause of action to quiet title because she failed to allege tender to cure her default on the promissory note.  Defendants further argued that Plaintiff’s allegations were irrelevant without an allegation of tender, or fraud at the time the deed was entered into. Plaintiff also represented that she had not discharged the debt or tendered the amount owed.  As a result, the trial court dismissed Plaintiff’s complaint without leave to amend and Plaintiff appealed.

On appeal, Plaintiff claimed the transfer from the Lender to Defendant was void, and therefore Defendant did not have proper title and standing to foreclose.  Plaintiff proceeded to argue she should be given leave to amend for a third time based upon recent changes in the law. 

Defendant argued that leave to amend would be futile as Plaintiff could not state a cause of action because she did not have standing to challenge Defendant’s claim to title. Plaintiff argued the transfer of the deed of trust and promissory note to Defendant and the subsequent securitization were improper.

The Appellate Court agreed with Defendant stating that “because a promissory note is a negotiable instrument, a borrower must anticipate it can and might be transferred to another creditor.” Herrera v. Federal National Mortgage Assn., (2012) 205 Cal. App. 4th 149. The assignment of the promissory note does not change Plaintiff’s obligations under the promissory note. An impropriety in the transfer of a promissory note only affects the parties to the transaction, not the borrower. Thus, a borrower “lacks standing to enforce any agreements relating to such transactions.” Jenkins v. J.P. Morgan Chase Bank, N.A., (2013) 216 Cal. App. 4th 497, 515 (“Jenkins”).

The Appellate Court further explained that “an unrelated third party to the alleged securitization, and any other subsequent transfers of the beneficial interest under the promissory note lacks standing to enforce any agreements. . . relating to such transactions.” Jenkins v. J.P. Morgan Chase Bank, N.A., (2013) 216 Cal. App. 4th 497, 515. 

The Appellate Court further held that Plaintiff “would not be the victim of such invalid transfers because her obligations under the note remained unchanged.” Plaintiff cannot “assume the theoretical claims of hypothetical transferors and transferees to assert causes of action from declaratory relief or wrongful foreclosure.”

Plaintiff argued that Glaski v. Bank of America, (2013) 218 Cal. App. 4th 1079 (“Glaski”), supported the assertion that a borrower may challenge a non-judicial foreclosure based on allegations that one or more transfers in the chain of title of a trust deed is void. In Glaski, the appellate court held that an “obligor may resist foreclosure on any ground that renders an assignment in the chain of title void.”

Although the Appellate Court agreed that Glaski supported Plaintiff’s position, not a single California court has chosen to follow Glaski’s holding.  Thus, the Appellate Court declined to follow Glaski and agreed with the reasoning of Jenkins.

Thus, the Appellate Court held Plaintiff had no standing to challenge Defendant’s pooling and servicing agreement, and thus any cause of action for wrongful foreclosure failed as a matter of law. The Court affirmed the trial court’s dismissal of Plaintiff’s second amended complaint.



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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