Tuesday, November 11, 2014

FYI: Cal App Ct Confirms Borrower Cannot Pursue Foreclosure Standing Before Foreclosure Completed, Cannot Assert Violations of Pooling and Servicing Agreement

The California Court of Appeals, Second District, recently affirmed a lower court’s dismissal of a borrower’s complaint, that a borrower cannot pursue preemptive judicial action challenging the right, power, and authority of a foreclosing party to initiate and pursue foreclosure.  The Court further held that a borrower lacks standing to challenge any alleged violations of an investment trust’s pooling and servicing agreement. 

A copy of the opinion as available at: http://www.courts.ca.gov/opinions/documents/B254007.PDF

In July of 2007, the plaintiff borrower (“Borrower”) executed a first note for $516,000.00 (the “First Note”), which was secured by a deed of trust (the First Deed of Trust”) on real estate (the “Property”).  Borrower also executed a second note for $64,500.00 (the “Second Note”) secured by a deed of trust (the “Second Deed of Trust”) on the Subject Property.  Both trust deeds named Defendant Lender (“Lender”) as trustee, and MERS as the beneficiary acting as nominee for Trustee, its successors, and assigns. 

Over two years later, Borrower recorded two instruments that purported to “modify” the First and Second Deeds of Trust to “correctly reflect” an indebtedness of zero dollars.  These instruments further stated the First and Second Deeds of Trust “were modified to eliminate any further payments, and to reflect a status of ‘paid as agreed.’”  Thereafter, a trust, which Borrower created, recorded two documents called “full reconveyance,” allegedly reconveying the First and Second Deeds of Trust to Borrower and declaring them void at inception.  Borrower then deeded the property to his trust. 

Despite Borrower’s transfer activity, MERS assigned all beneficial interest under the First Deed of Trust to another financial institution (the “Assignee of the First Deed of Trust”).  The Assignee of the First Deed of Trust recorded a notice of default and served a notice of trustee’s sale in March of 2012.  The foreclosure had yet to occur. 

As to the Second Deed of Trust, MERS assigned it to a different financial institution (the “Assignee of the Second Deed of Trust”) in July of 2012.

In October of 2012, Borrower, in his capacity as trustee of his trust, filed a complaint against Lender alleging, among other things, that the loans securing the Subject Property were improperly securitized, resulting in Lender’s interest in the Subject Property being extinguished and discharged.  Borrower’s complaint also alleged that all debt had been satisfied and the securitization process was deficient because the transfer of the promissory notes to a securitized trust did not comply with the terms of the pooling and servicing agreement governing the securitized trust.

Borrower did not name the Assignees of the First or Second Deeds of Trust as defendants, and thus they filed a motion to intervene.  The trial court granted their motions. 

The Assignee defendants promptly demurred to Borrower’s complaint.  The demurrers were sustained and Borrower’s complaint was dismissed without leave to amend.  Borrower appealed the trial court’s ruling.

On appeal, Borrower only argued that he stated a valid cause of action to quiet title.   Specifically, Borrower claimed that the attempt to transfer the First Deed of Trust to the mortgage backed investment trust did not comply with the trust’s servicing and pooling agreement, and thus was void.

Moreover, Borrower proposed that he should be allowed to amend his complaint to make the following the allegations: (1) the investment trust was created under New York law; (2) the trust is subject to the requirements imposed by the Internal Revenue Code on real estate investment trusts; (3) New York law requires that all trust deeds be transferred to such an investment trust before the trust closes; (4) the transfer of the subject trust deed to the investment trust occurred after the trust closed in 2007; and (5) the attempted transfer to the investment trust was therefore void.

The Court rejected Borrower’s argument noting that the “argument that a defendant lacks standing to foreclose because of an improper securitization process has recently become particularly popular in regards to the wave of real estate defaults over the past decade.” 

The Court explained that Borrower’s exact argument was recently addressed in Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal. App. 4th 497, 511 (2013) (Jenkins).  In Jenkins, the plaintiff alleged that her loan was pooled with other home loans in a securitized investment trust in a way that violated the trust’s pooling and servicing agreement, and thus any security interest in her home was extinguished. 

The Jenkins’ Court rejected plaintiff’s argument stating that “California courts have refused to delay the non-judicial foreclosure process by allowing trustor-debtors to pursue preemptive judicial actions to challenge the right, power, and authority of a foreclosing ‘beneficiary’ or beneficiary’s ‘agent’ to initiate and pursue foreclosure.”  Id. at p. 511.  A preemptive action by a borrower “seeks to create ‘the additional requirement’ that the foreclosing entity must ‘demonstrate in court that it is authorized to initiate a foreclosure’ before the foreclosure can proceed, a process not contemplated by the non-judicial foreclosure statutes.”  Id. at 512-513, quoting Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1154 (2011). 

The Jenkins court distinguished a borrower’s preemptive action to delay a foreclosure from a factual situation involving misconduct during a non-judicial foreclosure sale, which could provide a basis for a post-foreclosure cause of action.

Additionally, the Jenkins court held the plaintiff did not have standing to challenge any alleged violations of the investment trust’s pooling and servicing agreement.  Id. at 514-515.  The Jenkins court explained the plaintiff was an unrelated third party to the securitization, and even if any transfers were invalid, the plaintiff would not be injured as she would still be obligated to make payments under the promissory note.  Id.  Rather, a party who could assert violations of the pooling and servicing agreement would be someone who believed it held a beneficial interest in the promissory note.  Id. 

Borrower argued that Jenkins was incorrectly decided, and instead, the Court should apply the holding of Glaski v. Bank of America, 218 Cal. App. 4th 1079 (2013) (“Glaski”).  In Glaski, the court held a plaintiff “could properly allege a valid cause of action for wrongful foreclosure by stating facts showing the defendant who invoked the power of sale was not the true beneficiary, and a plaintiff’s allegations detailing the faulty transfer to the trust met this pleading standard.”  Glaski, 218 Cal. App. 4th at 1094.

The Glaski court also held that a borrower has standing to contest a defective assignment to a real estate investment trust, and explicitly rejected the view that a borrower’s status as a nonparty or non-third party beneficiary to an assignment agreement prevents the borrower from challenging the transfer.  Id. at 1094-1095. The Glaski court justified its holding by explaining that “it protects the beneficiaries of the investment trust from the potential adverse tax consequence of the trust losing its status as a REMIC trust under the Internal Revenue Code.”  Id. at 1097. 

The Court rejected Borrower’s argument that Glaski applied to his claims for several reasons.  First, Glaski involved a claim for wrongful foreclosure, but Borrower asserted a cause of action for pre-foreclosure quiet title.  Second, Glaski did not address other case law which held that “preemptive action is not authorized by the non-judicial foreclosure statutes because it creates an additional requirement that a foreclosing entity first demonstrate in court that it is entitled to foreclose.”  Gomes at 192 Cal. App. 4th at 1154-1156. 

Second, if Borrower was allowed to assert a preemptive action, it “would result in the impermissible interjection of the courts into a non-judicial scheme enacted by the California Legislature,” which “‘would be inconsistent with the policy behind non-judicial foreclosure of providing a quick, inexpensive, and efficient remedy.’”  Jenkins, 216 Cal. App. 4th at 512-513.

Thirdly, the Court explained that Jenkins involved essentially the same allegations as Borrower’s proposed amended allegations—that the subject deed of trust was not assigned to the investment trust prior to its closing date.  Thus, and just as Jenkins decided, the Court held that Borrower’s allegations did “not give rise to a viable preemptive action that overrides California’s non-judicial foreclosure rules.”

The Court noted a number of other courts that have criticized Glaski, including Keshtgar v. U.S. Bank, N.A., 226 Cal. App. 4th 1201 (2014) (“Keshtgar”), which involved similar facts as Borrower alleged here.  The Keshtgar court, citing to Gomes and Jenkins, held there was “no basis under the non-judicial foreclosure scheme for the plaintiff to challenge the authority of the party initiating foreclosure.”  Keshtgar, 226 Cal. App. 4th, at 1205-1206. 

The Keshtgar court also distinguished Glaski, stating that Glaski involved a post-foreclosure action for damages and not an action to prevent a foreclosure.  Id. at 1206.  The Keshtgar court went even further and specifically rejected Glaski’s holding because “an assignment of a deed of trust and promissory note do not change the borrower’s obligations and therefore do not create prejudice.” Id. at 1207.

Despite acknowledging the amount of criticism of Glaski, the Court saw no reason to expressly determine whether Glaski was correctly decided because it has “no direct applicability to this pre-foreclosure action.”  Borrower did not dispute whether the deed of trust allowed for its assignment, nor did Borrower dispute that his loan was in default.  Thus, California non-judicial foreclosure statutes did not provide Borrower with any basis to challenge the entity that initiated the foreclosure process. 

Accordingly, the Court held that the lower court properly sustained the demurrer and affirmed the lower court’s judgment. 

Eric Tsai
McGinnis Wutscher Beiramee LLP
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