Thursday, February 12, 2015

FYI: Cal App Ct Rejects Challenges to Notice of Default, Based on Timing of Substitution of Trustee and Lack of Affidavit of Mailing

The California Court of Appeal, First District, recently affirmed a trial court’s dismissal of allegations that a notice of default was void.  The Appellate Court rejected the borrowers’ argument that a notice of default is void when executed by a successor trustee prior to that successor trustee having been substituted in as trustee under the deed of trust. 

The Appellate Court also rejected the borrowers’ contention that the recorded substitution of trustee was void because it did not include an affidavit of mailing showing it was mailed to the trustee of record or other persons, if any, who may have requested notice of default and notice of sale, explaining that parties to a deed of trust may agree to a form of substitution of trustee other than that provided in Calif. Civil Code section 2934a. 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/A139055.PDF

As you may recall, in order to initiate the foreclosure process in California, “[t]he trustee, mortgagee, or beneficiary, or any of their authorized agents” must first record a notice of default. See Calif. Civ. Code § 2924(a)(1).  The notice of default must identify the deed of trust “by stating the name or names of the trustor or trustors” and provide a “statement that a breach of the obligation for which the mortgage or transfer in trust is security has occurred” and a “statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy [the] obligation . . . that is in default.” Calif. Civil Code § 2924(a)(1)(A)-(C).)

In 2005, the borrowers obtained a loan for $396,200 to purchase a home.  The borrowers executed and recorded a deed of trust in favor of the lender as the beneficiary.  The loan and deed of trust were subsequently assigned to another entity (“Bank”).

On September 7, 2010, the successor trustee executed and recorded a notice of default against the property.  However, the Bank did not execute a substitution of trustee appointing the successor trustee as the trustee under the deed of trust until September 24, 2010.  And, the substitution of trustee was not recorded until December 9, 2010, the same day that the successor trustee recorded a notice of sale.

On June 6, 2011, the property was sold to the Bank for an amount far less than what was then owed by the borrowers on the loan.

The borrowers filed a complaint to set aside the foreclosure sale.  The borrowers attempted to assert claims for wrongful foreclosure, intentional and negligent fraud, breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress, negligence, unfair business practices, cancellation of deed upon sale, quiet title, declaratory relief, wrongful eviction, willful lockout, and injunctive relief. 

The borrowers argued that the foreclosure sale was void because the successor trustee had not been substituted in as trustee at the time it recorded the notice of default and therefore it lacked the authority to initiate the foreclosure proceedings. 

However, the borrowers did not allege that they had tendered, or were ready, willing, and able to tender, the amount owed on the loan at any time between the time the notice of default was recorded in early September and the foreclosure and sale that took place nine months later on June 6, 2011.

The trial court sustained the Bank’s demurrers to the complaint, reasoning that the borrowers failed to state a claim for wrongful foreclosure based on the timing of the successor trustee’s substitution as trustee “because a notice of default can be recorded before a notice of substitution of trustee.”  The trial court further held that where “the alleged wrongful foreclosure is the result of a defect in the required notice, the transaction is voidable, not void” and that in any further amendment to the complaint the borrowers would have to “allege sufficient facts of tender.”

As you may recall, the “traditional method” to challenge a nonjudicial foreclosure sale in California “is a suit in equity . . . to have the sale set aside and to have the title restored.”  Lona v. Citibank, N.A., 202 Cal.App.4th 89, 103 (2011).  Generally, the party contesting the foreclosure must prove:  “(1) the trustee . . . caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a . . . deed of trust; (2) the party attacking the sale suffered prejudice or harm; and (3) the trustor . . . tenders the amount of the secured indebtedness or was excused from tendering.”  West v. JPMorgan Chase Bank, N.A., 214 Cal.App.4th 780, 800 (2013).

However, trustors attacking a void deed are “not required to meet any of the burdens imposed when, as a matter of equity, a party wishes to set aside a voidable deed.”  Dimock v. Emerald Properties, 81 Cal.App.4th 868, 878 (2000).  More specifically, the “distinction between a ‘void’ or ‘voidable’ nonjudicial foreclosure sale is simply whether the borrower, who is in default, must allege and prove a prerequisite tender of the amount due under the deed of trust and otherwise to show prejudice resulting from the defect, omission, or failure, before the sale will be set aside.  In deciding whether to require a showing of tender and prejudice, courts appear to focus on the nature and severity of the defect, omission or failure and its practical effect on the foreclosure process.”

The Appellate Court affirmed the trial court’s order of dismissal, and rejected the borrowers’ argument that the sale was void because the successor trustee did not yet hold the title of “trustee” as claimed on the notice of default, and was only formally named as trustee several weeks later, when the Bank executed a substitution of trustee naming the successor trustee as the trustee.

The Appellate Court first noted that a substitution of attorney may occur after a notice of default is recorded, but before a notice of sale is recorded.  See Calif. Civil Code § 2934a(c).  The Court found that the Bank complied with this procedure as authorized by the Legislature.  Accordingly, the Appellate Court determined that the ensuing trustee’s sale not either voidable or void.

The Appellate Court also determined that the successor trustee had the authority to execute the notice of default as the Banks’s agent.  The Court noted that Section 2924 authorizes a notice of default to be recorded by “the trustee, mortgagee, or beneficiary, or any of their authorized agents.”  The Court noted that nothing in the borrowers’ pleadings or judicially noticed documents suggests that the successor trustee was not authorized to act for the Bank, the beneficiary under the deed of trust.  See Calif. Civil Code § 2924(a)(1).

The Court held that the successor trustee’s substitution as trustee, which was executed within weeks of the successor trustee’s issuing the notice of default, “unmistakably evidences” an intent by the Bank to ratify the successor trustee’s authority to initiate the foreclosure proceedings.

Therefore, in order to avoid the effect of this ratification, the borrowers, as third parties, would be required to prove they were prejudiced by the successor trustee’s unauthorized actions. See Calif. Civil Code § 2313; Archdale v. American Internat. Specialty Lines Ins. Co., 154 Cal.App.4th 449, 480 (2007).  The Appellate Court noted that the borrowers had not alleged they suffered any prejudice.

The Appellate Court also rejected the borrowers’ argument that the recorded substitution of trustee, which is a single-page document, did not include an affidavit of mailing showing it was mailed to the trustee of record or other persons, if any, who may have requested notice of default and notice of sale under section 2924b. 

According to the borrowers, this failure to include an affidavit of mailing supposedly constituted a clear violation of section 2934a, subdivision (c), which supposedly invalidates the substitution of trustee.

In rejecting this argument, the Appellate Court explained that parties to a deed of trust may agree to a form of substitution of trustee other than that provided in Calif. Civil Code section 2934a.  See Jones v. First American Title Ins. Co., 107 Cal.App.4th 381, 390 (2003).  The Court then noted that the deed of trust entered into by the parties gave the Bank the option of substituting a successor trustee without the need to confirm that substitution with an affidavit:   “Lender, at its option, may from time to time appoint a successor trustee to any Trustee appointed hereunder by an instrument executed and acknowledged by Lender and recorded in the office of the Recorder of the county in which the Property is located.”

Finally, the Appellate Court held that the foreclosure sale was, at worst, voidable, not void.  The Court noted that the primary purpose of a notice of default is to provide notice of the amount in arrears and an opportunity to cure the default.  Therefore, in order for a defect in the notice of default to be material, it must cause prejudice.  Knapp v. Doherty, 23 Cal.App.4th 76, 99 (2004).

Accordingly, the Appellate Court affirmed the order of dismissal because the borrowers had not alleged that they were misled or prejudiced by the notice of default or that the information stated in the notice of default was erroneous.



Eric Tsai
McGinnis Wutscher LLP
 
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Email: etsai@mwbllp.com

Admitted to practice law in California, Nevada and Oregon
 

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