FYI: Cal App Ct Soundly Rejects Borrower's Third Attempt to Challenge Foreclosure

Noting that “[t]here are no free houses,” the Court of Appeal of the State of California, Second Appellate District, recently held that a borrower’s wrongful foreclosure claims had been adjudicated in a prior bankruptcy action, and in a prior unlawful detainer action, and were therefore barred by the doctrine of res judicata.  In so ruling, the Court stated “"[s]omewhere along the line, litigation must cease."

A copy of this opinion is available at: http://www.courts.ca.gov/opinions/documents/B255958.PDF

The borrower originally signed a promissory note for $1.15 million in 2006, secured by a deed of trust on his residence.  The note specifically advised the borrower that the originating lender could transfer the note.  The originating lender then transferred the note to an asset securitization trust.  The deed of trust was also assigned to the trustee of the trust.

Thereafter, the borrower made payments for three and a half years.  The borrower defaulted in December, 2010, and a notice of default was recorded “based upon a $32,508.04 loan default.” 

The trustee foreclosed, and in an apparent attempt to stay the foreclosure, the borrower filed an emergency bankruptcy petition.  The borrower declared that his home was worth $630,000 and that he currently owed $1,182,166.69.  The servicer filed a proof of claim based upon the note and deed of trust, and also filed a motion for relief from the automatic stay.  Ultimately, the bankruptcy court granted relief from the stay and further found that the deed of trust was valid, finding a “chain of control and title of the note[.]”

The trustee then purchased the property at the foreclosure sale and brought an unlawful detainer action to evict the borrower.  The borrower defended the action claiming that deed of trust was invalid and claimed that the trustee did not perfect title in the property. 

This claim was rejected, and the trial court entered summary judgment in favor of the trustee, which was affirmed on appeal.  The trustee then sold the property to a subsequent buyer, recording the grant deed in October of 2013.

The borrower then filed the action that was the subject of this appeal.  The borrower alleged causes of action for wrongful foreclosure, declaratory relief, violation of the Unfair Practices Act (“UPA”), and to quiet title.  The defendants to that suit, including the trustee, demurred.  In response, the trial court sustained the demurrers, finding that the wrongful foreclosure cause of action was subject to a res judicata/collateral estoppel bar and that the causes of action for quiet title, declaratory relief, and violation of the [UPA] were derivative of the wrongful foreclosure claim.

As you may recall, “res judicata precludes piecemeal litigation by splitting a single cause of action or relitigating the same primary right.”  Mycogen Corp. v. Monsanto Co., 28 Cal. 4th 888 (2002).  Under the doctrine, “all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date.”  Id.

On appeal, the appellate court first opined that the wrongful foreclosure claim had been adjudicated in two prior actions – the bankruptcy and the unlawful detainer action.  The unlawful detainer judgment – in which the court found that the foreclosure sale was proper and that title was perfected – created a res judicata bar “that extends to [the trustee], the subsequent purchaser … and the defendants who prepared and recorded the foreclosure documents and conducted the foreclosure sale.”  The appellate court also held that the trial court did not err in finding the borrower’s remaining claims subject to the same res judicata bar.

Second, the appellate court addressed the trial court’s alternative ground for sustaining the demurrers.  The appellate court rejected the borrower’s assertion that the note and deed of trust were void, finding that the evidence attached to the borrower’s own complaint indicated that the originating lender was an active California corporation when the loan originated.

Furthermore, the appellate court rejected the borrower’s argument that later assignments, including the assignment to the trustee, were void because the assignments were made after the asset securitization trust closed. 

Importantly, the appellate court opined that Glaski v. Bank of America, N.A., 218 Cal. App. 4th 1020 (2013) was both inconsistent with California foreclosure jurisprudence and did not apply as that case did not involve a similar res judicata bar.

In conclusion, the appellate court noted that there is “one constant theme in most, if not all ‘wrongful foreclosure’ cases: failure to pay on the note secured by a deed of trust,” and that this case was no exception.  “[The borrower] lost in the bankruptcy court.  He lost in United States District Court. He lost in the unlawful detainer court.  He lost in the Appellate Department of Superior Court.  He lost in Superior Court,” and “[h]e now loses here.” 

Accordingly, the appellate court affirmed the trial court’s order sustaining the trial court’s dismissal.

Eric Tsai
McGinnis Wutscher LLP 
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@mwbllp.com

Admitted to practice law in California, Nevada and Oregon

 

FYI: 9th Cir Confirms Fannie Mae and Freddie Mac Exempt from State and Local Excise Taxes on Transfers of Real Property

The U.S. Court of Appeals for the Ninth Circuit recently held that the statutory charters of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) exempts them from paying state and local excise taxes on the transfer of real property. 

In so ruling, the Ninth Circuit joins the First, Third, Fourth, Sixth, Seventh, Eighth, and D.C. Circuits, in finding that the statutory exemptions granted to Fannie Mae and Freddie Mac did not exceed Congress’s authority under the Commerce Clause.

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2014/12/30/13-35655.pdf

This appeal is part of a wave of similar lawsuits brought throughout the country against Fannie Mae, Freddie Mac, and their conservator the Federal Housing Finance Agency (“FHFA”).  The city here (“City”) sued Fannie Mae and Freddie Mac, arguing that they are required to pay state and local real property transfer taxes because such taxes fall under their statutory carve-out provision for taxes on real property. 

As you may recall, Fannie Mae and Freddie Mac “shall be exempt from all [state and local] taxation, . . . except that any real property of [Fannie Mae and Freddie Mac] shall be subject to State [and] local taxation  to the same extent . . . as other real property is taxed”.  See 12 U.S.C. §§ 1452(e) and 1723a(c)(2).

The Ninth Circuit rejected the City’s arguments, noting that the United States Supreme Court recognizes “the distinction between an excise tax, which is levied upon the use or transfer of property even though it might be measured by the property’s value, and a tax levied upon the property itself.”  United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988).  According to the Ninth Circuit, this distinction was apparent from state laws at issue. 

Under Washington law, taxes on real property are located in the “Property Taxes” title of Wash. Rev. Code title 84, and taxes on the conveyance of real property are located in the “Excise Taxes” title of Wash. Rev. Code title 82.  The transfer taxes at issue in this case were of the latter type under Wash. Rev. Code 82.45.060 (imposing “an excise tax upon each sale of real property”), and Wash. Rev. Code 82.46.010(2)(a) (authorizing cities and counties to impose a similar “excise tax on each sale of real property”). 

Because of the clear distinction in the statutory scheme, the Ninth Circuit concluded that Fannie Mae and Freddie Mac are statutorily except from paying transfer taxes on real property in the State of Washington.

The City also argued that the statutory exemptions to Fannie Mae and Freddie Mac exceeded Congress’s authority under the Commerce Clause, because state and local taxation is not commerce, but rather “the State exercising its sovereign duties” in taxing local intrastate activity.

As you may recall, the United States Supreme Court has identified three broad categories of activity that Congress may regulate under the Commerce Clause: (1) channels of interstate commerce; (2) instrumentalities of interstate commerce, or persons or things in interstate commerce; and (3) activities that substantially affect interstate commerce.  See, e.g., United States v. Lopez, 514 U.S. 549, 558-59 (1995).

Moreover, Congress is authorized to enact laws “necessary and proper for carrying into Execution” the powers “vested by th[e] Constitute in the Government of the United States.”  U.S. Const. art. I, § 8, cl. 18.  “[T]he Necessary and Proper Clause makes clear that the Constitution’s grants of specific federal legislating authority are accompanied by broad power to enact laws that are ‘convenient, or useful’ or ‘conducive’ to the authority’s ‘beneficial exercise.’”  United States v. Comstock, 560 U.S. 126, 133-34 (2010).  The court must therefore “look to see whether the statute constitutes a means that is rationally related to the implementation of a constitutionally enumerated power.”  Id. at 134.

In rejecting the City’s argument, the Ninth Circuit reasoned that Congress is empowered under the Commerce Clause to regulate the national secondary mortgage market.  Chartering Fannie Mae and Freddie Mac was a means rationally related to Congress’s regulation of the secondary mortgage market – e.g., to establish secondary market facilities for residential mortgage, to provide stability in the secondary market for residential mortgages, and to promote access to mortgage credit throughout the nation. 

If Congress had the power to create Fannie Mae and Freddie Mac, according to the Ninth Circuit, then it must have the power to protect their statutory mission by exempting them from state and local taxes.   In fact, the United States Supreme Court previously recognized that Congress is authorized to exempt another federally chartered corporation from state and local taxes.  See, e.g., Pittman v. Home Owners’ Loan Corp. of Washington, D.C., 308 U.S. 21, 33 (1939).  

The Ninth Circuit determined that the Congress could rationally have believed that states might be tempted to target Fannie Mae and Freddie Mac with large taxes, given the sheer volume of their mortgage portfolios and their statutory obligations to continue purchasing and guaranteeing mortgages throughout the country.  Moreover, Congress might rationally have believed that, without the exemptions, Fannie Mae and Freddie Mac would be exposed to inconsistent taxation, and their statutory mission to increase mortgage liquidity throughout the country would be undermined.

In short, the Ninth Circuit concluded that because Congress has power to regulate the secondary mortgage market under the Commerce Clause, it has power under the Necessary and Proper Clause to exempt them from state and local taxes.

Next, the Ninth Circuit rejected the City’s argument that the exemptions violated the Tenth Amendment because they are tantamount to congressional commandeering of state employees, and they violate general principles of federalism enshrined in the Tenth Amendment.

The Ninth Circuit disagreed.  The exemptions at issue did not impose any new affirmative obligation on municipalities.  Rather, they simply preclude state and local governments from enforcing preempted tax laws against Fannie Mae and Freddie Mac. 

Moreover, nothing in the text or structure of the Constitution categorically immunizes state taxation from federal preemption.  In fact, Congress’s dormant commerce authority precludes state taxation that improperly burdens interstate commerce, and the Constitution’s Supremacy Clause precludes state taxation of federal instrumentalities.

For all these reasons, the Ninth Circuit concluded that the exemptions neither commandeered state and local officials nor transgressed the general principles of federalism.

Accordingly, the Ninth Circuit affirmed the district court’s judgment.

Eric Tsai
McGinnis Wutscher LLP 
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@mwbllp.com

Admitted to practice law in California, Nevada and Oregon