Monday, March 30, 2015

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
 
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Email: etsai@mwbllp.com

Admitted to practice law in California, Nevada and Oregon
 

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