In a case limited to nonjudicial foreclosures, the Supreme Court of California recently held that a borrower may maintain an action for wrongful foreclosure based on an allegedly void assignment.
More specifically, the Court held that, "because in a nonjudicial foreclosure only the original beneficiary of a deed of trust or its assignee or agent may direct the trustee to sell the property, an allegation that the assignment was void, and not merely voidable at the behest of the parties to the assignment, will support an action for wrongful foreclosure."
The Court clarified that: "[w]e hold only that a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment. We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party's right to proceed."
The Court also declined to rule on whether the borrower could prove that the assignment was void instead of voidable, or otherwise satisfy the elements of a wrongful foreclosure claim.
In 2006, the plaintiff borrower executed a deed of trust on a residential property. The lender filed for bankruptcy in 2007 and was liquidated in 2008.
The servicer as attorney in fact for the lender executed an assignment of the deed of trust to an asset securitization trust. The assignment was dated December 19, 2011, after the lender's dissolution, and it was recorded eleven days later. The closing date of the asset securitization trust – i.e., the date by which the investment trust needed to receive the trust deed -- was January 27, 2007.
On February 28, 2012, a different entity was substituted as trustee on the deed of trust. On August 20, 2012, the new trustee recorded this substitution as well as a notice of trustee's sale dated August 16, 2012.
On September 14, 2012, the plaintiff borrower's property was sold at public auction. The sale was identified by the deed upon sale dated December 24, 2012.
The borrower filed suit for quiet title against various parties, alleging that the assignment from the lender to the investment trust was void because: (1) the lender's assets were transferred by the bankruptcy trustee in 2008, and the lender therefore had no authority to assign the deed of trust; and (2) the investment trust did not receive the assignment until after its closing date of January 27, 2007.
The defendants demurred, and the trial sustained the demurrer, finding that the borrower could not state a claim for quiet title.
The Court of Appeal affirmed the trial court's judgment. The appellate court held that the borrower's claim was fatally flawed because she failed to allege that she tendered payment on the debt. The appellate court then considered whether the borrower could amend her complaint to plead wrongful disclosure. After seeking and receiving briefing on the issue, the appellate court held that leave to amend was not warranted because, as an unrelated third party to the assignment, the borrower had no standing to enforce the terms of the securitization agreements allegedly violated.
The Supreme Court of California granted review and limited its analysis to whether a borrower has standing to pursue a claim for wrongful foreclosure by challenging the assignment of the deed of trust and arguing that defects on the assignment make it void.
The Supreme Court began its analysis by explaining that California designed its nonjudicial foreclosure system to provide mortgagees with an expedient remedy against the defaulted borrower, while also protecting the borrower from wrongful loss of the property and ensuring that properly conducted sales of the property are final and conclusive as to a bona fide purchaser.
The Court noted that a deed of trust typically has three parties: the borrower, the lender, and the trustee; and the trustee possesses the power of sale. However, the trustee of a deed of trust is not a trustee in the sense that it has fiduciary obligations, but rather acts as an agent for the borrower and the lender.
Under California law, the trustee initiates the nonjudicial foreclosure process. Cal. Civ. Code, § 2924, subd. (a)(1). But the trustee may only take these steps at the direction of the holder of the note and beneficiary interest under the deed of trust. See Santens v. Los Angeles Finance Co., 91 Cal.App.2d 197, 202 (1949).
Thus, while the Court agreed with the defendants that generally a borrower has no ability to raise an objection to an assignment of a note or deed of trust, if the borrower defaults on the loan, only the current beneficiary is authorized to instruct the trustee to initiate the nonjudicial foreclosure process.
A lender or trustee under a deed of trust may be liable to the borrower for wrongful foreclosure if it conducts an illegal, fraudulent or willfully oppressive sale of the property. This conduct includes foreclosure initiated by a trustee that has no authority to do so. Ohlendorf v. American Home Mortgage Servicing, 279 F.R.D. 575, 582-583 (E.D. Cal. 2010).
The borrower alleged such conduct in her complaint. This, the only question for the Court to decide was whether the borrower "may challenge the authority of one who claims [the authority to foreclose] by assignment." The Court answered that question in the affirmative.
The California Supreme Court held that a borrower has standing to bring a claim for wrongful foreclosure if it can show that the assignment is void instead of merely voidable.
When an assignment is voidable, the parties to the assignment have the power to ratify or avoid the transaction. In that situation, a borrower challenging the foreclosure could be asserting an interest belonging to the parties to the assignment instead of herself.
However, the Court found that when the borrower alleges that the assignment is void, the concern for asserting the interests of other parties is misplaced. The borrower is not asserting the rights of one of the contracting parties but rather asserting her own right not to have her home illegally foreclosed upon.
The California Supreme Court noted that underpinning the distinction between void and voidable transactions is the fact that, for void transactions, the parties cannot ratify or validate the transaction even if they so desire. Thus, standing is not lacking in those cases because the borrower has an independent interest and is not attempting to settle the rights of third persons who are not parties.
The Court recognized the defendants' argument that a defaulted borrower suffers no prejudice from foreclosure because the actual holder of the beneficial interest on the deed of trust could have also foreclosed on the property. But the Court declined to delve substantively into the claim for wrongful foreclosure, asserting that it was "concerned only with prejudice in the sense of an injury sufficiently concrete and personal to provide standing, not with prejudice as a possible element of the wrongful foreclosure tort."
Moreover, the Court disagreed with the defendants' contention that the borrower has no cognizable interest in the identity of the party enforcing her debt. The Court noted that although the borrower may not be able to object to an assignment, she is obligated to pay the debt only to the party "that has actually been assigned the debt." Contractually, it is not a "procedural nicety" to insist that the foreclosing party have the actual authority to foreclose.
According to the California Supreme Court, the logic of defendants' argument implied that anyone could foreclose upon a defaulted borrower's property. But, the Court noted, banks are not private attorneys general or bounty hunters, and are only permitted to foreclose upon those properties for which they are entitled to foreclose as beneficiaries of the deed of trust.
In embracing its limited decision that a borrower has standing to sue for wrongful foreclosure based upon a void assignment of the deed of trust, the Court pointed out that various other states around the nation had ruled similarly on the issue. The Court further asserted that federal courts ruling differently in applying California law did not alter its conclusion.
Accordingly, the Court reversed the Court of Appeal and remanded the case back to the trial court for it to reconsider whether the borrower could amend its complaint to plead wrongful foreclosure. In doing so, the Court expressed no opinion as to whether the borrower's complaint alleged facts showing that the assignment of the deed of trust was void instead of voidable, or whether the borrower could satisfy the elements for the claim of wrongful foreclosure.
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