The California Court of Appeals, Fourth District, recently held that California's nonjudicial foreclosure scheme does not permit a preemptive judicial action to challenge the foreclosing party's authority initiate nonjudicial foreclosure proceedings.
The Court also rejected several other challenges to foreclosure proceedings, including alleged violations of California's Business and Professional Code and Penal Code, alleged breach of good faith and fair dealing, and alleged violations of the federal Real Estate Settlement and Procedures Act ("RESPA").
A copy of the opinion is available at http://www.courts.ca.gov/opinions/documents/G046121.PDF.
A borrower fell behind on her home loan payments, and unsuccessfully attempted to refinance the loan. The beneficiary of the related deed of trust (the "originator") collapsed financially, and was placed into receivership. The receiver transferred the originator's loan portfolio to a bank (the "bank").
The borrower continued to attempt to negotiate a reduction of her loan payments, but was not able to do so. A servicer recorded a notice of default, and shortly thereafter the bank recorded a substitution of trustee naming that servicer trustee. A foreclosure sale was scheduled but postponed.
The borrower then sued the originator, the bank and the servicer. After several amendments of her complaint, the borrower alleged the following causes of action: (1) declaratory relief on the issue of whether the defendants had authority to initiate nonjudicial foreclosure proceedings; (2) alleged violation of California Civil Code Sec. 2932.5; (3) unfair business practices in alleged violation of California's Business and Professional Code and Penal Code; (4) alleged breach of good faith and fair dealing; and (5) alleged violations of the federal Real Estate Settlement and Procedures Act ("RESPA").
The bank and servicer filed demurrers, which the lower court granted, without leave to amend. The borrower appealed.
The Appellate Court began by surveying California's statutory rules concerning nonjudicial foreclosures, and the related responsibilities of trustees acting under deeds of trust. The Court explained that California law requires trustees to execute only one of two mutually exclusive duties: (1) to initiate foreclosure proceedings should the debtor default, or (2) to reconvey the property back to the debtor, should the debt be paid off.
The process by which the trustee initiates nonjudicial foreclosure proceedings in California is controlled by statute, which provides what the Appellate Court termed a "comprehensive framework" for the nonjudicial foreclosure process. The purposes of that framework are to provide the beneficiary of a deed of trust with an efficient remedy against a defaulting borrower; to protect the beneficiary from wrongful loss of the property; and to ensure that a properly conducted sale is final. See Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1154.
The Court emphasized that California courts have refused to read additional requirements into the nonjudicial foreclosure statute, due to the "exhaustive nature" of that statute. Id. at 1154.
With that framework in place, the Court proceeded to consider the borrower's first cause of action: a request for declaratory relief finding that the bank and servicer lacked authority to initiate nonjudicial foreclosure proceedings. Specifically, the borrower alleged various violations of the pooling and servicing trust agreement which controlled the investment trust of which her loan was a part. She also argued that the servicer lacked standing to foreclose, because it recorded the notice of default prior to the recording of the substitution of trustee document naming it trustee.
The Appellate Court found no merit in any of the borrower's arguments -- which it summarized as seeking "a judicial order directing Defendants to prove they possess the promissory note." The Court noted that such a requirement lacked legal basis, as no such requirement was created by the statute controlling nonjudicial foreclosures, nor was such a "preemptive action" authorized by statute.
Therefore, the Court found that reading such a requirement into the statute would be inconsistent with the statute's goal of providing an efficient remedy for beneficiaries.
The Court further noted that the relevant statutory provisions authorize a "trustee, mortgagee, or beneficiary, or any of their authorized agents" to initiate a nonjudicial foreclosure. See California Civil Code Sec. 2924. Accordingly, the Court held that the trustee's actions were proper, because the statute does "not require that the foreclosing party have an actual beneficiary interest in both the promissory note and deed of trust..."
In the alternative, the Court noted a separate basis to rule against the borrower as to her first cause of action: she failed to demonstrate that an actual controversy existed between her and the defendants. The Court explained that there was no dispute as to whether the borrower defaulted on her loan, nor any dispute concerning the provisions of the borrower's deed of trust, which authorized foreclosure in the event of a default. Accordingly, even if the transfers of the note were somehow invalid, the true victim would not be the borrower, but the true owner of the note.
Also, the Court found that the pooling and servicing agreement could not give rise to a controversy between the parties, because the borrower was an "unrelated third party" to that agreement.
The Court next turned to the borrower's second cause of action: her claim that transfers of her note violated Cal. Civil Code Sec. 2932.5. The Court summarily disposed of this claim, noting that Sec. 2932.5 is "inapplicable to deeds of trust."
The Court then considered borrower's third cause of action: purported violations of California's Business and Professions Code. The borrower's claim was based on, among other things, her contention that the defendants recorded fraudulent documents, and that the bank violated RESPA by failing to respond to the borrower's alleged Qualified Written Request.
To meet the private standing requirement of the Business and Professions Code, the Court explained that the borrower must (1) establish an economic injury and (2) show that the economic injury was caused by the alleged unfair business practice.
Here, the Court noted that the borrower claimed that the "economic injury" was the "impending loss of her home." The Court found that the borrower's claim was sufficient to satisfy the first prong of the standing requirements, but insufficient to satisfy the second prong. Specifically, because the borrower admitted that she defaulted her loan, the Court held that she "cannot show any of the alleged violations have a causal link to her economic injury."
With the borrower's third cause of action disposed of, the Appellate Court turned to the borrower's fourth cause of action: a purported contractual breach of the implied covenant of good faith and fair dealing. The borrower alleged various forms of wrongdoing by the defendants in relation to this cause of action, included allegedly withholding various disclosures, allegedly inflating her income such that she qualified for her home loan, and allegedly instructing her to default on her payments to qualify for a loan modification.
The Court again found the borrower's arguments unconvincing. It first rejected the borrower's allegations against the servicer, finding that the borrower "failed to identify a contract" that the servicer purportedly breached, which the Court noted was a "prerequisite for any action for breach of the implied covenant of good faith and fair dealing."
Next, the Court rejected the borrower's arguments against the bank, on the grounds that it was undisputed that when the bank acquired the loan from the originator, the related agreement expressly provided that the bank did not include the assumption of "any liability" associated with the originator's lending and/or servicing activities. Moreover, the Court held that the borrower again failed to tie her allegations to a breach of a contract, as required.
Finally, the Court rejected the borrower's cause of action alleging various violations of RESPA, for the same reason as described above -- that is, the borrower failed to allege that she suffered actual damages that were the result of the defendants' alleged failure to comply with RESPA.
Accordingly, the Court affirmed the judgment of the lower court, and awarded defendants their costs on appeal.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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