The California Court of Appeal, Fifth Appellate District, recently held that a borrower stated a cause of action for wrongful foreclosure, where the borrower alleged that an assignment of his deed of trust was void because the transfer of the loan into an asset securitization trust took place after the closing date of the trust.
A copy of the opinion is available at http://www.courts.ca.gov/opinions/documents/F064556.PDF.
A lender extended a loan to a borrower, and the loan was sold and transferred into an asset securitization trust, with servicing apparently retained. The lender was later seized by the Office of Thrift Supervision, and the Federal Deposit Insurance Company ("FDIC") was appointed as receiver. The FDIC transferred the lender's assets and liabilities to another bank (the "bank").
The borrower defaulted on his loan, and the bank instituted nonjudicial foreclosure proceedings. A nonjudicial sale was held. The borrower then filed the instant complaint, alleging numerous causes of action in connection with his claim that the loan was never properly transferred into the asset securitization trust.
The bank filed a demurrer, which the lower court sustained. The lower court then entered a judgment of dismissal, and the borrower appealed.
On appeal, the Appellate Court focused on the borrower's allegation that the foreclosure was wrongful, in that it was allegedly instituted by a non-holder of the deed of trust. Specifically, the borrower argued that his note and loan were not transferred into the trust prior to its closing date, nor was the assignment or the borrower's deed of trust ("DOT") recorded prior to the same date. Therefore, according to the borrower, the assignment was ineffective, and the foreclosure was therefore initiated by a non-holder of the DOT.
The Court noted that it agreed with a recent holding that a valid cause of action for wrongful foreclosure exists where "a party alleged not to be the true beneficiary instructs the trustee...to initial judicial foreclosure." See Barrionueva v. Chase Bank, N.A. (N.D. Cal. 2012) 885 F. Supp. 2d 964, 973. But to assert such a cause of action, the Court stated that "the plaintiff must allege facts that show the defendant who invoked the power of sale was not the true beneficiary."
The Appellate Court also addressed the possibility that the borrower might not have standing to challenge the assignment, inasmuch as the borrower was not a party to the assignment. The Appellate Court held that a borrower can challenge an assignment of a note and DOT where the defect asserted would void the assignment, rather than make it voidable at the election of the assignor.
With that standard in place, the Court proceeded to examine whether the borrower's allegations -- specifically, that the assignment of the DOT occurred after the relevant asset securitization trust closed -- might render that assignment void.
The Appellate Court answered in the affirmative. To reach its conclusion, the Court first noted that the borrower alleged that the trust was formed under New York law. The Court then recited that under New York law, "every sale, conveyance or other act of the trustee in contravention of the trust...is void." New York Estates, Powers & Trusts Law section 7-2.4.
Accordingly, the Appellate Court determined that a legal basis existed to conclude that an assignment into a trust after the closing date of that trust would render the act void. Although the Court acknowledged that several courts disagreed with its position, it noted that "we believe applying the statute to void the attempted transfer is justified because it protects the beneficiaries of [the trust] from potential adverse tax consequences..."
Based on the foregoing analysis, the Appellate Court held that the borrower "stated a cognizable claim for wrongful foreclosure under the theory that the entity invoking the power of sale...was not the holder of the [borrower's] deed of trust."
The bank argued that the borrower failed to allege that he made a valid and viable tender of payment of the indebtedness. However, the Court noted that "[t]ender is not required where the foreclosure sale is void, rather than voidable..." and accordingly rejected the bank's argument.
The Court therefore reversed the lower court's judgment of dismissal, and directed the lower court to vacate its order sustaining the general demurrer.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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