The California Court of Appeal, Sixth District, recently held that under California nonjudicial foreclosure law: (1) an assignee of a first deed of trust that expressly referred to the underlying promissory Note did not need physical possession of the Note in order to proceed with a property foreclosure sale; and (2) the holder of a second deed of trust on the same property was not entitled to declaratory judgment or quiet title to the property, as he was not prejudiced by a Notice of Default that did not adequately identify the name of the beneficiary under the first trust deed and which named the foreclosing trustee prior to the recording of a Notice of Substitution of Trustee.
A copy of the opinion is available at:
A borrower allegedly defaulted on a loan secured by a second deed of trust. The second-lien lender ("Second Lender") foreclosed on the loan and a trustee's sale of the property was held. Subsequently, a bank, which was the final assignee of a first deed of trust on the property ("Prior Lender") initiated nonjudicial foreclosure proceedings based on the borrower's default on a separate loan.
In an effort to stop the foreclosure, the Second Lender filed a complaint against the Prior Lender, its loan servicer, and the foreclosing trustee (collectively the "Prior Defendants"), seeking a declaratory judgment and to quiet title to the property and remove the first deed of trust. In his complaint, the Second Lender alleged that the foreclosure under the first deed of trust was improper, because the Prior Lender allegedly did not have physical possession of or ownership rights to the original promissory Note, and that any assignment of the deed of trust alone, without the underlying promissory Note, supposedly was of no effect.
The Second Lender further alleged that the foreclosing trustee's Notice of Default was defective, because that notice insufficiently identified the Prior Lender as the beneficiary under the first deed of trust, and the Notice of Default further improperly named the foreclosing trustee before the Notice of Substitution of Trustee was recorded.
The Second Lender further alleged that the foreclosing trustee's Notice of Default was defective, because that notice insufficiently identified the Prior Lender as the beneficiary under the first deed of trust, and the Notice of Default further improperly named the foreclosing trustee before the Notice of Substitution of Trustee was recorded.
The Prior Defendants demurred, arguing in part that possession of the original note was not required under applicable foreclosure law. Rejecting Second Lender's arguments that the "chain of assignment" was improper, the lower court sustained the demurrer and dismissed without leave to amend, ruling that all assignments of the first deed of trust, including the final assignment to the Prior Lender, conveyed all beneficial interest in the first deed of trust together with the Note and that physical possession of the underlying note was thus not required.
The Second Lender appealed, again arguing that the assignment of the deed of trust to the Prior Lender was of no legal effect, because the original underlying promissory Note had not been transferred to the Prior Lender. In addition, the Second Lender also claimed that the Prior Lender was attempting to unlawfully take the property, as the Prior Lender could not produce a copy of the Note or other evidence of indebtedness as required by the applicable foreclosure statute. However, the Court of Appeal affirmed the trial court's ruling.
The Second Lender argued on appeal that because the promissory Note was a negotiable instrument, it could not be assigned without a valid indorsement and physical delivery to the assignee, and therefore that the assignment of the deed of trust was invalid. Rejecting Second Lender's assertion that the assignment of the deed of trust should be governed by the California Commercial Code, the appellate court concluded that California's exhaustive and comprehensive framework for nonjudicial foreclosures applied and did not require that the Note be in the possession of the foreclosing party. See Cal. Civ. Code § § 2924-2924k.
In so ruling, the Court noted that the nonjudicial foreclosure statutes specify that a Notice of Default may be filed by the "trustee, mortgagee, beneficiary, or any of their authorized agents," and do not require the foreclosing party to have physical possession of the underlying note. See Cal. Civ. Code § 2924(a)(1). The Court also observed that California appellate courts have refused to read additional requirements into the non-judicial foreclosure statutes, such as a requirement to have a beneficial interest in both the Note and the deed of trust in order to commence a non-judicial foreclosure sale.
The appellate court was similarly not persuaded by the Second Lender's arguments based on the Ninth Circuit Bankruptcy Appellate Panel's opinion in In Re Veal, 2011 WL 2652328, 450 B.R. 897 (9th Cir BAP 2011) ("Veal"). Among other things, the Court noted that the parties in Veal had stipulated to the applicability of the Uniform Commercial Code to the issues in that case, the loan involved a mortgage governed by a different state's law while another state's law controlled the Note, and, significantly, the assignment in Veal failed to adequately identify all the rights and obligations transferred under the mortgage. The Court also pointed out that the Veal opinion implicitly acknowledged that California law does not require the production of the original Note in a nonjudicial foreclosure under a deed of trust. Accordingly, the Court distinguished Veal and rejected Second Lender's arguments based on that opinion.
Turning to the Second Lender's assertion that the Notice of Default was defective because it did not identify the beneficiary under the deed of trust, and listed the name of the foreclosing trustee even though no Substitution of Trustee had yet been recorded, the Court noted that the "Fair Debt Collection Practices Notice" attached to the Notice of Default clearly identified the Prior Lender as the creditor and provided the loan servicer's address and telephone number. In addition, the Court pointed out that the Second Lender was not prejudiced or adversely affected by any technical defect in the Notice of Default or any alleged premature substitution of the foreclosing trustee. The Court moreover noted that California law expressly provides for the situation in which a substitution of trustee is executed but not recorded until after the recording of the Notice of Default. See Cal. Civ. Code § 2934a(b).
The Court thus ruled that the Second Lender had failed to set forth viable causes of action for declaratory judgment or quiet title, because he was unable to show invalidity of the assignment to the Prior Lender, title free and clear of the first deed of trust, or prejudicial effects of any technical deficiencies in the Notice of Default.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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