FYI: Cal App Ct Rules Against Assignee of Sold-Out Second

The California Court of Appeal, Second District, recently held that:  (1) the holder of a "sold out second" loan could not obtain a judgment against a borrower, where the holder of the sold-out second received the assignment of the loan from the senior lien holder which had previously foreclosed via a non-judicial foreclosure sale; and  (2) an award of attorney fees was proper, despite the plaintiff's voluntary dismissal of its action on the note following ruling on the borrower's demurrer/motion to dismiss.

 

A copy of the opinion is available at: 

http://www.courtinfo.ca.gov/opinions/documents/B233924.PDF.

 

Defendant mortgagor ("Borrower") obtained a home mortgage loan from a mortgage lender ("First Lienholder") and secured the loan with two notes for different amounts and two separate deeds of trust on a single piece of property.  The Borrower defaulted on the loan and the First Lienholder sold the property pursuant to the first deed of trust at a non-judicial foreclosure sale.  Over a year after the foreclosure sale, the First Lienholder assigned the second trust deed to the plaintiff bank ("Second Lienholder"), which filed suit seeking a judgment against the Borrower for the amount allegedly still owing under the second note. The Borrower demurred, arguing that California's anti-deficiency statute precluded recovery of the debt secured by the second trust deed. 

 

Concluding that the Second Lienholder's claims were barred by California's anti-deficiency statute, the trial court sustained the demurrer without leave to amend.  The Borrower then moved for prevailing party attorney fees.  The Second Lienholder filed a request for voluntary dismissal with prejudice two days after the court sustained the demurrer, but before the entry of judgment, and opposed the motion for attorney fees, arguing that there could be no prevailing party because it had voluntarily dismissed the action.  The court vacated the voluntary dismissal, explaining that because it had sustained the demurrer without leave to amend, the Second Lienholder lacked the right to voluntarily dismiss.  The court dismissed the action and awarded the Borrower attorney fees and costs. 

 

The Second Lienholder appealed the judgment of dismissal and the award of attorney fees.  The Court of Appeal affirmed.

 

As you may recall, California law prohibits a deficiency judgment on a loan secured by a deed of trust on real property, where the mortgagee has sold the property pursuant to a non-judicial foreclosure.  Cal. Civ. Proc. § 580d. In addition, the California Civil Code provides that a plaintiff may voluntarily dismiss an action at any time before the "actual commencement of trial" and that voluntary dismissal deprives the court of jurisdiction except for purposes of awarding costs and attorney fees.  See Cal Civ. Proc. § 581, subdivisions (b)(1), (c).
 
In reviewing California case law, the Appellate Court noted a perceived risk of abuse where a lender holds both senior and junior deeds of trust, and found dispositive the reasoning in Simon v. Superior Court, 4 Cal. App. 4th 63 (1992), which held that a lender holding both the first and second deeds of trust on the same property could not recover on the loan secured by the second trust deed after the non-judicial foreclosure.  The Court thus noted that under the reasoning in Simon, the First Lienholder in this case would not have been permitted to obtain a judgment against the Borrower after the non-judicial foreclosure sale of the property. 

 

Stressing that assignment of the loan secured by the second deed of trust to the Second Lienholder after the trustee sale would not change this result, the Court reasoned that as the assignee of the sold-out second, the Second Lienholder stood in the shoes of the First Lienholder and was therefore "subject to any defenses which the [Borrower] ha[d] against the assignor . . . ."  Accordingly, the Court concluded that because the First Lienholder could not have obtained a judgment against the Borrower, the Second Lienholder was also similarly precluded.

 

The Court also ruled that nothing in the anti-deficiency statute suggested that the presence of a third party bidder at a foreclosure sale took the sale out of the reach of the statute to allow a deficiency judgment.  

 

Accordingly, the Appellate Court ruled that the trial court properly sustained the demurrer without leave to amend.

 

Turning to the award of attorney fees, the Court noted that the Second Lienholder filed its motion to voluntary dismiss after the trial court had already sustained the demurrer.  In so doing, the Court observed that where an action has progressed to a "determinative adjudication" or to a decision "tantamount to an adjudication," a plaintiff no longer has the right to voluntarily dismiss under Cal Civ. Proc. § 581. 

 

The Court rejected the Second Lienholder's assertion that, because it sought to voluntarily dismiss with prejudice, the trial court lacked jurisdiction to award attorney fees.  The Court noted that allowing dismissal after a dispositive ruling had been made would permit the Second Lienholder to manipulate the judicial process.  The Court thus ruled that the Second Lienholder had no right to voluntarily dismiss in order to avoid liability for the attorney fees once the demurrer had been sustained.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: 4th Cir Holds NBA Does Not Preempt State Debt Collection Law

The U.S. Court of Appeals for the Fourth Circuit recently held that:  (1) the National Bank Act did not preempt notice requirements related to repossession of personal property security under state law; and  (2) the national bank was subject to a contractual provision specifying the applicability of the statute, where the original non-bank lender elected to be governed by the statute and the bank voluntarily purchased and received the assignment of the contract.

 

A copy of the opinion is available at:

http://pacer.ca4.uscourts.gov/opinion.pdf/102444.P.pdf.

 

Plaintiff-appellant ("Plaintiff") purchased a used car from a car dealer with dealer financing, using the car as security.  The retail installment contract (RIC) provided that the Maryland Credit Grantor Closed End Credit Provisions ("CLEC") and federal law would govern the terms of the RIC. 

 

The car dealer sold and assigned the RIC to a national bank ("Bank"), which repossessed the car after the Plaintiff defaulted.  The Bank allegedly sent Plaintiff a notice informing Plaintiff of her right to redeem the car, but allegedly did not inform the Plaintiff of the vehicle's location or the time and place of the scheduled sale of the vehicle, as required by the CLEC.  The Bank allegedly sold the car and sent the Plaintiff a notice indicating in part that the Bank was seeking a deficiency for the unpaid loan balance. 

 

The Plaintiff filed a putative class action in Maryland state court, claiming in part that the Bank failed to comply with CLEC's notice requirements and breached the RIC.  The Bank removed the case to federal district court, where Borrower moved for partial summary judgment and the Bank filed a motion to dismiss. 

 

The district court dismissed the case, ruling that the National Bank Act preempted Maryland law as to debt-collection efforts of national banks. The district court also held that the contractual provision specifying that CLEC applied to the RIC was unenforceable as to the Bank because the Bank had not bargained for the applicability of CLEC to the loan agreement between the Plaintiff and the car dealer-lender.

 

The Plaintiff appealed, and the Fourth Circuit reversed.

 

As you may recall, the National Bank Act provides in pertinent part that national banks may exercise "all such incidental powers as shall be necessary to carry on the business of banking," including making loans secured by personal property.  12 U.S.C. § 24 (Seventh).  In addition, the NBA's implementing regulations promulgated by the Office of the Comptroller of the Currency ("OCC") expressly preempt any state law that interferes with a national bank's ability to fully exercise specified powers, including non-real estate lending, and allow a national bank to engage in such lending without regard to state laws concerning licensing, personal property used as security, and "disclosure and advertising" in credit applications "or other credit-related documents."  12 C.F.R. § 7.4008(d)(1)-(2)(as in effect prior to July 21, 2011). 

 

The OCC regulations also contain a "savings clause" that provides that certain state laws, including those governing contracts and "rights to collect debts" are not preempted if those state laws "only incidentally affect" a national bank's powers with respect to non-real estate lending.  12 C.F.R. § 7.4008(e) (as in effect prior to July 21, 2011) ("Savings Clause"). 

 

Further, Maryland's CLEC allows a creditor to repossess personal property securing a loan if a borrower defaults, but requires the creditor to comply with CLEC's provisions governing notice to the debtor, including notice as to the location of the repossessed property, the debtor's right to redeem the property, and the debtor's liability for any deficiency.  Md. Code Ann., Com. Law § 12-1021(a)(1), (c)-(e).
 
In examining the rules governing federal preemption, the Fourth Circuit noted that, while the NBA itself does not expressly preempt state law, the OCC's regulations carve out areas of state law that are expressly preempted, but also set forth particular subject categories that states may regulate pursuant to the Savings Clause.  In so doing, the Court pointed out the regulations' distinction between a national bank's collection activities and a bank's extension of credit, and that the Savings Clause specifically lists "rights to collect debts" (which the Court treated as "debt collection" generally) as a category of state law not preempted by federal law. 

 

The Fourth Circuit thus rejected the Bank's argument that the NBA preempted the CLEC because it impermissibly interfered with the Bank's ability to make non-real estate loans.  In making this argument, the Bank argued, first, that because non-real estate lending is an enumerated power under the NBA, the CLEC's repossession notice requirements are "disclosures" preempted by 12 C.F.R. § 7.4008(d) allowing national banks to make non-real estate loans without regard to state limitations concerning "disclosure and advertising."  The Bank also argued that CLEC's notice requirements concerned "other credit related documents" and were therefore similarly preempted by 12 C.F.R. § 7.4008(d).

 

Relying on the Ninth Circuit's reasoning in Aguayo v. U.S. Bank, 653 F.3d 912 (9th Cir. 2011), the Fourth Circuit noted the distinction drawn in that case between a "disclosure" prior to entering a loan transaction and a "notice" to a party during the life of a loan agreement, and ruled that the CLEC's post-repossession notices were not "disclosures" related to the extension of credit within the meaning of the NBA or the OCC regulations.    In addition, the Fourth Circuit held that the CLEC's notice requirements, triggered only when a creditor is attempting to collect on a debt, did not regulate "credit-related documents" used in the establishment of a lending relationship.

 

Turning to the Bank's other argument that, to the extent the CLEC is a debt-collection law, it is preempted because the CLEC more than incidentally burdened the Bank's non-real estate lending power.  Again citing Aguayo, the Fourth Circuit rejected this argument, because the Bank's argument led to the conclusion that the Bank would not be subject to state or federal law, as "no federal law governs self-help repossession." See Aguayo, 653 F.3d at 924.
 
Accordingly, the Fourth Circuit determined that under the Savings Clause, the Bank's activity in repossessing and selling the Plaintiff's car was subject to the state notice requirements, because the CLEC did not impermissibly interfere with the Bank's federal power to extend credit, and "the degree to which the CLEC regulate[d] an enumerated power of a national bank [was] merely incidental."
 
The Fourth Circuit also observed that the OCC's own interpretation of the Savings Clause supported its conclusion that the CLEC was not preempted, because the CLEC, as an "undiscriminating law of general applicability," did not treat national banks differently from other bank- or non-bank lenders in Maryland.
 
As to the Plaintiff's breach of contract claim, the Fourth Circuit disagreed with the district court's analysis that because the Bank had not negotiated the terms of the loan agreement it purchased from the original lender, the Bank was not bound by the CLEC provision in the contract.  Noting that the original lender had expressly elected to apply the CLEC to the loan, in part because it allowed the lender to charge a higher late fee, the Court reasoned that, as the voluntary assignee of the debt, the Bank was obligated to adhere to the terms of the loan contract, including the CLEC notice requirements. 

 

The Fourth Circuit vacated the lower court's ruling and remanded for further proceedings.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: Cal App Ct Holds State Certificate of Authority Requirement Preempted by NBA

The California Court of Appeal, Fourth District, recently held that an Iowa statute requiring foreign businesses to hold a certificate of authority to transact business in Iowa in order to avail themselves of Iowa's substitute service of process procedures impermissibly impairs a national bank's ability to sue, and that a national bank was thus not required to have obtained such a certificate of authority in order to have an enforceable judgment.
 
A copy of the opinion can be found at: 

http://www.courtinfo.ca.gov/opinions/documents/D058987.PDF.

 

An Iowa company borrowed money from a national bank ("First Bank") for the purchase of real property in Iowa.  The loan was personally guaranteed by the defendants in this case("Guarantors"), who are residents of California.  First Bank sold and assigned the loan to a second national bank ("Second Bank").  The company later defaulted on the loan, and Second Bank filed suit in Iowa to foreclose on the property and to collect on the guaranty. 

 

After unsuccessfully attempting to personally serve the summons and complaint on the Guarantors in California, Second Bank served the Guarantors by substitute service under Iowa law -- that is, by mailing copies of the foreclosure petition and other documents to the Iowa Secretary of State and to the Guarantors in California, pursuant to Iowa's substitute service statute (Iowa Code § 617.3). 

 

Second Bank obtained a default judgment against the Guarantors in the Iowa action, and registered the Iowa judgment in California.  Guarantors moved to vacate the judgment registered in California, claiming that they were never served with the summons and complaint and that the Iowa court thus lacked personal jurisdiction.  Second Bank argued that the Iowa judgment was valid because the Guarantors were served by substitute service in accordance with Iowa law (Iowa Code § 617.3).  The Guarantors claimed that section 617.3 was inapplicable, as section 617.3 required First Bank to be a "resident of Iowa" in order to utilize substitute service under that section, and First Bank was not a "resident of Iowa" at the time of the real estate loan agreement.

 

The lower court vacated the judgment, ruling that the Iowa court lacked personal jurisdiction over the Guarantors under section 617.3.  The court concluded that substitute service was proper only where a contracting party at the time of the transaction was a "resident of Iowa" with the authority to transact business in Iowa, as evidenced by a certificate of authority, and that because First Bank did not have a certificate of authority to transact business in Iowa when the loan was extended, First Bank was not a "resident of Iowa" as required.

 

Second Bank appealed, and the Appellate Court reversed. 

 

As you may recall, the National Bank Act ("NBA") allows national banks to engage in real estate lending, engage in acts necessary to collect on debts, and to sue and be sued in any court of law and equity as fully as natural persons.  See 12 U.S.C. § 24 (Fourth).  Iowa Code § 617.3 requires foreign corporations to hold a certificate of authority to transact business in Iowa, if they are to be deemed a "resident of Iowa" that may take advantage of the substitute service provisions allowed under that section. 

 

Noting that residency in Iowa is determined at the time of the contract, the Appellate Court looked to the status of First Bank at the time of the loan transaction to determine whether First Bank was required to hold a certificate of authority to transact business in Iowa, which it would have been.  The Court then considered the powers conferred on First Bank as a national bank and concluded that section 617.3's certificate of authority requirement was preempted by the NBA. 

 

In so ruling, the Court noted that, while the particular issue before it had not been addressed in California, other jurisdictions that addressed state laws requiring national banks to hold certificates of authority in order to maintain lawsuits in state courts have overwhelmingly held that the NBA preempts such laws as an impermissible interference with a national bank's powers to sue in any court of law and equity as fully as natural persons. 

 

Turning specifically to Iowa's procedures for substitute service of process, the Court rejected Guarantors' argument that section 617.3 pertains only to service of process, and not the ability to sue, because national banks, like natural persons, may avail themselves of Iowa courts and section 617.3's substitute service provision if they are residents of Iowa.  In so ruling, the Court noted other courts' rulings that the NBA preempts even the most limited aspects of state licensing requirements as an impermissible burden on the ability of a national bank to conduct business in a state.
 
The Court also held that section 617.3 impermissibly discriminated against national banks in favor of state-chartered banks, because state-chartered banks were not required to obtain a certificate of authority for purposes of substitute service.  The Court deemed it "especially discriminatory" to require national banks to obtain a certificate of authority in order to use Iowa's substitute service procedures, but not for purposes of conducting mortgage activities in Iowa.  See Iowa Code § 490.1501(2(g),(h) (setting forth lending activities permitted in Iowa without certificate).

 

Accordingly, the Appellate Court reversed and remanded the case to reinstate the Iowa default judgment.

 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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