FYI: Cal App Ct Holds CA Civ Code 2923.5 Not Preempted by NBA, Private Right of Action Allowed Under Civ Code 2923.5

The California Court of Appeal, Sixth District, recently held that the National Bank Act did not preempt Section 2923.5, the California requirement to contact borrowers to discuss options to avoid foreclosure prior to recording a notice of default, and that a borrower had a private right of action based on the bank's alleged failure to so communicate with the borrower.
 
A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/H036483.PDF.

 

Plaintiff ("Borrower") defaulted on a home mortgage loan that was secured by a deed of trust.  The deed of trust identified Mortgage Electronic Registration Systems, Inc. ("MERS") as the beneficiary under the trust deed and as nominee for the lender.  The deed of trust further provided that MERS could foreclose and sell the property "if necessary to comply with law or custom."

 

The successor trustee under the deed of trust served Borrower with a notice of default and recorded a declaration of compliance with California Civil Code Section 2923.5 ("Section 2923.5"), which requires mortgagees to contact borrowers prior to recording a notice of default to discuss alternatives to foreclosure, such as deeds in lieu and short sales.  About a month later, MERS assigned its beneficial interest in the deed of trust to defendant national bank ("Loan Holder").
 
Borrower filed a law suit, seeking damages and to enjoin the foreclosure.  The complaint included allegations that Loan Holder supposedly refused to respond to Borrower's various communications, and supposedly violated California law by failing to contact Borrower to discuss foreclosure alternatives prior to filing the notice of default.   Borrower also claimed that Loan Holder was not entitled to payment on the debt due to alleged improprieties in the assignment, transfer, and exercise of the power of sale under the trust deed.

 

Loan Holder demurred, and the trial court sustained the demurrer without leave to amend and dismissed the action with prejudice.  Plaintiff appealed.

 

The Court of Appeal reversed, ruling in part that (1) the National Bank Act did not preempt Section 2923.5, (2) Borrower had a private right of action under section 2923.5, and (3) Borrower sufficiently pleaded a violation of Section 2923.5.  
 
As you may recall, Section 2923.5 provides that a mortgagee, trustee, beneficiary, or authorized agent must contact the borrower "in person or by telephone in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure" or satisfy due diligence requirements before a notice of default is filed." Cal. Civ. Code §2923.5.

 

California law also allows a court to postpone a foreclosure sale until such time as the requirements of Section 2923.5 have been met.  See Cal. Civ. Code. §2924g, subdivision (c)(1)(A).

 

In addition, the National Bank Act "vests national banks . . . with authority to exercise 'all such incidental powers as shall be necessary to carry on the business of banking'" and expressly designates real estate lending as part of the business of banking.  See 12 U.S.C. §§24 (Seventh); 371(a).

 

Having taken judicial notice of the facts arising from the legal effect of the various loan documents presented by Loan Holder (see Fontenot v. Wells Fargo Bank, N.A., 198 Cal.App.4th 256 (2011)(status of loan owner as the beneficiary under a deed of trust was not reasonably subject to dispute due to the legally operative effect of document)), the Court of Appeal first ruled that MERS had the authority to execute the notice of default and the assignment of the deed of trust, as such acts were "required" and "necessary to comply with law or custom."

 

Next, finding the reasoning in the prior appellate case of Mabry v. Superior Court persuasive, the Appellate Court ruled that Section 2923.5 confers a private right of action.  See Mabry v. Superior Court, 185 Cal. App. 4th 208 (2010)("in order to have its obvious goal of forcing parties to communicate . . . about a borrower's situation and the options to avoid foreclosure, section 2923.5 necessarily confers an individual right").    The Appellate Court also observed that Section 2923.5 would be meaningless without the enforcement mechanism in Section 2924g allowing postponement of the foreclosure sale until the requirements in Section 2923.5 have been met. 
 
Turning to Loan Holder's argument that the National Bank Act preempted Section 2923.5 because Section 2923.5 more than incidentally affected a national bank's real estate lending powers insofar as Section 2923.5 "compel[s] loan modifications as a means of avoiding foreclosures . . . , mandates specific disclosures to borrowers, and requires burdensome reviews of borrower financials . . . .[,]" the Appellate Court narrowly ruled that Section 2923.5 only incidentally affected the lending operations of a national bank, because it did not require a lender to modify a loan or take detailed loan application information, and a lender's noncompliance merely results in providing borrowers more time.

 

In addition, the Appellate Court concluded that a factual dispute existed as to whether Loan Holder in fact complied with Section 2923.5.  Accordingly, in light of its rulings, the Court reversed the lower court's 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
 

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FYI: Ill App Ct Holds Non-Borrower Occupant Could Not Raise Foreclosure Standing Defense in Post-Foreclosure Eviction

The Illinois Appellate Court, Third District, recently held that a non-borrower occupant in a post-foreclosure eviction action could not assert a defense based on an alleged lack of standing of the plaintiff to foreclose, because such assertion was not "germane" to the issue of who was entitled to immediate possession of the property.

 

A copy of the opinion is available at: 

http://www.state.il.us/court/Opinions/AppellateCourt/2012/3rdDistrict/3110930.pdf.

 

Defendant ("Occupant") sold his residence in Will County, Illinois, to a relative ("Borrower") who funded the purchase with a mortgage loan with Mortgage Electronic Registration System, Inc. ("MERS"), as the mortgagee with power to foreclose on the property.   Following the sale, Occupant continued to live at the residence with Borrower.  

 

Borrower defaulted on the loan and plaintiff ("Plaintiff Bank") filed a foreclosure action against Borrower alleging that it was the mortgagee and holder of the note.   Moving for summary judgment, Plaintiff Bank submitted documentation to the court indicating that MERS, as lender's nominee, assigned the mortgage to Plaintiff Bank some time prior to the filing of the foreclosure action.   However, the assignment of the mortgage in favor of Plaintiff Bank was not recorded in the county recorder's office until over a month after the start of the foreclosure proceedings.

 

The trial court granted summary judgment for Plaintiff Bank, which purchased the property at the subsequent foreclosure sale.    Three months later, the sale was approved and the final foreclosure judgment entered.  The final judgment provided that Plaintiff Bank was entitled to possession of the property and that the sheriff was to evict Borrower from the premises. Borrower did not appeal the foreclosure judgment.

 

Plaintiff Bank filed a separate forcible entry and detainer action against Occupant, seeking an order of possession of the property against Occupant.  Plaintiff Bank attached to its complaint an unsigned and undated copy of the foreclosure judgment from the prior foreclosure action against Borrower.  Moving for summary judgment, Plaintiff Bank submitted various documents including an additional copy of the foreclosure judgment, as well as copies of the demand for possession and proofs of service. 
  
Occupant opposed the summary judgment motion, arguing that Plaintiff Bank lacked standing in the previous mortgage foreclosure action because the complaint had been filed before Plaintiff Bank had been assigned the mortgage and that Plaintiff Bank had thus committed a fraud upon the court. 

 

Following a hearing, the trial court granted Plaintiff Bank's motion for summary judgment.  Occupant appealed and filed an emergency motion to stay the eviction pending appeal.  The Appellate Court denied the motion to stay and affirmed the trial court's judgment.

 

Rejecting Occupant's assertions that there were outstanding issues as to whether Plaintiff Bank had standing to file the prior mortgage foreclosure action, and whether Plaintiff Bank had committed a fraud on the court, the Appellate Court noted that the summary nature of forcible entry and detainer actions precluded raising matters that are not germane to the issue of who is entitled to immediate possession of the property.  

 

In so doing, the Appellate Court noted that Illinois case law defined "germane matters" as those closely connected and relevant to the issue of possession, such as claims that: (1) assert a paramount and superior right of possession;  (2) deny the breach of the agreement vesting possession in the plaintiff;  (3) challenge the validity or enforceability of the agreement on which the plaintiff bases the right to possession; or  (4) question the plaintiff's motivation for bringing the action.  See, e.g., Department of Transportation v. Walliser, 258 Ill. App. 3d 782, 788 (1994).

 

Observing in part that Occupant never presented any evidence that he had a legal interest in the property or was somehow entitled to possession, the Appellate Court ruled that Occupant's allegations of fraud and lack of standing were separate and distinct from, and therefore not germane to, the issue of possession. 

 

Accordingly, the Appellate Court ruled that the trial court properly granted summary judgment in favor of Plaintiff Bank.

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: Maryland App Ct Rules Mere Gaps in Chain of Indorsements on Note Does Not Provide Basis to Undo Foreclosure Sale

The Maryland Court of Appeals recently held that mere alleged gaps in the chain of indorsements on a promissory note secured by a deed of trust did not amount to fraud that would allow an exception to the general rule that a foreclosure sale could be challenged only on the basis of procedural irregularities in the conduct of the sale itself.

 

A copy of the opinion is available at: 

http://mdcourts.gov/opinions/coa/2012/106a11.pdf.

 

Borrowers defaulted on a home mortgage refinancing loan.  The promissory note had been assigned from the original lender to a mortgage company ("Company") that subsequently went out of business.  Prior to its termination, Company indorsed the promissory note in blank to enable enforcement of the note. 

 

The note was eventually transferred to a firm ("Loan Holder") that allegedly first came into existence about a year after Company ceased doing business.   The ownership of the note during that one-year period was not clear in this case.

 

Loan Holder's substitute trustees initiated a non-judicial foreclosure action against Borrowers' property pursuant to the deed of trust and Loan Holder ultimately purchased the property at the subsequent foreclosure sale.  Borrowers did not contest Loan Holder's ownership of the underlying debt prior to the foreclosure sale.  However, following the sale, Borrowers filed exceptions to the sale, arguing in part that there was a gap in the chain of title from Company to Loan Holder, as it was not clear who owned the note during the one-year period between Company's termination and Loan Holder's formation.

 

The Circuit Court denied the exceptions and ratified the sale, ruling that any alleged irregularities concerning assignment and ownership of the note should have been addressed prior to the sale. 

 

Borrowers appealed, contending that gaps in the note's chain of title amounted to a "fraud on the judicial system" that justified their post-sale exception to the foreclosure.  Granting certiorari on its own motion, the Maryland Court of Appeals affirmed, ruling that the facts alleged did not amount to the type of fraud that would allow a post-sale exception.

 

As you may recall, under Maryland law a foreclosure sale will be ratified unless borrowers file within 30 days of the sale written exceptions that describe "with particularity" any procedural irregularities in the conduct of the sale.  Maryland Rule 14-305(c).  

 

Noting that Borrowers failed to allege procedural irregularities at the foreclosure sale, or fraud relating to execution of their loan documents, the Court was not convinced that a gap in the note's chain of title amounted to the type of fraud that would require setting aside the sale.  See Bates v. Cohen, 417 Md. 309, 9 A.3d 846 (2010) (leaving open the question whether fraud infecting the underlying mortgage or deed may be raised by a borrower following a foreclosure sale); Greenbriar Condo. v. Brooks, 387 Md. 683, 688, 878 A.2d 528 (2005)(post-sale exceptions must relate to procedural irregularities at the sale or to auditor's accounting).

 

In so ruling, the Appellate Court observed, first, that a prior Maryland opinion rejected the notion that courts of equity have broad authority to hear and determine all objections to foreclosure sales and, second, that Maryland Rule 14-305 established a new and limiting structure for post-sale inquiries.  Thus, while acknowledging that prior case law left open the possibility of a challenge based on fraud that "infected" the underlying debt, the Court further observed that, although Maryland commercial law recognizes a defense based on forgery or deceit as to the nature of an instrument, Borrowers failed to allege any facts with particularity that would constitute such a defense.

 

Among other things, the Appellate Court pointed out that Borrowers never challenged the genuineness of the note and trust deed, never claimed that they were not obligated to pay the loan, and only asserted generally that possible gaps in the chain of title sufficed to create exceptions to the finality of foreclosure sales.    
 
Accordingly, the Court concluded that the Borrowers' general allegation of fraud did not suffice to set aside the foreclosure sale. 

 

 

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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