CA Supreme Court Gives Former Homeowners Narrowly Expanded Standing To Bring Wrongful Foreclosure Lawsuits

by Archer Norris PLC
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On February 18, 2016, the California Supreme Court issued its long-awaited decision in Yvanova v. New Century Mortgage Corp. The Supreme Court unanimously held that a former borrower had standing to bring a wrongful foreclosure action alleging that one or more transfers of her loan obligation was void. The Supreme Court’s decision reversed the Second District Court of Appeal and disapproved of a number of California and federal cases that had rejected similar wrongful foreclosure claims. A link to the Supreme Court’s decision can be found here.

Borrowers, former borrowers and their lawyers will undoubtedly claim that Yvanova opens the door wide for them to challenge every pending and completed foreclosure sale based on allegations that the loan transfer process was defective. This will be a gross misreading of the holding. Lenders and their lawyers should still be able to defeat most wrongful foreclosure claims at the pleading stage.

The Yvanova decision actually is very narrow. It holds only that a former borrower can challenge a completed foreclosure sale when the borrower alleges specific facts which, if true, would demonstrate that a transfer of the former borrower’s loan was void. The California Supreme Court made it plain that such a challenge would not be viable where it was based on allegations that a defective transfer of the loan was merely voidable. A transfer is void only if it is “without legal effect” regardless of what the parties intend. A transfer is voidable where one of the parties has the option to ratify or reject the transfer.

The plaintiff in Yvanova argued that a transfer to a securitized trust was void because the trust allegedly closed before the loan was assigned to it. The Supreme Court expressly declined to determine whether this allegation was adequate to support a claim for a void transfer. However, the opinion includes language that savvy lender’s counsel should use to argue that an attack on the timing of transfers to securitized trusts raises only voidable claims.

More generally, lenders should still be able to frequently prevail at the demurrer stage by making some combination of the following arguments: (1) the challenged transfer is voidable, not void, so the complaint fails as a matter of law; (2) pre-foreclosure sale, Yvanova does not apply; (3) post-foreclosure sale, the former borrower must tender the debt if the borrower seeks to set aside the foreclosure sale or seeks any other equitable remedy. The Yvanova Supreme Court defined the issue before it very narrowly: can a former borrower seek damages by wrongful foreclosure where the transfer to the party completing the foreclosure was allegedly void? Thus, while many wrongful foreclosure lawsuits may have some additional twists and turns along the way, the practical effect of the Court’s Yvanova decision on the ultimate outcome of these lawsuits is likely to be extremely modest.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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