California Supreme Court Holds That Borrowers May Bring Wrongful Foreclose Actions Challenging Deed Of Trust Assignments

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On February 18, 2016, the California Supreme Court held that borrowers may bring wrongful foreclosure claims based on challenges to an assignment of the note and deed of trust to a securitized trust.  The supreme court’s decision rejects multiple lower court decisions holding that borrowers lack standing to bring such claims because they are not parties to the assignment nor the pooling and servicing agreements governing the loan transfers.  The decision expands the claims a defaulting borrower may use to contest a nonjudicial foreclosure in California.

In Yvanova v. New Century Mortgage Corp., the borrower (Yvanova) challenged a completed nonjudicial foreclosure of her Woodland Hills, California home.  While not disputing that she was in default of the loan, she argued that there was a four-year break in the chain of title between the original lender and the foreclosing party.  She claimed that the break in title voided the assignment of the deed of trust securing a $483,000 loan she obtained from New Century Mortgage in 2006. 

"A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights," according to the California Supreme Court’s ruling. It held that that a borrower can contest foreclosures if the purported holder of a loan cannot prove it is the legitimate owner.

"The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security," the supreme court stated in its ruling. "A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights at the foreclosing entity's hands. No more is required for standing to sue."

Yvanova challenged a 2011 assignment of the deed of trust executed by the mortgage servicer on behalf of the original lender. The assignment assigned the deed of trust to the trustee of a securitized trust, which later foreclosed.  She argued that the assignment was invalid because the operative pooling and servicing agreement stated that the trust had closed in January 2007—four years before the assignment.

The supreme court rejected several California lower court decisions holding that borrowers lack standing to bring wrongful foreclosure claims challenging assignments because they are not a party to or holder of the debt, nor a party to the pooling and servicing agreement.  Instead, the state supreme court followed the 2013 California appellate ruling in Glaski v. Bank of America, which held that a borrower has standing to challenge a nonjudicial foreclosure sale based on a deed of trust assignment to a securitized trust recorded after the trust’s closing date.

While the decision is an interim victory for the borrower, the California Supreme Court cautioned that its ruling was narrow, only addressing whether a borrower has standing to assert wrongful foreclosure claims based on allegedly void deed of trust assignments to overcome a demurrer.

“Our ruling in this case is a narrow one. We hold only that a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment. We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party‘s right to proceed. Nor do we hold or suggest that plaintiff in this case has alleged facts showing the assignment is void or that, to the extent she has, she will be able to prove those facts. Nor, finally, in rejecting defendants’ arguments on standing do we address any of the substantive elements of the wrongful foreclosure tort or the factual showing necessary to meet those elements.”

The case now will go back to the state court of appeals or a trial court for a decision of the merits of Yvanova's claim.

[View source.]

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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