California Supreme Court Opens Door For Wrongful Foreclosure Lawsuits and Challenges to Transfers of Mortgages: Practical Implications and Options Moving Forward

by Sheppard Mullin Richter & Hampton LLP
Contact

In Yvanova v. New Century Mortgage Corporation et al, the Supreme Court of California reversed the Court of Appeal’s ruling, and held that a borrower plaintiff who has been subject to a nonjudicial foreclosure has standing to bring an action for wrongful foreclosure based on an allegedly void deed of trust assignment (without making any determination as to whether the alleged facts established a void assignment).  In so doing, the Supreme Court came down solidly in favor of the “aggrieved” borrower thus settling, at least in California and likely other non-judicial foreclosure states, the issue regarding the standing of such a plaintiff to challenge the acts of a securitization trust.  Since the financial crisis there have been several cases considering the standing issue, most notably the California Court of Appeal decisions in Glaski  v. Bank of America, N. A. (2011) 198 Cal. App. 4th 256 (holding the plaintiff had standing to challenge the authority of the beneficiary to foreclose) and Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal. App. 4th 497 (holding the plaintiff had no standing to enforce the terms of the agreements allegedly violated).  The Supreme Court stated “On the narrow question before us – whether a wrongful foreclosure plaintiff may challenge an assignment to the foreclosing entity as void- we conclude Glaski provides a more logical answer than Jenkins.”

The Yvanova case has a particularly bad fact pattern where the deed of trust was executed in 2006 together with an assignment of mortgage or deed of trust “in blank”, or without filling in the name of the assignee of the deed of trust and recording the assignment.  New Century, the lender and beneficiary on the deed of trust, filed for bankruptcy on April 2, 2007 and on August 1, 2008 was liquidated and its assets were transferred to a liquidation trust.  Prior to that time, the mortgage was sold to a securitization trust – MSAC-2007 Trust-HE-1 Pass Thru Certificates.  Ocwen Loan Servicing LLC, as attorney in fact for New Century, completed the assignment of mortgage on December 19, 2011, and the assignment was recorded on December 30, 2011.  Although not deciding on the issue of whether the assignment was “void” and not merely “voidable”, the Court noted that New Century no longer existed when the assignment of mortgage was “completed”.  The foreclosure occurred in September 2012.

Practical Implications for Securitization Trusts

Securitization trusts have typically provided for assignments of deeds of trust or mortgages to be completed in blank.  There are practical reasons for such a delay in recording the assignments:

  • Holding the assignment in blank (rather than the recorded assignment) cuts down on the paperwork and expense relating to reconveyance of a mortgage loan to the Seller if the Seller was required to buy back a mortgage due to breach of representations given by the Seller at the time the loan was sold to securitization trust.
  • Assignments in blank provide flexibility for the trust to deal with the deeds of trust in the future.  The assignment in blank was considered a low-risk manner of conveying a mortgage loan while maintaining maximum flexibility, at least until the financial crisis.  It was during the financial crisis that we began to see a line of cases chipping away at the established legal principle (codified in the uniform commercial code) that the mortgage (or deed of trust in the case of California)  follows the note.

Regardless of whether the court got the issue of the legal/beneficial ownership of the loan and the deed of trust right, the decision regarding the standing of the plaintiff to challenge the foreclosure is problematic.

The Use of Titling Trusts

The Court of Appeal will now decide whether the bankruptcy of New Century and the fact that the securitization trust was closed to new loans at the time of completion of the assignment, constitutes the assignment of the deed of trust “void” and not merely “voidable”.   While we await the decision, the time may be right to rethink the manner in which deeds of trust are assigned to securitization trusts.  Particularly since the timing issues relating to conveyance of the loans to the trust remain with us today.  One alternative to consider is the use of a “titling trust”.  In a titling trust, the deed of trust would be assigned to the trustee of the titling trust and recorded in the trustee’s name.  The mortgage loans to be securitized would then be allocated to, and held in, a special unit of the titling trust, or “SUBI”.  A securitization trust would acquire the SUBI and would issue securities secured by the SUBI interest in the titling trust.  There would be no need for assignments in blank because the deed of trust would not have to be transferred outside of the titling trust until such time as the property was to be reconveyed to the original borrower.

Conclusion

It is now settled law in California that a plaintiff in a wrongful foreclosure may challenge an assignment to the foreclosing entity as void.  Although it is too late to rectify the manner in which the assignments securitization trusts were done in the past, we can change how we structure these transactions going forward.  The private securitization market is poised to make a comeback.  We should seize the opportunity to rectify the chain of assignment problem.

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.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP
Contact
more
less

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.