California Supreme Courts Holds that Borrowers Can State a Claim for Wrongful Foreclosure Based on a Void Assignment of the Loan; Declines to Decide Whether a Late Assignment Into a Securitized Trust Is Void Under New York Law

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In recent years, the plaintiffs' bar for borrowers resisting foreclosures has pushed the theory that a claim can be stated for wrongful foreclosure where a loan was transferred into a securitized trust after the closing date set forth in the trust's pooling and servicing agreement, or PSA. Such an assignment, it has been argued, is not only voidable, but void, meaning that the foreclosing entity has no power to foreclose at all. In 2013, the California Court of Appeal (the intermediate appellate court in California) held 1) that a borrower had standing to assert that such an assignment was void and 2) that such a transfer was void under New York law (which applied to the PSA in question.) See Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013). Glaski was roundly criticized and was not followed by other appellate court decisions and many federal courts. Westlaw, in fact, shows no fewer than 148 citations which criticized or distinguished Glaski.

This morning, the California Supreme Court issued its decision in Yvanova v. New Century Mortgage Corp., which addressed the general issue in Glaski. See Case No.S218973, Feb. 18, 2016, available at http://www.courts.ca.gov/opinions/documents/S218973.PDF. For lenders and loan servicers, the decision is not a good one, though it is not as bad as it could have been. The Supreme Court explicitly held that "because in a nonjudicial foreclosure only the original beneficiary of a deed of trust or its assignee or agent may direct the trustee to sell the property, an allegation that the assignment was void, and not merely voidable at the behest of the parties to the agreement, will support an action for wrongful foreclosure." Slip. Op. at 2. "If a purported assignment necessary to the chain by which the foreclosing entity claims th[e] power [to foreclose] is absolutely void, meaning of no legal force or effect whatsoever... the foreclosing entity has acted without legal authority by pursuing a trustee's sale, and such an unauthorized sale constitutes a wrongful foreclosure." Id. at 18-19. In effect, the Supreme Court approved of Glaski's first holding that a borrower can state a claim for wrongful foreclosure by alleging that an assignment of the loan was void, rather than merely voidable.

Just as important, however, is what the court declined to decide. Crucial to the outcome in Glaski was that the court in that case held that, not only did a borrower have standing to assert a void assignment, but that a transfer of a loan into a securitized trust after the PSA closing date is, in fact, void under New York law. 218 Cal.App.4th at 262-263. The Supreme Court in Yvanova expressly refused to address that question. Slip Op. at 13 ("We did not include in our order [granting review] the question of whether a postclosing date transfer into a New York securitized trust is void or merely voidable, and though the parties' briefs address it, we express no opinion on the question here.")

The practical import of Yvanova is that it is likely to give plaintiffs encouragement to bring wrongful foreclosure claims which allege that an assignment was void, rather than merely voidable. However, the decision's failure to address the underlying issue (whether a "late" transfer into a trust is void itself) gives defendants the opportunity to argue that Glaski's decision was wrong as a matter of substantive New York law. Lenders and loan servicers should therefore gather authority for that proposition in drafting demurrers or motions to dismiss such claims. The Yvanova decision also left open the question of what remedies a plaintiff, who otherwise is in default on a loan, would be entitled to under such a theory. See Slip. Op. at 9, n. 4. In addition, the Supreme Court's statement that "[w]e 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" (Id. at 2) leaves open the argument that a wrongful foreclosure claim of this sort cannot be used to prevent or halt a foreclosure in process — though the Supreme Court's analysis here is bit murky. (Finally, the Supreme Court noted that it was not deciding whether a borrower would have to tender the amount of the debt to bring such a claim, but, in a not-so-subtle aside, cited to cases holding that tender may be excused in the face of a void assignment. Id. at 9, n.4.)

The takeaway from Yvanova is that loan servicers and lenders will need to shift their emphasis in this type of case from asserting that borrowers have no standing at all to asserting that, under New York law (or the applicable law under the PSA), the assignment was not void, but merely voidable. Other arguments are also still available to defendants, but will require time and appellate development to understand the exact implications of the decision in Yvanova.

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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