The recent decision in Glaski v. Bank of America, National Association, et al., 160 Cal. Rptr. 3d 449 (2013), may, at least in certain circumstances, impact the ability of residential mortgage-backed security and commercial mortgage-backed security lenders to keep pooling and servicing agreements out of two-party borrower-lender disputes, and appears to place lenders on notice to verify the accuracy and effectiveness of their loan assignments.
In Glaski, the borrower's residence was foreclosed upon (due to nonpayment) by the successor to a securitized trust. After the foreclosure, the borrower filed a complaint for fraud, quiet title, wrongful foreclosure, declaratory relief and cancellation of foreclosure documents against the successor to the securitized trust, among other entities (the "Lender Defendants"). The Lender Defendants filed a demurrer (a motion to dismiss) to the complaint, which the lower court granted without leave to amend. The borrower appealed the decision to the California Court of Appeal, which vacated the order granting the demurrer on certain of the causes of action, allowing the borrower's complaint to survive at least in part.
Of particular note is that the Court of Appeal reversed the lower court on the count, alleging wrongful foreclosure. 160 Cal. Reptr. 3d at 459. Key to this reversal was whether the mortgage was properly transferred into a securitized trust, which impacted the borrower's standing to assert the cause of action. The loan was initially made by Washington Mutual Bank, FA (WaMu) in 2005. In late 2005, the WaMu Mortgage Pass-Through Certificates Series 2005-AR17 Trust was formed under New York law (the "Securitized Trust"). The loan documents in question, though, were not transferred into the Securitized Trust at that time. In September 2008, WaMu was seized by the FDIC, and its assets were sold to JPMorgan Chase Bank, N.A. ("Chase"). Also in September 2008, the borrower spoke to Chase, or an agent of Chase, about modifying his loan, and he continued to speak to Chase about modifying the loan through May 2009. Nevertheless, in December 2008, the borrower's loan documents were transferred by Chase to the Securitized Trust. On the same date that the loan documents were transferred to the Securitized Trust, a notice of default and election to sell under deed of trust was filed (a non-judicial foreclosure). On June 15, 2009, Chase as trustee transferred the loan documents to Bank of America as Trustee. Also on June 15, 2009, a trustee's deed upon sale was recorded. 160 Cal. Reptr. 3d at 455. The borrower's complaint alleged that the foreclosure was wrongful because the loan documents had not been properly transferred into the securitized trust, and the foreclosure was initiated by a party that did not hold the deed of trust. 160 Cal. Reptr. 3d at 454-55.
In particular, the borrower contended that because the loan was not transferred by the Securitized Trust's cutoff date provided for in the Pooling and Servicing Agreement governing the Securitized Trust (which was 90 days after December 2005), the purported transfer to the Securitized Trust was void, resulting in the foreclosure being void as well. In order for the borrower's allegations to succeed, and for the borrower to have standing, the borrower must have asserted a defect that would actually void the assignment of the loan documents, not merely render the assignment voidable. The Court of Appeal noted that there were two lines of cases: those holding that New York law provides that where a pooling and serving agreement establishes a closing date after which the trust may no longer accept loans, a trustee's attempt to accept a loan after the closing date is void; and those that hold such attempted transfers simply are voidable. 160 Cal. Reptr. 3d at 463. The Court of Appeal joined those courts that found such attempted transfers to be void.
The Court of Appeal found that the borrower's "factual allegations regarding post-closing date attempts to transfer his deed of trust into the WaMu Securitized Trust are sufficient to state a basis for concluding the attempted transfers were void. As a result, Glaski has stated a cognizable claim for wrongful foreclosure under the theory that the entity invoking the power of sale (i.e., Bank of America in its capacity as trustee for the WaMu Securitized Trust) was not the holder of the Glaski deed of trust." 160 Cal. Reptr. 3d at 463.
The court concluded:
"[t]hat a borrower may challenge the securitized trust's chain of ownership by alleging the attempts to transfer the deed of trust to the securitized trust (which was formed under New York law) occurred after the trust's closing date. Transfers that violate the terms of the trust instrument are void under New York trust law, and borrowers have standing to challenge void assignments of their loans even though they are not a party to, or a third party beneficiary of, the assignment agreement."
160 Cal. Reptr. 3d at 452.
The Court of Appeal consistently found that the mistake in failing to transfer the loan in question into the Securitized Trust could render the foreclosure void and, in any event, could form the basis for other types of relief such as damages. 160 Cal. Reptr. 3d at 466. As such, the complaint stated a claim for wrongful foreclosure, quiet title, declaratory relief, cancellation of instruments and unfair business practices. The Court of Appeal directed the lower court to vacate the order sustaining the demurrer and to enter a new order overruling the demurrer as to these causes of action.
Takeaway for Lenders
Although Glaski is a residential case that was decided at the demurrer stage, it is likely to be used by borrowers in "chain of title" challenges, and it may have opened the door to arguments that the pooling and servicing agreement has a place in a two-party dispute between a borrower and lender.