In Steinberger v. McVey, the Arizona Court of Appeals breathed life into what most would label standard “show me the note” claims, in which borrowers challenge their lenders’ authority to foreclose, despite admitting their default. It also found that mortgage servicers can assume tort duties when undertaking to consider borrowers’ requests to reduce mortgage payments. In doing so, it presents an analysis that is contrary to trending authority that is likely to spur unfounded and protracted litigation against mortgage lenders and servicers.
While emphasizing the opinion’s limitations to the specifics of Steinberger’s complaint, this action presents familiar fact patterns. The borrower originated his mortgage loan with one lender, but it was later assigned to a mortgaged-backed security. The borrower (in this case, the borrower’s heir, Steinberger) sought a loan modification to reduce her payments, and supposedly stopped paying because the lender advised she would not qualify “unless she was in default.” The lender noticed a trustee’s sale while it considered her request. Steinberger eventually filed suit against her lender and others, and sought an injunction to bar the trustee’s sale.
While the trial court granted the injunction, it later granted defendants’ motion to dismiss. The Court of Appeals accepted special action jurisdiction, reversed the trial court’s dismissal on several key grounds and reinstated the injunction. As the Court of Appeals observed, the main remedy sought was a declaration that defendants “lack the authority to foreclose on [Steinberger’s] home.” So long as the trustee’s sale has been enjoined, said the Court of Appeals, borrowers may challenge the authority of their lenders to foreclose by making an affirmative, good faith allegation that the trustee or beneficiary is not the “true” trustee or beneficiary.
In explaining its reasoning, the Court of Appeals assigned significance to factual allegations that are of no consequence. For example, Steinberger alleged that the individual who executed an assignment from MERS (the original deed of trust beneficiary) to IndyMac Federal in 2009 had no authority to do so because he “was employed by IndyMac Federal, not MERS.” Of course, there are no allegations that MERS disclaimed the assignment, and the Ninth Circuit has recognized that “MERS relies on its members to have someone on their own staff become a MERS officer with the authority to sign documents on behalf of MERS.” Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1040 (9th Cir. 2011).
As another example, Steinberger alleged that the notary on the deed of trust assignment “did not personally witness” the signature and rather notarized the document six weeks later. Of course, notaries do not need to witness signatures for them to be valid under Arizona law. Das v. JPMorgan Chase Bank, N.A., 2012 WL 1658718, at *2 (D. Ariz. May 11, 2012) (“A notary need not actually witness a signature or ask for photo identification for the notarization to be effective.”); Nichols v. Bosco, et al., 2011 WL 814916, at *4 (D. Ariz. Mar. 4, 2011) (“Arizona law does not require a notary to actually witness a signature.”). Nonetheless, the Court of Appeals found that allegations such as these have the capacity to “seriously undermine the validity of the title transfers” if proven true.
The Arizona Supreme Court decided a related issue in Hogan v. Washington Mutual Bank, holding that “Arizona’s non-judicial foreclosure statutes do not require the beneficiary to prove its authority or ‘show the note’ before the trustee may commence a non-judicial foreclosure.” 230 Ariz. 584, 585, 277 P.3d 781, 782 (2012). But the Steinberger court sought to sidestep Hogan, noting that Steinberger affirmatively alleged that defendants lacked authority to conduct a trustee’s sale; Hogan did not.
The Steinberger court also found that loan servicers can be liable to borrowers for negligent performance of an assumed duty, and here found a legally sufficient claim of “negligent administration of the loan modification,” which supposedly “increased the risk that Steinberger would default on her loan and lose her home in foreclosure.” Of course, Steinberger did not allege that her lender promised to modify her loan, only to consider her request. Certainly a loan servicer should not be found to assume tort duties when doing nothing more than promising to consider a borrower’s request to reduce payments.
On the heels of decisions such as Stauffer v. U.S. Bank National Assoc., et al., 233 Ariz. 22, 308 P.3d 1173 (Ct. App. 2013), the Arizona Court of Appeals has again departed from the sound jurisprudence that has developed since the balloon of foreclosure avoidance litigation several years ago. Allegations such as those advanced by Steinberger are largely recycled among the myriad of lawsuits pending in Arizona and elsewhere. Thus, if left to stand, Steinberger has the potential to delay proper foreclosures and unnecessarily consume resources as servicers are forced to task personnel with assisting in defensive litigation rather than focusing on deserving borrowers with loan modification needs.