For anyone who missed it, the California Supreme Court ruled earlier this year that a borrower has standing to allege wrongful foreclosure based on a void (but not merely voidable) assignment of the underlying note and deed of trust. See my earlier post on the Yvanova decision here: California Supreme Court: Borrowers Have Standing to Allege Wrongful Foreclosure Based on Void Assignment of Note
In Yvanova, the Supreme Court did not rule on the critical issue of whether the assignment of a note to a New York securitized trust after the trust’s closing date was void or instead, merely voidable, leaving that issue for the lower court to resolve.
After the publication of Yvanova, a couple of California Court of Appeal opinions have answered the question left open by the Supreme Court. The first was Saterbak, in which the Court of Appeal held that, based on New York authority, a technically defective assignment of a deed of trust was merely voidable by the beneficiary (not by the borrower), and therefore not void. See my earlier post on the Saterbak decision here: Court of Appeal Rules on “Standing to Challenge Foreclosure” Issues Left Unaddressed by Yvanova
Now, another case — Yhudai v. Impac Funding Corp. — has held similarly, making it more difficult for borrowers to rely on the theory of “invalid assignment.”
Facts: Borrower challenges foreclosure based on “void” assignment of deed of trust
The borrower obtained a $1.8 million loan from Impac Funding. The deed of trust stated that the note and deed of trust could be sold one or more times without prior notice to the borrower.
On March 29, 2007, Impac sold the note to the ISA Trust, a securitized investment trust formed under New York law pursuant to a pooling and service agreement. Under the pooling and service agreement, for a loan to be included in the ISA Trust, it had to be transferred into the trust by the “closing date” of March 29, 2007.
More than two years later, in 2009, Impac recorded an assignment of the deed of trust to Deutsche Bank, trustee of the ISA Trust.
The borrower defaulted, and the ISA Trust foreclosed.
The borrower sued, challenging the trustee’s sale on the grounds that the 2009 assignment of the deed of trust was void, since it post-dated the ISA Trust’s closing date.
The trial court dismissed the case on a demurrer, and the borrower appealed.
The Court of Appeal’s opinion: No standing; no dice.
The Court of Appeal affirmed the trial court’s decision.
The court tackled the issue left unaddressed by Yvanova. Looking to New York law, the court observed that recent decisions from New York appellate courts uniformly clarified that borrowers do not have standing to challenge assignments of notes or deeds of trust based on purported noncompliance with provisions of the trust’s pooling and service agreement.
The court found these New York decisions persuasive because under New York law, “unauthorized acts by trustees may generally be approved, or ratified, by the trust beneficiaries.” Allowing a stranger to the trust — i.e., a borrower — to declare a transaction void would directly conflict with the beneficiaries’ rights to ratify the transaction.
Even under California law, the court noted that the borrower would still be out of luck because in California a deed of trust is “inseparable” from the note it secures, and follows it even without a separate assignment.
The lesson from the Yhudai case is best summarized by the court’s holding: “a postclosing assignment of a loan to an investment trust that violates the terms of the trust renders the assignment voidable, not void, under New York law.”
As such, borrowers who are outsiders to New York trusts owning their loans cannot seek to unwind a foreclosure sale based on the trust’s sloppy assignment paper trail.