In the area of consumer lending litigation, plaintiffs’ and defense attorneys alike have waited with bated breath for the California Supreme Court to issue its decision in Yvanova v. New Century Mortgage Corp. The decision was published today.1
Although the opinion, at first glance, appears to open the door for defaulting mortgage borrowers to halt foreclosures and sue for alleged problems with the transfer of their mortgage loans to mortgage-backed securities trusts, closer scrutiny shows the opinion should do no such thing. In Yvanova, the Supreme Court has issued a cautiously “narrow” holding, left a lot of important questions truly affecting “wrongful foreclosure” litigation unanswered, and left a good portion of pro-lender opinions in the same area untouched.
1. Yvanova’s Holding
Yvanova has now held that “a home loan borrower has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void, depriving the foreclosing party of any legitimate authority to order a trustee’s sale.” Slip op. at 30. As broad as that holding may seem to the mortgage lending industry, the Court in Yvanova repeatedly stated that there are limits to the opinion. And it also left unaddressed questions, the answers to which will determine the viability of suits that may be brought in light of its holding.
2. The Limits to Yvanova’s Holding
First, the Court in Yvanova repeatedly and specifically stated that its holding is only applicable to wrongful foreclosure tort claims brought by borrowers after a foreclosure sale has already taken place. Id. at 17.2 Repeated at least three times throughout the opinion, this appears to be a real, immutable limitation.
Second, the Court offered no opinion as to whether allegations like those asserted by Yvanova even render an assignment void, as opposed to merely voidable. As the Court pointed out, federal courts frequently do examine the nature of the alleged “flaw” in the assignment’s transfer process to see if the borrower-plaintiff has alleged a flaw in that process that renders the transaction “void,” as opposed to “voidable.” Borrowers, post-foreclosure, should not be able to avail themselves of Yvanova’s holding if the alleged defect does not render the aggrieved transaction completely void.
For instance, in Glaski v. Bank of America, 218 Cal. App. 4th 1079 (2013), the borrower alleged that an assignee-trust received its interest in the mortgage loan after the contractual closing date for the trust to accept the mortgage loan into its corpus. The borrower further alleged that the contract the assignee-trust operated under in obtaining the mortgage loan included a New York choice of law provision. The borrower and the Glaski court concluded, on demurrer, that the alleged flaw in the transaction would, under New York trust law, render the transaction and associated assignment void, as opposed to voidable.
The Yvanova Court expressly declined to review the issue of what type of alleged flaw actually renders an assignment void. In fact, the flaw alleged in Glaski (and not addressed in Yvanova) likely does not render an assignment void.
In In re Sadri, 501 B.R. 369, 376 (N.D. Cal. 2013) a federal bankruptcy court in California spoke directly to this issue in saying:
The Glaski court cited only two cases in support of its determination that acts by a trustee in contravention of a trust were void. The first, Wells Fargo Bank, N.A. v. Erobobo, 39 Misc. 3d 1220(A), 972 N.Y.S.2d 147 (N.Y.Sup.Ct.2013), was issued by a New York trial court. Its reasoning and holding has been called into doubt. See Koufos v. U.S. Bank, N.A., 939 F.Supp.2d 40 (D.Mass.2013); Orellana v. Deutsche Bank Nat. Trust Co., 2013 WL 5348596 (D. Mass. Aug. 30, 2013). The second is an unpublished opinion by the Bankruptcy Court for the Southern District of Texas that relies on Erobobo and that is inconsistent with a district court decision from that district issued just days earlier. In re Saldivar, 2013 WL 2452699, at *4 (Bankr.S.D. Tex. June 5, 2013) (transfer was void); compare to Sigaran v. U.S. Bank Nat. Ass’n, 2013 WL 2368336 at *3 (S.D. Tex. May 29, 2013) (holding that “assignments made after the Trust’s closing date are voidable, rather than void”).
Thus, courts and counsel should now anticipate detailed briefing, even at the pleading stage, on the issue of whether the alleged flaw in the transaction by which an assignee-trust obtained a mortgage loan rendered the transaction void, or voidable.
Third, the Court in Yvanova left open other unaddressed issues relevant to the ultimate maintenance of a wrongful foreclosure case. For instance, can a borrower maintain a wrongful foreclosure suit where the borrower is in default and would have been foreclosed on by any holder of the note, old or new? Indeed, Yvanova’s analysis of “prejudice” was limited to prejudice in the context of standing, and did not address whether a borrower could legitimately allege prejudice as an element of the tort of wrongful foreclosure.
Although there are unanswered questions and limitations in the wake of Yvanova, one thing is certain: litigation in California will continue on this issue as both sides of the bar test the true boundaries of the opinion’s expressed limitations.
1 Tsvetana Yvanova v. New Century Mortgage Corp. et al., Case No. S218973 (Cal. Feb. 18, 2016), http://www.courts.ca.gov/opinions/documents/S218973.PDF.
2 “[T]he concrete question in the present case is whether plaintiff should be permitted to amend her complaint to seek redress, in a wrongful foreclosure count, for the trustee’s sale that has already taken place.” Yvanova, slip op. at 17; see also id. at 2 ( “Our ruling in this case is a narrow one. . . . We 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.”).