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Calif. Supreme Court Lets Borrowers Challenge Wrongful Foreclosures

By Kate Berry

"A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights," according to a California Supreme Court ruling that borrowers can contest foreclosures if the purported holder of a loan cannot prove it is the legitimate owner.

The California Supreme Court on Thursday ruled that borrowers may challenge a wrongful foreclosure on the grounds that the assignment of the deed of trust was invalid.

The decision in Yvanova v. New Century Mortgage Corp. has the potential to radically increase the number of lawsuits brought by borrowers, particularly on loans that were pooled into securitized trusts, experts on both sides of the issue said.

"There will be a flood of litigation only because the lending industry was not diligent in doing its paperwork during the housing finance boom," said Richard Antognini, who represented the plaintiff, California homeowner Tsvetana Yvanova.

The decision tackles a question that became important after the housing market's collapse in 2008: can a defaulted homeowner contest the validity of the chain of assignments involved in the securitization of loans?

In 2012 Yvanova challenged the foreclosure and public auction of her Woodland Hills, Calif., home, alleging there was a four-year break in the chain of title, essentially making it void.

Yvanova in 2006 took out a loan for $483,000 from Irvine, Calif.-based New Century Mortgage, which went bankrupt the next year. In 2011 the mortgage servicer Ocwen Loan Servicing executed an assignment of the deed of trust on Yvanova's loan to Deutsche Bank, which served as a trustee of a Morgan Stanley investment trust.

But Yvanova alleged that the Morgan Stanley investment trust had a closing date of January 2007 and should never have been assigned the mortgage. But the foreclosure went through, and Yvanova ultimately was evicted in May 2015.

Multiple lower courts in California had ruled in high-profile cases such as Jenkins v. JPMorgan Chase that borrowers have no standing to file a claim of wrongful foreclosure because they are not a party to or holder of the debt.

However, the state Supreme Court disagreed with those rulings and essentially sided with a 2013 state appellate ruling in Glaski v. Bank of America, which held that a borrower has standing to challenge a nonjudicial foreclosure sale based on alleged violations of the terms of a pooling and servicing agreement.

"The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security," the Supreme Court stated in a 33-page ruling. "A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights at the foreclosing entity's hands. No more is required for standing to sue."

The case now will go back to the state Court of Appeals or a trial court, which would decide on the merits of Yvanova's claim.

Frederick Levin, a partner at BuckleySandler, said the decision will breathe new life into the foreclosure defense bar, which believes that a loan assigned into a securitized trust after the trust's closing date makes the assignment void.

"This decision has [the] potential to increase litigation challenging securitized loans," said Levin, who on behalf of banks has long argued that contractual language gives investors and lenders broad latitude to reassign loans.

Others said the court was sending a big message to the lending industry.

"This was the court in California directing lenders and Wall Street securitizers to be very careful in documenting their instruments and assignments," said Kenneth Styles, a litigator at the law firm Miller Starr Regalia. "They've been more than sloppy in the past, and this was a directive to make sure their procedures are clean."

Antognini, the attorney for Yvanova, put it this way: "if you claim you own a debt, you have to prove it. And if you claim to own a debt, the borrower has the ability to allege and later to prove that you don't own it."

Into the void: What the decision in Yvanova means

February 22, 2016

Robert Finlay and Jonathan Fink


The California Supreme Court leaves much unresolved in case

The California Supreme Court has just issued its much anticipated decision in the case of Yvanova v. New Century Mortgage Corporation. As stated by the Supreme Court in its order granting review, the sole issue up for review in Yvanova was: “In an action for wrongful foreclosure on a deed of trust securing a home loan, does the borrower have standing to challenge an assignment of the note and deed of trust on the basis of defects allegedly rendering the assignment void?” Unfortunately, despite extensive briefing on both sides concerning the necessary and possible consequences of that determination, the Court’s opinion explicitly stated:

Our ruling in this case is a narrow one. We hold only that a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment. 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. Nor do we hold or suggest that plaintiff in this case has alleged facts showing the assignment is void or that, to the extent she has, she will be able to prove those facts.  Nor, finally, in rejecting defendants’ arguments on standing do we address any of the substantive elements of the wrongful foreclosure tort or the factual showing necessary to meet those elements. [Opinion at p. 2]

Essentially, despite expounding on the issues for 30 pages, the opinion just stands for the unremarkable (and, largely, undisputed) proposition that a borrower has standing to sue for wrongful foreclosure where the transaction by which the beneficiary acquired the loan was void at its inception. That point was even conceded, to some degree, by respondents in their brief.

What the Supreme Court specifically avoided doing, however, was to provide any clarity or even guidance as to what constitutes a void versus merely voidable transaction1, with what level of specificity a borrower must plead to establish a claim that the transaction was void (so as to be able to survive a demurrer or motion to dismiss), whether tender is required as a precondition of the borrower’s suit (as it otherwise typically is in wrongful foreclosure actions), or, most importantly, whether the borrower can bring a pre-emptive (pre-foreclosure) challenge on the basis of a claim that the transaction was void [“This aspect of Jenkins, disallowing the use of a lawsuit to preempt a nonjudicial foreclosure, is not within the scope of our review, which is limited to a borrower’s standing to challenge an assignment in an action seeking remedies for wrongful foreclosure.” Opinion at pp.16-17].2

The Court declined to consider any of the factual arguments made by Respondent to show that, in this particular case, at least, the transaction was, at worst, voidable. Oddly, the Court also did not address the purely legal issue (although argued in the briefs) of whether an assignment needed to be recorded at all to effect the transfer of the loan. These issues were all left to the lower courts to determine in the individual cases.3

What the Court did do, though, that might prove troublesome in cases still pending or yet to be filed, is reject the defense arguments that other, lower court cases had sometimes relied upon to the effect that: 

      1. It is irrelevant to the borrower who is enforcing the debt,
      2. There is no harm/prejudice to the borrower from the “wrong party” foreclosing if the loan is in default
      3. The borrower must show that the “true” owner would have refrained from foreclosing
      4. Borrowers lack standing to challenge an assignment as void because they are not parties to the assignment.4

The focus of defense will thus need to shift away from those arguments to issues which might pose more factual questions that are not usually suitable for resolution on demurrer or motion to dismiss.

Of course, given the recent change in the law concerning demurrers in California, there is already reason for beneficiaries/servicers to consider deferring their challenges to the borrower’s claims of void transactions to a summary judgment motion, where the “facts” alleged by the borrower can more fully be refuted. However, motions to dismiss in federal court remain potentially fruitful options given the stricter pleading standards imposed by the federal system.

The impact of the Supreme Court’s ruling on the lending and foreclosure industries — and the courts — in California will likely be significant. The uncertainty on the unresolved issues will undoubtedly lead to more litigation and confusion and create far greater expense for borrowers, lenders, servicers and foreclosure trustees.

It will also, inevitably, further inundate an already over-burdened court system. As noted in our Amicus Brief in support of the respondents’ position5, among the likely detrimental effects of an adverse ruling here would be: an increased cost to obtain loans in California; tighter underwriting standards to reduce the risk of default; fewer investors willing to take the risk of secondary market loans (further drying up funding sources); an increased risk and rate of borrower defaults as borrowers find it harder to obtain new credit (and/or as a result of some less scrupulous borrowers’ “gaming the system” to continue to live in properties without having to make any payments to anyone); a decrease of available housing in the market since there will be fewer foreclosed properties for sale; and those properties on which borrowers are already not making their loan payments are also less likely to be properly insured or maintained, resulting in increased blight and property hazards.

The opinion the Court ultimately issued here does nothing to assuage those concerns.

[1] The Court did concede, though, that defects which merely rendered a transaction voidable would not suffice for the borrower to bring suit. [Opinion at p.20]

[2] Although the Court briefly discussed the holding in Kan v. Guild Mortgage Co. (2014) 230 Cal.App.4th 736, rejecting borrower standing to sue for a supposedly void transaction prior to a foreclosure sale taking place, the Court expressed no opinion as to whether Kan was correctly decided. [Opinion at p.27] While Yvanova is now likely to be invoked there as well, Kan remains a published opinion, which can and should still be cited in preforeclosure cases.

[3] The Court also declined, as unnecessary to its opinion, to determine whether the California Homeowners Bill of Rights supported a borrower’s standing to sue. Thus leaving that issue open for argument as well. [Opinion at p.28]

[4] The Court expressly disapproved Jenkins v. JPMorgan Chase Bank, N.A.; Siliga v. Mortgage Electronic Registration Systems, Inc.; Fontenot v. Wells Fargo Bank, N.A.; and Herrera v. Federal National Mortgage Assn., “to the extent they held borrowers lack standing to challenge an assignment of the deed of trust as void.” [Opinion at p.25, fn.13].

[5] Wright, Finlay & Zak, LLP filed an Amicus Curie brief on behalf of industry groups, the United Trustees Association and American Legal and Financial Network.

Robert Finlay is one of the three founding partners of Wright, Finlay & Zak. Since 1994, Finlay has focused his legal career on consumer credit, mortgage and real estate litigation and compliance matters. Finlay has authored several amicus briefs on key issues impacting the mortgage and finance industry.

Jonathan Fink is a partner at Wright, Finlay & Zak. Fink has practiced in the fields of bank and finance, commercial, and real estate litigation since 1985, representing a variety of financial institutions and other businesses both in State and Federal Court, as well as in alternative dispute resolution proceedings. These cases have included numerous class action, mass joinder and multi-district litigation matters. Fink also has extensive appellate experience in both state and federal courts, having handled in excess of 100 appeals. In addition, Fink has been responsible for several amicus briefs on appeals in which non-party clients had an interest that needed to be presented and protected.

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