May 2, 2016
by Kayo Manson-Tompkins
The Wolf Firm
USFN Member (California)
The California Supreme Court has held that a borrower has standing to challenge an assignment of a deed of trust post-foreclosure. [Yvanova v. New Century Mortgage Corporation, 2016 Cal. LEXIS 956; WL 639526 (Feb. 18, 2016)]. Specifically, the Court concluded 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.”
This was a very surprising result. The great weight of authority in California — and throughout nonjudicial states — had been that a borrower did not have standing to challenge an assignment of mortgage, and thus a foreclosure could not be overturned if there was an improper assignment. [See, e.g., Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal. App. 4th 497, 156 Cal. Rptr. 3d 912 (2013); Siliga v. Mortgage Electronic Registration Systems, Inc., 219 Cal. App. 4th 75, 161 Cal. Rptr. 3d 500 (2013); Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256, 129 Cal. Rptr. 3d 467 (2011); and Herrera v. Federal National Mortgage Assn., 205 Cal. App. 4th 1495, 141 Cal. Rptr. 3d 326 (2012)].
The California Supreme Court disagreed with this logic, stating that the borrower does not owe monies to the “world at large” but to the entity that is legitimately entitled to payment and to enforce the debt against the security. The “harm” caused to the borrower is the loss of his home. The Supreme Court reversed the Court of Appeals’ judgment and remanded the case to reconsider whether Yvanova could file an amended complaint to plead wrongful foreclosure.
Borrowers now have another arrow in their quiver to potentially shoot down otherwise valid foreclosures. Cognizant of the upheaval this ruling would cause, the Supreme Court tried to carefully limit its holding. First, the Court made clear that its decision was limited to the issue of whether a borrower has standing to challenge an assignment of the deed of trust in a post-foreclosure proceeding. By doing so, the Court did not overturn decisions that precluded borrower standing on challenges made pre-foreclosure sale. Specifically, the Court stated:
"[D]isallowing 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 … the 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. We do not address the distinct question of whether, or under what circumstances, a borrower may bring an action for injunctive or declaratory relief to prevent a foreclosure sale from going forward."
Additionally, the Court made clear that it expressed no opinion as to whether the assignment was actually void, or whether any other challenges made by the borrower to the foreclosure were valid.
The immediate outcome of the Yvanova decision is that lenders and servicers will no longer be able to use a demurrer to quickly, and cost effectively, resolve litigation challenging the assignment (i.e., seek dismissal for the borrower-plaintiff’s failure to state a cause of action). Instead the matter will have to be litigated, thereby causing increased discovery costs as well as more lengthy and costly trials. Further, and despite the Court’s clear language that its ruling only applied to post-foreclosure actions, a rash of cases wrongfully using the Yvanova decision to challenge pending foreclosures can be anticipated.
Potential Title Claims — Finally, it is expected that the Yvanova case will result in previously precluded title claims now being raised in eviction proceedings. California eviction judges generally follow longstanding judicial decisions that title issues are not properly before the court in an eviction proceeding. For example, Old National Financial Services, Inc. v. Seibert, 194 Cal. App.3d 460 (1987), states at 465:
“... where the plaintiff in the unlawful detainer action is the purchaser at the trustee’s sale, he or she ‘need only prove a sale in compliance with the statute and the deed of trust, followed by a purchase at such sale and the defendant may only raise objections on that phase of the issue of title. Matters affecting the validity of the … primary obligation itself … are neither properly raised in this summary proceeding for possession, nor are they concluded by the judgment.’ (citations omitted).” (Emphasis is the court’s.)
The reasoning behind this rule is simple: “Because of its summary character, an unlawful detainer action is not a suitable vehicle to try complicated ownership issues …” [Mehr v. Superior Court, 139 Cal. App. 3d 1044, 1049 (1983)].
Nonetheless, even prior to the Yvanova decision, there were some California eviction judges who ignored precedent and believed that defendants were able to raise title issues as a defense to eviction, especially where those title issues related to alleged wrongful assignments. The Yvanova decision adds fuel to this fire.
Another case now pending before the California Supreme Court may definitively decide whether or not title issues can be raised in eviction proceedings. That is, Boyce v. T.D. Service Co., 235 Cal. App. 4th 429 (2015), which was ordered de-published pending review. Although the primary issue in Boyce concerns whether the lower court was in error in granting judgment based on res judicata, the underlying defense by the borrower was an alleged void assignment. The Boyce case has been ongoing since 2012, and the California Supreme Court was awaiting its decision in Yvanova before rendering an opinion in Boyce.
If the California Supreme Court allows defendants to litigate title in eviction actions, it will transform an otherwise summary proceeding into a lengthy and expensive trial. However, even if the pending decision in Boyce limits the ability to litigate title issues in eviction actions, Yvanova holds that a borrower has the right to challenge the validity of the beneficiary’s right to foreclose in a post-sale wrongful foreclosure action. Accordingly, the borrower can simply seek a stay of the summary eviction action, pending the separate title litigation. Of course, this will cause significant delays in obtaining possession of the property.
The California Supreme Court has spoken and, while it has tried to limit its ruling, the practical effect will be an increase in the frequency of litigation and a rise in the cost of that litigation.
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Spring 2016 USFN Report