Consumer Finance Litigation

Action Item: In a ruling last week, the California Supreme Court supported Glaski and issued a narrow holding that, post-foreclosure, borrowers have standing to assert wrongful foreclosure based on allegations that an underlying assignment is void. Servicers should be prepared for additional wrongful foreclosure claims by borrowers asserting that assignments of the mortgage were void.

On February 18, 2016, the California Supreme Court resolved a split in the Courts of Appeal and unanimously held that a mortgage loan borrower has standing to sue for wrongful foreclosure, based on an allegedly void assignment. Tsvetana Yvanova v. New Century Mortgage Corp. et al., Case No. S218973 (Cal. Feb. 18, 2016).¹ The court reasoned that the foreclosure itself is sufficient prejudice for standing purposes. The opinion did not extend to pre-foreclosure claims, did not address whether a borrower must allege tender to state a cause of action for wrongful foreclosure, did not address what facts render an assignment void, and explicitly limited its ruling to void—not voidable—mortgage assignments.

Summary of Facts and Case Background

Plaintiff-borrower Tsvetana Yvanova sued her mortgage lender, New Century Mortgage Corporation (“New Century”), and others for various foreclosure-related causes of action, with a single cause of action for quiet title remaining in her second amended complaint. Yvanova alleged that in 2006, she obtained a $483,000 loan from New Century, for which she provided a deed of trust as security. In 2007, New Century filed for bankruptcy and was liquidated in August 2008. In December 2011, the servicer on behalf of New Century, executed an assignment, transferring the Deed of Trust to Deutsche Bank National Trust Company (“Deutsche Bank”) as the trustee for a securitized trust. The closing date for the securitized trust was in January 2007. In August 2012, Western Progressive LLC recorded (1) a substitution of the trustee, substituting itself for Deutsche Bank, and (2) a notice of the trustee’s sale. On September 14, 2012, the property was sold at a public auction by Western Progressive LLC to a third-party.

Yvanova alleged the December 2011 Assignment of the Deed of Trust from New Century to Deutsche Bank was void because: (1) New Century lacked the authority to transfer the Deed of Trust in 2011, because its assets were transferred to the bankruptcy trustee in 2008, and (2) the investment trust was closed in 2007. The superior court sustained the defendants’ demurrer without leave to amend.

The Court of Appeal affirmed the judgment, concluding that Yvanova could not state a claim for quiet title, because Yvanova had not alleged the tender of the amount due. The Court of Appeal also determined that Yvanova could not, on the facts alleged, amend her complaint to state a claim for wrongful foreclosure because, as a third-party unrelated to the assignment at issue, Yvanova was not affected by any alleged deficiencies in the assignment and, therefore, lacked standing to enforce the terms of the agreements allegedly violated. In so ruling, the Court of Appeal declined to follow the holding of Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013). Yvanova petitioned for review before the California Supreme Court, which granted review on August 27, 2014. Yvanova v. New Century Mortg. Corp., 331 P.3d 1275 (Cal. 2014).

California Supreme Court Decision

The California Supreme Court limited its review to the following: “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?” Yvanova, 331 P.3d at 1275. The court found in the affirmative, following the reasoning in Glaski, supra, and rejecting the holding in Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, to the extent that those cases addressed a borrower’s standing to assert a post-foreclosure claim of wrongful foreclosure based on a void assignment. Specifically, the court found that an entity foreclosing following a void assignment of the deed of trust, as opposed to a merely voidable assignment, acts without legal authority to do so. Under such circumstances, a borrower has standing to state a claim for wrongful foreclosure, because he or she has suffered the loss of ownership of the property.

The court explicitly noted that its holding was limited to the issue of standing in post-foreclosure cases. The court did not determine whether the defects alleged by Yvanova would render an assignment void, and declined to address what facts must be alleged to demonstrate a void assignment. The court further declined to extend its analysis of prejudice beyond the standing context.

Conclusion

The Yvanova opinion will likely embolden aggrieved borrowers to assert wrongful foreclosure claims based on allegedly void assignments, which may result in extended briefing at the pleading and/or summary judgment stage on whether an assignment is void, voidable, or valid. However, the limitations of the court’s holding still permit defendants to challenge the borrower’s failure to tender, whether the underlying facts regarding the assignment render it void and whether the borrower has sufficiently alleged prejudice as an element of wrongful foreclosure.

Mr. Streibich would like to thank Todd Boock and Shawnda Grady for their assistance in preparing this alert.

1. http://www.courts.ca.gov/opinions/documents/S218973.PDF