Consider a scenario where in 2006, a borrower bought a house in California thru NCM Mortgage. Five years later, in 2011, NCM Mortgage assigned the loan to MS Trust. The terms of the MS Trust required that all transfers into the trust must be completed no later than December 31, 2007. Sometime thereafter, the borrower defaulted on the mortgage obligations, and MS Trust foreclosed on the property. After the foreclosure was completed, the borrower learned that NCM Mortgage filed for bankruptcy in 2007 and ceased to exist shortly thereafter. The borrower consequently filed an action for wrongful foreclosure based on (1) the purported invalidity of the assignment of the loan to MS Trust four years after NCM Mortgage’s bankruptcy and the trust’s closing date and (2) questions about the legitimacy of MS Trust’s ownership and standing to foreclose on the property.
The lower courts ruled that the borrower did not have the right to sue because of their default status and also held that the borrower lacked the standing to challenge the transfer in question because they were not a party to the transfer. However, upon appeal, the California Supreme Court recently found that the borrower’s default status and lack of direct involvement with the transfer did not prohibit the borrower from suing for wrongful foreclosure based on the assertion that the 2011 assignment to MS Trust was void at the time of the transfer. An important factor was that the trustee’s sale had occurred and foreclosure completed.
What does this mean and what effect does this ruling have on pending and future foreclosure actions?
The California Supreme Court provided a narrow opportunity for borrowers to pursue wrongful foreclosure actions on completed non-judicial foreclosures by permitting borrowers to challenge certain transfers of ownership of the underlying promissory note and deed of trust.
In Yvanova v. New Century Mortgage (2016) 62 Cal.4th 919, the Supreme Court held that a borrower can challenge a transfer of the lender’s interest in the promissory note and deed of trust when the transfer was void (as opposed to voidable) at the time of the transfer. The Supreme Court stated:
“We conclude that a home loan borrower has standing to claim a non-judicial 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.”
In Yvanova, the lender’s interest in the deed of trust was assigned at the end of 2011 to a securitized trust (the “Assignee”). However, the Assignee’s trust agreement provided that all deeds of trust assigned to the Assignee were to be assigned to the Assignee no later than January 27, 2007. Thus, when the Yvanova deed of trust was assigned to the Assignee in 2011, the Assignee’s trust was already closed to further trust deed assignments. Therefore the assignment in Yvanova was void.
Further, even though the Assignee’s trust still existed and, therefore, the Assignee could normally have ratified the transfer, the party transferring the note and deed of trust (New Century Mortgage) to the Assignee had previously filed for bankruptcy protection and was no longer in business. As a result, the assignment by New Century could not be ratified.
As a result, the California Supreme Court held that the assignment of the Yvanova deed of trust to the Assignee was void, not voidable. Therefore, the Trust could not instruct a trustee to foreclose.
The Court stated that its ruling was narrow: (1) the assignment of the deed of trust must be void (not voidable); and (2) the foreclosure being challenged must have been completed. Without the existence of both a void assignment and a completed foreclosure, a borrower does not have standing to challenge the foreclosure.
The Supreme Court explained its rationale for distinguishing between void and voidable assignments. While a voidable transfer may be ratified or validated after the act takes place, a void transfer cannot be ratified. Since the assignment was void, the Supreme Court ruled that the present holder of the promissory note and deed of trust did not have legal standing to instruct a trustee to commence a foreclosure and, therefore, the foreclosure trustee could not foreclose.
The Supreme Court made it clear that such a challenge could not preempt (stop) a pending foreclosure sale. This was reiterated shortly after the Yvanova decision in Saterback v. JP Morgan Chase (2016) 245 Cal.App.4th 808 (citing Yvanova,). In Saterback, the California Court of Appeal held that the “narrow question” under review in Yvanova was whether a borrower seeking remedies for wrongful foreclosure has standing to challenge a completed foreclosure, not whether a borrower could stop a pending non-judicial foreclosure.