Borrower Has Standing to Challenge Void Assignment

The Supreme Court of California held that a borrower on a home loan secured by a deed of trust has standing to base an action for wrongful foreclosure on allegations that defects in the purported assignment of the note and deed of trust renders the assignment void. Yvanova v. New Century Mortgage Corp., No. S218973 (Cal. Feb. 18, 2016).

In 2006, Ms. Yvanova executed a deed of trust in favor of New Century. In 2007, New Century was dissolved in a bankruptcy liquidation. In 2011, New Century assigned Ms. Yvanova’s deed of trust to Deutsche Bank as trustee to Morgan Stanley investment trust. The Morgan Stanley investment trust, however, had a closing date of January 27, 2007 by which all assignments had to be transferred. Western Progressive, the substitute trustee for Deutsche Bank, gave notice of trustee’s sale of the property on August 20, 2012. The property was sold at public auction on September 14, 2012.

Ms. Yvanova filed suit in state court for quiet title alleging that the assignment to Morgan Stanley was void because 1) New Century’s assets had previously been transferred to the bankruptcy trustee, and 2) the Morgan Stanley trust had closed prior to the assignment. The court granted the defendants’ demurrer finding that Ms. Yvanova lacked standing to challenge the foreclosure on the basis of invalid assignment of the mortgage because she was not a party to that assignment. The appellate court affirmed.

Generally, under California law, a deed of trust is a negotiable instrument and borrowers may not object to its assignment. In the event of default, only the current assignee is entitled to enforce the note through nonjudicial foreclosure.

In finding that Ms. Yvanova had standing, the court distinguished between assignments that are void and those that are merely voidable. An assignment that is void is a nullity; it has no legal effect. A contract that is voidable has a defect that would subject it to being rendered void, but it is not considered void unless action is taken. In Glaski v. Bank of America (2013) 218 Cal.App.4th 1079, the borrower, like Ms. Yvanova, challenged a foreclosure on the grounds that the deed of trust had been assigned after the trust had closed. The Glaski court found that the borrower had a legitimate cause of action so long as she could present facts demonstrating that the beneficiary on whose behalf the trustee initiated foreclosure was not the true beneficiary. That court determined that when a deed of trust is assigned to a trust after that trust was closed the assignment is void and the borrower has standing to challenge a foreclosure conducted on behalf of the purported assignee.

The court walked through the cases which Glaski discussed. In Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282  (1st Cir. 2013), the First Circuit rejected the broad rule that a borrower lacks standing to challenge an assignment that is void ab initio, finding that the borrower suffers the requisite harm by reason of the enforcement of the note by a non-owner. The court noted that under Massachusetts law, a broad rule that a borrower never has standing to challenge a foreclosure based on a void assignment would have the effect of depriving the borrower of any method of challenging a wrongful nonjudicial foreclosure.

In contrast, Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, upon which the appellate court relied, held that a borrower who is in default on the note has no standing to complain about the identity of the party foreclosing because the borrower’s rights and obligations are unaffected. The only party harmed is the true beneficiary.

The Yvanova court disagreed with Jenkins, finding that Glaski was the better reasoned decision. The issue of the borrower’s injury had different significance for purposes of standing than it did for purposes of establishing the elements of wrongful foreclosure. For standing, the harm to the borrower by reason of nonjudicial foreclosure by a nonbeneficiary of the deed of trust was sufficient. Moreover, the court rejected the proposition relied on in Jenkins that because the borrower’s obligations under the note remained the same regardless of who had the right to enforce it, he or she could not complain about the identity of party enforcing it. The Yvanova court reasoned that the mortgage contract contemplates not only that the borrower pay the debt, but that the recipient of the payments be the mortgagee. The contrary argument would prevent a borrower from complaining if a total stranger to the mortgage foreclosed. “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.”

Unlike the case of an assignment that is voidable, the borrower’s challenge to the assignment as void ab initio is not an attempt to assert the rights of other parties as those parties have no ability to ratify the assignment. Rather, it is a challenge to the existence of those rights. On the other hand, “when an assignment is merely voidable, the power to ratify or avoid the transaction lies solely with the parties to the assignment; the transaction is not void unless and until one of the parties takes steps to make it so. A borrower who challenges a foreclosure on the ground that an assignment to the foreclosing party bore defects rendering it voidable could thus be said to assert an interest belonging solely to the parties to the assignment rather than to herself.”

It is important to note what this case was not about. The court limited its holding as follows:

“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.”

Yvanova Cal SCt Opinion