A decision last week from the top court in California has legal experts warning about a possible flurry of litigation in foreclosure cases.
The case involves a $483,000 residential loan made in 2006 to Tsvetana Yvanova on a property located in Woodland Hills, California.
New Century Mortgage Corp., which was the original mortgage lender on the home loan, was liquidated through bankruptcy in 2008.
Yvanova brought a wrongful foreclosure action following a completed nonjudicial foreclosure sale on the grounds that an assignment from New Century to the foreclosing lender was void.
The trial court in Yvanova, sustained the defendants’ demurrers and dismissed the case. The Court of Appeal affirmed the decision.
The Supreme Court, however, reversed the decision following extensive briefing.
The much anticipated decision resolves conflicting decisions in other cases.
In Glaski v. Bank of America, the court held that a borrower’s allegation the assignment of his loan into a securitization trust took place after the trust’s closing date was sufficient to state a basis for concluding that the transfers were void as a matter of New York law, according to a case summary from Ballard Spahr LLP.
“Glaski further held that where the assignment is void, the borrower has standing to challenge the foreclosure by the assignee,” Ballard Spahr wrote.
But
in Jenkins v. JPMorgan Chase Bank, N.A., as well as other subsequent cases, the court concluded that the borrower lacked standing to enforce a securitization trust’s pooling-and-servicing agreement.
Ballard Spahr noted that the Glaski decision has been widely criticized by trial and appellate courts and hadn’t been used as precedent in any reported California appellate decision.
But in a Feb. 18 decision in Yvanova v. New Century Mortgage Corp., the
Supreme Court of California followed Glaski — specifically disapproving four other appellate decision ”to the extent they held borrowers lack standing to challenge an assignment of the deed of trust as void,” Ballard Spahr wrote.
That case was decided at the pleading stage without the Supreme Court deciding whether the plaintiff’s allegation that an assignment was void because it was assigned to an investment trust four years after the trust closed and three years after the deed was assigned to New Century’s bankruptcy trustee following its liquidation.
“We conclude 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,” the decision stated. “The Court of Appeal took the opposite view and, solely on that basis, concluded plaintiff could not amend her operative complaint to plead a cause of action for wrongful foreclosure.”
But in reversing the appeals court decision, the Supreme Court
additionally said, “We express no opinion on whether plaintiff has alleged facts showing a void assignment, or on any other issue relevant to her ability to state a claim for wrongful foreclosure.”
Ballard Spahr noted that
it remains unclear whether the record is sufficiently developed for the Court of Appeal to determine if the facts alleged by the plaintiff constitute a void assignment or whether trial court proceedings will be necessary.
“Although Yvanova is obviously a disappointing decision for lenders, the scope of the court’s review was narrow, and did not reach the question of whether a late assignment to a securitization trust is void or voidable,” Ballard Spahr wrote — adding that extensive litigation over the issues is anticipated.
Attorneys for Wright, Finlay & Zak LLP wrote that defense arguments rejected by the court might prove troublesome in cases still pending or yet to be filed.
Those arguments, which were sometimes relied on by lower courts, alleged that
it is irrelevant to the borrower who is enforcing the debt; there is no harm/prejudice to the borrower from the “wrong party” foreclosing if the loan is in default; the borrower must show that the “true” owner would have refrained from foreclosing; and borrowers lack standing to challenge an assignment as void because they are not parties to the assignment.
“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,” Wright Finlay wrote.
Wright Finlay, which provided an Amicus Brief in support of the respondents, said that the impact from the decision will be significant for the lending industry, the foreclosure industry and California courts. A tidal wave of related litigation is expected to overwhelm the courts — prompting tighter underwriting, a decline in secondary market investors and a reduction in the supply of homes as fewer foreclosure are available and less scrupulous borrowers game the system and live in homes for free.
Robert S. McWhorter of LeClairRyan sees a torrent of lawsuits ahead because of the decision.
“This decision may increase the filing of wrongful foreclosure actions against lenders, challenging the validity of the assignments based on alleged violations of pooling and servicing agreements by lenders,” McWhorter, who focuses on representing financial institutions, said in a written statement.
He noted that the decision could have national ramifications because many courts look to California for leadership.
