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California Cracks Open the Court Doors for Foreclosed Homeowners

posted by Katie Porter

As California Monitor, my staff and I fielded tens of thousands, probably hundreds of thousands, questions from homeowners. The hardest conversations were the easiest from a legal perspective. If someone's home was foreclosed in California, we advised there was little, if any, likely recourse. The California Homeowner Bill of Rights created a new remedy for consumers, but for homeowners before its January 2013 effective date, the options were nearly nil.

The California Supreme Court, in a decision that surprised many, staked out a clear right for homeowners to contest in court whether the foreclosing party had proper rights in the mortgage to allow it to foreclose. In Yvanova v. New Century Mortgage Corp, the court reversed the Court of Appeals and remanded to allow the plaintiff to present her action alleging wrongful foreclosure. The court was careful to stay away from the merits, making no ruling on whether the plaintiff could prove the assignment was void. But, I this the court engaged in a bit of chicanery in declaring that its "ruling in this case is a narrow one." Yvanova is a big change from the developing body of lower court cases in California denying a borrower standing to file a claim based on violations of the the terms of a pooling and servicing agreement. 

The LA Times story identifies a number of open questions that must be answered to know if any homeowners will actually win damages in wrongful foreclosure cases based on pre-Homeowner Bill of Rights' actions. For one thing, the statute of limitations for wrongful foreclosure is uncertain in California--partly because the state has had so few cases. While I think the court is correct on the law in Yvanova, the wheels of justice may have turned too slowly to help people. As a case study, the opinion may best be used as evidence of the importance of faster, legislative remedies for consumers such as the Homeowner Bill of Rights over developing the common law. The opinion is well-done, however, and merits a read, particularly for its quotation from the Miller opinion: "Banks are neither private attorneys general nor bounty hunters, armed with a roving commission to seek out defaulting homeowners and take away their homes in satisfaction of some other bank's deed of trust."

Comments

Look if the entity that purportedly foreclosed had not authority to foreclose then the substitute trustee's deed is VOID and without legal effect other than clouding title. There is no statute of limitations for challenging void acts - and "wrongful foreclosure" is not the proper cause of action because no foreclosure occurred. The proper cause of action is remove cloud and quiet title as to the substitute trustee's deed and any affidavit in support of the substitute trustee's deed.

Courts have consistently, and incorrectly, been using the trust doctrine that only the trust triumvirate (trustor, trustee, and beneficiary) has standing to compel compliance with the trust documents (the trust version of the corporate doctrine that only shareholders have standing to bring a shareholder derivative action) to block borrowers from raising the contract defense of ultra vires (i.e. the trustee did not have authority to act on this note and trust deed). Because of the nature of nonjudicial foreclosures, borrowers have to bring suit to stop foreclosures (they have to become plaintiffs to raise a defense), banks have raised standing from the start, and courts have obliged them. Unfortunately, even bankruptcy courts have obliged them, even though the burden of proving standing is on the creditors, not the debtors. Hence, I have argued that under the PSAs the trustee had no authority to accept the notes because they were transferred too long after the closing date and that under the New York trust law incorporated into every PSA the transfers were therefore void (not voidable, void), and on every occasion the court has ignored that standing issue by conflating it with the ultimate issue of colorable claim. Frustrating. The bulk of the note transfers to the REITs are void by the REITs' own terms and should be unenforceable by the trustee. At the very least, the trust should lose its holder in due course status and be subject to the full range of 3-305(1) defenses.

What's really great about the opinion are the citations!

What I don't understand is how sloppy the creditors in this situation have been. Certainly, $500,000 is not so much in the large scheme of things to them, but it is a lot of money to me. It seems to me that lenders would take more care with their assets.

I do not like that my mortgage is a negotiable instrument or that the assignee is not the one servicing my loan. Were that more people concerned about this.

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