The following is an update analyzing a recent case of interest:
Perez v. Mortgage Electronic Registration Services, 2020 WL 2312867 (9th Cir. May 11, 2020) follows a line of California appellate cases which hold that the owner of mortgaged property may not sue to stop a foreclosure based on a claim that the trust deed was not validly assigned to the foreclosing beneficiary. The case is another nail in the coffin of pre-foreclosure challenges based on the sometimes sloppy or unperfected transfers of mortgage documents. While that coffin may be closed, lenders still must peer into the very open casket of California’s Homeowner Bill of Rights, from whence such injunctions will rise again! A copy of the opinion may be found here.
The loan histories in Perez hearken back to the roots of the mortgage crisis. As to their property in West Sacramento, Bella and Enrique Perez executed a trust deed in 2006 which identified defendant Mortgage Electronic Registration Systems, Inc. (“MERS”) as beneficiary on behalf of Dollar Mortgage Corporation and its successors and assigns as lender. The loan was sold four times between 2005 and 2006 and was last acquired by U.S Bank, N.A. as trustee for the Lehman XS Trust 2006-2006-14N Mortgage Pass-Through Certificates, Series 2006-14N. As to their property in San Pablo, the Perezes executed a trust deed in favor or MERS as beneficiary for American Mortgage Express and its successors and assigns as lender. The San Pablo loan was sold three times and wound up in the hands of defendant Bank of New York Mellon. All of the assignments were handled through MERS, which remained the beneficiary of record.
The Perezes defaulted on the West Sacramento loan. A notice of default and a notice of trustee’s sale were issued in 2009. However, no sale or other foreclosure activity took place after that. In contrast, the San Pablo loan was never even in default. Regardless, the Perezes sued MERS, US Bank and Bank of New York Mellon in California Superior Court in two separate actions. In each case the complaint alleged that the loans were not properly assigned to the defendant banks and sought cancellation of instruments and to quiet title to the properties.
Both lawsuits were removed by the defendants to the United States District Court for the Eastern District of California. Each case was decided by a different district judge and each judge granted a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). The Ninth Circuit has now upheld these rulings.
In this removed action, the Ninth Circuit was bound to follow California law as stated by the California Supreme Court. Where no California Supreme Court case is precisely on point, a federal court is required to follow decisions of California’s intermediate appellate courts in the absence of “convincing evidence” that the California Supreme Court would decide differently.
The Perez opinion cites a line of California cases that bar preemptive, pre-foreclosure actions seeking declaratory or injunctive relief to stop a pending foreclosure. See, Saterbak v. JPMorgan Chase Bank, N.A., 245 Cal.App.4th 808, 199 Cal. Rptr. 3d 790, 793 (2016), the most recent such case cited in the Perez opinion. And see most recently, Tanguma v. Law Office of Les Zieve, 2020 WL 466632 (Cal. App. 1/29/2020). The reasoning of these decisions is the same, viz.; that California had enacted a very comprehensive and detailed nonjudicial foreclosure system and that to entertain requests to preemptively enjoin foreclosures would “interject the courts into this comprehensive nonjudicial scheme. . . . Nothing in the statutory provisions establishing the nonjudicial foreclosure process suggests that such a judicial proceeding is permitted or contemplated.” Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011).
As noted above, the California courts closed the door on pre-foreclosure injunctive relief in the process of stemming a flood of cases filed to delay on technical grounds the foreclosure of mortgages admittedly in default. However, Perez does correctly note that the California Supreme Court left that door open just a crack in Yvanova v. New Century Mortg. Corp., 62 Cal.4th 919, 199 Cal.Rptr.3d 66, 365 P.3d 845, 858–59 (2016), a case based on securitization defects which allows challenges only to assignments that are void and not merely voidable. Yvanova was expressly limited to post-foreclosure actions and did not decide whether pre-foreclosure injunctive relief is available in the case of a void assignment.
The Perez opinion does not, however, mention the effect of amendments to California’s nonjudicial foreclosure statutes enacted in the wake of the mortgage crisis and effective on January 1, 2013, years after the Perez foreclosure was commenced. This voluminous and detailed addition to the foreclosure laws is referred to as the “Homeowner Bill of Rights” or “HOBOR.” It governs the handling of requests for loan modifications by lenders and loan servicers. California Civil Code section 2924.12(a)(1), a part of HOBOR, provides that “[i]f a trustee’s deed upon sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin a material violation of Section 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17.” Among its many, many requirements for the handling of loan modification requests, HOBOR requires a notice that the owner will be furnished upon request with copies of relevant assignments of the trust deed. Cal. Civ. Code § 2924.55. HOBOR also requires that the servicer “ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose . . . .” Calif. Civ. Code § 2924.17.
Saterbak v. JPMorgan Chase Bank, supra., 245 Cal. App. 4th at 818, holds that a borrower cannot seek preemptive relief under HOBOR based on an allegedly defective assignment which occurred prior to HOBOR’s January 1, 2013 effective date, even though the foreclosure notices were issued after that date.
The recent case of Bustos v. Wells Fargo Bank, N.A., 39 Cal. App. 5th 369 (2019) (Ct. App. 2019), reh’g denied (Sept. 27, 2019), review denied (Nov. 20, 2019) provides strong encouragement to borrowers to seek pre-foreclosure injunctive relief under HOBOR. Bustos held that a borrower obtaining a TRO on an ex parte application could recover attorney fees under HOBOR even if a preliminary injunction was later denied.
It is to be expected that defaults related to the COVID crisis will increase the incidence of foreclosure litigation and test further the willingness of courts to enjoin foreclosures before they are completed. While Perez is a salutary decision for lenders, it will be of increasingly limited relevance in the post-HOBOR, post-COVID world.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.