In this recent Court of Appeal opinion, an issue of first impression inCaliforniawas addressed:  That is, can a borrower seek to set aside a nonjudicial foreclosure under a deed of trust which initially failed to identify a trustee?  The court said “no” and made two further holdings of interest.  First, the assignee lender can foreclose even if it does not have the beneficial interest in, or physical possession of, the note.  Second, the borrower’s failure to make a tender of amounts allegedly due precludes a claim seeking to invalidate the foreclosure sale.

In the case, the Shusters borrowed $670,000 to purchase a home.  The deed of trust securing the loan did not name a trustee.  The loan went into default and the lender substituted Recon Trust Company as the trustee to initiate nonjudicial foreclosure proceedings.  The lender also assigned its interest under the deed of trust to BAC Home Loan Servicing, which in turn assigned its interest to Arch Bay Holdings LLC. ArchBayultimately purchased the property at the foreclosure sale.

The Shusters sued to set aside the sale, primarily because the deed of trust did not designate a trustee.  In an opinion which adds to the body of case law rejecting efforts by borrowers to seek judicial relief for alleged “ministerial” or “speculative” defects in the nonjudicial foreclosure sale process, the court made several determinations which are significant for practitioners:

  • The omission of the trustee in a deed of trust does not preclude a nonjudicial foreclosure sale.  The primary objection raised by the borrowers was that the lender lacked the authority to foreclose under the power of sale given by the deed of trust because the deed of trust failed to designate a trustee.  The borrowers argued that this failure to designate a trustee transformed the instrument into a “mortgage” which can only be foreclosed through judicial foreclosure.  The borrowers analogized the situation before the court to a conveyance with no grantee, which is normally considered void.  The court rejected these assertions.  Reviewing out of state authority, the court concluded that the trustee under a deed of trust holds “bare legal title sufficient only to permit him to convey the property at an out of court sale,” and does not have the legal powers or obligations associated with a trustee under a traditional trust.  Accordingly, the absence of a designated trustee in a deed of trust is not an impediment to a nonjudicial foreclosure sale so long as a trustee is named prior to the sale.  In other words, since the sole purpose and duty of a trustee under a deed of trust is to convey the bare legal title he holds at a sale, so long as a trustee is named prior to the sale, nonjudicial foreclosure may proceed.  The court noted that this was consistent with out-of-state authority, and also with general California authority to the effect that a trust is valid notwithstanding the failure to designate a trustee.
  • Assignee lender can foreclose even though it does not have the beneficial interest in or physical possession of the note.  The borrowers also argued that BAC Home Loan Servicing and ArchBay had no right to foreclose because they were not the holder in due course of the promissory note, and did not physically possess the promissory note.  However, the court noted that California’s statutory nonjudicial foreclosure scheme does not require that the foreclosing party have a beneficial interest in or physical possession of the note.  Moreover, Civil Code section 2924(a)(1) specifically permits the “trustee, mortgagee, or beneficiary, or any of their authorized agents” to initiate foreclosure by recording a notice of default.  In this case, the trustee, Recon Trust, had statutory authority to commence the foreclosure process.
  • Borrower’s failure to tender amounts due under loan precluded claim to invalidate trustee’s sale.  The court further held that the borrowers’ claims seeking to invalidate the trustee’s sale failed because the borrower did not tender the amounts due and owing under the loan.  The court noted authority requiring a tender in order to set aside a foreclosure sale, and the rationale behind the rule:  namely, if the borrower could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the borrower.  While there are certain limited exceptions, such as when the borrower challenges the validity of the underlying debt or claims the deed of trust is void on its face, those exceptions were not at issue in this case.  The borrowers’ speculation that “there is something not quite right going on” did not justify setting aside the sale absent a tender of the amounts due.  

At bottom, this court, like courts before it, was not inclined to indulge a borrower’s claim of technical deficiencies in the foreclosure process, when that borrower admittedly had failed to pay amounts due under the note.  As the court succinctly put it:  “We are mindful that foreclosures are a far too frequent occurrence in today’s difficult financial times.  But the hardship must not become a haven for those who, as here, do not appear to make any good faith effort to resolve the issue but, instead, seek shelter in minor ministerial omissions or speculative acts that neither misled nor prejudiced them.”