The Court of Appeals of California, Fourth District, recently held that a homeowner who has been foreclosed on by one with no right to do so — by those allegations alone — sustains prejudice or harm sufficient to constitute a cause of action for wrongful foreclosure.
Citing Glaski v. Bank of America (2013) 218 Cal.App.4th 1079, the Appellate Court also held that, because the plaintiff properly alleged the foreclosure was void and not merely voidable, tender was not required to state a cause of action for quiet title or for cancellation of instruments.
A copy of the opinion is available at: Link to Opinion.
In 2005, the plaintiff obtained a loan secured by her house. On April 27, 2009, after the plaintiff defaulted on the loan, the successor in interest to the lender recorded an assignment of the deed of trust to a beneficiary and substituted the trustee. On the same day, the new trustee recorded a notice of default against the plaintiff, as she was more than $15,000 in arrears. The lender’s successor in interest was listed under the contact information on the notice of default.
In July 2009, the trustee recorded a notice of trustee’s sale. On Nov. 9, 2009, the lender’s successor in interest recorded an assignment of the same deed of trust to a second beneficiary. That same day, the trustee recorded a trustee’s deed upon sale on behalf of the lender’s successor in interest and the successor acquired the property in exchange for a credit bid.
On Dec. 28, 2009, the lender’s successor in interest recorded an assignment in order to correct the assignment of April 27, 2009, to the first beneficiary, stating the assignment to the second beneficiary was the correct one.
The plaintiff filed an action for (1) wrongful foreclosure; (2) quiet title; and (3) cancellation of instruments against the successor in interest, trustee and first beneficiary. After allowing amendments to the allegations, the trial court eventually sustained the defendants’ demurrer (motion to dismiss) and dismissed the complaint with prejudice.
As you may recall, the elements of an action for wrongful foreclosure in California are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.
A beneficiary or trustee under a deed of trust who conducts an illegal, fraudulent or willfully oppressive sale of property may be liable to the borrower for wrongful foreclosure. See Chavez v. Indymac Mortgage Services (2013) 219 Cal.App.4th 1052, 1062 [162 Cal.Rptr.3d 382]; Munger v. Moore (1970) 11 Cal.App.3d 1, 7 [89 Cal.Rptr. 323]. A foreclosure initiated by one with no authority to do so is wrongful for purposes of such an action. See Barrionuevo v. Chase Bank, N.A., supra, 885 F.Supp.2d at pp. 973-974; Ohlendorf v. American Home Mortgage Servicing (E.D.Cal. 2010) 279 F.R.D. 575, 582-583.
The plaintiff alleged that the only entity that was entitled to foreclose on the mortgage was the first beneficiary. The plaintiff alleged that the second beneficiary had no right to foreclose because it had never become beneficiary of the deed of trust.
The Appellate Court cited the Supreme Court of California’s recent ruling in Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919. The Supreme Court of California in Yvanova held that a borrower has legal authority—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.” 62 Cal.4th at pp. 942-943.
The plaintiff alleged that in November 2009, the successor in interest had nothing to assign to the second beneficiary because it had previously (in April 2009) assigned the promissory notes and deed of trust to the first beneficiary. According to the plaintiff, the successor in interest, having assigned all beneficial interest in the note and deed of trust to the first beneficiary in April 2009, could not assign again the same interests to the second beneficiary in November 2009.
The Appellate Court held that, under Yvanova, a homeowner has standing to challenge an assignment as void because success on the merits would prove the purported beneficiary is not, in fact, the mortgagee and therefore lacks any right to foreclose on the mortgage. 62 Cal.4th at pp. 935-936.
Rejecting the defendants’ arguments to the contrary, and assuming the plaintiff’s allegations are true as required on review of the demurrer, the Appellate Court held that the assignment to the second beneficiary was void and not merely voidable.
The defendants argued that the recording of the assignment to the first beneficiary merely served as notice of a transfer but does not actually transfer the interest in property. However, the Appellate Court held that the case the defendants relied upon — U.S. Hertz Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68 — was materially distinguishable because it involved a notice of substitution of trustee, not assignment of the deed of trust.
Further, the defendants argued that the corrective assignment in December 2009 demonstrated that beneficial interest had been assigned to the second beneficiary, not the first beneficiary. However, the defendants did not cite any authority to support the argument that a corrective assignment recorded after a nonjudicial foreclosure is completed has any legal effect.
The defendants also argued that the corrective assignment merely showed that the successor in interest made procedural errors in the documents. However, the Appellate Court noted that at the demurrer stage, the court must assume the facts pleaded by the plaintiff are true. The plaintiff alleged, and judicially noticeable documents affirmed, that at the time of the nonjudicial foreclosure sale, the first beneficiary was the proper beneficiary.
The Appellate Court held that the plaintiff sufficiently alleged that the foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was void.
Next, the Appellate Court addressed the prejudice pleading requirement. The plaintiff argued that prejudice or harm, beyond the wrongful foreclosure, should not be required to be alleged to state a cause of action where it is alleged the foreclosing beneficiary’s interest is void.
The Appellate Court held that, when a non-debtholder forecloses, a homeowner is harmed because he or she has lost her home to an entity with no legal right to take it. The Court noted that, but for the void assignment, the incorrect entity would not have pursued a wrongful foreclosure. Therefore, the Court held, the plaintiff sufficiently alleged that the void assignment was the cause-in-fact of the homeowner’s injury, and that this was all a plaintiff is required to allege on the element of prejudice.
The Appellate Court noted that the Supreme Court of California in Yvanova held that “the bank or other entity that ordered the foreclosure would not have done so absent the allegedly void assignment. Thus, ‘[the identified harm—the foreclosure—can be traced directly to [the foreclosing entity’s] exercise of the authority purportedly delegated by the assignment.'” 62 Cal.4th at p. 937.
The Appellate Court also found “strong policy reasons favoring this approach,” as in the Court’s view that a contrary rule would lead to a situation where anyone can foreclose on a homeowner because some other party had the right to foreclose.
The Court rejected the opinions cited by the defendants as incorrectly and exclusively focusing on the plaintiff’s ability to have avoided any foreclosure, and interpreting prejudice narrowly. The Court held that the defendants’ cited opinions were inconsistent with the policies underlying the standing rule in Yvanova: “The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security.” 62 Cal.4th at p.938.
Also, the Court noted, the rulings cited by the defendants failed to recognize that the measure of damages for wrongful foreclosure is similar to tort damages: all proximately caused damages.
The Appellate Court held that the plaintiff’s allegations that she sustained compensatory damages were sufficient for overcoming a demurrer, and therefore that the trial court erred in dismissing the case.
The Court also found that the trial court erred in sustaining the demurrer for the plaintiff’s causes of action for quiet title and cancellation of instruments on the grounds that tender is a necessary element for a quiet title cause of action.
However, citing Glaski v. Bank of America (2013) 218 Cal.App.4th 1079, the Appellate Court held that because the plaintiff properly alleged the foreclosure was void and not merely voidable, tender was not required to state a cause of action for quiet title or for cancellation of instruments. Accordingly, the Court found that tender was not required to state a cause of action for these claims because the purported assignment was void.
Accordingly, the Fourth DCA reversed the trial court’s ruling.