The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an adversary proceeding without leave to amend, holding that:
(a) the debtors failed to state a claim for wrongful foreclosure under California law;
(b) the debtors failed to state a claim for breach of contract or breach of the implied covenant of good faith and fair dealing because they were not third-party beneficiaries of the pooling and servicing agreement;
(c) the debtors failed to state a claim for breach of the deed of trust or breach of the implied covenant of good faith and fair dealing by executing the notice of default; and
(d) the debtors failed to state a claim for violating § 2923.5 of California’s Civil Code or for violating California’s unfair competition law.
A copy of the opinion is available at: Link to Opinion.
Husband and wife borrowers obtained a loan to purchase their home in Livermore, California. The loan was secured by a deed of trust, which named a title company as trustee and a national bank as both lender and beneficiary.
The bank sold the note and deed of trust and the purchaser deposited both into a mortgage-backed securities trust pursuant to a pooling and servicing agreement (“PSA”), which named another national bank as trustee. The language of the trust required the transfer of assets into the trust within 90 days after the trust pool’s start date, but the note and deed of trust allegedly were not deposited into the trust until 2012.
A third-party default services company recorded a notice of default against the borrowers’ property acting as agent or trustee for the beneficiary. The trustee then recorded substitution of trustee naming the default services company as trustee, after which the default services company recorded a notice of trustee’s sale.
The borrowers filed for bankruptcy shortly thereafter, but failed to pay as required by their reorganization plan, and the bank originally named as trustee filed a motion for relief from stay, which the bankruptcy court granted.
The borrowers then filed an adversary proceeding, alleging that the transfer of the deed of trust into the trust was void because it breached the PSA 90-day transfer requirement. They also alleged breach of the deed of trust and supposed violation of two California statutes.
The bankruptcy court dismissed the adversary complaint without leave to amend. The borrowers appealed to the district court, which affirmed the dismissal. They then appealed to the Ninth Circuit.
On appeal the Ninth Circuit was presented with two questions: “(1) whether the bankruptcy court correctly concluded that the [borrowers’] Adversary Complaint failed to state a claim and (2) whether the bankruptcy court erred in denying the [borrowers] leave to amend.”
The Ninth Circuit first addressed the borrowers’ claim for wrongful foreclosure, explaining that under California law a residential 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. … Unlike a voidable transaction, a void one cannot be ratified or validated by the parties to it even if they so desire.”
The Court rejected the borrowers’ argument that the assignments of the deed of trust were void, relying on three California Courts of Appeal opinions all holding that “such an assignment is merely voidable” because “an unauthorized act by the trustee is not void but merely voidable by the beneficiary.” Thus, the Ninth Circuit found that the district court correctly dismissed the wrongful foreclosure claim.
Turning to the borrowers’ claim for breach of contract of the PSA or breach of the implied covenant of good faith and fair dealing under the PSA, the Ninth Circuit rejected the borrowers’ argument that they were third-party beneficiaries of the PSA, relying on “numerous California appellate courts [that] have held, borrowers … are not third-parties [sic] beneficiaries of the PSA.” Accordingly, the Court concluded that “the district [court] correctly ruled that the [borrowers] failed to state a claim for either breach of the express agreement or the related breach of the implied covenant of good faith and fair dealing under the PSA.”
The Ninth Circuit next rejected the borrowers’ argument that the lender/beneficiary bank breached the deed of trust because it did not sign the notice of default and its agent, the default services company, “could not record the Notice of Default because the Notice was issued three months before [the default services company] was substituted as Trustee.”
The Court reasoned that their argument lacked merit because the express terms of the deed of trust did not require the lender/beneficiary bank “to execute the Notice of Default, but rather, it can cause the Trustee to execute a written notice of default.” Because “a substitution of trustee was recorded naming [the default services company] as Trustee … [it] had the authority to issue the Notice of Default [under Cal. Civ. Code § 2934a(d)]” which provides that “[o]nce recorded, the substitution shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section.”
The Ninth Circuit also rejected the borrowers’ argument that the bank breached the implied covenant of good faith and fair dealing “by obscuring the identity of the true holder of the beneficial interest making it impossible for them to know to whom to make their mortgage payments” because they “have not alleged that their payments were not accurately credited, that they sustained any damages, or that they were not in default. Having failed to identify any prejudice, the district court properly dismissed their claims.”
The Court then addressed the borrowers’ claim that the substituted trustee violated Cal. Civ. Code § 2923.5, which provides that “[a] mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent may not record a notice of default until either thirty days after initial contact with the borrower or thirty days after satisfying the due diligence requirements.”
Because the notice of default was signed by the substitute trustee as agent for the lender/beneficiary bank, a substitution of trustee was thereafter recorded, and “[t]he only remedy for noncompliance with [Section 2923.5] is the postponement of the foreclosure sale[,]” the Court concluded that the district court correctly dismissed the borrowers’ claim under section 2923.5.
Turning to the borrowers’ remaining claim that defendants violated California’s unfair competition law (“UCL”), which “prohibits unlawful, unfair, deceptive, untrue or misleading advertising[,]” the Ninth Circuit found that the borrowers “failed to establish standing to bring a claim under the UCL.”
The Ninth Circuit reasoned that in order to have standing to bring a UCL claim, “the plaintiff must ‘(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., cause by, the unfair business practice ….” The Court noted that a plaintiff fails “to satisfy this causation requirement if he or she would have suffered ‘the same harm whether or not a defendant complied with the law.’”
The Court concluded that the borrowers lacked standing because “they cannot establish the second prong.” Their “home would have been foreclosed regardless of the alleged deficiencies in the timing of the assignments of the [deed of trust] and Substitution of Trustee. [They] have not disputed that they stopped making payments, causing the loan to go into default.” Because it was the borrowers’ default “that triggered the lawful enforcement of the power of sale clause in the deed of trust, and the triggering of the power of sale clause subjected [the borrowers’] home to nonjudicial foreclosure, not any procedural deficiencies in the assignment … they do not have standing to pursue a claim under the UCL.”
Finally, the Ninth Circuit found that the district court correctly dismissed the borrowers’ claims without leave to amend “because any amendment would be futile.”
The Ninth Circuit affirmed the district court’s dismissal of the borrowers’ claims without leave to amend.