Foreclosure: Debtor Who Fails to Pay Has an Uphill Battle Finding a Remedy Based on Procedural Defects

Turner v. Wells Fargo Bank N.A. (In re Turner), 859 F.3d 1145 (9th Cir. 2017) –

The debtors brought multiple claims following foreclosure of their residence. After the bankruptcy court dismissed the claims in a decision that was affirmed by the Bankruptcy Appellate Panel, the debtors appealed to the 9th Circuit.

On appeal the court categorized the claims as wrongful foreclosure, breach of contract and the implied covenant of good faith and fair dealing under both a securitization pooling and servicing agreement (PSA) and the deed of trust (DOT), and violations of state law.

As background:

  • The debtors’ loan was sold and deposited into a REMIC trust that was securitized pursuant to the PSA. Although all assets were supposed to be transferred into the trust within 90 days after a 2005 start date, the debtors’ DOT was not transferred into the trust until 2012.
  • In 2012 NBS, as trustee or agent for the lender, recorded a notice of default on February 10th. The lender subsequently recorded a substitution of trustee naming NBS as the trustee under the DOT on May 2d, and NBS recorded a notice of trustee’s sale on May 16th.
  • The debtors filed for bankruptcy on June 4th. After the debtors failed to make payments as required by their plan, the court granted relief from the automatic stay to allow proceeding with a foreclosure.

The debtors attempted to block the foreclosure by alleging that the transfer of the DOT into the trust was void and a breach of the PSA because it was not timely, and by further alleging breaches of the DOT and violations of state law.

As an initial matter the court noted that borrowers would have standing to claim that a foreclosure was wrongful if the assignment to the foreclosing party was void (and not merely voidable). In arguing that the assignment was void as a matter of law based on the failure to comply with the PSA, the debtors relied on a California court of appeals decision interpreting New York law. However, both the Second Circuit and New York state courts disagreed with the California decision, finding that the assignment was not void but merely voidable by the beneficiary. The court agreed that the delay made the transfer voidable, not void, so that the debtors failed to state a claim.

Based on the same California court of appeals case, the debtors also argued that they were third party beneficiaries of the PSA, and therefore could assert a claim for breach of contract or the implied covenant of good faith and fair dealing. However, the 9th Circuit pointed out that there were numerous decisions holding that borrowers are not third-party beneficiaries of a PSA. Further where the trust at issue is organized under New York law, numerous California courts while declined to follow the case cited by the debtors. The court agreed that the debtors did not have standing and failed to state a claim.

The debtors then turned to arguments based on the DOT. They contended that the lender breached the express terms of the DOT by not executing the notice of default itself since NBS could not do so because the notice was issued three months before NBS was substituted as trustee under DOT. However, nothing in the DOT required the lender to execute the notice, and the court held that NBS had authority to issue the notice. Recording the notice of substitution of trustee under the DOT just provided conclusive evidence of the authority to act.

As a related matter, the debtors argued that there was a breach of the implied covenant of good faith and fair dealing because the identity of the true holder of the beneficial interest was obscured making it impossible to know where to make payments. However, they failed to identify any prejudice. So, the court agreed that these claims were also properly dismissed.

Turning to state law, a notice of default may not be recorded until 30 days after initial contact with the borrower or satisfying due diligence requirements. The only remedy for noncompliance is postponement of the foreclosure sale. The court concluded that NBS provided timely notice, and even if it was ineligible (e.g. because the notice of substituted trustee was recorded after NBS provided the notice of default) the debtors had no remedy.

Finally, the debtors argued that the state unfair competition law was violated by the appellees by executing and recording “invalid and void Assignments of Deed of Trust…; an invalid Notice of Default…; and an invalid Notice of Trustee’s Sale…; despite knowing that they were not the legal trustees or holders of beneficial interest” under the DOT.

While acknowledging that the unfair competition law made violations under other laws independently actionable, the court found that the debtors did not establish standing. To bring a claim, a plaintiff must establish economic injury and show that the injury was caused by the unfair business practice. It is not sufficient if the plaintiff would have suffered the same harm whether or not the defendant complied with the law. In this case the debtors stopped making payments, which caused the loan to go into default. It was the default that triggered the foreclosure, not procedural deficiencies in the assignments. Thus, the debtors did not have standing.

Accordingly, the court held that the debtors’ claims were properly dismissed, and there was no requirement that the debtors be allowed to amend their complaint since the lack of standing could not be cured and any amendment would be futile.

When a foreclosure occurs based on a payment default by the borrower, generally courts have not been sympathetic to borrower claims based on defects that do not have any causal relationship to the default.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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1 Response to Foreclosure: Debtor Who Fails to Pay Has an Uphill Battle Finding a Remedy Based on Procedural Defects

  1. Deadly Clear says:

    Reblogged this on Deadly Clear and commented:
    It appears homeowners were victims of a nationwide predatory mortgage lending scheme, a complex confidence game – as most homeowners were, that led the Department of Justice (“DOJ”) to file suit against Bank of America, et. al., its former and current subsidiaries and partners, on October 24, 2012. USA v. BofA, et. al., USDC Southern District of NY, 12 Civ. 1422 (JSR) (Oct. 2012). Due to the nature of the DOJ case, documents were originally sealed, some were released, though many remain sealed today. The overall DOJ case did not completely resolve until May 23, 2016. The case publicly unleashed the secret that prime and subprime loans by large mortgage companies such as Countrywide and New Century Mortgage Corporation (“NC”) sold and pledged their procured loans to Fannie Mae and Freddie Mac, government-sponsored enterprises (“GSE”):
    “Fannie Mae and Freddie Mac purchase single-family residential mortgages from lenders” (DOJ Intervenor Complaint, ¶18). “GSEs buy single-family mortgages from mortgage companies and other financial institutions [. . .] then either hold the loans in their investment portfolios or bundle them into mortgage-backed securities (“MBS”) that they sell to investors.” (DOJ Intervenor Complaint, ¶27)” (emphasis added).
    See also the book RECKLESS ENDANGERMENT by Gretchen Morgenson and Joshua Rosner.
    In most cases, the issues are really “fraud on the court” and “fraudulent concealment.” The wrongful fabricated assignments were supposed to have been removed from the land records offices according to the National Mortgage Settlement and several other federal agency consent orders. National Mortgage Complaint (NMS), Case 1:12-cv-00361-RMC filed on March 14, 2012 in the USDC for the District of Columbia. The Consent Judgment had a Settlement Term Sheet (“NMS Consent Order”) filed on April 4, 2012, and specifically identified the terms under which the banks and servicers must comply.
    The real interesting issues that are just now surfacing include the intentional concealment of Fannie or Freddie (GSE) as the “Real Party in Interest.” They stay hidden until after the bank sale and somehow magically appear as a buyer. GSEs buy originating loans – not defaulted bad debt. So, something appears really fishy when a GSE, or GSE/Treasury troll gets involved AFTER a foreclosure sale.
    It appears from the inception, FANNIE/FREDDIE’S ROLES WERE INTENTIONALLY CONCEALED. Pursuant to Fannie’s 2008 Servicing Guidelines:
    “Fannie Mae is at all times the owner of the mortgage note, whether the note is in Fannie Mae’s portfolio or whether owned as trustee, for example, as trustee for an MBS trust. In addition, Fannie Mae at all times has possession of and is the holder of the mortgage note, except in the limited circumstances expressly described below” (emphasis added).
    Failure to disclose all parties of interest upon filing the Complaint is an omission so material in nature that not only does it void the judgments, in this case it is intentional fraud on the Court. Hazel-Atlas Glass Co. v. Hartford Empire Co., [322 U.S. 238 (1944)] (This motion asks this Court to utilize its “historic power of equity to set aside [a] fraudulently begotten judgment[]” in order to uphold the “preservation of the integrity of the judicial process”).
    Fannie & Freddie (GSEs) had servicing guidelines during this period of time that required servicers to conceal them as the real party of interest as the GSE’s known debt was out of control.
    Over the years the GSEs changed their policies because the courts have rejected the notion that an action could be brought in the name of a servicer. See In re Viencek, 273 B.R. 354, 357, 59 (Bankr. N.D.N.Y. 2002) (requiring that servicing agent amend a proof of claim to identify the owner of the claim), In re Kang Jin Hwang, 396 B.R. 757 at 767, (Bankr. C.D. Cal. 2008) (finding that servicer was not the real party in interest), Bank of New York v Silverberg, 86 AD3d 274, 280 [2d Dept 2011], (“The foreclosure of a mortgage cannot be pursued by one who has no demonstrated right to the debt”).
    When researching home loans on the GSEs’ data base, loans in GSE securitization pools will not show up on their website “loan search.”. Again, this is another example of hiding debt. MERS® System, for example, was created to specifically track investors and ownership, allowing GSEs and banks to remove debt related assets from their accounting, while still tracking the asset. Who does this hurt? ANSWER: GSE investors, taxpayers, homeowners, and probably the judges that have mutual funds that contain GSE (MBS) shares, for example Vanguard, PIMCO.
    This is research – this is not legal advice. Contact an attorney to see if you have an alternative action. Closely research and dissect your documents. Ask if, for example, a Rule 60(b) and/or FRCP 60(d)(3) is an option.

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