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.
- 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.