Borrower Has Standing to Challenge Void Assignment

The California Supreme Court ruled that a borrower on a house loan secured by a deed of trust has the standing to sue for wrongful foreclosure based on allegations that the claimed assignment of the note and deed of trust is void due to faults in the purported assignment. New Century Mortgage Corp. v. Yvanova

Ms. Yvanova signed a deed of trust on behalf of New Century in 2006. In a bankruptcy liquidation in 2007, New Century was liquidated. Ms. Yvanova’s deed of trust was assigned to Deutsche Bank as trustee to Morgan Stanley investment trust in 2011. The Morgan Stanley investment trust, on the other hand, had a January 27, 2007 deadline for transferring all assignments. On August 20, 2012, Western Progressive, the substitute trustee for Deutsche Bank, gave notice of the trustee’s sale of the property. On September 14, 2012, the property was sold at a public auction.

Ms. Yvanova filed a quiet title action in state court, claiming that the assignment to Morgan Stanley was illegal since 1) New Century’s assets had already been transferred to the bankruptcy trustee and 2) the Morgan Stanley trust had closed prior to the assignment. Because Ms. Yvanova was not a party to the mortgage assignment, the court granted the defendants’ demurrer, ruling that she lacked standing to oppose the foreclosure on the basis of an improper mortgage assignment. The appeals court upheld the decision.

A deed of trust is a negotiable instrument under California law, and borrowers cannot object to its assignment. Only the current assignee has the right to enforce the note through nonjudicial foreclosure in the event of default.

The court distinguished between void assignments and those that are just voidable in determining Ms. Yvanova’s standing. A void assignment is a nullity; it has no legal standing. A voidable contract has a flaw that could cause it to be declared void, but it is not considered void until action is taken. Like Ms. Yvanova, the borrower in Glaski v. Bank of America (2013) contested a foreclosure on the basis that the deed of trust had been assigned after the trust had ended. The borrower had a viable cause of action, according to the Glaski court, if she could show that the beneficiary on whose behalf the trustee started foreclosure was not the genuine beneficiary. The court held that when a deed of trust is assigned to a trust after the trust has been closed, the assignment is null and illegal, and the borrower has the standing to dispute a foreclosure executed on behalf of the purported assignee.

The court led Glaski through the cases he described. The First Circuit rejected the wide rule that a borrower has the standing to contest an assignment that is void ab initio, ruling that the borrower suffers the essential loss as a result of the note’s enforcement by a non-owner in Culhane v. Aurora Loan Services of Nebraska. According to the court, a wide ruling that a borrower never has the standing to oppose a foreclosure based on a defective assignment would effectively deprive the borrower of all means of fighting a wrongful nonjudicial foreclosure under Massachusetts law.

The appeal court relied on Jenkins v. JPMorgan Chase Bank, N.A. (2013), which found that a borrower in default on a note has no standing to object about the name of the person foreclosing because of the borrower’s rights and responsibilities are unaffected. The actual beneficiary is the only one who suffers.

Jenkins was overruled by the Yvanova court, which determined that Glaski was the better-reasoned ruling. The problem of the borrower’s injury had a different meaning when it came to determining standing than when it came to determining the criteria of wrongful foreclosure. The injury to the borrower as a result of nonjudicial foreclosure by a non-beneficiary of the deed of trust was sufficient to provide the borrower standing. Furthermore, the court rejected Jenkins’ argument that the borrower’s responsibilities under the note remained the same regardless of who had the authority to enforce it, and that he or she could not object about the identity of the party enforcing it. The Yvanova court reasoned that the mortgage contract requires the borrower to not only pay the loan but also that the mortgagee receives the payments. The opposing rationale would bar a borrower from protesting if the mortgage was foreclosed on by a complete stranger. “A homeowner who has been foreclosed on by someone who has no legal right to do so has had his or her legal rights infringed upon by the foreclosing business. There is no longer any requirement for standing to sue.”

The borrower’s challenge to the assignment as void ab initio is not an attempt to vindicate the rights of other parties, unlike in the case of a voidable assignment, because those parties have no ability to ratify the assignment. Rather, it is a challenge to those rights’ existence. When an assignment is just voidable, however, the parties to the assignment have sole authority to ratify or avoid the transaction; the transaction is not void unless and until one of the parties takes steps to make it so.

A borrower who fights a foreclosure on the grounds that an assignment to the foreclosing party contained faults that rendered it voidable could thus be considered to be asserting an interest that belonged entirely to the assignees and not to herself.”

It’s critical to understand what this case was not about. The court’s decision was limited in the following ways:

“In this case, we made a narrow decision. We only hold that a borrower who has been the victim of a nonjudicial foreclosure has the standing to sue for wrongful foreclosure based on an allegedly void assignment simply because he or she was in default on the loan and was not a party to the disputed assignment. We do not believe or recommend that a borrower can use a lawsuit challenging the foreclosing party’s authority to proceed to prevent a threatened nonjudicial foreclosure. We also don’t believe or imply that the plaintiff in this action has stated facts proving the assignment is void, or that she will be able to prove those facts to the extent she has. Finally, we do not examine any of the substantive elements of the wrongful foreclosure tort or the factual showing required to establish those components in rejecting defendants’ standing arguments.