SHAZAM SALAZAR – Southern District bankruptcy Court of California says California Civil Code Section 2932.5 applies to mortgages AND Deeds of Trust – Wrongful Foreclosure is illuminated!
California Lenders, Loan Servicers, MERS and other foreclosing entities should ensure valid legal compliance with California Civil Code Section 2932.5 or risk have the foreclosure sale being declared VOID (with no obligation to tender). The following is Copyrighted 2011 by the Law Offices of Steven C. Vondran, P.C. ALL RIGHTS RESERVED. We can be reached at (877) 276-5084.
Case: Salazar v. U.S. Bank National Association as trustee of a securitized loan trust, Case# 10-17456-MM13, (Southern Dist. Bankruptcy April 11, 2011). GOOD ISSUES, GREAT HOLDING, AND EXCELLENT DECISION.
Okay, we have been waiting for some good cases to come out that clarify some of the more nebulous concepts in foreclosure defense law. But we just got a real nice decision that confirms what I have been saying al along (and which can be verified in previous posts I have made which go back as far as July 2010 – you can find one clip here on Timothy McCandless website). While everyone was talking about California Civil Code Section 2932.5 applying ONLY to mortgages, the California Southern District bankruptcy Court recently came down and said hogwash – THERE IS NO MEANINGFUL DISTINCTION BETWEEN A MORTGAGE AND A DEED OF TRUST. BOTH ARE NOTHING MORE THAN INSTRUMENTS THAT SECURE A RIGHT TO REPAYMENT OF MONEY. As such, 2932.5 applies to both mortgages and deeds of trusts (which is what most California and Arizona homeowners have – a recorded Deed of Trust in the County Recorder’s Office).
Okay, that is a lot of lawyer talk. But what on earth does it mean? Well, strap on your seat belt because here we g0: (1) First, what does California Civil Code Section 2932.5 actually say? Here is the code pasted in here for you (thankfully this section is short and sweet):
Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.
Now, you have to read this section clearly. To state is as simple as I can, IF A DEED OF TRUST IS ASSIGNED, THE ASSIGNEE HAS THE POWER OF SALE AND THAT ASSIGNEE CAN FORECLOSE NON-JUDICIALLY (BY EXERCISING THE POWER OF SALE CONTAINED IN THE DEED OF TRUST). HOWEVER, IN ORDER TO ACTUALLY EXERCISE THAT POWER OF PRIVATE SALE, THE ASSIGNMENT OF DEED OF TRUST MUST BE “DULY ACKNOWLEDGED AND RECORDED.” To me, “duly” means that the assignment of trust is (a) not backdated with a retroactive effective date (which we see all the time and which the lenders argue is perfectly fine), and (b) not subject to the robosigner/notary fraud phenomena that lenders are trying to sweep under the rug as a mere “mistake” or “irregularity.” As you will see, the lenders have no problem with this code section, it is just that they argue it does not apply to assignments of DEEDS OF TRUST (they argue the section only applies to MORTGAGES given the “mortgagee” language used above. That’s what this Salazar case is mainly about. It should be noted, that if the assignee/beneficiary does not have the private power of sale they would still be entitled to conduct a “judicial foreclosure” in front of the court. Why don’t they do this? 1. Costly 2. Time Consuming, 3. You can raise defense and 4. You can challenge their standing, maybe even force them to show proof that the note was endorsed to their securitized loan trust. This would be a major feat for them and might expose the fraud perpetrated on the SEC, but that is another topic.
Facts of Salazar: The borrower entered into a 2005 loan transaction with Accredited Home Loans (the “lender” under the Deed of Trust). Under the Deed of Trust, you have the traditional nonsense of MERS claiming to be the beneficiary of the loan even though it never held the loan, never lent any money, and collects no payments, etc. MERS was the “nominee” under the Deed of Trust. At some point the borrower fell into default on the loan and MERS substituted the trustee (there was both Quality Loan Service and Litton Loan Service mentioned) on June 2009. After that, a private non-judicial foreclosure sale was conducted on 12/2009. US Bank National Association, as trustee of a securitized loan trust that claimed to be the beneficiary and owner of Plaintiff’s note, executed the trustees deed upon sale indicating US bank was the “foreclosing beneficiary.” Based upon this, and based upon their argument that 2932.5 does not apply to deed of trust, US bank claimed the foreclosure was proper and valid.
The borrower however, when faced with an unlawful detainer (eviction action) shortly following the sale, filed for Chapter 13 bankruptcy protection on 9/2010. This action triggered the automatic stay in bankruptcy court and put a halt to the foreclosure action. The borrower also filed a wrongful foreclosure state court action. While in Chapter 13 bankruptcy, US bank filed a motion for relief from the automatic stay arguing the house had been foreclosed upon lawfully, and that the property was therefore not essential to a chapter 13 reorganization/restructuring plan. The borrower (now referred to as the debtor in the bankruptcy proceeding) sought to oppose the motion for relief from stay and argued US bank had no standing to lift the stay and that the private non-judicial foreclosure sale was invalid and must be set aside so the house could be factored into a chapter 13 payment plan. The basis for arguing wrongful foreclosure was that California Civil Code Section 2932.5 was not complied with as there was NO RECORDED ASSIGNMENT OF DEED OF TRUST TO US BANK THAT COULD BE FOUND IN THE RECORDED CHAIN OF TITLE, AND THEREFORE THE FORECLOSURE SALE FAILED TO BE IN COMPLIANCE WITH THE CALIFORNIA FORECLOSURE LAWS. As usual, the banks argued this was nonsense and the stuff of novels.
Legal Issues for the Salazar Court to Decide:
(1) Whether US Bank could establish its “standing” to bring the motion for relief from the automatic stay?
(2) Whether the debtor retained any equitable interest in the property following the private non-judicial foreclosure sale and if so, whether such property was necessary to an effective chapter 13 reorganization? (if so, it would be proper to continue the automatic stay in effect until the issues and defenses of US Bank were raised/resolved in another proceeding).
(3) Whether it was proper to allow the unlawful detainer case to proceed in light of the facts of the case?
Courts Holding (Decision on the above issues):
(1) Yes, US bank could meet the “standing” requirements which the court described as a “minimal test” and which the Court found that US bank was a “party in interest” mainly because they had a recorded trustees deed and claimed the note was assigned (in blank) to them.
(2) Yes, the debtor retained an equitable interest in the property. The private non-judicial foreclosure sale was wrongful and VOID (no tender required to challenge) for FAILURE TO COMPLY WITH CALIFORNIA FORECLOSURE LAWS, SPECIFICALLY CALIFORNIA CIVIL CODE SECTION 2932.5 FOR FAILURE TO RECORD AN ASSIGNMENT OF DEED OF TRUST PRIOR TO CONDUCTING THE PRIVATE FORECLOSURE SALE. Given this violation, it was proper to deny the motion to lift the automatic stay in bankruptcy and to keep the stay in effect until it was learned whether or not the Debtor could put together a viable chapter 13 repayment plan.
The court rejected arguments that 2932.5 applied only to mortgages, and the court refused to follow the other federal court cases cited by the moving party US Bank (they cited NOthern and Eastern District cases that lent credence to this argument). Instead, the court decided the case as they felt the California Supreme Court would have decided the issue. Rather, citing to a host of secondary legal authorities, the court finds there is no functional distinction between mortgages and deeds of trust as each has the “same effect and economic function” (ex. Witkin Summary of California Law / Miller and Starr California Real Estate).
(3) No, the Court felt that since the foreclosure was probably void, and since the debtor may be able to save her home in a chapter 13 bankruptcy plan, that the stay should remain in effect until US banks defenses could be heard in state court or in an adversary proceeding. The court did mention that challenges to foreclosure sales “are barred if the issue is not raised in the unlawful detainer action.”
Basically, the Court was not buying the MERS as beneficiary argument. The Court said that the MERS private alternative to non-judicial foreclosure is trumped by California foreclosure statutory law to the extent MERS is inconsistent. I know MERS is aching on this decision also. The Court said the assignment of deed of trust must be recorded under 2932.5 despite MERS initial role under the Deed of Trust. Classic!! Just because MERS alleges to know how the owner of a loan is at any given time (which most experts see as pure folly), the court will not allow that to win the day. The court distinguished the recent Gomes v. Countrywide decision where MERS was allowed to foreclosure non-judicially. In Salazar the court said the deed of trust was vague and only allowed MERS to act where “necessary by law or custom” but the court said this does not allow a specific grant to foreclose non-judicially without following California statutory foreclosure procedure. The court simply stated that MERS was not the beneficiary at the time the foreclosure sale occurred as evidenced by the US Bank Trustee’s deed after sale which indicated “US BANK was the foreclosing beneficiary.”
In addition, the Court discussed how 2932.5 creates a “right” for a trustor to know who owns their loan (novel concept I know), whether you are talking about a mortgage or a deed of trust. The court said 2932.5 is to protect trustors (that is the borrower) “from confusion as to ownership of loans” and that borrowers are entitled to know about changes in beneficiary status. Recording the assignment of deed of trust serves this purpose and is therefore a legal requirement before initiating a non-judicial foreclosure. Again, keep in mind, even having an assigned deed of trust is no substitute for owning/holding the original fully endorsed promissory note. As the “security follows the note” the note should be an issue in every case if you can demand proof of such. Cases like In re Walker have discussed how the mere assignment of a deed of trust, without the note, is a legal nullity (but it seems courts don’t love this position since it would tear the mask off these lenders who lied to the SEC) and would probably send our stock market crashing. Note the Judge in Salazar cited In re Gavin (need chain of title of valid endorsements) and In re Wilhelm (lender must have an interest in the relevant note) in order to evidence their standing.
Food for thought
(1) Although the Courts, and each of them, may disagree on the law when it comes to foreclosure defense, the Salazar case does suggest to me that some courts are getting tired of all the lender, loan servicer, MERS securitized loan nonsense. This may bode well if you are facing foreclosure and need grounds for an injunction to enjoin the private non-judicial foreclosure sale. You may want to have us review your recorded chain of title for irregularities in the chain of title. Any lawyer that has been taking foreclosure cases in the past few years knows these types of violations are real, and not uncommon. As documents such as the ADOT need to be “duly acknowledged and recorded” under 2932.5 it might also be wise to send out notary “produce your transaction log” letters (assuming the state of the notary requires them to keep logs. We have more information about this topic on our website http://www.RobosignerAudits.com.
(2) If your house has been sold, and you think you can potentially catch up with your arrears and make your loan payment in a chapter 13 bankruptcy case, then that is another reason to have your recorded chain of title examined for irregularities in the ADOT. In Salazar the court stated that the debtor “gets prima facie evidence of ownership” of property where a foreclosure sale is void under 2932.5. Note that court was requiring adequate protection payments be made to US Bank while the legal wrangling continued.
(3) By filing a lawsuit (assuming you have valid legal grounds) you won’t likely win a million dollars or get your house for free, but you never know what might happen if your case goes to a jury.
(4) We have been saying all along, only courageous judicial opinions can help lawyers like me fight the foreclosure meltdown. We will be discussing this case on our Foreclosure Defense Radio Show (Google Vondran Foreclosure Meltdown Show).
(5) Although the lenders, and loan servicers always argue you have to “tender the balance of the loan” to challenge irregularities in the foreclosure process, the judge in Salazar disagreed and cited two cases stating no tender is required where a foreclosure sale is VOID (for failing to follow California Foreclosure laws in California Civil Codes Section 2020-2955 which the court referred to an an exhaustive list of California nonjudicial foreclosure law that must be complied with). The cases cited for the no-tender proposition include Bank of America v. LaJolla Group II, 129 Cal.App. 4th 706, 710,717 (5th Dist. 2005); and Dimrock v. Emerald Properties, 81 Cal. App. 4th 868, 874 (4th Dist. 2000). Remember, tender applies to challenging irregularities in the “sale” (2932.5 could be argued to challenge the “process” and compliance with the statutory law).