Recent Calif. Supreme Court ruling could unleash torrent of lawsuits, notes Robert S. McWhorter
A recent California Supreme Court decision could expose numerous financial institutions to lawsuits on mortgage loan foreclosures, according to Robert S. McWhorter, a shareholder in national law firm LeClairRyan’s Sacramento office.
“The Supreme Court’s recent ruling in Yvanova v. New Century Mortgage Corporation will have a profound impact on the lending industry,” said McWhorter, whose practice focuses on representing financial institutions and business entities in commercial, business and bankruptcy litigation. Under the ruling, a borrower can challenge a non-judicial foreclosure sale by alleging that there was a break in the chain of assignments of the beneficial interest in the deed of trust and that sale was void.
“This decision strikes down a long line of decisions that stood for the proposition that defaulting borrowers lacked standing to challenge such assignments,” noted McWhorter. “This decision may increase the filing of wrongful foreclosure actions against lenders, challenging the validity of the assignments based on alleged violations of pooling and servicing agreements by lenders.”
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“Although the Court itself called its ruling a narrow one, the implications are quite wide: many courts look to California for legal leadership, so this case could have national ramifications,” McWhorter said.
For decades, many financial institutions have bundled their mortgages and sold them as packages to investors, a practice known as securitization. Following the 2008 collapse of the housing bubble and the controversy over the impact of securitization, one of the key legal issues that emerged was whether and how defaulting homeowners could challenge the validity of the chain of assignments involved in securitization of their loans.
“The question appeared to have been settled by a 2013 California Appellate division decision that held borrowers have no standing to file a claim of wrongful foreclosure challenging the beneficiary’s assignment of the deed of trust,” McWhorter explained. “But that decision was disapproved by the Yvanova ruling, where the Court concluded that borrowers do have standing to challenge whether an assignment is void. The Court reasoned that the borrower is asserting his or her own interest in limiting foreclosure on their property to those with legal authority to order a foreclosure sale, regardless of whether the borrower was a party to the beneficiary assignment agreement.”
In 2006, plaintiff Tsvetana Yvanova executed a deed of trust securing a note for $483,000 on a residential property in Woodland Hills. The lender and beneficiary of the trust deed filed for bankruptcy on April 2, 2007. In 2008, the lender was liquidated and its assets were transferred to a liquidation trust that itself was assigned to a separate investment loan trust in 2011. But Yvanova argued that the investment trust had a closing date – a deadline by which all loans and mortgages or trust deeds must be transferred to the investment pool – of January 27, 2007. The plaintiff alleged that the transfer into the trust after the trust’s closing date is sufficient to plead a void assignment and hence to establish standing.
“The Supreme Court reversed the Court of Appeal, finding that it spoke too broadly in holding that a borrower lacks standing to challenge an assignment of the note and deed of trust in which the borrower was neither a party nor a third-party beneficiary,” said McWhorter.
McWhorter advised that financial institutions that have already engaged in foreclosure transfers may wish to consult with their legal advisor about securing an acknowledgement of the validity of the transfer from the transferor.