The economic downturn of the past three years has spawned a
cottage industry of lawsuits against banks and other lienholders
for "wrongful foreclosure." Property owners are
struggling to come up with legal grounds to push back against
foreclosures, and creative lawyers have been able to come through
with various theories typically based on technical deficiencies in
the notices, improper party standing, and other attacks. The legal
reports of court filings regularly list new suits grouped under
this generic heading – "wrongful foreclosure"
– as if the exercise of contractual lien rights is itself
a civil wrong that demands compensation. Of course it is not, and
lienholders are within their contractual rights in foreclosing on
security upon default. That is, assuming there indeed are
such rights in the contracts at issue.
Federal courts are inundated with the claims, too. Plaintiffs can
bring a variety of claims alleging violation of such federal laws
as the Truth in Lending Act or the Real Estate Settlement
Procedures Act to challenge loan agreements by seeking rescission
or other remedies. Appended to these suits are state-law claims for
"wrongful foreclosure," which one federal judge recently
described as "an action in equity, in which a plaintiff seeks
to set aside a foreclosure sale that has already
occurred."1 A quick search in LEXIS yields dozens
of opinions filed just in 2011 in California federal courts
deciding motions to dismiss claims that include express foreclosure
challenges of one form or another.
The California Court of Appeal recently filed a published opinion
that takes some wind out of the sails of those who have gotten in
the courthouse door with imaginative theories that challenge
foreclosures on real property. In Gomes v. Countrywide Home
Loans2, the Court affirmed dismissal of a suit
against Countrywide that alleged wrongful foreclosure based on a
contention that the improper party had initiated the foreclosure on
the delinquent home loan.
At issue in Gomes is the role of Mortgage Electronic
Registration Systems, Inc. ("MERS"), an electronic
marketplace for mortgages that permits member lenders, for a fee,
to register their loans with MERS, make MERS the legal grantee and
security holder of record, and then transfer the loan paper in the
open market without making the transfers public record. The record
title holder is MERS, but contractually the lender retains various
rights in the paper. MERS has legal title and foreclosure rights if
the loan goes into default.
Jose Gomes bought a home in San Diego in part with $331,000.00 lent
by KB Home Mortgage Company. KB's deed of trust said MERS is
the beneficiary under the security instrument and is "acting
solely as a nominee" of KB and its successors and
assigns." It further states MERS "holds only legal title
to the rights granted by Borrower" under the trust deed but
"if necessary to comply with law or custom MERS ... has the
right: to exercise all of those interests including, but not
limited to, the right to foreclose and sell the property."
Gomes defaulted and a notice of default was recorded by ReconTrust,
an agent of MERS. Countrywide, a loan servicer, signed the
declaration accompanying the notice of default.
Gomes's suit alleged two causes of action addressed in the
appeal. First, he alleged the novel claim of "Wrongful
Initiation of Foreclosure," contending the notice if default
was recorded by parties who had no authority from the actual
beneficiary of the deed of trust, a party unknown to the plaintiff
because KB evidently sold the loan in the secondary market. He
sought damages of "at least $25,000" for this claim. The
second claim was for declaratory relief, seeking the court to
decide whether under California's deed of trust foreclosure
statutes a party may seek to set aside a foreclosure based on
improper authority of the party initiating the default and private
sale process. In other words, this second claim asked: "Do I
have a cause of action or not?"
The trial court answered "not," dismissing the case
because the complaint alleged no cognizable basis for relief.
Countrywide, the principal defendant, argued a number of reasons
why the suit could not prevail even if all of the complaint was
true, including California's nonjudicial foreclosure statute
sets forth an exhaustive framework that does not provide for the
type of relief that Gomes seeks; and in any case the terms of the
deed of trust authorize MERS to initiate a foreclosure proceeding.
The court agreed and tossed out the suit for lack of legal
basis.
The Court of Appeal agreed. The court noted the nonjudicial
foreclosure process is set up comprehensively in California's
statutes and the courts will not add implied terms to those
provisions. Nothing in them gives a borrower the right to sue for
alleged lack of authorization of the foreclosing party. To
recognize such a claim would impermissibly inject the courts into
what is by definition and design a nonjudicial, private sale
process. The purpose is to provide security holders with a
relatively quick, inexpensive way to foreclose upon default,
avoiding the time delays and costs (not to mention redemption
rights) associated with court foreclosure actions. On the key
point, California's statutes allow foreclosure by an assignee
or agent of the beneficiary, so whether or not MERS qualifies as a
true "beneficiary" is not relevant in this
state.3
Clouding the view are three federal cases, two of which are
unpublished, that give parties a basis to allege a foreclosing
party's lack of authority. The court in Gomes
addressed and found all of these cases inapplicable. In one, the
lender allegedly backdated an assignment of its deed of trust to
improperly grant foreclosing authority after the fact, a contention
not made in Gomes. The other two cases were decided under
Nevada and Arizona law and thus had no application to
California's statutory regime, and in any event alleged very
specifically that the party initiating the foreclosure had no
authority, and why. Here, there was no basis to claim MERS had no
such authority since the trust deed itself granted it. The court
noted that if Gomes was suing to fish around to see of there is a
lack of authority without any up-front basis, the suit is improper.
Thus it was properly dismissed.
The Gomes court noted an obstacle that faces plaintiffs
under longstanding California law if they attempt to undo a
foreclosure sale that has already occurred.4 In addition
to pleading a viable legal basis to set aside the sale, the
plaintiff also has to plead and prove tender of the amount of the
indebtedness. Failure to do so is common and will lead to
dismissal. Lawyers representing plaintiffs in these case are
learning this, but parties who represent themselves often miss this
point.
Gomes is a strong pronouncement that parties will not
proceed with suits against lenders and their assignees merely to
figure out later if they have a factual basis to challenge a
foreclosure sale. They need to have the factual basis at the
outset, alleged in specifics in the complaint. Otherwise their suit
will be dismissed before it gets to any discovery phase. The angles
for getting that foot in the door and keeping it there are limited
only by the creative acumen of the lawyers who bring these
"wrongful foreclosure" actions, but the courts are
correct in drawing some firm lines in the sand about what will have
a ghost of a chance.
Footnotes
1. Foster v. SCME Mortgage Bankers, Inc., U.S. Dist LEXIS 44648, at *11 (E.D. Cal. 2010).
2. Case D057005, Fourth Appellate District, Division One, filed Feb. 18, 2011. NOTE: The time for rehearing or for review by the California Supreme Court has not run and the opinion is not yet final.
3. The court noted other states have found MERS standing lacking if status as a beneficiary is required. Gomes, supra, slip op. at 12, fn. 9; see Weingartner v. Chase Home Finance, LLC, 702 F.Supp.2d 1276, 1280 (D. Nev. 2010). California law expressly allows foreclosure by a "trustee, mortgagee, or beneficiary, or any of their authorized agents..." Civ. Code, § 2924 (a)(1) (emphasis added).
4. Gomes, supra, slip op. at 11, fn. 8. The court found it unnecessary to address this point because it affirmed the sustaining of a demurrer without leave to amend on the merits of Gomes's claims. The tender requirement is mentioned in many federal and California cases. See, e.g., Sanchez v. Mortgageit, Inc., 2011 U.S. Dist. LEXIS 13142, at *3 (N.D. Cal. 2011); Abdallah v. United Savings Bank, 43 Cal.App.4th 1101, 1109 (1996).
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