Borrowers Lack Standing To Challenge Securitization Of Real Property Loans
In Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919 (Yvanova), the California Supreme Court issued a narrow ruling on a borrower’s standing the challenge the validity of the chain of assignments involved in the securitization of real property loans. The court held that a borrower has standing to allege that an assignment of the promissory note and deed of trust to the foreclosing party was void, but the borrower does not have standing if the transfer was merely voidable. The Supreme Court did not decide whether a post-closing date transfer into a New York securitized trust is void or voidable.
On December 13, 2016, in Mednoza v. JPMorgan Chase Bank, N.A., the California Court of Appeal held that a post-closing date transfer into a New York securitized trust is merely voidable. Accordingly, the borrower/plaintiff, Maria Mendoza, did not have standing to challenge alleged irregularities in the securitization of her loan.
The Court of Appeal explained that where assignment is void, meaning of no legal force or effect whatsoever, the foreclosing entity has acted without legal authority by pursuing a foreclosure sale. Because the assignment is without any effect, it can never be ratified or validated by the parties to it.
By contrast, a voidable contract or assignment is one that the parties to it may ratify and thereby give it legal force and effect or extinguish at their election. Only the parties to the contract or assignment have the power to ratify or extinguish; consequently, allowing a borrower to challenge an assignment based on a defect that only renders it voidable would allow the borrower to exercise rights belonging exclusively to the parties to the assignment.
Mendoza cited Glaski v. Bank of America (2013) 218 Cal.App.4th 1079 (Glaski) for the proposition that post-closing date transfers to a New York securitized trust were void. The Court of Appeal declined to follow the holding in Glaski noting an “avalanche of criticism of Glaski’sinterpretation of New York law followed.” The Court of Appeal stated that it would defer to New York courts on questions of New York state law. The New York courts have rejected the holding in Glaski.
The California Court of Appeal went on to state “The principle that a trustee’s unauthorized acts may be ratified by the beneficiaries is harmonious with the overall principal that only trust beneficiaries have standing to claim a breach of the trust. If a stranger to the trust also has such standing, the stranger would have the power to interfere with the beneficiaries right of ratification.”
The Court of Appeal concluded that assignments that violate a Pooling and Servicing Agreement (PSA) or applicable law are voidable and, as a result, borrowers do not have standing to challenge late transfers or other defects in the securitization process.
Because defects in the securitization process may be ratified, the result is that borrowers in California do not have standing to challenge securitization of their real property loans.
For further information, please contact Ruzicka, Wallace & Coughlin, LLP at (949) 748-3600; website: www.rwclegal.com.
The law firm of Ruzicka, Wallace & Coughlin, LLP represents landlords, property management companies, institutional and private lenders, employers and insurance companies throughout the State of California in real estate, business and employment litigation. The information provided herein is for general interest only and should not be relied upon or construed as legal advice.
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