On February 18, the California Supreme Court issued a potentially far-reaching decision in Yvanova v. New Century Mortgage Corp., in which it ruled that certain mortgage borrowers have standing to sue for wrongful foreclosure based on a void assignment of the promissory note or deed of trust. Although the Court limited the scope of its ruling, the decision may lead to a new wave of borrower lawsuits attacking allegedly void assignments. Mortgage lenders, servicers, and trustees should prepare now by ensuring all assignments and documentation are in order prior to foreclosure.
Since the 2008 financial crisis, mortgage borrowers across the country have attempted to stop or rescind a foreclosure sale by attacking the validity of the assignments of mortgage or deed of trust. Lenders have responded by arguing that borrowers lack standing to question the validity of an allegedly improper assignment. In California, a split developed within the courts of appeal, with the majority ruling borrowers lack standing (Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal.App.4th 497 (2013)), and at least one court ruling borrowers have standing (Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013)).
In its limited ruling, the Court in Yvanova sided with Glaski, stating “a borrower who has suffered a non-judicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.”
Importantly, the Court attempted to limit the applicability of its ruling to the specific factual allegations in the complaint. The borrower in Yvanova alleged that the assignment at issue was void because it was completed after the company had been liquidated in bankruptcy. If true, the allegation could render the assignment void ab initio, and therefore could support a claim for wrongful foreclosure seeking damages.
The Court ruled that the borrower had standing as a result because she was attempting to protect her interests from an alleged third party to the contract. The Court, however, distinguished claims that would render an assignment merely voidable, ruling that a borrower would lack standing to assert such a claim.
The Court also limited its ruling to exclude injunctive or prospective relief, meaning that for now the claim cannot be used to enjoin a pending foreclosure. However, for California mortgages, Yvanova eliminates potential defense arguments that it is irrelevant to the borrower who is enforcing a debt that is in default, and that borrowers lack standing as non-parties to an assignment.
Troutman Sanders LLP has considerable experience and expertise representing loan servicers in mortgage litigation, and will continue to monitor court interpretation in order to identify and advise on potential risks.