California Court’s Yvanova Decision Opens Door to Very Dark Room

If you’re someone who follows the foreclosure crisis then I’d have to think that by now you’ve already seen at least a few dozen articles all trumpeting the supposedly wonderful news about the California Supreme Court’s recent decision in Yvanova v. New Century Mortgage Corp. et al. 

And were those articles correct in their interpretation of what this decision means to California homeowners going forward, well… then I wouldn’t have felt compelled to spend a good part of last week and my weekend writing about it.  (Lord knows, I certainly don’t do it for fun or profit because it’s neither of those.)

The problem with the coverage in the press related to this decision is that everyone seems to be heralding the decision as some sort of major breakthrough or game changer for homeowners… as if it’s something to celebrate… and as something all but certain to unleash a flood of litigation going forward.

I don’t think any of that is true. 

It’s not that this decision doesn’t open a door that was previously closed, it’s more that, as my good friend Max Gardner (who is considered the top consumer bankruptcy lawyer in the country, by the way) said when I asked him about it… “Yes, it opens a door, but to a VERY DARK ROOM.”

The Backstory…

The backstory is one most of us have heard far too many times since the foreclosure crisis began in 2008.  The plaintiff, Tsvetana Yvanova, lost her home to foreclosure in 2012.  She then filed a lawsuit alleging that the foreclosure was wrongful because her loan wasn’t legally transferred into the trust that had claimed to own her loan and therefore that trust had no right to foreclose on her home. 

The common sense thinking is simple enough to follow: If her loan wasn’t legally transferred into the trust, then that trust didn’t own her loan and therefore couldn’t be the party with the right to foreclose when the loan went into default.  The problem is that such things are not decided in a court of common sense, it’s a matter of law, and that makes the whole thing a lot more complex.

Yvanova got her mortgage from the now infamous New Century Mortgage Corp. in 2006.  She alleged that it wasn’t assigned to a Morgan Stanley trust until 2011.  So, not only would that be long after the closing date of the trust, but in addition since New Century filed bankruptcy on April 2, 2007, how could the company assign a loan in 2011?

California’s lower courts ruled that Yvanova had no right to sue because for one thing she was in default and for another, she lacked standing to challenge the transfer because she was not a party to the contract that governed the transfers of title from the original lender to the trust.  The Supreme Court didn’t agree that either her being in default, or not being a party to the contract, prohibits her from suing for wrongful foreclosure based on the claim that the assignment to the trust was void.

The attorneys representing the trust argued that the trust did own the loan before the closing date and that the transfer in 2011 was only “a technical detail.”  Of course, what one person calls a technicality someone else calls a law, and so the case finally made its way all the way to California’s Supreme Court. 

The Bottom-line of the Supreme Court’s decision…

The first thing everyone should understand is that what we’re dealing with here is only the date of the RECORDING of the assignment of the Deed of Trust.  The defendants in this case argued that the loan had been endorsed in blank and assigned to the trust back in 2007, and that the 2011 assignment was only done to comply with a Pooling & Servicing Agreement requirement… but the court chose not to address that argument in this decision. 

Here’s what the decision said on the subject…

“Principally, defendants argue the December 2011 assignment of the deed of trust to Deutsche Bank, as trustee for the investment trust, was merely confirmatory of a 2007 assignment that had been executed in blank (i.e., without designation of assignee) when the loan was added to the trust‘s investment pool.”

“The purpose of the 2011 recorded assignment, defendants assert, was merely to comply with a requirement in the trust‘s pooling and servicing agreement that documents be recorded before foreclosures are initiated.”

“This claim, which goes not to the legal issue of a borrower‘s standing to sue for wrongful foreclosure based on a void assignment, but rather to the factual question of when the assignment in this case was actually made, is outside the limited scope of our review. The same is true of defendants‘ remaining factual claims, including that the text of the investment trust‘s pooling and servicing agreement demonstrates plaintiff‘s deed of trust was assigned to the trust before it closed.”

A Narrow Procedural Decision…

As the court wrote in the opening paragraphs of its decision, the ruling is a “narrow” one and to truly understand what that means requires very careful reading and skilled interpretation.  According to the court…

“Our ruling in this case is a narrow one. We hold only that a borrower who has suffered a nonjudicial 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.”   

Okay, so what this decision says is that a borrower is not precluded from claiming that an assignment was void in a wrongful foreclosure suit, just because that borrower is in default or not a party to the assignment.  In other words, this decision only says that a borrower is allowed to CLAIM that an assignment was invalid and therefore that the trustee had no right to foreclose. 

It says a borrower has standing.  And that’s all it says.  It’s considered a procedural as opposed to a substantive decision.  It doesn’t say that such an argument would prevail or whether a late assignment to a trust renders the Deed of Trust void, and in fact, it does not say a whole lot of other things that would be important to homeowners considering whether to bring such cases in the future, including…

• It does not say what constitutes a void versus voidable assignment. 
• It does not say an assignment is void because it was assigned after the trust’s closing date. 
• It does not say how New Century’s 2007 bankruptcy impacts an assignment made in 2011.
• It does not say that the ruling can be applied pre-foreclosure, in fact it says that it cannot.
• It does not say that the tender rule won’t apply. In fact, in a footnote it specifically says that all elements of wrongful foreclosure still apply… including tender.
• It did not say whether there’s a statute of limitations involved.
• It does not say which body of law would be used to decide any of these questions.
• It does not say what the remedy might be even if such a case were to prevail.

And no one knows how the courts will rule on any of those or a myriad of other substantive questions that this decision failed to address.  Further, In the conclusion, the court wrote…

“We conclude a home loan borrower has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void, depriving the foreclosing party of any legitimate authority to order a trustee‘s sale.”

Read it slowly… “a borrower has standing to claim…”  The court didn’t say whether such a claim would result in a decision that a foreclosure was in fact wrongful, only that a borrower now has standing to claim that’s the case. 

And then, to underscore what I’m trying to explain, the court’s last sentence says…

“We express no opinion on whether plaintiff has alleged facts showing a void assignment, or on any other issue relevant to her ability to state a claim for wrongful foreclosure.”

Get it?  The court had “no opinion” on anything else… only that in a wrongful foreclosure case, a borrower can now claim that an assignment to a trust was invalid and therefore void… not what would make an assignment void as opposed to merely voidable.

So what?  I hear you ask…

Well, the “so what” gets pretty complicated.  It has to do with rules that govern transfers of mortgage notes into such trusts, and there are several options as to which laws or rules apply.  In deciding Yvanova, the court stopped short of ruling on which laws would ultimately govern in this situation, but the choices might include…

• The Internal Revenue Code’s REMIC rules
• Pooling & Servicing Agreements
• Federal bankruptcy law
• New York State trust law
• Delaware trust law
• California state law
• The Uniform Commercial Code

REMIC Rules – The type of trust we’re talking about is a REMIC trust, which stands for Real Estate Mortgage Investment Conduit.  A REMIC trust is, “an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors.”

The phrase, “fixed pool” is used because a REMIC trust, in order to protect investors, is supposed to be a static trust, meaning that the trust has a closing date, after which no loans are to be moved in or out.  That rule was made to protect investors because it ensures that the loans that make up the trust at the time of their investments, cannot be altered later.

REMIC trusts are used in these situations because for tax purposes they are treated like a partnership or ’S’ corporation, meaning that the trust isn’t required to pay federal income taxes on income it receives as loan payments are deposited, rather said income is passed through to the investors that hold an interest in the trust, and the individual investors pay whatever income taxes are due. 

(That’s why the interests in REMIC trust that are purchased by investors are called “pass through certificates,” but they are also often referred to as “bond holders.”)

The REMIC rules are part of the Internal Revenue Code (IRC) and as a result they speak to the status of the trust as a pass through entity, meaning one that isn’t required to pay taxes on income received.  Best I can tell, these rules are only about taxes, not about ownership of notes or mortgages… and it’s entirely unclear as to whether a borrower has standing to raise issues in court because they violate the Internal Revenue Code.

Pooling & Servicing Agreements – Pooling & Servicing Agreements (PSAs) are the 500+ page documents that govern how almost everything is to be handled as related to a pool of securitized loans.  The PSA should have instructions on how a loan is to be assigned to a given trust, whether it requires physical transfer with an actual endorsement or whether a loan is automatically transferred without endorsement… whether a note can be endorsed in blank… and a whole host of other things besides.

Past decisions have ruled that a borrower is not a party or third party beneficiary to the PSA, and as I’ve said, this decision doesn’t actually say how that will come out, one way or the other.

Federal bankruptcy law – Yes, New Century had filed bankruptcy four years before Yvanova’s assignment was made, so it’s possible that federal bankruptcy law could play a part here, but the court didn’t mention it oner way or the other… and I have no idea.

New York vs. Delaware trust law – Call around the country and talk to lawyers about this issue and chances are you’ll get a different answer on each call.  Some say, at least as I’ve understood them, that New York’s trust law makes late transfers void, not voidable.  Delaware’s trust law may not. 

Other lawyers , however, have told me that New York trust law is not nearly so clear.  They say that the laws in New York only apply to certain types of trusts, and not others.  I really have no idea and there’s no way I’m going to even trying reading anything about trust laws in New York or Delaware.  Just know that thu jury is still way out as far as this issue is concerned. 

The Uniform Commercial Code or UCC 3 vs. UCC 9 – I’ve sat through at least two weekend seminars on the topic of the Uniform Commercial Code (UCC), as it applies to challenging or preventing foreclosures and I’m apparently incapable of staying awake or focused when it comes to this inconceivably nuanced and frankly boring subject because I can’t remember a darn thing about it. 

The UCC is the melatonin of foreclosure defense.  All I can remember is that it has to do with how notes are supposed to be endorsed under various circumstances but last week one attorney told me that in California, the UCC doesn’t even apply.  Again, I have no idea… nor do I want one.  Someone just let me know the answer once there is one.

California’s Homeowner Bill of Rights – California’s Homeowner Bill of Rights, the lawyers point out, contains language saying that foreclosing parties must own the loan.  So, perhaps it’ll be state law that’s eventually used to decide this issue of loan ownership.  Once again, however, no one seems to know for sure.

Statute of Limitations – Which homeowners in California can bring a wrongful foreclosure suit based on this Supreme Court decision?  No one actually knows.  I’m told it’s two years if a general torte… four years for breach of contract.

The reason is that, as I’ve been told by all the lawyers, unless the court’s decision says it’s retroactive, it’s not.  And in this case, there’s nothing about it being retroactive, so it isn’t.  That means that you can only bring a suit under this decision if your wrongful foreclosure occurred within the statute of limitations.

So, what does that mean?  Apparently, no one is sure.  Some think it might be two years… others said it might be four years. What the heck happened here?  Did the California Supreme Court forget about this little detail?  Or maybe they didn’t know there wasn’t already a statute of limitations on a wrongful foreclosure lawsuit?  It’s the sort of thing that makes me want to lay down in traffic.

Yvanova & Pre-foreclosure Lawsuits – The court was clear in saying that this decision could not be used in pre-foreclosure cases in an effort to prevent a foreclosure from happening.  The court only ruled that borrowers have standing to bring this argument in a wrongful foreclosure lawsuit, which means the borrower has already lost his or her house.

Of course, the court of common sense (that I realize doesn’t exist) would have to wonder, if it’s okay to challenge the trust’s ownership of a loan after foreclosure, why wouldn’t it be okay to do the same in order to prevent a foreclosure from taking place in the first place.  Do you have to lose your home before you can try to prove that the wrong party foreclosed? 

That makes absolutely no sense whatsoever.

The Tender Rule – In footnotes found in this decision, the court said that all conditions for wrongful foreclosure still apply, including the tender rule.  Here’s what that means…

In a wrongful foreclosure lawsuit, a borrower asks the court to rule that a foreclosure was wrongful and therefore that the home needs to be returned to the borrower.  However, even if the borrower wins such a suit, that rarely means that he or she gets the house for free.  When a borrower wins a wrongful foreclosure suit, the only way he or she gets the house back is by returning the secured indebtedness (which is principal and interest.)

That means that borrowers, in order to file a wrongful foreclosure lawsuit, have to show the court that they are able to tender the amount they borrowed plus interest back to the lender in the event that they prevail.  The thinking is that there’s no reason for the court to hear a wrongful foreclosure case if the borrower won’t be able to repay the lender in the event the borrower wins.

Now, some lawyers point out that there are exceptions to the tender rule.  One exception to the tender rule would be when there’s a forged Deed of Trust, as in one that you the borrower never signed or knew about.  Admittedly that’s pretty rare, and it’s not at all clear why the tender rule wouldn’t apply to a borrower who brings a lawsuit based on this decision.

What’s Next? 

A Mandelman Matters Podcast featuring 10 legal experts in foreclosure law.

Every time I write something that contradicts what others are saying about how a court decision is affecting homeowners, I hear from a slew of people who are angry about what I’ve written… the Glaski decision comes immediately to mind, but there have been many others.  Some accuse me of merely being wrong… others accuse me of somehow working for the dark side.

The fact is that neither is true.  I certainly don’t work for the dark side… or anyone else for that matter.  No one tells me what to write, no one pays me to write anything on Mandelman Matters.  Truth be told, I hate having to write things like this… it’s no fun, and it takes forever.

In order to write this article on Vvanova v. New Century, I first had to read the decision… twice.  After that, I had to read every article I could find that described the decision, and there were quite a few. 

Then I had to contact attorney after attorney to get their interpretations of the high court’s ruling, starting with Richard Antognini, the lawyer who argued Vvanova’s case in front of California’s Supreme Court.  And once I felt like I had learned enough to intelligently interview lawyers about the case, I called and interviewed 10 of the most experienced consumer and foreclosure defense attorneys I know.

You’ll be able to hear what those lawyers had to say about the Vvanova v. New Century decision later this week on a special Mandelman Matters Podcast.  I’m still not sure what to title it but I’m thinking about… “Everything you didn’t want to know about the Yvanova Decision.”  (Okay, that was a joke… lol.  But actually, it may not be a bad title.)

Look, I want everyone to know that I write these things to make sure that homeowners get an accurate picture of what something means and doesn’t mean. I don’t want to rain on anyone’s parade, nor do I want to dissuade someone who, knowing the facts, wants to pursue a suit based on this decision. 

Make no mistake about it…

What the banks and servicers have done to homeowners in need of assistance over the last eight years is unforgivable… and the fact that it continues today is beyond comprehension.  Had they treated homeowners fairly or at least with basic decency, we wouldn’t be talking about any of this now.  It’s them that created this mess, not us.

So, if you’ve been seriously wronged and damaged as a result, and you’re prepared for a long and difficult fight… then by all means fight for what’s right.  I’m completely on your side and always thrilled to write about a win by a homeowner.

If bankers and servicers find this decision annoying, all I can say is that you ain’t seen nothing yet.  Keep jerking homeowners around in the loan modification process… keep acting like all you really have to do is foreclose and that a modification is a huge favor… and things will only get worse.

I don’t know how the courts will rule on cases in the future, but I do know that decisions like this one, while a long way from being what we’d all like have seen, would not have happened when this crisis began.  And at the very least, in my opinion, that’s progress in the right direction.

 

Mandelman out.