Can Defaulting Borrower Enjoin a Foreclosure Sale by Asserting That Lender Lacks Standing ?
In Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, borrower brought a preemptive action to forestall foreclosure.
The borrower's complaint alleged that Mortgage Electronic Registration Systems, Inc. (MERS) had no authority to initiate foreclosure proceedings because the owner of the note did not authorize MERS to proceed. The loan servicer demurred to the complaint. The trial court sustained the demurrer without leave to amend and entered judgment for defendants.
The Court of Appeal affirmed.
The court noted that California's nonjudicial foreclosure statutes (Civ. Code, 2924-2924k) provide a comprehensive framework for the regulation of nonjudicial foreclosures. (Gomes v. Countrywide Home Loans, Inc., supra, 192 Cal.App.4th at p. 1154.)
One purpose of this comprehensive scheme is to provide a beneficiary with a quick, inexpensive and efficient remedy against a defaulting borrower. (Ibid.)
Nowhere does the scheme provide for a judicial action to determine whether the person initiating the foreclosure process is authorized. (Id. at p. 1155.)
There is no ground for implying such an action. (Ibid.)
Recognition of such a right would "fundamentally undermine the nonjudicial nature of the process and introduce the possibility of lawsuits filed solely for the purpose of delaying valid foreclosures." (Ibid.)
In Gomes, supra, 192 Cal.App.4th 1149, ReconTrust sent the borrower the notice of default.
In Gomes, ReconTrust acted as the agent for MERS. "'MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans.
Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members' interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages.
The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.' " (Id. at p. 1151.)
The borrower alleged that he "'does not know the identity of the Note's beneficial owner'" (id. at p. 1152) and that MERS did not have authority to initiate the foreclosure (ibid.). The trial court sustained a demurrer to the complaint without leave to amend. (Id. at p. 1159.)
Affirming, the Court of Appeal refused to interfere in the delicately balanced and comprehensive nonjudicial foreclosure scheme established by the Legislature. (Civ. Code, 2924 et seq.)
The court concluded, "Because California's nonjudicial foreclosure statute is unambiguously silent on any right to bring the type of action identified by Gomes, there is no basis for the courts to create such a right." (Gomes, supra, 192 Cal.App.4th at p. 1156.)
In Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, complained that MERS lacked authority to transfer the note because the deed of trust designated MERS as both the "nominee for Lender" and the "beneficiary." (Id. at p. 262.) Like plaintiffs, the borrower failed to allege how she was prejudiced by MERS's purported assignment. The court found the deficiency fatal to the cause of action for wrongful foreclosure.
The court explained that "a plaintiff in a suit for wrongful foreclosure has generally been required to demonstrate the alleged imperfection in the foreclosure process was prejudicial to the plaintiff's interests. . . . Even if MERS lacked authority to transfer the note, it is difficult to conceive how plaintiff was prejudiced by MERS's purported assignment, and there is no allegation to this effect. Because a promissory note is a negotiable instrument, a borrower must anticipate it can and might be transferred to another creditor. As to plaintiff, an assignment merely substituted one creditor for another, without changing her obligations under the note. Plaintiff effectively concedes she was in default, and she does not allege that the transfer to HSBC interfered in any manner with her payment of the note , nor that the original lender would have refrained from foreclosure under the circumstances presented. If MERS indeed lacked authority to make the assignment, the true victim was not plaintiff but the original lender, which would have suffered the unauthorized loss of a $1 million promissory note." (Fontenot, supra, 198 Cal.App.4th at p. 272.)
In Herrera v. Federal National Mortgage Assn. (2012) 205 Cal.App.4th 1495, the borrower again alleged a defect in MERS's assignment of the deed of trust, arguing that the successors and assignees of the original lender did not have an agency agreement with MERS. And again the borrowers, like plaintiffs, did not claim that the lender committed misconduct by initiating foreclosure proceedings, nor did they contend they were not in default. "Because a promissory note is a negotiable instrument, a borrower must anticipate it can and might be transferred to another creditor. As to plaintiff, an assignment merely substituted one creditor for another, without changing her obligations under the note." (Id. at p. 1507.)
Following the lead of the courts in Gomes and Fontenot, the Herrera court found no abuse of discretion in denying the plaintiffs' leave to amend.
The Fourth District Court of Appeal reiterated the same general rule in Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 511:
"California courts have refused to delay the nonjudicial foreclosure process by allowing trustor-debtors to pursue preemptive judicial actions to challenge the right, power, and authority of a foreclosing 'beneficiary' or beneficiary's 'agent' to initiate and pursue foreclosure." Jenkins, like each of the distressed homeowners in all of these cases, alleged an improper transfer of the promissory note during the securitization process. But the court noted that Jenkins's obligations under the promissory note remained unchanged, even if the subsequent assignments were invalid. She lacked standing to challenge or enforce any of the agreements reached during the securitization process, including the investment trust's pooling and servicing agreement. In the court's view, there might have been a true victim lurking, but it was not the borrower who had defaulted on her obligation and sought to create a controversy in which she was not a party. (Id. at p. 515.)