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Calif. App. Court (2nd Dist) Rejects Claim That Loan Assignment During Default Was Void

The Court of Appeal for the Second District of California recently affirmed the dismissal of a borrower’s claims for wrongful foreclosure alleging that the assignment of his mortgage to the foreclosing entity was invalid.

In so ruling, the Second District rejected the borrower’s argument that a mortgage cannot be assigned to another entity while the loan is in default as illogical and incorrect, in part because this reasoning would allow borrowers to prevent lenders from assigning debt by refusing to make payments.

A copy of the opinion in Myles v. Pennymac Loan Services, LLC is available at:  Link to Opinion.

A borrower took out a mortgage loan secured by a deed of trust to his home.  After the initial lender was closed and placed into receivership by the federal government, the FDIC as receiver transferred the loan to a new entity (“assignor”), who in turn assigned the loan to yet another entity (“assignee”) and recorded the assignment.

Thereafter, a substitution of trustee was recorded declaring that the assignee was substituted for a new trustee on the loan.  The assignee and trustee foreclosed the borrower’s home in April 2017.

The borrower filed a wrongful foreclosure action against the assignee and trustee alleging that they had no rightful claim to foreclose on his home on the basis that: (i) the initial lender sold his mortgage to entities that were not named defendants to the foreclosure, and; (ii) the loan was not legally transferred, conveyed or assigned to the assignee because the borrower defaulted on the loan nearly eight years prior to the time of assignment.

The trial court sustained the assignee and trustee’s demurrer to the borrower’s complaint and the instant appeal followed.

On appeal, the appellate court reviewed the borrower’s chief argument that a financial institution may not validly assign a mortgage loan to another entity while the loan is in default, and that such an assignment is “void.”

Under California law, it is not enough for a homeowner merely to allege a mortgage assignment was voidable. See, e.g., Yhudai v. IMPAC Funding Corp. (2016) 1 Cal.App.5th 1252, 1256.  Rather, the homeowner must allege facts supporting a legally viable theory as to why the challenged assignment is void as a matter of law. See, e.g., Kalnoki v. First American Trustee Servicing Solutions, LLC (2017) 8 Cal.App.5th 23, 44; cf. Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929–930 [distinguishing between void and four voidable contracts].

Here, the Appellate Court noted that the complaint asserted without any logical basis or supporting legal authority that a borrower, by refusing to pay, can prevent a lender from assigning the debt.

Examining the borrower’s argument that the assignment was void, the Second District was unpersuaded by this “strange suggestion,” concluding that the borrower’s argument was legally incorrect because he did not explain how the assignments were void as a matter of law.  See, e.g., Mendoza, supra, 6 Cal.App.5th at pp. 811– 820.).

The other five claims raised in the borrower’s complaint failed for not being within the jurisdiction of the appellate court (federal claims dismissed upon removal as invalid and remanded to state court), forfeited as not raised in the opening brief (claims for violation of Civil Code section 2934 or for cancellation of written instruments), or for want of an underlying claim (claim for unfair competition).

Because the borrower failed to provide a logical basis for his argument suggesting that the assignment of his mortgage loan while in default was void, nor any supporting legal authority, the Second District concluded that the trial court’s judgment sustaining the demurrer without leave to amend was proper, and affirmed the judgment.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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