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9th Cir. Holds Calif. Law Does Not Permit Pre-Foreclosure Challenges to Ability to Foreclose

Mortgage LawThe U.S. Court of Appeals for the Ninth Circuit recently held that California law does not permit preemptive actions to challenge a party’s authority to pursue foreclosure before a foreclosure has taken place.

A copy of the opinion in Perez v. MERS is available at:  Link to Opinion.

Husband and wife homeowners owned two properties in California and executed deeds of trust for both in 2006. Both deeds of trust identified the lenders and the Mortgage Electronic Registration Systems, Inc. as the beneficiary for the lender’s successors and assigns. Each mortgage loan was bought and sold multiple times.

In 2009 a notice of default and a notice of trustee’s sale were issued against the homeowners for failure to make payments on one of their loans. A sale was scheduled, but it did not take place. There were no allegations that any foreclosure proceedings had been initiated against the homeowners relating to the other property.

The homeowners sued MERS and the entities currently holding the two loans seeking declaratory relief, cancellation of instruments, and quiet title as to the holders and MERS.

The homeowners sought declarations that the holders had no legal rights in the underlying notes or deeds of trust or to initiate foreclosure proceedings. The homeowners sought unencumbered titles to their properties and permanent injunctions to prevent the holders from collecting mortgage payments or foreclosing on the properties. The homeowners base their claims for relief on alleged defects in the assignments of the underlying deeds of trust, such that, the homeowners asserted, the holders never received any beneficial interest in the loans.

Both actions were removed to federal court based on diversity jurisdiction and were dismissed for failure to state plausible claims for relief under California law. This appeal followed.

The homeowner’s claims were premised on the theory that they can preemptively challenge the holders’ authority to foreclose on their properties by filing judicial actions before any nonjudicial foreclosure has taken place. Thus, the controlling question before the Ninth Circuit was whether such preemptive, pre-foreclosure actions are viable under California law.

The Ninth Circuit began its review noting the California Supreme Court has not directly answered the question of whether preemptive, pre-foreclosure actions are viable under California law.

As you may recall, in Yvanova v. New Century Mortg. Corp., 365 P.3d 845, 858-59 (Cal. 2016), the California Supreme Court held that, in an action for wrongful foreclosure, borrowers have standing to challenge prior assignments of the note if they allege the assignment was void, as compared to voidable. The California Supreme Court expressly limited its holding to post-foreclosure actions for wrongful foreclosure, explaining that the holding did not apply to borrowers who “attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party’s right to proceed,” id. at 848, or to borrowers who bring “action[s] for injunctive or declaratory relief to prevent a foreclosure sale from going forward,” id. at 855.

The Ninth Circuit next turned its analysis to relevant decisions of the California intermediate appellate courts, first examining Gomes v. Countrywide Home Loans, Inc., 121 Cal. Rptr. 3d 819, 822 (Cal. Ct. App. 2011), where a defaulting borrower challenged whether the defendants were authorized to foreclose on his property. The Court of Appeals held that California’s comprehensive statutory scheme for nonjudicial foreclosures did not permit a borrower to bring a judicial action before a foreclosure had taken place to challenge whether a foreclosing party was authorized to foreclose. Id. at 824. The intermediate appellate court reasoned that allowing borrowers to bring such pre-foreclosure actions would impermissibly interject courts into California’s “comprehensive nonjudicial scheme” of foreclosure and “fundamentally undermine the nonjudicial nature of the process and introduce the possibility of lawsuits filed solely for the purpose of delaying valid foreclosures.” Id.

The Ninth Circuit next examined Jenkins v. JP Morgan Chase Bank, N.A., 156 Cal. Rptr. 3d 912, 923 (Cal. Ct. App. 2013), in which the Court of Appeals held that the borrower lacked a legal basis to bring her preemptive action under California’s statutory scheme for nonjudicial foreclosure; and Saterbak v. JPMorgan Chase Bank, N.A., 199 Cal. Rptr. 3d 790, 793 (Cal. Ct. App. 2016), which examined Yvanova and held that Yvanova did not alter prior California precedent barring pre-foreclosure suits because Yvanova was “expressly limited to the post-foreclosure context.” Id. at 796. Accordingly, the appellate court dismissed the action, holding that preemptive, pre-foreclosure actions were still not viable under California law. Id. at 795.

However, in Brown v. Deutsche Bank National Trust Co., 201 Cal. Rptr. 3d 892, 896 (Cal. Ct. App. 2016), the Court of Appeals, although not deciding the question of whether pre-foreclosure actions are viable after Yvanova, noted that the California Supreme Court could decide to extend its limited holding in Yvanova to cover some pre-foreclosure cases. The appellate court in Brown explained that the reasoning in Yvanova “raises the distinct possibility that [the California] Supreme Court would conclude that borrowers have a sufficient injury [from the initiation of foreclosure proceedings], even if less severe [than the injury from wrongful foreclosure], to confer standing to bring similar allegations before the [foreclosure] sale.” Id.

The Ninth Circuit noted “existing California appellate cases demonstrate that, both before and after Yvanova, California appellate courts have dismissed preemptive, pre-foreclosure actions. There is no convincing evidence the California Supreme Court would break with that precedent.” Thus, the Ninth Circuit held that California law does not permit preemptive actions to challenge a party’s authority to pursue foreclosure before a foreclosure has taken place.

In the present matter, it was “undisputed that no foreclosures [had] taken place.”  Accordingly, the homeowners’ claims were pre-foreclosure judicial actions that preemptively challenge the holders’ authority to foreclose on their properties in the future and thus not viable under California law. 

Furthermore, the Ninth Circuit held that the trial court did not abuse its discretion by denying the homeowners leave to amend, as the proposed amendments “would not have changed the determination that the action was a preemptive, pre-foreclosure action seeking to challenge the [holders’] authority to foreclose, and that such an action is impermissible under California law.”

Accordingly, the Ninth Circuit affirmed the trial court’s dismissal of the homeowners’ claims.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.