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RPLR Sep 2016
Wrongful foreclosure action was properly dismissed when assignment of deed of trust was voidable, not void, under relevant New York law.
Yhudai v Impac Funding Corp. (2016) 1 CA5th 1252
In 2007, Yhudai borrowed $1.8 million from Impac Funding and secured the loan with a deed of trust (DOT) against his California residence. The DOT named Impac Funding as the lender and MERS as the beneficiary. The DOT provided that
· MERS "is acting solely as a nominee for Lender"; and
· Yhudai's promissory note, along with the DOT, could "be sold one or more times with prior notice to [Yhudai]."
A month later, Impac Funding sold the note to a securitized investment trust formed under New York law. Under the terms of the pooling and service agreement governing that trust, a loan must be transferred into the trust by the closing date for it to be included in the trust. More than two years after the closing date, MERS, as nominee for Impac Funding, recorded an assignment of the DOT to the trustee of the investment trust.
A few years later, the successor trustee foreclosed on the property. Yhudai sued Impac Funding and other parties for wrongful foreclosure, alleging that the foreclosure was void because it was derived from a void assignment. The trial court granted Impac Funding's demurrer and Yhudai timely appealed.
The Second District Court of Appeal affirmed. In Yvanova v New Century Mortgage Corp. (2016) 62 C4th 919, reported at 39 CEB RPLR 73 (May 2016), the California Supreme Court held that a borrower may challenge a transferee beneficiary's authority to foreclose on the borrower's property if the assignment was void. However, an assignment that is merely voidable does not support a wrongful foreclosure action. 62 C4th at 936. Thus, whether Yhudai had standing to challenge the foreclosure turned on whether the assignment was void or voidable under New York law.
Yhudai relied on Glaski v Bank of America (2013) 218 CA4th 1079, reported at 36 CEB RPLR 111 (Sept. 2013), in which the court held that an assignment of a loan after the trust's closing date was void under New York law. However, the New York case on which Glaski relied has since been overturned. Subsequent New York cases have held that an assignment that fails to comply with the terms of a trust agreement is merely voidable and not void. See, e.g., In re Jepson (7th Cir 2016) 816 F3d 942. Accordingly, Yhudai did not have standing to challenge the foreclosure.
THE EDITOR'S TAKE: The court offers two justifications for its result:
The lateness of the assignment of the deed of trust to the pool trustee made the transfer merely voidable and not void under New York trust law (thus excluding the trustor from the protection of our own supreme court's recent decision in Yvanova v New Century Mortgage Corp. (2016) 62 C4th 919, reported at 39 CEB RPLR 73 (May 2016)); and
Because the promissory note was delivered into the trust on time, it carried the deed of trust (DOT) with it, thus eliminating any invalidating lateness.
Because the second argument appears only in a footnote, the court seems to have taken its first argument (void/voidable) more seriously than the second (note/DOT). However, Dale Whitman and others (some of whom wrote in A CEBinar on Foreclosures Following Problematic Securitizations, 39 CEB RPLR 56 (May 2016)) have maintained that under UCC Article 3, the transfer of the note is the key event, trumping the assignment of the DOT; a belated assignment of the DOT is just irrelevant if the note itself was turned over in time.
It certainly is true that, as a matter of law, transfer of the note (alone) is what matters, but I wondered whether lateness in the assigning of the DOT could nevertheless also matter in light of the fact that this pooling and servicing agreement (PSA) probably imposed deadlines on both transfers (as most PSAs do, even though the UCC speaks only of the note transfer). I wrote Dale to ask about this, and I reproduce his reply below:
Roger, the typical PSA does require delivery of several documents, not just the note, within the 90-day window. But what if that was not done? The result is a breach of contract on the part of the depositor, for which the depositor could theoretically be liable for damages if any could be proved. However, I don't think that has any effect on the transfer of the right of enforcement of the note, which I would argue remains governed exclusively by Art. 3. And Art. 3 is satisfied if the note is delivered prior to the inception of foreclosure, whether its delivery was timely within the meaning of the PSA's requirements or not. Unless you believe that somehow the trust is void because the trustee did not insist on compliance with every requirement of the PSA, the failure to deliver either the note or the other docs in a timely manner is largely irrelevant. It's a breach of contract, but so what? If the essential documents are eventually delivered, and if the IRS is not given any reason to revoke the trusts' tax-exempt status, who cares?
That argument goes even further than the Yhudai footnote goes, suggesting that even a late transfer of the note (outside the 90-day window) is forgivable as long as it did get into the pool before the foreclosure was commenced. However, given the language of Yvanova and Yhudai, as well as Sciaratta (covered by Dale for us in our last issue; see 39 CEB RPLR 96 (July 2016)), our courts may take a narrower view about these mechanical features, all of which may then get rendered inconsequential if they only make things voidable rather than void.
PS: Ms. Yvanova has since lost her case after it was remanded by the supreme court. The Second District, on July 29, 2016, held that her lateness claim made the transfer only voidable (not void). Interestingly, all transfer references in this second court opinion dealt with the assignment of the deed of trust, not the delivery of the promissory note. The decision was ordered unpublished. Readers may find it at https://scholar.google.com/scholar_case?case=16482242371835653680=en=lang_en=6,47=1=scholaralrt.—Roger Bernhardt
39 Real Property Law Reporter 119 (Cal CEB Sept. 2016), © The Regents of the University of California, reprinted with permission of CEB.