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Trends In Lender Liability

Bill DahlinBill Dahlin
The “financial crisis” that commenced in 2008 is still having ramifications. For example, the California Supreme Court, in a 7-0 decision issued on February 8, 2016, has held that a “borrower who has suffered a non-judicial 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.”

The newest California Supreme Court decision affecting lending practices (Yvanova v. New Century Mortgage Corporation) arose out of a 2006 loan secured by a deed of trust. The loan was for $483,000. The lender (New Century Mortgage Corporation) filed for bankruptcy in 2007 and in 2008 the lender entity was liquidated and its assets were transferred to a liquidation trust. In late 2011, the defendant (New Century) purported to execute an assignment of a Deed of Trust to Deutsche Bank irrespective of the fact that New Century had been dissolved three years earlier. There were multiple assignments of the Note and Deed of Trust and eventually notices of default to the borrower were mailed and recorded and a trustee’s sale took place in August 2012.

The debtor alleged in the complaint that the defendant’s assignments of the Note and Deed of Trust were void and that therefore the foreclosure was void. The trial court concluded the borrower lacked standing to object to the written assignment agreements because the borrower was not a party to any of the assignments and therefore could not challenge the terms or validity of any of those assignments. The Supreme Court of California granted review to address the narrow issue of “standing” and ruled, unanimously, in favor of the challenging borrower/ debtor.

The 30-page Opinion reflects immense effort expended by all the parties. Indeed, the briefing presented in this case reads like a “who’s who” of organizations supporting debtors as well as a similar set for amicus briefs filed on behalf of lenders. The ruling, in one sense, simply reflects the ongoing concern of the California Supreme Court for consumers and is illustrative of several recent rulings by the court. Indeed, in Coker v. Chase Bank, decided January 21, 2016, the California Supreme Court held that a borrower who sells property pursuant to an approved “short sale” is protected by California’s anti-deficiency laws. This new decision about borrowers having standing to challenge “solo-signings” and other claims that are being heard by courts all over the country may have nationwide impact one month later confirms that lenders will be held to strict account. For better or for worse, California Supreme Court has been a trend setter for decades and these two new cases might continue that history.

The California trend just spoken of is also exemplified by a Sixth District Court of Appeal decision also from California which was announced only one week prior to the newest California Supreme case mentioned above. The new Court of Appeal matter is entitled Orcilla v. Big Sur, Inc.

The Big Sur case involved a complaint by a debtor to set aside a non-judicial foreclosure sale on the grounds that the underlying Note and the subsequent modification of that Note were per se unconscionable and that the entire transaction should be set aside. The debtors’ multiple claims, including one for quiet title, were all rejected by the Appellate Court with the exception of the court allowing the debtors’ claim to seek an order setting aside the foreclosure sale and to pursue a potential unfair competition claim under California’s UCL (unfair competition) statute. (See Business & Professions Code section 17204.)

When read conjunctively, the Orcilla case, the prior Coker/Chase Bank case and the New Century Mortgage case illustrate that California courts continue to be receptive to certain forms of “lender liability claims.” This writer would opine that debtors in other states will cite these new published cases to support similar claims in other jurisdictions.

These recent cases, along with others decided elsewhere, also confirm that one ongoing trend in the law is that business transactions with consumers are being reviewed with an eye towards helping consumers whenever possible. That vantage point should be borne in mind for both the form and the substantive content of consumer oriented transactions.

Bill Dahlin is a partner with the Southern California law firm of Hart Kienle Pentecost and a leader in the firm’s Manufactured Housing Industry Practice Group. He can be reached at 714-432-8700, office (direct dial) or [email protected]. This article is for general information purposes and is not intended to be and should