California Supreme Court Weighs in on Standing

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California Supreme Court Weighs in on StandingThe California Supreme Court recently held that borrowers may have standing to challenge an assignment of a deed of trust in a wrongful foreclosure action where they assert that the assignment is void. The decision likely gives defaulted homeowners new avenues to defend against foreclosures and gives lenders more reason to closely scrutinize assignments, especially assignments of loans placed into securitized trusts.

In Yvanova v. New Century Mortgage Corp., a borrower brought a wrongful foreclosure action hoping to stop the nonjudicial foreclosure of her California home. The originating lender and beneficiary, New Century Mortgage, filed for bankruptcy approximately one year after origination. A few years after bankruptcy liquidation, New Century purportedly assigned the deed of trust to the trustee of a securitized loan trust. After the borrower defaulted, a nonjudicial foreclosure was initiated and the borrower brought a wrongful foreclosure action.

The borrower claimed that the purported assignment was void as the trust had closed prior to the assignment and because New Century’s assets had been transferred to a bankruptcy trustee. The defendants argued that the borrower lacked standing as she was not a party to the assignment or entitled to enforce the debt.

The California Supreme Court favored the borrower’s arguments, noting that if the assignment in a chain by which the entity which authorizes a nonjudicial foreclosure is void, the foreclosing entity has not acted with the necessary legal authority. Thus, the Court concluded that a wrongful foreclosure action could be brought by the borrower.

To the extent there is good news for the financial services community, it is that the Court noted that its ruling was narrow, “We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party’s right to proceed.” Notwithstanding this admonition, however, it seems virtually certain that lawyers representing borrowers will push for as expansive a reading of Yvanova as possible. Ultimately, it will be up for the California courts to decide whether Yvanova is, in fact, as narrow as it purports to be.