Wednesday, September 11, 2013

The Import & Impact of Glaski v. Bank of America

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Home » Newsletters » September Newsletter Covers Glaksi v. Bank of America, Recent Cases and Regulatory Updates

A month has passed since the California Court of Appeal handed down their decision in Glaski v. Bank of America, N.A., 218 Cal. App. 4th 1079 (2013). In that month, the opinion has been published and Bank of America’s petition for rehearing denied. Now binding on all California trial courts, the opinion has attracted much attention and praise in the foreclosure defense world. This article summarizes the court’s major findings, places the decision into the current legal landscape, and analyzes both its potential impact and its limitations.
                                           I.            The Court’s Conclusions
 Ultimately, the court’s conclusions are rooted in two basic and related inquiries that clarify (and in some respects simplify) the “authority to foreclose” question in California, at least for the time being. First, does the borrower allege that the foreclosing party was not the beneficiary based on specific facts? Second, if borrower’s claim is based on a failed assignment, was the assignment void, or voidable? If borrowers can allege specific facts showing that the purported beneficiary derived their authority from a void assignment, their claims, under Glaski, may now survive the pleading stage in California courts.
A.    Alleging that the Assignment Granting the Beneficiary’s Power to Foreclose is Void, is a Specific, Factual Allegation and the Basis for a Valid Wrongful Foreclosure Claim 
The court divides wrongful foreclosure claims based on an authority to foreclose theory into two categories: 1) borrowers who allege, generally, that the foreclosing entity was not the “true beneficiary under the deed of trust;” and 2) borrowers who allege, with specific facts, that the foreclosing entity was not the true beneficiary.[1] Borrowers in the first category rarely make it past the pleading stage, but borrowers in the second group may. In other words, it is not enough to say “X is not the true beneficiary,” but it may be enough to allege “X is not the true beneficiary because Y.” If “Y” is a specific, factual allegation that shows the foreclosing entity did not have the authority to foreclose, then the claim is viable.
The court then explained that “[o]ne basis for claiming that a foreclosing party did not hold the deed of trust” is if the assignment purportedly giving that party foreclosing power is void.[2]The court did not say that attacking a beneficiary’s assignment is the only way to bring a wrongful foreclosure claim, only that this particular defect, when alleged with specific facts, is enough to put the authority to foreclose at issue. Glaski alleged that the assignment of his deed of trust and note to the WaMu Securitized Trust was void because it occurred after the trust’s closing date.

B.     Standing: Void vs. Voidable Assignment
Many securitization-based wrongful foreclosure claims  fail because the borrowers do not have “standing” to challenge how their loan was securitized.[3] The Glaski court framed this issue simply, focusing on the assignment: “When a borrower asserts an assignment was ineffective, a question often arises about the borrower’s standing to challenge the assignment of the loan (note and deed of trust) –an assignment to which the borrower is not a party.”[4] The court cites federal cases from other circuits,[5] and a California Jurisprudence treatise to conclude, “a borrower can challenge an assignment of his or her note and deed of trust if the defect asserted would void the assignment.”[6] California courts have largely adopted a knee-jerk reaction to securitization theories, throwing those claims out because the borrower is not a party to, or third-party beneficiary of, the assignment agreement (the PSA in most cases).  The Glaski court broke with California precedent in framing the issue as one of void versus voidable assignments, allowing theories based on void assignments to survive pleading.

C.    A Post-Closing Date Transfer to Trust Renders the Assignment Void 
The court had thus far established: 1) Glaski’s attack on the beneficiary’s assignment was specific enough that it went beyond a general challenge foreclosing party’s right to foreclose; and 2) generally, void assignments give a borrower standing to challenge the loan’s securitization, even though the borrower was not a party to, or third-party beneficiary of, the PSA. The court then analyzed whether Glaski’s specific allegations, taken as true, would void the assignment, giving him standing.
Like many mortgage loans, Glaski’s note and deed of trust were sold (assigned) to a trust to be bundled with other mortgages, sliced up and sold again. Through a subsequent FDIC takeover, acquisition, and more assignments, defendant Bank of America either became the “successor trustee” to the WaMu trust, or acquired the Glaski deed of trust from JP Morgan, who bought all of WaMu’s assets from the FDIC.[7] Either way, the possible chains of title are broken because the transfer from JP Morgan Chase to the WaMu Securitized Trust occurred long after the closing date of the trust.[8]
But does a post-closing assignment to a trust render that assignment void? To answer this question, the Glaski court analyzed New York law, which, according to the pleadings, was controlling,[9] to conclude that an assignment transferred after a trust’s closing date is void, rather than voidable.[10]
Glaski pled both threshold questions with the requisite specificity: 1) he alleged that Bank of America was not the beneficiary because the assignment purporting to give it foreclosing power was invalid; and 2) the assignment was void, not voidable, because the transfer to the trust occurred after the trust’s closing date. The first point got him past Gomes, and the second established his standing.

D.    Tender
The court addressed the tender issue briefly, but it was still critical to its ruling and again emphasizes the importance of distinguishing whether a foreclosure sale is void or voidable. “Tender is not required where the foreclosure sale is void, rather than voidable, such as when a plaintiff proves that the entity lacked the authority to foreclose on the property.”[11] Because tender was not required, and because Glaski stated a cognizable claim for wrongful foreclosure, the court reversed the trial court’s dismissal of the complaint, and vacated and overruled the order sustaining the Bank of America’s demurrer.

II.            Placing Glaski in the California Foreclosure Landscape
A.    Distinguishing Gomes: Specificity
Gomes was probably Glaski’s biggest hurdle. The court dedicated an entire section of its opinion to differentiate its findings from those in Gomes.[12] The borrower in Gomes also brought a wrongful foreclosure claim, alleging that the foreclosing entity, MERS, was not the beneficiary’s nominee because the unknown beneficiary did not appoint MERS as nominee, or give MERS authorization to foreclose.[13] Unlike Glaski, however, Gomes left his argument there. He did not take the crucial step of explaining why MERS, who was listed as beneficiary and nominee in the deed of trust,[14] was not the true beneficiary.[15] Rather, Gomes alleged that CC § 2924 afforded him the right to “test” whether MERS had the beneficial interest before the sale took place.[16] “Whether” is the key word and the difference between a Gomes claim and a Glaskiclaim. Gomes wanted to investigate whether or not MERS was the beneficiary. By contrast, Glaski alleged that Bank of America was definitely not the beneficiary because the assignment giving them beneficiary status was late to the trust, and therefore void. Gomes asked, “who has the authority to foreclose?” whereas Glaski stated: “X definitely does not have authority for these reasons . . . .” The Gomes court found that CC § 2924 provides no right for borrowers to ask “whether” the foreclosing party had the authority to do so.[17]
B.     Distinguishing Nguyen: Void vs. Voidable
The Glaski court also had to reckon with Nguyen v. Calhoun, 105 Cal. App. 4th 428 (2003), which held that anything outside of the foreclosure sale process cannot be used to challenge a presumably valid and complete sale.[18] Specifically, the court had to consider whether an “ineffective transfer to the WaMu Securitized Trust” was an aspect of the foreclosure sale, or if it fell outside of that sale and was therefore irrelevant.[19] Because the transfer to the trust was fundamental to Bank of America’s authority to foreclose, and would void the sale itself, the court decided that the trust transfer was part of the foreclosure sale and a valid basis for challenging the foreclosure.[20]
C.    Distinguishing Fontenot: Burden Shifting 
The Glaski opinion nowhere cites Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256 (2011), but it is important to recognize why Glaski came out differently from that case. As inGlaski, the borrower in Fontenot alleged that an invalid assignment voided the entire foreclosure transaction.[21] Unlike Glaski, however, Fontenot based her invalid assignment theory, not on specific facts like a late transfer to a trust, but on the theory that the assignor (MERS) had the burden to prove the assignment was valid, and could not do so.[22] The court determined that MERS did not bear that burden because nothing in the statutory scheme regulating nonjudicial foreclosures created that duty: “[A] nonjudicial foreclosure sale is presumed to have been conducted regularly, and the burden of proof rests with the party attempting to rebut this presumption.”[23] If “‘the party challenging the trustee’s sale [can] prove such irregularity and . . . overcome the presumption of the sale’s regularity,’” that could shift the burden to defendant to show a valid assignment.[24] This is precisely what Glaski accomplished: by pleading specifically that the assignment is void because of the late transfer to the trust, Glaski rebutted the presumption of regularity, which is all he needed to do at the pleading stage.

                                     III.            The Promise & Limits of Glaski

Glaski cannot be used to bolster every securitization theory. To employ Glaski principles effectively, advocates should undertake the same analysis the court did. First, does the borrower simply allege the foreclosing party does not hold the beneficial interest in the deed of trust (Gomes), or does the borrower allege that the foreclosing party could not possibly be the rightful beneficiary because the assignment giving them that interest was invalid? (Glaski). Second, do the borrower’s allegations render the assignment void or voidable? If void, then Glaski could lend support to both the borrower’s standing and their wrongful foreclosure claim. The HBOR Collaborative will monitor Glaski’s implications and influence as other courts interpret this important decision. 

[1] See Glaski v. Bank of Am., N.A., 218 Cal. App. 4th 1079, 160 Cal. Rptr. 3d 449, 460 (2013).
[2] Glaski, 160 Cal. Rptr. 3d at 461 (emphasis added).
[3] Seee.g., Rodenhurst v. Bank of Am., 773 F. Supp. 2d 886, 898-99 (D. Haw. 2011) (“[C]ourts have uniformly rejected the argument that securitization of a mortgage loan provides the mortgagor a cause of action.”); Junger v. Bank of Am., N.A., 2012 WL 603262, at *3 (C.D. Cal. Feb. 24, 2012) (“[P]laintiff lacks standing to challenge the process by which his mortgage was (or was not) securitized because he is not a party to the PSA.”); Bascos v. Fed. Home Loan Mortg. Corp., 2011 WL 3157063, at *6 (C.D. Cal. July 22, 2011) (“Plaintiff has no standing to challenge the validity of the securitization of the loan as he is not an investor in of the loan trust.”).
[4] Glaski, 160 Cal. Rptr. 3d at 461.
[5] Id. (citing Reinagel v. Deutsche Bank Nat’l Trust Co., 722 F.3d 700, at *3 (5th Cir. 2013); Conlin v. Mortg. Elec. Registration Sys., Inc., 714 F.3d 355, 361 (6th Cir. 2013); Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 291 (1st Cir. 2013)).
[6] Glaski, 160 Cal. Rptr. 3d at 461 (emphasis original).
[7] Id.
[8] Id. The WaMu trust, by its own terms, closed in 2005. Id. at 454. An assignment recorded in 2008 “stated that JP Morgan transferred and assigned all beneficial interest under the Glaski deed of trust [and note] to ‘LaSalle Bank NA as trustee for WaMu [Securitized Trust].’”Id.
[9] Id. at 462.
[10] Id. at 463 (“[T]he [WaMu trust] trustee’s attempt to accept a loan after the closing date would be void as an act in contravention of the trust document.”). The closing date is meant to protect the interests of the trust’s investors because it ensures REMIC status, exempting investors from federal income tax (with respect to the trust). Id. at 460 n.12, 463.
[11] Id. at 466.
[12] Glaski, 160 Cal. Rptr. 3d at 464.
[13] Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1152 (2011).
[14] Id. at 1151.
[15] Instead, Gomes claimed he “‘d[id] not know the identity of the Note’s beneficial owner,’” but that whoever “authorized” MERS to foreclose was not the beneficiary or the beneficiary’s agent.Id. at 1152. He gave no specific reason for believing this, other than that his loan was “sold . . . on the secondary mortgage market.” Id.
[16] Id.
[17] Id. at 1155 (“[Section 2924 does not] provide for a judicial action to determine whether the person . . . foreclos[ing] . . . is indeed authorized.”).
[18] See Nguyen v. Calhoun, 105 Cal. App. 4th 428, 441-42 (2003).
[19] Glaski, 160 Cal. Rptr. 3d at 466.
[20] Id.
[21] See Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256, 269 (2011).
[22] See id. at 269-70.
[23] Id. at 270.
[24] Id. (quoting Melendrez v. D & I Inv., Inc., 127 Cal. App. 4th 1238, 1258 (2005)).

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