February 7, 2017

Mortgage Banking Litigation Alert – Court of Appeal’s Thorough Opinion Stops Borrowers’ Claims at Every Turn

California’s Third District Court of Appeal just published a decision that is best described as a lender-friendly primer on the documentary aspects of the state’s statutory non-judicial foreclosure process.  Though not making any novel holdings, the panel in Kalnoki v. First American Trustee Servicing Solutions, LLC, systematically destroyed each and every argument the plaintiffs raised in their attempt to defeat the foreclosure on their property.  The Kalnoki opinion arises out of claims relating to a 2011 nonjudicial foreclosure sale, which spawned multiple lawsuits and multiple appeals.  The plaintiffs’ allegations are common:  all of the foreclosure documents were fraudulent or otherwise defective, the assignment of the loan to a securitized trust was void, and the foreclosure was defective because the loan was never properly assigned to the trust pool.

The court reviewed each of the foreclosure documents, from the Substitution of Trustee, to the Assignment of the Deed of Trust, to the Notice of Default, to the Notice of Sale, to the Trustee’s Deed upon Sale, finding that each and every one of the documents was valid.  Through its validation of the Substitution of Trustee, the panel painstakingly explained how the National Bank Consolidation and Merger Act (12 U.S.C. § 215 et seq.) permits the comptroller of the currency to approve the merger of two entities (in this case Wells Fargo Bank, N.A. and Wells Fargo Home Mortgage, Inc.), with the surviving entity holding all “rights, franchises, and interests of the individual merging banks . . . without any deed or other  transfer.”  In other words, once the merger is approved, it is done.  Nothing else is necessary to effectuate the transfer of assets from one entity to the other.  Upon approval of the merger in this case, Wells Fargo Bank, N.A. became the beneficiary under the deed of trust by operation of law and any allegation to the contrary was correctly disregarded.

The plaintiffs also attempted to argue that the assignment of their deed of trust to a securitized trust after the trust’s closing date rendered the assignment void.  This position, often referred to as the “Glaski” argument after the misguided and universally criticized decision from the First District Court of Appeal, was dealt yet another blow by the Kalnoki court.  The panel followed the cases which echo the now common refrain, “[w]e decline to follow Glaski and conclude that an assignment to a securitized trust made after the trust’s closing date is merely voidable.”  Because any irregularities in the securitization process result in the assignment merely being voidable, and because the borrowers were not beneficiaries of the trust, they therefore lacked standing to challenge the assignment of the deed of trust.

In short, Kalnoki is a positive case for lenders, servicers and trustees.  It has several quotable recitations of the law, nicely distinguishes a few negative cases, and serves as a good summary or refresher on California’s non-judicial foreclosure law.

The full ruling is linked here.

Keesal, Young & Logan Mortgage Banking Litigation Group

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