By: Sridavi Ganesan
Connect: Sridavi Ganesan

On June 9, 2014, the Second District of the California Court of Appeal held that, under California’s non-judicial foreclosure scheme, a defaulting borrower cannot state a pre-foreclosure cause of action challenging a foreclosing entity’s right to foreclose on a property pursuant to the power of sale in a deed of trust.  In Keshtgar v. U.S. Bank, N.A. as Trustee (2014) 226 Cal.App.4th 1201, the borrower brought a legal action to, among other things, quiet title and cancel and declare void the Assignment of Deed of Trust to U.S. Bank, N.A. Trustee.  In support of his claims, the borrower alleged that the assistant secretary of Mortgage Electronic Registration Systems, Inc. (“MERS”), who executed the Assignment of Deed of Trust to U.S. Bank. N.A. on behalf of MERS, was not an employee or agent of MERS, lacked written authorization to convey property on behalf of MERS or the lender for whom MERS acted as a nominee under the Deed of Trust, and that the assignment was not approved by the Board of Directors of MERS or the lender.  Id., at 1203.  The borrower also alleged that U.S. Bank was not assigned the Note and was not the Note-holder.  Id., at 1204.  The borrower further challenged the assignment by alleging that the Note and Deed of Trust were transferred into the REMIC securitized trust for which U.S. Bank is Trustee, after the trust’s closing date as set forth in the pooling and servicing agreement governing the trust.  Id.

The Court noted that the borrower’s admission that he had been in default since 2011, coupled with the fact that the main thrust of the complaint was simply a challenge to the assignment, which was not contested by MERS and U.S. Bank, N.A., meant that the sole purpose of the action was merely to delay foreclosure.  Id., at 1204-1205.  The Court reiterated the holdings in Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149 and Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, that California’s non-judicial foreclosure scheme does not allow for preemptive challenges by a defaulting borrower to the right to initiate foreclosure under a deed of trust.  Id., at 1205-106.  The Court further clarified a common misinterpretation of Gomes, that a cause of action could be stated challenging a foreclosing entity’s right to foreclose, if a specific factual basis is alleged.  The Court stated that in referencing a “specific factual basis,” the Gomes court was only distinguishing the complaint before it from the federal cases cited by the plaintiff in that case.  Id. at 1205.  The Court explained that “a discussion distinguishing cases is not a holding.”  Id.

The Court also expressly disagreed with the controversial ruling in Glaski v. Countrywide Home Loans, Inc. (2013) 218 Cal.App.4th 1079, that a borrower has standing to challenge an assignment to a deed of trust.  The Court reasoned that while the Glaski Court relied on federal authorities to support its position, California cases hold that a borrower lacks standing to challenge an assignment to deed of trust without a showing of prejudice.  Id., at 1207.  The Court stated that regardless of whether the borrower were to allege that the loan did not make it into the trust or whether it was void, there was simply no pre-foreclosure cause of action to challenge U.S. Bank, N.A.’s authority to foreclose under the Deed of Trust.  Id., at 1207-1208.