Tag Archives: California

California’s Highest Court Confirms Lenders Owe No Duty to Borrowers to Process, Review, and Respond to Loan Modification Applications and Nixes Negligence Claim

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Wayne Streibich, Diana M. Eng, Cheryl S. Chang, and Jessica A. McElroy

Financial institutions, lenders, and servicers should take note that the California Supreme Court affirmed a Court of Appeal decision confirming there is no duty for a lender to “process, review and respond carefully and completely to” a borrower’s submitted loan modification application. In doing so, California’s highest court resolved a split of authority at the appellate level. However, the Court specifically disclaimed consideration of negligent misrepresentation or promissory estoppel claims, noting that nothing in the opinion “should be understood to categorically preclude those claims in the mortgage modification context.”

In Sheen v. Wells Fargo Bank, N.A.[1] (March 7, 2022), the California Supreme Court affirmed the decision of the Court of Appeal, which upheld the trial court’s decision sustaining defendant lender’s demurrer to plaintiff borrower’s negligence claim in a case involving a junior lien and a lender’s alleged negligence in failing to respond timely to the borrower’s request to modify a second position deed of trust.

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California Supreme Court issues narrow holding that, post-foreclosure, borrowers have standing to assert wrongful foreclosure based on allegations that an underlying assignment is void

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By: Shawnda M. Grady

On February 18, 2016, the California Supreme Court resolved a split in the Courts of Appeal and unanimously held that a mortgage loan borrower has standing to sue for wrongful foreclosure based on an allegedly void assignment.  Tsvetana Yvanova v. New Century Mortgage Corp. et al., Case No. S218973 (Cal. Feb. 18, 2016).   The Court followed the reasoning in Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), which held that foreclosure itself is sufficient prejudice for standing purposes.  The Yvanova opinion did not extend to pre-foreclosure claims, did not address whether a borrower must allege tender to state a cause of action for wrongful foreclosure, did not address what facts render an assignment void, and explicitly limited its ruling to void – not voidable – mortgage assignments.  Three additional cases currently pending before the California Supreme Court, which have not yet been briefed, also address a homeowner’s standing to assert a claim for wrongful foreclosure and have the potential to expand the Yvanova ruling.

Background
Plaintiff-borrower Tsvetana Yvanova sued her mortgage lender, New Century Mortgage Corporation (“New Century”), and others for various foreclosure-related causes of action, with a single cause of action for quiet title remaining in her second amended complaint.  Yvanova alleged that in 2006, she obtained a $483,000 loan from New Century, for which she provided a deed of trust as security.  In 2007, New Century filed for bankruptcy and was liquidated in August 2008.  In December 2011, the servicer, on behalf of New Century, executed an assignment transferring the Deed of Trust to Deutsche Bank National Trust Company (“Deutsche Bank”) as trustee for a securitized trust.  The closing date for the securitized trust was in January 2007.  In August 2012, Western Progressive LLC recorded (1) a substitution of trustee, substituting itself for Deutsche Bank, and (2) a notice of trustee’s sale.  On September 14, 2012, the property was sold at public auction by Western Progressive LLC to a third party.

Yvanova alleged the December 2011 Assignment of the Deed of Trust from New Century to Deutsche Bank was void because:  (1) New Century lacked authority to transfer the Deed of Trust in 2011, because its assets were transferred to the bankruptcy trustee in 2008, and (2) the investment trust was closed in 2007, four years before the assignment.  The superior court sustained defendants’ demurrer without leave to amend.

The Court of Appeal affirmed the judgment, concluding that Yvanova could not state a claim for quiet title, because Yvanova had not alleged tender of the amount due.  The Court of Appeal also determined that Yvanova could not, on the facts alleged, amend her complaint to state a claim for wrongful foreclosure.  The Court of Appeal reasoned that, as a third party unrelated to the assignment at issue, Yvanova was not affected by any alleged deficiencies in the assignment and, therefore, lacked standing to enforce the terms of the agreements allegedly violated.  In so ruling, the Court of Appeal declined to follow the holding of Glaski.  Yvanova petitioned for review before the California Supreme Court, which granted review on August 27, 2014.  Yvanova v. New Century Mortg. Corp., 331 P.3d 1275 (Cal. 2014).

California Supreme Court Decision
In Yvanova,  California Supreme Court limited its review to the following:  “In an action for wrongful foreclosure on a deed of trust securing a home loan, does the borrower have standing to challenge an assignment of the note and deed of trust on the basis of defects allegedly rendering the assignment void?”  Yvanova, 331 P.3d at 1275.  The Court found in the affirmative, following the reasoning in Glaski, supra,  and rejecting the holding in Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal.App.4th 497 (2013), to the extent that those cases addressed a borrower’s standing to assert a post-foreclosure claim of wrongful foreclosure based on a void assignment.  Specifically, the Court found that an entity foreclosing following a void assignment of the deed of trust, as opposed to a merely voidable assignment, acts without legal authority to do so.  Under such circumstances, a borrower has standing to state a claim for wrongful foreclosure, because he or she has suffered the loss of ownership of the property.

The Court explicitly noted that its holding was limited to the issue of standing in post-foreclosure cases.  The Court did not determine whether the defects alleged by Yvanova would render an assignment void, and declined to address what facts must be alleged to demonstrate a void assignment.  The Court further declined to extend its analysis of prejudice beyond the standing context.

Additional Cases Pending Review
Three additional cases remain pending before the California Supreme Court that also address a borrower’s standing to challenge foreclosure based on allegations of a void assignment:  Boyce v. TD. Service Company, 352 P.3d 390 (Cal. 2015) (post-foreclosure action); Keshtgar v. U.S. Bank, 334 P.3d 686 (Cal. 2014) (pre-foreclosure action); Mendoza v. JP Morgan Chase Bank, 337 P.3d 493 (Cal. 2014) (post-foreclosure action).  In each of these cases, the plaintiff asserted a wrongful foreclosure claim, alleging the assignment of the subject deed of trust was void because it was reportedly transferred into a securitized trust after the trust’s closing date; in Keshtgar and Medoza, the plaintiffs also challenged the authority of the individual who executed the assignment to do so.  In each of the three cases, the Court of Appeal declined to follow Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013) and instead followed the reasoning in Jenkins, supra, holding that the borrowers had no standing.  The Supreme Court deferred briefing in each of these three cases pending the Court’s disposition of Yvanova, and no further orders have been issued.

Although borrowers may attempt to rely on Yvanova to assert wrongful foreclosure claims based on allegedly void assignments, the limitations of the Court’s holding in Yvanova still permit defendants to challenge the borrower’s failure to tender, whether the underlying facts regarding the assignment render it void and whether the borrower has sufficiently alleged prejudice as an element of wrongful foreclosure.  It is not yet clear whether the Court’s anticipated disposition of Boyce, Keshtgar, and Mendoza will extend to these issues or clarify the Yvanova holding.

 

Ninth Circuit Holds that Putative TCPA Class Action Is Not Subject to Arbitration Clause in Shrinkwrap Contract

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By Joe Patry

The Ninth Circuit recently held that a putative class action asserting violations of the federal Telephone Consumer Protection Act (“TCPA”) was not subject to arbitration because the representative plaintiff was unaware of the purported contract containing the arbitration provision.

In Knutson v. Sirius XM Radio Inc., No.12-56120 (9th Cir. Nov. 10, 2014), the plaintiff purchased a new Toyota that came with a 90-day trial subscription to Sirius XM satellite radio. After the plaintiff received the trial subscription, he received a Welcome Kit containing a Customer Agreement, which included an arbitration clause containing a class action waiver. Although the Customer Agreement in the Welcome Kit indicated that he had three days after the activation of his subscription to determine whether to cancel the subscription or it would automatically continue, the Welcome Kit arrived long after the three-day period had expired. The plaintiff did not contact Sirius XM either to continue or terminate his subscription.

During the 90-day trial subscription, he received three unauthorized telemarketing calls from Sirius XM on his cell phone, and brought a putative class action alleging violations of the TCPA. In response to the putative class action, Sirius moved to compel arbitration. The plaintiff opposed the motion, claiming that the Customer Agreement was not binding because he received it more than a month after the three-day cancellation period expired and, as a result, there was no mutual assent to the terms of the Customer Agreement. Sirius XM contended that the Customer Agreement was binding and thus the plaintiff was required to arbitrate the dispute. The trial court dismissed the case and granted Sirius XM’s motion to compel arbitration.

On appeal, the plaintiff argued that he had not entered into a binding contract with Sirius XM because there was no mutual assent to enter into the Customer Agreement, since he was not given the opportunity to accept or reject the Customer Agreement. Sirius XM asserted that after Knutson received the Customer Agreement, he had the opportunity to both review it and to notify Sirius XM if he wished to cancel his subscription, but that he had not done so. The Ninth Circuit rejected Sirius XM’s arguments, noting courts may decline to enforce these agreements if there are legal or equitable grounds to do so. Mutual assent is a principle to any contract and a party cannot be required to arbitrate a dispute if the party had not agreed to do so as part of the contract. Here, the plaintiff never agreed to the arbitration clause because he was not given the opportunity to accept or reject the Customer Agreement. Further, the Customer Agreement was within the Welcome Kit, which the plaintiff had not opened and read. The plaintiff believed that the Sirius XM trial subscription was a complimentary service for marketing purposes, and he did not know that he was entering into a contractual relationship with Sirius XM. The Court found that a reasonable person who had purchased a Toyota would not think that they had entered into a binding contract with another company, such as Sirius XM.

The Ninth Circuit also indicated that, although a “shrinkwrap agreement” (where a consumer buys a product before getting the detailed terms of the contract) is generally enforceable and a party cannot generally avoid the terms of a contract by failing to read the contract before signing it, this does not apply when the writing does not appear to be a contract and the terms are not conspicuous. Further, a “shrinkwrap agreement” is between the customer and the service provider. Here, the plaintiff had no idea that he was entering into a contract with Sirius XM, since the terms of the Customer Agreement were contained in the Welcome Kit, which the plaintiff did not think he needed to read. Because the plaintiff was not aware that he had entered into a purportedly binding contract with Sirius XM, the arbitration clause in the Customer Agreement was unenforceable.

The Ninth Circuit heavily relied on Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012), a Second Circuit Court of Appeals case that interpreted California law regarding the enforceability of arbitration clauses. In Schnabel, the plaintiffs clicked on a website, which indicated they had received a “Special Award.” In small print, the website advised that the customer would receive membership information and that there was no obligation to continue to receive benefits, but the plaintiffs’ credit cards were automatically charged until they cancelled their membership. Similar to Knutson, the Schanbel plaintiffs claimed that they did not intentionally or knowingly enroll into the discount service; however, unlike Knutson, the Schnabel plaintiffs entered their information into a separate enrollment form and had to click on a “Yes” button to indicate that they had read the terms and conditions of the discount membership website, which included an arbitration provision. The Second Circuit found that the arbitration provision was unenforceable because the plaintiffs received the terms of the contract after they enrolled in the service; there was no prior commercial relationship between the parties that would have suggested that terms sent after the initial enrollment would become part of their agreement with that merchant. Further, automatically charging the plaintiff’s credit cards was too “passive” to show that the plaintiffs had understood and agreed to be bound by the terms of the arbitration provision.

The Ninth Circuit found that Knutson had done even less than the Schnabel plaintiffs to manifest intent to enter into a binding contract, as he did not affirmatively enroll into a subscription service with Sirius XM, nor did he indicate that he had read the terms of the Customer Agreement. Thus, Knutson could not assent to Sirius XM’s arbitration provision because he did not know that he was entering into a contract with Sirius XM. Accordingly, the Ninth Circuit reversed the dismissal of the case and the granting of the motion to compel arbitration.

Based on Knutson, companies selling products or services to consumers with “shrinkwrap agreements” should take steps to conspicuously disclose the terms of such agreements. Consumers should receive explicit disclosures that purchasing the product or using a trial or gift subscription for a different product or service may cause a binding contract to be formed. In addition, consumers should be made aware that the product being purchased includes provisions that will control any future disputes based on the product.