The California Supreme Court just gave defaulted homeowners a new tool to challenge foreclosures. On February 18, 2016 the Court in Yvanova v. New Century Mortgage Corporation ruled that a defaulted homeowner could sue a lender for foreclosing on their home on the grounds that its assignment or deed of trust was void. Prior to Yvanova, homeowners in default could not challenge a foreclosure on their homes on the basis the foreclosing party lacked the authority to foreclose due to defects in assignment of the loan.
While the full impact of Yvanova is currently unknown, it is significant the Supreme Court emphasized its holding was a narrow one. Importantly, it noted that its holding would not permit a borrower to pre-empt a non-judicial foreclosure by filing a lawsuit challenging the foreclosing party's right to proceed. Moreover the Court emphasized that a plaintiff homeowner would only have standing to sue where the defective assignment is void as opposed to voidable. This is an important distinction. A voidable assignment is one that, although defective, may be ratified or validated by the assignor and assignee. A void assignment is one that either 1) the assignee and assignor could not enter into as a matter of law or because of a contractual agreement with the borrower; or 2) has since become unenforceable.
The plaintiff in Yvanova claimed that her deed of trust was assigned to an investment trust after the closing date of the trust and after the assignor's liquidation in bankruptcy. The Supreme Court declined to address whether this allegation was sufficient to allege a void transaction as opposed to a voidable transaction. The Court also refused to state what elements a borrower would need to prove to prevail on a wrongful foreclosure action.
Lastly, it is unknown what damages a foreclosed borrower could ultimately recover in a wrongful foreclosure action. Given the strong protections afforded to purchasers of foreclosed properties, it is unlikely that a foreclosed homeowner would recover the home. It would also seem unlikely that the plaintiff could recover the proceeds from the sale as these would ultimately belong to the rightful owner of the note and deed of trust.
While it leaves many questions unanswered, Yvanova is not a sea-change that foreclosed borrowers and their attorneys will make it out to be. Lenders will likely still be able to resolve wrongful foreclosure cases at the pleading stage by arguing the assignments are merely voidable and not void and that Yvanova does not allow a borrower to halt an ongoing foreclosure.
Nathaniel Lucey is an attorney in the San Jose office. He can be reached at 408.286.0880 or .