California Foreclosure Law: A Defaulting Borrower

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California Foreclosure Law: A Defaulting Borrower Cannot Enjoin A Foreclosure Sale By Asserting That The Lender Lacks Standing By Kenneth R. Styles on July 21, 2014 *Republished with the permission of Miller Starr Regalia Under California’s non-judicial foreclosure statutes, a defaulting borrower cannot enjoin a lender’s initiation of foreclosure proceedings by asserting that the lender lacks standing. (Keshtgar v. U.S. Bank, N.A. (2014) 192 Cal.App.4th 1149 (Second Dist., June 9, 2014) (“Keshtgar”).) Relying principally on: (1) California’s non-judicial foreclosure statutes (Civ.Code, §§ 2924–2924k) and (2) the prior decision of Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149 (“Gomes”), the Second District Court of Appeal affirmed the lower court’s decision to sustain the foreclosing lender’s demurrer without leave to amend and enter judgment against the borrower. The court held that a defaulting borrower could not preemptively enjoin a non-judicial foreclosure sale even if the wrong entity was foreclosing on the property. Keshtgar represents the “bookend” to the Fourth District’s 2011 Gomes decision, in which the court held that a defaulting borrower could not preemptively enjoin a non-judicial foreclosure sale by claiming that the lender (or its agent) lacked standing. In between Gomes and Keshtgar, the Fifth District’s decision in Glaski v. Bank of America, N.A. (2013) 218 Cal.App.4th 1079 (“Glaski”) distinguished Gomes in a postforeclosure action for damages. Keshtgar’s disagreement with Glaski arguably creates a conflict between the districts that California Supreme Court may elect to address. 2011 Gomes Decision In the 2011 Gomes decision, the deed of trust identified MERS as “acting solely as a nominee for Lender and Lender’s successors and assigns,” and stated that “MERS is the beneficiary under this Security Instrument.” The borrower defaulted on the loan and received a notice of default from ReconTrust, identifying itself as an agent for MERS and signed by an employee of Countrywide (the loan servicer). The borrower then filed a complaint that challenged whether the foreclosing entity was duly authorized by the owner of the beneficial interest).

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Gomes affirmed the lower court’s decision to sustain the defendants’ demurrer without leave to amend and enter judgment against the borrower. The court held that California’s non-judicial foreclosure statutes set forth in Civil Code 2924 through 2924k did not provide for any pre-foreclosure determination of standing. “Nothing in the statutory provisions establishing the non-judicial foreclosure process suggest that such a judicial proceeding is permitted or contemplated.” 2013 Glaski Decision – The Detour In the 2013 Glaski decision, the borrower filed a post-foreclosure lawsuit alleging fraud, quiet title and wrongful foreclosure, the latter claim based on a claim that an assignment of the beneficial interest to a trust was void under New York law. The Fifth District reversed the trial court’s demurrer and remanded the matter with instructions. The court distinguished Gomes on the grounds that it involved the noteholder’s nominee, MERS, and that in Glaski the borrower specifically alleged grounds for the theory that the foreclosure was not conducted at the direction of the correct party. Glaski’s attempt to distinguish Gomes, however, does not fully harmonize with the holding and rationale in Gomes. 2014 Keshtgar Decision – Gomes Was Right No doubt seizing on Glaski’s confusing treatment of Gomes, the defaulting borrower in Keshtgar filed a pre-foreclosure action alleging that the assignment from MERS to the foreclosing entity was void. Relying principally on Gomes and California’s statutes governing non-judicial foreclosures, the Keshtgar court rejected the borrower’s claim: “California’s comprehensive nonjudicial foreclosure scheme does not provide for preemptive action to challenge the authority of the party initiating foreclosure.” The 2014 Keshtgar decision distinguished Glaski on several grounds. First, it noted that Glaski involved a post-foreclosure action for damages, not an action to prevent a foreclosure. Next, it argued that Glaski read Gomes too narrowly, stating its conclusion that a borrower lacks standing to challenge an assignment even after a foreclosure (absent a showing of prejudice). This latter discussion is arguably dicta because Keshtgar did not involve a post-foreclosure damage claim as opposed to a pre-foreclosure injunction claim. So where does Keshtgar leave defaulting borrowers? If Glaski created a crack in the door permitting a defaulting borrower to assert lack of standing to prevent a foreclosure, Keshtgar slammed that door shut (“[t]he yearning for a holding does not create one.”) A defaulting borrower cannot enjoin a non-judicial foreclosure sale based solely upon attacking the lender’s standing. After a non-judicial foreclosure is completed, Keshtgar further concluded that a borrower cannot pursue a claim for damages absent a showing of prejudice, although this discussion is arguably dicta and conflicts with Glaski.

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