A California Foreclosure Notice of Default Signed by Company “As Trustee” Before The Company Became The Trustee is Valid
One of the more common arguments made by borrowers seeking to challenge a foreclosure sale is that the person or entity that signed the notice of default (the first step in the foreclosure process) lacked authority to proceed with the foreclosure and hence, many borrowers argue, the entire foreclosure sale is void – just as if had it never happened. In most cases, borrowers assert this argument where the foreclosure company hired by the lender to conduct the foreclosure sale signs a notice of default “as agent” for the lender before the foreclosure company becomes the trustee under a deed of trust. Borrowers often challenge the notice of default under the mistaken belief that only the lender or a trustee may sign a notice of default when, in fact, a notice of default may be signed by the lender, trustee, or any of their authorized agents. (Civil Code § 2924(a)(1)) However, in Ram v. Onewest, published February 6, 2015, the California Court of Appeal resolved a more complicated issue. What happens if a foreclosure company signs a notice of default “as trustee” when, in fact, it is not the trustee? The potential problem here is that the California Court of Appeal had previously held that a foreclosure sale conducted by a company that is not the proper trustee is void. (Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868)
In California, a deed of trust is the preferred method of securing a loan with real property. A deed of trust has three parties – the lender, the borrower and the trustee. The trustee’s only duties are to conduct a foreclosure sale if the borrower defaults. The lender is not required to utlize the trustee named in the deed of trust to conduct foreclosure proceedings. In fact, it is common for lenders to use a different trustee. The lender may change the trustee by recording a Substitution of Trustee with the county recorder’s office.
In Ram v. Onewest, borrowers obtained a loan for $396,200 from First Federal Bank of California (“First Federal”) to purchase a home in Pleasant Hill in 2005. In order to secure the loan, the borrowers executed a deed of trust naming Seaside Financial Corporation as the trustee. Thereafter, First Federal was ordered closed by the federal government, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver. At the end of March 2010, the FDIC assigned the loan to OneWest Bank (“OneWest”). On September 7, 2010, a notice of default was executed and recorded by Aztec Foreclosure Corporation (“Aztec”) “[a]s [t]rustee.” The notice stated that, as of that time, the borrowers were almost $16,000 in default on their mortgage payments due under the loan. OneWest did not formally execute a Substitution of Trustee naming Aztec as the trustee until September 24, 2010, several weeks after it was identified astrustee on the notice of default. The Substitution of Trustee was recorded on December 9, 2010, the same day that Aztec recorded a notice of trustee’s sale. The foreclosure sale was postponed until April 18, 2011, and then again postponed until June 6, 2011, when the property was finally sold to OneWest for an amount far less than what was then owed by the borrowers.
After the foreclosure sale, the borrowers filed a lawsuit against OneWest, Aztec, and First Federal for wrongful foreclosure, intentional and negligent fraud, breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress, negligence, unfair business practices, cancellation of deed upon sale, quiet title, declaratory relief, wrongful eviction, willful lockout, and injunctive relief. The borrowers alleged that the foreclosure sale was void because Aztec had not been substituted as trustee at the time it recorded the notice of default and therefore it lacked the authority to initiate the foreclosure proceedings. In particular, the borrowers claimed that the allegedly defective notice irremediably “broke the chain of recorded title rendering all subsequent foreclosure proceedings, including the trustee’s sale, void and of no effect.” The trial court dismissed the borrowers’ lawsuit, and the borrowers appealed. The Court of appeal held that the foreclosure sale was valid. The Court of Appeal began with an overview of the law relating to non-judicial foreclosure sales. A nonjudicial foreclosure sale is intended as a quick, inexpensive, and efficient remedy against a defaulting borrower. To initiate the foreclosure process, the trustee, mortgagee, or beneficiary, or any of their authorized agents must first record a notice of default. After three months, a notice of sale must then be published, posted, mailed, and recorded in accordance with the time limits prescribed by the statute. The traditional method to challenge a nonjudicial foreclosure sale is to file a lawsuit to have the sale set aside and title restored. In order to succeed, a borrower must prove that there was a defect or irregularity in the foreclosure proceedings that resulted in harm to the borrower. Generally, the borrower must tender (offer to pay) the full amount of the debt secured by the deed of trust before being permitted to challenge a foreclosure sale. However, this requirement, which is often insurmountable for borrowers, does not apply where a foreclosure sale is void (rather than voidable). A sale is void when, among other circumstances, the foreclosure sale is conducted by an entity that lacks authority to do so.
In upholding the notice of default, the Court of Appeal was not convinced that there was any defect or omission in the notice of default because several statutory provisions contemplate that an entity may be substituted as trustee even where substitution is not “recorded” or “effected” until after the notice of default is recorded, so long as notice is given to the borrowers. Alternatively, even if Aztec lacked authority to sign the notice of default as trustee at the time it took this action, Aztec’s authority was subsequently ratified by OneWest when it formally named Aztec as trustee several weeks later. The effect of ratification is to vest the agent with authority that relates back to the time when the agent performed the act. Because it is presumed the nonjudicial foreclosure was properly conducted, the borrowers had the burden to plead facts showing not only that Aztec was not the trustee, but also that Aztec was not the agent of the trustee or the lender, which the borrowers did not do.
Once OneWest executed the Substitution of Trustee, naming Aztec as the trustee of the deed of trust on September 24, 2010, it had the effect of immediately transferring to Aztec the power to act as trustee under the foreclosing deed of trust, even though the Substitution of Trustee was not recorded until December 9, 2010, and the trustee’s sale did not take place until June 6, 2011. Under California law, once recorded, a Substitution of Trustee constitutes conclusive evidence of the authority of the substituted trustee or his or her agents to act. (Civil Code § 2934a) Consequently, the Substitution of Trustee constituted conclusive evidence that Aztec had the authority to conduct the trustee’s sale and to convey title to the borrowers’ home to the highest bidder, even if the notice of default was improperly signed and recorded by Aztec before it became trustee.
The borrowers also argued that the Substitution of Trustee was not effective because the lender failed to attach an affidavit of service as required by the California Civil Code. The Court of Appeal disagreed citing long-standing law that parties to a deed of trust may agree to a form of substitution of trustee other than that provided in the Civil Code, and the borrowers’ deed of trust did not require an affidavit of service.
Finally, the Court concluded that the alleged defect in the notice of default was not so substantial that it would render the entire foreclosure process null and void. At most, the foreclosure sale was voidable.
As a result, the borrowers were not entitled to challenge the foreclosure without first tendering the outstanding debt and establishing that the alleged defect in the notice of default caused them prejudice. The borrowers did not allege that they were misled or prejudiced by the notice of default or that the information stated in the notice of default was erroneous. The borrowers only claim was that the wrong entity signed it. Because the borrowers did not allege that any prejudice was suffered as a result of a procedural irregularity, the borrowers could not establish grounds to set aside the foreclosure sale.
Wallace, Richardson, Sontag & Le, LLP represents institutional and private lenders, landlords, property management companies, employers and insurance companies throughout the State of California in real estate, business and employment litigation, from expedited unlawful detainer (eviction) actions to complex class action lawsuits. The firm has built a reputation on providing superior legal representation and service. This article is for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. Earl R. Wallace, Esq. is a founding member of U.S. REO Partners. For further information, please contact us at (949) 748-3600 or visit our website at www.rwclegal.com