Lead Opinion
Opinion
I.
INTRODUCTION
Bhika Ram and his spouse, Asharfun Nisha Hafiz, purchased a home subject to a deed of trust in 2005. After they defaulted on their home loan, nonjudicial foreclosure proceedings were initiated, and the beneficiary of the deed of trust, OneWest Bank, FSB (OneWest), purchased the property at the foreclosure sale. Ram and Hafiz filed this action against OneWest and other entities, alleging that the sale was void due to irregularities in the foreclosure proceedings. OneWest filed a demurrer, which was sustained by the trial court with leave to amend some claims. Ram and Hafiz did not amend their complaint, and the trial court dismissed the case against OneWest.
On appeal, Ram and Hafiz challenge this dismissal, principally claiming that the foreclosure sale was void because the predicate notice of default was executed and recorded by an entity claiming to be the trustee of OneWest several weeks before OneWest signed and recorded documents formally designating that entity as such.
We conclude that there was no statutory defect in the manner or timing of the trustee substitution, but even if so, the entity was otherwise authorized to act for OneWest in filing the notice of default because it was alleged that the entity was at all times acting as the agent of OneWest.
Alternatively, we conclude that any alleged defect or omission in the representation of OneWest at the time the notice of default was filed was not substantial within the meaning of the law of foreclosure, making the subsequent sale at most voidable, and not void. Because the sale was, at worst, only voidable, the borrowers in default were required to allege tender and prejudice, which they did not do.
II.
FACTUAL AND PROCEDURAL BACKGROUNDS
A. The Loan and the Foreclosure Proceedings
In 2005, Ram and Hafiz obtained a loan for $396,200 to purchase a home in Pleasant Hill. They executed and recorded a deed of trust listing the lender and beneficiary as First Federal Bank of California (First Federal) and the trustee as Seaside Financial Corporation. The loan carried a variable interest rate and had a term of 40 years.
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 and a deed of trust confirming that assignment was recorded in Contra Costa County on April 23, 2010.
On September 7, 2010, a notice of default was executed and recorded by Aztec Foreclosure Corporation (Aztec) “[a]s [trustee.”
The notice also indicated that contact should be made with OneWest in care of Aztec. An address and two telephone numbers were provided. It also was accompanied by the declaration of a person with INDYMAC Mortgage Servicing indicating that due diligence had been exercised in trying to contact Ram and Hafiz to discuss their financial situation and to explore options to
OneWest did not formally execute a substitution naming Aztec as the trustee until September 24, 2010, several weeks after it was identified as trustee on the notice of default. This substitution 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 Ram and Hafiz on the loan.
B. The Procedural Background
The operative complaint is the first amended complaint (FAC) which states 13 causes of action against OneWest, Aztec, and First Federal: 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. In the FAC, Ram and Hafiz 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. The FAC does not allege that Ram and Hafiz tendered, or were ready, willing, and able to tender, the amount owed on the loan at any time between the time of the notice of default was recorded in early September and the foreclosure and sale that took place nine months later on June 6, 2011.
In sustaining OneWest’s demurrer, the trial court reasoned that Ram and Hafiz failed to state a claim for wrongful foreclosure based on the timing of Aztec’s substitution as trustee “because a notice of default can be recorded before a notice of substitution of trustee.” The court further held that where “the.alleged wrongful foreclosure is the result of a defect in the required notice, the transaction is voidable, not void” and that in any further amendment to the complaint Ram and Hafiz would have to “allege sufficient facts of tender.” The court also sustained the demurrer to the causes of action for intentional and negligent fraud, breach of the implied covenant of good faith and fair dealing, and negligence with leave to amend. It determined that the causes of action for unfair business practices, cancellation of deed upon sale, quiet title, and declaratory relief were “predicated on the wrongful foreclosure and fraud causes of action to which demurrers ha[d] been sustained with leave to amend,” and it therefore sustained the demurrer with leave to amend as to those causes of action as well. Finally, the court sustained the demurrer without leave to amend as to the remaining claims.
III.
DISCUSSION
A. The Order of Dismissal Against OneWest Is an Appealable Judgment
The order dismissing the action against OneWest did not dismiss the action against Aztec or First Federal. Ram and Hafiz argue that this order is nevertheless an appealable final judgment. Although OneWest does not contend otherwise, “we are dutybound to consider” the question of appeal-ability because it implicates our jurisdiction. (Olson v. Cory (1983)
B. Standard of Review
We review de nova a dismissal after a demurrer is sustained. (Lazar v. Hertz Corp. (1999)
In addition, when a demurrer is sustained with leave to amend, but the plaintiff elects not to amend, it is presumed on appeal that the complaint states the strongest case possible. (Reynolds v. Bement (2005)
C. Statutory Framework Governing Nonjudicial Foreclosure Sales
We begin with a general overview of the applicable law. A nonjudicial foreclosure sale is a “quick, inexpensive[,] and efficient remedy against a defaulting debtor/trustor.” (Moeller v. Lien (1994)
The “traditional method” to challenge a nonjudicial foreclosure sale “is a suit in equity ... to have the sale set aside and to have the title
The first element — wrongfulness—can be satisfied by a variety of procedural defects, such as noncompliance with the requirements for notice or the trustee’s lack of authority to foreclose. (Lona, supra, 202 Cal.App.4th at pp. 104-105.) The second element — prejudice—is met where an irregularity in the proceeding adversely affects the trustors’ ability to protect their interest in the property. “Prejudice,” however, “is not presumed from ‘mere irregularities’ in the process.” (Fontenot v. Wells Fargo Bank, N.A. (2011)
But trustors attacking a void deed are “not required to meet any of the burdens imposed when, as a matter of equity, a party wishes to set aside a voidable deed.” (Dimock v. Emerald Properties (2000)
In the end, the importance of any distinction between a “void” or “voidable” nonjudicial foreclosure sale is simply whether the borrower, who is in default, must allege and prove a prerequisite tender of the amount due under the deed of trust and otherwise to show prejudice resulting from the defect, omission, or failure, before the sale will be set aside. In deciding whether to require a showing of tender and prejudice, courts appear to focus on the nature and severity of the defect, omission or failure and its practical effect on the foreclosure process.
D. Ram and Hafiz Have Failed to State a Claim for Wrongful Foreclosure
1. The Applicable Foreclosure Statutes Authorize the Foreclosure Procedure Employed Here
Ram and Hafiz assert that the trial court erred in sustaining the demurrer to their wrongful foreclosure claim and in requiring them to amend their complaint to allege tender of the amount of their secured debt because the foreclosure sale was void under the statutes governing the nonjudicial foreclosure process. They argue the sale was void because Aztec did not yet hold the title of “trustee” as claimed on the notice of default, and was only formally named as trustee several weeks later, when OneWest executed a substitution of trustee naming Aztec as the trustee. Ram and Hafiz claim the defective notice irremediably “broke the chain of recorded title rendering all subsequent foreclosure proceedings, including the trustee’s sale, void and of no effect.” We disagree.
In the first instance, Ram and Hafiz have not made a convincing case that there was any defect or omission in the default and foreclosure process relating to their mortgaged property. We note that 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 trustor/borrowers.
First, section 2934a, subdivision (b) provides: “If the substitution is executed, but not recorded, prior to or concurrently with the recording of the
Alternatively, section 2934a, subdivision (c) provides: “If the substitution is effected after a notice of default has been recorded but prior to the recording of the notice of sale, the beneficiary or beneficiaries or their authorized agents shall cause a copy of the substitution to be mailed, prior to, or concurrently with, the recording thereof, in the manner provided in Section 2924b, to the trustee then of record and to all persons to whom a copy of the notice of default would be required to be mailed by the provisions of Section 2924b. An affidavit shall be attached to the substitution that notice has been given to those persons and in the manner required by this subdivision.” (Italics added.)
Thus, the statutory process under which foreclosures may proceed in this state contemplates both the circumstance where the substitution of trustee is executed but not recorded until after the notice of default is recorded, and the circumstance here where the substitution is first “effected”
2. Alternatively, Aztec Had Authority to Execute the Notice of Default as OneWest’s Agent
Ram and Hafiz’s argument that Aztec did not have authority to execute the notice of default fails not only because Aztec was eventually substituted as trustee but also because they affirmatively alleged that at all times, Aztec was acting as the agent of OneWest. Section 2924 authorizes a notice of default to be recorded by “[t]he trustee, mortgagee, or beneficiary, or any of their authorized agents.” (§ 2924, subd. (a)(1), italics added.) Section 2924 does not define what constitutes an “authorized agent,” but elsewhere in the foreclosure statute a “person authorized to record the notice of default or the notice of sale” is defined to include “an agent for the mortgagee or beneficiary, an agent of the named trustee, any person designated in an executed substitution of trustee, or an agent of that substituted
Because it is presumed the nonjudicial foreclosure was properly conducted, Ram and Hafiz had the burden to plead “affirmatively” facts showing Aztec lacked authority to record the notice of default. (Fontenot v. Wells Fargo Bank, N.A., supra,
Nothing in the FAC or judicially noticed documents suggests that Aztec was not authorized to act for OneWest, the beneficiary under the deed of trust. In fact, the FAC specifically alleges that “at all relevant times herein mentioned, each of defendants sued herein was the agent ... of each of the remaining defendants and was at all times acting within the purpose and scope of such agency and/or employment.”
Ram and Hafiz cannot have it both ways. Their argument that Aztec was unauthorized to issue the notice of default is undermined by their own assertion that Aztec, at all times, was acting as the alleged agent of OneWest conferring undeniable authority to record the notice of default. (See Rossberg v. Bank of America, N.A., supra,
Furthermore, the recorded documents in this case indicate that 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. “ ‘Ratification is the voluntary election by a person to adopt in some manner as his own act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him. [Citations.]’ ” (Estate of Stephens (2002)
3. Aztec Was Undeniably the Trustee in Authority at the Time It Conducted the Foreclosure Sale
Once OneWest executed a 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.
Section 2934a, subdivision (d), states: “A trustee named in a recorded substitution of trustee shall be deemed to be authorized to act as the trustee under the mortgage or deed of trust for all purposes from the date the substitution is executed by the mortgagee, beneficiaries, or by their authorized agents. . . . Once recorded, the substitution shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section.” (Italics added.) Consequently, the recorded substitution of trustee constituted conclusive evidence that Aztec had the authority to conduct the trustee’s sale and to convey title to Ram and Hafiz’s home to the highest bidder, even if the notice of default was improperly signed and recorded by Aztec before it became trustee.
In an attempt to avert the legal impact of Aztec’s substitution as trustee months before it conducted the trustee’s sale, Ram and Hafiz complain that the recorded substitution of trustee, which is a single-page document, did not include an affidavit of mailing showing it was mailed to the trustee of record or other persons, if any, who may have requested notice of default and notice of sale under section 2924b. This failure to include an affidavit of mailing, they claim, constitutes a clear violation of section 2934a, subdivision (c), which invalidates the substitution of trustee.
But, as OneWest points out in response, the deed of trust entered into by the parties gave OneWest the option of substituting a successor trustee without the need to confirm that substitution with an affidavit. The deed of trust provides: “Lender, at its option, may from time to time appoint a
It is well settled that parties to a deed of trust may agree to a form of substitution of trustee other than that provided in section 2934a. (Jones v. First American Title Ins. Co., supra,
It bears reemphasis that once recorded, a “substitution [of trustee] shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section.” (§ 2934a, subd. (d), italics added.) “Conclusive evidence” cannot be contradicted by any evidence to the contrary. (Pullen v. Heyman Bros. (1945)
Here, Aztec was named as the successor trustee in the recorded substitution of trustee, constituting conclusive evidence of Aztec’s authority to exercise all the powers of trustee. (See West, supra,
Even if we indulge Ram and Hafiz’s argument that there was a procedural irregularity created because Aztec executed the notice of default as trustee several weeks before it actually became the trustee of record, we conclude that this defect was not so substantial that it would render the entire foreclosure process null and void. Therefore, we find Ram and Hafiz were not excused from alleging prejudice arising from the late perfection of Aztec’s substitution as trustee and from alleging the tender of the unpaid and overdue amount they owed on their mortgage.
The primary purpose of a notice of default is to provide notice of the amount in arrears and an opportunity to cure the default. (Knapp v. Doherty, supra,
In a case similar to this one, the borrower in Debrunner v. Deutsche Bank National Trust Co. (2012)
Ram and Hafiz argue cases like Debrunner and U.S. Hertz do not apply here because they involve the delayed recording of documents already in existence granting authority to the entity that signed the notice of default, where in this case the notice of default was executed and recorded by an entity described as trustee before there were any documents in existence granting it that authority. However, in so arguing, they misconstrue the
We also note that even though they were given an opportunity to amend the FAC, Ram and Hafiz have not satisfactorily pleaded tender or the ability to tender, which is necessary to proceed on a claim of wrongful foreclosure. “As a general rule, a debtor cannot set aside the foreclosure based on irregularities in the sale without also alleging tender of the amount of the secured debt. [Citations.]” (Shuster v. BAC Home Loans Servicing, LP (2012)
The plaintiff in West, supra,
In this case, as in West, the trustee’s deed upon sale recites that the trustee complied with the deed of trust and all applicable statutory requirements of the State of California. No inconsistent recitals appear on the face of the
Finally, none of the cases cited by Ram and Hafiz grant relief from foreclosure, without a showing of tender or prejudice, due solely to an alleged lack of authority in signing a notice of default. For example, Dimock, supra,
Dimock provides no basis for setting this sale aside. The issue in this case with regard to Aztec’s legal authority to execute the notice of default has nothing to do with the nonjudicial foreclosure sale or Aztec’s authority to conduct that sale. Unlike the facts in Dimock, Aztec clearly was the lawful trustee for OneWest at the time it executed and recorded the notice of trustee’s sale in December 2010, and when it executed and recorded the trustee’s deed upon sale in June 2011. A defect in the notice of default that has no bearing on the legal status of the parties at the time of nonjudicial foreclosure sale cannot become an immutable obstacle, in perpetuity, to the lender’s efforts to recover that to which the parties agreed by contract and the remedy allowed by law.
The case of Glaski v. Bank of America (2013)
Even more attenuated is appellants’ reliance on Division One’s decision in Ung v. Koehler (2005)
In short, none of these cases supports the conclusion that Aztec’s allegedly defective trustee status at the time the notice of default was recorded, but which was cured long before the trustee’s sale of the property in question, “voids” the later foreclosure and sale. Thus, Ram and Hafiz cannot avoid the applicable law requiring tender of the amount due under the deed of trust and requiring facts showing prejudice from the alleged irregularity in the notice of default. Therefore, as a matter of law, they have not alleged facts establishing their claim for wrongful foreclosure, which is fatal to their FAC.
IV.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to OneWest.
Reardon, J., concurred.
Notes
The notice of default was signed by LSI Title Company “[a]s [a]gent” of Aztec, “[a]s [tjrustee.”
The opening brief filed by Ram and Hafiz is limited to challenging the court’s sustaining of OneWest’s demurrer to the causes of action based on alleged irregularities with the notice of default and substitution of trustee. Ram and Hafiz set out these causes of action as wrongful foreclosure, quiet title, declaratory relief, cancellation of instrument, and unfair business practices. Accordingly, we deem the other causes of action to be abandoned, and we will not address them further. (Bagley v. International Harvester Co. (1949)
All further statutory references are to the Civil Code, unless otherwise indicated.
The verb “effect” means: “1 : to cause to come into being [<][| 2 a : to bring about. . . H] b : to put into operation . . . .” (Merriam-Webster Diet. Online <http://merriamwebster.com/dictionary/effect> [as of Feb. 6, 2015].)
Concurrence Opinion
Concurring. — I agree with the majority that we must sustain the trial court’s grant of the demurrer to Bhika Ram and Asharfun Nisha Hafiz’s complaint because the complaint failed to allege sufficient prejudice. The complaint was filed long after the foreclosure sale, and its allegations do not support a reasonable inference that the sale could have been avoided if the alleged statutory violation had never happened. But I disagree with the majority’s conclusion that the complaint insufficiently alleged that Aztec Foreclosure Corporation lacked proper authority to initiate the foreclosure. Allegations that an entity recorded a notice of default before it had proper authority could support a claim in a case, unlike this one, in which prejudice could be shown.
I.
In my view, Ram and Hafiz sufficiently alleged a violation of the nonjudicial foreclosure statutes by alleging that Aztec lacked authority to initiate the foreclosure either as OneWest Bank, FSB’s trustee or as its agent. As to Aztec’s status as trustee, the majority concludes, as did the trial court, that
The statutes make clear that the notice of default must be recorded by “[t]he trustee, mortgagee, or beneficiary, or any of their authorized agents.” (§ 2924, subd. (a)(1).) Section 2934a, subdivision (d) provides that a “trustee named in a recorded substitution of trustee shall be deemed to be authorized to act as the trustee under the . . . deed of trust for all purposes from the date the substitution is executed . . . .” (Italics added.) Under this plain language, a substitution of trustee is not effective until the date it is executed. The majority correctly points out that the substitution, once recorded, is conclusive evidence of the trustee’s authority. But the majority fails to explain how the conclusiveness of the trustee’s authority after the recording of the substitution somehow confers on the substituted trustee retroactive authority to have acted as trustee before the substitution was signed.
Since Ram and Hafiz adequately alleged that Aztec lacked authority as trustee when the notice of default was recorded, I turn to whether they adequately alleged that Aztec lacked authority to record the notice as an agent. In my view, they did. Initially, I agree with the majority that Aztec would have been authorized to record the notice of default under section 2924, subdivision (a)(1) if, regardless of its trustee status, it was otherwise acting as OneWest’s authorized agent. But on the record before us we cannot know whether Aztec was such an agent. Whether an entity is an agent is normally a factual determination “not subject to resolution by demurrer.” (Childs v. State of California (1983)
In short, I conclude that Ram and Hafiz sufficiently alleged that Aztec lacked authority to initiate the foreclosure either as OneWest’s trustee or agent.
II.
Even though Ram and Hafiz sufficiently alleged a statutory violation, their wrongful-foreclosure claim nonetheless fails because they did not allege prejudice. More specifically, they did not allege, even after having been given an opportunity to amend their complaint, that the foreclosure sale could have been avoided if there had been no statutory violation.
As the majority correctly points out, prejudice is an element of a claim for wrongful foreclosure. (Herrera v. Federal National Mortgage Assn. (2012)
Ram and Hafiz effectively concede that they did not allege prejudice, but they argue they were excused from doing so because Aztec’s alleged lack of authority to record the notice of default resulted in a “void,” not just “voidable,” sale. I am not persuaded. In my view, prejudice must be alleged regardless whether a sale is considered void or voidable.
I am aware of no published California decision directly addressing whether prejudice is required when, as is alleged here, an entity lacked authority when it initiated foreclosure proceedings but later was substituted as trustee. But I see no reason that this particular defect should alter the generally applicable requirement that a borrower must show prejudice to prevail in a wrongful-foreclosure action. The recording of a notice of default by an unauthorized entity could conceivably result in prejudice to borrowers under some circumstances, such as when it affects their ability to retain the property. But Ram
Presiding Justice of the Court of Appeal, First Appellate District, Division One, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
All further statutory references are to the Civil Code.
It is worth mentioning that the California Homeowner Bill of Rights, which became effective in 2013, amended section 2924 to make it perfectly clear that “[n]o entity shall record or cause a notice of default to be recorded or otherwise initiate the foreclosure process unless it is the holder of the beneficial interest under the mortgage or deed of trust, the original trustee or the substituted trustee under the deed of trust, or the designated agent of the holder of the beneficial interest.” (§ 2924, subd. (a)(6).) The amendment does not apply here because it took effect after the events at issue. (See Alvarez v. BAC Home Loans Servicing, L.P. (2014)
A reviewing court normally “resolve[s] all ambiguities and uncertainties raised by the demurrer against” the plaintiffs when, as here, a demurrer is sustained with leave to amend and the plaintiffs choose not to amend. (Hooper v. Deukmejian (1981)
I agree with my colleagues in the Fourth District Court of Appeal, Division One, who found it ultimately “unhelpful to analyze trust deed nonjudicial foreclosure sales issues in the context of common law contract principles” like voidness and voidability. (Residential Capital v. Cal-Western Reconveyance Corp. (2003)