Monday, August 18, 2014

May California Deed of Trust Assignee enforce it without recording the Assignment?

Conundrum:  You find out that the assignee of your California Deed of Trust never acknowledged and recorded the deed of trust with the clerk of courts, and now wants to enforce the mortgage in order to foreclose.  You dig around and find these California Civil Code sections below.  Should you attack the assignee's standing to foreclose?

Answer:  No. In California, the assignee of beneficial interest in a mortgage security instrument must duly acknowledge and record the assignment in order to have the right to force a foreclosure sale.  The assignee of a beneficial interest in a deed of trust need not record the assignment in order to force a foreclosure sale.

Discussion:  A mortgage differs from a deed of trust.  Both secure the note, such that they entitle the owner of beneficial interest in the note (or agent) to enforce the note by foreclosure and forcible sale of the property.  However, a mortgage requires enforcement through judicial action - the foreclosing party must sue the borrower for breaching the note.  By contrast, a deed of trust involves a trustee who receives notice of the breach and of fulfillment of conditions precedent from the owner of beneficial interest in the note (or holder or agent), then orders the sale of the property held in trust.  A mortgage operates as a lien with title remaining in the borrower (technically, it goes to the mortgagee for purposes of a mortgage only), and a deed of trust conveys title to the trustee until the borrower has retired the debt.

It seems axiomatic that owner of beneficial interest in the note (oobi) may, in the event the borrower breaches the note, enforce the note through foreclosure and forcing the sale of the property securing the debt. Furthermore, it seems axiomatic that the oobi may assign the security instrument, to another party who may enforce the security instrument by forcing a foreclosure sale. 

But... always verify what the law means by looking at how the courts have opined.

For reference see Calvo v HSBC Bank, 199 CAL.APP.4TH 118 (CAL. APP. 2011)

California Civil Code Section

2932. A power of sale may be conferred by a mortgage upon the mortgagee or any other person, to be exercised after a breach of the obligation for which the mortgage is a security.

2932.5. Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.

2924. (a) Every transfer of an interest in property, other than in trust, made only as a security for the performance of another act, is to be deemed a mortgage, except when in the case of personal property it is accompanied by actual change of possession, in which case it is to be deemed a pledge. Where, by a mortgage created after July 27, 1917, of any estate in real property, other than an estate at will or for years, less than two, or in any transfer in trust made after July 27, 1917, of a like estate to secure the performance of an obligation, a power of sale is conferred upon the mortgagee, trustee, or any other person, to be exercised after a breach of the obligation for which that mortgage or transfer is a security, the power shall not be exercised except where the mortgage or transfer is made pursuant to an order, judgment, or decree of a court of record, or to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or is made by a public utility subject to the provisions of the Public Utilities Act, until all of the following apply: (1) The trustee, mortgagee, or beneficiary, or any of their authorized agents shall first file for record, in the office of the recorder of each county wherein the mortgaged or trust property or some part or parcel thereof is situated, a notice of default. That notice of default shall include all of the following: (A) A statement identifying the mortgage or deed of trust by stating the name or names of the trustor or trustors and giving the book and page, or instrument number, if applicable, where the mortgage or deed of trust is recorded or a description of the mortgaged or trust property. (B) A statement that a breach of the obligation for which the mortgage or transfer in trust is security has occurred. (C) A statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust or mortgage that is in default. (D) If the default is curable pursuant to Section 2924c, the statement specified in paragraph (1) of subdivision (b) of Section 2924c. (2) Not less than three months shall elapse from the filing of the notice of default. (3) Except as provided in paragraph (4), after the lapse of the three months described in paragraph (2), the mortgagee, trustee, or other person authorized to take the sale shall give notice of sale, stating the time and place thereof, in the manner and for a time not less than that set forth in Section 2924f. (4) Notwithstanding paragraph (3), the mortgagee, trustee, or other person authorized to take sale may record a notice of sale pursuant to Section 2924f up to five days before the lapse of the three-month period described in paragraph (2), provided that the date of sale is no earlier than three months and 20 days after the recording of the notice of default. (5) Until January 1, 2018, whenever a sale is postponed for a period of at least 10 business days pursuant to Section 2924g, a mortgagee, beneficiary, or authorized agent shall provide written notice to a borrower regarding the new sale date and time, within five business days following the postponement. Information provided pursuant to this paragraph shall not constitute the public declaration required by subdivision (d) of Section 2924g. Failure to comply with this paragraph shall not invalidate any sale that would otherwise be valid under Section 2924f. This paragraph shall be inoperative on January 1, 2018. (6) No 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. No agent of the holder of the beneficial interest under the mortgage or deed of trust, original trustee or substituted trustee under the deed of trust may record a notice of default or otherwise commence the foreclosure process except when acting within the scope of authority designated by the holder of the beneficial interest. (b) In performing acts required by this article, the trustee shall incur no liability for any good faith error resulting from reliance on information provided in good faith by the beneficiary regarding the nature and the amount of the default under the secured obligation, deed of trust, or mortgage. In performing the acts required by this article, a trustee shall not be subject to Title 1.6c (commencing with Section 1788) of Part 4. (c) A recital in the deed executed pursuant to the power of sale of compliance with all requirements of law regarding the mailing of copies of notices or the publication of a copy of the notice of default or the personal delivery of the copy of the notice of default or the posting of copies of the notice of sale or the publication of a copy thereof shall constitute prima facie evidence of compliance with these requirements and conclusive evidence thereof in favor of bona fide purchasers and encumbrancers for value and without notice. (d) All of the following shall constitute privileged communications pursuant to Section 47: (1) The mailing, publication, and delivery of notices as required by this section. (2) Performance of the procedures set forth in this article. (3) Performance of the functions and procedures set forth in this article if those functions and procedures are necessary to carry out the duties described in Sections 729.040, 729.050, and 729.080 of the Code of Civil Procedure. (e) There is a rebuttable presumption that the beneficiary actually knew of all unpaid loan payments on the obligation owed to the beneficiary and secured by the deed of trust or mortgage subject to the notice of default. However, the failure to include an actually known default shall not invalidate the notice of sale and the beneficiary shall not be precluded from asserting a claim to this omitted default or defaults in a separate notice of default. (f) With respect to residential real property containing no more than four dwelling units, a separate document containing a summary of the notice of default information in English and the languages described in Section 1632 shall be attached to the notice of default provided to the mortgagor or trustor pursuant to Section 2923.3.



COURT OF APPEAL OF CALIFORNIA, SECOND DISTRICT. EIGHT.

CALVO V. HSBC BANK USA, N.A. 

199 CAL.APP.4TH 118 (CAL. APP. 2011)

  • DECIDED SEPT. 13, 2011

EUGENIA CALVO, Plaintiff and Appellant, v. HSBC BANK USA, N.A., as Trustee, etc., Defendant and Respondent.

No. B226494.

Court of Appeal of California, Second District. Eight.

September 13, 2011.

Appeal from the Superior Court of Los Angeles County, No. BC415545, Mark V. Mooney, Judge. *119

Dennis Moore for Plaintiff and Appellant.

Houser Allison, Eric D. Houser, Robert W. Norman, Jr., and Carrie N. Heieck for Defendant and Respondent.


*120


OPINION


Plaintiff Eugenia Calvo obtained a loan secured by a deed of trust against her residence. The original lender assigned the loan and deed of trust to HSBC Bank USA, N.A. (HSBC Bank). A new trustee was also substituted after the loan was originated. Plaintiff defaulted in payment of the loan. The new trustee initiated foreclosure proceedings and executed a foreclosure sale of plaintiffs residence. Notice of the assignment of the deed of trust appeared only in the substitution of trustee, which was recorded on the same date as the notice of trustee's sale. The second amended complaint seeks to set aside the trustee's sale for an alleged violation of Civil Code section 2932.5, 1 which requires the assignee of a mortgagee to record an assignment before exercising a power to sell real property. HSBC Bank and its agent, the nominal beneficiary under the deed of trust, demurred to the second amended complaint, and the trial court sustained the demurrer without leave to amend.

1.

All statutory references are to the Civil Code unless otherwise specified.

We find defendant HSBC Bank did not violate section 2932.5 because that statute does not apply when the power of sale is conferred in a deed of trust rather than a mortgage. We affirm the judgment dismissing the complaint.

BACKGROUND

Plaintiff sued HSBC Bank and Mortgage Electronic Registration Systems, Inc. (MERS), its agent and nominal beneficiary under the deed of trust recorded against her residence. Plaintiff had borrowed money from CBSK Financial Group, Inc., which is not a defendant in this lawsuit. Her loan was secured by a deed of trust against her residence that was recorded on September 1, 2006. The deed of trust identified plaintiff as the trustor, CBSK Financial Group as the lender, MERS as the nominal beneficiary and lender's agent, and Lawyers Title Company as the trustee. In the deed of trust, plaintiff granted title to her residence to the trustee, in trust, with the power of sale. The deed of trust stated: "MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, *121 including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling the Security Instrument."

Aztec Foreclosure Corporation was substituted as trustee under the deed of trust on or about June 2, 2008. The substitution of trustee stated that MERS, as nominee for HSBC Bank, "is the present Beneficiary" under the deed of trust, as MERS had been for the original lender. The substitution of trustee was not recorded until October 14, 2008, the same date on which Aztec Foreclosure Corporation recorded a notice of trustee's sale. More than three months before recordation of the substitution of trustee, Aztec Foreclosure Corporation had recorded a notice that plaintiff was in default in payment of her loan and that the beneficiary had elected to initiate foreclosure proceedings. The notice of default advised plaintiff to contact HSBC Bank to arrange for payment to stop the foreclosure.

HSBC Bank bought plaintiffs residence in the foreclosure sale, and a trustee's deed upon sale was recorded on January 9, 2009. The gist of the complaint is that HSBC Bank initiated foreclosure proceedings under the deed of trust without any recordation of the assignment of the deed of trust to HSBC Bank in violation of section 2932.5.

DISCUSSION

A demurrer tests the legal sufficiency of the complaint. We review the complaint de novo to determine whether it alleges facts sufficient to state a cause of action. For purposes of review, we accept as true all material facts alleged in the complaint, but not contentions, deductions or conclusions of fact or law. We also consider matters that may be judicially noticed. ( Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [ 216 Cal.Rptr. 718, 703 P.2d 58].) When a demurrer is sustained without leave to amend, "we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm." ( Ibid.) Plaintiff has the burden to show a reasonable possibility the complaint can be amended to state a cause of action. ( Ibid.)

The trial court did not err in sustaining the demurrer without leave to amend. Plaintiffs lawsuit rests on her claim that the foreclosure sale was void and should be set aside because HSBC Bank invoked the power of sale without complying with the requirement of section 2932.5 to record the assignment of the deed of trust from the original lender to HSBC Bank. We find no merit in this contention. *122

Section 2932.5 provides: "Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded."

It has been established since 1908 that this statutory requirement that an assignment of the beneficial interest in a debt secured by real property must be recorded in order for the assignee to exercise the power of sale applies only to a mortgage and not to a deed of trust. In Stockwell v. Barnum(1908) 7 Cal.App. 413 [ 94 P. 400] ( Stockwell), the court affirmed the judgment against a plaintiff who sought to set aside and vacate a sale of real property under a deed of trust. In Stockwell, a couple borrowed money from two individuals and gave them a promissory note that provided, in case of default in the payment of interest, the holder of the note had the option to demand payment of all the principal and interest. To secure payment of the note, the borrowers executed and delivered a deed of trust by which they conveyed to the trustee legal title to a parcel of real estate, with the power of sale on demand of the beneficiaries of the promissory note. The borrowers defaulted. The original lenders assigned the note to another individual, who elected to declare the whole amount of principal and interest due and made demand on the trustee to sell the property. Before the trustee's sale was made, but on the same day as the trustee's sale, the defaulting couple conveyed the real property to the plaintiff, who then sued to set aside the trustee's sale.

One of the bases on which the plaintiff in Stockwell sought to set aside the sale was that no assignment of the beneficial interests under the deed of trust was recorded and therefore the original lender's assignee had no right to demand a trustee's sale of the property. The plaintiff inStockwell relied on former section 858, the predecessor of section 2932.5, as support for this contention. (The parties correctly acknowledge that § 2932.5 continued former § 858 without substantive change.) (Law Revision Com. com., Deering's Ann. Civ. Code, § 2932.5 (2005 ed.) p. 454.) TheStockwell court found the statute did not apply to a trustee's sale.

The Stockwell court distinguished a trust deed from a mortgage, explaining that a mortgage creates only a lien, with title to the real property remaining in the borrower/mortgagee, whereas a deed of trust passes title to the trustee with the power to transfer marketable title to a purchaser. The court reasoned that since the lenders had no power of sale, and only the trustee could transfer title, it was immaterial who held the note. ( Stockwell, supra, 7 Cal.App. at p. 416.) "The transferee of a negotiable promissory note, *123 payment of which is secured by a deed of trust whereby the title to the property and power of sale in case of default is vested in a third party as trustee, is not an encumbrancer to whom power of sale is given, within the meaning of section 858 . . . ." ( Id. at p. 417.)

The holding of Stockwell has never been reversed or modified in any reported California decision in the more than 100 years since the case was decided. The rule that section 2932.5 does not apply to deeds of trust is part of the law of real property in California. After 1908, only the federal courts have addressed the question whether section 2932.5 applies to deeds of trust, and only very recently. Every federal district court to consider the question has followed Stockwell. (See, e.g., Roque v. SunTrust Mortgage, Inc.(N.D.Cal., Feb. 10, 2010, No. C-09-00040 RWM) 2010 U.S.Dist. Lexis 11546, p. *8 ["Section 2932.5 applies to mortgages, not deeds of trust. It applies only to mortgages that give a power of sale to the creditor, not to deeds of trust which grant a power of sale to the trustee."]; Parcray v. Shea Mortgage, Inc. (E.D.Cal., Apr. 23, 2010, No. CV-F-09-1942 OWW/GSA) 2010 U.S.Dist. Lexis 40377, p. *31 ["There is no requirement under California law for an assignment to be recorded in order for an assignee beneficiary to foreclose."]; Caballero v. Bank of America (N.D.Cal., Nov. 4, 2010, No. 10-CV-02973-LHK) 2010 U.S.Dist. Lexis 122847, p. *8 ["§ 2932.5 does not require the recordation of an assignment of a beneficial interest for a deed of trust, as opposed to a mortgage"].)2

2.

Plaintiff cited only one bankruptcy court decision in support of her argument that section 2932.5 applies to deeds of trust. ( U.S. Bank N.A. v. Skelton (In re Salazar) (Bankr. S.D.Cal. 2011) 448 B.R. 814.) We find the analysis in that case unpersuasive. Holdings of the federal courts are not binding or conclusive on California courts, though they may be entitled to respect and careful consideration. ( Bank of Italy etc. Assn. v. Bentley (1933) 217 Cal. 644,653 [20 P.2d 940] ( Bank of Italy).) A federal bankruptcy court decision interpreting California law, however, is not due the same deference. (SeeStern v. Marshall (2011) 564 U.S. ___ [ 180 L.Ed.2d 475, 131 S.Ct. 2594].)

Plaintiff argues that Stockwell is "[o]utdated" and, that in the "modern era," there is no difference between a mortgage and a deed of trust. Plaintiff misconstrues Bank of Italy, supra, 217 Cal. 644 as holding that deeds of trust are the same as mortgages with a power of sale, and therefore, as supporting her argument that section 2932.5 applies to both mortgages and deeds of trust. First, our Supreme Court inBank of Italy did not consider or construe section 2932.5 or its predecessor statute.

Second, the court in Bank of Italy did not hold that a mortgage is the same as a deed of trust. Far from it; theBank of Italy court recognized that the distinction between a mortgage, which creates only a lien, and a deed of trust, *124which passes title to the trustee, "has become well settled in our law and cannot now be disturbed." ( Bank of Italy, supra, 217 Cal. at p. 655.) Third, the court's holding was expressly limited to the question (not in issue here) whether in California it is permissible to sue on a promissory note secured by a deed of trust without first exhausting the security or showing that it is valueless. The trial court had found "that no action may be brought on a note secured by a deed of trust unless and until the security is exhausted. The correctness of this conclusion is the sole point involved on this appeal." ( Id. at pp. 647, 648, 650.)

The plaintiff in Bank of Italy had argued the only statute requiring that security be exhausted before suing on the note was limited to mortgages and did not include the distinctly different deeds of trust. ( Bank of Italy, supra, 217 Cal. at p. 653.) The Bank of Italy court therefore considered whether the differences between a mortgage and a deed of trust under California law should permit the holder of a note secured by a deed of trust to sue on the note without exhausting the security by a sale of the property. The court recognized there were an increasing number of cases that applied the same rules to deeds of trust that are applied to mortgages and concluded that "merely because `title' passes by a deed of trust while only a `lien' is created by a mortgage," in both situations the security must be exhausted before suit on the personal obligation. ( Bank of Italy, supra, 217 Cal. at pp. 657-658.) Nothing in the holding or analysis of the Bank of Italy opinion supports plaintiffs position here that we should find section 2932.5 applies to a deed of trust.

Plaintiff also is mistaken in contending that Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735 [ 155 Cal.Rptr. 132] ( Strike) supports her position. In Strike, a homeowner had a judgment entered against him on a business debt he had guaranteed. The homeowner later defaulted in payments on a bank loan that was secured by a deed of trust against his home, and he asked the judgment creditor to help him out. The judgment creditor agreed to buy an assignment of the home loan and deed of trust from the bank, consolidate the indebtedness on the home loan with the amount owed to satisfy the judgment, and extend the maturity date of these obligations.

The homeowner defaulted again, and the judgment creditor initiated nonjudicial foreclosure proceedings. The homeowner sued in an attempt to avoid foreclosure and eviction but did not prevail at trial. The Court of Appeal affirmed. Among the homeowner's arguments that were rejected on appeal was the contention that the judgment creditor's interest in his home was an equitable lien that could only be foreclosed by judicial process. The Court of Appeal found the creditor had the right to pursue nonjudicial foreclosure, distinguishing an equitable subrogee from an assignee of a deed of trust with *125 the power of sale. The court stated: "A recorded assignment of note and deed of trust vests in the assignee all of the rights, interests of the beneficiary [citation] including authority to exercise any power of sale given the beneficiary ([§ 858])." (Strike, supra, 92 Cal.App.3d at p. 744.)

Plaintiff contends the sentence quoted above establishes that section 2932.5 (formerly codified at § 858) applies to deeds of trust. But the Strike court was not asked to consider or construe the predecessor of section 2932.5. TheStrike court briefly referred to the predecessor of section 2932.5 by way of illustrating the difference between an equitable subrogee and an assignee under a deed of trust with a power of sale. ( Strike, supra, 92 Cal.App.3d at p. 744.) "`It is axiomatic, of course, that a decision does not stand for a proposition not considered by the court.`" ( Agnew v. State Bd. of Equalization (1999) 21 Cal.4th 310, 332 [ 87 Cal.Rptr.2d 423, 981 P.2d 52].)

In California, over the course of the past century, deeds of trust have largely replaced mortgages as the primary real property security device. (See 4 Miller Starr, Cal. Real Estate (3d ed. 2003) former § 10:2, p. 15.) Thus, section 2932.5 (and its predecessor, § 858) became practically obsolete and was generally ignored by borrowers, creditors, and the California courts. On the other hand, other statutes expressly give MERS the right to initiate foreclosure on behalf of HSBC Bank irrespective of the recording of a substitution of trustee. Section 2924, subdivision (a)(1), states that a "trustee, mortgagee, or beneficiary, or any of their authorized agents," may initiate the foreclosure process. MERS was both the nominal beneficiary and agent (nominee) of the original lender and also of HSBC Bank, which held the note at the time of the foreclosure sale of plaintiffs residence. Thus, MERS had the statutory right to initiate foreclosure on behalf of HSBC Bank pursuant to section 2924, subdivision (a)(1).

MERS also had the right to initiate foreclosure on behalf of HSBC Bank pursuant to the express language of the deed of trust. Plaintiff agreed in the deed of trust that MERS had the right to initiate foreclosure and to instruct the trustee to exercise the power of sale as nominee (i.e., agent) of the original lender and its successors and assigns. (Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149,1157, fn. 9 [ 121 Cal.Rptr.3d 819] [construing a deed of trust identical in pertinent part to the trust deed in this case as granting MERS power to initiate foreclosure as the agent of the note holder, even if not also as beneficiary].) HSBC Bank was the assignee of the original lender. Accordingly, HSBC Bank and MERS, its nominal beneficiary and agent, were entitled to invoke the power of sale in the deed of trust, and plaintiff has alleged no legal basis for setting aside the sale in this case. *126

We affirm the judgment of dismissal. Respondent is to recover its costs of appeal.

Bigelow, P. J., and Flier, J., concurred.

*127





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