GERALDINE MUND, Bankruptcy Judge.
This appeal challenges the bankruptcy court's dismissal, pursuant to Civil Rule 12(b)(6),
On January 25, 2007, the Debtor executed a $444,000 promissory note in favor of SCME Mortgage Bankers, Inc. (SCME) (the Note). The Note was secured by a deed of trust (DOT) on the Debtor's residence in Canoga Park, California (the Property). The DOT named Stewart Title of San Diego (Stewart Title) as the trustee, and Mortgage Electronic Registration Systems (MERS) as beneficiary and nominee for SCME as the lender, the lender's successors and assigns. By the terms of the DOT, MERS could exercise the rights granted to the lender (and the lender's successors and assigns), including the right to foreclose on the Property. Additionally, the DOT allowed MERS to appoint a successor trustee. The Note and DOT were recorded February 7, 2007. The Note was endorsed in blank by SCME.
SCME subsequently assigned the Note to Rali Series 2007-QH8 Trust (Rali Trust) as part of a securitization process, which included a Pooling and Servicing Agreement (PSA). Deutsche Bank Trust Company (Deutsche Bank) is the trustee of the Rali Trust.
On August 13, 2009, MERS executed a Substitution of Trustee to substitute Cal-Western Reconveyance Corporation (Cal-Western) as the trustee under the DOT. The Substitution of Trustee was subsequently recorded on September 28, 2009. Before the Substitution of Trustee was recorded, on August 18, 2009, Cal-Western executed a Notice of Default and Election to Sell Under Deed of Trust (NOD); the NOD was recorded the following day. In the NOD, Cal-Western identified itself as the trustee, duly appointed substituted trustee, or agent for MERS as the beneficiary of the DOT.
The Debtor was directed to contact MERS c/o Cal-Western to find out the payoff amount or to make arrangements to stop the foreclosure. Additionally, the NOD provided that:
Cal-Western recorded a Notice of Trustee's Sale on November 20, 2009, notifying the Debtor that the Property would be subject to a public auction scheduled for December 10, 2009 (Notice of Sale).
In December 2009, Aurora and the Debtor entered into a loan modification agreement for a trial period, which suspended the foreclosure sale. However, after the trial period ended, Aurora terminated the loan modification agreement. The foreclosure of the Property occurred on July 13, 2010. Aurora was the successful bidder at the public auction. The Debtor filed for chapter 13 relief on July 15, 2010. Aurora obtained retroactive relief from stay to validate the recording of the sale of the Property. On July 29, 2010, Cal-Western executed the Trustee's Deed Upon Sale and conveyed the Property to Aurora. B.
On December 10, 2010, the Debtor initiated an adversary proceeding by filing a complaint (Complaint) against Aurora, Deutsche Bank, the Rali Trust, SCME, MERS and Cal-Western (collectively, the Defendants) alleging six causes of action:
(1) wrongful foreclosure, asserting that none of the Defendants were "persons entitled to enforce" the Note and therefore, had no right under Cal. Comm. Code § 3301 or Cal. Civ. Code § 2924 to declare a default or to foreclose on the Property; and, furthermore, that MERS and Cal-Western failed to comply with procedural requirements, including Cal. Civ. Code § 2923.5, for initiating the foreclosure;
(2) cancellation of the NOD, Substitution of Trustee, Notice of Sale, and Trustee's Deed Upon Sale based on MERS' and Cal-Western's lack of authority to initiate the foreclosure process;
(3) slander of title based on the Defendants' wrongful recording of the NOD, Notice of Sale and Trustee's Deed Upon Sale, and wrongful foreclosure;
(4) quiet title of the Property as to the Debtor and against the claims of Aurora to the Property;
(5) breach of contract based on Aurora's termination of the loan modification agreement;
(6) professional negligence against Cal-Western for its failure to ascertain the validity of the foreclosure documents to protect the trustor's interest.
On January 13, 2011, Cal-Western filed a motion to dismiss the Complaint for failure to state a claim upon which relief could be granted. Cal-Western asserted there was no merit to claims (1)-(4) and (6) because Cal-Western and the other Defendants complied with applicable California law in conducting the foreclosure sale and because the Debtor failed to allege an ability or willingness to tender the amount of his indebtedness. Additionally, Cal-Western argued that the Debtor did not have standing to assert his breach of contract claim.
On February 2, 2011, Aurora, Deutsche Bank, and MERS also filed a motion to dismiss for failure to state a claim. Like Cal-Western, Aurora, Deutsche Bank and MERS asserted that the Debtor's claims failed because the foreclosure complied with applicable California law.
The bankruptcy court issued a tentative ruling prior to a hearing on the motions to dismiss (Tentative Ruling). In its Tentative Ruling, the bankruptcy court determined that the Debtor failed to state a wrongful foreclosure cause of action because the allegations and documents demonstrated that the foreclosure was initiated by parties entitled to do so under the terms of the DOT and consistent with California's nonjudicial foreclosure statute, Cal. Civ. Code § 2924.
Nevertheless, the bankruptcy court did find that the Debtor alleged sufficient facts to support a claim that the Defendants failed to contact him prior to foreclosure as required under Cal. Civ. Code § 2923.5. In reaching its decision, the bankruptcy court rejected the position, set forth by other California courts, that once a foreclosure sale has occurred, a violation of Cal. Civ. Code § 2923.5 is not actionable. Furthermore, the bankruptcy court determined that the Debtor did not need to establish tender to support a claim under Cal. Civ. Code § 2923.5. The bankruptcy court determined that the Debtor alleged sufficient facts to state a cause of action to cancel the Trustee Deed Upon Sale and other instruments based on its conclusion that the Debtor's Cal. Civ. Code § 2923.5 claim was viable.
Also in its Tentative Ruling, the bankruptcy court found that the Debtor failed to plead all the elements required to state a cause of action for slander of title or to quiet title, and therefore, dismissed those claims with leave to amend. The bankruptcy court dismissed the Debtor's breach of contract claim with prejudice, holding that there was no private right of action under the Home Affordable Modification Program (HAMP). Finally, the bankruptcy court found that the Debtor stated a sufficient claim for professional negligence, again on the basis that the Debtor sufficiently alleged a claim under Cal. Civ. Code § 2923.5.
The bankruptcy court held a hearing on the motions to dismiss on March 9, 2011. At the hearing, the Debtor pressed the arguments, made in his Complaint and briefs, that the Defendants were not entitled to foreclose on the Property. At the close of the hearing, the bankruptcy court announced its decision as outlined in the Tentative Ruling. It allowed the Debtor leave to amend but gave the Debtor the option to elect not to amend the Complaint and have a final judgment of dismissal for purposes of appeal.
On April 8, 2011, the bankruptcy court entered an order granting in part the Defendants' motions to dismiss and allowing the Debtor to amend the Complaint. On April 9, 2011, the Debtor filed a notice of his election to not amend the Complaint. Thereafter, on April 18, 2011, the bankruptcy court entered a Judgment of Dismissal dismissing the adversary proceeding with prejudice. The Debtor timely appealed.
Did the bankruptcy court err in dismissing the Complaint under Civil Rule 12(b)(6)?
The bankruptcy court had jurisdiction under 28 U.S.C. § 157(b)(2)(A) and § 1334. We have jurisdiction under 28 U.S.C. § 158.
We review de novo the dismissal of a complaint for failure to state a claim under Civil Rule 12(b)(6).
Under Civil Rule 12(b)(6) (made applicable by Rule 7012), a court must dismiss a complaint if it fails to "state a claim upon which relief can be granted." In reviewing a Civil Rule 12(b)(6) dismissal, we accept as true all facts alleged in the complaint and draw all reasonable inferences in favor of the plaintiff.
To avoid dismissal under Civil Rule 12(b)(6), a plaintiff must aver in his complaint "sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'"
The Debtor's first cause of action alleged that the Defendants wrongfully foreclosed on the Property for two reasons. First, he alleged the foreclosure was initiated by parties who neither had an interest in the Note nor were authorized by the holders of the Note to undertake foreclosure. Specifically, the Debtor alleged that after the Note was transferred and securitized into the Rali Trust, SCME and MERS had no further authority to act under the DOT because they no longer had any interest in the Note or DOT.
Second, the Debtor alleged the foreclosure was improper because Cal-Western failed to comply with Cal. Civ. Code § 2923.5, which requires a lender to contact a borrower prior to filing a notice of default in order to assess the borrower's financial situation and explore options to avoid foreclosure. For the reasons explained below, we conclude that the Debtor's allegations failed to establish a cause of action for wrongful foreclosure.
The Defendants argue that the Debtor's wrongful foreclosure cause of action necessarily failed because the Debtor did not allege that he had the ability to tender. A tender is "an offer of performance made with the intent to extinguish the obligation."
California courts have held that a defaulted borrower is required to allege tender of the amount of the lender's secured indebtedness in order to maintain a cause of action for irregularity in the sale procedure."
Nevertheless, there are a few recognized exceptions to the tender requirement. For example, if the borrower's action attacks the validity of the underlying debt, then tender is not required because it would constitute an affirmation of the debt.
The Complaint alleged that "[a]lthough the Trustee's Deed Upon Sale appears valid on its face, it is invalid and void" because the foreclosure was not authorized by the beneficiary of the Note and DOT. Although "void," "voidable," and "invalid" are often used interchangeably, the "general rule" is that defects and irregularities in a sale render it merely voidable and not void.
The Debtor claims that the foreclosure was improper because the Defendants failed to demonstrate they were "persons entitled to enforce" the Note pursuant to Cal. Comm. Code § 3301. Specifically, the Debtor alleged that Cal-Western did not have the authority to initiate the foreclosure because: (1) there was no evidence that MERS was appointed as a nominee by the holder of the Note prior to the execution of the Substitution of Trustee; or (2) that the current holder of the Note authorized MERS and/or Cal-Western to proceed with the foreclosure.
However, in the context of nonjudicial foreclosure sales, such as here, the Debtor's reliance on Cal. Comm. Code § 3301 is misplaced.
Under Cal. Civ. Code § 2924, the party initiating foreclosure proceedings is not required to have a beneficial or economic interest in the note in order to foreclose.
The Debtor's Complaint and exhibits indicate that the DOT designated MERS as the nominal beneficiary for the lender and the lender's successor's and assigns. The terms of the DOT expressly provided MERS with the right to exercise any or all of the lender's, or the lender's successors' and assigns', rights including the right to foreclose and sell the Property. Additionally, the allegations and documents provided with the Complaint demonstrate that MERS executed a Substitution of Trustee substituting Cal-Western as the trustee under the DOT, which was recorded prior to the sale. Finally, the Complaint and exhibits demonstrate that Cal-Western initiated the nonjudicial foreclosure process by recording the NOD. On the NOD, Cal-Western identified itself as "the trustee, the duly appointed substituted trustee or an agent acting for the trustee or beneficiary" under the DOT.
The allegations and documents establish MERS's authority to foreclose on the Property. As the beneficial nominee for the original lender and the lender's successors and assigns, MERS was an authorized agent of the lender. As one court explained:
The Debtor has not alleged facts that demonstrated MERS was not authorized to initiate foreclosure proceedings. Rather, he argued only that MERS
Furthermore, the Debtor agreed, by executing the Deed of Trust, that MERS had the authority to foreclose on the Property.
The nonjudicial foreclosure process in California is commenced by the recording of a notice of default and election to sell. Here, Cal-Western commenced the process by recording the NOD. "An agent for the mortgagee or beneficiary, an agent of the named trustee, any person designated in an
Numerous cases have held that, as the nominee for the lender under a deed of trust, MERS has authority to substitute a trustee.
Nevertheless, the Debtor alleged that Cal-Western was not authorized to file the NOD because the Substitution of Trustee was not recorded when Cal-Western filed the NOD. But, there is no requirement that the Substitution of Trustee be recorded, only that it be executed. Cal. Civ. Code § 2924(b)(4);
As part of the Debtor's claim for wrongful foreclosure, he alleged that Cal-Western failed to satisfy Cal. Civ. Code § 2923.5 because Cal-Western failed to contact him to assess his financial situation and explore options to avoid foreclosure. Cal. Civ. Code § 2923.5(b) requires a notice of default to include a declaration "from the mortgagee, beneficiary, or authorized agent" of compliance, including that there was an attempt "with due diligence to contact the borrower."
The NOD included the necessary declaration to satisfy Cal. Civ. Code § 2923.5(b). Nevertheless, the Debtor alleged that the declaration was deficient because it contained boilerplate language and was not made under penalty of perjury. However, the language of the declaration may track the statute and there is no requirement that it be made under penalty of perjury.
The Debtor alleged that he was not contacted by the Defendants prior to the filing of the NOD. The Debtor also alleged that he and Aurora agreed to a modification of the loan terms, which forestalled the scheduled foreclosure. The statements are difficult to reconcile.
Even if the facts alleged are taken as true and the Debtor sufficiently established a claim for violation of Cal. Civ. Code § 2923.5, it does not follow, as the Debtor asserts, that the Trustee's Deed Upon Sale is void.
In his second cause of action, the Debtor alleged that the NOD was invalid, and therefore, the events that followed, such as the Notice of Sale and the Trustee's Deed Upon Sale were also invalid. He sought cancellation of the documents under Cal. Civ. Code § 3412.
"A written instrument in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may . . . be canceled." Cal. Civ. Code § 3412;
Slander of title is a "tortious injury to property resulting from unprivileged, false, malicious publication of disparaging statements regarding the title to property owned by plaintiff, to plaintiff's damage."
The Debtor alleged that the NOD, the Notice of Sale and the Trustee's Deed Upon Sale were invalid and constituted improper clouds on the Debtor's title to the Property. The Debtor alleged that the Defendants wrongfully recorded these documents in violation of California law. Because the Debtor's slander of title claim was based on the same facts relied on in his first two causes of action, he has failed to establish the falsity of the NOD, Substitution of Trustee, Notice of Sale and Trustee's Deed Upon Sale. Consequently, the Debtor failed to establish the third element of his slander of title claim and the bankruptcy court did not err in dismissing the Debtor's third cause of action.
To state a cause of action to quiet title under California law, a plaintiff must allege:
Cal. Civ. Proc. Code § 761.020.
The Debtor pled each of these requirements in the Complaint; however, we must also determine whether he pled facts sufficient to allow us to draw a reasonable inference that he was entitled to relief under his quiet title claim.
The plausibility of the Debtor's quiet title claim depended on the viability of his allegation that neither MERS nor Cal-Western were authorized to foreclose on the Property. Because we have determined that the allegations and supporting documents in the Complaint did not support a claim for wrongful foreclosure, the quiet title claim is fatally defective. Accordingly, we conclude that the bankruptcy court properly dismissed the Debtor's quiet title cause of action.
The Debtor has abandoned his claim for breach of contract. Appellant's Opening Br. at 5-6, 7. Therefore, we need not decide whether the bankruptcy court erred in dismissing the fifth cause of action alleged in the Complaint.
In order to state a claim for negligence, the Debtor was required to allege that (1) the defendant had a legal duty to use due care; (2) the defendant breached that duty; and, (3) the breach was the proximate or legal cause of the resulting injury.
A trustee under a deed of trust is not a true trustee that owes fiduciary duties to the trustor.
The Debtor stated his first four claims for relief were "in essence one claim stated as different theories related to the wrongful foreclosure." Appellant's Opening Br. at 6. For the foregoing reasons, we determined that the Debtor failed to allege that the foreclosure violated applicable California law and was improper. Consequently, the Debtor's first, second, third, and fourth claims for relief were properly dismissed. The Debtor's fifth claim for relief has been abandoned. Furthermore, we determined the Debtor's sixth claim for relief was also properly dismissed. Accordingly, we AFFIRM the bankruptcy court's Judgment of Dismissal that dismissed the adversary proceeding with prejudice.
However, because the Note was endorsed in blank, it is a bearer instrument. Cal. Comm. Code § 3205(b);
Some courts have held that tendering the indebtedness prior to the enforcement of the right under Cal. Civ. Code § 2923.5 is contradictory and would "thwart the operation of the statute."
