MARGARET M. MANN, Bankruptcy Judge.
US Bank National Association ("US Bank"), Trustee for the C-BASS Mortgage Loan Asset-Backed Certificates, Series 2006-CB2, nonjudicially foreclosed on the residence of Debtor Eleazar Salazar ("Salazar"), by exercising the power of sale under the deed of trust. At the time it foreclosed, U.S. Bank was not the original beneficiary of record, and it had not recorded an assignment of the deed of trust conveying to it an interest in the deed of trust.
After the foreclosure, two lawsuits were filed in state court: Salazar filed to invalidate the foreclosure sale and to seek damages against U.S. Bank and other parties,
In his bankruptcy, Salazar seeks to reinstate U.S. Bank's loan against his residence and cure the default, and U.S. Bank seeks relief from stay in the bankruptcy to proceed with its unlawful detainer action.
While U.S. Bank meets the minimal test for standing to seek relief from stay, Salazar's foreclosure sale challenge must still be addressed to resolve the merits of U.S. Bank's relief from stay motion. Relying upon controlling California statutory and decisional authority, the Court concludes MERS' original involvement in this loan does not provide talismanic protection against U.S. Bank's foreclosure deficiencies. US Bank's failure to record its beneficiary status before foreclosure left Salazar with equitable title to his residence. Although this equitable title must be finally established in an adversary proceeding rather than a relief from stay motion, Salazar has demonstrated a prima facie case that the foreclosure sale was void. Salazar thus has a significant property interest entitled to protection by the automatic stay, and the Court denies relief at this time.
Accredited Home Lenders, Inc. ("Accredited") made a loan ("Loan") to Salazar in October 2005 secured by his residence located at 1268 Emerald Way, Calexico, California ("Property"). Salazar executed a promissory note ("Note") to Accredited to document the Loan. To secure the Loan, Salazar executed a four party deed of trust ("DOT") among Salazar as "Borrower," Accredited as "Lender," Chicago Title Company as trustee, and MERS as beneficiary.
Under the DOT, the Lender's rights regarding the Loan are pervasive. The Lender is entitled to receive all payments under the Note and to enforce the DOT, including the exclusive right to conduct a nonjudicial foreclosure.
MERS has none of these rights under the DOT,
While some of the foreclosure claims were pending in district court, the unlawful detainer action came on for trial in state court on September 1, 2010, and was continued to October 1, 2010. This bankruptcy case was filed the day before the continued trial, which stayed the unlawful detainer action. US Bank then filed this relief from stay motion ("Motion") on October 26, 2010, which was heard on November 23, 2010, continued to January 11, 2011, and continued again to January 25, 2011 to allow for the submission of evidence and additional briefing.
To determine whether to grant U.S. Bank's Motion, the Court must first decide whether U.S. Bank has standing to bring it. The Court must then address the merits of the Motion, which will require consideration of whether Salazar retains any interest in the Property that is necessary for an effective reorganization, and whether allowing the unlawful detainer action to proceed in state court will promote the efficient administration of the bankruptcy and limit prejudice to the parties.
Due to the limited scope and expedited nature of a relief from stay proceeding, the standing requirement is not difficult to meet. Section 362(d) of the Bankruptcy Code provides that stay relief may be granted to a "party in interest," and any party affected by the stay should be entitled to seek relief. 3 Collier on Bankruptcy ¶ 362.07[2] (3d ed. rev. 2010). In the Ninth Circuit, challenges to secured claims are typically resolved in plenary proceedings. Johnson v. Righetti (In re Johnson), 756 F.2d 738, 740 (9th Cir.1985) ("The validity of the claim or contract underlying the claim is not litigated during the hearing."), overruled on other grounds by Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007); Biggs v. Stovin (In re Luz Int'l), 219 B.R. 837, 841-42 (9th Cir. BAP 1998). Even so, the moving party must establish a prima facie case of its claim or rights against a debtor or its estate to seek relief from stay. In re Bialac, 694 F.2d 625, 627 (9th Cir.1982); In re Aniel, 427 B.R. 811, 816 (Bankr. N.D.Cal.2010).
A prima facie case of standing requires the moving party demonstrate an undisputed interest in the bankruptcy case that is hindered by the automatic stay. Standing is lacking where a secured creditor cannot present the rudimentary elements of its claim. In re Gavin, 319 B.R. 27, 32 (1st Cir. BAP 2004) (holding the moving party could not trace the chain of
US Bank is the record title owner of the Property under the recorded Trustee's Deed, even if the foreclosure sale was invalid. US Bank therefore has standing to seek relief from stay. Even though U.S. Bank has established a prima facie case of standing, however, the Court must still determine if U.S. Bank's foreclosure sale was valid to rule on the merits of the Motion.
Whether Salazar may retain valuable equitable title in the Property despite the foreclosure sale is critical to the Motion. McCarthy, Johnson & Miller v. North Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1077 (9th Cir.2000) (whether debtor retained a property interest in registry funds determined whether stay applied). To decide the Motion, the Court must evaluate whether Salazar has equity in the Property necessary for an effective reorganization and whether cause exists to grant relief to U.S. Bank. Bialac, 694 F.2d at 627 ("it was within the bankruptcy court's discretion to consider the construction of the note's payment terms in the § 362(d) proceeding if they were important to the issue of valuation"); In re Bebensee-Wong, 248 B.R. 820, 823 (9th Cir. BAP 2000) (court first determined whether the trustee's deed after foreclosure was timely recorded; since foreclosure sale was valid, relief from stay was granted to allow unlawful detainer action to proceed); cf. In re Hoopai, No. 04-02511, 2005 WL 1156091, at *3-*5, 2005 U.S. Dist. LEXIS 42760, at *11-*15 (Bankr.D.Haw.2005) (relief from stay denied to foreclosing creditor because the property might have value to the estate).
If U.S. Bank's foreclosure sale was invalid, Salazar has an interest in the Property which militates in favor of continuing the stay. If U.S. Bank was not authorized to foreclose the DOT under Civil Code section 2932.5, the foreclosure sale may be void, and Salazar would not need to tender the full amount of the Loan to set aside the sale. Bank of America, N.A. v. La Jolla Group II, 129 Cal.App.4th 706, 710, 717, 28 Cal.Rptr.3d 825 (5th Dist.2005) (void foreclosure sale required rescission of trustee's deed returning title to the status quo prior to the foreclosure sale); Dimock v. Emerald Properties, 81 Cal.App.4th 868, 874, 97 Cal.Rptr.2d 255 (4th Dist.2000) (sale under deed of trust by former trustee void, and tender of the amount due is unnecessary). In this event, Salazar could potentially restructure the Loan and reorganize his financial affairs in his chapter 13 case. The Court emphasizes however, that U.S. Bank's defenses to Salazar's Civil Code section 2932.5 claim must be resolved either in state court or in another proper proceeding as these defenses are not before the Court.
US Bank, as the foreclosing beneficiary and assignee of Accredited's interest in the
Second, Civil Code section 2932.5 also requires that U.S. Bank's status as foreclosing beneficiary appear before the sale in the public record title for the Property. This second requirement was not met. US Bank offers two primary reasons why a recorded assignment of the DOT is unnecessary: (1) Civil Code section 2932.5 applies to mortgages, and not to its DOT; and (2) MERS' recorded interest as the nominal beneficiary was sufficient to satisfy Civil Code section 2932.5, particularly since the transfer by Accredited to U.S. Bank could be tracked in the publicly accessible MERS system.
The Court's analysis leads it to conclude that Civil Code section 2932.5 requires U.S. Bank's assigned beneficial interest be recorded despite MERS' initial role under the DOT, and that the statutory foreclosure scheme trumps MERS' proposed alternative system.
In claiming Civil Code section 2932.5 does not apply to its DOT, U.S. Bank relies on Caballero v. Bank of America, No. 10-CV-02973, 2010 WL 4604031, at *3, 2010 U.S. Dist. LEXIS 122847, at *8 (N.D.Cal.2010) (citing Stockwell v. Barnum, 7 Cal.App. 413, 416-17, 94 P. 400 (2d Dist.1908)), Roque v. Suntrust Mortg., Inc., No. C-09-00040, 2010 WL 546896, at *2-3, 2010 U.S. Dist. LEXIS 11546, at *7 (N.D.Cal.2010), and Parcray v. Shea Mortg., Inc., No. CV-F-09-1942, 2010 WL 1659369, at *12, 2010 U.S. Dist. LEXIS 40377, at *32 (E.D.Cal.2010).
Historically, a technical distinction existed between deeds of trust and mortgages. For deeds of trust, title vested in the trustee. For mortgages, title remained with the mortgagors. This distinction, however, has been determined to be obsolete. Bank of Italy Nat. Trust & Sav. Assn. v. Bentley, 217 Cal. 644, 656, 20 P.2d 940
The outdated distinction between mortgages and deeds of trust is especially moribund in the context of borrower's rights in the nonjudicial foreclosure context, such as the borrower rights protected by Civil Code section 2932.5. Bank of Italy, 217 Cal. at 658, 20 P.2d 940 ("[I]mportant rights and duties of the parties should not be made to depend on the more or less accidental form of the security."); Dimock, 81 Cal.App.4th at 877, 97 Cal.Rptr.2d 255 ("[The title distinction] has been ignored in order to afford borrowers with the protection provided to mortgagors."). Civil Code section 2932.5 protects borrowers from confusion as to the ownership of their loans. Stockwell, 7 Cal.App. at 416-17, 94 P. 400; Bank of America, 129 Cal.App.4th at 712, 28 Cal.Rptr.3d 825 (citing 4 Harry D. Miller & Marvin B. Starr, Miller and Starr California Real Estate, § 10:123 (3d ed. 2003)) ("Statutory provisions regarding the exercise of the power of sale provide substantive rights to the trustor and limit the power of sale for the protection of the trustor."); see also Civ.Code §§ 2935-2937 (Deering 2010) (providing requirements for the transfer of interests of indebtedness on residential real property that put borrower on notice). Civil Code section 2932.5 must therefore be applied to deeds of trust to ensure trustors are provided the same protection as mortgagors under California law.
The borrower concern addressed by Civil Code section 2932.5—that it be able to identify the assignee of its loan—is more exigent, not less, than it was during the Great Depression, when Bank of Italy was decided. Problems with the residential mortgage foreclosure process have been widely chronicled. See Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Tex. L. Rev. 121, 148-49 (2008), cited in Ameriquest Mortg. Co. v. Nosek (In re Nosek), 609 F.3d 6, 9 (1st Cir.2010) (noting mortgage holders and servicer's "(c)onfusion and lack of knowledge, or perhaps sloppiness, as to their roles is not unique in the residential mortgage industry"); Andrew J. Kazakes, Developments in the Law: the Home Mortgage Crisis, 43 Loy. L.A. L. Rev.
Because controlling Supreme Court authority requires this Court to enforce statutory borrower protections regardless of whether nonjudicial foreclosure is sought under a mortgage or a deed of trust, the Court must conclude Civil Code section 2932.5 applies to U.S. Bank's DOT here.
US Bank also claims MERS' status as nominal beneficiary under the DOT obviated the recording of the assignment of the DOT under Civil Code section 2932.5. This claim fails because MERS was not the beneficiary at the time of the foreclosure here, even if it was initially the nominal beneficiary under the DOT. The DOT also does not grant MERS any authority apart from the nominal role.
The recitals in the Trustee's Deed identify U.S. Bank alone as the foreclosing beneficiary, and this recital provides "prima facie evidence of the truth of the statements." DOT at ¶ 22.
In Gomes, the Court of Appeal held Civil Code section 2924(a)(1) does not establish a cause of action to permit a borrower to test MERS' authority to initiate a nonjudicial foreclosure, where there is no specific factual basis to challenge this authority. Civil Code section 2924(a)(1) permits an array of authorized parties to take the steps to initiate foreclosure, including the trustee, beneficiary and their authorized agents. Gomes, 192 Cal.App.4th at 1156, 121 Cal.Rptr.3d 819. Neither Gomes nor Civil Code section 2924(a)(1), applies to the questions here: Whether U.S. Bank as Accredited's assignee has authority to foreclose. This issue is instead addressed by Civil Code section 2932.5. In fact, Gomes specifically declined to decide the outcome where the facts demonstrated "the wrong party initiated the foreclosure process." Id. at 1155, 121 Cal.Rptr.3d 819 (distinguishing Weingartner v. Chase Home Finance, LLC, 702 F.Supp.2d 1276
Gomes also relied upon the borrower's acknowledgement of MERS' authority to foreclose as nominal beneficiary. Gomes, 192 Cal.App.4th at 1157-58, 121 Cal.Rptr.3d 819; see also Pantoja, 640 F.Supp.2d at 1189-90. Even if U.S. Bank had not replaced MERS as the foreclosing beneficiary by the time of the foreclosure here, MERS still had no authority to nonjudicially foreclose under Salazar's DOT under its express terms. The Lender, not MERS, had the right to "invoke the power of sale" under the DOT, ¶ 22, here. This acknowledgement of MERS' authority also did not extend so far as to permit it to foreclose. Salazar's acknowledgement was limited to the situation where MERS' enforcement actions were "necessary to comply with law or custom" (emphasis added). Whatever "necessary to comply with law or custom" means, and there is no evidence in the record to explain it, it should not mean that U.S. Bank or MERS' can contract away their obligations to comply with the foreclosure statutes.
Salazar's acknowledgment could also not be interpreted as an enforceable waiver of his right as borrower under Civil Code section 2932.5 to be informed of the identity of the assignee. The acknowledgement fails to meet the stringent test for waivers of residential borrower protections in the foreclosure context. Under Cathay Bank v. Lee, 14 Cal.App.4th 1533, 1539, 18 Cal.Rptr.2d 420 (4th Dist.1993), a waiver of borrower protections must be specific and explain the substance of the statutory rights at issue. In Cathay Bank, id., the court refused to enforce language of a deed of trust authorizing the lender to exercise the power of sale, because it served to waive the guarantor's defense to the deficiency claim.
As a matter of fact, U.S. Bank did not rely on MERS to nonjudicially foreclose on Salazar's residence here. As a matter of law, Salazar's acknowledgment cannot be read as a waiver of his right to be informed of a change in beneficiary status. For both of these reasons, Gomes, 192 Cal.App.4th at 1157-58, 121 Cal.Rptr.3d 819, is distinguishable.
The Court also rejects U.S. Bank's invitation to overlook the statutory foreclosure mandates of California law, and rely upon MERS as an extra-judicial commercial alternative.
US Bank as the foreclosing assignee was obligated to record its interest before the sale despite MERS' initial role under the DOT, and this role cannot be used to bypass Civil Code section 2932.5. Since U.S. Bank failed to record its interest, Salazar has a valid property interest in his residence that is entitled to protection through the automatic stay.
US Bank seeks relief from stay on two statutory grounds: 11 U.S.C. § 362(d)(1) (2011) (cause, including lack of adequate protection of an interest in property), and 11 U.S.C. § 362(d)(2) (2011) (lack of equity and property not necessary for an effective reorganization). Whether the stay should be lifted to permit the unlawful detainer litigation to proceed in
Maximizing the opportunities for reorganization of the estate is the most important factor in determining whether to grant relief from stay to permit litigation in another forum to proceed. Conejo, 96 F.3d at 353. Salazar, in his chapter 13 case, seeks to regain title to the Property by invalidating the foreclosure sale and curing the default on the Loan to U.S. Bank. Salazar's reorganization could be thwarted if the Court allows the foreclosure issues to proceed before it determines whether there is equity in the Property, or whether Salazar can restructure U.S. Bank's debt in his reorganization.
Denying relief from stay at this time is the least prejudicial option for both parties. Even if the stay prohibits U.S. Bank from regaining possession of the Property in the near term, that inconvenience is appropriate because the foreclosure process was flawed. The Court has scheduled a further hearing on relief from stay to determine the economic feasibility of Salazar's plan, and also to order that adequate protection payments be made to U.S. Bank to prevent diminution of the value of its collateral. 11 U.S.C. §§ 361, 363(e) (2011); United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 370, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (adequate protection payments can protect valid interests of creditors).
In contrast, Salazar could be substantially prejudiced by loss of his property interest if the unlawful detainer action proceeded even though the foreclosure sale may be void. Salazar has established a prima facie case of ownership of the Property, subject to whatever defenses U.S. Bank might bring in the state court proceeding. These rights should be protected by the automatic stay, assuming U.S. Bank's economic interests in the Loan are adequately protected.
Challenges to U.S. Bank's foreclosure sale are simultaneously pending in state and bankruptcy court, creating the potential for confusion and a waste of judicial resources. Even if not specifically raised in the unlawful detainer proceeding, the validity of the foreclosure sale could be decided by default. Cheney v. Trauzettel, 9 Cal.2d 158, 69 P.2d 832 (1937); Seidell v. Anglo-California Trust Co., 55 Cal.App.2d 913, 920, 132 P.2d 12 (3d Dist.1942) (challenges to foreclosure sales are barred if not raised in unlawful detainer action). Maintaining the automatic stay until the Court can hear U.S. Bank defenses, and
Even though U.S. Bank has standing to seek relief from stay as the record title owner of the Property, Salazar currently has an equitable title interest for the automatic stay to protect. The Court rejects the claim that MERS' limited role in the DOT provides it carte blanche authority over the nonjudicial foreclosure process. To enable the bankruptcy and foreclosure issues between the parties to be efficaciously addressed, the Court denies the Motion without prejudice. A status conference will be held on this matter on April 21, 2011 at 2:00 p.m. in this Court to determine the amount of the adequate protection payments to be provided to U.S. Bank and to schedule necessary future proceedings consistent with this ruling.
This Memorandum Decision will constitute the Court's findings of fact and conclusions of law. Counsel for Salazar is directed to prepare an order in accordance with this Memorandum Decision within ten (10) days of the date of entry.
IT IS SO ORDERED.
Civ.Code § 2932.5 (Deering 2011) (emphasis added).
