Case Name: Kim Vu and Tom Cao v. America’s Wholesale Lender, et al.
Case No.: 1-14-CV-263590

Demurrer by Defendants Countrywide Home Loans, Inc. dba America’s Wholesale Lender, The Bank of New York Mellon fka The Bank of New York, as Trustee for the Certificate Holders of CWALT, Inc., Alternative Loan Trust 2006-0A11, Mortgage Pass Through Certificates, Series 2006-0A11, and Mortgage Electronic Registration Systems, Inc. to the Second Amended Complaint of Plaintiffs Kim Vu and Tom Cao

Factual and Procedural Background

This action arises out of the attempted foreclosure of a residential property located at 15185 Alondra Lane, Saratoga, California (“subject property”). On May 9, 2006, a deed of trust was recorded in the name of Plaintiffs as security instrument on the subject property for a Mortgage Note (Adjustable Rate Rider) in the amount of $1,500,000. (See Second Amended Complaint [“SAC”] at ¶ 12.) The deed of trust lists defendant Countrywide Home Loans, Inc. dba America’s Wholesale Lender (“Countrywide”) as the lender; CTC Foreclosure Services Corporation (“CTC”) as Trustee; and Mortgage Electronic Registration Systems, Inc. (“MERS”) as the beneficiary under the security instrument. (Ibid.) On September 16, 2011, MERS assigned its interest in the deed of trust to The Bank of New York Mellon (“BONYM”). (Id. at ¶ 13.) On September 26, 2012, a substitution of trustee was recorded, substituting CTC with Recontrust Company (“Recontrust”). (Id. at ¶ 14.) On the same day, Recontrust recorded a notice of default and election to sell under the deed of trust. (Id. at ¶ 15.) After the recordation of the notice of default, Recontrust recorded a series of notices of trustee’s sale, which were eventually superseded by the recordation of a notice of rescission of notice of trustee’s sale on November 6, 2013. (Id. at ¶ 16.)

On November 14, 2014, Plaintiffs filed a SAC, now the operative pleading, against Defendants alleging the following causes of action: (1) violation of Civil Code sections 2924.17 and 2924.19; and (2) wrongful foreclosure.

On December 19, 2014, Defendants filed a demurrer to the SAC on the ground that the first and second causes fail to state a claim. (See Code Civ. Proc. § 430.10, subd. (e).) On February 4, 2015, Plaintiffs filed opposition to the motion.

Demurrer to the SAC

1. Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

2. Request for Judicial Notice

Defendants’ request for judicial notice is GRANTED. Exhibits A, B, C, and D constitute documents filed with the United States Bankruptcy Court and are therefore subject to judicial notice. (See Evid. Code § 452, subd. (d).) A court may take judicial notice of the existence of each document in a court file, but can only take judicial notice of the truth of matters asserted in documents such as orders, findings of fact and conclusions of law, and judgments. (See Day v. Sharp (1975) 50 Cal.App.3d 904, 914.)

3. Plaintiffs Lack Standing Due to Bankruptcy

With respect to the SAC, Defendants argue that Plaintiffs lack standing to bring each cause of action because they failed to schedule these claims in their chapter 7 bankruptcy.

Under Code of Civil Procedure section 367, every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute. After a person files for bankruptcy protection, any causes of action previously possessed by that person become the property of the bankrupt estate. (See Cloud v. Northrup Grumman Corp. (1998) 67 Cal.App.4th 995, 1001.) Any property that is neither abandoned nor administered by the bankruptcy trustee remains property of the bankruptcy estate. (Id. at p. 1003.) A chapter 7 debtor may not prosecute a cause of action belonging to the bankruptcy estate unless the claim has been abandoned by the trustee. (See Bostonian v. Liberty Savings Bank (1997) 52 Cal.App.4th 1075, 1081.)

Here, the judicially noticed records reveal that Plaintiffs’ claims against Defendants were not listed on the asset schedules they filed with the bankruptcy court. In opposition, Plaintiffs contend that the bankruptcy trustee and the court have been notified of the claims in this matter and that the chapter 7 case has been reopened. (See OPP at p. 2.) Plaintiffs assert that the trustee is currently undergoing an evaluation on whether to take authority over the claims or to abandon them. (Ibid.) However, Plaintiffs’ argument is not supported by allegations in the SAC or by any documents subject to judicial notice. Thus, the court sustains the demurrer on this ground.

4. Tender Rule Does Not Apply

Defendants also argue that Plaintiffs cannot maintain this action because they have failed to allege tender of the amount owed. In general, a plaintiff may not challenge the propriety of a foreclosure on his or her property without offering to repay the full amount borrowed against it. (See Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 117; West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 801 [“An allegation of tender of the indebtedness is necessary when the person seeking to set aside the foreclosure sale asserts the sale is voidable due to irregularities in the sale notice or procedure.”].) The tender requirement may also apply to any cause of action that is “implicitly integrated” with an irregular trustee’s sale. (See Arnolds Mgmt. Corp. v. Eischen (1984) 158 Cal.App.3d 575, 579.)

However, while the tender requirement may apply to causes of action to set aside a foreclosure sale, it does not apply to actions seeking to prevent a foreclosure sale. (See Intengan v. BAC Home Loans Servicing, L.P. (2013) 214 Cal.App.4th 1047, 1053-1054; Pfeifer v. Countrywide Home Loans, Inc. (2012) 211 Cal.App.4th 1250, 1280-1281.) Here, Plaintiffs do not allege that any foreclosure sale has as yet taken place; rather they seek to prevent Defendants from proceeding with a foreclosure sale. (See SAC at ¶¶ 17 and 44.) If the foreclosure sale has not yet occurred, and the court is not called upon to exercise its equitable powers to overturn a completed sale, then it seems tender of the indebtedness is not yet required.

5. Plaintiffs Lack Standing to Challenge Securitization of the Loan

With respect to the SAC, Defendants argue that Plaintiffs’ claims are predicated on theories relating to the securitization of the loan. (See SAC at ¶¶ 24-28.) In particular, Plaintiffs allege that the securitization failed because transfer of the loan was not effectuated through timely assignment of the Note and Deed of Trust and thus the assignment violated the Pooling and Servicing Agreement (“PSA”) and New York trust law. (Ibid.) However, Plaintiffs lack standing to challenge the process by which their loan was securitized as they were not parties to the securitization agreements. (See Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 515 [a plaintiff lacks standing to enforce any agreements, including the investment trust’s pooling and servicing agreement, relating to such transaction]; see also Gilbert v. Chase Home Fin., LLC (E.D. Cal. 2013) 2013 U.S. Dist. LEXIS 74772 at p. *9 [district court found that plaintiffs were not parties to a PSA and do not have standing to raise violations of a PSA or to otherwise bring claims on the basis that a PSA was violated].) Thus, the court also sustains the demurrer on this ground.

6. First Cause of Action: Violation of Civil Code Sections 2924.17 and 2924.19

With respect to the first cause of action, Plaintiffs allege that the assignment of the deed of trust dated September 16, 2011 was “robosigned” in violation of Civil Code section 2924.17. (See SAC at ¶ 31.) They further allege that the “robosigning” of the assignment is a material violation of Civil Code section 2924.17, entitling them to injunctive relief. (Id. at ¶¶ 34-35.)

Civil Code section 2924.17, subdivision (a), states: “[a] declaration recorded … pursuant to section 2923.5, a notice of default, notice of sale, assignment of a deed of trust, or substitution of trustee recorded by or on behalf of a mortgage servicer in connection with a foreclosure subject to the requirements of Section 2924 … shall be accurate and complete and supported by competent and reliable evidence.” In turn, section 2924.19, subdivision (a)(1), provides that if a trustee’s deed upon sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin a “material” violation of sections 2923.5, 2924.17, or 2924.18.

Here, Defendants correctly point out that Plaintiffs’ cause of action fails because it is premised on the recordation of the allegedly “robo-signed” assignment of the deed of trust in September 2011. (See SAC at ¶ 31.) Since the Homeowner’s Bill of Rights (the “HBOR”) did not take effect until January 1, 2013 and does not apply retroactively, the assignment cannot serve as a basis for the cause of action. (See Rockridge Trust v. Wells Fargo, N.A. (N.D.Cal. 2013) 985 F.Supp.2d 1110, 1152 [the HBOR does not state that it has retroactive effect].)

Also, Civil Code section 2924.19 permits a borrower to bring an action for injunctive relief to enjoin a material violation under section 2924.17. As stated above, Plaintiffs have not alleged a proper violation under section 2924.17 or any other facts to support a claim for injunctive relief. Thus, the court sustains the demurrer to the first cause of action.

7. Second Cause of Action: Wrongful Foreclosure

With respect to the second cause of action, Plaintiffs allege that Defendants do not have the authority to foreclose on the subject property because the notice of default was premised on a sham assignment of the deed of trust. (See SAC at ¶¶ 38-39.) Thus, Plaintiffs allege that defendants BONYM and MERS do not have the authority to foreclose on the subject property. (Id. at ¶ 40.)

On demurrer, Defendants correctly point out that there is no requirement that a holder in due course conduct foreclosure proceedings. Under Civil Code section 2924, subdivision (a)(1), a “trustee, mortgagee, or beneficiary, or any of their authorized agents” may initiate the foreclosure process. (See Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1155.) “California courts have refused to delay the nonjudicial foreclosure process by allowing trustor-debtors to pursue preemptive judicial actions to challenge the right, power, and authority of a foreclosing ‘beneficiary’ or beneficiary’s ‘agent’ to initiate and pursue foreclosure.” (Jenkins v. JPMorgan Chase Bank, N.A. supra, 216 Cal.App.4th at p. 511.) These courts reason that allowing a debtor to pursue such an action would interject the courts into the comprehensive nonjudicial scheme created by the Legislature. (Ibid. [citing Gomes v. Countrywide Home Loans, Inc. (2011) 193 Cal.App.4th 1149, 1154-1156].)

Here, Plaintiffs allege that Defendants have no authority to initiate a nonjudicial foreclosure sale because they have no beneficial interest in the property due to the allegedly sham assignment of the deed of trust. (See SAC at ¶¶ 38-40.) However, the nonjudicial foreclosure scheme does not “require that the foreclosing party have an actual beneficial interest in both the promissory note and deed of trust to commence and execute a nonjudicial foreclosure sale.” (Jenkins v. JPMorgan Chase Bank, N.A. supra, 216 Cal.App.4th at p. 513; see also Haynes v. EMC Mortgage Corp. (2012) 205 Cal.App.4th 329, 336 [holding that trustee may initiate foreclosure even if assignment of beneficial interest not recorded].) Thus, the allegedly sham assignment does not prevent Defendants from foreclosing on the property.

In his opposition, Plaintiff directs the court to the holding in Glaski v. Bank of America (2013) 218 Cal.App.4th 1079. In that case, the plaintiff alleged that an attempted transfer of the loan into a securitized trust located in New York was void and that the foreclosing entity was not the true owner of the loan. Following foreclosure, the plaintiff brought an action for damages for the alleged wrongful foreclosure. The trial court sustained the defendants’ demurrer and the plaintiff appealed. The Fifth Appellate District reversed, holding that a borrower may challenge a foreclosure based on specific allegations that an attempt to transfer the deed of trust was void. (Glaski, supra, 218 Cal.App.4th at p. 1099.)

However, Glaski is distinguishable from this case as it was based on a plaintiff bringing a post-foreclosure action for damages, not an action to prevent foreclosure. By contrast, this case is a preemptive action in which Plaintiffs are seeking to prevent the initiation of a nonjudicial foreclosure. Furthermore, the weight of California state and federal district courts has soundly rejected Glaski which appears to represent a minority view. (See Jenkins v. JPMorgan Chase Bank, N.A., supra, 216 Cal.App.4th at pp. 514-516; Newman v. Bank of N.Y. Mellon (E.D. Cal. 2013) 2013 U.S. Dist. LEXIS 147562 at p. *9, fn. 2 [no courts have yet followed Glaski and Glaski is in a clear minority on the issue]; Mottale v. Kimball Tirey & St. John, LLP (S.D. Cal. 2014) 2014 U.S. Dist. LEXIS 3398 at p. *12 [the weight of authority rejects Glaski as a minority view on the issue of a borrower’s standing to challenge an assignment as a third party to that assignment].)

Even if the court was inclined to follow the minority position in Glaski, Plaintiffs fail to allege facts demonstrating that they suffered prejudice. (See Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 272 [a plaintiff in a suit for wrongful foreclosure has generally been required to demonstrate the alleged imperfection in the foreclosure process was prejudicial to the plaintiff’s interests]; see also Siliga v. Mortgage Electronic Registration Systems, Inc. (2013) 219 Cal.App.4th 75, 85 [absent any prejudice, the plaintiffs have no standing to complain about any alleged lack of authority or defective assignment].) Plaintiffs do not address the prejudice argument in their opposition.

Therefore, the court sustains the demurrer to the second cause of action.

8. Leave to Amend

Since Plaintiffs provide no basis for further amendment, leave to amend is denied. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading]; see also Davies v. Sallie Mae, Inc. (2008) 168 Cal.App.4th 1086, 1097 [appellate court determined that trial court did not abuse its discretion in sustaining demurrer without leave to amend after plaintiff had two previous opportunities to amend the complaint].)