Preemptive Challenges to NonJudicial Foreclosure Barred by Ninth Circuit

June 17, 2020 by Kyle Niewoehner, Esq.

On May 11, 2020, the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) ruled in Perez v. Mortgage Electronic Registration Systems, Inc. that California law does not allow borrowers to bring judicial action challenging a lender’s authority to pursue non-judicial foreclosure prior to the foreclosure taking place. The borrower appellants had cited Yvanova v New Century Mrtg. Corp., 62 Cal.4th 919 (2016), arguing that Yvanova provides a basis for preemptive challenges to foreclosure sales. The Ninth Circuit disagreed.

The opinion was issued in response to two pre-foreclosure lawsuits. In each case, the Perez couple sued MERS and the lenders that held the loan asking for declaratory relief, cancellation of instruments, and quiet title as to the lenders and MERS. The appellants also requested a declaration that MERS and the lending entities had no legal rights in the underlying notes or deeds of trust. The Perez’s claim was predicated on alleged defects in assignments of the associated deeds of trust. They argued that the assignments did not convey beneficial interest in the deeds of trust. The lenders had filed a Notice of Default and Notice of Trustee’s Sale against the borrowers due to delinquent loan payments on one of the loans, but the scheduled foreclosure sale never occurred. No foreclosure proceedings had started on the second property.

Both claims were transferred to federal court due to diversity jurisdiction and were subsequently dismissed for failure to state a plausible claim for relief under California law—a ruling that the Perez couple subsequently appealed. The appeal argued that the couple had a right to preemptively challenge the lenders’ power to initiate foreclosures by filing a lawsuit before the non-judicial foreclosure sale occurred. Thus, the question being decided by the Ninth Circuit was whether this type of preemptive, pre-foreclosure action is tenable under California law.

The court started its analysis by pointing out that the California Supreme Court has not yet provided an explicit answer to this question. The Yvanova ruling established that in an action for wrongful foreclosure, borrowers are permitted standing to challenge preexisting assignments of a deed of trust if they claim the assignment was void. But the Yvanova court clearly limited the application of this doctrine to post-foreclosure lawsuits for wrongful foreclosure, stating that their ruling was not applicable to debtors who try to prevent a non-judicial foreclosure via litigation. Although the Ninth Circuit conceded that Yvanova suggests a potential scenario in which a debtor could incur sufficient injury from the initiation of foreclosure proceedings to grant them standing, it concluded that existing California appellate opinions have consistently dismissed preemptive, pre-foreclosure actions and there is no convincing evidence the California Supreme Court would alter that trajectory. The court also noted that California’s comprehensive system for non-judicial foreclosures would be undermined if borrowers could initiate judicial action prior to a foreclosure. Such a ruling could create a landslide of litigation initiated only to delay legitimate foreclosure proceedings.

If you have any questions about the California foreclosure process or COVID-19 foreclosure restrictions, contact Geraci Law Firm for a consultation today.

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