In Ram, et al. v. OneWest Bank, FSB, et al. (filed 2/6/15, No. A139055), the California Court of Appeal held that a nonjudicial foreclosure sale is not void merely because the notice of default was recorded by an entity who had not yet been substituted as trustee. The court also held that because the sale was voidable, rather than void, the plaintiffs were required to allege an ability and willingness to tender their debt in addition to alleging that they were prejudiced by the irregularity in the foreclosure process.
Plaintiffs were borrowers who purchased a home subject to a deed of trust. After they defaulted on their loan, nonjudicial foreclosure proceedings were initiated, and the beneficiary of the deed of trust, OneWest Bank, FSB (“OneWest”), purchased the property at the foreclosure sale. Plaintiffs sued OneWest and other entities for wrongful foreclosure, alleging that the sale was void because the entity identified as the trustee on the notice of default, Aztec Foreclosure Corporation (“Aztec”), had not been formally substituted as trustee until after the notice of default was recorded. The trial court sustained OneWest’s demurrer and plaintiff appealed.
The Court of Appeal affirmed, offering several alternate reasons as to why the plaintiffs failed to state a claim for wrongful foreclosure. First, Civil Code section 2934a, subdivisions (b) and (c) “contemplate that an entity may be substituted as trustee even where substitution is not ‘recorded’ or ‘effected’ until after the notice of default is recorded, so long as notice is given to the trustor/borrowers.” This statutory scheme, according to the majority opinion, allowed Aztec to execute the notice of default as trustee several weeks before it actually became the trustee of record.
Second, the operative complaint alleged that Aztec had been acting as the agent of OneWest. Since Civil Code section 2924, subdivision (a)(1) authorizes a notice of default to be recorded by “the trustee, mortgagee, or beneficiary, or any of their authorized agents,” plaintiffs failed to plead “affirmative” facts showing that Aztec lacked authority to record the notice of default. The court further found that by formally substituting Aztec as trustee after Aztec recorded the notice of default, OneWest ratified Aztec’s conduct thereby “vest[ing] the agent with authority that relates back to the time when the agent performed the act.”
The final reason that demur was appropriate was because plaintiffs were required, but failed, to allege that they were prejudiced by the alleged irregularity in the foreclosure process since the sale was voidable, rather than void. The court explained that in the context of nonjudicial foreclosures, prejudice is caused when the irregularity impairs the borrower’s ability to either prevent or contest the foreclosure as a result of the information in the notice of default being misleading or incorrect. Since plaintiffs only alleged that the wrong entity signed the notice of default – and they did not allege their ability to prevent or contest the foreclosure had been impaired – they failed to sufficiently plead a claim for wrongful foreclosure. Demur was therefore appropriate.
The concurring opinion agreed with the outcome but differed on its reasoning. First, it reasoned that allegations that an entity recorded a notice of default before it had proper authority could support a wrongful foreclosure claim because nothing in the statutes confers on substituted trustees retroactive authority. Indeed, Civil Code section 2934a, subdivision (d) specifically states that a substituted trustee is authorized to act “from the date the substitution of executed.” Second, prejudice must be alleged regardless of whether a sale is considered void or voidable. Since the plaintiffs failed to allege prejudice, the trial court properly sustained OneWest’s demurrer.
This case is significant because it is the first published California case involving an entity that recorded a notice of default “as trustee” before it was named as trustee. Although their routes differed, the majority and concurring opinions arrived at the same conclusion: plaintiffs must show prejudice to state a valid claim for wrongful foreclosure predicated on an irregularity in the foreclosure process. Therefore, although the main focus of both opinions is the trustee’s purported retroactive authority, and whether the timing of the substitution of trustee made the sale void or voidable, defendants fighting wrongful foreclosure claims can cite this case for the principle that failing to allege sufficient prejudice makes a complaint subject to demur.
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