Kan v. Guild Mortgage ( 2014 )

Filed 9/25/14 Modified and certified for publication 10/15/14 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
LINDSAY T. KAN, as Trustee, etc., B254007
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. PC053905)
v.
GUILD MORTGAGE COMPANY,
Defendant and Respondent;
THE BANK OF NEW YORK MELLON,
as Trustee, etc., et al.,
Inteveners.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Michael Mink, Judge. Affirmed.
Paul Kujawsky for Plaintiff and Appellant.
Severson & Werson, Jan T. Chilton, Kerry W. Franich for Inteveners.
No appearance for Defendant and Respondent.
___________________________________________________
Appellant’s real property loan is in default. Appellant seeks to quiet title and
avoid foreclosure by alleging that the deed of trust on the property was improperly
securitized and that the beneficiary lacks authority to foreclose. Because California’s
nonjudicial foreclosure statutes provide no basis for appellant’s claim, we find that the
trial court properly sustained the demurrer to appellant’s complaint without leave to
amend.
BACKGROUND
In July 2007, Lindsay Kan executed a first note for $516,000, secured by a deed of
trust on real property in Stevenson Ranch (the property). The same day, he executed a
second note in the amount of $64,500, also secured by a deed of trust on the property.
Both trust deeds named Guild Mortgage Company as the lender, Guild Administration
Corp. as the trustee, and Mortgage Electronic Registration Systems, Inc. (MERS) as the
beneficiary acting as nominee for the lender, its successors, and assigns.
More than two years later—based on what is characterized in appellant’s opening
brief as “spectacularly unsound and specious advice”—Kan recorded two instruments
that purported to “modify” the deeds of trust to “correctly reflect” an indebtedness of zero
dollars. The instruments stated the deeds of trust were “modified to eliminate any further
payments, [and] to reflect a status of ‘paid as agreed.’” Shortly afterward, PCYA Trust,
of which Kan is the trustee, recorded two documents labeled “full reconveyance,”
purporting to reconvey both trust deeds to Lindsay Kan and declare them “void at
inception.” Kan then deeded the property to the PCYA Trust.
In October 2010, in spite of Kan’s maneuverings, MERS substituted Recontrust
Company, N.A. (Recontrust) as the trustee under the first deed of trust and assigned all
beneficial interest under the deed of trust to The Bank of New York Mellon (BONY), as
trustee for CWALT, Inc., Alternative Loan Trust 2007-OA11 Mortgage Pass-Through
Certificates, Series 2007-OA11 (CWALT).1 Recontrust recorded a notice of default on
1 An essentially identical substitution and assignment form was filed on
December 22, 2010.
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December 8, 2010. It served a notice of trustee’s sale in March 2012. The foreclosure
sale, however, has not yet occurred.
The second deed of trust was assigned by MERS to Bank of America, N.A.
(BofA) in July 2012.
In October 2012, Kan, as trustee of the PCYA Trust, filed a quiet title complaint
against Guild Mortgage Company and “all persons or entities unknown, claiming any
legal or equitable right, title, estate, lien or interest in the property.” The complaint
alleged, among other things, that the loans secured by the property were securitized,
resulting in defendants’ interest in the property being extinguished, relinquished, or
discharged. It further claimed that all loan debt had been fully satisfied. In addition, the
complaint alleged that the securitization process was deficient because the transfer of the
promissory notes to a securitized trust did not comply with the terms of the servicing and
pooling agreement governing the securitized trust.
Although the complaint alleged that the first trust deed had been assigned to
BONY, and an attachment to the complaint showed that the second trust deed was
assigned to BofA, neither entity was listed as a defendant. As a result, respondents
BONY and BofA, along with respondent BANA LAS HFI 2ND LIEN HELOANS
(BANA), moved to intervene in the action. According to the application for leave to
intervene, BONY is the current beneficiary of the first deed of trust, BANA is the current
beneficiary of the second deed of trust, and BofA is the current servicer of the loans. The
trial court granted leaved to intervene.
Respondents filed a demurrer to the complaint. Kan opposed the demurrer. The
trial court granted requests for judicial notice made in connection with the demurrer and
sustained the demurrer without leave to amend.
Judgment was entered in favor of respondents. Kan timely appealed.
DISCUSSION
I. Standard of Review
We review the ruling sustaining the demurrer de novo, exercising independent
judgment as to whether the complaint states a cause of action as a matter of law. (Desai
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v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115.) We give the complaint a
reasonable interpretation, assuming that all properly pleaded material facts are true, but
not assuming the truth of contentions, deductions, or conclusions of law. (Aubry v. Tri-
City Hospital Dist. (1992) 2 Cal.4th 962, 967.) We may consider matters that are
properly judicially noticed. (Four Star Electric, Inc. v. F & H Construction (1992) 7
Cal.App.4th 1375, 1379.)
A demurrer tests the legal sufficiency of the complaint. (Hernandez v. City of
Pomona (1996) 49 Cal.App.4th 1492, 1497.) Accordingly, we are not concerned with the
difficulties a plaintiff may have in proving the claims made in the complaint. (Desai v.
Farmers Ins. Exchange, supra, 47 Cal.App.4th at p. 1115.) We are also unconcerned
with the trial court’s reasons for sustaining the demurrer, as it is the ruling, not the
rationale, that is reviewable. (Mendoza v. Town of Ross (2005) 128 Cal.App.4th 625,
631; Sackett v. Wyatt (1973) 32 Cal.App.3d 592, 598, fn. 2.)
When a demurrer is sustained without leave to amend, “we decide whether there is
a reasonable possibility that the defect can be cured by amendment: if it can be, the trial
court has abused its discretion and we reverse; if not, there has been no abuse of
discretion and we affirm. [Citations.] The burden of proving such reasonable possibility
is squarely on the plaintiff. [Citation.]” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) A
plaintiff may show for the first time on appeal how amendment would cure the
complaint’s defects. (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93
Cal.App. 4th 700, 711.)
II. Proposed Amendments
The complaint contained a number of theories by which Kan claimed he was the
sole party that had valid title to the property. On appeal, Kan abandons the majority of
these theories, and argues only that he can state a valid cause of action for quiet title
based on allegations that the attempt to transfer the first deed of trust to the mortgage-
backed “investment” trust (CWALT) did not comply with the trust’s servicing and
pooling agreement and was therefore void.
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Kan proposes that, upon remand, he be allowed to amend his complaint to make
the following allegations: the investment trust was created under New York law; the trust
is subject to the requirements imposed by the Internal Revenue Code on real estate
investment trusts; New York law requires that all trust deeds be transferred to such an
investment trust before the trust closes; the transfer of the subject trust deed to the
investment trust occurred after the trust closed in 2007; and the attempted transfer to the
investment trust was therefore void. Kan asserts these allegations sufficiently plead a
right to quiet title in his favor, including a finding that respondents have no right, title, or
interest in the property.
III. Analysis
Kan’s argument is not a novel one. The wave of real estate loan defaults over the
past decade has given rise to a number of creative theories developed by individuals
hoping to avoid foreclosure. The argument that a defendant lacks standing to foreclose
because of an improper securitization process has recently become particularly popular.
This argument was addressed in Jenkins v. JPMorgan Chase Bank, N.A. (2013)
216 Cal App.4th 497, 511 (Jenkins). The plaintiff alleged that her loan was pooled with
other home loans in a securitized investment trust in a manner violating the trust’s
pooling and servicing agreement, thereby resulting in extinguishment of any security
interest in her home. The Jenkins court found that the plaintiff’s allegations were
insufficient to state a cause of action because “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.” (Id. at p. 511.) California’s
nonjudicial foreclosure scheme has an “‘“exhaustive nature,”’” which is intended “‘“(1)
to provide the [beneficiary-creditor] with a quick, inexpensive and efficient remedy
against a defaulting [trustor-debtor]; (2) to protect the [trustor-debtor] from wrongful loss
of the property; and (3) to ensure that a properly conducted sale is final between the
parties and conclusive as to a bona fide purchaser.”’” (Id. at pp. 509-510, quoting Gomes
v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1154 (Gomes).) A
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preemptive action “seeks to create ‘the additional requirement’ that the foreclosing entity
must ‘demonstrate in court that it is authorized to initiate a foreclosure’ before the
foreclosure can proceed,” a process not contemplated by the nonjudicial foreclosure
statutes. (Jenkins, supra, 216 Cal App.4th at pp. 512-513, quoting Gomes, supra,192
Cal.App.4th at p. 1154.) The Jenkins court distinguished a factual situation involving
misconduct in a nonjudicial foreclosure sale, which can provide a basis for a valid
postforeclosure cause of action, from the plaintiff’s preemptive action, which improperly
sought to stop or delay the nonjudicial foreclosure process. (Jenkins, at p. 512.)
Additionally, the Jenkins court found that the plaintiff lacked standing to challenge
purported violations of the investment trust’s pooling and servicing agreement. (Jenkins,
supra, 216 Cal.App.4th 497, 514-515.) The court reasoned that the relevant parties to the
pooling process were the parties that transferred the promissory notes and the third party
acquirers of the notes, not the plaintiff, who was an unrelated third party to the
securitization. (Id. at p. 515.) Even if transfers were invalid, the plaintiff would not be
injured because she remained obligated under the promissory note; rather, an injured
party would be one who incorrectly believed it held a beneficial interest in the promissory
note. (Ibid.) Accordingly, the Jenkins court found that the demurrer to the plaintiff’s
complaint was properly sustained without leave to amend. (Id. at pp. 503, 517.)
Kan argues that Jenkins was decided incorrectly and that we instead should follow
Glaski v. Bank of America (2013) 218 Cal.App.4th 1079 (Glaski). The plaintiff in Glaski
alleged that his loan was transferred to a securitized trust after the trust’s closing date,
thus rendering the transfer ineffective. As Kan seeks to allege in an amended complaint,
the Glaski plaintiff alleged that the late transfer violated the trust’s pooling and servicing
agreement and was void because, if effectuated, it would have caused the trust to lose tax
advantages accruing to real estate mortgage investment conduit (REMIC) trusts; federal
tax code provisions require that mortgages be transferred to such trusts within a certain
time frame, usually 90 days after a trust is created. (Id. at pp. 1093-1095.) The court
held that a plaintiff could properly allege a valid cause of action for wrongful disclosure
by stating facts showing the defendant who invoked the power of sale was not the true
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beneficiary, and that the plaintiff’s allegations detailing the faulty transfer to the REMIC
trust met this pleading standard. (Id. at p. 1094.)
The Glaski court further found that a borrower has standing to contest a defective
assignment to a real estate investment trust, explicitly rejecting the view that the
borrower’s status as a nonparty or non-third party beneficiary to an assignment agreement
prevents the borrower from challenging the transfer. (218 Cal.App.4th at pp. 1094-
1095.) Analyzing New York law, under which the investment trust was formed, the court
held that a postclosing date assignment into such a trust is void. (Id. at p. 1096.) The
court acknowledged that other courts, analyzing the same law, have held that postclosing
transfers are merely voidable, not void. (Id. at pp. 1096-1097, citing Calderon v. Bank of
America, N.A. (W.D.Tex. 2013) 941 F.Supp.2d 753, 767; Bank of America National
Association v. Bassman FBT, L.L.C. (2012) 2012 ILApp(2d) 110729, 981 N.E.2d 1, 8.)
Differing with these opinions, the Glaski court wrote: “In this case, however, we believe
applying the statute to void the attempted transfer is justified because it protects the
beneficiaries of the [investment trust] from the potential adverse tax consequence of the
trust losing its status as a REMIC trust under the Internal Revenue Code.” (Id. at p.
1097.) According to the court, the status of the assignment as void (rather than voidable)
gave the plaintiff standing to challenge it. (Id. at p. 1098.) The court therefore reversed
the trial court’s order sustaining the demurrer to the wrongful foreclosure claim. (Id. at p.
1100.)
We disagree with Kan that following Glaski is appropriate here. Critically, the
primary claim at issue in Glaski was one for wrongful foreclosure. In contrast, Kan seeks
to assert a preforeclosure cause of action for quiet title. Although Glaski discussed
Gomes, supra, 192 Cal.App.4th 1149, and distinguished it in certain respects, Glaski did
not take issue with Gomes’s holding that a preforeclosure, preemptive action is not
authorized by the nonjudicial foreclosure statutes because it creates an additional
requirement that a foreclosing entity first demonstrate in court that it is entitled to
foreclose. (See Gomes, supra, 192 Cal.App.4th 1149, 1154-1156.) As explained in
Jenkins (a case not discussed in the Glaski opinion), allowing a plaintiff to assert a
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preemptive action like the one Kan proposes “would result in the impermissible
interjection of the courts into a nonjudicial scheme enacted by the California
Legislature.” (Jenkins, supra, 216 Cal.App.4th 497, 513.) Further, it “‘would be
inconsistent with the policy behind nonjudicial foreclosure of providing a quick,
inexpensive and efficient remedy.’” (Id. at p. 512, quoting Gomes, supra, 192
Cal.App.4th 1149, 1154, fn. 5.) Jenkins involved allegations essentially identical to
Kan’s proposed amended allegations—that the subject deed of trust was not assigned to
the investment trust prior to its closing date. We agree with Jenkins that such allegations
do not give rise to a viable preemptive action that overrides California’s nonjudicial
foreclosure rules.2
Although not necessary to our decision, we note that many courts have criticized
Glaski’s finding that the plaintiff had standing to challenge alleged violations of the
securitization process. Kan points out that Glaski was followed in two unpublished
district court cases: Engler v. ReconTrust Co. (C.D.Cal., Dec. 20, 2013, No. CV12-1165
CBM) 2013 U.S. Dist. LEXIS 179950) and Kling v. Bank of America, N.A. (C.D.Cal.,
Sept. 4, 2013, No. CV13-2648 DSF) 2013 U.S. Dist. LEXIS 184981.)3 The vast majority
of courts analyzing the case, however, have found it unpersuasive. (See, e.g., Miller v.
JP Morgan Chase Bank N.A. (N.D.Cal., Aug. 8, 2014, No. 5:13-CV-03192-EJD) 2014
U.S. Dist. LEXIS 110038, *11 [“Courts in this District have expressly rejected Glaski”];
2 Kan’s cursory argument that BANA failed to prove it acquired any interest in the
second deed of trust fails. BANA was not required to prove anything in filing the
demurrer. On demurrer, it is the pleadings, not the evidence, at issue. In any event,
assignment of a deed of trust need not be recorded. (Calvo v. HSBC Bank USA, N.A.
(2011) 199 Cal.App.4th 118, 122; Fontenot v. Wells Fargo Bank, N.A. (2011) 198
Cal.App.4th 256, 272.) Kan does not allege, nor does he propose to allege, that the
second deed of trust was never assigned to BANA. Furthermore, to the extent that Kan
claims that the assignment to BANA was the result of a defective securitization process,
the argument fails for the reasons discussed throughout this opinion.
3 Unpublished federal district court cases are citable as persuasive authority.
(Aleman v. Airtouch Cellular (2012) 209 Cal.App.4th 556, 576, fn. 8.)
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Tavares v. Nationstar Mortgage LLC (S.D.Cal., July 14, 2014, No. 14CV216-WQH)
2014 U.S. Dist. LEXIS 95537, *9 [finding Glaski’s reasoning unpersuasive]; Zapata v.
Wells Fargo Bank, N.A. (N.D.Cal., Dec. 10, 2013, No. C 13-04288 WHA) 2013 U.S.
Dist. LEXIS 173187, *5 [“Every court in this district that has evaluated Glaski has found
it is unpersuasive and not binding authority”]; Davies v. Deutsche Bank National Trust
Co. (In re Davies) (9th Cir. Mar. 24, 2014, No. 12-60003), 2014 U.S. App. LEXIS 5416,
*4-5 [following Jenkins instead of Glaski]; Rajamin v. Deutsche Bank Nat'l Trust Co. (2d
Cir. N.Y. 2014) 757 F.3d 79 [disagreeing with Glaski’s interpretation of New York law;
finding improper transfer into investment trust is voidable, not void].)
Indeed, the one published California appellate decision that analyzed Glaski in the
context of a preforeclosure lawsuit explicitly disagreed with the decision.4 The plaintiff
in Keshtgar v. U.S. Bank, N.A. (2014) 226 Cal.App.4th 1201 (Keshtgar) asserted a claim
similar to the one at issue here. The Court of Appeal, citing to Gomes and Jenkins, found
no basis under the nonjudicial foreclosure scheme for the plaintiff to challenge the
authority of the party initiating foreclosure. (Keshtgar, at pp. 1205-1206.) The court
distinguished Glaski, noting that it was a postforeclosure action for damages, not an
action to prevent foreclosure. (Keshtgar, at p. 1206.) The court went further, however,
and rejected Glaski’s holding that a borrower has standing to challenge an assignment,
finding that an assignment of a deed of trust and promissory note do not change the
borrower’s obligations and therefore do not create prejudice. (Keshtgar, at p. 1207.)
While we acknowledge the extent of this criticism, we see no reason to wade into
the issue of whether Glaski was correctly decided, because the opinion has no direct
applicability to this preforeclosure action. Jenkins’s holding denying this sort of
preemptive lawsuit is directly applicable, and its reasoning is persuasive. Kan does not
4 Yvanova v. New Century Mortgage Corp. (2014) 226 Cal.App.4th 495, a wrongful
foreclosure case, was recently depublished, as the California Supreme Court granted
review on the issue of whether, in a wrongful foreclosure case, a borrower has standing to
challenge a defective assignment of a note and deed of trust that allegedly rendered the
assignment void.
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dispute that the terms of the deed of trust allowed for its assignment. Nor does Kan
dispute that the subject loan is in default. Because California’s nonjudicial foreclosure
statutes provide Kan with no basis to challenge the authority of the entity initiating the
foreclosure process, respondents’ demurrer was properly sustained.
DISPOSITION
The judgment is affirmed.
BOREN, P.J.
We concur:
ASHMANN-GERST, J.
FERNS, J.*
_______________________________________________________________
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice
pursuant to article VI, section 6 of the California Constitution.
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Filed 10/15/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
LINDSAY T. KAN, as Trustee, etc., B254007
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. PC053905)
v.
ORDER MODIFYING OPINION
GUILD MORTGAGE COMPANY, AND CERTIFYING OPINION
FOR PUBLICATION
Defendant and Respondent;
[No Change in Judgment]
THE BANK OF NEW YORK MELLON,
as Trustee, etc., et al.,
Inteveners.
THE COURT:*
The opinion filed herein on September 25, 2014, is modified as follows:
Page 6, second to last line, replace the word “disclosure” with “foreclosure,” so that the
entire sentence on pages 6-7 reads: The court held that a plaintiff could properly allege a
valid cause of action for wrongful foreclosure by stating facts showing the defendant who
invoked the power of sale was not the true beneficiary, and that the plaintiff’s allegations
* BOREN, P.J. ASHMANN-GERST, J. FERNS, J. .†
† Judge of the Los Angeles Superior Court, assigned by the Chief Justice
pursuant to article VI, section 6 of the California Constitution.
detailing the faulty transfer to the REMIC trust met this pleading standard. (Id. at p.
1094.)
This modification does not effect a change in judgment.
At the time of filing, this opinion was not certified for publication in the Official
Reports.
For good cause it now appears that the opinion, as modified herein, should be
published in the Official Reports and it is so ordered.
2