The California Court of Appeal for the Fifth Appellate District has held that a borrower has standing to state a claim for wrongful foreclosure based on the alleged improper securitization of the borrower’s note and deed of trust. Glaski v. Bank of America, N.A., et al., 218 Cal. App. 4th 1079 (Cal. App. 5th Dist. 2013). This is a minority view. Rejecting both the holding and reasoning of the Glaski court, and adopting the majority view, the U.S. Bankruptcy Court for the Northern District of California reached a contrary conclusion. Sandri v. Capital One, N.A., et al. (In re Sandri), No. 12-3165DM, 2013 WL 5925655 (Bankr. N.D. Cal. Nov. 5, 2013).

I. Glaski v. Bank of America, N.A., et al., 218 Cal. App. 4th 1079 (Cal. App. 5th Dist. 2013)

Factual Background and Procedural History:

In mid-2005, appellant Glaski obtained a purchase money loan from lender Washington Mutual Bank, FA (“WaMu”). The loan was secured by a deed of trust against Glaski’s residence, identifying WaMu as the lender and beneficiary. In late-2005, the WaMu Mortgage Pass-Through Certificates Series 2005-AR17 Trust was formed as a securitized trust under New York law. Glaski alleged that his note, and the deed of trust securing it, were ineffectively transferred to the trust.

Glaski defaulted under the note and deed of trust by failing to make monetary installment payments when due. In December 2008, a successor trustee of the trust commenced non-judicial foreclosure proceedings, and in July 2009, the property was sold at foreclosure pursuant to the power of sale provisions in the deed of trust. Shortly thereafter, Glaski commenced wrongful foreclosure proceedings against several defendants, including JPMorgan Chase Bank, N.A., as acquirer of WaMu’s interest in the subject loan, and Bank of America, N.A., as successor trustee of the securitized trust. In his suit, Glaski asserted, among other theories, that the failure to timely and properly transfer his loan into the securitized trust in violation of the trust’s pooling and servicing agreement deprived defendants of their authority to foreclose under the deed of trust.

In September 2011, defendants demurred to Glaski’s operative complaint. Two months later, the trial court sustained defendants’ demurrer and dismissed Glaski’s wrongful foreclosure claims without leave to amend.

Glaski timely appealed.

Holding and Analysis:

Reversing the trial court’s judgment for dismissal, the court of appeal concluded that Glaski had standing to challenge the foreclosure sale based on the alleged untimely transfer of his note and deed of trust into the securitized trust.

The appeals court expressly acknowledged that in wrongful foreclosure cases based on a purportedly ineffective loan assignment, “a question often arises about the borrower’s standing to challenge the assignment of the loan … an assignment to which the borrower is not a party.” Id. at 1094. Indeed, in making its determination, the appellate court declined to follow the ruling of several federal district courts sitting in California, rejecting the post-closing date theory of invalidity on the grounds that the borrower does not have standing to challenge an assignment between two other parties. See, e.g., Aniel v. GMAC Mortgage, LLC, No. C 12–04201 SBA, 2012 WL 5389706 (N.D. Cal. Nov. 2, 2012); Almutarreb v. Bank of New York Trust Co., N.A., No. C 12–3061 EMC, 2012 WL 4371410 (N.D. Cal. Sept. 24, 2012).

Rather, the court of appeals reasoned that where the defect asserted would void the assignment – rather than make it merely voidable – a borrower retains standing to challenge an assignment of the borrower’s note and deed of trust. Turning to the question of whether the assignment was void (as opposed to voidable), the court of appeals concluded that, pursuant to New York trust law, a transfer to a securitized trust after the date of that trust’s closing rendered that transfer void.

As a result, the court of appeals held that Glaski had standing to challenge the subject foreclosure based on his factual allegations that the post-closing date attempts to transfer his deed of trust into the WaMu trust were void – notwithstanding that Glaski was neither a party to the trust agreement, nor alleged that he was a third party beneficiary thereof.

II. Sandri v. Capital One, N.A., et al. (In re Sandri), No. 12-3165DM, 2013 WL 5925655 (Bankr. N.D. Cal. Nov. 5, 2013)

Factual Background and Procedural History:

Similar to the facts in Glaski, chapter 13 debtor-plaintiff Cheryl Sandri executed a promissory note in favor of Chevy Chase Bank, F.S.B. (“Chevy Chase”) in late-2005. The loan was secured by a first priority deed of trust against Sandri’s residence. The deed of trust named Chevy Chase as the Lender and Trustee thereunder, and Mortgage Electronic Registration Systems, Inc. (“MERS”) as the “beneficiary” and nominee for the lender and lender’s successors and assigns.

After filing her bankruptcy case, Sandri commenced an adversary proceeding challenging defendants’ initiation of foreclosure proceedings against the subject property. Therein, Sandri alleged, among other things, that Chevy Chase’s securitization and assignment of her loan into the Chevy Chase Mortgage Funding LLC Mortgage–Backed Certificates, Series 2006–1 Trust was invalid because the attempted transfer took place after the closing of the trust, in violation of its pooling and servicing agreement.

In August 2013, the court heard defendants’ motion to dismiss Sandri’s complaint. After supplemental briefing addressing related case law, including the court of appeals’ Glaski decision, the Honorable Dennis Montali ultimately granted the motion to dismiss without leave to amend.

Holding and Analysis:

After a careful examination of the Glaski opinion and the U.S. Bankruptcy Appellate Panel’s (“BAP”) decision in Nordeen v. Bank of America, N.A. (In re Nordeen), 495 B.R. 468 (9th Cir. BAP 2013), the bankruptcy court declined to follow the Glaski ruling.

Observing that Glaski is an “outlier” case, Judge Montali noted that the majority of district courts in California have held that borrowers do not have standing to challenge the assignment of a loan because borrowers are not party to the assignment agreement (citing Aniel, supra, and Patel v. Mortgage Electronic Registration Systems, Inc., No. 4:13-cv-1874 KAW, 2013 WL 4029277 (N.D. Cal. Aug. 6, 2013), among other authorities). The bankruptcy court further noted that the Glaski court’s ruling flew in the face of other California appellate courts’ rulings which rejected standing claims similar to those asserted in Glaski. See, e.g., Siliga v. Mortgage Electronic Registration Systems, Inc., 219 Cal. App. 4th 75 (Cal. App. 2d Cir. 2013); Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497 (Cal. App. 4th Dist. 2013).

Judge Montali also rejected the Glaski court’s interpretation of New York trust law, remarking that New York intermediate appellate courts have repeatedly and consistently found that an act in violation of a trust agreement is voidable, not void.

Finding the BAP’s Nordeen decision persuasive, as well as the weight of post-Glaski authorities addressing the issue, the bankruptcy court concluded that Sandri had failed to state a claim upon which relief could be granted, in part because Sandri did not have standing to enforce a pooling and servicing agreement to which she was neither a party nor a third party beneficiary.

Author’s Commentary:

Following Judge Montali’s holding in Sandri, other federal courts have soundly rejected Glaski‘s holding that a borrower retains standing to challenge foreclosure proceedings based on purported violations of a trust agreement to which that borrower is not a party or beneficiary. See, e.g., Scomparin v. Deutsche Bank Nat’l Trust Co., as Trustee, et al., No. 13–04054, 2014 WL 184175 (N.D. Cal. Jan. 15, 2014); Rivac v. NDEX West LLC, No. 13-1417 PJH, 2013 WL 6662762 (N.D. Cal. Dec. 17, 2013). As demonstrated by the Sandri decision and the thoughtful opinions which cite to it, practitioners should carefully examine whether their borrower clients actually have standing to assert wrongful foreclosure claims based on alleged breaches of a securitized trust’s pooling and servicing agreement, particularly where the subject transfer is merely voidable — and not void — in nature.