Understanding California Civil Code Section 2932.5.

25 Sep

Can a lender or their agent (ex, the loan servicer) pursue a non-judicial foreclose on real property via exercising the power of sale contained in the deed of trust, if the alleged creditor has only the note and no assignment and recording of the deed of trust (the security for payment of the note)?
Posted by Foreclosure Defense Attorney Steve Vondran on July 18, 2010 · Leave a Comment

Can a lender or their agent (ex, the loan servicer) pursue a non-judicial foreclose on real property via exercising the power of sale contained in the deed of trust, if the alleged creditor has only the note and no assignment and recording of the deed of trust (the security for payment of the note)? Understanding California Civil Code Section 2932.5.

This article is general legal information only and not intended to serve as legal advice or a substitute for legal advice. As law is constantly changing and evolving, the information may not be 100% complete, accurate or up-to-date. For specific questions about your legal liability in regard to junior loans, please contact a skilled and experienced real estate or foreclosure defense lawyer.

Steve Vondran is a California Real Estate Lawyer who is licensed to practice law in California and Arizona. He also holds a real estate broker’s license in California and Arizona and has a background in mortgage brokering and commercial real estate. HE can be reached at steve@vondranlaw.com or (877) 276-5084 begin_of_the_skype_highlighting (877) 276-5084 end_of_the_skype_highlighting.

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First, let’s get some general rules on the table that lenders and their attorneys will rely on when seeking to foreclose on your property:

(1) There is no obligation to produce the original note if a lender seeks to conduct a private trustee sale (i.e. a non-judicial foreclosure that relies on the power of sale contained in the deed of trust). In other words, do not try to file for an injunction in a court of law to fight the lender and challenge whether or not they own the loan, because you have no right to ask who is foreclosing on you in a private sale. Sad yes, but such is the law. Therefore, in a non-judicial foreclosure setting, there is no way to force them to prove they are in fact your creditor with the right to foreclose. Their mere allegation that they have the note is all they need if you challenge them at this stage, and do not expect the judge to rule otherwise.

See our Blog posting on this page for more details: http://www.foreclosuredefenseresourcecenter.com/2010/03/can-a-california-homeowner-demand-that-the-lender-or-loan-servicer-produce-the-note-as-a-foreclosure-defense-strategy/.

(2) In support of their right to foreclose non-judicially, lenders like to use the “security follows the note” argument and line of cases to support their position that if they merely allege that they have the note, then that must also mean they have the security interest (i.e. the deed of trust or mortgage) whether or not the security interest is/was specifically assigned to them – normally by MERS who originally records the security interest in as many as 60 million mortgages across the United States. For this proposition they usually cite two cases: (a) Carpenter v. Longan, 83 U.S. 271, 275 (1873); and (b) Restatement Third of Property (Mortgages) Section 5.4 (1997). Note that these pre-date most loan securitization.

LONGAN: In Longan the United States Supreme Court held: “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.” Note, this case says only that assigning the note also assigns the security (i.e. the right to foreclose). The case does NOT say that the POWER OF SALE is also assigned when a note is assigned. This is important, because without the power of sale, a lender should be relegated to conducting a JUDICIAL FORECLOSURE SALE AND NOT A PRIVATE TRUSTEE SALE USING THE POWER OF SALE.

RESTATMENT: It appears to be the general rule in California that the transfer of a mortgage note transfers with it the related mortgage – “the mortgage follows the note” as they say. The RESTATEMENT (THIRD) OF
PROPERTY (MORTGAGES) § 5.4 (1997), relied on by many lenders in their briefs, states: “a transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise.” The rationale is to avoid economic waste to the lender and avoid a windfall to the borrower if the note and mortgage are split – rendering the mortgage note unsecured. The Restatement also cites the case of Carpenter v. Longan, 83 U.S. 271 (1827) “all the authorities agree that the debt is the principal thing and the mortgage an accessory.”

These cases seem to give the lenders wide latitude to just merely claim they own the note (they never want to show it) and have the Court agree that the security naturally follows (whether or not the deed of trust was assigned, acknowledged, and recorded) and that the lender therefore has standing to lift a stay in bankruptcy court. If the lender can show proof of the original promissory note in the BK lift-stay motion, I would say I might agree. But again, they will not want to show the note, and it is up to the BK judge to demand they show this critical piece of evidence before they allow a creditor to lift the automatic stay. If you want legal authority take a look at In re Hwang, 396 B.R. 757 (C.D. California 2008. I have attached a link to my case brief on this important case: http://www.producethenoteattorney.com/2010/05/in-re-hwang-an-overview-of-motion-for-relief-from-automatic-stay-real-party-in-interest-and-constitutional-standing-requirements-in-a-california-bankruptcy-court/

But is the same true if a homeowner files for an injunction trying to prevent a lender from conducting a non-judicial foreclosure sale where there is simply no proof the lender has physical possession of the note and the chain of title does not indicate any assignment or recording of the deed of trust (i.e. the power of private sale never conveyed per 2932.5)?

Applying Constitutional law standards, States are always free to grant more rights and freedoms that the United States Supreme Court may grant, but states cannot provide less. I would argue that is what California did when it enacted Civil Code Section 2932.5 by requiring an actual assignment and recording of the deed of trust if the lender/mortgagee wants to exercise the power of sale and conduct a private trustee sale – Notice of Default / Notice of Sale – outside the watchful eye of the Court (as would be required in a judicial sale). In other words, if a lender wants to foreclose in a non-judicial private trustee sale fashion, it would seem they need both the endorsed note and physical possession of such – or, physical possession of the note endorsed in blank – AND the assignment of the deed of trust duly acknowledged and recorded as required under California Civil Code Section 2932.5. Without both, I would argue a lender is relegated to a judicial foreclosure sale only, and the Court should enjoin the attempted and threatened private trustee sale. At least that is my honest opinion and it would be great if it worked out that way. There is not a lot of case law on this curious code section.

Let’s take a look at 2932.5 and tell me if you agree. First off, here is a link to the law I am talking about so we can all take a look at it. It is short and sweet so do not be intimidated. http://law.onecle.com/california/civil/2932.5.html I have pasted the law below if you are the type of person who hates opening up links:

“Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.”

Looks to me like the power of sale (i.e. the right to pursue a private judicial foreclosure sale) requires an assignment of the deed of trust and recording of such in the County recorder’s office. If that is not what this law means, then what does it mean? In other words, if a lender conducts a private trustee sale and the chain of title reflects that there has been no assignment or recording of the deed by that lender or its agent, wouldn’t that make the private sale voidable and subject to set aside? See our blog piece on the “lender please don’t make me tender” rule before you get excited. Here is a link to that post.

http://www.foreclosuredefenseresourcecenter.com/2010/03/phoenix-foreclosure-lawyer/

Bolstering this position that the deed of trust must be assigned, acknowledged, and recorded before exercising the private power of sale in California is the case of Strike v. Transwest Discount Corp, 92 CA3d, 735 (1979). In this case the court held:

“A recorded assignment of note and deed of trust vests in the assignee all of the rights, interests of the beneficiary (Musgrave v. Renkin, 180 Cal. 785 [183 P. 145]) including authority to exercise any power of sale given the beneficiary (Civ. Code, § 858)…… The power of sale here derived from the instrument itself. (Civ. Code, § 2932; McDonald v. Smoke Creek Live Stock, 209 Cal. 231).”

Therefore, I would think you have at least a fair argument that a lender seeking to foreclose non-judicially, outside the Courts presence (as in a judicial foreclosure), that they would need to be able to establish that the deed of trust was properly assigned and recorded in addition to owning the note, although as discussed above they don’t have to show the note. If there is no proof of recorded assignment of the security in the County Recorder’s office, I would argue the lender has only the right to foreclose judicially (subject to a four year statute of limitations**), and by filing the Notice of Sale and Notice of Default, the lender has indicated that they are not willing to go that route. The problem is, if you filed for an injunction, they would probably just quickly assign and record the deed of trust killing the argument altogether. If any one else has any other opinions or interpretations, or even case law, I would love to see/hear it.

** There are time limits to file a judicial foreclosure as stated in the case of Aviel v. Ng, 161 Cal.App.4th 809, (2008) where the Court held: “The running of the statute of limitations on an obligation underlying a mortgage or deed of trust bars judicial foreclosure of the mortgage as well as an action to enforce the obligation. Cal.Civ.Code § 2911(1).”

For now, suffice it to say, this might be something to look into or argue if you are going all out and trying to save your home from foreclosure. Before filing any civil lawsuit, you should consult with a real estate or foreclosure lawyer to determine whether you have proper legal grounds to file a lawsuit.

One way this popped up in a bankruptcy case was the lender sought to record the assignment of the deed of trust while the borrower was in bankruptcy court and protected by the automatic stay. We are arguing that this is an attempt to perfect its right to non-judicially foreclose (i.e. they are trying to comply with 2932.5 to get the right to foreclose non-judicially) and that such action to perfect its interest violates Bankruptcy Code Section 362 which prohibits the following:

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

Again, just trying to give you some things to think about as you fight to save your home from foreclosure. Although the security may follow the note and that may be fine to judicially foreclose, perhaps that security interest must be assigned, acknowledged and recorded in order to preserve the right to conduct the private non-judicial trustee sale under the power of sale contained in the security. The deed of trust itself may also have some language you need to look at that that may dictate other rights.

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NOTICE: The foregoing information is general legal information only and shall not be relied upon as legal advice, or a substitution for legal advice. If you have specific legal questions about your foreclosure case you should seek out the advice of a real estate attorney. In addition, the information posted above may not be 100% complete, accurate or up-to-date. Law is always changing. The Law Offices of Steve Vondran is licensed to practice law in the state of Arizona and California and only seeks to solicit and serve Clients in these two states. Steve Vondran, Esq. is a licensed attorney and real estate broker in California and Arizona. He can be reached by email at steve@vondranlaw.com or toll free (877) 276-5084 begin_of_the_skype_highlighting (877) 276-5084 end_of_the_skype_highlighting. This is an advertisement and communication pursuant to State Bar Rules. Please do not send us private or confidential information through any of our above-listed websites. Sending us an email does not create an attorney-client relationship (only signing a legal retainer will do this). Copyright 2010 – Law Offices of Steven C. Vondran – All Rights Reserved.

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9 Responses to “Understanding California Civil Code Section 2932.5.”

  1. California Income Property October 7, 2010 at 11:40 am #

    Interesting article. Thanks for keeping us up to date with the current laws governing California Real Estate.

  2. Diana July 28, 2011 at 4:28 pm #

    I am in the process of being foreclosed upon. Is there a way that I can find out if the servicing company has satisfied these legal requirements? Option One Mortgage was the original company involved in the loan. Now American Home Mortgage Servicing, Inc is who I am suppose to be paying but Fidelity National Default resolutions has filed the foreclosure and noone can tell me who my actual lender is. So, is there a way to see if the correct documents were filed for my home to move from Option One as the company who held the loan? thanks.

    • Diana July 28, 2011 at 4:40 pm #

      UPDATE- My deed actually says recording requested by Fidelity National Title Company. The Notice of Default is from Default Resolution Network and the Notice of Sale has Fidelity National Title Company at the top of the notice but the bottom says Power default Services, Inc, Trustee. So, are they covered because the Deed says Fidelity instead of Option One who was the listed mortgage corporation on signing the loan papers. And the sale notice says Fidelity although it seems Power Default is doing the work. Both notices show the same address in San Francisco.

      • fred September 12, 2011 at 9:59 pm #

        sounds like it was securitized

    • fred September 12, 2011 at 9:57 pm #

      you need to get a copy of your assignment of trust deed

      • Diana September 12, 2011 at 11:35 pm #

        thank you fred. i have a hearing tomorrow, the 13th. I will see if this could be added to their full accounting of monies due.

  3. Randall Kelton January 15, 2012 at 7:14 am #

    I suggest, that if the client were to file a debt validation letter under 15USC1692(g), that the trustee would be estopped by statute from any further actions toward collection of the debt. Also, a demand for production of the note for inspection under UCC 3.501 would also shield the borrower from the duty to render payment until the law was complied with.

  4. Randall Kelton January 15, 2012 at 7:27 am #

    I would like to suggest a strategy and get your opinion. It seems that the real issue is “Who is the true holder?”

    By addressing any condition of the note you stipulate to it’s existence. I suggest a debt validation letter be sent under 15USC1692(g). That subjects the lender to estoppel from any attempt to collect the debt. Lender may claim that he is not a debt collector (see Wilson v Draper). Even without the argument in Wilson, until such time as the lender provides the validation required by 1692(g), the lender must be construed as a debt collector for the purposes of 1692(e) and (f).

    Nothing in state law may preempt the federal requirement in the FDCPA, therefore, any subsequent foreclosure would be forbidden by federal and voidable.

    Also, as to production of the note, UCC 3.501 would likewise subject the lender to estoppel as the borrower is authorized to cease all payment until the lender complies with the demand for production of the wet ink signature note.

Trackbacks/Pingbacks

  1. Challenging wrongful foreclosure : Foreclosure Defense Resource Center - April 12, 2011

    […] defense law.  But we just got a real nice decision that confirms what I have been saying al along (and which can be verified in previous posts I have made which go back as far as July 2010 – yo…).  While everyone was talking about California Civil Code Section 2932.5 applying ONLY to […]

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