H/T Mike

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT

DENNIS RICKY HOLMES,
Plaintiff and Appellant,

v.

HSBC BANK USA et al.,
Defendants and Respondents.

RUBIN, J. – Dissenting

I respectfully dissent.

When appellant Dennis Ricky Holmes borrowed $1 million from Countrywide
Home Loans, Inc., he gave Countrywide a promissory note. To secure repayment of his
debt to Countrywide, he also signed a deed of trust on his Los Angeles home. As of the
filing of his complaint, Holmes alleged that now-defunct Countrywide had not assigned
or transferred his promissory note or deed of trust to anyone, including respondent HSBC
Bank USA, N.A. or J.P. Morgan Alternative Loan Trust 2007-A1 for which HSBC is
trustee. Thus, as the record stands in reviewing a demurrer, lender Countrywide appears
to continue to own appellant’s note and the security interest under which he owes
payments.

Under the loan and deed of trust, only Countrywide (or its successors or assignees)
can declare Holmes’s loan in default. Paragraph 22 of the deed of trust states:
“Acceleration; Remedies. Lender shall give notice to Borrower prior to acceleration . . . .
If the default is not cured on or before the date specified in the notice, Lender at its option
may require immediate payment in full of all sums secured . . . and may invoke the power
of sale and any other remedies . . . . [¶] If Lender invokes the power of sale, Lender shall
execute or cause Trustee to execute a written notice of the occurrence of an event of
default and of Lender’s election to cause the Property to be sold. Trustee shall cause this
notice to be recorded . . . .” (Italics added.)

According to the first amended complaint, in 2010, the trustee on the deed of trust,
respondent Recontrust Company NA, conducted a nonjudicial foreclosure sale of
Holmes’s house. Although Countrywide had neither declared Holmes in default nor
invoked the trust deed’s power of sale, Recontrust issued a Trustee’s Deed Upon Sale
following the foreclosure sale to respondent HSBC as trustee for J.P. Morgan Alternative
Loan Trust 2007-A1. The record does not explain – and on demurrer we cannot resolve –
how or why J.P. Morgan Alternative Loan Trust 2007-A1 claims an interest in Holmes’s
mortgage, but I am willing to hazard a guess that it might have something to do with the
slicing, dicing, and securitizing of mortgages that was commonplace before Wall Street’s
meltdown five years ago, a meltdown that led to Countrywide’s demise and its absorption
by Bank of America. If this case were permitted to go to trial, presumably the true facts
would come out as to the HSBC/JP Morgan connection with this loan and whether
HSBC/JP Morgan was anything more than a purchaser after foreclosure.1

In August 2011, Holmes filed his first amended complaint. He alleged that
Countrywide’s failure to declare a default or invoke the power of sale meant respondent
Recontrust acted without authority when it foreclosed on his home and sold it to HSBC.
Therefore, he alleged, the Trustee’s Deed Upon Sale was void, giving HSBC no right,
title, or interest in his property. Distilled to its essence, Holmes’s complaint asserts that
respondents “with no right to do so, sold Dr. Holmes’s house to HSBC, claiming that
HSBC was the entity owed the money by Dr. Holmes (claiming that HSBC is the
beneficiary of the deed of trust).”2

Respondents HSBC and Recontrust demurred to Holmes’s first amended
complaint. They asserted he did not state a cause of action for wrongful foreclosure
because Recontrust had the authority to foreclose on Holmes’s house. Holmes’s
opposition disagreed, stating his theory of his case as follows: “The basis for this entire
action is that no money is owed from Dr. Holmes to any defendant herein, that the only
entity owed money by Dr. Holmes is Countrywide, and that Countrywide has not
declared the loan in default, nor invoked the power of sale in the deed of trust, nor caused
the trustee to execute and record a notice of default . . . .”

At the hearing on the demurrer, the court took judicial notice that Recontrust was
the trustee for Holmes’s deed of trust. The court also took judicial notice of Recontrust’s
notice of default and election to sell that preceded the foreclosure sale, and that
Recontrust recorded the notice at the behest of MERS. The court expressly declined,
however, to take judicial notice that Recontrust acted on Countrywide’s behalf. For the
purpose of Holmes’s opposition to the demurrer, the court accepted as true that
Recontrust acted without instructions from Countrywide. The court noted that “the
gravamen of the complaint is that Recontrust, as the Trustee, initiated foreclosure
proceedings without any instruction or authorization from the lender.”3
I believe the trial court accurately described the state of the pleadings but erred in
sustaining the demurrer.

California’s nonjudicial foreclosure statutory scheme promotes speed and
efficiency in foreclosing on property to enforce a debt. Nonjudicial foreclosure is
supposed to be streamlined. Thus, a homeowner traditionally cannot challenge a pending
foreclosure with a preemptive lawsuit. “California courts have refused to allow
[homeowners] to delay the nonjudicial foreclosure process by pursuing preemptive
judicial actions challenging the authority of a foreclosing ‘beneficiary’ or beneficiary’s
‘agent.’ ” (Siliga v. Mortgage Electronic Registration Systems, Inc. (2013)
219 Cal.App.4th 75, 82; Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th
497, 511-512 [same].)

But the nonjudicial foreclosure statutory scheme, which courts have sustained by
largely rejecting homeowners’ attempts to encumber the system with additional
procedural safeguards beyond those contained in the foreclosure statutes, was written in a
bygone era, and that was then and this is now. The lending/foreclosure process which is
now playing out in the courts and elsewhere bears little resemblance to what happened
with the mortgages of our grandparents. The common law evolves to meet new
challenges from new circumstances. In a quip often attributed, perhaps incorrectly, to the
renowned economist John Maynard Keynes, “When the facts change, I change my mind.
What do you do sir?” I believe we have reached the time to make clear a homeowner’s
right to challenge a foreclosure based on the foreclosing party’s absence of authority
from the beneficiary of the homeowner’s deed of trust.

There was a time not long ago when a foreclosing trustee customarily enforced
collection of a homeowner’s debt at the direction of the lender or the lender’s successor
whose place in the promissory note’s chain of title was easily ascertained and apparent to
all. Widespread securitization of mortgages in the years before the financial meltdown of
2008, an economic catastrophe triggered in part by the often unlawful repeated
packaging, selling, repackaging, and reselling of mortgages in which the Mortgage
Electronic Registration Systems (MERS) played a pivotal role, mostly unseen and poorly
understood by homeowners, investors, regulators, and the public, has changed much of
that. “MERS is a private corporation that administers the MERS System, a national
electronic registry that tracks the transfer of ownership interests and servicing rights in
mortgage loans. Through the MERS System, MERS becomes the mortgagee of record
for participating members through assignment of the members’ interests to MERS.
MERS is listed as the grantee in the official records maintained at county register of
deeds offices. The lenders retain the promissory notes, as well as the servicing rights to
the mortgages. The lenders can then sell these interests to investors without having to
record the transaction in the public record.” (Gomes, supra, 192 Cal.App.4th at p. 1151.)

In this new era, ownership of a homeowner’s promissory note and of the beneficial
interest in a deed of trust may have changed hands many times to the point where reliable
proof of who owns what is hard to come by. “A side effect of the MERS system is that a
transfer of an interest in a mortgage loan between two MERS members is unknown to
those outside the MERS system.” (Gomes, supra, 192 Cal.App.4th at p. 1151.) As one
experienced federal district court judge noted in seeming dismay, the mortgage industry’s
lending practices fueled by Wall Street’s creation of ever-newer and arcane financial
products has upended traditionally simple, clear-cut foreclosure proceedings. The federal
judge said, “This Court has dealt with numerous mortgage-related cases, and in the
process of wading through them it has learned that seemingly straightforward
transactions—nonjudicial foreclosures—are not at all routine. Indeed, all too often they
are mystifying, because of the utterly confusing assignments, substitutions, and other
transactions (some recorded, some not) conducted by a host of entities.” (Sacchi v.
Mortgage Elec. Registration Sys. (C.D.Cal. June 24, 2011 No. CV 11-1658 AHM
(CWx)) 2011 U.S.Dist. Lexis 68007, *3.)

Perhaps in recognition that the mortgage business is not what it once was, courts
have started to permit homeowners to challenge the loss of their homes on the ground
that the foreclosing party did not own the homeowner’s promissory note or security
interest and did not represent the party who did. “[O]nly the ‘true owner’ or ‘beneficial
holder’ of a Deed of Trust can bring to completion a nonjudicial foreclosure under
California law.” (Barrionuevo v. Chase Bank, N.A. (N.D.Cal. 2012) 885 F.Supp.2d 964,
972.) “Several courts have recognized the existence of a valid cause of action for
wrongful foreclosure where a party alleged not to be the true beneficiary instructs a
trustee to file a Notice of Default and initiate nonjudicial foreclosure.” (Id. at pp. 972-
973.) Among the cases in this post-2008 financial meltdown era are:

Glaski v. Bank of America (2013) 218 Cal.App.4th 1079, 1088, 1097: A
homeowner successfully “raised questions regarding the chain of ownership, by
contending that the defendants were not the lenders or beneficiaries under his deed of
trust and, therefore, did not have the authority to foreclose.”

Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1378-
1379: Deutsche Bank was not entitled to summary judgment on a wrongful foreclosure
claim because it failed to show a chain of ownership that would establish it was the true
beneficiary under the deed of trust.

Barrionuevo v. Chase Bank, N.A., supra, 885 F.Supp.2d at pages 973-974: The
court permitted a cause of action for wrongful foreclosure where a homeowner alleged
that Chase lacked authority to foreclose because Washington Mutual securitized the
subject loan, divesting itself of any interest, prior to transferring its beneficial interest to
Chase.

Sacchi v. Mortgage Elec. Registration Sys., supra, 2011 U.S.Dist. Lexis 68007,
*16-21: A homeowner stated a cause of action for wrongful foreclosure where MERS
transferred a lender’s beneficial interest in a deed to the lender’s successor after the
successor executed without authority a substitution of trustee, making the new trustee’s
notice of sale invalid.

Ohlendorf v. Am. Home Mortg. Servicing (E.D. Cal. 2010) 279 F.R.D. 575, 583:
Permitted a homeowner to pursue a claim for wrongful foreclosure where the foreclosing
party may have relied on a series of backdated transfers of a deed of trust’s beneficial
interest to pursue foreclosure. Documents showed that MERS was beneficiary under the
deed of trust at the time foreclosure proceedings began, but the notice of default listed
Deutsche Bank as beneficiary and a mortgage servicer as trustee. To rectify the “taint” of
the inconsistent recorded documents, MERS filed a backdated assignment of the
beneficial interest to the mortgage servicer, and 11 seconds later the mortgage servicer
recorded a backdated assignment of the deed of trust to Deutsche.

Javaheri v. JP Morgan Chase Bank, N.A. (C.D.Cal. June 2, 2011, No. CV10-
08185 ODW (FFMx)) 2011 U.S.Dist. Lexis 62152, *12-14: A homeowner stated a claim
for wrongful foreclosure against J.P. Morgan Chase by alleging that lender Washington
Mutual sold the homeowner’s promissory note to an investment pool, which thereafter
transferred the promissory note to another investment pool, preventing J.P. Morgan
Chase from obtaining the note when it acquired Washington Mutual’s assets because the
note was no longer owned by Washington Mutual at the time of the assignment.
I agree with the majority that these cases describe situations not completely found
in the present case. That is not my point in citing them. These authorities are useful
because they spell out the framework by which courts should analyze carefully lawsuits
challenging foreclosures.

To challenge the foreclosure of his home, Holmes must articulate specific facts
that demonstrate respondents lacked the authority to foreclose. (Siliga v. Mortgage
Electronic Registration Systems, Inc. (2013) 219 Cal.App.4th 75, 82 [homeowner
permitted to challenge foreclosure if homeowner alleges “ ‘specific factual x’ for the
claim that the foreclosure was not initiated by the correct person”]; Fontenot v. Wells
Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 263, 272 [plaintiff who sought to
demonstrate that the nonjudicial foreclosure sale was invalid was “required to allege that
[HSBC as trustee for securities trust that purportedly owned homeowner’s promissory
note] did not receive a valid assignment of the debt in any manner”].)

Here, Holmes alleges that MERS can act only when the lender (or the lender’s
successor) who owns the note invokes the power of sale. Thus, if respondent HSBC was
a successor to Countrywide and owned Holmes’s promissory note, either for itself or as
trustee for J.P. Morgan Loan Trust, Holmes concedes MERS may act for HSBC. The
central allegation of Holmes’s complaint is that HSBC does not own Holmes’s
promissory note because Countrywide did not assign, sell, or transfer it to anyone. Thus,
Holmes alleges, HSBC was an interloper that had no legal interest or claim to his note,
his deed of trust, or his home. It is not a far-fetched possibility that HSBC indeed does
not own Holmes’s promissory note – at this juncture, HSBC has not demonstrated to the
contrary – and that Holmes does not owe his debt or repayment to HSBC. (Accord
Miller v. Carrington Mortgage Services (N.D.Cal. Sept. 19, 2013, No. C-12-2282 EMC)
2013 U.S.Dist. Lexis 165957, *16-17 [permitted challenge to foreclosure based on break
in the chain of title of the loan and deed of trust].) This appeal is from a demurrer.

Whether HSBC or anyone else (other than Countrywide) had the authority to direct
Recontrust (either directly or through MERS) to foreclose cannot be resolved on the face
of Holmes’s complaint or by taking judicial notice of a promissory note and deed of trust
in which HSBC’s name does not appear. Accordingly, the trial court erred in sustaining
the demurrer to Holmes’s cause of action for wrongful foreclosure.

A final point. The majority observes that Holmes has not tendered full repayment
of his debt, which respondents asserted was a precondition to challenging the foreclosure
(and which I believe underlies the majority’s characterization of Holmes as having
committed “predatory borrowing”). Holmes’s failure to tender full repayment of his debt
does not deny him the right to seek relief. “Tender is not required where the foreclosure
sale is void, rather than voidable, such as when a plaintiff proves that the entity lacked the
authority to foreclose on the property.” (Glaski v. Bank of America, supra,
218 Cal.App.4th at p. 1100.) Holmes’s dilemma is payment to “whom”? “Several courts
have refused to apply the tender requirement where plaintiff alleges that the defendant
lacks authority to foreclose on the property and, thus, that any foreclosure sale would be
void rather than merely voidable. . . . [W]here a sale is void at the outset, rather than
voidable, the transaction is a ‘nullity with no force or effect as opposed to one which may
be set aside’ in equity.” (Rockridge Trust v. Wells Fargo, N.A. (N.D.Cal. Sept. 25, 2013,
No. C-13-01457 JCS) __ F.Supp.2d __ (2013 U.S.Dist. Lexis 139606, *84), citations
omitted.)

Holmes alleges Recontrust Company N.A. lacked authority to foreclose on his
home. Because Holmes has stated facts, subject to development through discovery and
proof at trial, sufficient to support a cause of action for wrongful foreclosure, I would
reverse the trial court’s order sustaining the demurrer.

RUBIN, J.

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