The law governing California real estate investment, development, deeds of trust, and title evolves in real time | Lessons from the courtroom battlefront

A Loan In Default Can Still Be Assigned

Borrowers looking to invalidate a foreclosure sale often come up with interesting theories.

One frequent strategy is to attack the validity of a prior assignment of the underlying note and deed of trust.  As explained in previous Money and Dirt posts, that strategy usually fails.  See Has Yvanova Lost Its Mojo For Wrongful Foreclosure Plaintiffs?

In a recent opinion published by California’s Second Appellate District — Myles v. Pennymac Loan Services, LLC — the court rejected a new and “illogical” challenge to a prior loan assignment.

Facts: borrower defaults; challenges foreclosure based on prior assignment of loan while loan was in default

Gerald Myles borrowed $880,000 from Washington Mutual secured by his Los Angeles home.  Myles defaulted on the loan in the summer of 2008, and made no payments whatsoever after 2008.

Washington Mutual shut down, and the Federal Deposit Insurance Corporation (FDIC) transferred Myles’ mortgage to JPMorgan.

JPMorgan then assigned Myles’ mortgage to Pennymac, as reflected in a recorded assignment of the deed of trust.  Pennymac foreclosed in 2017.

Myles sued for wrongful foreclosure, arguing that the assignment was invalid because his loan was in default at the time of the assignment.  As framed by the Court of Appeal, Myles’ theory was that “he had the power to invalidate the mortgage assignments by deciding not to pay his mortgage.”

The trial court rejected Myles’ theory and dismissed the complaint on Pennymac’s demurrer.  Myles appealed.

Court of Appeal’s Opinion: the assignment and foreclosure were valid

The Court of Appeal affirmed, calling Myles’ arguments “illogical and incorrect.”

To succeed in a wrongful foreclosure claim, the court held, the plaintiff “must allege facts supporting a legally viable theory as to why the challenged assignment is void as a matter of law.”  Here, Myles’ allegations fell short.  The court held:

Myles’s legal argument is incorrect because he does not explain how the assignments of his mortgage are void as a matter of law.  His complaint seems to suggest that a borrower, by refusing to pay, can prevent a lender from assigning the debt.  Why?  Myles does not give a logical basis for this strange suggestion.  Neither does he support it with legal authority.  The trial court properly sustained the demurrer.

The Court acknowledged Myles’ argument that “there was a lot of monkey business in the mortgage markets in the last decade,” but that argument did not save the complaint.

Lesson

A loan in default can still be assigned.  Borrowers cannot challenge an assignment of the loan merely by arguing that they were in default at the time of the assignment.

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