Compliance with California Foreclosure Recording Law: What Level of "Defect" in Foreclosure Recordings "Void" a Foreclosure Sale?

In the wake of the California foreclosure crisis, one of several arguments relied on by borrowers facing foreclosure (and their attorneys) in “wrongful foreclosure” suits has been that some aspect of the statutory foreclosure recording requirement process[1] was not “strictly complied” with, making the sale “void” and invalid, as opposed to “voidable.”

Although California courts have generally pored over the issue of whether specified “defects” in foreclosure initiating recordings (i.e., notices of default (“NOD”)) should go so far as to invalidate a sale,[2] last week the California First District Court of Appeal examined a related issue of apparent first impression.[3] The specific issue was whether a foreclosing initiating instrument was void (and the resulting sale invalidated) where the entity that recorded the NOD claimed to be the authorized “trustee” for recording, but its role as trustee was not recorded for months after it recorded the NOD.

In June 2011, OneWest Bank (“OneWest”), the beneficiary under a deed of trust, proceeded with a non-judicial foreclosure pursuant to California Civil Code section 2924 et seq. The initiating NOD was executed and recorded by Aztec Foreclosure Corporation (“Aztec”), “as trustee.” Aztec was designated in the NOD as OneWest’s point of contact regarding the NOD. OneWest, however, did not execute a substitution of trustee (“SOT”) naming Aztec as the new trustee for weeks after the NOD was recorded. Moreover, the SOT was not publically recorded for over two months after its execution.

In a suit post-foreclosure, the borrowers claimed “that the foreclosure sale was void because Aztec had not been substituted as trustee at the time it recorded the [NOD] and therefore it lacked the authority to initiate the foreclosure proceedings.”[4] The Court, examining the prior case law examining the prejudicial nature of various defects in foreclosure initiating documents, proceeded to examine the facts (and realities) of the foreclosure process applied to the borrower’s property:

• The process was not flawed:
  
  “[S]everal statutory provisions contemplate that an entity may be substituted as trustee even where substitution is not ‘recorded’ or ‘effected’ until after the [NOD] is recorded, so long as notice is given to the trustor/borrowers.”[5] This substitution was “effected” after the NOD, with notice to the borrower. And alternative grounds supporting the validity of the foreclosure were noted.

• Consistent with statute, Aztec’s authority to initiate foreclosure existed, whether or not it was correct that it was the “trustee” at the time:
  
  Aztec “was acting as the agent of OneWest,” the beneficiary.[6] “Because it is presumed the nonjudicial foreclosure was properly conducted,” borrowers must affirmatively show that the disputed trustee is not only not the trustee, but was not the agent of the beneficiary at the time.[7] Regardless of what someone may plead, “the recorded documents in this case indicate that even if Aztec lacked authority to sign the [NOD] as trustee at the time it took this action, Aztec’s authority was subsequently ratified by OneWest when it formally named Aztec as trustee several weeks later.”[8] “In order to avoid the effect of this ratification, [the borrowers] as third parties, would be required to prove they were prejudiced by Aztec’s unauthorized actions.”[9] And borrowers in undeniable default, with notice of a sale as a result of the default, are not prejudiced by the beneficiary’s agreement to have its agent or the trustee proceed with foreclosure. The alleged injury was tethered to the non-payment of the mortgage.

• The SOT was “conclusive evidence” of Aztec’s authority to foreclose:
  
  The borrowers alleged another layer of statutory non-compliance with foreclosure requirements by claiming that the recorded SOT did not attach an affidavit of mailing, in violation of statute.[10] In the deed of trust, however, the parties agreed the beneficiary could substitute the trustee without the need for confirmation by affidavit. In other words, if not compliant with statute, the substitution can be effectuated by compliance with the deed of trust. Moreover, the Court noted, a “‘substitution shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section.’”[11] “‘[C]onclusive evidence’ cannot be contradicted by any evidence to the contrary.”[12]

From these findings, the Court concluded that “this defect was not so substantial that it would render the entire foreclosure process null and void. Therefore, we find [the borrowers] were not excused from alleging prejudice ...”[13]

In conclusion, the Court offered pragmatic guidance on what types of issues constitute defects of the type that “void” an NOD: defects substantial enough that borrowers need not demonstrate their ability to tender their unpaid debt or show they were prejudiced by the “defect, omission, or failure, before the sale will be set aside.”[14] Courts, and notably the First District Court of Appeal, “focus on the nature and severity of the defect” and “its practical effect on the foreclosure process.”[15] As we wade through the remnants of the foreclosure crisis, we are affirmed in the knowledge that in California, it should take more than an argument that “statutory requirements were not ‘strictly complied with’” to invalidate a sale everyone knew was coming, for reasons not associated with any fault of the beneficiary, trustee or mortgage loan servicer.

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[1] Cal. Civ. Code §§ 2924 – 2924k.