Real Estate & Property Law

California Supreme Court permits foreclosure lawsuits over ownership of loans

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A ruling from the California Supreme Court could enable lawsuits from thousands of people who may have been wrongfully foreclosed, the Los Angeles Times reported today.

The court ruled unanimously Feb. 18 that foreclosed homeowner Tsvetana Yvanova of Los Angeles may amend her lawsuit with a wrongful foreclosure count based on the claim that an assignment of her loan was invalid. In so ruling, the court said Yvanova is not barred from suing because she was in default on the loan, or because she wasn’t a party to the assignment.

A lower court will decide whether the facts in Yvanova’s case support her contention that the company that foreclosed on her home didn’t have the legal right to foreclose. But the ruling will open the courthouse doors to people in Yvanova’s situation, according to University of California at Irvine law professor Katherine Porter.

That’s because lower courts often rule that borrowers have no standing to sue when they are in default on their loans and when they are challenging contracts to which they are not a party.

Justice Kathryn Werdegar wrote that mortgage borrowers like Yvanova have standing to challenge assignments when they are demonstrably void, which would remove the foreclosing party’s authority to foreclose, Bloomberg BNA reports.

“The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security,” Werdegar wrote.

Yvanova’s loan was assigned to a Morgan Stanley investment trust, which was the foreclosing entity. However, she argued that the trust didn’t own her loan at the time of the foreclosure, because it was closed to new loans at the time of the alleged transfer. The loan was legally transferred later, in 2011, she argued.

Attorneys for the trust said the 2011 transfer was just a technical detail, according to the Times.

It’s not clear that the decision will cause a flood of new foreclosure cases, the Times noted. For one thing, courts have not set a statute of limitations, but any such limit is likely to be three or four years. That would exclude the years when foreclosures were at their highest.

For another, tracing the ownership of the loans will be tough, according to USC Gould School of Law professor George Lefcoe. During the subprime loan boom, transfer paperwork was often sloppy, the newspaper noted.

And damages for anyone who wins such a case aren’t clear, the newspaper noted.

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