Led by partner Vincent Howard, our San Bernardino foreclosure defense lawyers frequently handle bankruptcy cases that involve foreclosures and defenses to foreclosure. In fact, some of our clients file for bankruptcy expressly to fight foreclosure, because filing for bankruptcy automatically stops all debt collection, and can give debtors the time and financial flexibility they need to catch up on mortgage payments. However, lenders can still petition the court for permission to foreclose, which generally means a fight in bankruptcy court for these protections. That was what happened in In re Cedano, a decision by the Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals. Humberto Cedano of Los Angeles filed an adversary proceeding alleging wrongful foreclosure due to invalid loan documents, but the bankruptcy court and the BAP both ruled in favor of the banks.
Cedano took out a loan on a Canoga Park home in 2007, with MERS as beneficiary and nominee for the original lender. The loan was securitized and the note assigned to a trust for the security, with Deutsche Bank as trustee and Aurora Loan Services as loan servicer. On Aug. 13, 2009, MERS substituted Cal-Western Reconveyance Corp. as trustee under the deed of trust. This was recorded on Sept. 28, but long before, on Aug. 18, Cal-Western filed a notice of default and intention to sell. Cedano and Aurora worked out a trial loan modification, but after the trial was over, Aurora declined to make it permanent. Aurora sold the property to itself at a foreclosure sale in July of 2010, and Cedano filed for Chapter 13 bankruptcy two days later. Cedano later filed an adversary proceeding, arguing that none of the companies involved in his foreclosure had the right to foreclose and that Aurora had breached its contract by failing to make the loan workout permanent. The bankruptcy court rejected most of Cedano's claims, but did find that the companies may have failed to contact him before foreclosure as required by California law. Cedano declined to amend his complaint, so the court dismissed it.
The BAP reviewed the dismissal for failure to state a claim, but ultimately upheld the bankruptcy court's decisions. On the wrongful foreclosure claim, Cedano argued that MERS had no more interest in the note or deed of trust after the loan was securitized and the note transferred. Under California law, the panel determined, MERS had authority to foreclose regardless of who had the note. Similarly, Cal-Western had authority to foreclose because state law requires only that the substitution of trustee be executed, not that it also be recorded. The BAP also rejected Cedano's claim that Cal-Western failed to contact him to discuss options as state law requires. It noted that this was difficult to reconcile with the loan modification agreement with Aurora, but also said that even if true, a violation of this state law does not automatically void a trustee's sale. The remedy the law provides is postponement of foreclosure, the court said, and no remedy is available after the foreclosure has already taken place. Because it rejected those claims, the panel also rejected Cedano's other claims, and thus upheld the bankruptcy court.
Vincent Howard and our Costa Mesa foreclosure defense attorneys would be interested to see a further appeal of this case. By ruling that there is no remedy for violations of the state foreclosure-notification law that are caught only after a foreclosure goes through, the court essentially voided this consumer protection law. After all, if borrowers have a right but can't enforce it, what use is that right? We're also disappointed that Cedano apparently abandoned his breach of contract claim as to the loan servicer declining to make his loan modification permanent. As a recent Seventh Circuit case has demonstrated, these claims may be viable under state law even if there's no private right of action under HAMP. (One might also ask why there's no way for consumers to enforce HAMP rules in the first place.) At Howard Law, P.C., our Los Angeles County foreclosure defense lawyers routinely handle these types of claims.
If you're facing a foreclosure and you'd like to discuss your legal options with an experienced attorney, don't hesitate to contact Vincent Howard and the team at Howard Law. For a consultation or to learn more, send us a message online or call 1-800-872-5925.