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Kan.v. Guild Mortgage Co.

California Court of Appeals, Second District, Second Division

September 25, 2014

LINDSAY T. KAN, as Trustee, etc., Plaintiff and Appellant,
GUILD MORTGAGE COMPANY, Defendant and Respondent THE BANK OF NEW YORK MELLON, as Trustee, etc., et al., Interveners and Respondents.

[As modified Sept. 25, 2014.]

APPEAL from a judgment of the Superior Court of Los Angeles County, No. PC053905 Michael Mink, Judge.

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[Copyrighted Material Omitted]

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Paul Kujawsky for Plaintiff and Appellant.

No appearance for Defendant and Respondent.

Severson & Werson, Jan T. Chilton and Kerry W. Franich for Interveners and Respondents.



Appellant’s real property loan is in default. Appellant seeks to quiet title and avoid foreclosure by alleging that the deed of trust on the property was improperly securitized and that the beneficiary lacks authority to foreclose. Because California’s nonjudicial foreclosure statutes provide no basis for appellant’s claim, we find that the trial court properly sustained the demurrer to appellant’s complaint without leave to amend.

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In July 2007, Lindsay T. Kan executed a first note for $516, 000, secured by a deed of trust on real property in Stevenson Ranch (the property). The same day, he executed a second note in the amount of $64,500, also secured by a deed of trust on the property. Both trust deeds named Guild Mortgage Company as the lender, Guild Administration Corp. as the trustee, and Mortgage Electronic Registration Systems, Inc. (MERS) as the beneficiary acting as nominee for the lender, its successors, and assigns.

More than two years later—based on what is characterized in appellant’s opening brief as “spectacularly unsound and specious advice”—Kan recorded two instruments that purported to “modify” the deeds of trust to “correctly reflect” an indebtedness of zero dollars. The instruments stated the deeds of trust were “modified to eliminate any further payments, [and] to reflect a status of ‘paid as agreed.’” Shortly afterward, PCYA Trust, of which Kan is the trustee, recorded two documents labeled “full reconveyance, ” purporting to reconvey both trust deeds to Lindsay Kan and declare them “void at inception.” Kan then deeded the property to the PCYA Trust.

In October 2010, in spite of Kan’s maneuverings, MERS substituted Recontrust Company, N.A. (Recontrust) as the trustee under the first deed of trust and assigned all beneficial interest under the deed of trust to The Bank of New York Mellon (BONY), as trustee for CWALT, Inc., Alternative Loan Trust 2007-OA11 Mortgage Pass-Through Certificates, Series 2007-OA11 (CWALT).[1] Recontrust recorded a notice of default on December 8, 2010. It served a notice of trustee’s sale in March 2012. The foreclosure sale, however, has not yet occurred.

The second deed of trust was assigned by MERS to Bank of America, N.A. (BofA) in July 2012.

In October 2012, Kan, as trustee of the PCYA Trust, filed a quiet title complaint against Guild Mortgage Company and “all persons or entities unknown, claiming any legal or equitable right, title, estate, lien or interest in the property.” The complaint alleged, among other things, that the loans secured by the property were securitized, resulting in defendants’ interest in the property being extinguished, relinquished, or discharged. It further claimed that all loan debt had been fully satisfied. In addition, the complaint alleged that the securitization process was deficient because the transfer of the promissory notes to a securitized trust did not comply with the terms of the servicing and pooling agreement governing the securitized trust.

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Although the complaint alleged that the first trust deed had been assigned to BONY, and an attachment to the complaint showed that the second trust deed was assigned to BofA, neither entity was listed as a defendant. As a result, respondents BONY and BofA, along with respondent BANA LAS HFI 2ND LIEN HELOANS (BANA), moved to intervene in the action. According to the application for leave to intervene, BONY is the current beneficiary of the first deed of trust, BANA is the current beneficiary of the second deed of trust, and BofA is the current servicer of the loans. The trial court granted leaved to intervene.

Respondents filed a demurrer to the complaint. Kan opposed the demurrer. The trial court granted requests for judicial notice made in connection with the demurrer and sustained the demurrer without leave to amend.

Judgment was entered in favor of respondents. Kan timely appealed.


I. Standard of Review

We review the ruling sustaining the demurrer de novo, exercising independent judgment as to whether the complaint states a cause of action as a matter of law. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115 [55 Cal.Rptr.2d 276].) We give the complaint a reasonable interpretation, assuming that all properly pleaded material facts are true, but not assuming the truth of contentions, deductions, or conclusions of law. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967 [9 Cal.Rptr.2d 92, 831 P.2d 317].") We may consider matters that are properly judicially noticed. (Four Star Electric, Inc. v. F & H Construction (1992) 7 Cal.App.4th 1375, 1379 [10 Cal.Rptr.2d 1].)

A demurrer tests the legal sufficiency of the complaint. (Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497 [57 Cal.Rptr.2d 406].) Accordingly, we are not concerned with the difficulties a plaintiff may have in proving the claims made in the complaint. (Desai v. Farmers Ins. Exchange, supra, 47 Cal.App.4th at p. 1115.) We are also unconcerned with the trial court’s reasons for sustaining the demurrer, as it is the ruling, not the rationale, that is reviewable. (Mendoza v. Town of Ross (2005) 128 Cal.App.4th 625, 631 [27 Cal.Rptr.3d 452]; Sackett v. Wyatt (1973) 32 Cal.App.3d 592, 598, fn. 2 [108 Cal.Rptr. 219].)

When a demurrer is sustained without leave to amend, “we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there

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has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58].) A plaintiff may show for the first time on appeal how amendment would cure the complaint’s defects. (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 711 [113 Cal.Rptr.2d 399].)

II. Proposed Amendments

The complaint contained a number of theories by which Kan claimed he was the sole party that had valid title to the property. On appeal, Kan abandons the majority of these theories, and argues only that he can state a valid cause of action for quiet title based on allegations that the attempt to transfer the first deed of trust to the mortgage-backed “investment” trust (CWALT) did not comply with the trust’s servicing and pooling agreement and was therefore void.

Kan proposes that, upon remand, he be allowed to amend his complaint to make the following allegations: the investment trust was created under New York law; the trust is subject to the requirements imposed by the Internal Revenue Code on real estate investment trusts; New York law requires that all trust deeds be transferred to such an investment trust before the trust closes; the transfer of the subject trust deed to the investment trust occurred after the trust closed in 2007; and the attempted transfer to the investment trust was therefore void. Kan asserts these allegations sufficiently plead a right to quiet title in his favor, including a finding that respondents have no right, title, or interest in the property.

III. Analysis

Kan’s argument is not a novel one. The wave of real estate loan defaults over the past decade has given rise to a number of creative theories developed by individuals hoping to avoid foreclosure. The argument that a defendant lacks standing to foreclose because of an improper securitization process has recently become particularly popular.

This argument was addressed in Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 511 [156 Cal.Rptr.3d 912] (Jenkins). The plaintiff alleged that her loan was pooled with other home loans in a securitized investment trust in a manner violating the trust’s pooling and servicing agreement, thereby resulting in extinguishment of any security interest in her home. The Jenkins court found that the plaintiff’s allegations were insufficient to state a cause of action because “California courts have refused to delay the nonjudicial foreclosure process by allowing trustor-debtors to pursue preemptive judicial actions to challenge the right, power,

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and authority of a foreclosing ‘beneficiary’ or beneficiary’s ‘agent’ to initiate and pursue foreclosure.” (Id. at p. 511.) California’s nonjudicial foreclosure scheme has an “‘“exhaustive nature, ”’” which is intended “‘“(1) to provide the [beneficiary-creditor] with a quick, inexpensive and efficient remedy against a defaulting [trustor-debtor]; (2) to protect the [trustor-debtor] from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.”’” (Id. at pp. 509-510, quoting Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1154 [121 Cal.Rptr.3d 819] (Gomes).) A preemptive action “seeks to create ‘the additional requirement’ that the foreclosing entity must ‘demonstrate in court that it is authorized to initiate a foreclosure’ before the foreclosure can proceed, ” a process not contemplated by the nonjudicial foreclosure statutes. (Jenkins, supra, 216 Cal.App.4th at pp. 512-513, quoting Gomes, supra, 192 Cal.App.4th at p. 1154, fn. 5.) The Jenkins court distinguished a factual situation involving misconduct in a nonjudicial foreclosure sale, which can provide a basis for a valid postforeclosure cause of action, from the plaintiff’s preemptive action, which improperly sought to stop or delay the nonjudicial foreclosure process. (Jenkins, at p. 512.)

Additionally, the Jenkins court found that the plaintiff lacked standing to challenge purported violations of the investment trust’s pooling and servicing agreement. (Jenkins, supra, 216 Cal.App.4th 497, 514-515.) The court reasoned that the relevant parties to the pooling process were the parties that transferred the promissory notes and the third party acquirers of the notes, not the plaintiff, who was an unrelated third party to the securitization. (Id. at p. 515.) Even if transfers were invalid, the plaintiff would not be injured because she remained obligated under the promissory note; rather, an injured party would be one who incorrectly believed it held a beneficial interest in the promissory note. (Ibid.) Accordingly, the Jenkins court found that the demurrer to the plaintiff’s complaint was properly sustained without leave to amend. (Id. at pp. 503, 517.)

Kan argues that Jenkins was decided incorrectly and that we instead should follow Glaski v. Bank of America (2013) 218 Cal.App.4th 1079 [160 Cal.Rptr.3d 449] (Glaski). The plaintiff in Glaski alleged that his loan was transferred to a securitized trust after the trust’s closing date, thus rendering the transfer ineffective. As Kan.seeks to allege in an amended complaint, the Glaski plaintiff alleged that the late transfer violated the trust’s pooling and servicing agreement and was void because, if effectuated, it would have caused the trust to lose tax advantages accruing to real estate mortgage investment conduit (REMIC) trusts; federal tax code provisions require that mortgages be transferred to such trusts within a certain time frame, usually 90 days after a trust is created. (Id. at pp. 1093-1095.) The court held that a plaintiff could properly allege a valid cause of action for wrongful foreclosure

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by stating facts showing the defendant who invoked the power of sale was not the true beneficiary, and that the plaintiff’s allegations detailing the faulty transfer to the REMIC trust met this pleading standard. (Id. at p. 1094.)

The Glaski court further found that a borrower has standing to contest a defective assignment to a real estate investment trust, explicitly rejecting the view that the borrower’s status as a nonparty or non-third party beneficiary to an assignment agreement prevents the borrower from challenging the transfer. (Glaski, supra, 218 Cal.App.4th at pp. 1094-1095.) Analyzing New York law, under which the investment trust was formed, the court held that a postclosing date assignment into such a trust is void. (Id. at p. 1096.) The court acknowledged that other courts, analyzing the same law, have held that postclosing transfers are merely voidable, not void. (Id. at pp. 1096-1097, citing Calderon v. Bank of America, N.A. (W.D.Tex. 2013) 941 F.Supp.2d 753, 767; Bank of America National Association v. Bassman FBT, L.L.C. (2012) 2012 ILApp(2d) 110729, 981 N.E.2d 1, 8, 366 Ill.Dec. 936].) Differing with these opinions, the Glaski court wrote: “In this case, however, we believe applying the statute to void the attempted transfer is justified because it protects the beneficiaries of the [investment trust] from the potential adverse tax consequence of the trust losing its status as a REMIC trust under the Internal Revenue Code.” (Glaski, at p. 1097.) According to the court, the status of the assignment as void (rather than voidable) gave the plaintiff standing to challenge it. (Id. at p. 1098.) The court therefore reversed the trial court’s order sustaining the demurrer to the wrongful foreclosure claim. (Id. at p. 1100.)

We disagree with Kan that following Glaski is appropriate here. Critically, the primary claim at issue in Glaski was one for wrongful foreclosure. In contrast, Kan seeks to assert a preforeclosure cause of action for quiet title. Although Glaski discussed Gomes, supra, 192 Cal.App.4th 1149, and distinguished it in certain respects, Glaski did not take issue with Gomes’s holding that a preforeclosure, preemptive action is not authorized by the nonjudicial foreclosure statutes because it creates an additional requirement that a foreclosing entity first demonstrate in court that it is entitled to foreclose. (See Gomes, supra, 192 Cal.App.4th 1149, 1154-1156.) As explained in Jenkins (a case not discussed in the Glaski opinion), allowing a plaintiff to assert a preemptive action like the one Kan.proposes “would result in the impermissible interjection of the courts into a nonjudicial scheme enacted by the California Legislature.” (Jenkins, supra, 216 Cal.App.4th 497, 513.) Further, it “‘would be inconsistent with the policy behind nonjudicial foreclosure of providing a quick, inexpensive and efficient remedy.’” (Id. at p. 512, quoting Gomes, supra, 192 Cal.App.4th 1149, 1154, fn. 5.) Jenkins involved allegations essentially identical to Kan’s proposed amended allegations—that the subject deed of trust was not assigned to the investment trust

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prior to its closing date. We agree with Jenkins that such allegations do not give rise to a viable preemptive action that overrides California’s nonjudicial foreclosure rules.[2]

Although not necessary to our decision, we note that many courts have criticized Glaski’s finding that the plaintiff had standing to challenge alleged violations of the securitization process. Kan points out that Glaski was followed in two unpublished district court cases: Engler v. ReconTrust Co. (C.D.Cal., Dec. 20, 2013, No. CV12-1165 CBM (SPx)) 2013 U.S. Dist. Lexis 179950) and Kling v. Bank of America, N.A. (C.D.Cal., Sept. 4, 2013, No. CV13-2648 DSF (CWx)) 2013 U.S. Dist. Lexis 184981.)[3] The vast majority of courts analyzing the case, however, have found it unpersuasive. (See, e.g., Miller v. JP Morgan Chase Bank N.A. (N.D.Cal., Aug. 8, 2014, No. 5:13-CV-03192-EJD) 2014 U.S. Dist. Lexis 110038, pp. *11, *12 [“Courts in this District have expressly rejected Glaski”]; Tavares v. Nationstar Mortgage LLC (S.D.Cal., July 14, 2014, No. 14CV216-WQH-NLS) 2014 U.S. Dist. Lexis 95537, p. *9 [finding Glaski’s reasoning unpersuasive]; Zapata v. Wells Fargo Bank, N.A. (N.D.Cal., Dec. 10, 2013, No. C 13-04288 WHA) 2013 U.S. Dist. Lexis 173187, p. *5 [“Every court in this district that has evaluated Glaski has found it is unpersuasive and not binding authority”]; Davies v. Deutsche Bank National Trust Co. (In re Davies) (9th Cir. Mar. 24, 2014, No. 12-60003) 565 Fed.Appx. 630 [2014 U.S.App. Lexis 5416, pp. *4-*5 [following Jenkins instead of Glaski]; Rajamin v. Deutsche Bank National Trust Co. (2d Cir. 2014) 757 F.3d 79 [disagreeing with Glaski’s interpretation of New York law; finding improper transfer into investment trust is voidable, not void].)

Indeed, the one published California appellate decision that analyzed Glaski in the context of a preforeclosure lawsuit explicitly disagreed with the decision.[4] The plaintiff in Keshtgar v. U.S. Bank, N.A. (2014) 226 Cal.App.4th 1201

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[172 Cal.Rptr.3d 818], review granted October 1, 2014, S220012 (Keshtgar) asserted a claim similar to the one at issue here. The Court of Appeal, citing to Gomes and Jenkins, found no basis under the nonjudicial foreclosure scheme for the plaintiff to challenge the authority of the party initiating foreclosure. (Keshtgar, at pp. 1205-1206.) The court distinguished Glaski, noting that it was a postforeclosure action for damages, not an action to prevent foreclosure. (Keshtgar, at p. 1206.) The court went further, however, and rejected Glaski’s holding that a borrower has standing to challenge an assignment, finding that an assignment of a deed of trust and promissory note do not change the borrower’s obligations and therefore do not create prejudice. (Keshtgar, at p. 1207.)

While we acknowledge the extent of this criticism, we see no reason to wade into the issue of whether Glaski was correctly decided, because the opinion has no direct applicability to this preforeclosure action. Jenkins’s holding denying this sort of preemptive lawsuit is directly applicable, and its reasoning is persuasive. Kan does not dispute that the terms of the deed of trust allowed for its assignment. Nor does Kan dispute that the subject loan is in default. Because California’s nonjudicial foreclosure statutes provide Kan with no basis to challenge the authority of the entity initiating the foreclosure process, respondents’ demurrer was properly sustained.


The judgment is affirmed.

Ashmann-Gerst, J., and Ferns, J.,[*] concurred.

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