Judges Should Not Engage in Ad Hoc Law-Making to Help Banks Skirt Legal Requirements at Homeowners’ Cost

Should our judges be skewing our laws in favor of after-the-fact relief to the “community of lenders,” as one appellate court judge put it?

Statue of Liberty Raising Justice Scales Retro

Yale Law Journal published an interesting comment about judicial law-making in the foreclosure context.  In discussing the context of judicial foreclosure and res judicata finality principles, the authors said:

When addressing faulty foreclosures, courts are afraid to bar future attempts to foreclose—that is, afraid of giving borrowers “free houses.” While courts rarely explain the reasoning behind this aversion, it seems to arise from a reflexive belief that such an outcome would be unjust.1 Courts are therefore quick to sidestep well-established principles of res judicata in favor of ad hoc measures meant to protect banks against the specter of “free houses.” This Comment argues that this approach is misguided; courts should issue final judgments in favor of homeowners in cases where banks fail to prove the elements required for foreclosure. Furthermore, these judgments should have res judicata effect—thus giving homeowners “free houses.” This approach has several benefits: it is consistent with longstanding res judicata principles in other forms of civil litigation, it provides a necessary market-correcting incentive to promote greater responsibility among foreclosure litigators, and it alleviates the tremendous costs of successive foreclosure proceedings.

Comment, “In Defense of ‘Free Houses,'” 125 Yale L. J. 1115 (2016)

I formed my opinion based on my experiences representing homeowners in Arizona courts.  Having litigated many cases in a state where banks predominantly foreclose non-judicially through a deed of trust (without court supervision), I have had to bring the homeowners’ claims or defenses to the foreclosure in civil actions. I would agree with this sentiment, and note too, that courts have too neatly sidestepped well-established principles of law related to real property transfers, title, and federal and state statutes.

For example, in one of my cases, Sitton v Deutsche Bank Nat Trust Co the Arizona Court of Appeals appeared to go out of its way to decide an issue not on appeal.  The Court decided, without being prompted, and without a trial court ruling based on the question,  “does an Arizona statute prohibiting false recordings have a materiality requirement?”  233 Ariz. 215, 311 P.3d 237 (Ct. App. 2013).

In Sitton, what was actually being litigated was whether the statute applied to foreclosure documents at all, and whether a homeowner who had granted a deed of trust actually had standing to bring a claim as an “owner or beneficial title holder.”  Answer to both questions:  yes.  Sitton, 311 P.3d at 241 (ARS 33-420 applies to foreclosure documents and homeowner has standing);  see also Stauffer v. U.S. Bank Nat’l Ass’n, 233 Ariz. 22, 25 (Ct. App. 2013), rev. den. (Feb. 11, 2014).

Finally, there was a question regarding the statute of limitations for the statute (four years, at least) and the effect of the statutory waiver from the borrower’s alleged failure to seek an injunction to stop a trustee’s sale that was never legal in the first place (the waiver of A.R.S. 33-811(c) does not waive monetary damage claims).

So it would seem the homeowner won Sitton, right?  At least the homeowner got a chance to go to trial on the claims?  Wrong.

Instead, the Sitton appellate panel grabbed onto the word “material” in the statute, though it appeared in the middle of a string of prohibitions, to hold that a party ‘s false recorded assignment and subsequent foreclosure had to be “material” to the homeowner, in effect “depriving [her] of effective choices.”  But see Steinberger v. McVey ex. rel. Cnty of Maricopa, 234 Ariz. 125 (Ct. App. 2014), rev. den. (Sept. 2014); Huff v. Mason, 2013 WL 4507920 (Ariz. Ct. App. 2013)(not designated for publication despite request).

The court wrung this out of a statute stating that a party who records a document “purporting to claim an interest in, or a lien, or encumbrance against real property, knowing or having reason to know that the document is”:

forged, groundless, contains a material misstatement OR false claim OR is otherwise invalid

violates the remedial statute.  Ariz. Rev. Stat. 33-420(A), (B).  Automatic statutory damages are set forth.

Okay, the statute has a series of disjunctive types of false documents, and the Court interpreted the phrase too broadly.  Surely the plaintiff would be allowed to go to trial on disputed facts of materiality that were raised by ambush by the appellate court? No.

But it is material that the party foreclosing is so authorized, right? Wrong.

Listening to a recent oral argument to the Arizona Court of Appeals Division One, on a different A.R.S. 33-420 case, with respect to arguing “materiality,” the banks’ lawyers are now trying to claim that the entirety of A.R.S. 33-420 is “cabined” by this Sitton materiality requirement.

A.R.S. 33-420 was intended to be a remedial statute.  Ostensibly, it was passed for a reason.  It was not meant to just mimic the tort of misrepresentation.  We already have that tort.  It is confounding that the statute has been twisted pretzel-like to get bankers out of jams they created.  They are recording documents to sell property they do not own.  They are allegedly forging documents, backdating, forward dating, signing without authority, creating new “assignments” of interests they don’t own, by people who don’t work for the signer and have no authority.  Why are we gerrymandering our laws to help them do this?

In Arizona, the non-judicial foreclosure statutes are to be strictly construed in favor of the homeowner, because they deprive homeowners of such a strong interest as their home.  The trustee sale statutes require no fewer than thirteen recording requirements.  Presumably, those requirements mean nothing if a party can just record false documents and satisfy the requirement.  Ariz. Rev. Stat. 33-420 is a complementary tool to construing those statutes.

Putting aside that the Court of Appeals raised a new issue (the materiality of the misrepresentation had not been argued at the trial court and had pretty much been presumed by both sides), it injected a new requirement into the law that was simply not there.  In fact, it was pointedly not there, as it appeared in the middle of the statute when so intended.

Further, the Sitton court got it wrong in determining that the newly injected requirement was not met.  The Arizona Court of Appeals essentially decided that the plaintiff should have pleaded and evidenced (on a converted motion to dismiss with only three weeks of discovery on designated topics, not materiality) a statutory requirement that was not there.

Further, the Court seemed to suggest that it was not material to a homeowner that a party with authority and ownership be the one to sell their house at a trustee’s sale.

In Yvanova v New Century Mortg. Corp., the California Supreme Court disagreed with this line of reasoning in a compelling way, stating:

In itself, the principle that only the entity currently entitled to enforce a debt may foreclose on the mortgage or deed of trust securing that debt is not, or at least should not be, controversial. It is a “straightforward application [ ] of well-established commercial and real-property law: a party cannot foreclose on a mortgage unless it is the mortgagee (or its agent).” (Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title (2013) 63 Duke L.J. 637, 640.) Describing the copious litigation arising out of the recent foreclosure crisis, a pair of commentators explained: “While plenty of uncertainty existed, one concept clearly emerged from litigation during the 2008–2012 period: in order to foreclose a mortgage by judicial action, one had to have the right to enforce the debt that the mortgage secured. It is hard to imagine how this notion could be controversial.” (Whitman & Milner, Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement to Enforce the Note (2013) 66 Ark. L.Rev. 21, 23, fn. omitted.)

Yvanova v New Century Mortg Corp., 2016 WL 639526, __P.3d ___(Cal. Feb. 18, 2016)

Further, the California Supreme Court stated (as I have argued to numerous Arizona courts, state and federal, trial and appellate):

It is no mere “procedural nicety,” from a contractual point of view, to insist that only those with authority to foreclose on a borrower be permitted to do so. (Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, supra, 63 Duke L.J. at p. 650.) “Such a view fundamentally misunderstands the mortgage contract. The mortgage contract is not simply an agreement that the home may be sold upon a default on the loan. Instead, it is an agreement that if the homeowner defaults on the loan, the mortgagee may sell the property pursuant to the requisite legal procedure.” (Ibid., italics added and omitted.)
The logic of defendants’ no-prejudice argument implies that anyone, even a stranger to the debt, could declare a default and order a trustee’s sale— and the borrower would be left with no recourse because, after all, he or she owed the debt to someone, though not to the foreclosing entity. This would be an “odd result” indeed. (Reinagel, supra, 735 F.3d at p. 225.) As a district court observed in rejecting the no-prejudice argument, “[b]anks are neither private attorneys general nor bounty hunters, armed with a roving commission to seek out defaulting homeowners and take away their homes in satisfaction of some other bank’s deed of trust.” Miller v. Homecomings Financial, LLC (S.D.Tex.2012) 881 F.Supp.2d 825, 832.

Id. at *12 (emphasis supplied).

Even the California Supreme Court seemed spooked to go “too far” and kept its decision tepid beyond simple judicial restraint.  The Yvanova Court made a point of narrowing the holding to a sliver of light (though lending trade journals would trumpet the holding as a portent of certain doom).  The Court did not decide whether an assignment was void or voidable.  It did not decide whether the plaintiff proved a claim, just that one was pleaded.  It did not decide any possible context other than post-foreclosure.  To me, it is almost sad that this is what passes as a homeowner victory (although it was a well-written, well-analyzed opinion, and at least it did not go out of its way to swallow pablum).

Are the Courts really so scared by the banks’ “Chicken Little” routine that if we hold banks to the law, the sky will fall?  The sky already fell in 2008.  We survived.

Will our system of justice survive if we apply it as intended?  I think so.

It’s not a game.  These are people’s homes at stake.

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5 thoughts on “Judges Should Not Engage in Ad Hoc Law-Making to Help Banks Skirt Legal Requirements at Homeowners’ Cost

  1. Excellent analysis though it is much worse than you describe. The “lenders” who made these loans are defunct; the “Trustees” of the MBS simply lent their name and perform no fiduciary oversight at all. That leaves unscrupulous, unsupervised servicers to manufacture defaults, run up fees in the amount sometimes exceeding the amount of the original debt. They then foreclose in non-judicial states with nothing more than an affidavit, using a “substitute trustee” who in actuality their own law firm.
    Foreclosure is the civil equivalent to the criminal death penalty. In seeking to prevent a the “moral hazard” of a “free house,” the courts are creating an even more dangerous one. The servicers/foreclosure mills are re-writing the rules of agency, (principal power over the agent, no agency after death,), the tenets of contract law (offer, negotiation, and acceptance; one-sided contract reformation, revival of matured contracts, inventing make believe terms like deceleration). Worst of all, they have all but eliminated due process during foreclosure by making a mockery the role of the trustee and by claiming the rules of civil procedure regarding statute of limitations, local court rules, dismissals and res judicata do not apply.
    THAT is the real “moral hazard.”

    Like

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