More than a few financially distressed homeowners have been enticed by ads from "foreclosure rescue" operations. Frequently, such ads will claim that their strategy is to stop a foreclosure by uncovering irregularities in the processes of the foreclosing entity. They may even allude to the likelihood of stopping a foreclosure by demonstrating that the foreclosing entity does not possess the necessary documents.
Alas, such ads and suggestions may often lack merit. Certainly in California a string of court decisions has shown that the judicial system is not sympathetic to the idea of letting procedural irregularities outweigh substantive issues such as a borrower's unwillingness and/or inability to make timely payments.
A number of such cases have been discussed here previously. Now, a California case decided this spring (Debrunner v. Deutsche Bank, California Sixth Appellate District, March 16, 2012) addresses the particular issue of whether or not a foreclosing lender must be in actual possession of the promissory note in order to be able to foreclose.
Stephen Debrunner was a private investor who, along with others, made a loan of $675,000 to Barbara Chiu and Shimin Xu in March of 2006. The note was secured by a second trust deed on a home in Los Altos, California. The first trust deed secured a $975,000 loan made by Quick Loan Funding in June of 2004. The first trust deed and its promissory note was assigned a month after the loan origination to Option One Mortgage Corporation. Shortly thereafter Option One assigned both interests to FV-1, Inc. In 2008, FV-1 assigned both interests to Deutsche Bank with Saxon Mortgage Services, Inc. (Saxon) acting as its "Attorney in Fact."
Chiu's business entity filed for bankruptcy in 2008. After being granted a relief from bankruptcy stay, Debrunner and co-investors foreclosed in March of 2009. Then in September of 2009, Deutsche Bank, using Old Republic Default Management as trustee, filed a notice of default on the first trust deed. The notice informed the debtor that payment to stop the foreclosure could be made to Saxon, and it provided Saxon's address and phone number.
Debrunner then filed an action to stop the foreclosure. His position was that "the defendants had no right to foreclose because Deutsche Bank did not have physical possession of or ownership rights to the original promissory note." He maintained that "any assignment of the deed of trust was immaterial because a deed of trust 'cannot be transferred independently' of the promissory note, which must be 'properly assigned' and attached." According to him, "[a] deed of trust standing alone is a nullity," and cannot provide authority for a lender to foreclose.
The trial court dismissed Debrunner's claim, which led him to the Sixth Appellate District Court of Appeal. There, the appellate court upheld the ruling of the trial court.
The appellate court noted that Debrunner "submits that we must look to the Commercial Code for guidance, because a promissory note is a negotiable instrument which cannot be assigned without a valid endorsement and physical delivery to the assignee." The appellate court said that Debrunner's "reliance on the Commercial Code provisions pertaining to negotiable instruments is misplaced." It noted that the California Civil Code (sections 2924 - 2924(k)) established a "comprehensive statutory framework" to govern nonjudicial foreclosure sales, and that the framework was considered exhaustive, which is to say, complete. It did not need to be supplemented by reference to the Commercial Code or anything else.
The Civil Code sections do not require that the foreclosing entity has to be in physical possession of the underlying promissory note. The trial court's dismissal was upheld.
The appellate court also took note of Debrunner's argument that the notice of default was defective because it did not properly identify Deutsche Bank as the beneficiary. However, the notice did provide Saxon's address and phone number as the place where payment could be made. The appellate court said that nothing about the "alleged imperfection" in the process was prejudicial to Debrunner's interests. None of the "imperfections" made him unable to make the needed payment. Case dismissed.