Insights

The California Court of Appeals recently rejected a borrower’s argument that California law does not permit a loan servicer to commence a judicial foreclosure action in its own name. The court held that a secured creditor can assign its right to commence a judicial foreclosure action to a loan servicer. Here’s what happened.

James Arabia refinanced his home loan through Countrywide Home Loans, Inc. Arabia later obtained a home equity line of credit from Countrywide. Both loans were secured by deeds of trust against Arabia’s home. Countrywide and others entered into a pooling and servicing agreement pursuant to which Countrywide transferred certain home loans, including Arabia’s home loan, to a securitization trust. The Bank of New York was named trustee of the trust, and BAC Home Loans Servicing, L.P. was appointed to service the home loans, which included the authority to foreclose on deeds of trust securing loans in default. Arabia subsequently defaulted on his home loan, and BAC sought to foreclose against his home. Arabia sued BAC and others, alleging nonjudicial foreclosure irregularities, breach of the covenant of good faith and fair dealing, intentional infliction of emotional distress, and promissory estoppel. BAC filed a cross-complaint for judicial foreclosure and moved for summary judgment. The trial court denied the motion, stating that BAC could refile the motion after addressing the existence and notification of the junior lienholder, Countywide. BAC refiled, and the trial court granted its motion. Arabia appealed to the Court of Appeal of California, which affirmed the trial court’s judgment in part.

Arabia argued, among other things, that California law does not permit a loan servicer to commence a judicial foreclosure action in its own name. Specifically, Arabia claimed that California’s Code of Civil Procedure Section 725a only permits the beneficiary or the trustee of the deed of trust or their successors to bring the judicial foreclosure action. Arabia further claimed that if the California legislature wanted to include agents, such as loan servicers, in Section 725a, it would have expressly included them, as it did in the case of non-judicial foreclosure proceedings. The appellate court rejected Arabia’s interpretation of the statute and reference to California’s non-judicial foreclosure statutory scheme, explaining that the California legislature did not have the same concerns for homeowner protections in drafting Section 725a because Section 725a requires the filing of a lawsuit to initiate foreclosure and, thus, a court’s involvement in the foreclosure. The appellate court held that Section 725a does not prohibit a loan servicer from filing suit to initiate a judicial foreclosure or permit such action.

However, the appellate court explained that California law permits the assignment of a cause of action, including legal obligations or a violation of a property right. The appellate court stated that Arabia’s promissory note secured by the deed of trust is an assignable legal obligation and rejected Arabia’s argument that Section 725a prohibits such an assignment.

Dana F. Clarke is a partner in the California office of Hudson Cook, LLP. Dana can be reached at 714-263-0427 or by email at dclarke@hudco.com.