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What Do You Mean My Claim Is Capped? Ninth Circuit Ruling Further Clarifies Types Of Damages Excluded From A Landlord’s Claim In Bankruptcy

The Ninth Circuit Court of Appeals recently provided landlords dealing with a rejected lease with further guidance on the size and basis of their claims against a tenant’s bankruptcy estate.  Kupfer v. Salma (In re Kupfer), No. 14-16697 (9th Cir. Dec. 29, 2016).  The Ninth Circuit held that the statutory cap – 11 U.S.C. § 502(b)(6) – on a landlord’s claims against a tenant arising from lease rejection in bankruptcy applies only to claims that result directly from the lease termination; the cap does not apply to collateral claims.

The Statutory Cap in Bankruptcy Code Section 502(b)(6)

Bankruptcy Code Section 502(b)(6) caps a landlord’s claim for damages for a lease terminated before or during the tenant’s bankruptcy to (a) the greater of (i) one year’s worth of rent or (ii) 15%, not to exceed three years, of the remaining lease term; plus (b) any unpaid rent due under the lease as of the earlier of (x) the date the bankruptcy case was initiated (commonly called the “petition date”) or (y) the date the landlord repossessed the property or the tenant surrendered it.  The cap is designed to prevent landlords from pursuing large claims arising from terminated long-term leases, when in reality the landlord will likely be able to re-let the space at some point in the future.

Many courts have considered how broadly the statute should be construed and what type of damages are subject to the cap.   (Other cases have dealt with other idiosyncracies of Section 502(b)(6), such as whether the “15%” means 15% of the remaining rent (escalating over time under the lease), or 15% of the remaining lease months at the current rent.  For a recent post on this arcane “15% of what” issue, see here.)   In Kupfer, the Ninth Circuit specifically considered whether Section 502(b)(6) caps a landlord’s entire claim for attorney’s fees and costs, if some of such amounts arose from other lease breaches, and not the lease termination.

Factual Background And Lower Court Rulings

Two related tenants had leased two commercial properties, each lease running for ten years and containing an arbitration clause and a prevailing party attorney’s fees, arbitration fees, and costs provision.  Tenants stopped paying rent and eventually vacated the premises.   Landlords won in arbitration, obtaining a $1.3 million damages award against Tenants for unpaid past rent and the present value of future rent.  Landlords also received an attorney’s fees, arbitration fees, and costs award of almost $200,000.

Tenants subsequently filed Chapter 11 cases.  Landlords filed a proof of claim for the entire arbitration award.  Tenants objected, arguing that Section 502(b)(6) applied to the entire arbitration award, including past rent, future rent, and the fee award.  Landlords argued that the statutory cap should only apply to the past and future rent award, not the fee award.  The bankruptcy court agreed with Landlords and the District Court affirmed.  Tenants appealed to the Ninth Circuit.

The Ninth Circuit Decision

In ruling, the Ninth Circuit considered public policy, legislative history behind the statutory cap, and various cases, including its prior ruling in In re El Toro Materials Co., 504 F.3d 978 (9th Cir. 2007) (damages arising from tort claims for waste, trespass and nuisance were not subject to statutory cap because they would have existed regardless of lease termination).  In El Toro Materials, the Ninth Circuit held that the statutory cap in Section 502(b)(6) only applies to damages directly resulting from lease termination.  (For a contrary ruling that the cap encompasses virtually every form of damages a landlord could suffer, even a breach of the contractual duty to repair and maintain the premises, see the Mr. Gatti’s decision out of Texas, here.)

Extending its reasoning in El Toro Materials, the Ninth Circuit partially reversed the lower court rulings and held the statutory cap only extends to the portion of Landlords’ fee award attributable to litigating Landlords’ future rent claims.  Accordingly, Landlords’ award for attorney’s fees and costs related to claims for unpaid past rent and defending against counterclaims were not subject to the statutory cap.  The Ninth Circuit remanded the case for determining which portion of the fee award related to lease termination – and is therefore included in the cap and hence disallowed – and which portion of the fee award did not arise from the lease termination, and thus would be an additional allowed claim free from the cap of Bankruptcy Code section 502(b)(6).


In the Ninth Circuit, Bankruptcy Code section 502(b)(6) only caps landlord damages directly resulting from lease termination – including attorney’s fees and costs awards to the extent they are attributable to lease terminations.  Thus, a landlord’s claim is not limited if its damages would have existed regardless of a tenant’s lease terminations.

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11th Circuit Holds Consumer Lenders Can’t Include Estimated Expenses In Pre Closing Reinstatement or Payoff Letters; What You Should Do About This Remarkable Opinion

Editor’s Pre- / Post-Script:  The original post about this case was, frankly, a bit sarcastic toward the consumer borrower, and made light of a serious matter.  (Your author Mark Duedall is to blame for that.)  When the post found its way to the borrower’s counsel, he was kind enough to let us know, as Paul Harvey would say, “the rest of the story.”  And that was this – the borrower was down on his luck, a hard working public servant, but eventually managed to come up with the funds needed to pay his bills (including this loan) in full.  Truly, an individual deserving to be treated fairly in all respects.  But when he paid the loan in full, including the estimated future charges, the lender then refused to refund the estimated future charges that the borrower had paid in full (and that the lender did not incur).  Yikes; the consumer had no choice but to sue to get back his money for these phantom charges.  We here at the Bankruptcy Cave don’t like over-reaching at all, and especially when it comes to how one treats consumers.  Anyway, while we still disagree with this ruling from a legal standpoint, we start to kind of like it from a karma standpoint.  We appreciate getting more of the story, and the opportunity to correct this post.  Lesson learned by the dwellers of the Bankruptcy Cave.

Anyway, on to the post, as corrected . . .

Consumer borrowed money from Lender.  Consumer defaulted, and Lender began to foreclose, including all the usual steps: arranging for property  inspection, hiring counsel, etc.  After about a year,[1] Consumer sought to reinstate the loan, and asked Lender how much it would cost.  Lender responded in writing, with an itemized list of expenses to be paid, plus an estimate of additional costs (clearly marked as estimates) that Lender may incur over the next month if it continued to exercise remedies, in case Consumer did not make good on the loan.)

Consumer paid the entire amount required to reinstate the loan, including Lender’s estimated out-of-pocket expenses.  A few months later, Lender refunded the estimated expenses which it didn’t incur after all (although Lender first refused any and all efforts by the consumer to get any refund).  So what’s the big deal?  Why is this unusual?  Why are you reading this, and why did we write it?  Well, in the 11th Circuit, as of last week, including any estimated future charges or expenses in a reinstatement letter (or a loan payoff, as your authors can’t see any reason why this remarkable ruling wouldn’t also apply to payoff letters) violates the federal Fair Debt Collection Practices Act (FDCPA)[2] if your loan documents don’t clearly allow for that inclusion (and most don’t – we checked).  This is the ruling in Prescott v. Seterus, Inc., 2015 U.S. App. LEXIS 20934 (11th Cir. Dec. 3, 2015).

So what can you do about this ruling?  First, fix your loan forms.  In  Prescott, the loan documents listed all the things a consumer must pay to reinstate a loan – estimated out-of-pocket expenses through the payoff date was not included as something Lender could collect as a condition to reinstatement.[3] (And please don’t think “my loan documents surely must be state of the art and already contain this.”   The originating lender in this case was one of the largest in the U.S., with top, up-to-date forms and rigid standardization to ensure everyone uses the proper documentation.  Its loan documents still did not allow for the inclusion of estimated expenses in payoff statements.)  Your loan documents should clearly state that any reinstatement or payoff statement can and will include estimates of charges through the payoff date (which will be promptly refunded if those charges are not actually incurred).  Second, change your reinstatement and payoff letters, to provide the same.[4]  Third, bear in mind the “least sophisticated consumer” mandate of the FDCPA: your consumer loan documents must spell everything out in painful, page-after-page detail, thus devolving to the lowest common denominator of consumer borrowers.[5]

Your helpful and devoted Bryan Cave Bloggers have blogged before about our efforts to improve lender forms to avoid ridiculous decisions.  Of course, this is nothing to think about as the Holidays approach.  Go here instead, and pick a wonderful day to celebrate.  And then, put a note on your calendar to call us after the start of the year; we do loan document house-cleaning for many clients, and would love to help you out.  Until then, enjoy the egg nog and watch out for including estimated out-of-pocket expenses in any payoff or reinstatement letters, unless your loan documents expressly allow it.


[1] The property was in Florida, a state requiring judicial foreclosure, so exercising remedies against collateral takes forever.

[2] 15 U.S.C. § 1692 et seq.

[3] Prescott, 2015 U.S. App. LEXIS at *2 and *7.

[4] Our angst over this maddening opinion is informed by another recent ruling, Kaymark v. Bank of America, 783 F.3d 168 (3d Cir. 2015). In that case, the lender was chastised for including estimates of future costs in a foreclosure complaint. This violated the FDCPA because the estimates were not labelled as such. Id. at 175. So, the Lender in Prescott followed this ruling, and did note which charges in the reinstatement letter were estimates. And then it refunded the amounts not actually incurred a few weeks later. It is still liable for violating the FDCPA. The world has turned upside down, we think.

[5] Id. at *6-*8 (citing, among other cases, Jeter v. Credit Bureau, Inc., 760 F.2d 1168, 1175 n.6 (11th Cir. 1985), holding that you must assume you are dealing with a borrower “on the low side of reasonable capacity.”).

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Good News for Rent-Stabilized Debtors in New York

Late last year, the New York Court of Appeals issued an interesting opinion: In Mary Veronica Santiago-Monteverde v. John. S. Pereira, 24 N.Y.3d 283 (2014), the Court held that a bankruptcy debtor’s interest in her rent-stabilized apartment is exempted from her bankruptcy estate as a “local public assistance benefit.”

The debtor lived in Manhattan for 40 years in a rent-stabilized apartment. In 2011, after her husband passed away, she became unable to pay her credit-card debts, which totaled about $23,000, and she subsequently filed for Chapter 7 bankruptcy. In her initial filing, the debtor listed her apartment lease as an ordinary unexpired lease.

The debtor’s landlord offered the trustee a deal: The landlord would pay the $23,000 credit-card debt in exchange for the debtor’s interest in the lease and would continue to let the debtor live in the apartment at the rent-controlled rate of $703 a month for the rest of her life. The “catch,” so to speak, is one that anyone living in any of New York’s approximately one million rent-controlled apartments would quickly recognize: If the debtor’s interest in the lease were regained by the landlord, then the debtor’s son, who shares her apartment, would not be able to inherit the lease and keep paying the rent-controlled rental rate. Consequently, when the trustee advised the debtor that her interest in the lease was to be sold, the debtor amended her bankruptcy schedules to list the value of her lease as personal property exempt from the bankruptcy estate under New York Debtor and Creditor Law § 282(2) as a “local public assistance benefit.”

The Bankruptcy Court, granting a motion by the trustee, struck the claimed exemption and said that “the benefit of paying below market rent is not a ‘public assistance benefit’ that is entitled to any exemption in bankruptcy” and that the benefit “is a quirk of the regulatory scheme in the New York housing market, not an individual entitlement.” In re Santiago-Monteverde, 466 B.R. 621 (Bankr. S.D.N.Y. 2012).

The District Court affirmed, and the United States Court of Appeals for the Second Circuit certified the “local public assistance benefit” question to the New York Court of Appeals. In disagreeing with the decision of the Bankruptcy Court, the New York Court of Appeals noted that “When the rent-stabilization regulatory scheme is considered against the backdrop of the crucial role that it plays in the lives of New York residents, and the purpose and effect of the program, it is evident that a tenant’s rights under a rent-stabilized lease are a local public assistance benefit.” 24 N.Y.3d at 289. The Court also indicated that the Bankruptcy Court’s description of the rent stabilization program as “quirk of the regulatory scheme in New York…” may be true, but the fact that it is a local quirk lends credence to the debtor’s claim that it is in fact a local public assistance benefit.

While the rent-stabilization program does not provide payments directly to participants in the way that many traditional public assistance programs do, the Court held that the program conferred a clear benefit on the debtor that was intended by the legislature that created the program. The Office of the New York Attorney General and the city’s Law Department agreed and filed a joint brief in the case arguing that the sale of the lease would undermine the benefits intended to be provided by rent stabilization. Indeed, had the Court held the opposite, it would have become easier for landlords to evict rent-stabilized tenants who filed for bankruptcy by purchasing their leases from the trustee, charging market rent (rather than offering to allow the debtor to remain at a stabilized rate, as the landlord in this case did), and then evicting the tenants who could no longer afford the rates.

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In this world nothing is certain, except taxes—but does that include pre-petition tax sales?

On November 6, 2014, the United States Bankruptcy Court for the Western District of New York in Canandaigua Land Dev., LLC v. Cnty. of Ontario, ruled that an in rem tax foreclosure conducted by a county—in full compliance with Article 11 of the New York Real Property Tax Law—was capable of being set aside in bankruptcy as a constructively fraudulent transfer, pursuant to 11 U.S.C. § 548(a)(1)(B).

The County had foreclosed on a real property tract, 642-732 pdfvalued at approximately $300,000 to $425,000, in order to satisfy a tax debt of $16,595. Further, the sale was conducted only a few hours after the debtor filed its Chapter 11 petition.  The debtor argued that the County’s foreclosure of its tax lien constituted a constructively fraudulent transfer because the debtor was rendered insolvent by the transfer and received less than reasonably equivalent value in exchange for the transfer of the property to the County.

The Canandaigua court distinguished the United States Supreme Court case BFP v. Resolution Trust Co. (holding that a properly-conducted, non-collusive mortgage foreclosure sale is entitled to a presumption of reasonably equivalent value) on the grounds that the tax foreclosure process did not include the safeguards provided in a mortgage foreclosure.  The Canandaigua court noted that, by footnote, the BFP Court emphasized that its decision and analysis “cover[ed] only mortgage foreclosures of real estate” and that “[t]he considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.”

In the wake of the Supreme Court’s BFP decision, lower courts have reached varied conclusions when applying the BFP rationale outside the context of mortgage foreclosures. jn0-643 dumps The Canandaigua court concurred with the rationale of the majority of courts facing this question and held that taxing authorities are not entitled to a conclusive presumption of having provided reasonably equivalent value when taking title to a debtor’s property—pre-petition—as a result of an in rem or strict tax foreclosure conducted in full compliance with Article 11 NYRPTL.

Debtors should consider this case a reminder as to the possible limits of the BFP rationale when faced with a pre-petition forced sale of property.

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Arizona Court Finds That A Non-Judicial Foreclosure After Entry of Judgment Limits Valuation Hearing Rights

For lenders in many jurisdictions around the United States, the risk of post-sale litigation expense for valuation determinations can be daunting. However, in a recent unpublished opinion, the Arizona Court of Appeals concluded that once a judgment is entered, the Arizona statute providing a right to a post-sale valuation hearing does not apply if the sale occurs after judgment is entered.

In states like Arizona, there are statutory protections for obligors that require a court to conduct a valuation hearing to determine the lender’s enforceable deficiency. Recently, Bryan Cave represented a lender in attempting to recover on a defaulted loan. In that case, the borrower/guarantors were convinced that the Arizona real property securing the loan was far more valuable than what the lender could recover at a non-judicial foreclosure sale (i.e., in Arizona, a trustee’s sale).

In our case, the lender commenced a trustee’s sale simultaneously with pursuing an action in state court on the note and guaranty (n.b., because some states limit enforcement rights, you should coordinate your enforcement strategy with an attorney knowledgeable with local law). To accommodate the borrower/guarantors’ interest in reducing deficiency liability, the lender proposed—and the borrower/guarantors agreed—that the borrower/guarantors could market and sell the property for a discrete timeframe, subject to lender approval for any proposed sale that nets less than the outstanding loan balance; in exchange, the borrower/guarantors stipulated to the entry of judgment in the amount of the outstanding loan balance, with interest and attorneys’ fees, in the event no sale closed by the stated deadline. The proposed judgment contained express language that the lender’s recovery on the judgment would be reduced by the price paid for the sale of the property, either at a private sale or at a trustee’s sale.

The borrower/guarantors could not sell the property within the specified time frame; the lender filed, and the court entered, the stipulated judgment. Within months, the property was foreclosed at a trustee’s sale, leaving a deficiency of approximately one third of the outstanding loan balance. Approximately 90 days later, the borrower/guarantors petitioned the court for a fair value hearing. When the request was denied, the borrower/guarantors appealed.

The Arizona Court of Appeals affirmed the lower court’s ruling. The borrowers/guarantors argued that Arizona law does not limit the time frame after the foreclosure sale within which a guarantor can seek a fair value hearing, citing A.R.S. § 33-814, which establishes the circumstances under which the borrower may request such a hearing. However, the Arizona Court of Appeals concluded that once the judgment was entered, A.R.S. § 33-814 no longer applied because that statute applies only to the pursuit of a deficiency judgment “after the date of sale of trust property under a trust deed.” See A.R.S. § 33-814. While an entirely different statutory scheme limits post-judgment valuation hearing rights in judicial foreclosure cases to 30 days after the sale, the Arizona Court of Appeals did not consider whether this statute applied to a post-judgment non-judicial trustee’s sale because the fair value request was made more than 30 days after the house was sold.

The borrower/guarantors have sought further review from the Arizona Supreme Court, but unless and until a different ruling is rendered, Arizona lenders should weigh the benefits of a limited valuation hearing request period when considering their loan enforcement options.

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Bankruptcy Court will not Revisit State Court Foreclosure Decision

A Memorandum of Decision recently entered in In re 56 Walker, LLC, Case No. 13-11571 (ALG), Bankr. S.D.N.Y. (Mar. 25, 2014), provides clear guidance as to the effect of a state court decision granting summary judgment in favor of a secured lender in a foreclosure action prior to the Debtor’s bankruptcy filing.642-737 dumps The collateral estoppel, res judicata and Rooker-Feldman doctrines each separately served as grounds for the Bankruptcy Court’s finding that it was unable to review the prior state court decision.

In 56 Walker, the Debtor’s sole asset was a six-story mixed-use building in New York, New York. The property was pledged as security for a mortgage loan with Broadway Bank. The Debtor defaulted, and Broadway Bank commenced a foreclosure action against the Debtor in the Supreme Court of New York, New York County. After a first chapter 11 case was dismissed, MB Financial Bank, N.A. (having acquired the loan via a purchase and assumption agreement with the FDIC, as receiver of Broadway Bank), filed a motion for summary judgment in the State Court. The Debtor opposed MB’s motion and filed a cross-motion for summary judgment seeking dismissal of MB’s complaint on the grounds that MB had not provided adequate proof that it was the assignee of the debt, and that MB was liable on certain lender liability claims. The State Court issued a Decision and Order granting MB’s motion for summary judgment of foreclosure on the property and denying the Debtor’s cross-motion. However, before the State Court entered MB’s proposed judgment of foreclosure, the Debtor filed a second chapter 11 petition.

The property was sold as part of the bankruptcy case, and competing claims to the proceeds were filed. MB claimed all of the proceeds, and the Debtor objected to this claim, with six creditors joining in the objection. MB argued in response that the doctrines of res judicata and collateral estoppel applied to the State Court’s decision granting MB summary judgment of foreclosure on the property. The Bankruptcy Court agreed, finding that the State Court decision was entitled to collateral estoppel effect because the Debtor litigated in the State Court the same issues it had raised in the bankruptcy case, it had a full and fair opportunity to litigate those issues, and it received a determination from the State Court. In addition, even though they were not parties to the State Court action, the Bankruptcy Court found that the other creditors were bound by the decision because they were in privity with the Debtor.210-060 pdf

In any event, the Bankruptcy Court held, it did not have the authority to review state court decisions, whether on behalf of a debtor or its creditors, because the Rooker-Feldman doctrine deprives the bankruptcy court of 2 subject-matter jurisdiction to review a state court decision and 300-101 precludes federal jurisdiction if the relief requested in federal court would reverse or void a state court decision.

Lastly, the Bankruptcy Court found that the doctrine of res judicata would also preclude it from revisiting the State Court decision. Although the Debtor had argued that res judicata could not apply because the State Court decision was not incorporated into a foreclosure judgment before the Debtor filed for bankruptcy, the Bankruptcy Court noted that in the case of decisions that have not ripened into a judgment because of a bankruptcy filing, courts have held that a judgment is not always a condition to the application of res judicata.

Secured lenders should take comfort in this decision, wherein one of the more respected U.S. bankruptcy courts has acknowledged that a debtor should not be allowed to relitigate its entire foreclosure case merely because it has filed for bankruptcy before a final judgment of foreclosure by the state court.

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Case Updates: Glaski v. Bank of America  and Sandri v. Capital One

The California Court of Appeal for the Fifth Appellate District has held that a borrower has standing to state a claim for wrongful foreclosure based on the alleged improper securitization of the borrower’s note and deed of trust. Glaski v. Bank of America, N.A., et al., 218 Cal. App. 4th 1079 (Cal. App. 5th Dist. 2013). This is a minority view. Rejecting both the holding and reasoning of the Glaski court, and adopting the majority view, the U.S. Bankruptcy Court for the Northern District of California reached a contrary conclusion. Sandri v. Capital One, N.A., et al. (In re Sandri), No. 12-3165DM, 2013 WL 5925655 (Bankr. N.D. Cal. Nov. 5, 2013).

I. Glaski v. Bank of America, N.A., et al., 218 Cal. App. 4th 1079 (Cal. App. 5th Dist. 2013)

Factual Background and Procedural History:

In mid-2005, appellant Glaski obtained a purchase money loan from lender Washington Mutual Bank, FA (“WaMu”). The loan was secured by a deed of trust against Glaski’s residence, identifying WaMu as the lender and beneficiary. In late-2005, the WaMu Mortgage Pass-Through Certificates Series 2005-AR17 Trust was formed as a securitized trust under New York law. Glaski alleged that his note, and the deed of trust securing it, were ineffectively transferred to the trust.

Glaski defaulted under the note and deed of trust by failing to make monetary installment payments when due. In December 2008, a successor trustee of the trust commenced non-judicial foreclosure proceedings, and in July 2009, the property was sold at foreclosure pursuant to the power of sale provisions in the deed of trust. Shortly thereafter, Glaski commenced wrongful foreclosure proceedings against several defendants, including JPMorgan Chase Bank, N.A., as acquirer of WaMu’s interest in the subject loan, and Bank of America, N.A., as successor trustee of the securitized trust. In his suit, Glaski asserted, among other theories, that the failure to timely and properly transfer his loan into the securitized trust in violation of the trust’s pooling and servicing agreement deprived defendants of their authority to foreclose under the deed of trust.

In September 2011, defendants demurred to Glaski’s operative complaint. Two months later, the trial court sustained defendants’ demurrer and dismissed Glaski’s wrongful foreclosure claims without leave to amend.

Glaski timely appealed.

Holding and Analysis:

Reversing the trial court’s judgment for dismissal, the court of appeal concluded that Glaski had standing to challenge the foreclosure sale based on the alleged untimely transfer of his note and deed of trust into the securitized trust.

The appeals court expressly acknowledged that in wrongful foreclosure cases based on a purportedly ineffective loan assignment, “a question often arises about the borrower’s standing to challenge the assignment of the loan … an assignment to which the borrower is not a party.” Id. at 1094. Indeed, in making its determination, the appellate court declined to follow the ruling of several federal district courts sitting in California, rejecting the post-closing date theory of invalidity on the grounds that the borrower does not have standing to challenge an assignment between two other parties. See, e.g., Aniel v. GMAC Mortgage, LLC, No. C 12–04201 SBA, 2012 WL 5389706 (N.D. Cal. Nov. 2, 2012); Almutarreb v. Bank of New York Trust Co., N.A., No. C 12–3061 EMC, 2012 WL 4371410 (N.D. Cal. Sept. 24, 2012).

Rather, the court of appeals reasoned that where the defect asserted would void the assignment – rather than make it merely voidable – a borrower retains standing to challenge an assignment of the borrower’s note and deed of trust. Turning to the question of whether the assignment was void (as opposed to voidable), the court of appeals concluded that, pursuant to New York trust law, a transfer to a securitized trust after the date of that trust’s closing rendered that transfer void.

As a result, the court of appeals held that Glaski had standing to challenge the subject foreclosure based on his factual allegations that the post-closing date attempts to transfer his deed of trust into the WaMu trust were void – notwithstanding that Glaski was neither a party to the trust agreement, nor alleged that he was a third party beneficiary thereof.

II. Sandri v. Capital One, N.A., et al. (In re Sandri), No. 12-3165DM, 2013 WL 5925655 (Bankr. N.D. Cal. Nov. 5, 2013)

Factual Background and Procedural History:

Similar to the facts in Glaski, chapter 13 debtor-plaintiff Cheryl Sandri executed a promissory note in favor of Chevy Chase Bank, F.S.B. (“Chevy Chase”) in late-2005. The loan was secured by a first priority deed of trust against Sandri’s residence. The deed of trust named Chevy Chase as the Lender and Trustee thereunder, and Mortgage Electronic Registration Systems, Inc. (“MERS”) as the “beneficiary” and nominee for the lender and lender’s successors and assigns.

After filing her bankruptcy case, Sandri commenced an adversary proceeding challenging defendants’ initiation of foreclosure proceedings against the subject property. Therein, Sandri alleged, among other things, that Chevy Chase’s securitization and assignment of her loan into the Chevy Chase Mortgage Funding LLC Mortgage–Backed Certificates, Series 2006–1 Trust was invalid because the attempted transfer took place after the closing of the trust, in violation of its pooling and servicing agreement.

In August 2013, the court heard defendants’ motion to dismiss Sandri’s complaint. After supplemental briefing addressing related case law, including the court of appeals’ Glaski decision, the Honorable Dennis Montali ultimately granted the motion to dismiss without leave to amend.

Holding and Analysis:

After a careful examination of the Glaski opinion and the U.S. Bankruptcy Appellate Panel’s (“BAP”) decision in Nordeen v. Bank of America, N.A. (In re Nordeen), 495 B.R. 468 (9th Cir. BAP 2013), the bankruptcy court declined to follow the Glaski ruling.

Observing that Glaski is an “outlier” case, Judge Montali noted that the majority of district courts in California have held that borrowers do not have standing to challenge the assignment of a loan because borrowers are not party to the assignment agreement (citing Aniel, supra, and Patel v. Mortgage Electronic Registration Systems, Inc., No. 4:13-cv-1874 KAW, 2013 WL 4029277 (N.D. Cal. Aug. 6, 2013), among other authorities). The bankruptcy court further noted that the Glaski court’s ruling flew in the face of other California appellate courts’ rulings which rejected standing claims similar to those asserted in Glaski. See, e.g., Siliga v. Mortgage Electronic Registration Systems, Inc., 219 Cal. App. 4th 75 (Cal. App. 2d Cir. 2013); Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497 (Cal. App. 4th Dist. 2013).

Judge Montali also rejected the Glaski court’s interpretation of New York trust law, remarking that New York intermediate appellate courts have repeatedly and consistently found that an act in violation of a trust agreement is voidable, not void.

Finding the BAP’s Nordeen decision persuasive, as well as the weight of post-Glaski authorities addressing the issue, the bankruptcy court concluded that Sandri had failed to state a claim upon which relief could be granted, in part because Sandri did not have standing to enforce a pooling and servicing agreement to which she was neither a party nor a third party beneficiary.

Author’s Commentary:

Following Judge Montali’s holding in Sandri, other federal courts have soundly rejected Glaski‘s holding that a borrower retains standing to challenge foreclosure proceedings based on purported violations of a trust agreement to which that borrower is not a party or beneficiary. See, e.g., Scomparin v. Deutsche Bank Nat’l Trust Co., as Trustee, et al., No. 13–04054, 2014 WL 184175 (N.D. Cal. Jan. 15, 2014); Rivac v. NDEX West LLC, No. 13-1417 PJH, 2013 WL 6662762 (N.D. Cal. Dec. 17, 2013). As demonstrated by the Sandri decision and the thoughtful opinions which cite to it, practitioners should carefully examine whether their borrower clients actually have standing to assert wrongful foreclosure claims based on alleged breaches of a securitized trust’s pooling and servicing agreement, particularly where the subject transfer is merely voidable — and not void — in nature.

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