The Problem of the Assignment of Deed of Trust

• Publication year: 2019
• Author: Andrew Noble

The Problem of the Assignment of Deed of Trust

Andrew Noble

Andrew Noble is a director of dispute management at SRS Acquiom, where he manages post-closing merger & acquisition issues. Andrew previously represented mortgage lenders and servicers at a San Francisco-based law firm and is a former chair of the CLA's Consumer Financial Services Committee. He may be reached at anoble@srsacquiom.com.

I. INTRODUCTION

Mortgage loan servicers frequently record an assignment of deed of trust in the public records. The assignment is typically from the originating lender, who purports to grant, assign, and transfer all beneficial interest in the deed of trust to the designated assignee. Reading this text, one might assume that (1) the assignor held title to the mortgage loan as of the date of the assignment, (2) the assignment effected a transfer of ownership in the deed of trust and with it, the right to foreclose, and (3) the assignee was entitled to enforce the deed of trust upon the borrower's default by virtue of the assignment. Surprisingly, all three assumptions would be wrong.

Contrary to its terms, a bare assignment of the deed of trust does not operate to transfer or convey the beneficial interest in the deed of trust.¹ The beneficial interest in a deed of trust is "incident to" the promissory note it secures, and follows a transfer of the note without any further assignment or documentation.² No assignment of the deed of trust need be recorded—or even exist—for the originating lender to sell or transfer its interest in the mortgage debt, or for the transferee of the promissory note to foreclose in the event of a default.³

And yet, deed of trust assignments are frequently recorded, and often years after the underlying note was transferred. Their recordation causes widespread confusion among mortgage borrowers trying to grasp the meaning of documents recorded against their property, their attorneys, and even courts handling foreclosure-related litigation. This article examines the assignment of deed of trust, why it is recorded, and the myriad problems its recordation causes. Finally, it suggests an alternative recording device provided for in the California Commercial Code that accomplishes the same goals as recording an assignment but that foregoes the misleading assignment language that causes such misunderstanding.

II. THE DEED OF TRUST'S ROLE IN MORTGAGE LENDING

A promissory note is a negotiable instrument that the lender may sell to a third party without notice to the borrower.⁴ A deed of trust is a separate document encumbering real property that may be foreclosed and sold in the event of a default on the promissory note it secures. Under a deed of trust, the borrower, or "trustor," conveys nominal title to real property to an intermediary, the "trustee," who holds that title as security for repayment of the loan to the lender, or "beneficiary."⁵ If the borrower/trustor defaults on the loan, the lender/beneficiary may demand that the trustee conduct a nonjudicial foreclosure sale. The trustee is not a true trustee as the word is commonly used elsewhere, and owes no fiduciary obligations; it merely acts as a common agent for the borrower and lender. As the California Court of Appeal memorably put it, "[j]ust as a panda is not a true bear, a trustee of a deed of trust is not a true trustee."⁶

The California Legislature has established a comprehensive set of legislative procedures governing nonjudicial foreclosures at Civil Code sections 2924 to 2924l. The Court of Appeal has explained:

The purposes of this comprehensive scheme are threefold: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor for 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.⁷

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The foreclosure process is commenced by the recording of a notice of default and election to sell by the beneficiary, trustee, or any of their authorized agents.⁸ After the notice of default is recorded, the trustee must wait three calendar months before issuing a notice of sale that is published, posted, and mailed 20 days before the sale and recorded 14 days before the sale.⁹ The trustee then sells the property at auction to the highest bidder. Once the trustee's sale is complete, the borrower has no further right of redemption. The purchaser takes title by a trustee's deed upon sale.¹⁰ Due to the exhaustive nature of this scheme, California appellate courts have generally refused to read any additional requirements into the nonjudicial foreclosure statutes.¹¹

III. THE DEED OF TRUST "FOLLOWS" THE PROMISSORY NOTE WITHOUT SEPARATE ASSIGNMENT

Understanding the assignment of deed of trust instrument requires grasping the relationship between the deed of trust and the promissory note it secures. As the California Court of Appeal explained in Domarad v. Fisher & Burke, Inc. ("Domarad"),¹² "a deed of trust is a mere incident of the debt it secures" and "is inseparable from the debt and always abides with the debt, and it has no market or ascertainable value, apart from the obligation it secures." Even though the deed of trust is a separate document that is recorded in the public records, the rights and obligations set forth in the deed of trust are forever tied to the note.

For this reason, the beneficial interest in a deed of trust "follows" assignment or sale of the promissory note without a separate assignment. The U.S. Supreme Court summarized this longstanding common law principle in its seminal decision Carpenter v. Longan,¹³ where it explained that the "transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter." Inevitably, perhaps, given the California Legislature's enthusiasm for codifying the common law, the principle is codified as Civil Code section 2936, which states: "[t]he assignment of a debt secured by mortgage carries with it the security."

It follows that a bare assignment of deed of trust does not, in fact, assign or otherwise convey the beneficiary interest in the deed of trust. As the California Court of Appeal concluded in Domarad, the "deed of trust has no assignable quality independent of the debt, it may not be transferred apart from the debt, and an attempt to assign the deed of trust without a transfer of the debt is without effect."¹⁴ So, the beneficial interest in a deed of trust is "assigned" or otherwise conveyed only when the promissory note it secures is transferred to a new person entitled to enforce the note.

Potentially, an exception exists where the assignment purports to convey the deed of trust and the promissory note it secures. The Court of Appeal has found that "[s]uch a form of assignment operates as an assignment of both the note and the deed of trust."¹⁵ However, the reality of modern residential mortgage servicing is that the assignment is neither prepared nor recorded in the public records until the mortgage servicer is preparing to non-judicially foreclose following a default. This may be months or years after the originating lender has sold its interest in the loan. No assignment may be prepared at all if no delinquency occurs. The transfer of ownership in a residential mortgage loan is often through a bulk sale with hundreds or thousands of other loans, often only days after the loan was originated. So, an assignment purporting to assign the beneficial interest in a deed of trust and the promissory note it secures is almost invariably moot because the indebtedness had already been transferred.

For this reason, one cannot assume that the assignee even held the beneficial interest in the deed of trust (or the promissory note) on the date of the assignment. The mortgage loan servicer normally holds a power of attorney from the originating lender authorizing the servicer to execute an assignment from the originating lender. As noted, this could be years after the putative assignor sold its interest in the loan. Still, federal law requires timely notice to the borrower if a residential mortgage loan is transferred to a new servicer¹⁶ or owner,¹⁷ and timely notice of a transfer may conflict with the date of a recorded assignment, inevitably causing confusion.

IV. A LENDER MAY PROVE IT IS THE BENEFICIARY ENTITLED TO ENFORCE THE DEED OF TRUST BY SHOWING IT IS A "PERSON ENTITLED TO ENFORCE" THE NOTE

In 2016, the California Supreme Court issued a decision in Yvanova v. New Century Mortgage Corp. ("Yvanova")¹⁸ holding that a mortgage borrower has standing to sue for wrongful foreclosure on the ground that a completed non-judicial foreclosure sale was not conducted by the deed of trust beneficiary or its agent.¹⁹ The court explained that "[o]nly the 'true owner' or 'beneficial holder' of a Deed of Trust can bring to completion a nonjudicial foreclosure under California law."²⁰ For this reason, it is important for attorneys representing both lenders and borrowers (and courts, of course) to correctly identify the deed of trust beneficiary.

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Too frequently, attorneys—even those representing lenders and servicers—try to rely upon a recorded assignment of deed of trust to establish ownership of the debt. They should not. The assignment of deed of trust does not, in fact, convey the beneficial interest in a deed of trust. Rather, attorneys representing lenders and loan servicers should identify the person who is entitled to enforce the underlying promissory note to satisfy the inquiry.

Identifying the person entitled to enforce the note requires...