Who is going to mind the banks now?

APPELLATE ZEALOTS

The 2007 mortgage crisis and resulting recession were some of the worst economic events in modern-day U.S. history. The crisis had many causes, but the indiscriminate bundling of mortgages into trusts for sale to other financial institutions certainly contributed. Bundling was an ideal tool for banks to transfer subprime mortgages that were likely to default onto another bank because each trust often contained thousands of mortgages.

In the wake of the mortgage crisis, Congress and state legislatures began enacting statutes to prevent this problem from happening again. These trusts now have very specific rules regarding the types of mortgages that can be bundled, when the transfers can take place, and similar limits. Yet a recent decision from the 9th U.S. Circuit Court of Appeals -- building on bad precedent from the 2nd Circuit -- takes the teeth out of these rules.

The issue turns on who can enforce the new statutes and trust provisions. Governmental regulators are swamped, so the only effective way to enforce these restrictions is to allow homeowners facing foreclosure to contest the transfer of their title. If banks know that homeowners can defeat foreclosure based on a fulty transfer of title, they will finally comply with the statutes regulating these trusts. Without enforcement, the banks have little incentive to reform the faulty, but lucrative for them, business practices that led to the 2007 mortgage crisis.

The California Supreme Court took a positive step toward remedying this problem in Yvanova v. New Century Mortg. Corp., 62 Cal. 4th 919, 924 (Cal. 2016), where it held "the borrower on a home loan secured by a deed of trust may base an action for wrongful foreclosure on allegations a purported assignment of the note and deed of trust to the foreclosing party bore defects rendering the assignment void." But the impact of that ruling has been gutted by recent decisions holding that virtually no defect in the transfer of title is ever void -- even though the governing statute says it is. See In re Turner v. Wells Fargo Bank, NA, 2017 DJDAR 5690 (9th Cir. June 15, 2017); Saterbak v. JP Morgan Chase Bank, N.A., 245 Cal. App. 4th 808 (Cal. Ct. App. 2016).

Under New York law (which controls the vast majority of these trusts), any "sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void." N.Y. Est. Powers & Trusts Law Section 7-2.4. In construing that provision, New York courts have held that void means void, although there are no recent cases addressing the statute in this context. See Dye v. Lewis, 324 N.Y.S.2d 172, 175 (N.Y. Sup. Ct. 1971) (holding "every act in contravention of the Trust is void" under this statute), modified on other grounds, 332 N.Y.S.2d 968 (N.Y. Sup. Ct. App. Div. 1972).

Instead of relying on the plain wording of the New York statute and the precedential decisions of New York courts interpreting state law, however, the 2nd Circuit held that homeowners cannot challenge the transfer of their title into such a trust because all such transfers are merely voidable, not void. Rajamin v. Deutsche Bank Nat'l Trust Co., 757 F.3d 79 (2d. Cir. 2014). Even though the statute says transfers that do not comply with trust rules are void, the Rajamin court held they are merely voidable, because the statute does not address the possibility that the trustee would later ratify such a transfer. The Rajamin logic is flawed for myriad reasons, but most importantly, under New York law "a void act is not subject to ratification." Aronoff v. Albanese, 446 N.Y.S.2d 368, 370 (N.Y. App. Div. 1982).

Further, Rajamin disregarded the plain wording of the statute. The cardinal rule of statutory construction is that where the language of a statute is unambiguous, the analysis stops there. "Words used in a statute ... should be given the meaning they bear in ordinary use. If the language is clear and unambiguous there is no need for construction, nor is it necessary to resort to indicia of the intent of the Legislature" S.B. Beach Prop. v. Berti, 39 Cal. 4th 374, 379 (Cal. 2006) (citation omitted, ellipses in original).

The 9th Circuit compounded this problem in Turner, a case that devotes absolutely no analysis to New York law, but simply adopts Rajamin. What the 2nd and the 9th Circuits should have done is certify the question to the highest court in New York to let that court interpret New York law. The 9th Circuit still has time to reconsider Turner. Let's hope they give this case a closer look and let the New York courts decide New York law for the sake of the entire country's homeowners.