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Financial Services Law Insights and Observations

California Bankruptcy Court Denies Bank’s Request for Relief from Automatic Stay Because of Failure to Record Assignment of Deed of Trust Prior to Foreclosure

State Issues

On April 11, the United States Bankruptcy Court for the Southern District of California held that a national bank was not entitled to relief from an automatic bankruptcy stay in order to proceed with a foreclosure-related action because the bank did not record its assignment of the deed of trust. In re: Eleazar Salazar, Bankruptcy No. 10-17456 (Bankr. Ct. S.D. Cal. Jan. 25, 2011). The original lender’s interest in the promissory note and a deed of trust executed by the debtor were later assigned to a national bank, but the bank did not record the assignment. The debtor defaulted on the note, leading the bank to conduct a non-judicial foreclosure on debtor’s property and to file an unlawful detainer action against the debtor in state court. The debtor filed for Chapter 13 bankruptcy the day before trial on the unlawful detainer action. The bank then moved in the bankruptcy court for relief from the automatic bankruptcy stay. The debtor challenged the bank’s motion, arguing that the foreclosure sale was defective because the bank did not record the assignment of its interest in the deed of trust as required by California Civil Code § 2932.5. The court concluded that the bank had to satisfy two requirements contained in § 2932.5 in order for the nonjudicial foreclosure to be valid: (i) the bank must have obtained an assignment of the right to be paid the mortgage debt, and (ii) the power of sale must have been recorded. The court found an endorsement in blank by the lender to be sufficient to meet the first requirement. However, the court found that the bank failed to record its assignment and, therefore, failed to comply with § 2932.5. The court rejected the bank’s arguments that the fact that MERS was a nominal beneficiary on the original deed of trust eliminated the need to record the assignment and that the MERS foreclosure process is an alternative to statutory foreclosure law because only the state legislature can change statutory requirements.

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