bankruptcy beach blog

The Salazar Saga Continues

Bankruptcy and foreclosure lawyers everywhere have been vitally interested in the fate of In re Salazar, 448 B.R. 814 (Bankr. S.D. Cal. 2011), which denied the lender’s motion for relief from the automatic stay to complete an eviction after a pre-bankruptcy foreclosure sale. The trust deed in Salazar named MERS as the beneficiary, but the foreclosure notices and trustee’s deed referred instead to US Bank. The opinion in Salazar concluded that California Civil Code section 2932.5, which states that the power of sale under a mortgage “may be exercised by the assignee if the assignment is duly acknowledged and recorded.” was not satisfied by off-record assignments under the MERS system.  Since the assignment to US Bank was not recorded, the Court concluded that the Debtor had made a prima facie showing that the foreclosure was void, and declined to grant relief from the automatic stay for that reason.  The Court acknowledged, however, that the Salazars’ title to their home “must finally be established in an adversary proceeding.” The holding in Salazar denying relief from the automatic stay was a final order for purposes of appeal.  It was appealed to the District Court (Case No. 3:11-cv-00907). That appeal has already been briefed and submitted without argument to Judge Lorenz.  Salazar has been several times distinguished and was also criticized in a couple of unpublished decisions:  See Kurek v. America’s Wholesale Lender, 2011 WL 3240482 (N.D. Cal. Jul. 28, 2012) (Magistrate Judge Zimmerman); and Forbes v. Countrywide Home Loans, 2011 WL 4985965 (Cal. App. 4th Dist. Div. 2 Oct. 20, 2011).

In the meantime, the Salazars got around to filing their adversary proceeding to declare the foreclosure void and for damages on a variety of theories. (Case No. 11-90441) On January 31, 2012, Judge Lorenz withdrew the reference in that adversary proceeding.  We can therefore ultimately expect to have an important ruling on the MERS issue, binding in our District until the Ninth Circuit speaks.

Judge Lorenz’s four page order explains that withdrawal of the reference was based on jurisdictional concerns raised by Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2601–02 (2011).  Judge Lorenz reasoned that the complaint was a “wrongful foreclosure action which could have been filed in state court and would not be ‘resolved in the process of ruling on a creditor’s proof of claim.’ [quoting Stern].”  This shows just how deep Stern v. Marshall may cut at the bankruptcy system.  Until a short time ago, no one would have thought that a bankruptcy court lacked jurisdiction to determine whether the debtors had title to property which they occupied as their home.  Will we have to wait for a decision on the appeal until the to-be-expected motion for summary judgment is briefed in the adversary proceeding?

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