Despite Statutory Silence, Loan Servicer Is Not Prohibited From Initiating Judicial Foreclosure Action When Given Authority To Foreclose By Contract

In Arabia v. BAC Home Loans Servicing, L.P. (— Cal.Rptr.3d —-, Cal.App. 4 Dist., August 13, 2012), a California Court of Appeal considered whether Code of Civil Procedure Section 725a prohibits a loan servicer from filing a judicial foreclosure action in its own name.  The court determined the language of Section 725a neither expressly prohibits nor allows a loan servicer from filing a judicial foreclosure action.  Therefore, a loan servicer is not prohibited from doing so if it is granted the authority elsewhere, as in a contract between the lender and the servicer.


In 2005, James Arabia refinanced his home with a mortgage of $2,846,250 from Countrywide Home Loans (“Countrywide”).  The deed of trust included a clause authorizing Countrywide to foreclose on it if Arabia failed to make his monthly mortgage payments.  Countrywide and other entities later entered into a pooling and services agreement (“PSA”) under which Countrywide sold a package of its mortgage loans, including Arabia’s mortgage.  Under the terms of the PSA, BAC Home Loans Servicing, L.P. (“BAC”) became the master servicer of the loans and had the authority to foreclose on deeds of trust securing loans that were in default.  Arabia stopped making payments on his loan in 2007. 

In 2010, after BAC had begun nonjudicial foreclosure proceedings, Arabia filed suit against BAC and others alleging nonjudicial foreclosure irregularities, breach of good faith, intentional infliction of emotional distress, and promissory estoppel.  In response, BAC filed a cross-complaint for judicial foreclosure.  The trial court granted summary judgment to BAC on its cross-complaint allowing it to foreclose.  Arabia appealed.


Arabia argued that Section 725a prohibits a loan servicer from initiating a judicial foreclosure and permits only the beneficiary or trustee under a deed of trust to do so.  The court reviewed the language of Section 725a, which states in part: “The beneficiary or trustee named in a deed of trust . . . with power of sale upon real property or any interest therein to secure a debt or other obligation . . . shall have the right to bring suit to foreclose the same in the manner and subject to the provisions, rights and remedies relating to the foreclosure of a mortgage upon such property.”

The court found that while the language of Section 725a did not explicitly limit the right to initiate a judicial foreclosure only to a trustee or beneficiary, it also did not explicitly allow a loan servicer to file such an action.  Arabia argued that the Legislature did not intend to allow an agent, such as a loan servicer, to file a foreclosure action because the Legislature did not include the language “or any authorized agent” in the statute.  That agency language is found only in the statutes regulating nonjudicial foreclosures.  The court, however, explained that the Legislature deliberately laid out more restrictive and elaborate regulations for nonjudicial foreclosures because, unlike judicial foreclosures, they are not overseen by the courts.  Therefore, the rules for nonjudicial foreclosures were not useful for interpreting laws pertaining to judicial foreclosure. 

While not precluded from filing a judicial foreclosure action, a loan servicer must find its authority to initiate a judicial foreclosure elsewhere.  Here, BAC was assigned the right to bring a judicial foreclosure action by the PSA which arose out of a legal obligation contained in the deed of trust allowing the lender to invoke the power of sale.  In addition, the court held that the failure to include a junior lienholder as a defendant in a judicial foreclosure action does not render the action improper as to the named parties, as Arabia alleged.  To the contrary, when a junior lienholder has been omitted from the action and sale, the foreclosure is not void, but is merely ineffective as to the junior lienholder.

Finally, the court ruled that the trial court erred when it ordered Arabia to pay rent to BAC for possession of the property because at the time of the judgment it was not known who would purchase the property at the foreclosure sale.  The court remanded the matter to the trial court to strike that section of the foreclosure decree.  The remainder of the judgment was affirmed.


If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Bruce A. Scheidt or Amara Harrell | 916.321.4500