Steinberger v. McVey ex rel. County of Maricopa
2014 WL 333575 (Ariz. Court of Appeals, Jan. 30, 2014)
Summary prepared by Dale Whitman

A defaulting borrower may defend against foreclosure on ground that the
chain of assignments of the deed of trust is defective, and also on a
variety of other theories.



The residential mortgage loan in this case was originally made in 2005 to
Steinbergerıs 87-year-old father, who died two years later, leaving her
the property. By 2008, she was having difficulty making the payments, and
asked IndyMac FSB to consider a loan modification. She was advised that
she must first default, and she did so. There followed a period of more
than two years during which she was ³jerked around² by IndyMac, with
successive promises to consider a loan modification, the setting of (and
then vacating of) foreclosure dates, and assertions by IndyMac that she
had not properly submitted all of the paperwork required for a
modification.

In November 2010 she filed an action seeking a declaratory judgment that
IndyMac had no authority to foreclose on the house, and upon filing a
$7,000 bond, she obtained a TRO against foreclosure. The following
summarizes the theories on which she obtained a favorable result.

1. Lack of a proper chain of title to the deed of trust. The Court of
Appeals seems to have assumed that no foreclosure would be permissible
without the foreclosing party having a chain of assignments from the
originator of the loan. If one accepts this assumption, IndyMac was in
trouble. The first assignment, made in 2009, was from MERS, acting as
nominee of IndyMac Bank, to IndyMac Federal FSB, but it was made before
IndyMac Federal FSB even existed!

A second assignment was made in 2010 by IndyMac Federal FSB to DBNTC, the
trustee of a securitized trust. But Steinberger alleged that by this
date, IndyMac Federal FSB no longer existed, so this assignment was void
as well. She also made the familiar allegation that this assignment was
too late to comply with the 90-day transfer period required by the
trustıs Pooling and Servicing Agreement, but the court did not pursue
this theory.

The courtıs opinion is significant for its treatment of Hogan v. Wash.
Mut. Sav. Bank, the 2012 case in which the Arizona Supreme Court held
that ³Arizonaıs non-judicial foreclosure statutes do not require the
beneficiary [of a deed of trust] to prove its authority.² The Court ofAppeals, in Steinberger, read this statement to mean that the beneficiary
need not prove its authority unless the borrower alleges a lack of
authority in her complaint. There was no such allegation in Hogan, but
there was in Steinberger. Hence, the Court of Appeals concluded that
Steinberger could contest IndyMacıs right to foreclose. And it felt that
Steinbergerıs allegations about the defects in the chain of title to the
deed of trust, if proven, could constitute a successful attack on
IndyMacıs authority to foreclose.

Itıs important to realize what the Court of Appeals did not do. It did
not disagree with Hoganıs holding that the beneficiary need not show
possession of the promissory note in order to foreclose. Several
commentators (including me) have criticized Hogan for this holding, but
the Steinberger opinion leaves it intact. Indeed, in Steinberger, the
borrower raised no issue as to whether IndyMac had the note, and seems to
have conceded that it did. The discussion focuses on the legitimacy of
the chain of title to the deed of trust, not on possession of the note.

Is the court correct that a valid chain of title to the deed of trust is
necessary to foreclose under Arizona law? As a general proposition, one
would think not. Arizona not only has adopted the common law rule that
the mortgage follows the note, but even has a statute saying so: Ariz.
Rev. Stat.§ 33 817: ³The transfer of any contract or contracts secured
by a trust deed shall operate as a transfer of the security for such
contract or contracts.² So if the note is transferred, no separate
assignment of the deed of trust would be needed at all. And a recent
unreported Court of Appeals case, Varbel v. Bank of America Nat. Ass'n,
2013 WL 817290 (Ariz.App. 2013), quotes the Bankruptcy Court as reaching
the same conclusion: In re Weisband, 427 B.R. 13, 22 (Bankr.D.Ariz. 2010)
(³Arizona's deed of trust statute does not require a beneficiary of a
deed of trust to produce the underlying note (or its chain of assignment)
in order to conduct a Trustee's Sale.²).

By the way, thatıs the rule with respect to mortgages in virtually every
state. A chain of assignments, recorded or not, is completely unnecessary
to proof of the right to foreclose. The power to foreclose comes from
having the right to enforce the note, not from having a chain of
assignments of the mortgage or deed of trust.

However, since Hogan has told us that no showing of holding the note is
necessary in order to foreclose, what is necessary? It defies common
sense to suppose that a party can foreclose a deed of trust in Arizona
without at least alleging some connection to the original loan documents.
If that allegation is not that one holds the note, perhaps it must be the
allegation that one has a chain of assignments of the deed of trust. If this is true,
then the opinion in Steinberger, written on the assumption that the assignments
must be valid ones, makes sense.

The ultimate problem here is the weakness of the foreclosure statute
itself. Ariz. Stat. 33-807 provides, ³The beneficiary or trustee shall
constitute the proper and complete party plaintiff in any action to
foreclose a deed of trust.² Fine, but when the loan has been sold on the
secondary market, who is the ³beneficiary?² The statute simply doesnıt
say. The normal answer would be the party to whom the right to enforce
the note has been transferred, but Hogan seems to have deprived us of
that answer. An alternative answer (though one that forces us to
disregard the theory that the mortgage follows the note) is to say that
the ³beneficiary² is now the party to whom the deed of trust has been
assigned. But the Arizona courts donıt seem to be willing to come out and
say that forthrightly, either. Instead, as in the Steinberger opinion,
itıs an unstated assumption.

As Wilson Freyermuth put it, after graciously reading an earlier version
of this comment, ³The Steinberger court couldnıt accept the fact that a
lender could literally foreclose with no connection to the loan documents
--- so if Hogan says the note is irrelevant, well then it has to be the
deed of trust (which would presumably then require proof of a chain of
assignments). Itıs totally backwards --- right through the looking
glass. And totally inconsistent with Ariz. Stat. 33-817.²

To say that this is an unsatisfactory situation is an understatement;
itıs an unholy mess. The statute was written with no recognition that any
such thing as the secondary mortgage market exists, and the Arizona
courts have utterly failed to reinterpret the statute in a way that makes
sense. Itıs sad, indeed.

There are a number of other theories in the Steinberger opinion on which
the borrower prevailed. Some of these are quite striking, and should give
a good deal of comfort to foreclosure defense counsel. In quick summary
form, they are:

2. The tort of negligent performance of an undertaking (the ³Good
Samaritan² tort). This applies, apparently, to IndyMacıs incompetent and
vacillating administration of its loan modification program.

3. Negligence per se, in IndyMacıs recording of defective assignments of
the deed of trust in violation of the Arizona statute criminalizing the
recording of a false or forged legal instrument.

4. Breach of contract, in IndyMacıs failure to follow the procedures setout in
the deed of trust in pursuing its foreclosure.

5. Procedural unconscionability, in IndyMacıs making the original loan to
her elderly father without explaining its unusual and onerous terms,
particularly in light of his failing mental health.

6. Substantive unconscionability, based on the terms of the loan itself.
It was an ARM with an initial interest rate of 1%, but which could be
(and apparently was) adjusted upward in each succeeding month. This
resulted in an initial period of negative amortization, and once the
amortization cap was reached, a large and rapid increase in monthly
payments.

At the same time, some of Steinbergerıs other theories were rejected,
including an argument that, because IndyMac had intentionally destroyed
the note, it had cancelled the debt. The court concluded that, in the
absence of proof of intent to cancel the debt, it remained collectable.