Castillo v. Deutsche Bank Nat'l Tr. Co. (In re Castillo)

In re: GINA GUTIERREZ CASTILLO, Debtor.

GINA GUTIERREZ CASTILLO, Appellant, v. DEUTSCHE BANK NATIONAL TRUST CO; OCWEN LOAN SERVICING LLC, Appellees.

BAP No. SC-19-1192-SLG

Adv. No. 3:19-ap-90037-CL

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Argued and Submitted on March 26, 2020

April 16, 2020

NOT FOR PUBLICATION

Bk. No. 3:18-bk-07217-LT7

MEMORANDUM^*

Appeal from the United States Bankruptcy Court for the Southern District of California

Honorable Christopher B. Latham, Bankruptcy Judge, Presiding

Appearances: Appellant Gina Gutierrez Castillo argued pro se; Gary E. Devlin of Hinshaw & Culbertson LLP argued for appellees.

Before: SPRAKER, LAFFERTY, and GAN, Bankruptcy Judges.

INTRODUCTION

Chapter 7¹ debtor Gina Gutierrez Castillo appeals from the dismissal with prejudice of her adversary proceeding against Deutsche Bank National Trust Co ("Deutsche") and Ocwen Loan Servicing LLC ("Ocwen").

Castillo has not demonstrated that the bankruptcy court incorrectly dismissed her lawsuit under the doctrines of claim preclusion and issue preclusion. Accordingly, we AFFIRM.

FACTS

A. The 2003 mortgage transaction.

Castillo admits that, in July 2003, she entered into a residential mortgage transaction with Equity 1 Lenders Group ("Equity 1"). Indeed,she attached as exhibits to her adversary complaint copies of the note and deed of trust she executed. The attached note for $407,000.00 names Equity 1 as the lender and Castillo as borrower. There are two indorsements on the face of the note, one by Equity 1 in favor of Impac Funding Corporation ("Impac") and another in blank made by Impac. The deed of trust, recorded in July 2003, similarly names Equity 1 as lender and Castillo as borrower. It also names Mortgage Electronic Registration Systems, Inc. ("MERS") as beneficiary but solely as nominee for the lender and its successors. The deed of trust identifies the collateral as Castillo's residence on Pointe Parkway in Spring Valley, California.

Castillo also referenced and attached to her adversary complaint a copy of an assignment of deed of trust recorded in October 2012 assigning the beneficial interest in the deed of trust from MERS to Deutsche. Notwithstanding the above documents, Castillo claims that the lender's rights under the note and the beneficiary's rights under the deed of trust never were properly transferred to Equity 1's successors in interest.

B. The 2010 action.

The underlying adversary proceeding was not the first time Castillo challenged the validity of these transfers. In January 2010, Castillo commenced a lawsuit in the San Diego County Superior Court against Equity 1, MERS, ETS Services, Impac, GMAC Mortgage, and others ("2010 Action"). Her complaint included causes of action for: (1) quiet title; (2)unfair business practices; (3) violation of 15 U.S.C. § 1639(h); (4) conspiracy to commit fraud and conversion; (5) conspiracy to commit fraud related to MERS; and (6) declaratory relief.² In relevant part, Castillo alleged that none of the defendants were "holders of the note" or otherwise were entitled to enforce the note. She also alleged that the assignment of the deed of trust was invalid. In addition, Castillo claimed that each lender, servicer, creditor, owner, or "Note Holder" was required by law to provide proof that they actually had rights in the loan Equity 1 originated and in the note and the deed of trust.

Castillo admitted in her complaint that she used the loan funds to purchase her residence in 2003, but she asserted that the foreclosure proceeding commenced in 2009 was improper because none of the defendants were entitled to enforce the note. Based on the above, Castillo requested that the state court enter a judgment determining, among other things, that the foreclosure proceedings were invalid. After the state court granted the defendants' demurrer with leave to amend, Castillo requested dismissal of the 2010 Action without prejudice, which the state court granted.

C. The 2014 action.

In January 2014, Deutsche commenced a judicial foreclosure action in the San Diego County Superior Court against Castillo ("2014 Action").Castillo filed a cross-complaint against Deutsche for quiet title, declaratory relief, and injunctive relief. She alleged that Deutsche was not the holder of the note and that the assignment of the deed of trust was invalid. She also claimed that the securitization of her note and deed of trust extinguished or satisfied any obligation for which she originally was liable.³ Castillo further alleged that Deutsche committed perjury when it claimed in its complaint that it had possession of the original note and deed of trust.

Castillo later amended her cross-complaint to include a new cause of action for cancellation of instruments. Her amended cross-complaint thus stated two causes of action, one for declaratory relief and the other for cancellation of instruments. Castillo still claimed that Deutsche was not the holder of the note or the beneficiary under the deed of trust. But she also alleged that the purported transfer of the note and the purported assignment of the deed of trust (both to Deutsche) were illegal and invalid because the transfer violated the terms of the "REMIC Trust" documents pursuant to which Deutsche purportedly took its interest in the pooledmortgage notes (including Castillo's note). In the process of making this allegation, she abandoned her earlier claim that securitization of her note extinguished or satisfied her loan obligations. Nonetheless, she maintained that, as a result of the violations of the REMIC Trust documents, Deutsche had no legal or equitable interest in her note and her deed of trust, and no right to payment.

The state court granted Deutsche's demurrer without leave to amend. The state court reasoned that Castillo lacked standing to enforce any violation of the securitization trust documents. The court explained that any "assignment merely substituted one creditor for another, without changing her obligations under the note." Castillo never appealed this ruling.

As for the judicial foreclosure part of the 2014 Action, a series of procedural missteps occurred, which resulted in entry of a default judgment against Deutsche and a subsequent order vacating that judgment. As part of the order vacating the default judgment, the state court specifically found: "Plaintiff [Deutsche] submits undisputed evidence that Defendant Gina Castillo is in default and indebted to Plaintiff under the Note in the amount of $514,808.14. . . . The court finds Plaintiff establishes it has a meritorious case." San Diego County Superior Court Minute Order (Mar. 30, 2017) at p. 2. After the court granted the motion to vacate, it also granted Deutsche's request that the judicial foreclosureaction be dismissed without prejudice.

Castillo appealed the order vacating the default judgment, but the California Court of Appeal affirmed. Though the court of appeal noted that Deutsche had been required to show that it had a meritorious case and that Deutsche met this burden by submitting a declaration showing that it "is the current beneficiary of the trust deed and promissory note," the court of appeal indicated this merely showed that Deutsche had established its prima facie case. The court of appeal further emphasized that it did not consider the issue of Deutsche's right to enforce the note conclusively established for purposes of the underlying judicial foreclosure action.

D. The 2018 action.

Deutsche then proceeded with its efforts to conduct a nonjudicial foreclosure. But in September 2018, Castillo initiated yet another action in the San Diego County Superior Court ("2018 Action"). This time, she stated eleven different causes of action.⁴ In addition to Deutsche, she also named Ocwen as a defendant.⁵ Among other things, Castillo alleged that none ofthe defendants could establish proper possession, transfer, and endorsement of the note. According to Castillo, they also could not establish proper assignment of the deed of trust. As a result, Castillo asserted that none of the defendants had any interest or standing to take action under the note or deed of trust, or to initiate foreclosure proceedings. Her causes of action for quiet title and declaratory relief were both premised on the defendants' lack of possession and improper transfer of the note, together with the improper assignment of the deed of trust. In her prayer for relief, Castillo requested judgment "[t]hat the Trustees of the Trusts have no enforceable secured or unsecured claim against the Property."

The state court sustained the defendants' demurrer without leave to amend. The state court held that Castillo failed to state a viable cause of action because of the claim and issue preclusive effect of the prior decisions in the 2010 Action and the 2014 Action. As the court explained, the decision in the 2010 action was based on the court's determination that defendants had authority to initiate foreclosure proceedings regardless of Castillo's allegations that none of the defendants held the note and that the assignment of the deed of trust was invalid. Meanwhile, the decision in the 2014 Action sustaining the demurrer against Castillo's amended cross-complaint was based on the determination that Castillo lacked standing to challenge the securitization of her home loan. According to the court,Castillo's complaint in the 2018 Action "asserts the same claims based on the same facts, same loan, same deed of trust, and same challenges to Deutsche Bank's right to foreclose that were litigated in the 2010 and 2014 lawsuits."

In the alternative, the court held that Castillo could not challenge the assignment of the deed of trust, at least prior to foreclosure. The court also rejected the notion that any of the defendants needed to possess the original promissory note in order to conduct a nonjudicial foreclosure.

E. Castillo's bankruptcy and her adversary proceeding.

Castillo commenced a chapter 13...