Deutsche Bank Says Landlord Ruling May Flood Courts

Deutsche Bank AG (DBK) may learn today whether it will get a chance to overturn a California court ruling that exposes it to wrongful-eviction claims the bank says will depress prices in foreclosure sales and spur lawsuits against innocent homebuyers.

An appeals court in San Jose, in the first such ruling in the U.S., said in January that Deutsche Bank can be sued in state court for violating a federal tenant-protection law. Two renters sued over their eviction from a foreclosed home the Frankfurt-based company acquired in 2009 as trustee for a mortgage-backed security that contained a loan on the property.

Deutsche Bank, along with bankers’ groups in California and Nevada, told the California Supreme Court the ruling may jeopardize the economic recovery as lenders and investors weigh the risks of buying properties that house unwanted tenants, are subject to leases, or are vulnerable to lawsuits brought by renters evicted by paid middlemen.

“The risk of being declared a landlord, when there was no knowledge of a tenancy at the time of sale, could have a chilling effect on bidding at the foreclosure sale,” Charles McKenna, the bank’s attorney, said in a petition asking the state high court to overturn the decision of the three-judge appeals panel. The San Francisco-based court may decide as soon as today whether to review the ruling.

Deutsche Bank National Trust Co., a U.S. unit of Europe’s largest investment bank, was the beneficiary of the deed of trust securing the loan on the property in Sunnyvale, California. Deutsche Bank, as trustee, acquired the home, which had a two-bedroom garage rental unit, after the owner defaulted on the mortgage.

Tenants Barred

The tenants, who paid rent to the owner, sued after their belongings were tossed outside and destroyed and police barred them from the home. Deutsche Bank says the foreclosure ended the tenants’ lease, it played no role in evicting them, and loan servicers are responsible for dealing with renters.

More than one-third of all California residential units in foreclosure during the height of the housing crisis were rentals, and more than 200,000 California tenants lost their homes to foreclosures, according to the California Attorney General’s office. If the ruling stands, thousands of these renters could flood state courts with wrongful-eviction lawsuits, according to Deutsche Bank’s petition.

Nonsense, said Richard Rothschild, attorney for Rosario Nativi and her adult son, who rented the garage unit. They sued after finding their belongings -- furniture, electronics, clothing and family photos -- in a heap in the backyard in September 2009. Nativi was in her native El Salvador having surgery when she was evicted and had paid the $1,600 monthly rent in advance to the owner, according to court records.

Federal Protection

Rothschild, legal director at the Western Center on Law and Poverty, said the January ruling established that tenants can take owners who acquire properties through foreclosure to state court for violating protections Congress afforded renters under the 2009 Protecting Tenants Against Foreclosure Act. The law doesn’t give renters the right to sue in federal court.

“The bank can’t decide that its only job is to clear people out,” Rothschild said by phone.

Deutsche Bank filed the petition as trustee of the mortgage-backed security “on behalf of the investors,” said Ari Cohen, a bank spokesman.

“Deutsche Bank has no financial stake in this case,” he said in an e-mail. “Loan servicers, and not Deutsche Bank as trustee, are responsible for foreclosure activity, including actions relating to tenants of foreclosed properties, and the maintenance and resale of foreclosed properties.”

Eviction Notice

The federal law, which expires at the end of this year, requires that tenants be given 90 days’ notice of eviction. The San Jose appeals court said Deutsche Bank stepped into the landlord’s shoes when it acquired the home and had to honor the existing lease until it expired 10 months later or a new owner moved in and gave the tenants 90 days’ notice.

It doesn’t matter that the rental wasn’t legal because the owner hadn’t obtained the proper permit, the court said.

A California law granting the same protections to renters in foreclosed properties was passed last year, Rothschild said.

“We are unaware of even a mild dent in the housing market,” he said in a filing urging the California Supreme Court not to review the case. Median home prices in California rose to a six-year high in March to $376,000, according to San Diego-based research firm DataQuick.

More than 480,000 properties nationwide were bank-owned as of last month, compared with more than 1 million in January 2011, according to research firm RealtyTrac. Almost 45,000 California homes were bank-owned, down from about 146,000 in January 2011, according to RealtyTrac.

Local Hire

Deutsche Bank contracted with American Home Mortgage Servicing Inc. to service the property and prepare it for sale, and American Home hired a local real-estate company to assist, the appeals court said in its ruling. According to Deutsche Bank, the service company’s contract was with American Home Mortgage Corp., the sponsor of the security holding the loan.

American Home Servicing is named as a defendant in the case. Katarina Wenk-Bodenmiller, a spokeswoman for West Palm Beach, Florida-based loan servicer Ocwen Financial Corp. (OC), which acquired American Home, said by phone the company doesn’t comment on ongoing litigation.

While there’s no evidence that employees of the bank, American Home or the local company trashed Nativi’s property, no one working on the bank’s behalf ascertained whether the renters had a valid lease even after Nativi said she had one, the court found, calling that “troubling.”

When Nativi, a cleaning woman and caretaker for the elderly, tried to get back into the home, police told her to leave after an employee of the local real estate company said she wasn’t a tenant and had no right to be on the property, according to the court.

‘Triable Issues’

“We believe this evidence raises triable issues of material fact whether the bank,” through the employee’s conduct, helped prevent the Nativis from getting back into the home and should have done something to help them, the judges ruled, reversing a trial-court judge who sided with the bank. Nativi is seeking damages for losing her home and possessions.

The decision broadens banks’ exposure to renters’ claims that they were wrongfully evicted, said Eric Rans, an attorney with Encino, California-based Michelman & Robinson LLP who represents banks and real estate developers.

“If there’s a bona fide tenant in there, it puts the onus on the bank, and if there’s a third party, any wrongdoing that occurs is also put on the bank,” Rans said in a phone interview. “That will cause more work and more levels of review of properties and how they are being handled.”

The case is Nativi v. Deutsche Bank National Trust Co., S216911, California Supreme Court (San Francisco).

To contact the reporter on this story: Karen Gullo in federal court in San Francisco at kgullo@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net Stephen Farr, Andrew Dunn

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