Deutsche Bank AG (DBK) lost its challenge to a California court ruling that exposes bank trustees to wrongful-eviction claims it says will depress prices in foreclosure sales and spur lawsuits against unsuspecting homebuyers.

The California Supreme Court yesterday let stand a lower-court ruling that the Frankfurt-based bank stepped into the shoes of a landlord for a rental unit on a property it acquired through foreclosure and must face a lawsuit the tenants filed after they were evicted and their possessions trashed. The court didn’t give a reason for its decision to deny the bank’s petition to review the ruling.

“It’s good news and not surprising,” said Richard Rothschild, an attorney for renter Rosario Nativi, who lost her possessions and Sunnyvale, California, home in 2009 after the homeowner she’d been paying rent to defaulted on the mortgage, unbeknown to Nativi, and the bank acquired the property.

The ruling upheld yesterday “says essentially that banks and other players in the mortgage industry have to play by the same rules as other property owners,” Rothschild said in a phone interview. Nativi’s lawsuit, which seeks damages for the loss of home and property, will proceed in state court in San Jose, California, he said.

Deutsche Bank, along with bankers’ groups in California and Nevada, told the the state’s high court that the ruling, if upheld, might jeopardize the economic recovery. Lenders and investors will have to 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, they said.

Ari Cohen, a Deutsche Bank spokesman, declined to comment after yesterday’s decision.

Cohen said earlier that Deutsche Bank filed the petition for review with the California Supreme Court as trustee of the mortgage-backed security “on behalf of the investors.”

“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.”

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.

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 said the foreclosure ended the tenants’ lease, and that it played no role in evicting them and loan servicers are responsible for dealing with renters.

A trial judge in San Jose, California, state court agreed with the bank and ended the case. Nativi appealed and a three-judge appeals court panel reversed that decision, saying 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.

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 court ruled. The law doesn’t give renters the right to sue in federal court.

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.

“The claim that the floodgates will be open suggests that banks have been running roughshod over tenants in a massive way,” said Rothschild, legal director of Los Angeles-based Western Center on Law and Poverty.

Deutsche Bank said new lawsuits were already being filed following the January ruling, citing a single case filed in February against it in state court in Orange County, California. The case was filed by renters who said the bank failed to honor their lease on a property it acquired through foreclosure in June 2012.

“This is precisely the type of case that the Nativi decision has encouraged,” the bank said in a court filing.

Bloomberg News