Author Archives: Karl Dowden

About Karl Dowden

Karl is a third year law student attending Brooklyn Law School. He received his B.A. from the State University of New York at Geneseo with a major in Political Science and a minor in Sociology. Karl has completed the required courses in order to receive a Certificate in Real Estate Law in addition to his Juris Doctor. He has substantial experience in affordable housing after completing internships at New York State Homes and Community Renewal, the umbrella organization for New York State's affordable housing agencies, and at Goldstein Hall, PLLC. He has also gained experience in both small business law and nonprofit law throughout the course of those internships.

Texas Case Distinguishes Between a Holder and an Owner of Promissory Notes

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In Martin v. New Century Mortgage Company, et al., 2012 Tex. App. Lexis 4705 (Houston 1st Court of Appeals, June 14, 2012), the plaintiffs executed a deed of trust and promissory note with New Century Mortgage Corporation. The deed of trust contained a provision allowing, “the note (together with [the deed of trust]) can be sold one or more times without prior notice to the borrower.” The deed of trust was assigned to Wells Fargo after the plaintiffs defaulted and acceleration of the loan occurred. The plaintiffs filed suit on the day before the foreclosure sale by Wells Fargo alleging a lack of standing.

The plaintiffs argued that Wells Fargo failed to prove they were the holder or owner of the note, which is required to have standing to foreclose on the property. Specifically, they argued that there was no written endorsement from New Century showing an assignment to Wells Fargo. The Court agreed with the plaintiffs that Wells Fargo is not considered a “holder” of the promissory note under Texas commercial law. Without the written endorsement from New Century that showed negotiation (which is defined as the “transfer of possession … of an instrument by a person other than the issuer to a person who thereby becomes its holder”) (Tex. Bus. & Com. Code Ann. § 3.201(a) (West 2002)), Wells Fargo cannot be the holder of the note.

However, under Texas common law, it is still possible to assign ownership of the note without a written endorsement as required under Texas commercial law. With a proper assignment, Wells Fargo could acquire the rights associated with the note, even without the status as a “holder” of the note. Wells Fargo has the burden of proving the transfer of ownership and any gap in the chain of title may result in a question of ownership.

In this case, Wells Fargo proved the transfer of ownership through an executed document assigning the deed of trust and promissory note along with their respective rights. As a result, the Court found Wells Fargo had standing to continue the foreclosure process.

Waiver and Equitable Estoppel Argument Rejected by Texas Court

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The federal Court of Appeals in Texas affirmed a district court’s dismissal of the plaintiff’s claims in Wigginton v. Bank of New York Mellon, et al., No. 12-10136, (5th Cir. 2012).

Two weeks after two default notices were sent to the plaintiff, a letter reporting a rate adjustment was sent to the plaintiff. The plaintiff argued that the defendant could not foreclose after the change of rate notice was sent because the notice implied the continuation of the note. Specifically, the plaintiff argued that the change of rate notice was effectively a waiver of the default notices because the notice implied that the loan was still on a monthly payment schedule.

The district court stated that the elements of waiver are (1) an existing right, benefit, or advantage; (2) knowledge, actual or constructive, of its existence; and (3) an actual intent to relinquish that right (which can be inferred from conduct). Furthermore, the court stated that waiver is largely a matter of intent, which can be shown by actual renunciation or inference. However, proving a waiver through inference would require a showing that the opposite party has “unequivocally manifested its intent to no longer assert its claim.”

In this case, the district court found that there was no express waiver of the default in the rate of change notice. In addition, although the plaintiff argued that the rate notice indicates that the plaintiff’s loan was still on a monthly payment schedule, she failed to allege facts that would reasonably infer that the defendants unequivocally manifested intent to waive. The court found the claim to be conclusory without supporting evidence. As a result, the district court dismissed the claim because of the pleading deficiency.

The Court of Appeals also disagreed with the plaintiff’s theory of waiver and estoppel and affirmed the district court’s finding.

The Northern District Court case may be found here.

 

General Challenge to MERS Rejected by Texas Federal District Court

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The United States Southern District Court of Texas defended MERS in Richard v. CIT Group, et al., No. H-12-848 (S.D. Tex Jul. 21, 2012). The plaintiff’s attorney challenged the standing of the defendants and the use of MERS. The plaintiff argued that her confusion about the identity of the holder of the note should be evidence towards lack of standing. The Court notes that the plaintiff never received overlapping or conflicting mortgage bills. In addition, the allonge to the note named the defendant as the rightful holder of the note, showing that the defendant has standing.

The plaintiff also mentioned a number of criminal acts that MERS has committed, but failed to make a specific claim against the institution. The Court then stated that MERS is a tool used for efficiency to lower the cost of borrowing. In addition, those who borrow money to purchase a house through issuing a negotiable note cannot object to its being negotiated or to the effective process for documenting them (in the context of Texas commercial law, the term negotiate is defined as the “transfer of possession … of an instrument by a person other than the issuer to a person who thereby becomes its holder”) (Tex. Bus. & Com. Code Ann. § 3.201(a) (West 2002)).

The Court granted the defendants’ motion of summary judgment after dismissing the plaintiff’s claims.

Exceptions for Mortgagee’s Lack of Standing to Challenge Assignments in Texas

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In Kramer v. Federal National Mortgage Association, et al., No. A-12-CA-276-SS (W.D. Tex May 15, 2012), the Western District Court in Austin, the home owner sued Fannie Mae, MERS, and Countrywide to quiet title and for a fraudulent foreclosure. Although the case was initially in state court, it was removed to federal court because of the diverse jurisdiction (i.e. the different state residency) of the plaintiff and defendants. The Court listed exceptions to the general rule that mortgagees lack standing to challenge assignments of the deed of trust. However, it ultimately granted the defendant’s motion to dismiss the home owner’s claims.

Kramer alleged that the assignment of the note and deed by trust from MERS was signed by a “notorious robo-signer” who did not have authority to execute the assignment. As a result, no conveyance could have occurred and any subsequent actions should be void. The defendants argued that Kramer lacked standing to challenge the assignments because he was not a party to them. Kramer relied on a California District court case (Johnson v. HSBC Bank USA, National Association), which was distinguished based on Johnson’s reliance on California law and on the facts of the case (the Court distinguished the same case in Bridges v. JP Morgan Chase Bank, N.A., et al.).

However, the Court does list two exceptions to the general standing rule. The first exception is “where an assignee of a claim sues the obligor for performance.” This exception is done to ensure that the obligor does not have to pay the same claim twice. (See Tri-Cities Constr., Inc. v. Am. Nat’l Ins. Co., 523 S.W.2d 426, 430 (Tex. Civ. App. —Houston 1st Dist. 1975, no writ)). A second exception allows a defendant sued on a negotiable instrument to assert defenses and claims held by others if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. (See Tex. Bus. & Com. Code § 3.305(c)).

In this case, the obligor of the instrument (the owner who signed the deed of trust and note) is not at risk of paying the loan obligation twice and he is the plaintiff, not the defendant. As a result, the exceptions do not apply to him.

Since the exceptions did not apply to Kramer, he did not have standing to challenge the assignments of the note and deed of trust. As a result, his claim was ultimately rejected and the defendant’s motion to dismiss the suit was granted.

Mortgagee Lacks Standing to Challenge Assignments in Texas

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Bridges v. JP Morgan Chase Bank, N.A., et al., No. A-12-CA-635-SS (W.D. Tex Sept. 21, 2012), is a recently decided federal district court decision in Texas. The Western District Court in Austin granted the defendant’s motion to dismiss the plaintiff’s suit. The plaintiff, Bridges, is suing a number of financial entities including Chase Bank and MERS.

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The plaintiff alleged that the initial transfer of her mortgage to MERS was not a proper transfer because MERS does not hold the note (MERS only held the deed of trust). However, this court relied on cases that held Texas foreclosure law enforces the deed of trust, not the underlying note. Additionally, Texas does not require possession of the original promissory note as a prerequisite to foreclosure.

The defendants also argued that the Bridges lacked standing to challenge the validity of the assignments of the note and deed. A number of Texas Federal District Courts held since the mortgagee was not a party to the assignments, they do not have standing to challenge the validity of the assignments. This Court rejected plaintiff’s reliance on a California Southern District court holding because the holding relied on California state law and was distinguishable because the plaintiff of the California case claimed deficiencies in the assignment that resulted in high payments to the wrong entity.

Bridges also alleged various fraud and misrepresentation claims that were either inapplicable (a statutory fraud claim applying to real estate does not apply to loan transactions), or does not fulfill the required elements (a negligent misrepresentation claim is dismissed because plaintiff did not rely to her detriment). A claim of filing a fraudulent lien was dismissed because the Bridges lacked standing to challenge the assignment (since she was not a party to it).

Texas Appellate Court Holds that Formal Transfer of Deed is Not Required to Initiate Foreclosure

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In Robeson v. Mortgage Electronic Registration Systems, Inc., No. 02-10-00227-CV (Tex. App. –Fort Worth [2nd Dist.] 2012, pet. denied), the Texas Court of Appeals affirmed a summary judgment motion by MERS and the Midfirst bank granted by the trial court. The homeowner plaintiff argued that the bank did not have standing to accelerate the loan and begin foreclosure on January 2009 because the deed of trust was assigned to the Bank on February 2009 and there was no evidence of an endorsement of the note (the note contained a blank endorsement).

The Court of Appeals held that, as to the blank endorsement in the note, no special endorsement is necessary under the Texas Business and Commercial Code, only possession of the note. Two vice presidents of Midfirst bank testified that the bank held both the note and the deed of trust. In addition, one testified that both the note and deed of trust were received on October 2008. Since the plaintiff did not challenge the accuracy of the statements made, the court found that the evidence was sufficient. The court also held that the date the deed of trust was assigned does not create a factual issue of when the interests were transferred to the bank relying on a prior holding that an assignment of the deed of trust from MERS to a lender dated two years after the actual date of transfer does not raise a factual issue of whether the assignment was fabricated. The court held that the date of transfer is not evidence of when the bank is entitled to initiate foreclosure relying on prior holdings which found that the mortgage typically follows the note it secures.

The deed of trust granted both the lender and the beneficiary various lender’s rights in the agreement, particularly the power of sale. As a result, the court stated that MERS was authorized to exercise the right to invoke the power of sale in the deed of trust.

The Texas Supreme Court recently denied the petition for review of this case.

Federal District Court in Texas Rules That Third-Party Lacks Standing in Recording-Fee Case

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It appears that although courts may be receptive to claims about lost recording fees because of MERS, they won’t hear cases brought by third parties (at least, not in federal court). The citizens of a Texas county brought the claim seeking lost recording fees from MERS as a defense while they were in foreclosure. In Huml v. Mortgage Electronic Registration System, Judge David Guaderrama of the U.S. District Court in El Paso, Texas, rejected the plaintiffs’ theory of MERS gaining unjust enrichment. The plaintiffs alleged that the county lost recording fees that would have been acquired had MERS not taken “undue advantage of real property recording systems.”

The Judge found that the plaintiffs lacked standing to bring the claim. Since the plaintiffs alleged that counties were harmed by MERS, Judge Guaderrama found the argument of standing “piggy-backs on the direct injury, if any, to the counties.” Since the plaintiffs couldn’t assert direct injury from lost recording fees, and because plaintiffs cannot sue to enforce a third party’s rights in federal court (unless the suit falls under a particular exception, which didn’t happen in this case), the Judge dismissed the claim.