California Superior Court Judge Karnow issued a Memorandum Order Overruling Defendants’ Demurrers in California v. The McGraw-Hill Cos. et al., CGC-13-528491 (Aug. 14, 2013 San Francisco County).   California Attorney General Harris alleged “that S&P intentionally inflated its ratings for the investments and that these knowingly false ratings were material to the investment decisions of [California Public Employees’ Retirement System (PERS) and the California State Teachers’ Retirement System (STRS)], in violation of the False Claims Act and other statutes.” (2)

S&P demurred to the False Claims Act causes of action [asked for the causes of action to be dismissed], because, among other reasons,

(l) the complaint does not plead that any ‘claims’ were ever “presented” to the state;

(2) if claims were presented, they did not involve ‘state funds’ . . .. (4)

S&P asserts, among other things, that because it “was not the seller, it did not “present” any claims for payment.” (4) The Court stated, however, that the False Claims Act “imposes liability on any person who ’causes’ a false or fraudulent claim to be presented or ’causes to be made or used a false . . . statement material to a false or fraudulent claim.’ C. 12651(a)(1)-(a}(2).” (4, citation omitted) The Court inferred “from the complaint that S&P ’caused’ PERS and STRS to purchase the securities. This is good enough for present purposes.” (4, citation omitted)

I am a longstanding critic of the rating agencies, but I have to say that I am struck by how broadly courts have interpreted statutes relied upon by the federal government and the states as they pursue alleged wrongdoing by financial institutions involved in financial crisis. In the courts’ defense, they typically rely on the plain language of the statutes, but, boy, do they interpret them broadly.

In this case, giving a rating can “cause” someone to purchase a security — is there any limit on what is a sufficient “cause” to trigger the statute? In DoJ’s case against Bank of America, a financial institution may be liable under FIRREA for a fraud it perpetrates even if the only entity affected by the fraud is — Bank of America! Similar broad interpretations of NY’s Martin Act make it relatively easy for NY government to bring a securities fraud case against a financial institution because our normal intuitions about intent are not relevant under that act.

Pursuing alleged wrongdoers: good.

Pursuing alleged wrongdoers with broad, ambiguous and powerful tools:  worrisome.


The United States District Court, Eastern District of Arkansas in Kimberly Peace v. MERS, 4:09-cv-00966 (2010) granted MERS’ motion to dismiss. The court found that the assignment to MERS was valid.

This also led the court to decide that BAC had standing to appoint Recon Trust as BAC’s agent to exercise its right to start a non-judicial foreclosure. The borrower unsuccessfully alleged that the assignment from MERS to BAC had no legal effect as MERS was not on the note and was not an agent for the note holder. The court rejected this contention.


The Arkansas court in MERS v. Southwest Homes of Arkansas, 301 S.W.3d 1 (2009) denied MERS’ motion to set a decree of foreclosure, therein affirming the decision from the lower court. As the record beneficiary of the deed of trust, MERS received no foreclosure notice. The court in their finding, applied Arkansas law, and found that the lender was the deed of trust beneficiary not MERS, since MERS did not receive payment of the debt.

MERS alleged that the lower court erred in ordering foreclosure because as the holder of legal title it was a necessary party that was never served. However, In affirming the lower court decision, the court disregarded the written terms of the mortgage contract that selected MERS as the deed of trust beneficiary entitled to notice.

The court went on further to hold that under the recorded deed of trust in this case, James C. East, as trustee under the deed of trust, held legal title. Moreover, as the court reasoned, MERS was at most the mere agent of the lender Pulaski Mortgage Company, Inc., and it held no property interest and was not a necessary party.


Florida Twelfth Judicial Circuit Magistrate Bailey issued a Recommended Order in HSBC Bank USA, National Association, et al. v. Marra, No. 2008 CA 000630 NC (Aug. 14, 2013) that makes you want to give up.  Not because of the judge, but  because of what she documents in what is in all likelihood a run of the mill foreclosure in Florida.

Somewhat amazingly, the defendant was unrepresented but was able to get the Court to focus on various inconsistencies in the court filings and implausible assertions made by the Plaintiff, particularly those relating to whether the plaintiff owned and held the note and mortgage as it alleged in the complaint.

It would require about as many words to summarize the opinion as are in it, so I refer you to the link above if you want to see it in all of its glory. Let me leave you with the Court’s conclusion:

After taking into consideration the above-cited information from the [Pooling and Servicing Agreement], it appears that the transfers that have been variously asserted by the Plaintiff in several Motions and/or documents attached to those Motions as conferring standing upon it could  not possibly have occurred as the Plaintiff represents. Further, the Magistrate cannot  conceive of any manner in which the Plaintiff could possibly create additional  documentation in an effort to manufacture standing in this action. (5)

Said less politely, the Plaintiff appear to have lied to the Court or at least been unbelievably negligent in preparing its papers.  The Court also had these things to say about the Plaintiff’s filings:

  • the procedural history recounted by the Plaintiff in its Motion is inaccurate. (4)
  • it is not even likely that GreenPoint was the “owner and holder” of Marra’s loan documents at the time this case was filed in 2008, as was alleged in the original Complaint. (4)

As a law professor, I teach students about the importance of procedure to the functioning and legitimacy of our system of adjudication.  Reading cases like this, replete with a factual summary of obfuscation and possibly outright lies, I wonder what the lesson is that we should take away from the foreclosure epidemic.

One lesson is that you can say anything you want in court and you are unlikely to be punished even if you are caught.  If that is the lesson we are left with, just shoot me now.

An alternative lesson is that we should severely punish those who treat the courthouse as no better than a white-collar fight cage where trained mercenaries lord it over ill-prepared amateurs, with no holds barred. If that is the one we take, lower your gun, roll up your sleeves and start thinking about what a well-functioning judicial system would look like for unrepresented parties in civil suits, such as homeowners in foreclosure and consumers facing debt collectors.

[HT April Charney]


I will be speaking at NYU Law next week on

The Future of Fannie and Freddie

Friday, September 20, 2013
9:00 am – 5:00pm
Reception to follow

Greenberg Lounge, NYU School of Law
40 Washington Square South
New York, NY 10012

Jointly sponsored by:
The Classical Liberal Institute & NYU Journal of Law & Business


This conference will bring together leaders in law, finance, and economics to explore the challenges to investment in Fannie Mae and Freddie Mac, and the future possibilities for these government-sponsored entities (GSEs).  Panels will focus on the reorganization of Fannie and Freddie, as well as the recent litigation surrounding the Treasury’s decision to “wind down” these GSEs.  Panelists will explore the legal issues at stake in the wind down, including the administrative law and Takings Clause arguments raised against the Treasury and Federal Housing Finance Agency.  Panelists will also look at economic policy and future prospects for Fannie and Freddie in light of legislation proposed in the House and the Senate.

Conference Panels:

  • The Reorganization of Fannie Mae and Freddie Mac
  • Fannie Mae, Freddie Mac, and Administrative Law
  • Conservatorship and the Takings Clause
  • The Future of Fannie and Freddie

Confirmed Participants:

  • Professor Barry Adler (NYU)
  • Professor Adam Badawi (Washington University)
  • Professor Anthony Casey (Chicago)
  • Charles Cooper (Cooper & Kirk PLLC)
  • Professor Richard Epstein (NYU)
  • Randall Guynn (Davis Polk & Wardwell LLP)
  • Professor Todd Henderson (Chicago)
  • Professor Troy Paredes (former SEC Commissioner)
  • Professor David Reiss (Brooklyn)
  • Professor Lawrence White (NYU Stern)


Brad and I posted Goliath Versus Goliath in High-Stakes MBS Litigation on SSRN (and BePress).  The abstract reads,

The loan-origination and mortgage-securitization practices between 2000 and 2007 created the housing and mortgage-backed securities bubble that precipitated the 2008 economic crisis and ensuing recession. The mess that the loan-origination and mortgage-securitization practices caused is now playing out in courts around the world. MBS investors are suing banks, MBS sponsors and underwriters for misrepresenting the quality of loans purportedly held in MBS pools and failing to properly transfer loan documents and mortgages to the pools, as required by the MBS pooling and servicing agreements. State and federal prosecutors have also filed claims against banks, underwriters and sponsors for the roles they played in creating defective MBS and for misrepresenting the quality of the assets purportedly held in MBS pools. This commentary focuses on the state of this upstream litigation. It reviews claims of several complaints and discusses some decisions on motions for summary judgment in several of the cases. The commentary is not a comprehensive review of all the activity in this area, but it does provide an overview of the issues at stake in this litigation. The litigation in this area is still relatively new, but with hundreds of billions of dollars at stake, it will likely last for years to come and should reshape the MBS landscape.


The Arizona court in deciding the case of Sparlin v. BAC Home Loans Servicing, CA-CV-2010-0173 (Ct. Ap. AzDiv. 2, 2011), had to consider arguments based on the theory of ‘show me the note.’ Sparlin had appealed the lower court decision to grant summary judgment to MERS. Upon reconsideration, the court affirmed the lower court decision and granted summary judgment.

In arguing their ‘show me the note’ claim, the borrowers alleged that MERS was required to actually prove that it was in possession of the original promissory note in order to execute a substitution of trustee appointing Recon-Trust as the substitute trustee and executing an assignment to BAC Home Loans Servicing. These were the documents that allowed the trustee to initiate foreclosure.

The court, in affirming the lower court’s dismissal, found that MERS, as the beneficiary on the deed of trust, had the right to enforce the security instrument. Additionally, the court found that under Arizona law, it was not required of MERS to be the note holder.