Author Archives: David Reiss

Be Careful What You Contract For . . .

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Justice Ramos of the Commercial Division of the New York State Supreme Court NY County) issued an opinion in Assured Guar. Corp. v. EMC Mtge., LLC, 2013 NY Slip Op. 50519(U) (April 4, 2013).  Assured, a monoline insurer, “alleges that Bear Stearns grossly misrepresented the risk of the underlying pooled loans” that Bear Stearns had used as collateral in RMBS deals that it had underwritten. (1) Assured alleged that loan warranties in nearly 90 percent of the loans in one of the pools at issue had been breached.  The court noted that more than half of the loans in that pool had either “defaulted or are seriously delinquent.” (2) Bear Stearns’ successor-in-interest refused to repurchase the breaching loans.

The Court found that the deal documents make “clear that the parties intended to limit Assured’s remedies for breach of the representations and warranties relating to the quality and characteristics of the pooled loans to the Repurchase Protocol . . .” and the Court indeed so limited Assured’s remedies. (4) Justice Ramos relied on the opinion by Judge Rakoff (SDNY) in Assured Guar. Mun. v. Flagstar Bank, that reached a similar result.

One wonders how monoline insurers will seek to change deal documents going forward.  Will they be so willing to treat representations and warranties as mere risk allocation devices between the parties?  As risk allocation devices, the reps and warranties typically make only limited remedies available.  Or will they demand that they be treated as something more — perhaps as actual representations and warranties about the underlying transaction and upon whose shoulders broader remedies could be hung?

6th Circuit Upholds Foreclosure by Lender Under Michigan Law

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The 6th Circuit upheld a foreclosure under Michigan law in Conlin v. MERS et al., (Case No. 12-2021, April 10, 2013).  Plaintiff Conlin sought to have the foreclosure sale of his property “set aside based on alleged defects in the assignment of the mortgage on the property from Defendant Mortgage Electronic Registration Systems to Defendant U.S. Bank.” (2) The Court noted that “Michigan courts have held that once the statutory redemption period lapses [as had occurred in this case], they can only entertain the setting aside of a foreclosure sale where the mortgagor has made ‘a clear showing of fraud, or irregularity.'” (5, citation omitted) Furthermore, the fraud “‘must relate to the foreclosure procedure itself.'” (6, citation omitted)

Conlin claimed that the assignment from MERS to U.S. Bank “was forged or ‘robo-signed.'” (7)  He also claimed that “MERS had no capacity to assign the Mortgage to U.S. Bank.” (7) The Court noted that third parties typically do not have standing to challenge an assignment unless the challenge would render “the assignment absolutely invalid or ineffective, or void.'” (7, citation omitted) The Court determined that the Michigan Supreme Court held that ‘”defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio‘” and that borrowers must be prejudiced by lender’s failure to comply with the foreclosure statute’s requirements. (8, citation omitted)

The court concluded:

Even were the assignment from MERS to U.S. Bank invalid, thereby creating a defect in the foreclosure process under § 600.3204(1)(d), Plaintiff has not shown that he was prejudiced. He has not shown that he will be subject to liability from anyone other than U.S. Bank; he has not shown that he would have been in any better position to keep the property absent the defect; and he has not shown that he has been prejudiced in any other way. Additionally, he has also failed to make the clear showing of fraud in the foreclosure process required to challenge the foreclosure after the expiration of the six-month redemption period. (9)

On Fairy Tales for the Subprime Era

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Practicum has posted my short article, The Emperor’s New Loans: A Cautionary Tale from the Subprime Era, today. It begins

A body of folk tales from the subprime mortgage era is now being written. Some are in PowerPoint. Some are in video format. Some appear in the guise of a non-fiction account.  After all, isn’t The Big Short just Jack the Giant Slayer—with the little guys not only ending up with the gold, but also with the big guys dead on the ground? And some stories, like the one below, are just plain old fairy tales.

You might ask why a complex financial crisis needs such folk tales. And I would tell you that they are necessary because they help us to identify the essence of the crisis. They can also make the significance of the crisis clear to non-experts. And they can help shape government responses to the last crisis in order to avert potential future crises. Luckily, noted storyteller Philip Pullman offers us some guidance on finding the essence of a story.

The rest of the article can be found here.

Careful When Putting Shoe on Other Foot

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Nestor Davidson has posted a very useful article to SSRN, New Formalism in the Aftermath of the Housing Crisis.  The article notes that as “borrower advocates have responded to [the] surge in mortgage distress, they have found success raising a series of largely procedural defenses to foreclosure and mortgage-related claims asserted in bankruptcy.” (391)

Davidson points out that this “renewed formalization in the mortgage distress system is a curious turn in the jurisprudence” because from “the earliest history of mortgage law, lenders have had a tendency to invoke the hard edges of law’s formal clarity, while borrowers have often resorted to equity to obtain a measure of substantive fairness in the face of such strictures.” (392)

What I particularly like about this article is that it takes the broad view on downstream (homeowner foreclosure and bankruptcy) litigation.  Instead of painting a pointillistic portrait of all of this “mortgage distress” litigation (a standing case here, a chain-of-assignment case there), Davidson identifies a pattern of formalistic defenses being raised by homeowners and puts it into historical context.

Davidson warns of the potential unintended consequences of this development: “The borrower push to emphasize formalism in mortgage practice, however understandable, may thus give primacy to the set of judicial tools least amenable to claims of individual substantive justice.” (430)

I don’t think that I agree that this new formalism will bite homeowners in the end.  As Davidson himself acknowledges, “formalism need not be equivalent on both sides  . . ..” (430) But I do agree with his conclusion:

For those concerned about the long-term structural balance between procedural regularity and substantive fairness embodied in the traditional realms of law and equity, the brittleness that the new formalism may be ushering in is worth considering and, perhaps, cause for redoubling efforts to find structural solutions to a crisis that even now continues. (440)

 

 

Can’t Stand It, Just Show Me The Note

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The federal District Court for Massachusetts issued a Memorandum and Order in Ross v. Deutsche Bank National Trust Company that has two interesting aspects. First, it follows the 1st Circuit’s recently decided Culhane. Second, it reaffirms that “show me the note!” is alive and well in Massachusetts. The Rosses alleged that Deutsche Bank violated Massachusetts statutory foreclosure scheme.  These alleged violations included: 1. lack of standing and 2. Deutsche Bank did not have “valid title to either the Note or the Mortgage and thus lacks the legal authority to conduct a foreclosure sale of the subject property.” (7-8)

The bottom line on standing:  the Massachusetts Supreme Court (in Eaton v. Fannie Mae), along with the federal District Court of Massachusetts and the First Circuit have been requiring “strict compliance with the regulations governing who has legal standing to foreclose . . ..” (8)

The bottom line on “show me the note:” this court was willing to carefully parse the chain of title to a note and mortgage.  In this case, they had been owned by New Century which was dissolved by a bankruptcy court.  The court found that “the Rosses have stated a plausible claim that the [] assignment from New Century to Deutsche Bank was invalid.” (13) So, while some courts are not so strict about establishing the legal chain of title to a note and mortgage,we now know that this court is.

No News to Report on Preemption

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The Fourth Circuit recently reversed a dismissal of a fraud claim in McCauley v. Home Loan Investment  Bank, F.S.B.; Deutsche Bank National Trust Company. The main issue on appeal was whether the Home Owners’ Loan Act preempted the homeowner’s state law  claims arising from a mortgage originated by a federal savings association. While the court affirmed the dismissal of the unconscionability claim as preempted by HOLA, it held that the fraud claim “only incidentally affects lending, it is not preempted by HOLA or its implementing regulation . . ..” (12-13)

As to the unconscionability claim, the court found that McCauley “in essence asks us to impose new, substantive requirements on mortgage lenders.” (10) But as to the fraud claim, the court found that HOLA and its implementing regulation were not intended to “preempt state laws that establish the basic norms that undergird commercial transactions.” (7, citation omitted)  McCauley does not blaze a new path on preemption, but it is consistent with a number of recent decisions that refuse to broadly preempt state consumer protection laws, a welcome trend.

Rule of Law Cuts Both Ways

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The New York Appellate Division (2d Dep’t) reversed orders by Justice Schack of New York Supreme Court (Kings County) in HSBC Bank USA, N.A. v. Taher.  Justice Schack became something of a folk hero to many for holding lenders’ feet to fire for their lackadaisical approach to various formal requirements for foreclosures.  But he has been accused of playing fast and loose with the law himself.  Just as many have rightly said that lenders should be made to comply with the law governing foreclosures, those opposing lenders must do the same.  The Appellate Division wrote

Since Emmanuel was decided approximately two months before the Supreme Court improperly directed dismissal of the complaint in the instant action, sua sponte, for lack of standing, we take this opportunity to remind the Justice of his obligation to remain abreast of and be guided by binding precedent. We also caution the Justice that his independent internet investigation of the plaintiff’s standing that included newspaper articles and other materials that fall short of what maybe judicially noticed, and which was conducted without providing notice or an opportunity to be heard by any party (citation omitted) was improper and should not be repeated. (4)

There can be the rule of law without justice, but there can be no justice without the rule of law.