November 13, 2013
Nevada District Court Holds that MERS Has Power to Start Foreclosure Action on Behalf of Lender
The federal district court of Nevada in Smith v. Community Lending, 773 F.Supp.2d 941 (D.N.V. 2011), held that MERS properly started a foreclosure action on behalf of the lender, Community Lending, Inc., because it found that MERS acted within the scope of its authority as Community Lending’s agent in the foreclosure. In this case, the court consolidated two separate cases regarding investment properties where the plaintiff brought 11 causes of action against the defendants.
In the first case, (“651 case”), the Plaintiff, S. Burke Smith bought a home with a total mortgage amount of $148,500 with Community Lending, Inc. (“CLI”) as the lender for a property in Fallon, Nevada, in July 2005. Smith defaulted on the first note on April 1, 2009, and MERS sold the loan to BAC Home Loans Servicing, LP on August 18, 2009. BAC then sent the loan to Recontrust Co., N.A (“Reconstruct”) the same day and First American Title filed a Notice of Default against Smith as Reconstruct’s agent. Reconstruct then started foreclosure proceedings by filing a notice of sale on June 9, 2010.
In the second case, (“653 case”), the Plaintiff entered a mortgage for $148,000 with CLI, also for a property in Fallon, Nevada, but defaulted on April 1, 2009. MERS eventually sold the loan to the The Bank of New York Mellon, who then listed Reconstruct as the trustee of the loan. Reconstruct later initiated foreclosure proceedings against the Plaintiff by filing notice of sale on October 15, 2010.
The district court granted the defendant’s motion to dismiss in both cases and held that
1) MERS had authority to transfer interest in the loan from deed of trust beneficiary to loan servicer;
2) Mortgage foreclosure, in and of itself, did not constitute debt collection as contemplated by Fair Debt Collection Practices Act (FDCPA);
3) Cause of action for unfair lending practices accrued, and three-year limitations period began to run, when loans were made;
4) Deed of trust debtors could not equitably remain in properties without making payments due on deeds of trust until after their unfair lending practices claims had been decided by the court;
5) Deed of trust debtors failed to state claims for bad faith, fraud, fraud in the inducement, or unjust enrichment;
6) Exercise of federal-question jurisdiction over claim alleging violation of Nevada statute premised entirely on FDCPA violation was warranted; and
6) Non-diverse defendants were fraudulently joined for purpose of defeating diversity jurisdiction.
In the 651 case, the district court denied the Plaintiff’s claims for quiet title, injunctive and declaratory relief against MERS because the court found that although MERS did not hold legal title or act as a beneficiary, that it acted within the broad scope of its agency to act on behalf of the owner of the underlying debt (the lender) to start a foreclosure action. As a result, the court found that MERS’s actions were proper and therefore rejected the Plaintiff’s claims against MERS. The court found that the foreclosure in the 653 case was proper for the same reasons 651 case, and denied the Plaintiff’s other claims for the same reasons.
November 13, 2013 | Permalink | No Comments
Kansas Appellate Court Holds that MERS Does Not Have Standing to Initiate Foreclosure Against Homeowners
The Kansas state Court of Appeals in Mortgage Electronic Registration Systems, Inc. v. Graham, 44 Kan.App.2d 547 (KS Ct. App. 2010) held that MERS did not have standing to start a foreclosure action against two Kansas homeowners because the entity is only an agent for the holder of the actual mortgage, Countrywide Home Loans Inc., in this case.
In August 2002, Michelle Graham (“Graham”) bought a house for $140,000 and entered a mortgage with Countrywide Home Loans Inc. and MERS held the actual mortgage. Graham was the sole signatory on the mortgage but lived with David Martinez (“Martinez”), her common law spouse. Graham stopped making monthly mortgage payments in June 2004 and later filed for Chapter 13 bankruptcy in August 2004. MERS initiated a foreclosure action in September 2004 and named both Graham and Martinez as defendants in the action. The district court dismissed the action without prejudice because it learned of Graham’s bankruptcy filing. The bankruptcy was later dismissed in February 2005 for lack of feasibility and Graham, Martinez filed for another bankruptcy in May 2005, and MERS filed a motion for relief from the bankruptcy.
During the second bankruptcy, MERS hired the Georgia law firm McCalla, Raymer, Padrick, Cobb, Nichols & Clark, LLC (“McCalla”) to identify borrowers eligible for loan modification and the firm contacted Graham in October 2005 stating that Graham had been pre-approved for a loan modification if two conditions were met: 1) approval of MERS’ motion for relief from the bankruptcy and 2) dismissal of the bankruptcy. The letter requested Graham and Martinez to contact the firm about the modification, but neither Graham nor Martinez contacted McCalla. On November 9, 2005, Graham lifted the automatic stay on MERS’s foreclosure action and McCalla sent a letter to Graham on November 14 requesting a response to the modification proposal by November 21 or McCalla would close the file. On January 18, 2006, MERS filed a second petition to foreclose the property after the district court had dismissed the second bankruptcy due to Graham’s lack of payment. Graham and Martinez filed counterclaims against MERS and cross-claims against Countrywide alleging that both had committed fraudulent statements in the October letter under the Kansas Consumer Protection Act (KCPA). In February 2008, the district court granted summary judgment for MERS and Countrywide and dismissed Graham’s claims because they failed to provide supporting evidence.
The Court decided two separate issues: the foreclosure action started by MERS and Graham’s fraud claims.
MERS’ Foreclosure Action
The Kansas Court of Appeals reversed the district court’s summary judgment ruling for MERS and dismissed the foreclosure action. The court held that MERS did not have standing to bring the original foreclosure action against Graham. The court found that MERS did not have standing because it was solely a nominee or agent for Countrywide, the holder of the promissory note, and did not suffer any injury since only Countrywide could have collected the mortgage and suffered the harm when Graham did not pay the mortgage.
Graham’s Fraud Claims under KCPA
The Court affirmed the district court’s dismissal of Graham’s fraud claims because Graham and Martinez “simply failed to present any evidence that MERS and Countrywide, through McCalla Raymer’s October 26 letter, engaged in any unconscionable acts as described in” the fraud statute.
November 13, 2013 | Permalink | No Comments
November 12, 2013
Wrongful Foreclosure Claim Survives Motion to Dismiss
Judge Conti (N.D. Cal.) issued an order granting in part and denying in part a motion to dismiss in Subramani v. Wells Fargo Bank N.A. et al., No. 13-1605 (Oct. 30, 2013).
Plaintiff Subramani received a mortgage loan from Defendant Wells Fargo secured by a deed of trust (DOT). Subramani alleges (and these allegations are taken to be true for the purposes of a motion to dismiss) that Wells Fargo sold the loan in 2006 to an affiliate and that it was ultimately bundled with other mortgages into a mortgage-backed security. Subramani later defaulted on the loan and the home was sold at foreclosure.
Subramani contends that documents relating to the foreclosure were void because Wells Fargo “was no longer the valid lender in the DOT, or even an agent of a successor beneficiary after it sold the Loan in 2006 . . .. Plaintiff therefore states that after Defendant sold the Loan, neither Defendant nor anyone else had any right to or interest in the Loan, so all legal notices associated with the note and DOT — including the SOTs [substitutions of trustee] , NODs [notice of defaults], and the foreclosure sale itself — are illegal and void.” (4, citations omitted)
The Court found that at the motion to dismiss stage, Subramani “has sufficiently stated a claim for wrongful foreclosure based on his allegations that Defendant’s 2006 sale of Plaintiff’s DOT precluded Defendant from retaining a beneficial interest in the DOT. Plaintiff has sufficiently alleged that Defendant directed the wrong party to issue Notices of Default, that Defendant is not the true beneficiary, and that Defendant failed to abide by the rules regarding transference of the Loan.” (8, citations omitted)
[HT April Charney]
November 12, 2013 | Permalink | No Comments
Texas Court of Appeals Finds That Plaintiff’s Claim – That the Note and Deed of Trust Became “Split” – Has No Basis in Law
The Court of Appeals of Texas, Ninth District in deciding Townsend v. Barrett Daffin Frappier Turner & Engel, LLP, 2013 Tex. App. LEXIS 13515, 2013 WL 5874607 (Tex. App. Beaumont Oct. 31, 2013) affirmed the lower court’s decision holding that Tex. Prop. Code Ann. § 51.0025 permitted the company to administer the foreclosure proceedings.
Plaintiff alleged conspiracy to commit fraud due to the fact that the promissory note was “split” from the deed of trust when the deed of trust was assigned through MERS. Further, the plaintiff alleged that the local clerk’s office did not have a record of an assignment into Bank of America, as successor “by merger” to BAC Home Loans Servicing, LP.
However, the court found that the plaintiff’s allegation that the note and deed of trust “split” had no basis in law. The court reasoned that the alleged agreement between the persons conducting the foreclosure accomplished neither an unlawful purpose nor a lawful purpose by unlawful means. Thus, the assignment would be binding on both plaintiff, who had notice of it, and the parties to the assignment.
November 12, 2013 | Permalink | No Comments
Eastern District of California Dismisses Plaintiff’s Action, Thus Upholding Decision That Possession of Original Note is Unnecessary
The United States District Court for the Eastern District of California in Candelo et al v. NDEX West, LLC et al., No. CV F 08-1916 LJO DLB (E.D.Cal. 2008) dismissed the plaintiff’s action.
In dismissing the plaintiff’s claims, the court upheld the decision that there was no requirement under the statutory framework for the mandatory production or possession of the original note, by the foreclosing party, to initiate non-judicial foreclosure.
November 12, 2013 | Permalink | No Comments
Alabama Court Dismisses Plaintiff’s Insufficiently Plead Quiet Title Claim
The United States District Court for the Northern District of Alabama, Western Division, in deciding Orton v. Matthews, 2013 U.S. Dist. LEXIS 156870 (N.D. Ala. Nov. 1, 2013), granted [defendant] Bank of America’s motion to dismiss plaintiff’s claims pursuant to Rule 12(b)(6) of the FRCP for failure to state a claim.
Plaintiff’s complaint represented an attempt to quiet title to the underlying property in the case. The theory behind plaintiff’s quiet title action was that, as a result of the separation of the note and the mortgage at the time of their execution, the defendant’s alleged security interest in the property was invalidated.
Defendant attacked the plaintiff’s complaint on multiple grounds, asserting that 1) it was devoid of the factual allegations necessary to maintain an action to quiet title, and 2) its only cause of action is almost wholly dependent on a theory of law, the so-called “split the note” theory, that contravenes established Alabama law.
Defendant successfully argued that such deficiencies prevented plaintiff’s complaint from meeting Rule 8’s pleading standard, and require dismissal of this action under Rule 12(b)(6). The court agreed.
November 12, 2013 | Permalink | No Comments
November 8, 2013
Reiss on Risk Management
Law360.com interviewed me in Banks Caught In Middle Of Regulators’ Fair-Lending Pursuits (behind a paywall). The article reads in part,
Federal and state regulators are increasingly enlisting banks in their pursuit of fair-lending and other violations at payday and auto lenders and other financial services providers with which they do business, a tactic that has also increased banks’ risk of penalties for conduct by third parties.
In late October, the Office of the Comptroller of the Currency was the latest to put out new guidance for banks’ responsibility to monitor the activities of third-party vendors that perform operations on behalf of the bank. Other federal and state regulators have been calling on banks with growing frequency and force in recent years in order to ensure their vendors and clients comply with fair lending and other laws.
* * *
The increased use of pressure on banks to indirectly go after firms that may not be subject to federal or state laws or regulations comes after banks outsourced a great deal of their mortgage-lending operations and other services during the financial crisis, according to David Reiss, a professor at Brooklyn Law School.
While many of those vendors met high standards, others, particularly in the subprime loan context, did not. And banks didn’t monitor those failings, Reiss said.
“The crazy thing about that is you’d think banks would do this on their own,” Reiss said. “Why do they need their regulators to say, ‘Check on these things’?”
November 8, 2013 | Permalink | No Comments
