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Editor: David Reiss
Cornell Law School

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July 22, 2013

Dirty REMICs, Revisited

By David Reiss

Brad and I have posted, Dirty REMICs, Revisited (also on BePress).  The abstract reads:

We review the differences between two visions for the residential mortgage markets, one driven by the goal of efficiency and the other driven by the goals of efficiency and consumer protection. Both visions advocate for structural reform, but one advocates for industry-led change and the other advocates for input from a wider array of stakeholders. Broader input is not only important to ensure that a broad range of interests are represented but also to ensure the long-term legitimacy of the new system. This is a response to Joshua Stein, Dirt Lawyers Versus Wall Street: A Different View, Probate and Property (2013 Forthcoming), which in turn is a response to Bradley T. Borden & David J. Reiss, Dirt Lawyers and Dirty REMICs, Probate and Property 12 (May/June 2013).

July 22, 2013 | Permalink | No Comments

Washington Court Holds That the Language of the Security Instrument Gave MERS Both the Authority to Foreclose and Assign the Deed of Trust

By Ebube Okoli

The court Salmon v. Bank of America, MERS et al., No. 10-446 (D. Wash. May 25, 2011) dismissed claims against Bank of America and MERS. The plaintiffs argued that MERS was a “ghost-beneficiary” and as such could not be the beneficiary of a deed of trust under Washington law, as it did not have an interest in the note. The court rejected this argument, and noted that the beneficiary of a deed of trust is not required to be the note holder

The court, in their holding, noted that MERS had both the authority to foreclose and the authority to assign the deed of trust, based on the language of the security instrument.

July 22, 2013 | Permalink | No Comments

July 21, 2013

Utah Court Holds That Under Utah Law, MERS Was Not Required to Identify the Note-Holder in Order to Permit the Trustee to Proceed With Foreclosure

By Ebube Okoli

The plaintiff in Nielsen v. Aegis Wholesale Corporation, MERS et al., No. 10-606 (D. Utah May 4, 2011) argued that MERS divided the deed of trust as well as the promissory note. The court, in reaching their decision and rejecting the plaintiff’s argument, noted that “the court adopted the defendant’s argument that plaintiff had latched onto a failed theory—that a note and trust deed can be ‘split’ and rendered null and void.” The court subsequently dismissed the plaintiff’s claims against MERS with prejudice.

The court further went on to state that, “by law, each successor to the note also received the benefit of the security, and by contract, MERS was appointed as the nominee beneficiary under the First Deed of Trust. Contrary to the plaintiff’s argument, MERS had established its rights with respect to foreclosure on the security and MERS had, at all relevant times been, entitled to act as beneficiary under the First Deed of Trust.”

The court further noted that under Utah law, MERS was not required to identify the note holder in order to permit the trustee to proceed with foreclosure.

July 21, 2013 | Permalink | No Comments

Oregon Court Rules That MERS’ Role as Beneficiary is Not Inconsistent With the Purpose of Oregon’s Non-Judicial Foreclosure Statute

By Ebube Okoli

The Oregon court in Nigro v. Northwest Trustee Services and Wells Fargo Bank, No. 11 CV 0135 (May 15, 2011) denied the plaintiff’s motion for a preliminary injunction to stop a non-judicial foreclosure sale.

The court in reaching their holding found that the plaintiff failed to establish the necessary elements to sustain a request for a preliminary injunction. Most notably, the plaintiff failed to demonstrate the likelihood of success based on the merits.

The plaintiff alleged that the defendants violated the Oregon Deed of Trust Act by failing to record all transfers of the assignment as well as the note. The court, in their ruling, cited Bertrand v. SunTrust Mortgage, Inc., which held that MERS was specifically designated by all parties as the beneficiary and had the authority to assign the deed of trust. Although MERS was not a party to this case, the court in Nigro ruled that MERS’ role as beneficiary is not inconsistent with the purpose of Oregon’s non-judicial foreclosure statute, and that the Act did not require the recording of note transfers.

July 21, 2013 | Permalink | No Comments

July 19, 2013

Bad Faith Remedies for Loan Modification Negotiations

By David Reiss

New York Supreme Court Justice Torres (Bronx) issued a Decision and Order in Citibank, N.A. v. Barclay et al., No. 381649-09 (June 21, 2013), in which he evaluated what the appropriate remedies were for failing to negotiate in “good faith” as required by CPLR section 3408(f). Like other cases, it recites a litany of facts that make the owner of the note look comically (darkly comically) incompetent or even malevolent.

In an earlier decision, the Court “found that the plaintiff had failed to act in good faith.” (3) In particular, the Court found that Citibank “made it impossible for Barclay to comply with its conflicting ever changing, never written requests for documentation.  Moreover, the plaintiff refused to review applications that were complete and it never took a clear position on the defendant’s loan modification application.” (3) The details in the decision add Dickensian color to this summary.

CPLR section 3408(f) requires that both “the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable conclusion, including a loan modification, if possible.” As NY courts have noted, the CPLR does not offer up any remedies for a party’s failure to negotiate in good faith, thereby leaving the appropriate sanction up to “judicial discretion.” (6)

Other cases have granted remedies such as barring “banks and loan servicers from collecting interest, legal fees, and expenses.  Other penalties have included exemplary damages and staying the foreclosure proceeding.” (6, citations omitted) The Court notes that remedies such as dismissal of the foreclosure, cancelling the note and mortgage, or ordering “a specific judicially imposed loan modification agreement.” (6) The court’s remedy in this case “is a bar on the collection of any arrears, including interest, costs and fees” from the date Barclay “received the unsupported HAMP denial.” (6)

On the one hand, this seems like a measured remedy because it punishes Citibank for the time period that it was not acting in good faith. But given how common this behavior seems to be, one wonders if it will deter future bad faith negotiations.

July 19, 2013 | Permalink | No Comments

July 18, 2013

DoJ All FIRREA-ed Up With S&P Suit

By David Reiss

Law360 quoted me in a story, Prosecutors Unleashed As $5B S&P Action Rolls On (behind a paywall), about DoJ’s success in fending off S&P’s motion to dismiss its FIRREA case. It reads in part

While the latest ruling against S&P was lighter on substance, Brooklyn Law School professor David Reiss called it “a very big deal.”

“It adds to a body of law that gives the government another powerful tool to go after alleged misdeeds by financial institutions,” he said.

The suit, launched in February to much fanfare, targets S&P’s top-notch ratings for complex mortgage-backed securities that later failed. As part of a controversial, widespread practice known as the “issuer pays” model, banks created the securities, paid S&P to rate them and then sold them to investors. The DOJ claims S&P mismarked the securities on purpose to keep clients happy and boost profits.

In its motion to dismiss, the firm argued its public statements touting the ratings as objective, based on solid data and unaffected by potential conflicts of interest amounted to “puffery” and therefore could not form the basis of a fraud suit against S&P and parent company McGraw-Hill Cos. Inc.

But Judge Carter ruled Tuesday that the DOJ had sufficiently alleged S&P’s statements were not general, subjective claims, but were based on specific policies and procedures governing how the firm “shall” or “must not” rate securities. The judge called the firm’s puffery argument “deeply and unavoidably troubling when you take a moment to consider its implications.”

“Despite defendants’ protestations to the contrary, the court cannot find that all of these ‘shalls’ and ‘must nots’ are the mere aspirational musings of a corporation setting out vague goals for its future,” the judge wrote in an 18-page order. “Rather, they are specific assertions of current and ongoing policies that stand in stark contrast to the behavior alleged by the government’s complaint.”

Judge Carter also found the DOJ had sufficiently claimed S&P defrauded investors who had relied upon the ratings in determining the credit risk of certain investments. And the judge ruled the government did not have to plead “with a high degree of particularity” that S&P intentionally issued false ratings because the suit was filed under FIRREA. Tougher pleading requirements set out in the Private Securities Litigation Reform Act, which governs many securities suits, therefore do not apply, the judge ruled.

S&P spokesman Ed Sweeney noted Wednesday that the ruling did not address the merits of the case, as the judge was required to accept the government’s factual allegations as true during the early stages of litigation.

“We now welcome the opportunity to demonstrate the lack of merit to the Department of Justice’s complaint,” Sweeney said. “We firmly believe S&P’s ratings were and are independent, and expect to show just that in court.”

The decision followed a tentative July 8 ruling by Judge Carter. And indeed, given the sheer amount of resources the government has devoted to the case, the finding should have come as no surprise, according to Jacob Frenkel, an attorney at Shulman Rogers Gandal Pordy & Ecker PA who chairs the firm’s securities enforcement practice.

“When you have a deep-pocketed client that is willing to fight, a good lawyer will exhaust all options and remedies,” Frenkel said of S&P’s motion. “It would have been unreasonable to believe it stood any chance of success, but that does not mean you don’t try.”

Still, Judge Carter’s takedown should give the firm pause as it weighs whether to fight the claims or strike a settlement, according to Reiss, the Brooklyn professor.

“We now have a sense that the judge’s take on the guts of the case is pretty favorable to the government,” Reiss said. “And we’re now seeing the rating agencies start to crumble a little bit after their decades-long run of avoiding either settling or losing at trial.”

July 18, 2013 | Permalink | No Comments

July 17, 2013

What Was S&P Puffing?

By David Reiss

I have been closely following DoJ’s suit against S&P since the complaint was filed in February (and see here, here and here).  DoJ alleges that S&P “issued or confirmed ratings that did not accurately reflect true credit risks” and seeks to obtain civil penalties pursuant to FIRREA. (4) Yesterday, Judge Carter issued a doozy of an order, denying S&P’s motion to dismiss the case.

Let’s remember that for the purposes of a motion to dismiss, the judge takes as true all of the facts alleged in the plaintiff’s complaint.  So, if a complaint survives a motion to dismiss, it means that the legal theory of the case is sound and that the plaintiff can win if the facts are as it alleges.

This should be the scariest passage in the order, as far as S&P is concerned:

Defendants lead off with a proposition that is deeply and unavoidably troubling when you take a moment to consider its implications.  They claim that, out of all the public statements that S&P made to investors, issuers, regulators, and legislators regarding the company’s procedures for providing objective, data-based credit ratings that were unaffected by potential conflicts of interest, not one statement should have been relied upon by investors, issuers, regulators, or legislators who needed to be able to count on objective, data-based credit ratings. (7-8)

This is repudiation of S&P’s “puffery” defense: their statements about their objectivity and rigorous methodology were merely “non-actionable puffery” along the lines of Charmin’s claim that it is the softest of all toilet papers. (8)

The Court follows this line of thought through to its logical conclusion:

if no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness? (12)

One wonders how S&P executives responded to their lawyers when they proposed this argument — were they thinking about anything else other than winning this motion?  Did they consider how regulators might react to this argument?

And, while this goes beyond the matter at hand, the Court’s reaction to S&P’s argument is an implicit indictment of the business model of the major rating agencies: they are really in the business of selling licenses to access the capital markets more than they are in the business of issuing mini-editorials about the creditworthiness of securities, as they have successfully argued in previous cases challenging their ratings.

July 17, 2013 | Permalink | No Comments

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