April 24, 2013
No Scarlet Letter for Robo-Signing
An “admitted robo-signer” and her bank were let off the hook in Grullon v. Bank of America et al. (Mar. 28, 2013, No. 10-5427 (KSH) (PS)) (D.N.J.). (19) Grullon, a homeowner, alleged that he, and others similarly situated, was entitled to relief under New Jersey’s Consumer Fraud Act because of BoA’s “bad practices, including: robo-signing, foreclosure documents, concealing the true owner of loans from the borrowers, and initiating foreclosure proceedings before it had the right too, resulted in unreliable and unfair foreclosure proceedings and ascertainable losses.” (1)
Grullon alleged a variety of fraudulent robo-signing practices, including for affidavits and assignments. The Court found that in “light of the lack of- or de minimis nature of- the errors found on the documents said to have been “robo-signed,” and Grullon’s lack of standing to challenge the Assignment, the Court is not satisfied that Grullon has proffered sufficient evidence to support his NJCFA claim on this basis.” (21) The Court was also not satisfied that Grullon “has adequately shown that he suffered any ascertainable loss as a result of the 2009 NOI [Notice of Intention to Foreclosure] or the ‘robo-signed’ documents.” (24) The Court also appears to find that the “robo-signing” of assignments presents no problem as the signer is not attesting to the truth of such a document. (20-21)
Bottom line: one needs to demonstrate that there was a wrong and that harm resulted from it. Scatter shot allegations of robo-signing don’t work.
April 24, 2013 | Permalink | No Comments
April 23, 2013
Cherryland, Very Strange
I looked at the Cherryland decision yesterday. Law360 ran a story (behind a paywall) about it today, quoting me and others. To recap, the original Cherryland case appeared to unexpectedly open up many commercial borrowers in Michigan to personal liability. The most recent Cherryland opinion reversed this result as a result of Michigan’s newly passed Nonrecourse Mortgage Loan Act.
The story reads in part:
Cherryland and Schostak reaped the benefits of the NMLA. But many CMBS loan documents are similarly written, and other borrowers and guarantors “may not have the saving grace of a politically connected developer getting a law passed very rapidly,” said Brooklyn Law School professor David Reiss.
“If I was an existing borrower [or borrower’s counsel], I would look at this very carefully,” Reiss told Law360. “And new borrowers should try to negotiate new language that protects for this, saying that becoming insolvent is not something that is going to trigger the bad boy guarantee.”
After the initial decision was handed down last year, attorneys say they and their colleagues all took a hard look at the language in their clients’ nonrecourse loan documents to be sure that if they found themselves in a similar situation they would be protected without the cover of a law like Michigan’s NMLA or Ohio’s Legacy Trust Act, which followed shortly thereafter.
In fact, experts say they don’t believe many other states will likely follow suit with their own guarantor-protecting statutes. So even though Wells Fargo lost out in the Cherryland row, lenders will likely keep the case in mind when considering deals.
Although “most people believe that the [pre-NMLA] decision in Cherryland was not what was intended by virtue of the documents,” said Schulte Roth & Zabel LLP real estate partner Jeff Lenobel, the solvency covenant was drafted in a way that allowed it to be read as a bad boy trigger.
This has led many who represent borrowers and guarantors to seek more due diligence and spend more time making sure loan language is just right.
More than $1 trillion in CMBS loans are coming due over the next several years, and Lenobel said he wouldn’t be surprised to see the issue come up again in a different court.
While the Cherryland case is all but over, another similar suit — Gratiot Avenue Holdings LLC v. Chesterfield Development Co. LLC — is making its way through Michigan’s federal courts. And attorneys aren’t ruling out the possibility of an appeal to the U.S. Supreme Court to ultimately determine the responsibilities of a guarantor in a nonrecourse loan.
“It may be a very smart move by the lending industry to appeal to the Supreme Court,” Reiss said.
April 23, 2013 | Permalink | No Comments
Bounced Mortgage Relief Checks
In February, federal banking regulators reached a $9.3 billion pact with 13 major lenders to settle claims of foreclosure abuses like bungled loan modification and flawed paperwork. Under the deal, homeowners can receive up to $125,000 in cash relief.
Unfortunately, as some of the 1.4 million homeowners entitled to settlement funds went to go cash their much-anticipated checks, they found themselves on the receiving end of some bad news– the “funds were not available.”
Since the settlement, there have been a number of problems. For example, in Ohio, problems arose at Rust Consulting, a firm chosen to distribute the checks. After collecting the $3.6 billion from the banks, Rust had failed to move the money into a central account for distribution. Second, there have been bureaucratic delays like those arising from checks made out jointly to estranged divorcees.
Even though the settlement is supposed to bring relief to million of homeowners, this fiasco of “bounced checks” is just one of the latest “runarounds” leaving homeowners increasingly exhausted at the process.
Article here.
Read about settlement here.
April 23, 2013 | Permalink | No Comments
April 22, 2013
Cherry Bombs in Michigan
An ongoing Michigan state case, Wells Fargo Bank, N.A. v. Cherryland Mall L.P. et al., has been generating a lot of heat over an obscure but important issue for commercial mortgage borrowers, the scope of carveouts from standard nonrecourse provisions in loan documents. And now the most recent opinion issued in the case raises important constitutional issues as well.
This case (as well as the similar Chesterfield case (a federal court case also in Michigan)) took many in the real estate industry by surprise by reading language in the loan documents at issue in those cases so as to gut their nonrecourse provisions. Michigan (as well as neighboring Ohio) quickly passed legislation to return the nonrecourse language to how it was commonly understood.
The Michigan courts’ interpretations of the language in the loan documents was inconsistent with how such provisions were typically understood in the industry. While the new statutes returned things to how they were commonly understood to be before the cases were decided, they did so in a way that raises more fundamental issues. Most importantly, such statutes potentially violate the Contracts Clause of the United States Constitution which bars the “impairing” of “the Obligation of Contracts.”
The most recent Cherryland opinion upheld the constitutionality of the new Michigan statute and rightly notes that the Contracts Clause is not read literally. This has been true at least since the Depression era U.S. Supreme Court case of Home Building & Loan Association v. Blaisdell did not invalidate Minnesota’s mortgage moratorium. The U.S. Supreme Court had thereby given states some leeway pursuant to their police power to remedy social and economic problems, notwithstanding the text of the Contracts Clause. The situation in the Cherryland case is less sympathetic than that in Depression-era Blaisdell, where many, many homeowners were being foreclosed upon. The Cherryland borrower, in contrast, is a politically-connected real estate developer. But the point remains that the Contracts Clause is not an absolute bar to legislative revision of privately negotiated contracts. How politically connected, you might ask. The court indicates that
defendant [David] Schostak is co-chief executive officer of defendant Schostak Brothers & Company, Inc., and that Robert Schostak is co-chairman and co-chief executive officer. . . . Robert Schostak is “a high ranking Republican Party leader in Michigan, with many years of involvement in assisting the party’s candidates to gain election in the legislature.” We note that Robert Schostak has been chairman of the Michigan Republican Party since January 2011, was finance chairman through the 2010 election cycle, and had served on campaign fundraising teams for prominent Republicans. (8, note 3)
The borrowers here are as well positioned to get helpful legislation passed as anyone. There is much to chew over here, not the least of which is the Court’s finding that the statute was not “intended to benefit special interests.” (8)
There are also important practical aspects to the case. For instance, it is quite possible that courts in other jurisdictions will read the typical CMBS nonrecourse language similarly to how the Michigan courts read it. Lenders will want to take a look at their loan documents to determine whether they mean what they say and say what they mean. And borrowers should read the language in their loan documents carefully before signing on the dotted line. They have been warned.
April 22, 2013 | Permalink | No Comments
April 19, 2013
Robo-Signing Complaints Must Sing A Different Toone
The Court of Appeals for the 10th Circuit took a hard look at a complaint alleging robo-signing misbehavior relating to a promissory note and its various endorsements in Toone v. Wells Fargo Bank, N.A. et al., (Mar. 8, 2013, No. 11-4188). The court noted that
Ordinarily, we accept the well-pleaded factual allegations of the complaint as true for purposes of resolving a motion under Rule 12(b)(6). But there are exceptions to this rule. Courts are permitted to review “documents referred to in the complaint if the documents are central to the plaintiff’s claim and the parties do not dispute the documents’ authenticity.” The Note falls squarely within this exception: We may consider it in evaluating the plausibility of the Toones’ claims because it is mentioned in the complaint, it is central to their claims, and its authenticity is not disputed. (7, citations omitted)
The Court found that
The face of the Note contradicts the Toones’ allegations. The first endorsement states that Accubanc is Premier’s “agent and attorney in fact,” Aplt. App., Vol. II at 209 (capitalization omitted), and the Toones present no argument why the endorsement would be invalid when signed by Premier’s agent. Likewise, the other endorsements look regular on their face. Of course, the endorsements may be forged or otherwise fraudulent. But the complaint alleges no facts from which one could infer such misconduct. It does not explain what “robo-signing” is or why it renders the endorsements fraudulent, let alone include factual content indicating that it occurred in this case.(8)
The 10th Circuit now joins many other courts in finding that “bald allegations of “robo-signing” do not suffice under the Rule 8(a)(2) standard set by Iqbal.” (8)
April 19, 2013 | Permalink | No Comments
April 18, 2013
Judiciary’s Take on the Subprime Zeitgeist
The 2nd Circuit’s opinion in FHFA v. UBS Americas Inc. et al. (April 5, 2013, No. 12-3207-cv) offers an interesting window into how at least some members of the judiciary understand the Subprime Crisis. On its face, the case was about some technical issues of procedure — whether the case was untimely and whether the FHFA lacked standing. The Court’s reasoning, however, delved into some deep issues.
In discussing the timeliness issue, the Court concluded that given the statute’s plain language and the particular provision as a whole, “a reasonable reader could only understand” it to resolve the issue in favor of the FHFA. (17) Then, seemingly gratuitously, the Court delved into the legislative history of the statute. But this legislative history seemed to be drawn as much from the Court’s understanding of recent events as from the record. It wrote
Congress obviously realized that it would take time for this new agency to mobilize and to consider whether it wished to bring any claims and, if so, where and how to do so. Congress enacted HERA’s extender statute to give FHFA the time to investigate and develop potential claims on behalf of the GSEs — and thus it provided for a period of at least three years from the commencement of a conservatorship to bring suit.
Of course, the collapse of the mortgage-backed securities market was a major cause of the GSEs’ financial predicament, and it must have been evident to Congress when it was enacting HERA that FHFA would have to consider potential claims under the federal securities and state Blue Sky laws. It would have made no sense for Congress to have carved out securities claims from the ambit of the extender statute, as doing so would have undermined Congress’s intent to restore Fannie Mae and Freddie Mac to financial stability. (17-18)
I agree with the Court on the substance, but I found it interesting that certain things about the legislative history were “obvious,” certain facts “must have been evident” and alternative interpretations would make “no sense.” I am not sure if I could go that far.
This version of legislative history does, however, reflect a view that Congress intended the Executive Branch to take extraordinary measures to hold financial institutions accountable for their role in the financial crisis.
April 18, 2013 | Permalink | No Comments
