March 28, 2013
Tennessee Court of Appeals Dismisses Homeowner Complaint as Unripe
In Mills v. First Horizon Home Loan Corp., No. W-2010-00310-COA-R3-CV, 2010 WL 4629610 (Tenn. Ct. App. Nov. 16, 2010), the court dismissed the homeowners complaint as unripe for declaratory judgment. It did not find that the mortgage would be unenforceable based on the involvement of MERS.
The appeal arose from a complaint to quiet title filed by the homeowners against First Horizon Home Loan Corporation MERS. The homeowners had two mortgages and asserted that, although the second mortgage held by First Horizon on their residence had been satisfied and the deed of trust released, First Horizon had failed to surrender the note as required by Tennessee Code Annotated § 47-3-501(b). Moreover, they were told that the second “note” was destroyed, therefore under Tennessee Code Annotated § 47-3-309, First Horizon had a burden to prove that the second mortgage was enforceable “when the note went missing.” The homeowners also argued that despite language in the deed of trust, MERS cannot be a beneficiary of the first mortgage deed because it never had a right to their mortgage note payments.
The court held that even though the complaint is styled as an action to quiet title, there is no suggestion that the homeowner’s title currently is encumbered other than by a mortgage which they do not deny executing. The second deed of trust securing the second mortgage has been released. The terms of the first mortgage are not in dispute, the mortgage is not in default, and no enforcement proceedings have been initiated against the homeowners. Therefore the action is actually in the nature of a declaratory judgment action that seeks to ascertain whether there is a right to enforce the first mortgage in foreclosure action. The court also found that the real question raised in this action is whether a potential foreclosure action or action to enforce the note upon default would be successful if the original note cannot be produced. Because this was not an enforcement proceeding or foreclosure action, the court found that the issue is not ripe for review where the note is not in default and no foreclosure or enforcement proceedings have been initiated against the homeowners.
March 28, 2013 | Permalink | No Comments
Bransten Trio: Part Tres
The last of the Bransten Trio of cases (previously, I wrote of Part Un and Part Deux) dealing with Allstate’s complaint against Morgan Stanley has some of the allegedly misrepresentative language at issues in such cases. A sampling includes
- “These mortgage loans may be considered to be of a riskier nature than mortgage loans made by traditional sources of financing . . .. The underwriting standards used in the origination of [these loans] are generally less stringent than those of Fannie Mae or Freddie Mac with respect to a borrower’s credit history and in certain other respects . . . . As a result of this less stringent approach to underwriting, the mortgage loans purchased by the trust may experience higher rates of delinquencies, defaults and foreclosures . . ..” (24)
- “It is expected that a substantial portion of the mortgage loans will represent” a DTI ratio exception, a pricing exception, a LTV ratio exception or “an exception from certain requirements of a particular risk category.” (25)
- The court noted that the Morgan Stanley defendants indicated that in connection with various MBS certificates they issued, “‘a significant number,’ ‘a substantial portion,’ or a ‘substantial number’ of the loans represented underwriting exceptions.” (25)
Justice Bransten found, as she did in the other two cases referenced above, that such warnings are “ineffective.” (26) She further notes that the defendants’ “statements are misleading to the extent that they imply that defendants would act in accordance with, rather that [sic] completely disregard, the results of their findings” from their reviews of the loans securing the MBS certificates at issue in the case. (29)
March 28, 2013 | Permalink | No Comments
US District Court of Nevada Dismisses Motion of Wrongful Foreclosure, Negligence and Quiet Title
In Vazquez v. Aurora Loan Services, No. 2:08-CV-01800-RCJ-RJJ, 2009 WL 1076807 (D. Nev. 2009), the court granted MERS’ motion to dismiss claims of wrongful foreclosure, negligence and quiet title and found that the land records “sufficiently demonstrate[d] standing by Defendants with respect to the loan and the foreclosure conducted pursuant to applicable law and the Nevada foreclosure statues.” The court rejected the negligence claim because it found that neither Aurora nor MERS were the broker or lender of Plaintiffs’ conventional home mortgage loan and neither owed the alleged negligence duty as a matter of law. The quiet title claim was also dismissed because no claim was stated for wrongful closure, therefore no basis to quiet title.
March 28, 2013 | Permalink | No Comments
Kansas Bankruptcy Court Finds that Agency Relationship Exists With Use of the Word “Nominee”
Martinez v. MERS, et al., No. 09‐40886, 2011 WL 489905 (Bankr. D. Kan. Feb. 10, 2011), the court held that assignment of the Note and Mortgage to different entities does not render them void because such a split may be performed when there is an “agency relationship” between the holder of the note and the holder of the mortgage. The court also looked to the language of the mortgage and found that there was sufficient evidence to demonstrate that MERS was acting as the agent for the lender. MERS also submitted the affidavit of its Treasurer to demonstrate that an agency relationship existed. The court reasoned, “the fact that MERS and Countrywide chose to use the word “nominee,” rather than “agent,” does not alter the underlying relationship between the two parties.”
The homeowner executed and delivered a promissory note to Countrywide. The loan was made to enable the homeowner to purchase real property, which she claimed as her exempt homestead in the bankruptcy proceeding. Countrywide has remained the holder of that note. To secure repayment of the debt to Countrywide and its successors and assigns, the homeowner signed a mortgage on the property to “MERS, as the nominee for Countrywide and its successors and assigns.” The mortgage specifically identifies the lender as Countrywide Home Loans, Inc., the same Lender identified in the note, the amount of the mortgage is identical to the amount borrowed under the note, and the mortgage instrument, itself, grants Countrywide various rights. The Mortgage further states that: “MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender.” The mortgage was properly and timely recorded with the county.
March 28, 2013 | Permalink | No Comments
Indiana Superior Court Upholds MERS’ Right to Assign
The Bank of New York Mellon v. Michael R. Green, Case No. 41D01-0901-MF-00027, Johnston Superior Court (Sept. 20, 2010), held that Bank of New York Mellon‘s mortgage is enforceable and that MERS as the mortgagee, had the right to assign the mortgage. Additionally, the court found that there is no disconnection between the note and mortgage since MERS was defined as both mortgagee and nominee for Fremont, the lender, and Fremont‘s successors and assigns and acted in accordance with the terms of the mortgage.
March 28, 2013 | Permalink | No Comments
March 27, 2013
Georgia Bankruptcy Court Holds that Security Deed Creates an Agency Relationship Between Lender and MERS
In Drake v. Citizens Bank of Effingham, et. al., AP No. 10-4033 (Bankr. S.D. Ga. Feb. 28, 2011), the court held that the security deed granted to MERS satisfied the requirements of Georgia law and the language of the security deed created an agency relationship between the lender and MERS. The debtors purchased real property and to complete the transaction, they borrowed the purchase money from Citizen’s Bank of Effingham, executed a promissory note for the borrowed amount, and executed a deed to secure debt as security for that loan. The security deed named MERS as grantee and nominee for Citizen’s Bank and its successors. The note was transferred multiple times, with different entities taking possession, ownership, and servicing rights at different times. Ownership and possession of the security deed were transferred at least once. When Debtors filed Chapter 7, the Trustee commenced an adversary proceeding to determine the extent, validity, and priority of the security deed, asserting that the mortgage note was unsecured.
The court found that there “was no split of the Note and Security Deed as a matter of contract by any transfer of the Note, because the Security Deed expressly contemplate[d] that the Note [could] be transferred from the original Lender, and that MERS’ role as nominee for the Lender extend[ed] to each successive assignee.” It also held that “the note and the deed must (and do) retain a legal nexus except on the rare occasions when a mortgagee will wish to disassociate the obligation and the mortgage, but that result should follow only upon evidence that the parties to the transfer so agreed.”
March 27, 2013 | Permalink | No Comments
Martin-et Act?
I am on the record in favor of greater prosecutorial attention to the events that led to the financial crisis, but I also believe that any prosecutions that result from such investigations should arise from laws that clearly outline potential liability. Jeff Izant, a 3L at Columbia, has written a Note on an important, related topic: Mens Rea and The Martin Act: A Weapon of Choice for Securities Fraud Prosecutions?
In particular, Izant argues
that the mental state requirements for Martin Act Section 352-c misdemeanor and felony liability need to be clarified and more thoroughly supported, because the statutory text and legislative history are somewhat ambiguous, and the subsequent jurisprudence has failed to provide a coherent explanation for the current state of the doctrine. Nonetheless, the Martin Act’s text, history and underlying policy rationale can be interpreted to support strict liability prosecutions for misdemeanor securities fraud, and to impose felony liability only for reckless violations of the statute. (919)
I have already noted that the Martin Act is in need of a thorough review, but Izant makes a strong case that strict liability under the act is on shaky grounds both as a legal and policy matter.
Izent notes that the Martin Act is a powerful club for the NY Attorney General to wield. Because those under investigation fear it so and typically choose to settle, there is little case law to guide our understanding of its reach. Indeed, the New York Court of Appeals has never directly addressed the mens rea element of a Martin Act violation and Izant argues that lower courts have also not addressed it satisfactorily. Because of this, Izant concludes that the Martin Act poses dangers to the rule of law, particularly when the citizenry is calling for blood after a financial crisis.
Jean Martinet came to be a symbol of one “who demands absolute adherence to forms and rules.” The Martin Act poses a greater danger: in the wrong hands, it can demand absolute adherence to ambiguous rules that are only clearly articulated after the fact. The Martin Act is in need of legislative attention. Let us hope that some in the NY State Assembly or Senate agree.
March 27, 2013 | Permalink | No Comments
