March 27, 2013
Connecticut Superior Court Recognizes MERS’ Status as Mortgagee and MERS’ Subsequent Assignee
In LaSalle Bank v. Johnson, No. CV‐085016113, 2009 WL 2872844 (Conn. Super. Aug. 10, 2009), the court recognized MERS’ status as mortgagee and MERS’ subsequent assignment of the mortgage. Fremont Investment & Loan loaned Ronald Johnson $192,000.00. To secure a loan from Fremont Investment & Loan, homeowner gave a mortgage to MERS. A foreclosure action against the homeowner was then commenced for unpaid water and sewer services and a judgment of foreclosure by sale was obtained. In that case, Fremont was named as a defendant but MERS was not. During the foreclosure sale, JMP emerged as the successful bidder and the deed was recorded under JMP. After the judgment of foreclosure by sale, MERS assigned its mortgage to LaSalle Bank. The court held that as assignee, LaSalle had standing to not only bring an action to foreclose its mortgage but it also entitled to summary judgment. Therefore, it upheld LaSalle’s contention that due to WPCA’s failure to name MERS as a party defendant, LaSalle is an omitted party and did not have its mortgage extinguished by the prior foreclosure action by WPCA and therefore, has standing to bring an action against JMP.
March 27, 2013 | Permalink | No Comments
March 26, 2013
Bransten Trio: Part Deux
As I work through the Bransten Trio of cases on misrepresentation in the securitization process, I am struck by the arguments of the defendants, arguments that do not seem to carry much weight with judges who hear them. In the Merrill Lynch case, the defendants (all Merrill-affiliated entities) “argue that it was not reasonable for plaintiffs, as sophisticated investors in the mortgage-backed security market, to rely on ‘unverified information.'” from the mortgage originators that was repeated by the defendants with the defendants making “no representations or warranties as to the accuracy or completeness of that information.”. (22)
This court, like others, does not treat “boilerplate disclaimers and disclosures” as Get Out of Jail Free Cards” for underwriters. (22) The court reviews a number of cases in which courts similarly refuse to treat such disclaimers as such, including
- Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 773 (1st Cir. 2011)
- In re Morgan Stanley Mortgage Pass-Through Certificates Litig., 810 F. Supp. 2d 650, 672 (S.D.N.Y. 2011)
- New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Group, PLC, 720 F. Supp. 254, 270 (S.D.N.Y. 2010)
- Pub. Employees’ Ret. Sys. of Mississippi v. Merrill Lynch & Co., Inc., 714 F. Supp. 2d 475, 483 (S.D.N.Y 2010)
- In re IndyMac Mortgage-Backed Sec. Litig., 718 F. Supp. 2d 495, 509 (S.D.N.Y. 2010)
It will be interesting to see how disclaimers will be modified to offer increased protection to underwriters in the future. Could an underwriter protect itself by saying that “there is a high likelihood that the representations and warranties contained in offering materials are false and intended solely to convince potential purchasers of the securities to purchase them?”
March 26, 2013 | Permalink | No Comments
US District Court for Arizona Rejects Split-Note Theory Claim Made in Multi-District Litigation
In In Re MERS Litigation, 09-2119-JAT (D. Ariz. 2011), the case was a multi-district litigation concerning claims related to the formation and operation of MERS, Inc. and MERSCORP, Inc. The plaintiffs alleged violations of Arizona Revised Statutes (“A.R.S.”) § 33-420; the tort of wrongful foreclosure; violations of Nevada Revised Statutes § 107.080 and Oregon Revised Statutes § 86.735; allegations of aiding and abetting wrongful foreclosure; aiding and abetting predatory lending; unjust enrichment; and slander of title; violations of O.R.S. § 646.607, and South Carolina Code of Laws § 39-5-10. All of the claims turn on the contention that naming MERS as a beneficiary on the deeds of trust, and the subsequent operation of the MERS system splits the MERS deeds of trust from their promissory notes and renders these notes unsecured and unenforceable.
The court rejected the contention. They reasoned that none of the cases cited by Plaintiffs support their theory that naming MERS as the beneficiary completely destroys the security and bars all attempts at non-judicial foreclosure in Arizona, California, Nevada, or Oregon. Additionally, the court did not find legal support for the proposition that the MERS system of securitization is so inherently defective so as to render every MERS deed of trust completely unenforceable and unassignable. The court also did not find any of the contentions supported by statutory authority.
March 26, 2013 | Permalink | No Comments
District Court of Arizona Rejects Homeowners’ Motion to Remand, Grants Lender’s Motion to Dismiss, Without Prejudice
In Kane v. Bosco, 10-CV-01787-PHX-JAT, 2010 WL 4879177 (D. Ariz. Nov. 23, 2010) the court denied plaintiffs’ motion to remand, and granted defendants’ motions to dismiss, without prejudice.
In 2005 plaintiffs/homeowners, Peter and Diane Kane, refinanced their residential loan for $120,000. The corresponding deed of trust named Downey Savings and Loan Association, F.A. (“Downey”) as beneficiary. Several months later Downey executed a corporate assignment which assigned all of its interest in the deed of trust to defendant MERS, as nominee for defendant Central Mortgage Company (“Central”). In 2010, MERS assigned the deed of trust to Central. A substitution of trustee was also recorded appointing defendant Michael A. Bosco, Jr. (“Bosco”) as successor trustee under the deed of trust. At the same time a notice of trustee’s sale was recorded.
While the trustee’s sale was pending, plaintiffs hired a forensic examiner to review their loan documents. They also hired a certified banking expert witness to investigate which entity had the right to foreclose. Plaintiffs filed this complaint and sought an emergency temporary restraining order, alleging defendants violated the Truth In Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”), and that MERS lacked authority to transfer any interest in property or to initiate foreclosure proceedings. The court denied this order and a subsequent order. In this decision the court addressed plaintiffs’ motion to remand and various defendants’ motions to dismiss.
Plaintiffs’ Motion to Remand
The court denied plaintiffs’ motion to remand. Plaintiffs argued that because defendants committed crimes and felonious acts against the State of Arizona; and that state law claims and issues predominated over the federal claims; and that defendants did not properly appear in state court so as to have the authority to remove, remanding was proper. First, the court rejected plaintiffs’ argument that crimes against the State of Arizona warranted removal to the U.S. Supreme Court, concluding “plaintiffs misunderstand the jurisdiction of the federal courts.” Since the state of Arizona is not a party to the action, and there were no allegations of crimes against the state in the complaint, removal to the U.S. Supreme Court was inappropriate. Second, the court rejected plaintiffs’ supplemental jurisdiction argument, finding their claims of fraud and invalidity of the loan did not predominate over the federal law claims as they all arose from the same transaction or series of transactions. Finally, the court clarified that defendants’ counsel did not have to file a motion or notice of appearance before seeking to remove the case pursuant to a notice of removal.
Defendants’ Motion to Dismiss
The court granted defendants’ three separate motions to dismiss.
First, the court found plaintiffs’ complaint lacked “specific, clearly defined allegations as to each defendant.” Accordingly, plaintiffs’ complaint failed to satisfy the pleading requirements in Federal Rules of Civil Procedure 8 and 9.
Second, the court agreed that plaintiffs’ complaint failed to make any allegations related to a breach of Bosco’s obligations as successor trustee. Since they did not allege any violations of his obligations under the deed of trust or the statutes governing deeds of trust, Bosco was entitled to immediate dismissal.
Third, the court dismissed the individual defendants from the action as plaintiffs’ complaint failed to allege defendants were personally involved in the origination or servicing of plaintiffs’ loan.
Fourth, the court found plaintiffs’ TILA and RESPA claims were both insufficient as they didn’t allege any specific conduct by defendants that constituted a violation. Further, both claims were barred by the statute of limitations. Additionally, plaintiffs’ claims under the FTCA were barred as private litigants cannot maintain a claim for unfair trade practices. Finally, plaintiffs’ claims that defendants violated the Federal Deposit Insurance Act were also dismissed as they did not identify any provision of the act defendants allegedly violated.
Fifth, plaintiffs’ claims of fraud were dismissed as they were not made with particularity as required by F.R.C.P. 9(b).
Sixth, defendants’ authority to foreclose was not diminished by their mistitled assignment. The court concluded “MERS’s failure to title the document as a Corporate Assignment of Deed of Trust, instead of Mortgage, does not invalidate the…assignment…and subsequent transactions.”
Seventh, the court rejected plaintiffs’ allegations that MERS lacked the authority to assign security instruments or initiate foreclosure processes. It concluded it “fail[ed] to see how the MERS system lacks authority as a nominee of lenders to assign deeds of trust, and how, in assigning deeds of trust, commits fraud or records forged of false documents.”
Eighth, the court rejected plaintiffs’ claims that defendants failed to produce the original note before the commencement of a trustee’s sale. It quoted Mansour v. Cal W. Reconveyance Corp., 618 F.Supp.2d 1178, 1181 (D. Ariz. 2009) for the proposition that courts “have routinely held that [the] ‘show me the note’ argument lacks merit.”
Ninth, while plaintiffs alleged defendants filed forged and fraudulent documents, they did not specify which documents they were referring to.
Tenth, the court rejected plaintiffs’ claims regarding the splitting of the note and deed of trust as this is not a requisite to foreclosure under Arizona case law.
Accordingly, the court granted defendants’ motions to dismiss, but allowed plaintiffs 21 days to amend their complaint on their claims of fraud, Arizona’s deed of trust statutes, the Federal Deposit Insurance Act, forgery, and any specific declaratory relief.
District Court of Arizona Grants Lender’s Motion to Dismiss in Part, Denying Relief Only on Homeowners’ Quiet Title Claim
In Higton v. Quicken Loans, Inc., 2:10-CV-01320 JWS, 2011 WL 333357 (D. Ariz. Jan. 31, 2011) the court granted defendant, Quicken Loans, Inc.’s (“Quicken”), motion to dismiss for failure to state a claim in part and denied relief in part.
In 2007, plaintiffs/homeowners Graham and Janet Higton refinanced their home, borrowing $600,000 from Quicken. Plaintiffs claimed Quicken deliberately overstated their monthly income to qualify them for a loan that was “designed for failure.” Plaintiffs claimed the introductory interest rate, applicable only for the first five years, was never disclosed to them. After making payments for three years, they received a letter from Quicken in 2010 informing them that they risked default because the loan to value ratio was approaching its maximum of 115%. In fear they would lose their home, plaintiffs filed this suit asserting claims against Quicken for intentional misrepresentation, consumer fraud, quiet title, and violation of the Truth In Lending Act (“TILA”). In response, Quicken filed a 12(b)(6) motion to dismiss for failure to state a claim.
First, for plaintiffs’ intentional misrepresentation claims, the court noted there is a three-year statute of limitation for actions based on fraud. However, the time is not deemed accrued until the discovery by the aggrieved party of the facts constituting the fraud. Here, the court found it was unclear whether any of the “true facts” were not included in the loan documentation. It concluded by stating “[i]f all of the necessary information was disclosed to the Higtons in the loan documents, then the fraud claim is time-barred.”
Second, the court discussed plaintiffs’ claims of common law fraud. To make a showing of common law fraud, a party must show:
(1) A representation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury.
In total, the Higtons had five potential bases for their fraud claim.
1. The introductory interest rate was not disclosed to them, and thus they did not realize they had a negative amortization loan
The court concluded that based on the TILA statement provided to the Higtons, “[s]imple multiplication and division are all that would have been necessary to determine the…rate.” Further, the loan documents included “negative amortization” in bold typeface. Thus, plaintiffs failed to show element 5.
2. Quicken fraudulently overstated their income in the loan application
The court found plaintiffs failed to meet the 4th element because the Higtons certified to Quicken that their monthly income figure was “true and correct” as of 2007. The court found the misrepresentation was not to the Higtons, but rather “to employees of Quicken who were evaluating the loan.”
3. The court found this claim identical to the first and did not analyze it
4. Quicken induced the Higtons to enter into the loan transaction on the false belief that the Introductory Payment could be made for five (5) years
Again, the court found the only proof plaintiffs offered of this claim related to the nondisclosure of the introductory rate.
5. Quicken made verbal representations that the Higtons could refinance the loan at a later date
The court again found plaintiffs had failed to describe these assertions in their complaint.
Third, the court discussed plaintiffs’ consumer fraud claim, which has a one year statute of limitation after the cause of action accrues. Here, because reasonable diligence would have uncovered any fraud in the loan documentation at closing, the court concluded this claim was time-barred.
Fourth, the court addressed plaintiffs’ quiet title claim. It agreed with the Higtons that Quicken has an interest in their residence based on the deed of trust. It found that “[a]lthough plaintiffs’ claim does not appear very strong, it does not fail based on Quicken’s disclaimed interest in the property.”
Fifth, the court found plaintiffs’ TILA claims were time-barred as well, since any TILA claim must be brought “within one year from the date of the occurrence of the violation.” Here, the violation would have occurred no later than 2007. The court also rejected plaintiffs’ request for equitable tolling, finding their argument that they “are not mortgage professionals” as insufficient.
Finally, the court agreed with the Higtons that there were sufficient facts plead to support punitive damages. However, it clarified this is not an independent legal claim. It also granted the Higtons leave to amend. Accordingly, it dismissed plaintiffs’ claims based on intentional misrepresentation, consumer fraud, and TILA without prejudice. It also denied Quicken’s motion to dismiss plaintiffs’ quiet title claim.
March 26, 2013 | Permalink | No Comments
District Court of Illinois Grants Ocwen Loan Servicing’s Motion for Summary Judgment, Finding MERS had Authority to Assign Mortgage & Note
In Ocwen Loan Servicing LLC v. Kroening, 10 C 4692, 2011 WL 5130357 (N.D. Ill. Oct. 28, 2011), the District Court for the Northern District of Illinois granted Ocwen Loan Servicing’s motion for summary judgment to foreclosure.
Defendant/homeowner, Victoria Kroening had originally executed a note and mortgage with Taylor Bean & Whitaker Mortgage Corporation (“TBW”) in 2007. The mortgagee of the mortgage was MERS, which acted as nominee for TBW. In 2009, MERS assigned the rights associated with the mortgage and the note to Ocwen Loan Servicing LLC (“Ocwen”). After defaulting, Ocwen issued a notice of default to Ms. Kroening. When she did not cure her default, Ocwen initiated this suit.
The court found that this case was essentially a contract dispute. After discussing various provisions in the mortgage, the court concluded the “clear language unambiguously grants MERS the power to assign the mortgage and the note.” Further, since Illinois law defines “mortgagee” more broadly than just the holder of a note to include “any person designated or authorized to act on behalf of such holder,” the court concluded MERS had the legal authority to assign the mortgage.
The court also rejected Ms. Kroening’s argument that Ocwen didn’t actually possess the note. The court found that the note itself is a negotiable instrument, endorsed in blank, and thus subject to assignment by transfer and possession. Further, the contract’s clear language unambiguously gave MERS the ability to assign the right to foreclose. Finally, the court rejected Ms. Kroening’s claims that she never received notice of the default as “unsupported by record evidence.” Since Ms. Kroening had not “put forth any evidence upon which a reasonable jury would find for her,” the court granted Ocwen’s motion for summary judgment and entered a judgment of foreclosure and order of sale.
March 26, 2013 | Permalink | No Comments
Kentucky Counties Sue MERS and Banks for Recording Fees
In Boyd County, et al. v. MERSCORP, Inc., 0:12-cv-00033-HRW (Apr. 19, 2012) several counties in Kentucky brought a lawsuit against MERS and several Banks for lost recording fees. On August 7, 2012, the U.S. District Court for the Eastern District of Kentucky issued a stay of action pending the result of Christian County Clerk v. Mortgage Electronic Registration Systems, Inc. (6th Cir. No. 12-5237).
March 26, 2013 | Permalink | No Comments
