March 20, 2013
A Bransten Trio Join Judicial Chorus on Misrepresentation
Justice Bransten, a judge in the Commercial Division of the N.Y. S. Supreme (trial) Court, issued three similar decisions last week denying motions to dismiss lawsuits by Allstate over its purchase of hundreds of millions of dollars of MBS. The net result is that various Deutsche Bank, BoA’s Merrill Lynch and Morgan Stanley entities must continue to face allegations of fraud relating to those purchases.
In the Deutsche Bank case, the court rejected “the notion that defendants are immunized from liability because the Offering Materials generally disclosed that the representations were based on information provided by the originators.” (22)
The court also found that “defendants can be held liable for promoting the securities based upon the high ratings from the credit rating agencies, if, as alleged, thy knew the ratings were based on false information provided to the agencies.” (22) Finally, the court found that “Defendants’ occasional disclaimers cannot be invoked to excuse the wholesale abandonment of underwriting standards and practices.” (24-25)
Justice Bransten joins a growing chorus of judges who reject the notion that vague disclosures can protect parties who engage in rampant misrepresentation. One wonders how this body of law will impact the behavior of Wall Street firms during the next boom.
March 20, 2013 | Permalink | No Comments
March 19, 2013
Reiss on CFPB’s New Escrow Rules
The CFPB Journal interviewed me here about the new five year escrow requirement for Higher-Priced Mortgage Loans (HPMLs):
According to David Reiss, professor of law at Brooklyn Law School, the text of the Dodd-Frank Act itself requires the five-year escrow period be implemented.
Specifically, the CFPB’s rule implements sections 1461 and 1462 of the Dodd Frank Act, which amends the requirements for maintaining escrow accounts in connection with higher-priced mortgage loans.
“CFPB has indicated that it is trying to have a coordinated roll out of new mortgage regulations and this is part of that roll out,” Reiss says. “Creditors will benefit from the float on the aggregate escrow accounts—a small amount for each individual homeowner but potentially a meaningful amount for creditors, particularly if interest rates rise to their historic average or higher in coming years.”
Per the rule, a creditor may not cancel escrow accounts required under the rule except with the termination of the loan or the receipt of a consumer’s request to cancel the escrow account no sooner than five years after it was established, whichever happens first. The CFPB’s rule also states that the creditor may not cancel the escrow account unless the unpaid principal balance is less than 80 percent of the property’s original value and the consumer is not delinquent or in default on the loan at the time of the request.
One key aspect of the rule involves the exempting small creditors who operate primarily in rural or underserved areas. According to the CFPB, to qualify for the exemption, a creditor must:
- Make more than half of its first-lien mortgages on properties located in counties that are designated either “rural” or “underserved” by the CFPB
- Have had assets of less than $2 billion at the end of the preceding calendar year
- Have originated, together with its affiliates, 500 or fewer covered, first-lien transactions during the preceding calendar year
- Together with its affiliates, not maintain escrows for property taxes or insurance for any mortgage it or its affiliate currently services, except when the escrow account was established for a first-lien, higher-priced mortgage loan between April 1, 2010 and before June 1, 2013
- Escrow accounts established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure
One outcome of the escrow requirement as it pertains to creditors is the marginal cost of maintaining escrows for five years instead of one. “To some extent, creditors may be able to pass along the increased cost of the longer escrow term to homeowners,” Reiss says. “This is a rule that is probably good for homeowners and creditors in the aggregate.”
March 19, 2013 | Permalink | No Comments
U.S. District Court in Oregon Dismisses Borrower’s Claims Against Defendant Financial Institutions and Holds MERS Valid Beneficiary Under Deed of Trust
In Beyer v. Bank of America, 800 F.Supp.2d 1157 (2011), the U.S. District Court for the District of Oregon dismissed a borrower’s complaint against defendant financial institutions in its entirety and held MERS was a valid beneficiary under a deed of trust.
In June 2006, Beyer (“Borrower”) executed a note and deed of trust. The deed of trust named MERS as the beneficiary and Fidelity National Title Insurance (“Fidelity”) as the trustee.
In December 2009, MERS assigned its beneficial interest in the deed of trust to Deutsche Bank National Trust Company (“Deutsche Bank”). The deed of trust and the assignment were both duly recorded.
Thereafter, Borrower filed suit to prevent foreclosure and moved for a temporary restraining order (“TRO”)(the case did not describe the events surrounding the foreclosure other than those specified above). Defendant financial institutions moved to dismiss the complaint for failure to state a claim. The Court denied Borrower’s motion for a TRO and granted defendants’ motion dismissing the complaint in its entirety.
Borrower asserted four claims in the complaint, and the Court addressed them in turn:
First, Borrower argued defendants could not proceed with foreclosure without first presenting the promissory note. The Court dismissed this claim because under Oregon Law, defendants were not required to present the note as part of the foreclosure process. The statute requires only presentation of the deed of trust in a nonjudicial foreclosure, such as the one in this case.
Second, Borrower argued the deed of trust was null and void because it had been separated from the note, and therefore, Deutsche Bank (assignee of the beneficial interest in the deed of trust) was not entitled to foreclose. The Court dismissed this claim because the Oregon Supreme Court has expressly permitted foreclosure where the deed of trust and note had been separated and later rejoined.
Third, Borrower argued defendants committed fraud by naming MERS as the beneficiary because under Oregon Law, MERS is not a beneficiary. If Borrower’s claim were true, then MERS could not have validly assigned the deed of trust to Deutsche Bank.
The statute defines “beneficiary” as “the person named or otherwise designated in a [deed of trust] as the person for whose benefit a [deed of trust] is given.” One line of cases interpreting this statute holds that because MERS was named as the beneficiary, MERS is the beneficiary under Oregon Law. Another line of cases holds that while MERS is named as the beneficiary, the benefit of the deed of trust actually goes to the lender. The Court, however, does not address this issue because MERS was both named as the beneficiary and designated as the person receiving the benefit of the deed of trust.
Under Oregon Law, the purpose of a deed of trust is to secure performance of an obligation owed to the beneficiary, so the benefit of a deed of trust is that the obligation is fulfilled. Here, the deed of trust secured payment of the note, making the benefit of the deed of trust payment of the note. Under Oregon Law, the “beneficiary” is the person for whose benefit the deed of trust is given. Therefore, the beneficiary of the deed of trust is the person who has the right to payment of the note. Borrower argued that the obligation (payment of the note) was owed to the lender, not MERS, and therefore, the lender was the proper beneficiary.
The Court disagreed, however, because the deed of trust expressly named MERS as the beneficiary, and the Court concluded that MERS was entitled to receive payment of the note, thereby making MERS a proper beneficiary. In essence, the deed of trust granted MERS the right to exercise all rights and interests of the lender “if necessary to comply with law or custom.” This includes the right to receive payment of the note. The deed of trust repeatedly referred to MERS as the beneficiary, and this would not comply with Oregon Law unless MERS had the right to receive payment of the note. Therefore, the Court rejected Borrower’s arguments and dismissed this claim because MERS was a proper beneficiary of the deed of trust.
The Court also noted that this holding is consistent with public policy because it makes no change to the Borrower’s rights or obligations. It only changes the party to whom those obligations are owed. Moreover, this conclusion best carries out the intent of the parties, who clearly intended for MERS to be the beneficiary.
Finally, Borrower argued defendants committed fraud by authorizing non-employees to execute transfer documents. The Court dismissed this claim because Borrower failed to put forth any reason why defendants could not authorize these parties to act as their agents in executing these transactions. The mere fact that the signatories were not “regular employees” is not enough to establish a claim for fraud.
March 19, 2013 | Permalink | No Comments
Florida Appellate Court Reverses Summary Judgment in Favor of Bank in Foreclosure Action Because of Issues of Fact as to Whether Bank Had Standing to Foreclose
In BAC Funding Consortium Inc. ISAOA/ATIMA v. Jean-Jacques, 28 So.3d 936 (2010), the Second District Court of Appeal of Florida (“Court”) reversed the trial court’s entry of summary judgment in favor of a bank in a foreclosure action because a genuine issues of material fact existed as to whether the bank had standing to foreclose.
In December 2007, US Bank National Association (“US Bank”) filed a complaint seeking to foreclose a mortgage and reestablish a lost note. US Bank attached a copy of the mortgage to the complaint, but the mortgage identified Fremont Investment and Loan (“Fremont”) as the lender, and MERS as the mortgagee.
Instead of answering the complaint, BAC Funding Consortium Inc. (“BAC”) moved to dismiss on the grounds that US Bank lacked standing to foreclose because US Bank failed to show it actually held the note or mortgage in question.
In its response, US Bank attached a purported assignment of mortgage. However, the assignment was neither executed nor notarized, and the space for the name of the assignee was blank. Further, US Bank did not provide anything in its response to authenticate the assignment or otherwise render it admissible into evidence.
US Bank then voluntarily dismissed its action to reestablish the lost note, but moved for summary judgment on the foreclosure issue. With its motion, US Bank filed the original note and mortgage, but neither document identified US Bank as the holder. US Bank did not file the original purported assignment or any other document establishing its right to foreclose.
Despite the foregoing, the trial court granted US Bank’s motion for summary judgment. BAC appealed, arguing that summary judgment was improper because US Bank never established it had standing to foreclose.
The Court reversed and remanded because US Bank failed to carry its burden entitling it to summary judgment. Specifically, there were genuine issues of material fact as to whether US Bank had standing. The exhibits attached to the complaint conflicted with US Bank’s assertions, the note did not identify US Bank as the lender or holder, and US Bank did not provide an assignment or other evidence establishing it as the holder.
US Bank argued that it was not required to file an assignment of the note or mortgage or otherwise prove that it validly held them in order to be entitled to summary judgment. The Court disagreed for two reasons. First, although BAC did not answer the complaint, US Bank was still required to show that no genuine issue of material fact could be raised if an answer were filed. Here, the record reveals US Bank failed to meet this requirement. Second, regardless of whether BAC answers the complaint, US Bank was required to establish through admissible evidence that it had standing to foreclose before it would be entitled to summary judgment. Here, the incomplete, unsigned and unauthenticated assignment was not admissible evidence, and US Bank provided no other evidence of its standing.
As a result, the Court held the trial court’s entry summary judgment was inappropriate and reversed and remanded for further proceedings.
March 19, 2013 | Permalink | No Comments
March 18, 2013
Reiss on Future of the FHFA
Law360 wrote a story (here, behind a paywall) on the Obama Administration’s plans for the Federal Housing Finance Agency. It reads in part
Although the Obama administration has dealt aggressively with congressional Republicans in some areas, it’s unlikely to make a recess appointment before the U.S. Supreme Court rules on the NLRB case, or chooses not to take it.
“The notion of a recess appointment is even harder to fathom,” said Brooklyn Law School professor David Reiss.
Still, despite those challenges, there are whispers that DeMarco could be replaced within the next few weeks. The names of some potential replacements, including Rep. Mel Watt, D-N.C., have been publicly floated.
A second part of DeMarco’s job is to help figure out just what to do with Fannie and Freddie, and how to bring more private money into the mortgage market.
Currently, Fannie and Freddie own or guarantee around 75 percent of all residential mortgages. Combined with the mortgages owned by the FHFA and the U.S. Department of Veterans Affairs, more than 90 percent of mortgages have some sort of federal backing.
DeMarco in October laid out a five-year plan for winding down Fannie and Freddie, including a common securitization platform for the two companies.
The Obama administration may well be on board with those plans and DeMarco provides convenient cover, Reiss said.
“It’s hard to imagine that Ed DeMarco is taking big positions like that without the administration’s at least tacit approval,” he said.
March 18, 2013 | Permalink | No Comments
Defendant’s Motion to Dismiss Plaintiff Homeowner’s Claims Granted. Claims Dismissed with Prejudice for Lack of Good Faith
In Ruiz v. Suntrust Mortg., Inc., 2012 U.S. Dist. LEXIS 103239 (E.D. Cal. July 24, 2012), Plaintiff Florida Ruiz brought action against Sun Trust Mortgage, Inc. (SunTrust), MERS, Fannie Mae, and the Wolf Law Firm to challenge the foreclosure of her Bakersfield, California property. Defendants SunTrust, MERS, and Fannie Mae filed a F.R.Civ.P. 12(b)(6) motion to dismiss the claims brought against them.
Plaintiff had taken out two loans from SunTrust secured by deeds of trust (DOT) in April 2007 with MERS identified as beneficiary under both. Following default and failure to cure, Plaintiff’s property was sold at foreclosure in March 2010, though the sale was rescinded. In August 2011, MERS assigned its interest in the first DOT to Sun Trust. In September 2011, the Wolf Law Firm, acting as trustee, recorded a second notice of default and substituted as trustee. The Wolf Law Firm recorded a notice of trustee’s sale of the property in February 2012.
There were many claims within the Plaintiff’s complaint, which are detailed below.
1) Wrongful Foreclosure Claims:
Failure to Tender: Plaintiff alleged that SunTrust, via the Wolf Firm, did not have authority to initiate foreclosure proceedings, because MERS was the proper beneficiary of the deed of trust. The court noted that to properly challenge a foreclosure proceeding, Plaintiff was required to tender the amount owed on her loan, “nothing short of the full amount due the creditor.” Rauer’s Law etc. Co. v. S. Proctor Co. 40 Cal.App. 524,525, 181 P. 71 (1919). As the record demonstrated that Plaintiff had defaulted, failed to cure, and no evidence was proffered to demonstrate a tender offer, Plaintiff’s attempt to stop foreclosure based on MERS’s alleged status was an “empty remed(y), not capable of being granted.”
Foreclosure Irregularities: Plaintiff alleged that foreclosure irregularities should preclude foreclosure. In California, a lender may proceed with non-judicial foreclosure when a default occurs and the deed of trust contains a power of sale clause. McDonald v. Smoke Creek Live Stock Co., 209 Cal. 231, 236-237, 286 P. 693 (1930). Per Cal Civ Code § 2924, a “trustee, mortgagee or beneficiary of authorized agents” can conduct the foreclosure. There is a presumption that a foreclosure “(is) conducted regularly and fairly.” Melendrez v. D & I Investment, Inc., 127 Cal.App.4th 1238, 1258, 26 Cal.Rptr.3d 413 (2005).
Robo-Signing: Specifically, Plaintiff claimed that MERS Vice President Mr. Mitchell “robo-signed” various documents. The court stated that Plaintiff failed to establish statutory violations such an action would violate, or how such an action, if it occurred, would prevent foreclosure.
Standing: Plaintiff also boldly claimed that Defendants did not have proper standing to foreclose, because the foreclosure sale of her property in March 2010 had divested Defendants of an interest in the property. As the March foreclosure was rescinded and Plaintiff claimed no other irregularities, Plaintiff’s standing allegations were unconvincing.
Securitization / Original Note: Plaintiff alleged that Defendants’ securitization of the loan was unlawful and thereby precluded foreclosure – an argument the court found unsupported by law and case history. Similarly, Plaintiff’s argument that Defendants needed the original note and joint possession of the note and deed of trust to foreclose was not substantiated by California law.
MERS Authority: Plaintiff claimed that MERS lacked authority to execute certain documents relating to the transfer of the mortgage note. The court stated that prejudice is required to prevent a wrongful foreclosure. “Prejudice is not presumed from mere irregularities in the process.” Meux v. Trezevant, 132 Cal. 487, 490, 64 P. 848 (1901). As Plaintiff failed to allege the prejudice she suffered from foreclosure, given her loan obligations, such a claim does not preclude foreclosure.
2) Fraud:
Plaintiff’s second claim alleged that Mr. Mitchell fraudulently signed a deed of trust claiming to be a MERS employee when employed by SunTrust. The elements of a fraud claim in California are: (1) misrepresentation; (2) knowledge of falsity; (3) intent to defraud; (4) justifiable reliance; and (5) resulting damage. Lazar v. Superior Court, 12 Cal.4th631, 638, 49 Cal.Rptr.2d 377 (1996). Fraud claims are also subject to the heightened pleading standard under F.R.Civ.P. 9(b). Plaintiff’s conclusory allegations not only failed to meet the burden of the heightened standard, but also lacked facts or specifics to support the basic elements of a fraud claim.
3) Slander of Title:
Plaintiff’s third claim alleged that Defendants slandered the title of her property, through preparing, publishing and recording documents including the notice of trustee’s sale and trustee’s deed, actions Defendants knew were improper. The court noted that Plaintiff failed to allege facts to support slander of title claim, because, among other reasons, the documents sent to defendant were not false given her default.
4) Quiet Title:
Plaintiff’s fourth claim, to quiet title, was also found by the court to be lacking. Quiet title claims first require plaintiff to allege that she is the rightful owner of the property. Kelley v. Mortgage Electronic Registration Systems, Inc., 642 F.Supp.2d 1048, 1057 (N.D. Cal. 2009). As the Plaintiff was in default and could not pay the amount owed, her claim to quiet title failed.
5) Declaratory Relief:
Plaintiff’s fifth claim was for declaratory relief. The court noted that since declaratory relief is not an independent claim, and no viable claim existed, relief could not be granted.
6) California Civil Code Violation:
Plaintiff’s sixth claim alleged violations of Cal Civ Code § 2932.5, resulting from Fannie Mae’s failure to record its interest in the deed of trust. The court ruled that a deed of trust assignment is not required for a judicial foreclosure, Plaintiff lacked standing to challenge the transfer, and Plaintiff offered no support for any claim under Cal Civ Code §2932.5.
7) Unfair Competition Claim:
Plaintiff’s seventh claim alleged various violations of California’s Unfair Competition Law, but failed to support such allegations with facts required for UCL relief. The court conveyed that any alleged damages suffered by the Plaintiff were “self-inflicted” as they resulted from her default.
8) Punitive Damages:
Plaintiff’s eighth claim, for punitive damages, failed because this assertion was unsupported by facts and nothing sufficient in the complaint alleged anything sufficient to impose punitive relief.
The court dismissed the complaint with prejudice and denied Plaintiff the right to amend. The court determined that Plaintiff brought this action in the absence of good faith solely to delay the foreclosure of her property, as evidenced by untrue material allegations of fact in its complaint. The court ordered Plaintiff to file papers with the court within a week to show why claims against the remaining defendant, the Wolf Law Firm, should not be dismissed. As Plaintiff did not do so, in Ruiz v Suntrust Mortg. Inc., CV F 12-0878 LJO BAM, 2012 WL 3150081 [ED Cal Aug. 1, 2012], the court dismissed the complaint against the Wolf Law Firm.
March 18, 2013 | Permalink | No Comments
Plaintiff Denied Summary Judgment in Foreclosure Proceedings Due to Factual Dispute
In Bayview Loan Servicing v Sanchez, CV 09 5004156 S, 2009 WL 1874180 [Conn Super Ct June 10, 2009], an unpublished opinion, Plaintiff Bayview Loan Servicing moved for summary judgment against non-appearing Defendant Pedro Sanchez in a foreclosure action. The town of Windham (Defendant), holder of two mortgages on the property, objected – claiming a factual dispute as to whether its mortgages were subordinate to Plaintiff’s mortgages.
In July 2006, Mr. Sanchez delivered an executed note to USMoney Source Inc. doing business as Soluna First (US Money) for a loan and secured the note through a mortgage delivered to MERS as nominee for USMoney. Plaintiff claimed that its mortgage was prior in right to two granted to Sanchez, recorded in 2001, via a subordination agreement.
The burden in summary judgment proceedings is on the moving party to prove both that no genuine issues of material fact exist and that it is entitled to judgment as a matter of law. Curry v. Allan S. Goodman, Inc. 286 Conn. 390, 402, 944 A.2d 925 (2008). Plaintiff submitted into evidence “… copies of the subordination agreement, certified copies of the note, the mortgage, the assignment of mortgage, and the default letter…”
Defendant claimed its mortgages were not subordinate to the mortgage being foreclosed by Plaintiff because it only agreed subordinate its mortgages to an entity known as “US Money Source DBA Soluna First Mortgage, its successors and assigns” and not to a mortgage “granted by Sanchez to MERS as a nominee for USMoney.”
The court described that the term nominee “connotes the delegation of authority to the nominee in a representative capacity only, and does not connote the transfer or assignment to the nominee of any property or ownership rights…” Mortgage Electronic Registration Systems, Inc. v. Rees, Superior Court, Judicial District of Ansonia-Milford, Docket no, CV 03 081773 (September 4, 2003, Curran, J.T.R.). As such, the court ruled that USMoney was the “true lender.”
However, as there was a factual discrepancy between the mortgage deed (listing lender as USMoney Source, Inc. d/b/a Soluna First) and the subordination agreement (listing mortgagee as US Money source dba Soluna First Mortgage), the court found that a genuine issue of material fact existed. Plaintiff failed to meet its burden and the court denied summary judgment.
March 18, 2013 | Permalink | No Comments
