February 4, 2013
Florida Court of Appeal held that Loan Servicer Defendant was the Proper Holder of Promissory Note and Mortgage, and Granted Summary Judgment
In Riggs v. Aurora Loan Services, LLC, 36 So. 3d 932 (Fla. Dist. Ct. App. 2010), the District Court of Appeal of Florida, Fourth District, held that Aurora Loan Services, LLC, was the lawful holder of a promissory note and affirmed the Circuit Court’s decision granting Aurora’s motion for summary judgment.
Riggs, the borrower/homeowner, objected to Aurora’s foreclosure action on the grounds that Aurora’s promissory note had a blank indorsement and thus failed to conclusively establish that Aurora was the lawful owner and holder of the note. The Court disagreed.
Aurora possessed the original note which was indorsed in blank and signed as required. The Court noted that because the indorsement was a blank indorsement, the note was payable to bearer and could be negotiated by transfer of possession alone. The Court then held that Aurora was the holder of the note, and was entitled to enforce it, because the note was negotiated by its transfer of possession. The Court also found no authentication issue since Riggs never challenged the authenticity of the signature at issue in his pleadings, and because the promissory note was self-authenticating. Thus, because Aurora offered supporting affidavits and the original note with a blank indorsement, the Court held that Aurora was the proper holder of the note and mortgage.
February 4, 2013 | Permalink | No Comments
February 1, 2013
United States District Court in Florida Denies Plaintiff’s Motion to Remand Case to State Court
In Diversified Mortg., Inc. v. Merscorp, Inc., 809-CV-2497-T-33EAJ, 2010 WL 1793632 (M.D. Fla. May 5, 2010) the United States District Court, in the Middle District of Florida, denied Diversified Mortgage Inc.’s motion to remand its case to state court. MERS originally removed its case to federal court alleging complete diversity of citizenship between the parties and an amount in controversy above $75,000. Diversified filed the motion to remand the case claiming that the amount in controversy “ha[d] not been met.” Diversified argued that it did not request monetary damages but instead sought declaratory and injunctive relief. The Court noted, however, that “for equitable claims such as ones for declaratory or injunctive relief, the amount in controversy is determined by the object of the litigation that will flow to Diversified, not the damages.” Thus, because Diversified sought declaration as to whether it had any ownership in 65-135 mortgage loans, the amount in controversy would be determined from the monetary value of the benefit the Court declared Diversified had in the mortgages at issue.
Diversified responded by claiming that if it had an interest in the mortgages, it is unlikely that Diversified would seek collection from MERS. Instead, Diversified would pursue many individual actions against unidentified mortgage companies, or not pursue any actions at all. But the Court noted that the amount in controversy is determined by the face value of the mortgages and not by the level of ease or difficulty associated with collecting the loan amounts. Consequently, the Court reviewed the mortgage documents, determined that the amount in controversy exceeded $75,000, and denied Diversified’s motion.
February 1, 2013 | Permalink | No Comments
Borden and Reiss on Lawyers and REMICs
Our latest, Dirt Lawyers and Dirty REMICs, is on SSRN and BEPress.
February 1, 2013 | Permalink | No Comments
January 31, 2013
United States District Court in California Denies Plaintiff’s Motion for Temporary Injunctive Relief, Allowing Non-Judicial Foreclosure
In Chilton v. Fed. Nat. Mortg. Ass’n, 1:09-CV-02187 OWW SM, 2009 WL 5197869 (E.D. Cal. Dec. 23, 2009), the United States District Court, in the Eastern District of California denied Chilton’s motion for temporary injunctive relief. Chilton filed a complaint alleging that Federal National Mortgage Association (Fannie Mae) violated provisions within U.S.C. Title 15, regarding Commerce and Trade, and/or U.S.C. Title 18, regarding Crimes and Criminal Procedure, because Fannie Mae initiated a non-judicial foreclosure on her property without a genuine original note. Chilton then filed an order to show cause and motion for temporary restraining order, in an attempt to block the foreclosure process. The Court noted that in order to obtain temporary injunctive relief, Chilton must demonstrate a likelihood of success on the merits.
The Court rejected Chilton’s legal theory holding that non-judicial foreclosures can be commenced without producing an original promissory note. The Court noted that under California Civil Code § 2924, et seq. Section 2924(a)(1), regarding Mortgages in General, a trustee, mortgagee, beneficiary or any of their authorized agents may conduct a foreclosure. In addition, the party initiating the foreclosure need not be in possession of the original note. Consequently, the Court held that Chilton was unlikely to succeed on her claim for relief, and thus found it unnecessary to set Chilton’s motion for temporary injunctive relief for a hearing.
January 31, 2013 | Permalink | No Comments
Rhode Island Court Denies Plaintiff’s Claim to Invalidate Foreclosure Sale
In Porter v. First NLC Financial Services LLC, No. PC 10-2526 (R.I. Sup. March 31, 2011), the plaintiff challenged the validity of a foreclosure sale conducted by MERS. The defendant’s motion for summary judgment was addressed in this opinion.
The plaintiff argued that the original lender, First NLC, terminated its agency relationship with MERS by filing for bankruptcy protection. The plaintiff alleged that First NLC failed to affirm its contract with MERS which was required under Section 365 of the Bankruptcy Code. However, the court noted that the plaintiff failed to include affidavits or any evidence to support her allegations, as required to successfully oppose a summary judgment motion.
In addition, the plaintiff alleged that MERS was not the holder of the note or mortgage deed on the date of the foreclosure sale, MERS was not acting as an agent of the lender, and there was no chain of title to MERS or valid assignment of the note to the lender. The court found the plaintiff’s these objections to the foreclosure sale as substantially similar to Bucci v. Lehman Bros. Bank and adopted the reasoning to dismiss these claims. The plaintiff similarly claimed these actions were violations under both the mortgage agreement and Rhode Island’s statutes.
The court found the language in the mortgage agreement was unambiguous and clear in granting MERS status as both nominee for the First NLC and as mortgagee under the agreement. As a result, the statutory power of sale was specifically granted to MERS as mortgagee and lender’s nominee.
A statutory challenge to the authority of MERS was similar rebuffed. Since adopting the plaintiff’s argument would result in mortgagees and lenders being unable to use a mortgage servicer, the court rejected the argument.
Finally, a claim of tortious interference based on the plaintiff’s tenants who broke their leases and terminated their tenancy at the property as a result of the foreclosure was addressed. A claim of tortious interference requires the plaintiff to show an existence of a contract, the alleged wrongdoer’s knowledge of the contract, and the intentional improper interference of the contract along with damages as a result. The court found the foreclosure to be proper, which resulted in the tortious interference claim being dismissed since the interference must be improper in order to succeed.
The court ultimately granted the defendant’s motion to dismiss the case.
January 31, 2013 | Permalink | No Comments
FDIC Lawsuit against Bank Directors
The FDIC has filed a lawsuit (hat tip LaCroix by way of April Charney) against the officers and directors of a small bank in New Mexico alleging negligence, gross negligence and breaches of fiduciary duties. The FDIC alleges that the
Defendants, as officers and directors of Charter Bank of Santa Fe, New Mexico (“Charter Bank” or “the Bank”), committed $50 million – 72 percent of the Bank’s core capital of $69 million – to open and operate a highly risky and speculative subprime lending operation in Denver, Colorado in late 2006, when they knew or should have known that there was no secondary market for subprime loans. The Bank funded loans that no reasonable financial institution would have made at any time, much less in 2007 and 2008 when the risks of such lending were well recognized. The Defendants negligently permitted and presided over, and failed to suspend, limit or stop the production of a portfolio of approximately $50 million in risky, subprime residential loans intended for sale into a secondary market that at the time was recognized to be increasingly unstable, unpredictable, and illiquid due to concerns about the credit quality of subprime loans. (1)
While the allegations, if true, would prove that the bank engaged in predatory lending, the complaint is revealing about the behavior of the bank’s regulators too:
Federal regulators repeatedly warned the Director Defendants that the Bank was over-leveraged and needed to raise more capital. The Director Defendants responded that they could operate the Bank with less capital and more borrowed money because they had placed most of their loans in the real estate acquisition, development, and construction loan business. The Director Defendants asserted that, because these loans were shorter in duration, the Bank had less risk – an analysis that failed to anticipate any real downside risk in the real estate development business. (6)
One wonders if the regulators should have done more than “repeatedly warn” these defendants in the run up to its failure.
The complaint also has some revealing allegations about how far lenders went to skirt the Home Ownership and Equity Protection Act’s regulation of high cost loans by limiting “loans to interest rates of no more than 11.5 to 12 percent. Given the minimum FICO score and maximum debt-to-income ratios for SLG loans based solely on stated income, these artificially capped interest rates were simply insufficient to cover the very high risk of default.” (10) Clearly, incentives ran amok at this closely held bank.
January 31, 2013 | Permalink | No Comments
SEC Complaint on Improper Trading of MBS — Much Ado?
By David Reiss
Floyd Norris, the only journalist to whom I have written fan mail (sorry Gretchen, you’re next), has another interesting column about a case that the SEC has brought against an MBS trader, Jesse Litvak. The complaint alleges that
On numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, customers about the price at which his firm had bought the MBS and the amount of his firm’s compensation for arranging the trades. On some occasions, Litvak also misled the customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies’ inventory. Litvak’s misconduct misled customers about the market price for the MBS, and, thus, about the transaction they were agreeing to. Litvak also misled customers about whether they were getting the best price for their MBS trades and how much money they were paying in compensation. MBS are generally illiquid and discovering a market price for them is difficult. Participants trading in the MBS market must rely on informal sources, including their broker, for this information.(1-2)
Norris is right to highlight what this case can reveal about the lack of transparency in the trading of MBS, a lack of transparency that does not exist in many other major secondary markets for securities.
But I was struck by how little is at stake in this SEC case. The complaint alleges that the misconduct occurred in 25 (count ’em, 25!) trades from 2009 through 2011 (7) and that Litvak’s behavior “generated over $2.7 million in additional revenue for his firm.” (2) Not for him personally, mind you, but for his firm! He, of course, should be punished if the allegations prove to be true. And yet . . ..
Time after time, the government brings cases against mid-level players somehow involved in the financial crisis. Time after time, people wonder why these are the best cases that can be brought. My earlier thoughts about this can be found here and here. Is it possible that even the SEC lacks the resources to investigate the massively document intensive cases that would get to the heart of the matter?
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February 1, 2013 | Permalink | No Comments